Transcript High Level Seminar No.3 Financial Crisis and Economic Reforms

Options for Africa
Zambia’s Case
Presentation to the High-Level Round Table Discussion at the
African Development Bank Annual Meetings
Dr. Situmbeko Musokotwane, M.P.
Minister of Finance and National Planning
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Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Outline
S Impact of the crisis on Zambia
S Our response to the crisis
S Lessons learned and the road ahead
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Impact of the crisis on Zambia
S Zambian economy depends significantly on the mining
sector
S Copper accounts for about 70 percent of exports
S Mining industry employs about 50,000 workers (9 percent of
total formal employment)
S Global copper prices have been the main transmission
mechanism of the crisis and its effects in Zambia:
S Prices have tumbled from a peak of US$ 8985 per metric tonne
in August 2008 to US$ 2902 at the close of 2008
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Transmission Mechanism of the
Crisis to the Local Economy
• Foreign exchange earnings
• Investor sentiment
• Sharp volatility and depreciation as a result of investor withdrawals
amid growing risk aversion
• Fall in international reserves as Central Bank intervenes to
maintain orderly depreciation
• Profitability of mining sector
• Retrenchment of workers
• Tourism, manufacturing, construction sectors expected to be weak
• Drop in mining, corporate taxes, excise and VAT collections
• Lower personal income taxes as a result of job losses
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Impact of the crisis on Zambia
S Effects of the commodity price shock:
S Significant fall in foreign exchange earnings, affecting reserve position
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and balance of payments
Heightened volatility and sharp depreciation (about 40 percent) of the
Zambian Kwacha against major currencies, as a result of weaker
investor sentiments leading to large portfolio withdrawals by investors
Cash flows of mining companies severely affected, particularly in highcost operations
About 13,000 workers laid off, one third of the workforce due to closure
or streamlining of mining operations
First and second order fiscal effects: direct losses on corporate taxes and
variable profit taxes; indirect losses through reduced Pay-as-you-earn
income taxes from mining sector
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Ministry of Finance and National Planning
Impact of the crisis on Zambia
contd.
S Mining sector in 2009:
S Mining sector expected to slow down, resulting in
lower tax revenues.
S 2009 projected revenues from mining sector is around
US$ 73.7 million. In 2008, revenues stood at US$
138.6 million.
S 1st quarter estimates indicate that these projections are
still on-track, despite better than expected production
data from mines
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Impact of the crisis on Zambia
contd.
S The rest of the economy in 2009:
S Tourism expected to slow down as a result of weak global demand
for travel; initial indications are that there has been a sharp drop in
bookings at Livingstone (Victoria Falls)
S Construction, transport and communication to be affected as a
result of weaker domestic conditions and displaced workers
S For now, financial sector is stable but remains vulnerable to secondround domestic effects such as defaults, bankruptcies, etc.
S Investments may dry up as global credit conditions aggravate the
business environment
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
External Sector Vulnerability
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Responses to the crisis
S Immediate responses:
S Exchange rate allowed to adjust in line with changing market
sentiments, unlike in 70s and 80s where rates were not allowed to
adjust. Depreciation of around 40 percent since crisis began;
Central Bank market intervention restricted to smoothening
volatility only.
S Bank of Zambia actively monitoring financial sector
developments, enhancing supervision and oversight activities so as
to maintain investor confidence.
S Through 2009 Budget, Government took steps to intensify its
diversification drive in line with broad medium and long-term
strategy
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Responses to the crisis contd.
S Immediate responses contd.:
Revenue side:
S New mining fiscal regime with reduced taxes on fuel imports, a
more streamlined profit tax system, and incentives for additional
investment in the sector (through 100 percent capital allowance)
S Duty and tax incentives for agricultural equipment imports
S Customs, excise and VAT incentives to manufacturers to set up
economic zones and industrial parks
S Social sectors:
S Significant real increases in education and health outlays in the
Budget
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Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Response to the crisis contd.
S Medium/Long term responses:
S Two-pronged strategy to mitigate current crisis, and use the
opportunity to safeguard against future crises – à la Keynes
S Immediate realignment of expenditures to focus on large
public works and infrastructure, helping to create additional
domestic demand
S These expenditures target key projects in Tourism and
Agriculture so as to diversify the economy away from mining.
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Showcase:
Nansanga Farm Block
A model for Agricultural Development in Zambia
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Showcase – Nansanga Farm
Block Contd.
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Showcase – Nansanga Farm Block
S 155,000 hectares of fertile land about 400 km North of Lusaka
S Government will provide roads, bridges, dams, and water supply
facilities
S Both large and small scale farmers to accommodate cross-section of
economic activity; hub-and-spoke system, with smaller farmers
supplying to larger ones
S Tar roads leading to national highways; easy access to a number of
markets (Lusaka, Copperbelt, Luapula and Northern Provinces)
S Works have already commenced, will be completed later this year
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Ministry of Finance and National Planning
Showcase – Nansanga Farm
Block contd.
S Nansanga farm block:
S Once completed, investors can move in quickly and
commence operations with low gestation periods
S Model for agricultural development in Zambia
S Aim is to develop at least one each year across the
country
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Ministry of Finance and National Planning
Response to the crisis… contd.
S Other key medium/long-term projects:
S “Livestock can be the next copper”
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Development of livestock disease-free zones to foster meat exports
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Improving livestock extension service
S “Zambia can be the energy provider of Southern Africa”
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Commencement of energy projects which will transform Zambia’s vast
energy potential in the medium-term
S Enhancing competitiveness
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Reducing the cost of doing business through business licensing reforms
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Increased spending on road infrastructure
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Ministry of Finance and National Planning
Way Forward
S “Good crises like these don’t come easily”:
S Need to take advantage, seize the moment and
engage in rapid and aggressive economic
diversification, while ensuring that the vulnerable
are protected
S Otherwise, we will be back in the same place when
the next crisis strikes
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Way forward
S Need to take a deeper look at what other countries have
done:
S East Asia, India opening up to FDI, embracing modern
technology and processes (particularly in agriculture)
S UNIDO Study (2007 data):
Irrigation as a percentage of arable land is only around 5 percent
in Africa; 38 percent average in basket of 9 countries (Bangladesh,
Brazil, China, India, Pakistan, Philippines, South Korea,
Thailand, Vietnam)
S Average tractors: 28/1000 ha in Africa against 241/1000 ha in the
9 countries
S Fertilizer use: 13kg/ha in Africa ; 208kg/ha in the 9 countries
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Ministry of Finance and National Planning
Way Forward
S Role of donors:
S More effective channelling of aid:
S Money isn’t going to areas where it is most needed
S Easier to build a school than a road
S Often, donors discuss directly with sector ministries, posing
difficulties at a later stage when resources must be realigned
S Focus must be on providing resources (grant, credit, semiconcessional debt) that provide a way out of donor dependency:
Africa does not want to be dependent on aid forever!
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Total Lending Approvals
1960s – 2007
(US$ bn.)
180
160
140
Infrastructure
120
Social Sectors
Multisector
100
Industry, Mining, Quarrying
80
Finance
60
Environment
Agriculture
40
Others
20
0
AFDB (1967)
ADB (1967)
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Ministry of Finance and National Planning
IADB (1961)
Source: Annual Reports and Statistical Compendiums
Total Lending Approvals
1960s – 2007
(% allocation of total portfolio)
100%
90%
80%
Infrastructure
70%
Social Sectors
60%
Multisector
50%
Industry, Mining, Quarrying
Finance
40%
Environment
30%
Agriculture
20%
Others
10%
0%
AFDB (1967)
ADB (1967)
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
IADB (1961)
Source: Annual Reports and Statistical Compendiums
Infrastructure Lending
1960s to 2007
(US$ bn.)
70
60
50
40
Water and Sanitation
Transport & Communications
30
Energy
20
10
0
AFDB (1967)
IADB (1961)
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
ADB (1967)
Source: Annual Reports and Statistical Compendiums
Infrastructure Lending
1960s – 2007
(% allocation within infrastructure portfolio)
100%
90%
80%
70%
60%
Water and Sanitation
50%
Transport & Communications
40%
Energy
30%
20%
10%
0%
AFDB (1967)
IADB (1961)
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
ADB (1967)
Source: Annual Reports and Statistical Compendiums
Way Forward
S There has never been a better time for Africa to get
serious on regional integration
S Cross-continental infrastructure such as roads,
power lines
S Reducing the cost of doing cross-country business
S Dismantling trade barriers: border crossing times,
checkpoints
S Promoting open skies
S Actively sharing information to prevent money-laundering
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Showcase:
North-South Corridor
Connecting Eastern and Southern Africa
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Ministry of Finance and National Planning
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Ministry of Finance and National Planning
Showcase:
North-South Corridor
S North-South Corridor:
S Initiative of COMESA, EAC, and SADC
S Aimed at enhancing regional trade through the improvement of
infrastructure (road corridors) and reducing transaction costs for crossborder transactions
S High-level conference held in Lusaka last March reaffirmed commitment
to this important project
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Strong financial and technical commitments
US$ 1.2 billion in commitments from development partners to upgrade rail,
road and port facilities
Pledged to improve integration of national and regional planning processes
Pledge to harmonize policies and regulations such as tariff regimes, customs
and immigration procedures, etc.
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Ministry of Finance and National Planning
Conclusion
S While it is true that:
S This crisis was not of our making and originated beyond our
borders
S We have remained steadfast to development agenda,
principles of good governance and prudent macroeconomic
management
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Ministry of Finance and National Planning
Conclusion
S We must still face the hard fact that the crisis is here to stay for some
time.
S And so, we must all do our part:
S Governments must seize this as an opportunity to push through
harder reforms that will safeguard against future crises
S More regional integration and cooperation to ensure that we are
doing everything we can as a continent
S Donors must scale up assistance and ensure strong alignment to
national priorities and honour and make operational commitments
that have been declared to deal with the crisis.
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
Conclusion
S Finally, as you will agree, Ministers of Finance
must do everything they can to mitigate the
impact of the crisis on their countries.
S I would be failing in my job if I did not show
you what awaits you on your next holiday:
Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning
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Ministry of Finance and National Planning
Investors:
[email protected]
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Thank you!
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Presentation to the 3rd High-Level Round Table
Ministry of Finance and National Planning