Transcript Global crisis and its effects on the Zambian economy Session 4

Danies Chisenda, Director of Budget
CABRI 5th Annual Seminar
7th - 9th April, 2009
Dakar, Senegal
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
Presentation outline
 Introduction
 Impact of the global crisis on the economy
 Government Policy Responses
 Conclusions.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
INTRODUCTION
 The Zambian economy has experienced robust growth over the recent
years owing to:
 Macroeconomic stability supported by prudent fiscal management; and
 A favorable external economic environment with strong global demand for metal
commodities.
 Zambia, a copper-rich country, has benefited from high copper prices
over the recent years:
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High economic growth – averaging 6.1 percent per annum between 2006 and 2008
Surplus overall balance of payments position
Comfortable gross international reserves
Exchange rate stability
Increase in employment levels
Expansion of industries through sector linkages and increased domestic demand
 Higher oil prices in 2007 and 2008 had, however, a negative effect on
the economy especially on inflation level.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
INTRODUCTION (CONT’D)
Real GDP Growth
Inflation (End Year)
International Reserves (US$ millions)
Copper Export Volume (000s of MT)
Copper Export Price ( US$ per pound)
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
2005
2006
2007
2008
5.2
6.2
6.3
6.0
15.9
8.2
8.9
16.6
331.1
595.1
947.4
976
439
491.7
490.9
584.2
1.5
2.8
3.1
2.9
IMPACT OF THE GLOBAL CRISIS ON THE ZAMBIAN
ECONOMY
 The external economic environment turned
unfavourable in 2008:
 Record high increases in world fuel and food prices during
the 1st half of the year.
 Falling global demand, leading to lower metal prices in the
2nd half of the year.
 External threats to economic growth.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
IMPACT OF THE GLOBAL CRISIS ON THE ZAMBIAN
ECONOMY (CONTD.)
 Effects on the domestic economy:
 A steep increase in inflation – while the annual target was 7
percent, the outturn was 16.6 percent.
 Depreciation of the Kwacha – by 27.3 percent against US
dollar compared to the end year level for 2007.
 Weak growth outlook for 2009 – mining, tourism,
construction, communications all expected to be significantly
slower.
 Increases in Government Security yield rates as a result of
weakening demand, which also affected commercial bank
lending rates.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
IMPACT OF THE GLOBAL CRISIS ON THE ZAMBIAN
ECONOMY (CONTD.)
 Reduction in projected Government revenues as a result
of falling copper production volumes.
 Realignment of expenditure items during the year to
cushion impact on the domestic economy :
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Higher provisions for social safety programmes (Fertiliser
Support Programme)
Reduction in fuel excise duties to lower cost at pump.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
IMPACT OF THE GLOBAL CRISIS ON THE ZAMBIAN
ECONOMY (CONTD.)
 2009 Projections
 Growth: 5 percent
 Inflation: 10 percent
 Fiscal Deficit: 2.6 percent of GDP
 Medium-term is more uncertain. Growth expected to
improve in 2010/2011 alongside a global recovery.
Fiscal deficit expected to reduce as revenues from
commodities (copper and cobalt) improve.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
POLICY MEASURES/RESPONSES
 The 2009-2010 Medium Term Expenditure Framework (MTEF)
has been prepared bearing in mind the impact of the global
economic slowdown.
 Some key macroeconomic objectives:
 maintaining macroeconomic stability;
 Promote economic diversification;
 Maintain borrowing within sustainable level;
 Increase investment in human capital; and
 Enhance competitiveness of the domestic economy.
 Key policy intervention is the diversification of the economy
from mining to agriculture, tourism, and manufacturing.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
POLICY RESPONSES/MEASURES (CONT’D)
Some Specific Interventions
I. Revenue side
 Fiscal incentives to the mining sector:
 Removal of the windfall tax;
 Allow hedging income to be part of mining income for tax
purposes;
 Increase capital allowance to 100 percent (as investment
incentive);
 Removal of customs duty on copper powder, copper flakes
and copper blisters;
 Inclusion of copper and cobalt concentrates on the import
deferment scheme; and
 cutting of excise duty on heavy fuel oil from 30 percent to
15 percent.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
POLICY RESPONSES/MEASURES (CONT’D)
 Incentives in other sectors:
 For manufacturing sector and particularly for developers and
investors in the Multi Facility Economic Zones (MFEZ) and
Industrial Parks.
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No tax on management fees, consultancy fees, and interest paid to foreign
contractors;
VAT zero rate for supplies to the to the MFEZ and industrial parks;
Import tax exemption for equipment and machinery for the development of
MFEZ and industrial parks; and
Exemption of foreign suppliers to the MFEZ and industrial parks from
reverse VAT charge.
 Other tax incentives cover the agriculture, tourism and energy
sectors.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
POLICY RESPONSES/MEASURES (CONT’D)
 Where are revenues coming from?
 Lower tax revenues have meant other financing sources
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Increased grant support from 3.9 to 4.6 percent of GDP
Increase in domestic borrowing, from 1.2 to 1.9 percent of GDP
Small increase in external borrowing, from 0.5 to 0.8 percent of GDP
Increased effort to improve collection efficiency through audits of
mining companies, etc.
 No signs of reduced commitment from donors
 Certain donors have even increased support (DFID, EU, etc.)
 Donors have recently pledged to continue supporting the
development agenda, and indicated that commitments
would not waver.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
POLICY RESPONSES/MEASURES (CONT’D)
II. Expenditure Side
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Spending on growth-enhancing areas including
infrastructure –
 To support diversification of the economy, allocation raised
for construction and rehabilitation of roads, airports,
agricultural dams, etc.
 Support the development of MFEZ by providing
infrastructure such as roads, water, electricity and telephone,
etc.
 By improving infrastructure, this is seen to reduce the cost of
doing business by private sector.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
CONCLUSIONS/LESSONS
 The global financial crisis has exposed our country with
negative effects on the domestic economic especially in the
external sector.
 Too much reliance on one sector or commodity can be
dangerous hence the need for diversification so that the
impact can be manageable in times of crisis.
 The major challenge facing the country is how to ensure the
success of the diversification programme given that the
resources to fund the programme has tremendously
reduced or dwindled.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
CONCLUSIONS/LESSONS (CONT’D)
 The future of the Zambian economy lies in diversification:
 The bread basket and provider of energy for eastern and southern
Africa.
 Beef can be the new copper for Zambia, with export earnings potential
almost as large.
 With the right incentives, manufacturers can use Zambia’s strategic
location to supply East/North/Southern Africa. Need for more regional
integration.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation
Thank you for your attention.
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Merci pour votre attention.
Ministry of Finance and National Planning
Government of the Republic of Zambia
CABRI Presentation