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Global Crisis and its Effects on the Zambian Economy

Global Crisis and its Effects on the Zambian Economy. Danies Chisenda, Director of Budget CABRI 5 th Annual Seminar 7 th - 9 th April, 2009 Dakar, Senegal. Presentation outline. Introduction Impact of the global crisis on the economy Government Policy Responses Conclusions.

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Global Crisis and its Effects on the Zambian Economy

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  1. Global Crisis and its Effects on the Zambian Economy Danies Chisenda, Director of Budget CABRI 5th Annual Seminar 7th - 9th April, 2009 Dakar, Senegal

  2. Presentation outline Introduction Impact of the global crisis on the economy Government Policy Responses Conclusions.

  3. 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: • 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.

  4. INTRODUCTION (CONT’D)

  5. 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.

  6. 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.

  7. 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 : • Higher provisions for social safety programmes (Fertiliser Support Programme) • Reduction in fuel excise duties to lower cost at pump.

  8. 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.

  9. 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.

  10. POLICY RESPONSES/MEASURES (CONT’D) Some Specific Interventions • 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.

  11. 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. • 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.

  12. POLICY RESPONSES/MEASURES (CONT’D) • Where are revenues coming from? • Lower tax revenues have meant other financing sources • 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.

  13. POLICY RESPONSES/MEASURES (CONT’D) • Expenditure Side • 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.

  14. 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.

  15. 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.

  16. Thank you for your attention.__________Merci pour votre attention.

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