Zambia: Investors Rattled By Zambian Reforms

Photo: Manoocher Deghati/IRIN
A worker on duty at a coal mine belonging to Maamba Collieries, the largest coal producer in Zambia, 2 March 2007. The country’s mining sector plays a significant role in the country’s economy.

Hikes to minimum wages and a total ban on foreign currency transactions have raised concerns among investors in Zambia

A few months after the ratings agency Fitch downgraded Zambia's economic outlook, citing concerns over the new government's direction on mining reform, new laws on minimum wages and foreign currency transactions have some investors concerned.

In July, the government announced revisions to the country's minimum wages, increasing pay for domestic workers, general workers and shopkeepers without unions. Those increases aren't universal or homogenous, but see some salaries hiked by as much as 100 percent. That news came after Zambia's central bank banned dollar-denominated transactions, threatening imprisonment for offenders caught "quoting, paying or demanding to be paid or receiving foreign currency as legal tender for goods, services, or other domestic transactions".

Zambia is Africa's biggest copper producer and broadly the policies are aimed to bolster a heavily mineral dependent economy. Changes to the foreign exchange regime should steer resource revenues through local banks and boost the thinly-traded kwacha. Wage hikes, meanwhile, targeted at those considered to be particularly poorly paid and lacking union representation, look more politically motivated, points out Robert Besseling, senior Africa forecaster with Exclusive Analysis. Despite being classed as lower middle income, around 60 percent of Zambians live below the poverty line.

But the measures have some parties concerned - and not only in business quarters. Restrictions on foreign currencies are causing a headache for international and domestic businesses used to transacting in dollars, and wage hikes are overstretching others. Critics argue that Zambia's already low tax base will narrow as employers are forced to cut their workforces. The Zambian economy - already faced with high unemployment rates, especially among the youth - can ill afford a greater unemployment burden.

"Many employers cannot afford such a huge increase without an increase to their own income," points out Caleb Fudanga, president at the country's Institute for Finance and Economics and former governor of the Bank of Zambia. "Most employers of domestic servants are civil servants. Civil servants are not the best paid and during the recent wage increase round they only got a maximum increase of 15 percent. The reaction of a number of employers has been to reduce the labour force."

Hotels and lodges have been also been announcing staff redundancies since the announcement of the new minimum wage, Mr Fudanga says.

"In many situations in Zambia there are automated solutions to reduce the workforce," explains one businessman, who operates in the tourism sector. "We used to employ good numbers of people to grade roads by hand with hoes and cut grass by hand. These positions have all been replaced with machinery which used to be more expensive but is now cheaper."

Certain unions are concern too. The Zambia National Farmers Union argues that the labour-intensive farming industry will suffer as a result of the hikes. It too fears that mechanisation will become the cheaper option. "While some sectors can easily deal with the increase in labour cost by passing on the costs to the consumers, it is difficult to invoke this on agriculture products especially when dealing with food related products," points out Jervis Zimba, president of the ZNFU.

"Agriculture by nature is labour intensive... [and] profitability is dependant on low costs of production. Any increase in... labour [costs] will have a negative impact on the profitability of the sector which could lead to a shift away from producing commodities that have marginal profits," he adds. "The worst case scenario could be mechanisation. In a country where there are high poverty levels in the rural areas and high unemployment, these options should be entirely mitigated against."

Analysts are more circumspect. "The bulk of the wage increases will be applicable for workers employed at Chinese firms, which have been consistently singled out in criticism of working conditions," argues Robert Besseling, senior Africa forecaster with Exclusive Analysis. During previous electoral campaigns, Mr Sata has run on a vehement anti-China platform, and in August, Zambian miners killed a Chinese manager during protests over delays in implementing the new wage.

"We would doubt that this massive increase in minimum wages will have a significant impact on the economy as a whole or raise foreign companies' operating costs," Mr Besseling says.

In a recent interview with This is Africa, Zambia's vice president Guy Scott rejected accusations of whimsical reform, pointing to agriculture and tourism as key development sectors. But it is the lack of consultation by the new government, led by Michael Sata, a former cleaner in London's Victoria station, that has upset businesses.

"It was noticeable that there was no consultation or implementation period for the wage increase, but it was introduced retrospectively overnight. Any employer or potential investor has to be extremely nervous of employing anyone when we never know what lies around the corner in terms of enforced wage rises and labour rights," the tour operator says.

"A number of commentators have mentioned a lack of policy pronouncements by the new government as a problem," agrees Mr Fudanga. Those concerns have been compounded by the decision to repossess the previously privatised Zamtel, and to resume control of the national rail network by means of state-owned holding company Zambia Railways Ltd, he argues.

"This has certainly raised fears about policy taking a nationalistic turn," he says. "In the absence of a clear statement of policy direction, these fears will continue to linger on."

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InFocus

Investors Rattled by Zambian Reforms

A worker on duty at a coal mine belonging to Maamba Collieries, the largest coal producer in Zambia, 2 March 2007. The country’s mining sector plays a significant role in the country’s economy.

The government's direction on mining reforms, new laws on minimum wages and a ban on foreign currency transactions have raised concerns among investors, writes Eleanor Whitehead ... Read more »