12 December 2012

Zambia: Nation's Economy On the Upsurge

THIS year, Zambia's economy is, yet again, on the rise.

The country's economic performance will keep this mineral-rich country in the group of the fastest growing economies in Sub-Saharan Africa (SSA).

With growing agricultural, mining, manufacturing and service sectors, Zambia's economy is expected to grow at above 7 per cent in 2012, higher than the 6.8 per cent growth rate registered in 2011.

The Foreign Direct Investments (FDIs) have risen from US$350 million recorded in 2009 to an estimated $991 million this year.

Despite the country's exposure to the global and internal economic crises, Zambia's economy has held on due to apt economic policies being undertaken by the Government.

The economy has been undergoing continuous growth and development in the last 10 years, which has led to a rise in employment and wages.

The economic system of Zambia is standing on a market driven exchange rate, a regime that is targeting inflation.

Surpluses in agricultural and metal productions helped to increase exports.

At the beginning of the year, the Government through the Ministry of Finance introduced three significant reforms, the minimum capital requirement for commercial banks, rebasing of the Kwacha and the anti-dollarisation measure.

This saw the Central Bank revising the minimum capital requirement from K12 billion to K104 billion for local commercial banks and to K520 billion for foreign banks.

Finance Minister Alexander Chikwanda introduced the reforms in the financial sector as he believed the changes were made on a tiered basis, with consideration to different demands of local and foreign banks.

Mr Chikwanda believed that the revised capital requirement would help mobilise additional resources to enable banks to participate more effectively in growing the economy by increasing credit available to the private sector.

The increase in the minimum capital requirement has made banks to be more resilient to economic shocks.

But the adjustment of the minimum capital requirement upwards for commercial banks was welcomed by the public with mixed feelings as some pointed out that the measure would hurt banks which would be pushed into operational difficulties.

Bank of Zambia (BoZ) Deputy Governor in charge of operations Bwalya Ng'andu during the course of the year assured the public that the Central Bank expected no bank to fail in the recapitalisation process.

The assurance gave peace to the public and the commercial banks knowing that BoZ was in control and would ensure that it supported financial institutions that might have challenges in meeting the new capital requirement.

The rebasing of the local currency being implemented by BoZ raised a lot of dust both on the economic and political front.

There were fears among the people that the rebasing exercise and cost associated with it would push the country into an economic crisis and distort the value of the local unit.

But the Central Bank pointed out that no changes would be introduced to the face value of the Kwacha.

To make the financial sector more solid, BoZ introduced the policy rate to replace the money supply targeting framework which had been in place previously.

The inaugural benchmark interest rate was set at above nine per cent and currently stands at 9.25 per cent.

The policy rate allows BoZ to clearly signal its monetary policy stance to the market, providing financial market participants with a credible and stable anchor for setting of interest rates on their credit products.

This week's World Bank economic brief on Zambia underscores the fact that the economy has continued to register strong growth in 2012 which it estimated at 7.3 per cent.

Zambia has grown faster than most of its peers including both mineral-producing and non-mineral producing countries.

Notably, the growth has been broad-based, led by a strong performance in agriculture, manufacturing and services, even as mining output contracted for the second year.

The report indicated that Zambia's recent fiscal policy had been expansionary, while the capital inflows too have remained resilient despite global slowdown.

FDI inflows continue to be directed mainly at the mining sector, with manufacturing, communications, and financial institutions also contributing to recent FDI growth in the country.

Gross International reserves are at about three months of prospective imports and the Government aims at further increasing the reserve coverage, mainly to guard against trade shocks.

World Bank Country Director for Zambia Kundhavi Kadiresan says: "The medium-term economic prospects for Zambia remain good though dependent upon continued high mineral prices. The World Bank estimates GDP growth to average above seven per cent over the 2013-14 forecast horizons."

In addition, rapid expansion in transport services in Zambia is also a response to strong growth on demand from other sectors of the economy.

Telecommunication services continued to grow due to an expanding customer base.

Despite strong economic growth in the last decade, there was very little progress in reducing poverty, particularly in the latter half of the previous decade.

Former BoZ Governor Caleb Fundanga says the economy is generally doing well and that with growth expected to grow at 7.3 per cent in 2012, it is important to look at the risks associated with the growth.

"As we have had farmers not being paid, inputs have not been delivered for me those are the things that are worrisome because if we cannot feed ourselves maize is very expensive to import. It is a low value but bulk product, so if you don't produce it, you end up fire-fighting.

"We must ensure that the bottlenecks in the agricultural sector are addressed quickly so that we can remain a food surplus country," Dr Fundanga said.

In supporting Zambia's economic growth, Finance Minister Alexandar Chikwanda pointed out that the improved macro-economic and business conditions have resulted in increased private sector investment in the country.

The investments in a broad array of sectors is consistent with the Government policy objective of diversifying the economy by encouraging the growth of other sectors other than mining and Mr Chikwanda says the long-term efforts are beginning to bear fruits.

Mr Chikwanda is particularly happy to note that while the mining sector, which is the mainstay of the Zambian economy, is said to have posted a negative growth this year, the overall GDP growth in 2012 is projected to remain robust.

The key drivers of this growth would be non-mining sectors of construction, transport and communication, manufacturing and agriculture.

He observes that the impressive macro-economic performance will amount to very little if it does not translate into tangible improvements in the living standards of the majority of the Zambian people.

He adds that in line with the National Development Strategic focus of human capital development, the Government has over the past few years committed a significant amount of public resources for investment in the social sectors.

Commenting on the Kwacha, Financial analyst Maambo Haamaundu said the Kwacha would in the short term continue being under pressure owing to limited supply of the dollar on the market.

Mr Haamaundu says presently, the exchange rate is being driven by demand and supply as such, the local unit would continue being under pressure.

He said the performance of the Kwacha in 2012 has not been good, after the local unit opened trading at about K5,150 against the United States Dollar; it depreciated to K5,315 in March.

From August to date, the Kwacha has generally been depreciating against major convertibles and its performance can generally best be described as volatile.

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