AMCHAM POLICY REVIEW
JULY - SEPTEMBER 2021 ISSUE #3
2021 WWW.AMCHAMZAMBIA.COM
Foreword July - September, 2021
The third quarter of 2021 at the Chamber was characterized by an uncertain future for the Zambian business environment owing to the general elections that were held in August 2021. However, the ushering in of a new government means a new opportunity to rebuild our economy, and most importantly for us to further strengthen the trade relations between Zambia & United States of America. Given the general election mood under the period in review, this report gives an overview of the economic highlights following the president’s inaugural speech, insights about the trends and impacts of IMF programs in Zambia, and a budget forecast highlighting what sectors the new government can prioritize. The recognition of the role that the private sector plays in transforming economies as alluded to by Zambia’s seventh republican president gives hope to us that indeed both the private and public sectors can work together in advancing economic development. With a membership that is largely from the private sector, opportunities are vast for our members to contribute to our economy significantly. We entreat you to read AmCham’s 2021 Q2 Policy Review Journal for in-depth content.
Chief Executive Officer Chansa Mwila
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Contents Economic Highlights 4
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Budget Forecast 8 IMF Programs: Trends and Impact In Zambia 10 Legislation From National Assembly 14
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Economic Highlights
On the Image Above From Left to Right; Mr. Mafiipe Chunga, Associate Director at KPMG Zambia, Dr. Wala Chabala, Chairman, Zambia Railway Limited, Ms. Florence Muleya, CEO, Zambia Asssociation of Manufactuerers, Mr. Munkanta Mulenga, Managing Partner, Munkanta Mulenga Legal Practitioners, Mr. Beyani Zulu, Independent Accountant The America Chamber of Commerce in Zambia held a panel discussion to review President Hakainde Hichilema’s inaugural speech on 31st August, 2021. The discussion revolved around Zambia’s debt situation, manufacturing sector, transport sector, and the legal and regulatory framework in Zambia. The following highlights salient issues raised following the president's speech. Debt Zambia recently defaulted on its Eurobond debt payment of $42.5 million in 2020. Against this backdrop, Fitch Ratings downgraded a key rating for Zambia from CC to Restricted Default. The aftermath of this rating is that despite the failure of government to pay its debt, it has still other financial obligations to fulfil such as the $750 million Eurobond debt that matures in 2022.
The new Government’s first task as discussed in the speech review is to restore investor confidence. From the kwacha appreciation, it is apparent that the change of Government has had a positive impact on investor confidence. The inaugural speech highlighted the private sector as a key sector in restoring economic emancipation in the economy coupled with consistent policy direction. Further, the increasing demand for copper on the international market has assisted in restoring investor confidence. Zambia's fiscal deficit and debt remain devastatingly high and burdensome on the economy. In light of that, Zambia’s talks with the IMF pave the way to negotiate a debt restructuring program. 4
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To have a successful IMF debt restructuring program, there is a need to ensure that the Government and IMF mutually align their priorities. Manufacturing Sector In his inaugural speech, President Hakainde identified the Zambia Association of Manufacturers (ZAM) as a key entity in improving the lives of the Zambian people. It was stated in the speech review that albeit change is imperative, it is an enabling business environment that is important for manufacturers. From a manufacturing sector viewpoint, an enabling business environment means: how well businesses can run smoothly in terms of logistic operations in the country; how efficiently businesses can seek legal services; and timeframes associated with acquisitions of permits and licenses for the business players. All these factors speak to the costs manufacturers incur when running businesses. In terms of permits, there are numerous licenses required in the manufacturing sector which discourages entry by small players. Excise duties placed on manufacturing further restrict the entry and effective performance of small businesses as they affect the profitability of small businesses.
Another issue that poses a challenge for the manufacturing sector is border efficiency. To enable the manufacturing sector to perform better, it is important to ensure that there is improved border efficiency as delays in transit times add to the cost of doing business through accommodation costs, food costs, and storage of goods. Another area that could be exploited in the manufacturing sector is to develop strategies for value addition across all manufacturing entities. This can be achieved by ensuring that there is the infrastructure that underpins value-added goods storage. One of the challenges with value-addition processes has been the reality that there are no storage facilities for manufacturers thus transportation of raw materials is preferred. Transport Sector
The railway system provides great potential for providing an alternative transport system for transporting goods. At the height of its performance, Zambia Railway Limited was able to transport over 5 million tons of cargo each year. Despite the growth of the Zambian economy, the rail and road infrastructure remains unimproved. In 2020, the Zambia Railway Limited transported 1 million tons of cargo, a target achieved after years of challenges; that's over 30,000 truckloads of goods taken off the road and a huge portion of carbon emissions taken out of the atmosphere. 5
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In recognizing the importance of the railway sub-sector to economic development, president Hichilema underscored Government’s commitment to developing the the sub-sector to provide for a cost-effective and efficient means transportation of bulk cargo. With the creation of the Ministry of Green Economy and Environment, this success presents an opportunity for the transport sector to be innovative and harness its capital financing strategies. Carbon credits can be leveraged to access capital and carbon funding which can be utilized as working capital to rehabilitate the railway infrastructure and creation of new railway systems. Legal and Regulatory Framework Firm and consistent legal and regulatory frameworks remain critical in lessening the cost of doing business. All economic sectors are affected by inconsistent policy pronouncements as they disturb the smooth running of businesses. To ensure policy consistency for the business sector, there is need to formulate policies that can be enacted in parliament and that are not dependent on present-day Government.
In terms of laws governing external investors, policy regulations need to allow for the management of offshore companies within the country. This can be achieved July - September, 2021 through the provision of a public platform such as public interest entities that publicly scrutinize offshore entities. This will facilitate greater economic benefits for the country and enable citizens to benefit from investors. In regard to local investors, consideration needs to be given locallyowned businesses through the provision of tax incentives. External shocks experienced by countries such as Covid-19 undermine policy consistency. Going forward, the legal frameworks must allow for year-to-year budgetary adjustments that respond to unforeseen economic shocks.
Business disputes such as timelines associated with the enforcement of business contracts continue to be prevalent. Given the above, legal and regulatory frameworks need to be addressed to solve disputes through the creation of mediation processes that allow businesses to privately resolve disputes. This will not only reduce the number of cases taken to court but also shorten the timeline of court cases.
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Panel Discussions Presenters 1. Mr. Mafipe Chunga, Assossicate Director KPMG Zambia: Moderator 2. Mr. Beyani Zulu, Independent Accountant: Debt July - September, 2021 3. Dr. Wala Chabala, Chairman of Zambia Railway Limited: Transport Sector 4. Mr. Munkanta Mulenga, Managing Partner Munkanta Mulenga Legal Practitioners: Legal and Regulatory Framework 5. Ms. Florence Muleya, CEO of the Zambia Association of Manufacturers: Manufacturing Sector
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Budget Forecast for democracy and human rights. The creation of the July Ministry of Small - September, 2021 and Medium Enterprises and the Ministry of Green Environment and Environment underscores the Government's commitment to improving livelihoods through sustainable practices. To achieve economic transformation that will reduce poverty, there is a need to revise tax policies particularly in the mining sector that will allow for more revenue collection and provide incentives for the Zambia’s debt profile has been spiraling in recent local people that will stimulate years owing to issues predating the Covid-19 participation in the mining sector and pandemic. With the country’s Eurobond principal other pertinent sectors. debt payment of $750 million maturing in 2022, expectations are high to see what strategies the new Zambia’s debt payment strategies are Government will put in place to see to it7 that critical for transforming the current state Zambia’s debt burden is managed sustainably and of the economy. In 2020, around 60 what sectors Government will prioritize in the 2022 percent of GDP was spent on debt national budget presentation. servicing, this was more than the funds allocated to health, education, and The ushering in of Zambia’s new Government and manufacturing sectors. its seventh republican president raises enthusiasm for those in favour of the new Government and Negotiations with the IMF and criticism for those against it. However, one issue international creditors place the that remains prominent for both parties is government at a more strategic point to expectations around the 2022 national budget put to effect strategies on how its presentation. The new Government’s theme is external and internal debt can be focused on “Creating a United, Prosperous and restructured and dismantled without Equitable Zambia: Restoring Economic Growth impeding economic growth. The success And Safe-Guarding Livelihoods.” Government seeks of these negotiations will be critical for to achieve this through broad policy direction in Zambia as they will set the trajectory on four key thematic areas: whether the Government will be able to pay the debt maturing in 2022. i. Economic transformation and job creation; ii. Human and social development; The manufacturing sector remains iii. Environmental sustainability; and central in fostering economic growth. iv. Good governance environment. Public expectations are high to see more funds allocated to this sector as it The government has continued to reiterate the need underscores the mandate of the ministry for economic transformation, enforcement of the of small and medium enterprises and the rule of law, environmental sustainability, and ministry of science and technology. 8
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Through the manufacturing sector, Government can leverage on opportunities of a digital economy and strengthen the development of healthcare services, education, SME development, and infrastructure development. July - September, 2021
In the health sector, the Government is expected to continue safeguarding the lives and livelihoods of the people in the wake of the Covid-19 pandemic. Health system strengthening is expected to prioritize resource mobilization towards fighting the Covid-19 pandemic, particularly in terms of medical supplies. Zambia is a signatory to the Maputo Declaration on Agriculture and Food Security, an initiative of the African Union that requires allocating 10 percent of national budgets to the agriculture sector. This sets a good premise for nations to achieve at least six percent annual agricultural growth rate at the national level. Over 60 percent of Zambian the population derives its livelihood from agriculture thus affirm adherence to the Maputo Declaration is critical for the alleviation of poverty and job creation for the youth. In that regard, the Government is urged to increase funding to agriculture as it is key to alleviating poverty and improving livelihoods and devise programs and policies that are deliberated at commercializing agriculture. Stable macroeconomic indicators attract foreign and domestic investment. Through effective monetary policies, stable exchange rates, steady inflation rates, and the creation of decent jobs, Government hopes for economic recovery will not be far-fetched. Ultimately, there is need to strengthen Government institutions to ensure that Government spending is in line with its budgetary objectives through public finance management. This calls for Government to work around sustainable revenue collection strategies and proper prioritization of public spending.
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IMF Programs: Trends and Impact In Zambia payment needs and also assist nations in July - September, 2021 economic crisis.
Zambia has over the years sought negotiations with the International Monetary Fund (IMF) in hopes of acquiring financial assistance through loans. Despite the previous IMF programs undertaken by previous governments, there are heavy debates among most citizens as to whether acquiring another loan is feasible for the nation given that the country is currently hampered with huge external debt of about $14.40 billion. The debates have been focused around questions of what really have been the gains and losses of IMF programs in Zambia and what lessons can the new government draw from them. The IMF lends under concessional and nonconcessional arrangements or can provide outright loans. As at 2015, Zambia had drawn an equivalent of $2,357,642 for various economic programs starting from 1974 to 2011. Post 2011, the Zambian Government has sought IMF assistance albeit none have been successful. The first assistance sought from the IMF was the standby arrangement which would help the nation to overcome the balance of payments problems and other economic challenges at the time. Various IMF arrangements respond to specific balance of
Experts have suggested that the success of structural adjustment policies is predicated on the existence of state capacity to push through reform measures and in particular to insulate itself or its bureaucracy from the demands of interest groups. It is more a matter of political will and commitment by a government to implement a structural adjustment package. The lack of commitment in the implementation of stabilization and structural between 1973 and 1991 underscores this claim as the Government failed to fulfill the agreed targets and had the agreements suspended or cancelled. Structural Adjustment Program, 1973 to 1991 During 1973 to 1991 period, the most comprehensive economic adjustment policies were implemented in 1985. The centrepiece of the 1985 programme was the adoption of the foreign exchange auction system. It was aimed at streamlining the allocation of foreign exchange and in particular eliminating the import licensing system. Other measures included liberalisation of agricultural marketing, public sector reform and a reduction in civil service employment. Foreign commercial firms welcomed it as they were able to bid for foreign exchange and bring in imported consumer goods. They were also able to externalise their profits. Despite the gains experienced in this period, several business parties, particularly those from different social groups, did not appreciate the foreign exchange auction system because it had a negative impact on manufacturing firms both in the private and public sector. The problems they 10
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experienced were of three kinds; First, production costs continued to rise because of fluctuations in the value of foreign exchange, secondly, there was an inability to raise the local currency (kwacha) cover to bid for foreign exchange, given foreign exchange fluctuations and high bank interest rates which averaged 35% in 1985-86 and lastly, there was the problem of delays in paying successful bids. This was partly because of donors’ delays disbursing money they had pledged to the central bank. It has even been suggested that the failure of Zambia’s auction system should be attributed more to insufficient funds from external sources than to lack of commitment by the Zambian Government.
priority sectors and programmes; (g) reform of the civil service and parastatals to improve efficiency and performance; and (h) the privatisation programme. July - September, 2021
As a result of adverse weather conditions, the sharp decline in copper exports, and the weakening of the financial position of the copper parastatal (ZCCM), real GDP contracted by an estimated 2 percent in 1998. Inflation increased since the beginning of 1998 to 31½ percent by end-January 1999, reflecting mainly the pressures on domestic food prices and the pass-through effects of the depreciation of the kwacha since late 1997. Owing to revenue shortfalls and spending overruns, mainly on public service retrenchment and domestic arrears, the overall The overall effect of the auction system was a fiscal balance (excluding grants) widened in devaluation of the local currency and 1998 to 10½ percent of GDP from 7 percent in escalation of the cost of living of the urban 1997. wage earners. It led to the deterioration in workers’ living conditions. Prices of essential Post 2000 commodities sky-rocketed and workers Since 1991, far-reaching structural reforms agitated for wage increases. have been implemented, including (i) the decontrol of agricultural prices and the Structural Adjustment Program, 1991 to 1996 liberalization of maize marketing; (ii) The structural adjustment program between substantial progress on a comprehensive 1991 – 1996 welcomed by Zambia’s second parastatal reform and privatization program; ruling party after agreements were made by (iii) the decontrol of interest rates, (iv) the the first ruling party of Zambia and the IMF. removal of exchange controls and the floating This economic reform package included: (a) of the kwacha; (v) the liberalization of the price decontrols of all products (except maize) banking sector; and (vi) the removal of and inputs; (b) exchange rate adjustment in quantitative restrictions on imports and real terms and elimination of exchange rate exports, as well as the reduction of the level restrictions; (c) liberalisation of export and and dispersion of customs tariffs. These import trade, while providing export reforms, coupled with efforts to pursue stable incentives; (d) fiscal austerity measures to financial policies, have improved Zambia's reduce the budget deficit and control economic outlook considerably. Nonetheless, inflation; (e) monetary policy measures to economic performance was uneven, as several adjust interest rates and tighten monetary droughts and falling copper production caused policy; (f) reform of the public investment negative economic growth during 1991–95, program to focus on resource allocation to and real per capita GDP declined by more than 20 percent during this period. 11
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Economic activity recovered significantly after the mid-1990s, with real GDP expanding by 6½ percent in 1996 and 3½ percent in 1997. The turnaround in economic activity was helped by the near doubling of the maize harvest in 1996 and strong growth in nontraditional exports. The tightening of monetary policy contributed to a steady decline in the rate of inflation from 35 percent in 1996 to 18½ percent in 1997. As a result of adverse weather conditions, the sharp decline in copper exports, and the weakening of the financial position of the copper parastatal (ZCCM), real GDP contracted by an estimated 2 percent in 1997. Inflation increased since the beginning of 1998 to 31½ percent by end-January 1999, reflecting mainly the pressures on domestic food prices and the pass-through effects of the depreciation of the kwacha since late 1997. Owing to revenue shortfalls and spending overruns, mainly on public service retrenchment and domestic arrears, the overall fiscal balance (excluding grants) widened in 1998 to 10½ percent of GDP from 7 percent in 1997. After the period 1999 - 2002, the Government of Zambia took on two more Extended Credit Facility (ECF) arrangements in 2004 and 2008 respectively. These programs were based on the three-year arrangement under the ECF. ECF-1 (2004-7) called for fiscal consolidation to contain the domestic debt and interest payments that jeopardized macro stability and social spending. As tax revenue performance was then considered strong, the focus was on limiting the wage bill and avoiding unplanned expenditures. Although issues in budget execution persisted, the fiscal discipline and reduced resort to domestic financing fostered price stability, particularly as the authorities became more adept at sterilizing inflows associated with high copper
prices. Program conditionality was largely adhered to, and economic performance during this period was strong: growth and international reserves improved more quickly July - September, 2021 than anticipated; inflation declined, and government spending—including on wages and salaries—was contained. Government capital spending fell sharply, however, largely because of a sharp drop in project aid. The strategy of ECF-2 (2008-11) emphasized more strongly medium-term growth, with diversification to make this growth more broad-based and resilient. Macroeconomic policies were to be geared toward creating space to increase spending on infrastructure and human resources by strengthening revenues. Reflecting the 2004 Econonic Payment Arrears priorities, this would be done in part by a new fiscal regime for mining and a more consistent approach toward tax exemptions. Improved budget and expenditure management and public procurement reform would enhance spending efficiency and encourage donor support. Despite strong macroeconomic stability, the downsides of this program saw to it grants and revenues run well below targets, and inflation was higher than initially targeted. From 2011 to 2015, Government did seek any IMF supported program. The economic crisis in 2015 triggered the Government to vie for IMF assistance. Despite the effort, Zambia's quest for an IMF deal has been unsuccessful. However, as of 31 May 2019, Zambia held an SDR-quota of equivalent of US$1.375 billion at the IMF which puts the country at a better position to access IMF assistance. Most recently, the IMF completed a virtual mission with top government representatives in 2021. Discussions covered economic developments, the near-term macroeconomic challenges, and policy options to return Zambia to a sustainable macroeconomic position over the medium-term. 12
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Sources: 1. Cheelo, C, Mungomba, N, 2019,'In Further Pursuit of an IMF-Programme: Possible Pathaways for Zambia and Lessons for Africa,' Working Paper No. 35. 2. https://www.imf.org/en/News/Articles/2021/03/04/pr2159-zambia-imf-staff-completesJuly - September, 2021 virtual-mission-to-zambia 3. https://www.elibrary.imf.org/view/journals/002/2010/208/article-A001-en.xml 4. Simutanyi, Neo 1996, 'The Politics of Structural Adjustment in Zambia,' Third World Quarterly, Vol. 17, No. 4. pp. 825 -839.
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Legislation From National Assembly 2021 Acts of Parliament The Electronic Government Act, 2021( Act No. 41 of 2021) July - September, 2021 Land Survey (Amendment) Act, 2021 ( Act No. 40 of 2021) Lands and Deeds Registry (Amendment) Act, 2021 ( Act No. 39 of 2021) The Insurance Act, 2021 ( Act No. 38 of 2021) The Zambia Correctional Service Act, 2021 ( Act No. 37 of 2021) Acts of Parliament (Amendment) Act, 2021 ( Act No. 36 of 2021) The Narcotic Drugs And Psychotropic Substances Act, 2021 ( Act No. 35 of 2021) The Industrial Hemp Act, 2021 ( Act No. 34 of 2021) The Cannabis Act, 2021 ( Act No. 33 of 2021) Electoral Process (Amendment) Act, 2021 ( Act No. 32 of 2021) The Zambia Institute of Tourism and Hospitality Studies (Amendment) Act, 2021 ( Act No. 31 of 2021) The Chartered Institute of Logistics and Transport (Amendment) Act, 2021 ( Act No. 30 of 2021) The Zambia Institute of Advanced Legal Education (Amendment) Act, 2021 ( Act No. 29 of 2021) The Engineering Institution of Zambia (Amendment) Act, 2021 ( Act No. 28 of 2021) The Zambia Institute of Marketing (Amendment) Act, 2021 ( Act No. 27 of 2021) The Health Professions (Amendment) Act, 2021 ( Act No. 26 of 2021) Urban and Regional Planners (Amendment) Act, 2021 ( Act No. 25 of 2021) The Accountants (Amendment) Act, 2021 ( Act No. 24 of 2021) The Higher Education (Amendment) Act of 2021 ( Act No. 23 of 2021) The Public-Private Partnership (Amendment) Act, 2021 ( Act No. 22 of 2021) The Health Professions (Amendment) Act, 2021 ( Act No. 21 of 2021) The Rural Electrication (Amendment) Act, 2021 ( Act No. 20 of 2021) The National Heritage Conservation Commission (Amendment) Act, 2021 ( Act No. 19 of 2021) The Examination Council of Zambia (Amendment) Act, 2021 ( Act No. 18 of 2021) The Zambia Law Development Commission (Amendment) Act, 2021( Act No. 17 of 2021) The Zambia Institute of Advanced Legal Education (Amendment) Act, 2021 ( Act No. 16 of 2021) The Zambia Revenue Authority (Amendment) Act, 2021 ( Act No. 15 of 2021) The Zambia Institute of Diplomacy and International Studies (Amendment) Act, 2021 ( Act No. 14 of 2021) The Tropical Diseases Research Centre (Amendment) Actl, 2021 ( Act No. 13 of 2021) The Service Commissions (Amendment) Act, 2021 ( Act No. 12 of 2021) The Public Service Pensions (Amendment) Act, 2021 ( Act No. 11 of 2021) The Petroleum (Exploration and Production) (Amendment) Act, 2021 ( Act No. 10 of 2021) The National Institute of Public Administration (Amendment) Act, 2021 ( Act No. 9 of 2021) The National HIV/AIDS/STI/TB Council (Amendment) Act, 2021 ( Act No. 8 of 2021) The Control of Goods (Amendment) Act, 2021 ( Act No. 7 of 2021) The Compensation Fund (Amendment) Act, 2021 ( Act No. 6 of 2021) The Citizen Economic Empowerment (Amendment) Act, 2021 ( Act No. 5 of 2021) The Electronic Communications and Transactions Act, 2021 ( Act No. 4 of 2021) The Data Protection Act, 2021 ( Act No. 3 of 2021) The Cyber Security and Cyber Crimes Act, 2021 ( Act No. 2 of 2021) The Legal Aid Act, 2021 ( Act No. 1 of 2021) The Zambia Institute of Marketing (Amendment) Act, 2021 ( Act No. 27 of 2020)
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AMCHAM QUARTER 3 POLICY REVIEW The American Chamber oF Commerce in Zambia Phone: +260 975 028 026, +260955 689 301 Email: info@amchamzambia.com Website: www.amchamzambia.com Address: The Works | Latitude 15 | Leopards Lane |Kabulonga| Lusaka | Zambia
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Prepared By Sharon K. Nkandu (Policy Research & Advocacy), with the support of Daniel Chibutu (Business Development) and Chansa Mwila (Chief Executive Officer)
