III. Economic Trends And Outlook Major Trends and Outlook Zambia is in the third year of an ambitious structural adjustment program. The stabilization portion of the program began to show results in mid 1993 when inflation fell sharply from a 200-plus annual rate to less than 10 percent in the last five months of 1993. Inflation has been relatively low so far in 1994. After appreciating sharply when inflation fell, the kwacha corrected and has remained stable in 1994. Exchange controls were removed entirely in February 1994. Interest rates have not fallen enough in line with inflation and very high real interest rates are hindering recovery. Structural reforms have proceeded more slowly than macroeconomic reforms. Civil Service reform is just getting started. A new revenue authority which has replaced the former Customs service and Tax office is the only major improvement in government administration. Legal reform is proceeding, but very slowly. There has not been any significant progress on land reform or property rights. Privatization has become bogged down, the victim of bureaucratic and political infighting. A stock exchange was opened in 1994 but there is little prospect that any parastatal shares will be floated on the exchange in coming months. The Zambian economy remains sluggish. In 1993 GDP posted four percent growth and a slight improvement in GDP per capita. Most sectors did poorly and growth came almost entirely from the strong recovery of the agriculture sector following the very low output during the 1992 drought. Growth will probably be close to zero in 1994 since no sector looks like it will turn in improved performance. Principal Growth Sectors Agriculture Initial harvest projections predicted a good year for Zambian agriculture with increasing diversification of crops and good harvests. Uneven rainfall late in the season has drastically reduced harvest projections. Most crops will have output similar to 1993's with the exception of maize and rice. Area planted to rice dropped sharply in the face of competition from cheap imports. Maize was most affected by the rain problems and will only be about 65 percent of last year's harvest. Some food imports will be required. The livestock sector has not yet recovered from the drought and shortages of beef are affecting the meat industry. Continued high interest rates are complicating the transition to private sector marketing, but the increase of small scale mills has increase competition and markets. Mining The copper industry suffered from a double blow of a strong kwacha and low copper prices in late 1993 and suffered a 150 million dollar loss for the year. Production is barely reaching targets and costs have been escalating. The current recovery in copper prices is allowing some reduction of accumulated debt. The Copper conglomerate, ZCCM, is putting in place a restructuring program to lower costs. An early step in the program has been to stop mining at the lead/zinc mine in Kabwe. ZCCM is seeking finance to develop a new underground mine known as Konkola Deep, but financing the project will remain problematic under the current management structure. A number of foreign mining houses are undertaking exploration in Zambia. Gemstone mining remains a mainly wildcat operation. Kagem, the government joint venture emerald mine, has closed down. Manufacturing The manufacturing sector has been the hardest hit by structural reforms so far. The sector is heavily dependent on imports and the devalued currency has increased costs at that same time that tariff protection has been lowered. Companies can't afford to invest in upgrades at current interest rates. Industries which process domestic raw materials and which export have been doing well and in some cases are expanding. The painful restructuring of manufacturing will probably continue for several years. Transport Transport was a growth sector in 1993, mainly due to increased demand for crop transport for the bumper harvest. Private companies are competitive and are doing well especially in trucking, although the government has made threatening noises to foreign truckers who are cutting into the domestic market. The passenger bus sector is opening up to competition. The continued poor performance of Zambia Airways is opening up opportunities for others to fill in cargo and passenger service. British Airways has added a third weekly flight to Lusaka from London. Parastatal transport companies are doing badly across the board. This is felt most severely in rail service, where there is no competition. Managers have been replaced at most transport parastatals, but time is needed to see if improvements follow. Construction Construction remains weak. The difficulty of obtaining land is hindering would-be builders in the private sector and government capital expenditure is down. Many government building projects have halted due to lack of funds. There is pent up demand for office space, industrial plots, and housing so if land becomes available this could be a growth sector. Services Services were another bright spot in 1993. Deregulation in the financial sector and freer trade boosted performance of many services companies. The lower capital requirements of many services have allowed them to move more quickly to take advantage of new opportunities. Government Role in the Economy The government's policy is to disengage from economic activity and to concentrate on regulation, enforcement, and the provision of government services. Government control of most markets has been dramatically reduced, but the parastatal sector still dominates the economy, and privatization has barely begun. Although parastatals are now supposed to be operating on a competitive basis, they are still under pressure to favor other parastatals. Direct subsidies have been ended (except for Zambia Airways), but cross subsidization between parastatals still occurs, and there is enormous interlocking debt among parastatals. The government is slowly moving to update business law but enforcement remains lax. Balance of Payments Situation Zambia's imports and exports roughly balance most years at roughly USD 1 billion dollars. In 1993 this figure fell to between 700 and 800 million as copper revenues fell and imports were compressed. Zambia's debt service is enormous--usually USD 600-700 million per year. This covered by external assistance. Trade and Investment Barriers Quotas and most other non-tariff barriers to trade have been abolished. Tariffs have been lowered and simplified to one of three rates--20, 30 or 40 percent for most goods. In addition there is an across-the-board sales tax on imports of 23 percent. To formally invest one must apply to the investment board and receive an investment license, but this is fairly simple and speedy process. Acquiring land, various licenses, and immigration permits for expatriate personnel are the most trying problems for investors. Foreign investors get national treatment. Exchange controls have been lifted, making the transfer of funds in and out of the country relatively easy. Labor Force The best figures estimate a labor force of roughly 3.4 million people out of a population of 8 million. About 500,000 are employed in the formal labor force. The national language is English and adult literacy is relatively high, but there is a shortage of skilled, technical and professional workers. Only about 20 percent of the population have some secondary school education. There is very high prevalence of HIV infection in the urban areas. Wages are low in Zambia but restrictive labor laws and a requirement that employers provide housing make labor costs relatively high on a regional comparison. Major Competitors in the Market Local private businesses while competent have tended to remain fairly small given the past hostile environment toward the private sector. A good number of multinational companies--US, European and South African --have subsidiaries in Zambia. In trade, the South Africans have a clear advantage due to their proximity and knowledge of the region. The South African influence in the Zambian economy is expected to increase as formal relations resume. In the past, South African and European companies have often been more successful here because U.S. business has not been very interested. U.S. businesses that establish themselves in South Africa should soon be able to compete from a base within the region. Major Infrastructure Projects Underway Nearly all infrastructure projects in Zambia are funded by foreign donors. There are relatively few infrastructure projects on the boards. There are a number of small, bilaterally financed road rehabilitation projects underway or planned. The African Development Bank is financing the rehabilitation of the water and sewage system in Lusaka and has a similar but smaller project for Kitwe in the planning stages. The World Bank is funding the final phase of the rehabilitation of the oil pipeline from Dar-Es-Salaam to the Copperbelt. USTDA is financing a feasibility study for hydroelectric project on the Kafue river. ZCCM is seeking finance for opening a new deep mine, but is slow in coming to grips to with some of the prerequisites for raising such a large amount of money.