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Tuesday, 30 April 2013

Zambia is Vulnerable

Copper prices have been falling in recent months, and if truth be told they have been falling since 2011. They have lost about $3000 per tonne over the last two years. That fall has coincided with a slowdown in China's growth - and naturally all commodities have been taking a battering.

The fall in copper prices and the slowdown in the Chinese economy has naturally raised fears, with Zambia being on every lip. China's growth rate is still well above 7 per cent a year, but a slowdown is happening, and the near 10 per cent growth of the previous decade is gone. So what does it mean for Zambia? Capital Economics have crunched the factors and produced the table below. It puts Zambia at the top of vulnerable countries. 
Photo: There are signs that the Chinese economy is slowing down. China’s growth rate is still well above 7 per cent a year, but a slowdown is happening, and the near-10 per cent growth of the previous decade is gone. So what does it mean for Africa? Capital Economics have crunched the factors and produced this table. It puts Zambia at the top of vulnerable countries. We do have some room for responding but that is only if we keep a tight rein on borrowing and spending now.
There's certainly room for concern. Our economy suffers from lack of diversification and therefore not well position to withstand external shocks. A significant slowdown in the global economy led by China would definitely negatively affect the economy through the obvious decline in copper revenues. Some small mining closures may also okay (as was the case last time). At the same time there are likely to be further depreciation of the Kwacha with inevitable political fallout (which may improve competitiveness in other sectors) and associated inflationary risks. However, the recent regulatory changes through the Bank of Zambia Bill (Amendment) 2013 may minimise that risk.

But there's reason to be hopeful. The copper prices are unlikely to fall to 2008/9 levels because the drivers this time round are different. This is China re-adjusting within the general growing trajectory rather than a meltdown in the global economy. Perhaps more importantly is that our experience in 2008/9 shows that though output declined Zambia was still able to maintain growth around 6%, against expectations, largely due to strong performance in construction and agriculture.The policy response at that time was quite decisive with the Banda government moving swiftly to secure mining closures and make effective use of counter-cyclical policy with costly concessions to mining companies. 

The PF government needs to be prepared for these uncertain times and begin planning for contingencies in case things get worse. They have the advantage of that any reduction in revenue levels from low copper prices, against the counter-factual,  should be offset by ramp up in mining production in general - assuming the prices remain broadly reasonable. The key is ensuring fiscal prudence now so that we have sufficient headroom for counter cyclical policy should the need arise. Borrowing endlessly now (see here and here) may rob us of opportunities when we should borrow. Similarly rampant wage increases should be contained. We should continue to be wary of tinkering too much at this stage with the mining fiscal regime. In times of uncertainty, stability is the watch word. 

And of course we should note that in the long term structural demand for copper is positive. There are good reasons to believe that strong demand from China and other emerging economies in particular may continue for several decades, although the adoption of new technologies could see a lower degree of resource intensive output in these countries over time. Furthermore, productivity advances are still helping to contain the world price of manufactured goods, and a reduction in the price of some services is also probable as the tradability of services in an increasingly globalised economy becomes more widespread. While these various trends continue, they could support the continuation of relatively high real prices for metals and other resources for some time yet.

Copyright © Zambian Economist 2013

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