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Friday, 28 February 2014

A final word...for now!

This has been a busy week. A few developments over the last two days which I have not mentined. The Kwacha depreciated further against the dollar on Thursday, owing to increased demand from importers seeking to cover their foreign obligations so as to minimise currency losses. The Kwacha opened at K5.780 / 5.810 and closed at K5.795 / 5.825. In the absence of improved supply, the market analysts predict the Kwacha is likely to remain under pressure in the short to medium term. (Source : Cavmont Bank)

The annual rate of inflation, as measured by the all items Consumer Price Index (CPI) for February 2014 was recorded at 7.6 percent compared to the 7.3 percent recorded in January 2014. This means that on average, prices increased by 7.6 percent between February 2013 and February 2014. (Source : Central Statistics Office)

Zambia rebases GDP (25% larger)

Some good news for the PF government! Well kind of good news. The economy is 25% larger than previously thought. According to new figures released by the Central Statistics Office. The CSO have now moved to the new base year of 2010. Zambia last rebased its GDP measure in 1994 and a lot has changed since then. The annonced GDP rebase follows the completion of its analysis of the 2010 economic census.

It is customary for countries to rebase their GDP every five years or so to keep up with prices and structure of the economy. More importantly such a rebasing exercise usually includes taking on board new accounting conventions, improved estimation methods and revised statistical classifications. For Zambia this has not happened for nearly 20 years making the GDP and inflation (GDP deflator) figures deeply unreliable.

The 25% estimate is larger than the 20% it had previously suggested. However it is lower than what we have seen for Ghana were the rebasing exercise increased its GDP by 60%. The Nigerians are expecting their GDP to double when it rebases later this year. Zambia's GDP has not changed as much as that because we are still structurally dependent on similar activities as in 1994.

So what does this mean for Zambia?

Broken Statistics in Zambia

I know I have said this before but there's a big problem in Zambia when it comes to data and public policy debate.

The Central Statistics Office (CSO) which we all rely on for information is politically captured. It is not an independent statistical authority. All their data collection and activities are not protected by any credible parliamentary statute. The man in charge is not independently appointed. He is not even subject to parliament.

How do we know that the data we are looking at has not been tempered with? Who checks on the CSO? Who ratifies the appointment of those in charge? Why are we all quiet on this cardinal issue? How can we be confident about our data?

Thursday, 27 February 2014

Trial and error economics at BoZ

The Bank of Zambia (BoZ) has increased the statutory reserve ratios for commercial banks to 14% from 8% from March 10 in a bid to reduce liquidity and help prop up the free falling Kwacha (Source: Cavmont). What this means is that the Bank will have keep more money on its books and will not be able to lend as much.

When PF came to power it reduced the reserve ratio to 5% because it argued that it wanted to boost lending in the economy. Then it decided to increase it to 8 percent. And now it has made a huge increase to 14%. This is at a time when it has controversially capped commercial bank loan rates.

Deficit woes, free falling Kwacha and more borrowing!

Parliament yesterday voted to increase the threshold of domestic borrowing payable over a period of ten years from K200m (US$35m) to K13 billion (US$2.3bn). Domestic threshold for loans repayable over one year has risen from K10m(US$5.8m) to K20bn (US$3.8bn). Finance Minister Alexander Chikwanda says the increase in the domestic borrowing threshold is meant to help the Patriotic Front (PF) government implement various economic projects given the burgeoning budget deficit and limited room for external borrowing.

Chikwanda's 2014 Budget has a huge hole that needs to be filled. The PF were looking to do that through a Eurobond before Christmas but the tapering of US credit has made it a little bit more costly for Zambia and other African economies to borrow. This has meant that PF has had to invent a Plan B. Though it is still possible that Eurobond may be revisited down the line if the situation improves.

Tuesday, 25 February 2014

Economics of Biofuels

A recent World Bank paper by Sinkala et al examines the economics of biofuels in Zambia. Here are their broad conclusions:

With increased global interest in biofuels, Zambia, a Sub- Saharan African country that entirely depends on imports for its petroleum supply, is planning to implement blending mandates for biofuels. But, a large number of issues—including production costs of biofuels, land requirements to meet the mandates, and environmental benefits—have not yet been explored.

This study aims to contribute in filling this gap. It finds that depending on feedstock type, costs of ethanol production range from US$0.360 a liter to US$0.680 a liter while the costs for biodiesel production range from US$0.612 a liter to US$0.952 a liter. Even if lower energy contents of biofuels are taken into account, the analysis shows that biofuels are cheaper than their petroleum counterparts.

Considering the cost advantage of these biofuels over petroleum products and the availability of surplus agricultural land, Zambia is likely to benefit from the development of a biofuel industry. Biofuels is expected to reduce Zambia’s petroleum import bill, which currently stands at more than US$700 million, enhance food security by providing incentives to increase yields, and increase affordability and accessibility to modern energy in the country where 77 percent of the population still lacks access to modern energy. It could also stimulate rural employment and development.

(Source: World Bank Policy Research, June 2013)
Essentially what they seem to be saying is that biofuels make economic sense in Zambia. According to the authors biofuels would be very competitive against the current GRZ strategy of procuring petroleum via current supply chain. With the current wholesale price around $1 per litre. Sinkala et al say biofuels would have a production cost less than $0.65 per litre. The wider economic benefits would also be huge in terms of employment.

Friday, 21 February 2014

Zambia's Population Must Keep Growing!

Editor's note: This is a guest post by Henry Kyambalesa (PhD), a resident contributor to Zambian Economist. He is a Zambian academic currently residing in Colorado, USA. The articles argues that recent statements by some Zambian politicians that the country’s rate of population growth of around 3% is too high are misplaced. 
Recent statements by some Zambian politicians that the country’s rate of population growth of around 3% is too high are misplaced. With its current population of around 14 million people, and a population density of around 18 persons per square kilometer, Zambia is relatively one of the most sparsely populated countries in the world.

What we seriously need is for the government to prudently harness and marshal the country’s resources in order to meet the basic needs and expectations of the people.

Wednesday, 19 February 2014

Economic Policy Resource Centre (EPRC)

The Economic Policy Resource Centre (EPRC) is an open-access online information exchange system for economic research and policy outputs from Southern Africa, hosted by the Southern African Institute for Policy and Research, located in Lusaka, Zambia. The EPRC is designed to bring together previously disparate resources on economic policy produced both within Africa, as well as internationally. Resources from academic, non-governmental, and governmental institutions are searchable through a state-of-the-art database system, freely available to all researchers and their institutions worldwide.

The Zambian Economic Policy Resources collection currently focuses on secondary economic policy resources from Zambian academic, non-governmental, and governmental institutions created since 2008. Specifically, the collection focuses on macro- and micro-economic policy; the agricultural, mining, and tourism sectors; infrastructure development; and labour markets. These resources are freely available for use by local and international researchers and institutions.

The EPRC project has recently completed its first phase, with an eye towards continued growth in sources and community promotion in the coming months. For more information on the EPRC project, to find out how you can become involved, or to provide feedback on this exciting new initiative, contact the Database Manager, Jessica Achberger : jessica.achberger@saipar.org

Tuesday, 18 February 2014

Broken Zambia

A recent piece from Think Africa Press provides some interesting observations on Zambia's current constitutional impasse :
In the short term, real change won't emerge from the government's legal apparatus. It will have to come from outside. Protesting Zambians have chalked up victories before, as when public demonstrations played a role in dissuading Chiluba from seeking an unconstitutional third term. And if NGOs, beleaguered though they are by looming registration reforms, were to focus their efforts on mobilising not just urban Zambians, but also those people living in undeveloped areas, more tangible results could be achieved..."

But it's not just a case of focusing their efforts. It's a case of refocusing them. The fight for a new and improved constitution is certainly a worthy one, but civil society organisations have made a holy grail of constitutional reform, as if delivery will automatically slacken the state's grip on an array of levers it freely abuses, from stacking the judiciary with supporters to deploying waves of violent thugs in by-election campaigns..."
The last point the author makes is an important one. As important as the fight for a new constitution is, it won't immediately deliver tangible change because there are many areas where the 'One Party State' mentality still dominates the country.

Sunday, 16 February 2014

Reframing the Lower Zambezi Mining Copper Debate

Editor's note: This is a guest post by Michael Chishala, a Zambian writer and regular contributor to the discussions on the ZE Facebook page. Follow him on Facebook. 
The Zambian government recently made a controversial decision to grant a licence to Zambezi Resources Ltd for copper mining activities in the Lower Zambezi National Park. The action triggered a hullabaloo that has no signs of abating, what with a court injunction granted to environmental groups to halt the process for the moment. 

Although I am a very fierce critic of the the current Patriotic Front government, this is one of the few things they have done right, even if it is for totally selfish reasons. The main argument given by opponents of the project is an environmental one (i.e. that mining activities will destroy the beauty of the national park and reduce its tourism value). There are also arguments on pollution from the mining process. My observations are as follows:

Saturday, 15 February 2014

Zambia Jobs Challenge

Another important economic report that I forgot to upload last year. I am still working through my archives so expect a few more!



AUTHOR
Chola Mukanga | Economist
Copyright © Zambian Economist 2013

Friday, 14 February 2014

Minimum wage and jobs

Editor's note: The article below is taken from VoxEU publication 'Minimum wages and jobs' by Canadian economists Pierre Brochu & David A Greene. It provides  new evidence on increases in minimum wages. It suggests that for less educated workers an increase in the minimum wage results in more stable jobs, but fewer of them.  In other words minimum wages makes it harder to reduce unemployment for many young and uneducated. But those who do find a job may find that they stay longer in it. The reason may be because employers are much more careful about who they hire given the higher cost of employment. It may also because new recruits put in a greater effort given fewer hiring opportunities. This evidence is of course relevant to Zambia given last year's decision to increase minimum wages. 

Minimum wages: the effects on employment and labour-force turnover

On 14 January 2014 a group of 75 economists, including seven Nobel laureates, released a letter calling for an increase in the US minimum wage (Woellert 2014). At the same time, George Osborne, the Conservative Chancellor of the Exchequer in the UK, has called for the minimum wage in that country to rise by more than the rate of inflation this year (BBC 2014). In both cases, the key argument for an increase concerns a need for fairness in insuring that the lowest paid workers share in the benefits of post-recession economic growth.

Wednesday, 12 February 2014

Mining Developments

Mines Minister Christopher Yaluma says the government is considering increasing the mineral royalty tax from 6 per cent to as high as 10 per cent. Yaluma says, "we are not reaping what we are supposed to reap for the people of Zambia...We can't even guarantee that we are monitoring what is coming out of the soil..until we know what is coming out, then we will adequately tax." (Source : The Post)

FQM says it will engage GRZ to reverse the 10 percent export duty on nickel concentrate. It says nickel mines in Zambia are too small to justify the construction of Nickel smelters. The export duty is meant to encourage construction of smelters but what it is allegedly doing is merely holding up revenue for government. FQM is currently constructing a $100m nickel mine (Enterprise) in North Western Province (Source : ZNBC)

Tuesday, 11 February 2014

Banks and Credit Growth

The chart below is good news because we are witnessing increased delivery of financial services in rural areas through rapid expansion of bank branches. Current GRZ plans to improve titling of customary land will also hopefully translate into improved credit access for many rural dwellers. No point of having access to banking services if you are still struggling to borrow.


However, even with the growth in bank branches the borrowing rates are still beyond the reach of ordinary Zambians. More must be done than merely increase of land titling. We have previously noted the large risk premium (lending rates minus savings rate) currently standing at 12.8% gap. Clearly the reason for high lending rates is partly due to lack of collateral and credit history.

Monday, 10 February 2014

Governing by decrees

The Zambia Episcopal Conference recently held a press conference at which they made wide ranging observations on where they think the PF administration is failing. The key paragraph that jumped out for me is this one :
In our past statements in 2013, we consistently appealed to government to promote a culture of consultation as a basis of policy and decision making. Ruling by decrees is not only undemocratic but also denies our country the benefit of bright ideas that could be offered by many citizens not in positions of decision making. Some decrees have led to policies that raise great challenges to implement. In the past we have talked about decrees on creation of a multitude of districts; today it is the issue of using local languages as a mode of instruction at lower primary in our schools and then the issue of SI No. 103
This is an important statement. As I have previously noted, effective policy making is not just about having right policies (if such exists), but also the right processes of reaching policy decisions. Transparency and national consensus are key ingredients for sustainable and effective long term policies. Not "governing by decrees" or as the "know it all".

Sunday, 9 February 2014

Lesson Learnt

Finance Minister Alexander Chikwanda recently announced that no money has been saved from the removal of fuel and maize subsidies. There has been calls on government to explain how much it has saved from the removal of subsidies and where that money is being spent.

Chikwanda says what GRZ has done is merely prevent expenditure on further subsidies. And by doing so it has increased expenditure "on other developmental projects which could have suffered if such funds were still being allocated to subsidies...". He did not say what amount and where the money has gone precisely.

The money on subsidies could only have been "saved" in a real sense if it resulted in a reduced budget deficit and government debt. But both of these things have ballooned. The money "saved" from fuel and maize subsidies went on funding the large unprecedented increase in public sector wage bill.

Saturday, 8 February 2014

Technical Compendium of Agriculture Statistics

This helpful technical compendium from IAPRI is intended to serve as a reference document for  researchers and government officials. It uses nationally representative survey data to provide descriptive trends and analysis relevant to the agricultural sector. 



AUTHOR
Chola Mukanga | Economist
Copyright © Zambian Economist 2013

Friday, 7 February 2014

Wrong Priorities

I spent much of last year bemoaning the poor policy decision to award large public sector pay rise. These graphs below illustrates the scale of that mind boggling wage rise:.

Photo: It is economic folly to spend 11% of your GDP on public sector wages. It is a complete misallocation of resources. Especially when that is being funded by removal of subsidies on fuel, maize and foreign debt. What is wrong with us as a people?

Thursday, 6 February 2014

In Cryptography We Trust : A Short Guide to Bitcoin

Editor’s note: This is a guest post by Michael Chishala, a Zambian writer and regular contributor to the discussions on the ZE Facebook page. Follow him on Facebook.
What is Bitcoin?

Bitcoin is a form of decentralized currency system similar to Dollars or Pounds, except that it is completely digital (based on computer hardware and software). These "digital coins" can be used like traditional money for transactions between two parties. They are "mined" (like gold or silver) from a special "peer-to-peer" computer program that sits on a distributed worldwide network of computers. The mining process involves using computers to solve complex mathematical problems and getting rewarded with the bitcoins which the "miners" can then trade for other things just like silver can be exchanged for Dollars or used to pay people's wages. Bitcoins can be traded on an exchange just like Gold can be traded on the London Metal Exchange. The Bitcoin system makes extensive use of encryption technology (hence sometimes called a "crypto-currency") and because it is a peer-to-peer network, there are millions of copies of the records of how many bitcoins there are and all the transactions between different parties using Bitcoin.

Wednesday, 5 February 2014

Zambia's Copper Risks

Copper prices are headed for the longest slump in 20 years, on signs of weakening demand after manufacturing slowed in China and the U.S., the world's top metals consumers. The metal for delivery in three months on the London Metal Exchange slid as much as 0.3 percent to $7,000 a metric ton, the lowest intraday level since Dec. 4. Prices have lost 4.3 percent in this run of declines. (Source: Businessweek)

Factories in the U.S. expanded in January at the weakest pace in eight months, and a measure of orders declined by the most since December 1980, data from the Institute for Supply Management showed yesterday. In China, a purchasing managers' index fell to a six-month low last month as orders slowed.

Copper in London has slumped 15 percent in the past 12 months, partly as economic growth eased in China. Global supply will exceed demand by 385,000 tons this year, after a 45,000 ton surplus in 2013, and prices will "grind lower". About $2.9 trillion has been erased from the value of global equities this year as China's economy slowed and the Federal Reserve further cut stimulus on Jan. 29.

What does this all mean for Zambia? That depends on how long the slump lasts and where the prices might finally end up. Chile and other produces are pricing much lower copper prices. If they correct it should concern all of us because our economy suffers from lack of diversification and therefore not well positioned to withstand external shocks.

Tuesday, 4 February 2014

Government by design

Editor's note : The article below is taken from McKinsey's publication 'Government by design: Four principles for a better public sector'  by Diana Farrell and Andrew Goodman of the McKinsey Center for Government. The issues are global but very relevant to the Zambian context. 
Governments everywhere face a daunting paradox. On the one hand, they operate in an increasingly complex environment and must deliver on an expanded set of policy objectives. In a world characterized by macroeconomic uncertainty, rapid social change, and technological innovation, citizens' expectations of what government ought to deliver are rising. On the other hand, governments are hampered by unsustainable debt burdens and shrinking budgets. The ratio of general government debt to gross domestic product for member states of the Organisation for Economic Co-operation and Development (OECD) now exceeds 100 percent.11. McKinsey analysis based on Economic Outlook No. 93, Organisation for Economic Co-operation and Development, May 2013, oecd-ilibrary.org. Meanwhile, public trust in government is eroding.22.2012 Edelman Trust Barometer, Edelman, January 2012. Against this backdrop, not only must governments do more with less; they must do so in highly visible ways, if they are to regain the faith of their constituents.

Monday, 3 February 2014

Prices are rising!

Life continues to be challenging for many of our people. And all the signs are pointing to even greater challenges in the future as things become even more expensive.

The price of maize is up!

A 25kg of breakfast mealie is now in the region of K70 - K80 in many parts of the country. This is at least K25k - K30 more than it cost last year (K55) or 40-50% increase in the price, far above the general rise in inflation of 7%. The price of maize had been expected to reduce to around K65 (20% higher than last year) following a GRZ directive and FRA releasing 50,000 tonnes on the market and A , but in many urban areas retailers have maintained it at around K75. (Source : Post, Daily Mail, MuviTV)

Saturday, 1 February 2014

Zambian Economist is 7 years old!

Zambian Economist celebrates its 7th year anniversary today! On  1 February 2007 I begun to write! Thank you everyone for your continued support! It is fair to say if it was not for your support I would have stopped writing in the first month. Many have started and fallen off the way side! So, thank you again for keeping this going! I would particularly thank you those who have stayed with this from its early days - if you have please let me know, it would be great to hear from you. Thanks! Here is the first blog post I wrote on that very day of 1 February 2007 [the country was under President Mwanawasa].


After reading about the latest economic deal Zambia has signed with China, it’s clear that this partnership is here to stay. I cannot see how any future Zambia leader no matter how opposed he/she may be to China’s practices will be able to reverse the current arrangements that are being put in place between the current Government and China.