Thursday, October 22, 2009

Zambia's fresh ambition

By Charlie Corbett | Published: 04 August, 2009

Rupiah Banda, the new president of Zambia talks about his vision for transforming the southern African state's economy in the light of a severe economic downturn. Writer Charlie Corbett in Cape Town

The untimely death of Zambia's longstanding president, Levy Mwanawasa, in August 2008 pitched the southern African state into an unexpected period of political instability. Investors held their breath as the country searched for a new president, against a backdrop of profound economic deterioration. In a nation where political rivalries are traditionally fierce, many feared a deadlock, particularly as Mr Mwanawasa had yet to anoint a successor before his death. It was not to be. Former vice-president Rupiah Banda was nominated as the ruling Movement for Multi-Party Democracy (MMD) party's candidate and beat the opposition Patriotic Party candidate, Michael Sata, by a slim margin.

Although political stability has been assured in the short term - elections are due in 2011 - Zambia's economic woes are manifold. The price of copper, which makes up 60% of the country's exports, has collapsed by about two-thirds since its highest point in 2008, dramatically reducing government revenues. Added to that, the global economic recession has stunted foreign investment and reduced remittances. As a result, the government was forced to revise its February 2009 budget estimates of 5% gross domestic product (GDP) growth down to a more sober 4% for this year. Others estimate that GDP growth will be well below even this figure.

The country's balance of payments has weakened dramatically and Zambia's currency, the kwacha, depreciated by a staggering 40% (in real terms) against the dollar between June 2008 and February 2009. By mid-March this year, the country's foreign currency reserves had fallen to just $750m, down from $1.3bn in July 2008. According to the International Monetary Fund, Zambia's trade balance, which was in surplus in 2008, will swing into a 4.9% of GDP deficit this year on the back of a 44% fall in the value of the country's exports.

Beyond mining

Despite such bad news on the economic front, President Banda remains bullish. Speaking exclusively to The Banker at this year's World Economic Forum meeting in Cape Town, he says that the country's economic woes should be viewed as an opportunity to reform. "Our desire now is to diversify. We've always talked about it before, but now we have to do it. In that sense, the recession is good for us," he says. "We are seeing it as a challenge that we don't have to depend on mining alone. We have to learn to do other things. Zambia has to learn to diversify."

This is a familiar mantra. Many African leaders, especially those whose economies are dependent on commodity exports, talk endlessly of diversifying their economies and without much tangible success. However, it seems that in the case of Zambia, Mr Banda's promises are backed up with some substance. Finance minister Situmbeko Musokotwane announced in his 2009 budget that the government had increased its allocation to agriculture by 37%, or K1.1bn ($216,000), to support diversification. After a torrid year in 2008, where the agro-sector contracted by 4%, the government is determined to turn things around. It has promised, among other measures, to abolish value added tax on agricultural plant and machinery, and to invest heavily in small-scale farming. Similarly, ministers see tourism as a vital component in moving the economy away from its reliance on mining. As a result, budget allocations to the tourist sector have been tripled and efforts are under way to establish a tourist zone in Livingston, a popular centre for tourists and home to the Victoria Falls.

Manufacturing push

If Zambia is truly to diversify, however, it needs to encourage manufacturing. Like most African nations, it exports raw materials and buys in manufactured goods from abroad. President Banda is aware of the need to establish a manufacturing base and his government is committed to continuing his predecessor's policy of setting up Multi-Facility Economic Zones (MFEZ). Such zones encourage investment by offering inducements to foreign manufacturers such as tax breaks and a loose regulatory environment in which to operate. The government is also committed to providing the necessary infrastructure and communications. So far, MFEZs have been established across the country and more are planned this year in the south and east of Zambia's capital, Lusaka. "We want to try to mechanise our industry," says President Banda. "We are talking to the Chinese to see if they can give us equipment which we can sell on to our people at cost price."

Enter the dragon

The issue of Chinese involvement in Zambia has provoked some sharp debate. China is the third largest single investor in Zambia, behind South Africa and the UK, with investments worth about $1bn. Some fear China's real motives and many ask if the Asian industrial giant's increasing influence will truly benefit Zambia's impoverished indigenous population. During last year's presidential elections, opposition challenger Michael Sata won support in urban areas after criticising what he called "exploitive" Chinese investors. President Banda, however, strongly refutes allegations that China's influence in Zambia is in any way negative.

"Our relationship with China is mutually beneficial, particularly in terms of employment," he says. "They employ Zambians. If you want something quickly, such as a smelter, you go to the Chinese. They also pay tax, and they don't argue. It is up to us to take that money and train our people, and build hospitals and roads."

President Banda draws attention to the Luanshya copper mine, which was closed down last year, causing the loss of 3000 jobs. "The Chinese reopened it and recreated the 3000 jobs that had been lost, plus an additional 2000," he says. The China Non-Ferrous Metal Mining Company now owns the mine and has pledged to invest up to $400m. "It is only China that has the money now, China and the Middle East, but they have the know-how as well," says President Banda.

Power and politics

Looking ahead, President Banda and his cabinet face a series of challenges. Top of the 'to-do' list must be to control inflation. High food and fuel prices at the end of 2008 pushed the rate of inflation to as high as 16.6% in January 2009. It has since eased to about 14%, as The Banker went to press, but the government is determined to push it back down to single figures by 2010. This should be helped by an easing of oil and food prices this year, as well as by slower growth as a result of the wider economic malaise. Another critical issue is power. The supply of electricity from the country's outdated power plants falls well short of demand and new capacity is urgently needed. The country generates just 772 megawatts (MW) from a capacity of 1300MW, while total Zambia power demand is 1600MW. Blackouts are commonplace, and as if to emphasise the point, Lusaka was plunged into darkness for two days in June after Zambia's biggest power plant stopped functioning. The government is committed to completing its power rehabilitation project by the end of 2009 and has entered into a performance contract with the management of state-owned power utility, Zesco.

On the political front, elections loom ever closer. President Banda's elevation to head of state after last year's rushed elections is merely a temporary measure and the country will return to the polls in 2011. It is not certain, as yet, who will take the prize. President Banda beat the opposition candidate by just 2% of the popular vote last year, and troubles within his own party might conspire to see him ousted. As The Banker went to press, news emerged that the defence minister, George Mpombo, had resigned. Although officially Mr Mpombo cited family reasons, there is wider speculation that he quit due to internal divisions within the MMD and a potential run for the presidency.

Despite the challenges that lie ahead, both economically and politically, President Banda exudes an air of confidence. "We know there are problems when you go to Africa. There is bureaucracy, slowness in doing things and there is corruption - but we are tackling them now and we are tackling them with vigour."