Lessons from Zambia: Zim can be wealthier

via Lessons from Zambia: Zim can be wealthier – The Zimbabwe Independent August 28, 2015

Following on from last week, Zambia has grown steadily over the last two decades and today is wealthier than Zimbabwe. This was not always the case and somehow Zambia managed to unlock its wealth and unleash economic growth through transformation of its economic policies.

Ritesh Anand Column

In 2013, Zambia successfully raised US$750 million through a 10-year Eurobond at 5,625%. The inaugural issue was more than 10 times oversubscribed.

Much of Zambia’s success can be attributed to the visionary leadership of former president Levy Mwanawasa, who guided Zambia to achieve a growth of 7,1% per annum for seven years, and foreign direct investment (FDI) inflows more than doubled from 3,7% of GDP to 6,3%. Inflation declined from over 80% per annum to less than 16%.

His predecessor Rupiah Banda built on this economic success as Zambia continued to grow by 8,6% under his leadership. FDI inflows remained high and inflation continued to decline. GDP growth has averaged over 7% per annum in the last 13 years while FDI flows have averaged over 6% of GDP while sound macro-economic policies saw inflation decline to single digits.

The privatisation programme in Zambia was formally launched with the enactment of the Privatisation Act of 1992 which provided the Zambia Privatisation Agency (ZPA) the responsibility to plan, implement and control the privatisation of state-owned enterprises in the country.

The speed at which Zambia has proceeded with its privatisation process was attributed to the autonomy of the ZPA, which had a 12-member private sector majority board, devoid of political influence. The process was closely monitored by the international community, notably by key donors. Prior to privatisation, about 80% of economic activities in Zambia were controlled by the state. This has since been reduced to between 10% and 15%.

The privatisation of the mining sector in particular, had been made an important condition in a number of financing facilities extended by the World Bank and the International Monetary Fund, from as early as 1993. This was also necessary as the previous model had not yielded the desired results.

The privatisation exercise attracted a significant number of foreign investors from South Africa, China, the UK, India, US and Germany.

To date, a total of 264 units have been transferred to private hands out of a working portfolio of 288. Most of the small to medium enterprises were privatised by the mid-1990s.

Gross receipts from privatisation were estimated at US$433m, with the mining sector alone accounting for US$339m. In addition, the transfer of ownership and operations of mining companies to private hands had revived production in the sector, which saw its output plunge to 226 192 metric tonnes in 2000 from a high of 700 000mt in 1972. After privatisation, production has climbed up once again, mainly due to increased investments in plant rehabilitation and expansion of operations, in addition to high copper prices. For the year 2014, copper production was estimated to reach 950 000mt.

FDI inflows have been steadily increasing over the years, averaging US$651m for the period 2002 to 2009 with a peak in 2013 at US$2,1 billion, a five-fold increase compared to the 2003 figures. The majority of these investments were directed to mining. Investment pledges continue to rise, with total investment pledges by ZDA-licensed companies for 2008 reaching US$10,4bn, 95% of which is FDI.

Zambia is also attracting investments from countries other than its traditional partners. China and India are among the notable examples of countries which have in recent years invested in large-scale projects either through public-private partnerships or joint ventures.

In contrast, FDI flows to Zimbabwe have remained stagnant for more than a decade. Since 2000, FDI flows have averaged US$150m per annum versus over US$890m for Zambia. The country has received almost five times more FDI than Zimbabwe since 2000.

While improvements in several aspects of the business environment have been instituted, some problems which may be of concern to investors remain, including cumbersome administrative procedures, stability and predictability of laws, high cost of doing business due to poor infrastructure, cost of finance and human resource concerns.

Business is made costlier due to gaps in infrastructure, poor road networks and conditions as well as a lack of continuous energy supply have been mentioned. As a landlocked country with 70% of its trade volume going through its road networks, the state of the road infrastructure is a valid business concern.

With ageing power generation plants, the country has suffered power supply cuts in recent years resulting in the disruption or slowing down of some business operations. Several rehabilitation projects have started and the government has already implemented staggered power rate increases to rectify the below cost-reflective electricity tariffs that have impeded rehabilitation works and fresh investments in power generation and transmission.

Despite these challenges, Zambia is ranked 111 out of a total of 189 countries in the latest World Bank Easy of Doing Business Index, while Zimbabwe was ranked a lowly 171. Zambia has demonstrated its ability to transform its economy and attract investment.

Zambia’s success has been driven by policy reforms and investment. Zimbabwe has greater natural resources and higher literacy levels. Zimbabwe’s ability to transform itself is dependent of policy reforms and it’s attitude towards foreign investors. Much like Zambia, we have the ability to unleash the true potential of the economy and become as wealthy, if not wealthier, than Zambia.