88863 © 2014 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Africa Region Poverty Reduction and Economic Management. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Direc- tors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Cover: Musa Mwamutanda Photo: Jumbe Ngoma Contents Foreword   v Acknowledgments   vi Executive summary   vii Section 1 Recent Economic Developments   1 Saharan Africa in 2013    1 Sub-­ The state of Zambia’s economy    2 Economic outlook: Increasing concerns in a challenging external environment    8 Section 2 Trade and Competitiveness   10 Performance on trade and competitiveness    10 Growing Zambia’s agriculture trade    20 Trade facilitation   29 Improving competitiveness of mining-related goods and services    32 Summary of findings and policy implications    37 Annex A Economic data   41 Annex B  Analysis of firm-level trade transactions    44 Annex C  Zambia’s competitiveness in maize production    46 Annex D  Copper mining global value chain    48 Annex E Some design issues about the institutional partnership to develop the local mining services supply cluster    49 Notes   52 References   56 Boxes 1.1 Domestic VAT collection for 2013 and going forward    5 1.2 Taking stock of the recent regulatory changes in the financial sector    7 2.1 Churning among exporting firms    14 2.2 Data on ICBT   15 iii ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? 2.3 Regulatory requirements for agriculture trade    21 2.4 Are government-to-government transactions crowding out private maize deals?    22 2.5 Emerging private sector relations in agriculture    23 2.6 Domestic resource costs as a measure of competitiveness    24 2.7 Where are the opportunities for local suppliers in the global copper value chain?    33 2.8 Lessons from the IFC Suppliers Development Program    36 Figures 1.1 Growth picked up in Sub-­ Saharan Africa in 2013    1 1.2 Inflation eased in 2013    2 1.3 Prices of aluminum, copper, and nickel    2 1.4 Zambia copper production and global copper prices (2005–13, quarterly figures)    3 1.5 Inflation, Treasury bill yields, and policy rates are moving up    3 1.6 Domestic and private sector credit growth    6 1.7 Current account balance, net FDI, and gross international reserves    7 2.1 Zambia’s share of COMESA, Sub-­ Saharan Africa, and world exports has been growing   11 2.2 Average annual growth of exports and imports in Zambia and comparators, 2002–12   11 2.3 Agriculture imports and exports    12 2.4 Number of products, destinations, and exporters    13 2.5 Share of export transactions and value by destination region    13 2.6 Average size of export transaction per firm by product exported    14 2.7 Destination of Zambia’s non-copper exports    15 2.8 Zambia’s beans, maize, and rice exports    16 2.9 Trade costs to key destination markets remain higher for Zambia than for its neighbors   17 2.10 Border clearance times for imports have more than doubled over the last year    18 2.11 Structure of services trade, 2011    18 2.12 Services export metrics, 2009–11    18 2.13 Exports of professional services from Zambia and selected comparators    19 2.14 Percent share of FISP/FSP and FRA in total MAL spending, 2003–13    23 D1 Copper mining global value chain    48 Tables 1.1 Budget versus fiscal outturn, 2013    4 2.1 Copper and non-copper merchandise exports, 2002–12    12 2.2 Export shares in 2012/13 and growth 2005–13, selected export lines    12 2.3 LCF competitiveness indicators   25 2.4 FAM competitiveness indicators   26 A1 GDP growth by main sectors, 2005–13    41 A2 Central government finances, 2010–14    42 A3 Financial soundness indicators, 2008–13    43 A4 Selected balance of payments indicators, 2009–13    43 B1 Regression model   45 B2 Regression model: Imported inputs    45 C1 Costs of formal sector border crossing at Kasumbalesa    47 C2 Parity price assumptions   47 iv Foreword I am pleased to share the third Zambia Eco- analysis shows that Zambia’s non-copper nomic Brief with a focus section on trade and exports to neighbors are indeed growing competitiveness. This Brief is part of a series and could grow further. Agriculture exports of short economic updates produced twice a also show large potential, and Zambia could year by the World Bank. Each Brief includes emerge as the grain basket for Southern and two sections: the Bank’s assessment of recent Eastern Africa. But this requires that trade economic developments and outlook in the costs be reduced. Currently, the costs of short to medium term, and its analysis on a crossing borders and compliance with regu- specific development topic or theme. lations are high. This encourages small trad- Zambia continues to experience strong ers, including women for whom such trade is growth, but challenges are building up. Cop- an important source of livelihood, to bypass per prices are declining, and global financial formal systems. For agriculture, a more pre- conditions are tightening. At home, the fiscal dictable export policy would lead to higher deficit is becoming difficult to manage, and output and lower volatility in domestic prices. Zambia’s currency has sharply depreciated. Zambia could also gain by improving value The government intends to reduce future addition by local suppliers to the mining budget deficits, but this would involve mak- industry. ing difficult political choices. Zambia risks We hope that the findings of the Brief will losing the benefits of macroeconomic stabil- generate a healthy debate in the country on ity. In the past few years inflation and inter- policies and interventions on trade and com- est rates have declined and the currency has petitiveness and further opportunities for been relatively stable, providing an environ- diversification for Zambia. ment for growth and reducing poverty. High inflation would hurt the poor most. The trade and competitiveness section of the Brief stresses that Zambia can and should try to get more out of what it has, namely cop- Kundhavi Kadiresan per, arable land, and water, to grow faster Country Director for Zambia and create more jobs. Beyond rhetoric, the The World Bank v Acknowledgments The third Zambia Economic Brief has been subsection of the Brief. Valuable comments prepared by the Poverty Reduction and were received from Kate Bridges, Nalini Economic Management Unit of the World Kumar, and Jumbe Ngoma. Peer reviewers Bank Country Office in Lusaka. The team were Ian Gillson, Steven Shalita, and Sergiy was led by Praveen Kumar and included Zorya. Dissemination of the report has been Marius Brulhart, Nora Dihel, Arti Grover, organized by Kate Bridges, Victoria Cabral, Asumani Guloba, Mombert Hoppe, Gerard Ngao Mubanga, and Jumbe Ngoma. Hellen Kambou, John Keyser, Madina Kukenova, Mungaila provided administrative support Mupuwaliywa Mupuwaliywa, and Cecile to the team. Kundhavi Kadiresan, Country Valadier. The Brief draws heavily on Director, Zambia, and John Panzer, Sector the report “Zambia Diagnostic Trade Manager, AFTP1 unit, provided overall Integration Study,” led by Nora Dihel. guidance and advice. Nicholas Sitko and Brian Chisanga from The report was edited and laid out by the Indaba Agricultural Policy Research a team at Communications Development Institute contributed to the agriculture Incorporated, led by Bruce Ross-Larson. vi Executive summary Zambia Recent economic developments lower collection of revenues than budgeted. continues to Zambia’s 6.4  percent growth rate in 2013, The authorities financed the much-higher- post strong though strong, was lower than the 7.3  per- than-budgeted deficit using domestic financ- cent in 2012. During 2013, agriculture ing, bridge loans from the central bank and growth, but output contracted by 15.4  percent, cop- unspent proceeds from the 2012 Eurobond. fiscal accounts per output rebounded despite a decline in Net domestic financing was 4.7  percent of deteriorated copper prices, and services grew in excess GDP against 1.5 percent budgeted. in 2013 of 8  percent, partly due to growth in gov- Increased issuance of domestic debt along- ernment services. The Zambian national side rising inflation has pushed up yields accounts have been recently rebased to 2010 on government securities. For example, the from the previous base year of 1994. Rebased weighted average yield rate for Treasury bills estimates for 2010 GDP are 25 percent larger was 12.8 percent in 2013, up from an average than the 1994-based estimates due to better of 10.8 percent in 2012. Without fiscal consol- coverage of informal economic activities, idation, increased domestic financing of the which are mostly in the services sector. This deficit will prevent the private sector from Brief uses 1994-based GDP data. accessing credit at lower cost. Inflation stayed within single digits in Zambia faces declining copper prices, 2013, but pressure has been building up. prospects of slowing growth, and likely Average annual inflation in 2013 was around increasing borrowing costs in the near 7.0  percent against 6.6  percent in 2012. To term. In these circumstances, continuation contain inf lationary pressures, the Bank of the highly expansionary fiscal stance of of Zambia increased the policy rate several 2012 and 2013 will hurt growth and make times during 2013 and in 2014, raising it the economy more vulnerable to negative from 9.25 percent at the beginning of 2013 to shocks. The government seems aware of the 12.00 percent at the end of March 2014. need to adjust, and some steps have been Fiscal accounts deteriorated sharply in taken to contain expenditure. While its 2013, and the fiscal deficit was 6.8 percent of immediate priority would be to implement GDP against 4.3  percent budgeted. Includ- the 2014 budget as planned, particularly by ing other liabilities such as the buildup of staying within the net domestic financing arrears toward pensioners and the guaran- target, a more aggressive reduction in the tees extended by the government to the Food deficit would be needed in 2015 and 2016. Reserve Agency (FRA), fiscal deficit stood at But that is not going to be easy. Four expen- around 8.7 percent of GDP. The higher fiscal diture areas will determine success in reduc- deficit is mainly the result of significant over- ing fiscal deficit: agriculture subsidies, fuel run in subsidies (3.1 percent of GDP against subsidies, the wage bill, and public invest- 0.7 percent budgeted), wage bill (9.9 percent ment. Each of these involves making diffi- of GDP against 9.1  percent budgeted), and cult political choices. vii ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? External debt is still low but new risks are managed well. Zambia is also more closely emerging given recent Eurobond issuances. monitored now by international investors Rollover and refinancing risks are real in and policy mistakes could be costly, as evi- the future, as investor risk aversion to non- dent from the higher cost of borrowing the investment-grade countries might increase, second time when Zambia went to interna- following the U.S. Federal Reserve’s tighter tional capital markets. In the past two years monetary policy. This will especially be true several policy actions have been reversed if rollover periods coincide with times of primarily because their full implications heightened global financial turbulence or a were not considered initially. This raises depreciating kwacha against the dollar. The concerns about the process of policymaking government should strengthen its capacity and coordination in the government and Zambia faces declining to identify suitable projects, manage its debt creates uncertainty about how policymakers copper prices, portfolio, and develop a medium-term debt would respond to economic challenges in the prospects of slowing management strategy in light of its rapidly future. changing debt situation. growth, and likely Trade and competitiveness increasing borrowing Medium-term outlook Zambia’s trade grew fast over the past decade costs in the near term Among Zambia’s trading partners, in the and its share of Sub-­ S aharan Africa, Com- next two years growth is projected to remain mon Market for Eastern and Southern subdued in South Africa and to slow down Africa, and world exports grew too. The in China. Copper prices are projected to nature of trade has also been changing in fall in 2014, by 5.9 percent in nominal terms terms of composition and partner countries. and 6.4 percent in real terms, as supply con- Six salient trade and competitiveness out- tinues to rise and demand remains weak. comes are identified in the Brief: Weakening copper prices would be mitigated • Non-copper merchandise exports have by a production increase but overall export grown briskly alongside copper exports. earnings are set to remain subdued. The • The number of exporting firms and medium-term outlook is for growth to stay exported products has grown, but exports robust—around 6.5  percent a year—sup- have low survival rates. ported by domestic demand and the global • Zambia is trading more with its regional recovery, but with a real risk of being actually partners, including through informal lower. A major risk to the outlook is that cop- channels. per prices could decline even more than in • Zambian enterprises face high trade costs. the baseline presented in this outlook, hurt- • Zambia has scope to expand export of ing Zambia’s economy. services. Increased financial-market and capi- • Zambia has scope to improve competitive- tal volatility associated with the “tapering” ness of mining-related goods and services. of quantitative easing in the United States These outcomes point to the opportuni- also remains a substantial risk. With global ties available to diversify production and financial conditions tightening, short-term exports further. Data from export transac- capital inflows have tumbled in Sub-­ Saharan tions over more than a decade show a large Africa; Zambia, which has seen robust port- increase in the number of exporting firms folio inflows into its local securities markets and in products exported to neighboring in recent years, might be affected by a rever- countries. This increase signifies oppor- sal of capital flows. Also Zambia has relied tunities, though they are often transient. on favorable international capital flows with Since these transactions are small in value, two Eurobond issuances to finance its fiscal border costs are a big share of exported expansion in the aftermath of the global value. Therefore reducing costs of crossing financial crisis. It is therefore particularly borders will improve the competitiveness vulnerable to a changing international envi- of exporting firms. Also there is sizable ronment and possible increase in benchmark informal trade with neighboring countries interest rates and spreads. mostly involving small traders including Tightening global financial conditions women. Greater recognition and facilita- may hit the Zambian economy if they are not tion of small trade and reducing the costs viii of crossing borders would help these people declarations and improved customs data for whom trade is also an important source management systems, elimination of pre- of livelihood. shipment inspection and replacement with The Brief specifically focuses on the destination inspection, strengthened risk opportunity for Zambia to emerge as a major management regimes, and one-stop border food exporter to Eastern and Southern posts (OSBPs). But these initiatives have not Africa and the policy direction that would had their full impact yet. Particularly for take it there; the need to reduce high costs OSBPs, complementary actions need to be of crossing borders that would facilitate taken to get the full benefits. An approach regional trade in non-copper products; and that gives priority to simplifying procedures, a long-term approach to developing competi- streamlining requirements, and improving tiveness of the local mining supply cluster. governance before investing heavily in bor- Zambia has Three constraints are identified that come der infrastructure would be preferable. opportunities to in the way of growing agriculture exports Zambia should also use the World Trade emerge as a major and competitiveness: Organization’s Agreement on Trade Facili- food exporter to • High regulatory costs related to obtaining tation to advance the reforms for reducing trade permits, phytosanitary and other border costs. The agreement is binding not Eastern and Southern certificates, quality analysis, and product only on customs but on all border agencies, Africa and as a registration and testing. and presents a framework within which dis- regional logistics • Unpredictable trade policy and FRA inter- cussions among all stakeholders can be orga- hub. It can also ventions in maize market, which create nized and critical decisions taken. develop long-term disincentives for farmers to produce for Zambian suppliers have not been able competitiveness exports and make on-farm investments to benefit much from the strong expan- of local mining and for agribusiness firms to invest in sion of copper mining industry in the past input supply and marketing mechanisms. decade. While the local supply cluster is supply cluster • High input subsidies that create incentives relatively big in terms of number of suppli- for smallholders to expand area under ers, it is very small in terms of value-added maize but hurt competitiveness by divert- content. A large number of suppliers are ing public resources away from long-term into distribution activities characterized by improvements. lower capital and skills requirement. There Analysis shows that even without any are several constraints to competitiveness of input and output subsidies, commercial local suppliers. These include, among oth- farmers would be able to produce additional ers, skills scarcity and gaps that prevent firms irrigated and rainfed maize for exports to from technological upgrading and business neighboring countries that would also help expansion; and structural, cost-raising fac- in stabilizing domestic prices. Good oppor- tors such as high cost of finance, high border tunities also exist for smallholder farmers costs, and the like. to benefit from export trade. Agriculture The long-term approach to improving exports and competitiveness could therefore competitiveness of local supply cluster would grow by: have the following goals. First, to increase • Reducing the cost of regulatory compli- local value-added content, by increasing the ance by streamlining trade procedures technological, skills, and capital intensity and eliminating unnecessary ones. of local activities, and by facilitating their • Putting in place a mechanism that pre- upgrading processes. It is very important commits the government to allowing that this goal is not confused with the goal agreed amounts of private maize exports of simply increasing turnover for Zambian- and moving to a policy of open borders owned businesses. Second, to expand the over time. number of new entrants in the mining supply • Ploughing back savings from farm input chain, which will increase the range of ser- subsidies into measures aimed at improv- vices provided locally, and promote competi- ing long-term competitiveness. tion. Third, to expand market opportunities The government has taken several steps for existing service providers. These market to reduce border costs and facilitate trade. opportunities consist of expanding sales to These include introduction of pre-arrival current customers, selling to other mining ix ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? and non-mining companies, and expanding the process. The strategy of developing a into regional markets. local supply cluster cannot be unilaterally To pursue these goals, an institutional pushed by local suppliers or the govern- partnership among the government, mining ment. For the strategy to be successful and companies, and local suppliers is needed. its outcomes sustainable, it has to be well An existing, public‑private sector–driven informed and designed to make local sourc- initiative, the Zambia Mining Local Con- ing economically and financially attractive tent Initiative, could be used to energize to buyers. x SECTION 1 Recent Economic Developments Net FDI Saharan Africa in 2013 Sub-­ was less than the 6.5 percent of GDP recorded inflows to the Economic activity was robust in much of Sub-­ in 2012 but slightly higher than the develop- region grew Saharan Africa, including Zambia, in 2013, ing country average of 5.7  percent. Net for- supported by strong investment demand and eign direct investment (FDI) inflows to the 10.7 percent private consumption. Gross domestic prod- region grew 10.7  percent to $31.9  billion in to $31.9 billion uct (GDP) growth in the region strengthened 2013, boosted by new hydrocarbons discov- in 2013 to 4.7 percent that year, up from 3.5 percent eries in many countries. While the resource in 2012. In South Africa, one of Zambia’s sector continued to account for much of the key trading partners, growth slowed due to region’s FDI, some 30 percent of it focused on structural bottlenecks, tense labor relations, the domestic market. Consumer-oriented FDI and low consumer and investor confidence. projects in services expanded, including in Excluding South Africa, average GDP growth telecommunications, banking, and transport. for the rest of the region was 6.0 percent, sec- Real metal prices have fallen more than ond only to developing East Asia and Pacific any commodity group since reaching their at 7.2 percent (figure 1.1). peak in 2011. Metal prices were 6  percent Owing in part to lower international food lower in 2013 than in 2012. The price decline and fuel prices, inflation decelerated in the was broad-based: prices for zinc, copper, region, growing at an annual 6.3 percent in aluminum, and nickel declined 2, 9, 9, and 2013, down from 10.7 percent a year earlier 14 percent, respectively (figure 1.3). Still his- (figure 1.2). torically high, copper declined from $7,966 Capital f lows to Sub-­ S aharan Africa per metric ton at end-December 2012 to remained robust, reaching an estimated $7,215 at end-December 2013, declining fur- 5.8  percent of regional GDP in 2013, which ther to $6,650 at end-March 2014. S aharan Africa in 2013 Figure Growth picked up in Sub-­ 1.1 15 East Asia and Paci c South Asia Sub-Saharan Africa (excluding South Africa) Sub-Saharan Africa Zambia 10 Percent 5 0 2007 2008 2009 2010 2011 2012 2013 Source: World Bank. 1 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Figure Inflation eased in 2013 1.2 20 Zambia Sub-Saharan Africa (oil exporters) Sub-Saharan Africa (oil importers) Percent, year over year Sub-Saharan Africa 15 10 5 0 In 2013 mining 2006 2007 2008 2009 2010 2011 2012 2013 2014 production rebounded Source: World Bank. after two years of decline Figure Prices of aluminum, copper, and nickel 1.3 60 Nickel Copper Aluminum $ per ton (thousands) 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Bank. The state of Zambia’s economy estimates for 2010 GDP are 25 percent larger Zambia continued to post strong, but declin- than the 1994-based estimates—kwacha ing, growth (6.4  percent in 2013 against (K) 97.2 billion compared with K77.7 billion. 7.3  percent in 2012). As in recent years, the The new estimates aim to include more com- main drivers were the secondary and tertiary prehensive coverage of the informal sector. sectors (with annual growth of 8.3 and 8.6 per- Among other notable differences with previ- cent, respectively). Several factors (including ous estimates, the relative contribution of each stepped-up public infrastructure spending, sector to overall GDP has changed: Zambia is rising urban incomes, and new hires in the now presented as a service-oriented economy civil service) boosted expansion of the con- with the tertiary sector at 53.7 percent of GDP struction, communications, and transport sec- and manufacturing at 7.9  percent. Agricul- tors as well as public administration services. ture, forestry, and fishing account for 9.9 per- Agriculture output contracted sharply (down cent and mining 12.9  percent. The revised 15.4 percent), due to a fall in maize and cot- GDP estimates for 2011, 2012, and 2013 are ton production. In 2013 mining production expected to be released later in 2014. This rebounded after two years of decline. Yet even Brief uses the 1994-based GDP. as prices of copper declined, its production Inflation has stayed within single digits was boosted by the opening of the Lubambe since 2009, but pressures started building mine and ramping up of production at the in 2013, despite moderating food inflation Mulyashi copper mine (figure 1.4). (figure 1.5). Inflation was 7.1 percent at end- The just-completed rebasing of the national 2013, mainly due to higher nonfood inflation accounts shows that the Zambian economy is (8.2 percent, year over year); food inflation bigger than earlier estimated and that services at end-2013 moderated to 6.2 percent (year have a bigger share. The Central Statistical over year) thanks to improved food supply. Office has just finalized rebasing the national The latest inflation figures (April 2014) indi- accounts to 2010 (from 1994). Rebased cate acceleration to 7.8  percent (year over 2 Figure Zambia copper production and global copper prices (2005–13, quarterly figures) 1.4 Copper production Global copper price 250 12,500 200 10,000 Million metric tons $ per metric ton 150 7,500 100 5,000 50 2,500 0 0 The 2013 budget 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 overrun resulted Source: Bank of Zambia and World Bank staff computations. mainly from higher expenditure on Figure Inflation, Treasury bill yields, and policy rates are moving up subsidies and wages, 1.5 Weighted Treasury bill rate Interbank rate Policy rate In ation rate and domestic revenues 20 that came in lower 15 than budgeted Percent 10 5 0 May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2014 2014 Source: Bank of Zambia. year). Average annual inflation for 2013 was K5.4 billion, around 4.3 percent of GDP, but around 7.0 percent (6.6 percent in 2012). ended up with a deficit of K8.2 billion—close The Bank of Zambia (BoZ) acted to con- to 6.8  percent of GDP according to pre- tain inflationary pressures. During 2013 it liminary estimates (table 1.1). This prelimi- increased the policy rate by 25 basis points nary figure is based on budgetary releases, twice to reach 9.75 percent. In 2014, BoZ mon- therefore computed mostly on a cash basis. etary policy targets end-year annual inflation It does not take into account the buildup of of no more than 6.5 percent through the use arrears toward pensioners or the guarantees of open-market operations aiming to steer extended by the government to the Food the average interbank rate toward the policy Reserve Agency (FRA), which did not lead rate (within a band of 2 percentage points). to disbursements within the year. Including Prompted by increased inflation as well as these liabilities would raise the fiscal deficit high liquidity levels and strong pressures on to around 8.7 percent of GDP, or very close the exchange rate, the monetary policy com- to the International Monetary Fund (IMF) mittee further adjusted the BoZ policy rate estimated fiscal deficit in the 2013 Article IV by 50 basis points to 10.25  percent at end- Consultation (IMF 2014). February 2014 and then by 175 basis points to The 2013 budget overrun resulted 12 percent in April. mainly from higher expenditure on sub- sidies and wages and from domestic rev- Fiscal deterioration and difficult choices ahead enues that came in lower than budgeted. Expenditure on subsidies was 3.1 percent of Large budget overrun in 2013 GDP versus 0.7  percent budgeted, in large Fiscal accounts deteriorated sharply in part due to arrears from 2012, which came 2013. The 2013 budget planned a deficit of from unplanned expansion of agriculture 3 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Table Budget versus fiscal outturn, 2013 1.1 Percent of GDP, unless otherwise stated Budget Outturna Revenue 21.7 20.9 Tax 17.9 17.7 Income taxes 9.0 8.1 Value-added tax 5.0 6.1 Excise taxes 2.1 1.9 Custom duties 1.7 1.5 Nontax 2.6 2.9 Grants 1.3 0.4 Increased issuance Expenditure 26.2 27.8 of domestic debt Current expenditure 19.0 21.2 Out of which wages and salaries 9.1 9.9 alongside rising Out of which interest payments 1.7 1.8 inflation expectations Out of which Fertilizer Support Program 0.4 0.9 have pushed up Out of which Strategic Food Reserve 0.2 0.9 Out of which fuel subsidy 0.0 1.3 yields on government Capital expenditure 7.2 6.6 securities Overall balance (including grants) –4.5 –6.8 Financing 4.5 6.8 External (net) 2.9 2.2 Domestic (net) 1.5 4.7 Memorandum items GDP (millions of kwacha) 120,952 120,780 a. Preliminary figures assume 100 percent disbursement of external project financing. Source: Ministry of Finance, IMF, and World Bank. subsidies. Specifically, expenditure booked in mainly in 2014, with the budget projecting to fertilizer subsidies under the Farmer Input a 30 percent increase in the wage bill from Support Programme (FISP) was K1.1  bil- 2013’s outturn. lion, against K500 million budgeted, mainly Revenue performance was below target by because of clearance of arrears built up 5 percent due to lower collection of income in 2012. And expenditure booked to FRA tax1 and lower receipts of donor grants. procurement operations and subsidies was Domestic value-added tax (VAT) collection K1.1 billion against K345 million budgeted. was 115 percent of the target because of lower However, this booked figure does not include refunds in the last quarter of 2013 (box 1.1). the commercial loans that the FRA took out in 2012 with the government’s guarantees. Increased domestic financing and Treasury bill The guarantees were called in 2013 but the yields outstanding amount (K1.4 billion) was rolled To finance the higher budget deficit in 2013, over by commercial banks and is expected to the authorities sharply increased domestic be repaid starting in 2014 (K600  million is bond issuance, borrowed from the BoZ using set aside in the 2014 budget for this purpose). bridge loans2 intended for cash manage- Fuel subsidies were not budgeted for but ment, and recalled unspent 2012 Eurobond added K1.6  billion to the deficit as arrears proceeds from spending agencies. These built up until May 2013 when the fuel price funds are provisioned for in the 2014 budget. was adjusted. Overall, net domestic financing was slightly The government unexpectedly anchored more than three times higher than bud- salaries of its lowest paid employees on the geted, also partly due to lower than expected cost of a basic needs basket for a family of foreign financing. five, which tripled their salaries from Sep- Increased issuance of domestic debt along- tember 2013. The full effect of the salary side rising inflation expectations have pushed increase, along with some other pay policy up yields on government securities. During reform measures that saw salaries of all gov- 2013 the local currency debt of the central ernment employees go up, is expected to kick government is estimated to have increased 4 Box Domestic VAT collection for 2013 and going forward 1.1 Zambia’s VAT regime is based on the 1997 Value Added Tax Act. Under Rule 18 of this Act, exporters who want to claim a zero VAT tax rate on their exports have to produce several documents to substantiate their claim, among which are a certificate of importation in the country of destination and proof of payment by the customer for the goods. On January 11, 2013, Rule 18 was amended to include one more requirement that documentary evidence be provided to show that payment for the goods has been made into the exporter’s bank account in Zambia. Introduction of this amendment and stricter enforcement by the Zambia Revenue Authority of the rule itself starting in August 2013 (after several audits were conducted) led to lower refunds on domestic VAT for exporters, primarily mining com- panies. Several cases were brought before the courts, which have yet to be resolved. The authorities seem to have agreed to ring-fence the funds pending resolution of the disputed cases. Source: Zambia Revenue Authority. Four areas will determine success to K19,744  million (around 16.3  percent of targets a fiscal deficit of 6.6 percent of GDP in fiscal adjustment: GDP), from K15,409 million (14.5 percent of and some steps, discussed below, have been agricultural subsidies, GDP). This debt stock is made up of Treasury taken to contain expenditure. While its bills (T-bills) with maturities less than 1 year immediate priority would be to implement fuel subsidy, the (50 percent), government bonds with maturi- the 2014 budget as planned, particularly public wage bill, and ties up to 15 years (45 percent), and domes- by staying within the planned net domestic public investment tic arrears (5 percent). The weighted average financing target, a more aggressive reduc- yield rate for T-bills averaged 12.8 percent in tion in the deficit would be needed in 2015 2013, up from an average of 10.8 percent in and 2016. But that is not going to be easy. 2012. Similarly, the composite average yield Revenues are expected to rise only gradually rate of government bonds rose to an average as most revenue measures are geared toward of 15.4 percent from an average of 12.9 per- increasing nontax revenues or improving tax cent in the previous year. administration, and so most of the adjust- Nonresidents’ holdings of T-bills and of ment burden will fall on expenditures. Four government bonds account only for 9.7 per- areas will determine success: agriculture cent and 5.1  percent, respectively, of the subsidies, fuel subsidies, the wage bill, and total stock of T-bills and bonds in circulation public investment. (against 25 percent in Ghana and more than In 2013 the government announced reduc- 40  percent in South Africa—both regional tions in FRA and FISP subsidies. From 2014 peers vulnerable to a sudden stop in external it has decided to bring all FRA activities on financing). Nonresidents’ holdings of gov- to the central budget.3 The aim is to tighten ernment securities (T-bills and government financial control of the agency following bonds) rose during 2013, suggesting that shortcomings noted in its operations in previ- investors’ risk appetite had not been affected ous years. The government has also decided by other global economic developments. that the FRA will limit its procurement to a However, worldwide financial volatility at level that enables it to maintain a strategic the start of the year put pressure on cur- grain reserve of 0.5  million MT. However, rencies and asset markets in Zambia (along this policy is yet to be tested—going by past with South Africa, Ghana, and Nigeria) with experience it will likely require strong politi- short-term capital inflows falling sharply. cal commitment. Also, preliminary figures for budgetary releases in January and Febru- Difficult choices lie ahead to control the fiscal deficit ary 2014 show that almost 60 percent of the Zambia faces declining copper prices, pros- budget allocation for the FISP for 2014 was pects of slowing growth, and likely increas- spent in the first two months of the year, due ing borrowing costs in the near term. In to clearance of arrears from 2013, suggesting these circumstances, continuation of the possible overruns later. highly expansionary fiscal stance of 2012 In April 2014 fuel prices were adjusted and 2013 will hurt growth and make the upward by an average of 8.3  percent, to economy more vulnerable to negative account for the depreciating kwacha and the shocks. The government seems aware of the higher import price of oil.4 The government need to adjust. For example, the 2014 budget has yet, though, to announce that prices 5 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? in future will be automatically adjusted to by 43.9 percent in December 2013 (year over reflect changes to supply costs. year), mainly due to a rise in credit to gov- The wage bill is the largest expenditure ernment. Credit to the private sector, which item in the budget and therefore its size and includes households and private enterprises, trend have a heavy impact on the budget bal- also rose, by 10 percent. ance. The ratio of the wage bill to domestic The banking sector, which has seen regu- revenue is about 55 percent in 2014. In 2013 latory changes in the past two years (box 1.2), the government also started implementing a performed well in 2013 as several financial pay policy reform where all civil servants were soundness indicators show (see annex table brought on to a single salary grade struc- A3). As of end-March 2014, capital adequacy ture, which is likely to have further finan- was stable at 26.8 percent (versus end-Decem- Public wage bill is set cial implications. As a temporary measure, ber 2013). Nonperforming loans (NPLs) as to grow further from the 2014 budget announced a wage freeze a share of total loans increased to 8 percent 55 percent of domestic until end-2015 and a hiring freeze until end- (from 7 percent in end-December 2013), and 2014. The authorities have a declared objec- more than 70  percent of these NPLs were revenues in 2014 tive to reduce the wage bill to revenue ratio provisioned for. Liquidity indicators also to 35 percent by 2018, but the trajectory has improved, while earnings and profitability yet to be designed. Indeed, hard choices will remained stable in the last quarter of 2013 be involved on wages and their structure to and in the first quarter of 2014. achieve the goal. As of end-December 2013, the banking Public investment allocation was increased sector’s total assets amounted to 33 percent to 7.2 percent of GDP in the 2014 budget, up of GDP. Loans and advances to customers, from 6.6  percent in the 2013 outturn. The which account for the largest share of total government will need to find the right bal- assets, are mainly financed by deposits from ance between frontloading infrastructure customers, suggesting that the lack of bank- investment and achieving fiscal consolida- able projects to finance and risk aversion tion. This will most likely involve slowing could be the main constraints to financial down on road construction and prioritizing intermediation.5 public investment projects. External reserves came under pressure Sound banking sector A shrinking current account surplus and a Strong growth in private sector credit since depreciating kwacha put pressure on exter- 2009 has supported economic activity, but a nal reserves. Zambia is a small open economy sharp slowdown in the last part of 2013 coin- with a trade-to-GDP ratio (averaging above ciding with larger government borrowing 72 percent since 2003) higher than the Sub-­ might suggest crowding out of the private sec- Saharan average. Despite increasing diversifi- tor (figure 1.6). Absent fiscal consolidation, cation of trade (World Bank 2013), Zambia’s increased domestic financing of the deficit exports still heavily depend on copper, which will prevent the private sector from access- leaves the country vulnerable to global cop- ing credit at lower cost. Domestic credit rose per developments. Policies toward greater Figure Domestic and private sector credit growth 1.6 75 Private sector credit Domestic credit 50 Percent 25 0 –25 2011 2012 2013 2014 Source: Bank of Zambia. 6 Box Taking stock of the recent regulatory changes in the financial sector 1.2 In 2012 the BoZ revised the minimum capital requirements for banks to strengthen balance sheets. As of end-December 2013, 14 of 19 operating banks met the minimum primary capital requirements. Of the five others, one is set to convert to a nonbank financial institution, while the remaining four have been granted special approval for recapitalization plans that extend beyond the December 31, 2013, deadline. Effective January 2, 2013, the BoZ introduced a cap on margins that commercial banks can add on the BoZ policy rate to determine the effective lending interest rate; at that time, interest rate caps were 18.75 percent for commercial banks, 30 per- cent for payroll lenders, and 42 percent for development-oriented microfinance institutions. These interest rate caps moved up along with the policy rate in 2014. Effective March 10, 2014, the BoZ issued new statutory reserve requirements to manage the high liquidity in the banking system and support the kwacha. The reserve ratio has been increased from 8 to 14 percent. The slowdown in net Source: Bank of Zambia. portfolio inflows and market reaction to economic and trade diversification can miti- than in 2012, driven by higher export vol- an uncertain policy gate this risk. umes even as the realized average copper Preliminary data for 2013 indicate that price marginally declined. environment were Zambia recorded a current account surplus In 2013 the financial account recorded likely the main drivers at around 1.2  percent of GDP, down from a larger deficit than in 2012, mainly due to of kwacha depreciation 3.9 percent in 2012 (figure 1.7). This decline lower inflows of project grants and portfo- in 2013 and 2014 stemmed from an increase in imports lio investment. Despite increasing in recent of goods and services (17  percent and years, primarily in mining, net FDI declined 14 percent, respectively) relative to exports, in 2013 to $1.6 billion from $2.4 billion the a deterioration in the income account previous year, as outward FDI became posi- due to higher income on equity payments tive again. Conventional classification under (126  percent), and lower official transfers, the “other investment” category in the finan- mainly budget support grants (42 percent). cial account shows mining companies keep- The surge in goods and services imports ing a large share of mining export proceeds came mainly from the governments’ stepped- abroad, which is recorded as a large outflow. up investment in infrastructure along with The kwacha depreciated against most the rise in foreign investment inflows, with major currencies in 2013. The slowdown in imports of iron and steel, petroleum prod- net portfolio inflows and market reaction to ucts, and electrical machinery and equip- an uncertain policy environment (reflected ment rising the fastest. Imports of food items by the downgrading of the sovereign rating declined by 9.3 percent. by credit rating agencies) were likely the Merchandise exports grew by 13 percent main drivers. In 2013 the kwacha depreci- in 2013, driven largely by growth in nontra- ated against the U.S. dollar by 4.9  percent ditional exports (up 23  percent). Copper and the euro by 8.6  percent, while appre- export earnings were 10.3  percent higher ciating against the rand by 10.7  percent. Figure Current account balance, net FDI, and gross international reserves 1.7 Direct investment Current account International reserves 20 6 Months of import cover Percent of GDP 10 4 0 2 –10 0 2008 2009 2010 2011 2012 2013 Source: Bank of Zambia. 7 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Despite the BoZ’s sales of foreign exchange if rollover periods coincide with times of to offset kwacha depreciation in Janu- heightened global financial turbulence or a ary–April 2013, which cut international depreciating kwacha against the dollar. The reserves, further depreciation came at year- government should strengthen its capacity end. And since end-December 2013 to May to identify suitable projects, manage its debt 9, 2014, the kwacha has fallen against the portfolio, and develop a medium-term debt dollar by 17.4 percent and against the rand management strategy in light of its rapidly by 18.6  percent. In April 2014 the kwacha changing debt situation. traded in an average range of K6.20/$ and K0.59/ZAR. While a weaker kwacha will Economic outlook: Increasing concerns make imports more expensive it might have in a challenging external environment The government a positive impact on competitiveness of non- Among Zambia’s trading partners, growth is should strengthen its traditional exports, especially agricultural projected to remain subdued in South Africa capacity to identify products. under the combined effect of policy tighten- In line with the moves on the balance of ing and infrastructure bottlenecks. China suitable projects, payments and in the kwacha exchange rate, a has set its growth target at 7.5  percent for manage its debt decline in unencumbered gross international 2014, and a rebalancing of growth drivers portfolio, and develop reserves was recorded in 2013, from around toward more reliance on consumption and a medium-term $2,457  million to $2,396  million (from 3.2 less on investment is expected in the next debt management months of import coverage to 2.7 months). few years. Slower growth in China and other strategy in light of At the close of March 2014, unencumbered emerging markets is expected to translate reserves declined further, mainly due to for- into lower demand for commodities, espe- its rapidly changing eign exchange sales aimed at supporting the cially industrial metals. Relevant to Zambia, debt situation currency ($178  million was sold in March copper prices are projected to fall in 2014, by alone). Reserves have shot up recently from 5.9 percent in nominal terms and 6.4 percent the proceeds of the $1 billion Eurobond. in real terms, as supply continues to rise and External debt is still low but new risks are demand remains weak. Weakening copper emerging given recent Eurobond issuances. prices should be mitigated by a production At end-December 2013, total outstanding increase but overall export earnings are set central government debt was estimated to to remain subdued. have remained stable at 30.2 percent of GDP The medium-term outlook is for growth to (from 30.3  percent in 2012).6 Of that debt, stay robust, supported by domestic demand 54 percent is domestic and in local currency and the global recovery, but with real down- (K19.75  billion). Borrowing from non-Paris side risks. Real GDP growth is projected to club bilateral creditors has increased in increase from an estimated 6.4  percent in recent years in response to the authorities’ 2013 to 6.7 percent in 2014 and to stabilize ambitious public investment program and its around 6.5 percent in 2015–16. Zambia’s real large financing needs. In April 2014 Zambia GDP growth is projected to remain above the tapped the international capital markets for 5.0 percent average for Sub-­Saharan Africa. the second time by raising $1 billion through A major risk to the outlook is tied to the a Eurobond issue to finance the 2014 budget. commodity market, as weaker demand and However, this issuance had a higher yield increased supply could lead to a sharper (8.625 percent against 5.625 percent in 2012), decline in copper prices. In particular, if reflecting cooling demand from global inves- Chinese demand, which accounts for some tors for emerging market debt as well as a 45 percent of Zambia’s total copper demand, less positive assessment of Zambia. The gov- remains weaker than in recent years and ernment has announced that proceeds of supply continues to grow robustly, copper the 2014 Eurobond issuance will be used for prices could decline even more than in the energy and transport projects. baseline presented in this outlook, hurting Rollover and refinancing risks are real in Zambia’s economy. With the current account the future as investor risk aversion to non- surplus already narrowing, a more pro- investment-grade countries might increase, nounced decline in copper prices will place following the U.S. Federal Reserve’s tighter greater downward pressure on the kwacha, monetary policy. This will especially be true which could push inflation higher. A major 8 slowdown in China’s growth and lower cop- a sudden 100 basis point increase in U.S. per prices would together weaken long-term bond yields could lower capital inflows to foreign investment and growth in Zambia, developing countries by about 50  percent given its strong dependence on copper. for several months, implying a significant Increased financial-market and capi- increase in the cost of raising capital, which tal volatility associated with the “tapering” could lower investment and growth (World of quantitative easing in the United States Bank 2014). Zambia has relied on favorable also remains a substantial downside risk. international capital flows with two Euro- With global financial conditions tighten- bond issuances to finance its fiscal expan- ing, short-term capital inflows have tumbled sion in the aftermath of the global financial in Sub-­ S aharan Africa, suggesting chang- crisis. It is therefore particularly vulnerable ing investor sentiment to the region. South to a changing international environment Zambia is vulnerable Africa, which has strong links with global and possible increase in benchmark interest to a changing financial markets, is particularly vulnerable rates and spreads. international to sudden stops of capital inflows given its Tightening global financial conditions environment and reliance on portfolio inflows to finance its may hit the Zambian economy if they are not current account deficit. Zambia, which has managed well. Zambia is also more closely possible increase in seen robust portfolio inflows into its local monitored now by international investors benchmark interest securities markets in recent years, might also and policy mistakes could be costly, as evi- rates and spreads be affected by a reversal of capital flows. dent from the higher cost of borrowing the More financial sector tightening has yet second time when Zambia went to interna- to come, pushing up borrowing costs and tional capital markets. In the past two years spreads for developing countries. If inter- several policy actions have been reversed pri- est rates rise too rapidly or there are sharp marily because their full implications were pullbacks in capital flows, economies with not thought through initially. This raises large external financing needs or rapid concerns about the process of policymaking expansions in domestic credit in recent and coordination in the government and years could come under considerable stress. creates uncertainty about how policymakers Simulations conducted for the January 2014 would respond to economic challenges in the Global Economic Prospects report suggest that future. 9 SECTION 2 Trade and Competitiveness Zambia’s This section examines Zambia’s trade perfor- long-term project whose main aim should be shares in mance in the past decade to identify areas of to increase value added by Zambian provid- COMESA, potential export growth and how the com- ers. This project requires close collaboration petitiveness of exporting and import-compet- between buyers and sellers with a convening Sub-Saharan ing producers can be improved. The focus and supportive government role. Africa, and is on non-copper exports, in line with the world exports country’s development goal to diversify pro- Performance on trade and grew during duction. Apart from aggregate trade statistics competitiveness 2002–12 reported at country level, the analysis draws Over the past decade Zambia’s trade grew fast on decade-long firm-level export transac- and underwent several structural changes tions to understand the characteristics of that point toward opportunities. Exports exporting firms, particularly those that sur- grew at an average annual rate of about vive in the export market. 25  percent (nominal) in 2002–12, for one An assessment of trade performance identi- of the highest rates in Sub-­ S aharan Africa. fies opportunities in non-copper exports that Zambia’s shares in the Common Market for can be harnessed, with actions focused on Eastern and Southern Africa (COMESA), reducing trade costs. It gets into the details of Sub-­Saharan Africa, and world exports grew the high costs of crossing Zambia’s borders, during this period (figure 2.1). Imports grew as well as actions being taken to reduce them. similarly fast with an annual average growth High border costs hurt particularly those rate of more than 20 percent (nominal) over exporters who depend on imported inputs, as the same period (figure 2.2). they face these costs both at import and export Zambia’s trade during this period of growth stage. Some suggestions are made for policy exhibits several characteristics that indicate direction to reduce border-­ crossing costs. that the nature of trade has been changing in The section identifies agriculture and terms of composition and partner countries. related products, particularly maize, as an At the firm level there are signs of consider- emerging area for exports, and discusses con- able churning whereby an increasing number straints to faster growth, such as unpredictable of firms are trying to export. These changes trade policy and expensive subsidies. It offers signal opportunities that could be tapped. suggestions on how policy can be made more predictable and what can be done to improve Six salient facts about Zambia’s trade and long-term competitiveness of agriculture. competitiveness over the last decade It also examines why Zambian goods and service providers have been unable to ben- Non-copper merchandise exports have grown efit from growth in the copper industry in briskly alongside copper exports the past decade. It argues that improving the Copper exports grew at 29 percent a year in competitiveness of a local supply cluster is a 2002–12, because of large increases in copper 10 S aharan Africa, and world exports has been growing Figure Zambia’s share of COMESA, Sub-­ 2.1 Share of Sub-Saharan Africa exports Share of COMESA exports Share of world exports 20 0.08 15 0.06 Percent Percent 10 0.04 5 0.02 Zambia’s non-copper 0 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 exports have been Source: COMTRADE/WITS. growing, but the structure of exports still reflects the Figure Average annual growth of exports and imports in Zambia and comparators, 2002–12 economic weight of 2.2 Exports Imports the copper industry 30 Compound annual growth rate, 20 2002–12 10 0 Zambia Rwanda Angola Ethiopia Ghana Tanzania Uganda Kenya Mozambique Malawi Botswana Zimbabwe Seychelles Mauritius Source: COMTRADE/WITS. prices until 2011 and higher copper produc- Non-copper exports are growing from tion. The fast growth of copper exports, a small base. Together, they contributed much in excess of GDP growth, took the share to more than 30  percent of merchandise of copper exports to GDP from 14 percent to exports in 2012, but individually none of 30 percent. However, non-copper exports saw these products commanded a share of more strong growth too at around 22 percent annu- than 2  percent in total exports (except ally during the period. As a result, the share cobalt at around 4  percent and electrical of non-copper exports in GDP increased equipment and machinery at 2.6 percent).7 from 12 percent to 16 percent, by value from Therefore, the structure of Zambia’s exports $0.5 billion to around $3.2 billion (table 2.1). still reflects the economic weight of the cop- Recent data indicate that several non-cop- per industry. Besides dominating exports, it per exports—such as electrical equipment also strongly influences imports. In particu- and machinery, sulfur and related products, lar, increasing amounts of copper ores have and residues from the food industry and ani- been brought into Zambia for processing in mal feed—have had a higher average annual recent years from the neighboring Demo- growth rate in value than copper since 2005 cratic Republic of Congo, while imports of (table 2.2). Information presented later machinery and motor vehicles for extracting on exporting firms shows that non-copper and transporting copper have also grown exports are still unstable with a large number rapidly. of exporting firms exiting the market every Agriculture exports have also grown fast year. Yet there are some stable trends, as in in the past decade at an average of 27  per- gemstones, sugar, and products of the food cent a year since 2000 (figure 2.3). Agri- industry, which are encouraging. culture import growth has been slower at 11 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Table Copper and non-copper merchandise exports, 2002–12 2.1 Share of GDP (%) Annual growth rate, 2002 2012 2002–12 (%) Total exports 26 46 26 Copper 14 30 29 Non-copper 12 16 22 Source: COMTRADE/WITS, World Bank’s World Development Indicators, and Central Statistical Office. Table Export shares in 2012/13 and growth 2005–13, selected export lines Agricultural 2.2 trade surplus has Share in Annual merchandise exports, growth rate, been growing HS code Product description 2012/13 (%) 2005–13 (%) 74, 2603,262030 Copper and related products 66.7 22 Non-copper exports, of which: 33.3 21.7 4,85 Electrical machinery equipment and parts thereof; sound recorders and so on 2.5 40.5 10,11 Cereals and products of the milling industry 3.5 31.1 71 Gold and precious stones 3 39.8 25 Cement and lime 2 41.2 28 (excluding 2822) Sulfur and related products 2.4 103 23 Residue from agroindustry 1.1 73.8 Source: Central Statistical Office and World Bank staff computations. Figure Agriculture imports and exports 2.3 800 Exports Imports 600 $ millions 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: FAOSTAT data. 18  percent during the same period result- likewise experienced strong growth in recent ing in a growing trade surplus. As described years with flue-cured and burley tobacco cur- later, these data do not include the value of rently benefiting from very high prices. Until informal trade and so understate the real recently, the maize sector has also done very trade situation. well with a series of bumper harvests due In agriculture, sugar, tobacco, wheat, to favorable weather conditions and heavy and soybean exports, as well as maize, have spending on input subsidies.8 made substantial gains. Zambia has long Maize, maize f lour, and maize bran been a major exporter of sugar and tobacco, grew from a low base to become a major but the country is increasingly self-reliant in agriculture export, accounting for roughly wheat and soybean cake with growing sur- 19 percent of total agriculture exports from pluses available for export. Most wheat and 2007 to 2011. In 2011 alone, maize and maize soybean exports leave Zambia as milled flour products accounted for 28 percent of all agri- and manufactured stock-feed, respectively, culture exports worth almost $208  million so they are important for value addition with industry insiders saying the total value and downstream job creation. Tobacco has was similar or even greater in 2012. 12 The number of exporting firms and exported prod- the average export transaction to Europe ucts has grown, but exports have low survival is almost 20 times larger (figure 2.5). This rates variation is driven by metals and mineral Firm-level customs data for 1999–2011 products. Machinery has the highest number obtained from the Central Statistical Office of exporting firms and products among the and Zambia Revenue Authority show that broad product categories, but with very small the number of Zambian exporters increased transaction values, suggesting a large pres- from 232 firms in 1999 to 1,754 in 2011.9 The ence of re-exports (figure 2.6). number of destinations served by exporters Exporting firms display high churning. more than doubled over this period, and the Firm entry rates into exporting are near number of products exported increased four- the international maximum, suggesting fold over 1999–2011 (figure 2.4). Further- lively activity by Zambian firms trying to About 80 percent of more, while an average Zambian exporter enter export markets. But these firms have a export transactions in shipped four different products and gener- uniquely low export survival rate internation- 2011 were with Sub- ated some $2  million of export revenue in ally (box 2.1). Saharan Africa, but 2011, the corresponding median values are A modeling exercise was carried out to considerably smaller, indicating a skewed identify firms’ characteristics associated with they are much smaller distribution. their export survival (see annex B). The exer- in size than those to About 80 percent of export transactions in cise shows that survival prospects are better other destinations 2011 were with Sub-­ Saharan Africa. By value, for firms involved in bigger transactions and the share of exports to Sub-­ Saharan Africa is economically larger destination markets. Both 25 percent, indicating that individual trans- destination country GDP and distance seem actions with the region are much smaller to have a significant impact on export sur- than those to other destinations—indeed, vival, other things equal. These are essentially Figure Number of products, destinations, and exporters 2.4 2,500 Products Destinations Exporters 2,000 1,500 Number 1,000 500 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Authors’ calculations. Figure Share of export transactions and value by destination region 2.5 Share of export value Share of number export transactions 100 75 Percent 50 25 0 Latin America South Middle East and North East Asia Europe and Sub-Saharan and the Caribbean Asia North Africa America and Paci c Central Asia Africa Source: Authors’ calculations. 13 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Figure Average size of export transaction per firm by product exported 2.6 3 2 $ millions 1 0 Exchange-rate tals s uffs ts s ass s urs ts s on al ers s ar uct tile rie uct eou duc duc tric dge ati ubb /gl df Me dst ust rod rod Tex lan lec ort pro pro hea e n Foo ind s/r n lp lp ,a cel y/e Sto nsp ar/ volatility and problems stic ble od r Mis era ma ed the ner Tra wo twe eta Pla alli ani Min lea chi Foo Veg and Ma and nd ns, la related to the ski od als ma Wo es, mic Ani hid Che Raw importing of inputs Source: Authors’ calculations. destabilize Zambian firm-level export spells Box Churning among exporting firms 2.1 For any 100 exporters in a given year, 50 have not exported in the previous year and 41 exit in the following year. Among the 41 who exit, 18 will never re-enter within the sample period. Some 65 percent of firm-level export spells last no longer than one year. Only 55 firms exported without interruption over the 13-year sample period. There is somewhat greater stability at the product level than the firm level. At the product level, for any 100 exported products in a given year, 37 have not been exported in the previous year and 31 will not be exported in the following year. Among the 31, only 4 will never be exported again within the sample period. Of product-level export spells, 53 percent last no longer than one year. The most “unstable” categories are chemicals and textiles. the firms that are exporting mineral products input intensity is found to increase export to European and East Asian markets. hazard rates significantly. This means that, Interviews were conducted with selected other things equal, the more a firm relies firms engaged in exporting. Their business on imported inputs, the more unstable its representatives brought up a number of export spells become (see annex table B2). constraints to exports, including financial frictions, exchange-rate issues, inefficient Zambia is trading more with its regional partners, and costly services inputs (finance, electric- including through informal channels ity, or infrastructure), to the emergence of Aggregate trade data confirm that Sub-­ new international competitors, and politi- Saharan countries have been a major and cal instability in destination markets. Two growing destination for Zambia’s non-copper recurrent themes emerged: problems with exports, while the value of exports going to unexpected exchange-rate movements, and high-income countries has stagnated (fig- impediments to importing inputs required ure 2.7). Indeed, non-copper exports to for export production. COMESA and the Southern African Devel- Analysis confirms what many business opment Community (SADC) have grown people say: exchange-rate volatility and prob- faster than total exports over the last decade. lems related to the importing of inputs desta- The main products exported to Sub-­ Saharan bilize Zambian firm-level export spells. The countries include cereals, sugar, tobacco, regression models for survival showed that gold, cement, cotton, soap, iron/steel, and exchange-rate volatility is indeed a driver of chemical products. The main regional firm-level export instability (see annex table importers of Zambia’s products are the Dem- B1). For impediments to imported inputs, ocratic Republic of Congo, South Africa, the results show that exporting firms that Zimbabwe, and Malawi. According to official are also importers have more stable export records, Zimbabwe followed by Kenya, South patterns. However, in all cases, imported Africa, Tanzania, and Malawi have been the 14 Figure Destination of Zambia’s non-copper exports 2.7 High-income countries Sub-Saharan Africa China Other 4 3 $ billions 2 1 0 There is considerable 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 two-way informal Source: COMTRADE/WITS (total less 74, 2603, 262030). trade between Zambia and its neighbors largest exports markets for Zambian maize, Zambia’s official trade statistics underes- in that order. In practice, however, the Dem- timate actual volumes of trade with regional ocratic Republic of Congo is widely regarded partners. This is because two-way, informal as Zambia’s second most valuable maize mar- cross-border trade (ICBT) is likely to be con- ket with large amounts of value-added maize siderable (box 2.2). meal going across the border informally. According to FEWS Net data, which cov- Sub-­ Saharan countries are also the source ers ICBT of three major agricultural com- of the majority of Zambia’s imports, but modities (maize, rice, and beans), maize their shares have decreased since the early has the largest volume of informal exports 2000s while the share of imports sourced in (124,000 tons between 2005 and 2011, reach- non-African countries (such as China) has ing close to 40,000 tons in 2009). Informal increased. South Africa remains Zambia’s exports of rice and bean are fewer (50,000 main source of imports, but imports of cop- tons of rice and 31,000 tons of beans in per ore from the Democratic Republic of the same period) but still larger than the Congo, oil from Kuwait, and manufactured recorded exports in these commodities (fig- products from China have increased these ure 2.8). There are also unrecorded imports countries’ shares in total imports. Zambia’s coming into Zambia from neighboring imports of Chinese manufactures consist countries. Data collected by FEWS Net sug- mainly of engineering machinery, electrical gest that total informal imports of maize, equipment, and motor vehicles, as well as rice, and beans amounted to 70,000, 11,000, metal/plastic manufactures and textile arti- and 9,000 tons, respectively, between 2005 cles to a lesser extent. and 2011. Box Data on ICBT 2.2 Attempts at capturing data on informal trade have been carried out in Zambia and other COMESA countries but there is still a dearth of comprehensive and accurate data on ICBT over long periods, which partly explains the relatively low profile of this issue among policymakers. Several complementary methods were elaborated in the 1990s to assess the magnitude and charac- teristics of ICBT. These include border monitoring, tracking of trucks and passenger buses, and stocktaking at open markets or warehouses, as well as surveys of different stakeholders. Several concrete initiatives using these methods to assess the magnitude of ICBT flows have since been launched in some African countries. The most useful source on ICBT between Zambia and its neighbors is the monitoring initiative implemented by FEWS Net and the World Food Programme, which focuses on food security and therefore only covers three major agricultural com- modities (maize, rice, and beans). Despite the limited coverage, this initiative has the major advantage of providing monthly data on informal export/import quantity and prices since 2005. The data accumulated shed light on the links between pro- duction and domestic/regional exchange patterns, but only capture trade flows at some border posts and thus fail to capture exchanges at nonmonitored posts or outside established border crossings, which are widespread at the porous border region between Malawi and Zambia, for example (Njiwa, Nthambi, and Chirwa 2011). For this reason, the figures should only be considered as rough. 15 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Figure Zambia’s beans, maize, and rice exports 2.8 Informal Formal Beans exports 15 Thousand tons 10 5 0 2005 2006 2007 2008 2009 2010 2011 Maize exports 400 300 Thousand tons 200 100 0 2005 2006 2007 2008 2009 2010 2011 Rice exports 20 15 Thousand tons 10 5 0 2005 2006 2007 2008 2009 2010 2011 Note: Only the countries for which FEWS Net reports data for beans are included (Democratic Republic of Congo, Tanzania, Zimbabwe), maize (Democratic Republic of Congo, Malawi, Mozambique, Tanzania, Zimbabwe), and rice (Democratic Republic of Congo, Malawi, Zimbabwe). Source: Authors’ calculations based on FEWS Net and COMTRADE/WITS data for dried beans (code 05423), maize and maize meal (044 and 04721), and rice (042). ICBT appears to be an income source small and short-lived price differences that for many small traders. Surveys carried out develop in neighboring areas. By defini- at selected border posts by the COMESA tion these opportunities are not systematic secretariat suggest that 20,000 –30,000 and large enough to be exploited through small traders cross the border every month formal trade. In addition ICBT represents at Mwami/Mchinji (Malawi), 15,000 – efforts to bypass regulatory measures and 20,000 at Chirundu, and 12,000–13,000 the costs of formal border crossing. Thus at Livingstone/­V ictoria Falls (Zimbabwe) minimizing regulation and costs of border (Njiwa, Nthambi, and Chirwa 2011; Njiwa crossings should move trade into formal 2012). channels. Greater recognition and facilitation of small trade as well as more informa- Zambian enterprises face high trade costs tion on such trade are needed in Zambia. Recent data on trade costs show that costs ICBT arises from opportunities available in for agricultural and manufacturing products 16 from Zambia to key markets (China, Ger- the Democratic Republic of Congo border) many, Japan, United States) are consistently stayed at around 46 hours over the same higher than those to neighbors (Tanzania, period. Average crossing times for imports South Africa, Namibia, Botswana) in 2009 at Nakonde (on the Tanzanian border) fell and 2010.10 For agricultural exports, trade slightly from 109 hours in 2010 to 72 hours costs are also usually higher than those faced in April 2013, but remain high. While these by companies in Malawi or Mozambique to crossing times include time in the queue, reach global markets (figure 2.9). For Zam- more recent data focusing more narrowly bia to play a central role in regional markets on border crossing times indicate that these and value chains and possibly emerge as a have more than doubled at Chirundu and logistics hub for intraregional trade, given its Kasumbalesa over the last year (figure 2.10). central location (it borders eight countries), High border costs hurt small traders dis- High border costs reducing trade costs is rightly a high priority. proportionately. These costs are often a big hurt small traders Trade costs are high for several reasons. share of the value exported, which could be disproportionately. Delays at borders are one—and form a big hurting competitiveness of smaller firms with These costs are often part of trade costs. Despite attempts to reduce small transactions. Also small traders find it them, delays at borders do not appear to be harder to navigate complex procedures. a big share of their going down. A note issued by TradeMark value exported Southern Africa in 2013 showed, using GPS Zambia has scope to expand services exports data, that average crossing time for imports Zambia’s trade in services has been declin- at Chirundu increased from about 19 hours ing as a share of GDP. Services trade declined in the first quarter of 2011 to 33 hours11 in to about 8 percent of GDP in 2010–12 from January 2013 and that the share of trucks about 14 percent in 2000–02. Recorded ser- cleared within 12 hours fell from 57 percent vices exports are relatively low ($375  mil- to 28  percent over the same period. Aver- lion in 2011) and are mainly transport age time for imports at Kasumbalesa (on (46 percent) and travel services (39 percent). Trade costs to key destination markets remain higher for Zambia than for Figure its neighbors 2.9 China Germany United States Japan Agriculture, 2010 500 400 300 $ 200 100 0 Malawi Mozambique South Africa Tanzania Zambia All goods, 2009 400 300 200 $ 100 0 Malawi Mozambique South Africa Tanzania Zambia Source: http://data.worldbank.org/data-catalog/trade-costs. 17 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Figure Border clearance times for imports have more than doubled over the last year 2.10 50 Entering Zambia at Kasumbalesa Average crossing time (hours) Entering Zambia at Chirundu 40 30 20 10 0 January March May July September November January 2013 2013 2013 2013 2013 2013 2014 Source: www.tmsa.informationplatform.co.za. Services imports are higher ($1.2 billion in example, the ratio of commercial services 2011), with transport services forming the exports relative to goods exports is below bulk (60  percent) and construction, insur- 5  percent and is the lowest among selected ance, and other business services the rest comparators (figure 2.12). In comparison, (figure 2.11). exports of services to goods exports are Zambia’s services exports are low on sev- more than 60  percent for Uganda, Kenya, eral metrics (other than share of GDP). For and Rwanda. At the extreme are Mauritius Figure Structure of services trade, 2011 2.11 Transport Insurance Construction Travel Personal, cultural, Other business Communications and recreational services 100 75 Percent 50 25 0 Exports Imports Source: UNCTADSTAT. Figure Services export metrics, 2009–11 2.12 Commercial services exports Per capita services exports 125 500 Percent of goods exports 100 400 75 300 $ 50 200 25 100 0 0 Kenya Mozambique Mauritius Malawi Rwanda Seychelles Uganda Zambia Note: Mauritius’s per capita services exports at $2,500 are not shown. Source: World Development Indicators. 18 and Seychelles where the services exports to great help to increase business opportunities goods exports ratio is 100 percent or more. within the region and boost service exports. Zambia’s per capita commercial services Regional discussions in Southern Africa on exports are also extremely low (below $50) as MRAs in professional services are in a very in most other comparators except Mauritius preliminary phase. Interested countries and Seychelles. could learn from East Africa’s experience Zambia’s services exports are, however, with MRAs in accounting and architectural growing briskly—particularly for modern services. services exports. Business surveys undertaken in 2012–13 in Sub-­ Saharan Africa reveal that Zambia has scope to improve competitiveness of about 18 percent of the interviewed firms in mining-related goods and services Zambia already export professional services Zambia’s copper mining sector has expanded The fragmentation (figure 2.13). There is potential for Zambia strongly in the past decade. This has created of regional markets to further grow exports in education and new opportunities for local suppliers. Several for professional, professional services within the region. For multinational companies have invested in education, and example, more than 80  percent of the pro- plant rehabilitation and expansion and new fessional services firms in the country inter- copper extraction and refining projects. This health services viewed as part of a World Bank–COMESA has expanded demand for mining-related prevents Zambia project export to at least one country within goods and services. Tapped into effectively, from fully benefiting the Sub-­Saharan region. Also, Zambia is con- such demand could contribute to economic from exports and sidering replicating the positive experience growth, jobs creation, skills and entrepre- imports of services of the Kafue Gorge Regional Training Cen- neurship development, and technological tre that offers specialized training in hydro- upgrading.12 power station operations to Sub-­ S aharan The volume of locally sourced goods and countries for other technical subjects. services by copper mines is large but the The fragmentation of regional markets for share of Zambian suppliers is quite small. professional, education, and health services Accurate data are lacking on the value of by restrictive policies and regulatory het- local procurement by Zambia’s copper min- erogeneity prevents Zambia from fully ben- ing sector, but a study prepared in 2012 efiting from exports and imports of services. estimates local sourcing to amount to some Opening regional boundaries and establish- $2.5 billion, comprising equipment and min- ing mutual recognition agreements (MRAs) ing services (35  percent of total expendi- would help raise Zambia’s exports of educa- tures); consumables, parts and components, tion and professional services to its African and maintenance (40  percent); low-tech partners and relieve temporary shortages in manufactured goods (5 percent); and basic crucial sectors such as health. The free move- services (20 percent) (Kasanga 2012). These ment of COMESA/SADC nationals with- were supplied by locally based international out work permit requirements would be of suppliers of goods and services (80 percent), Figure Exports of professional services from Zambia and selected comparators 2.13 Share of rms exporting services Average share of exporters’ revenue obtained from export 40 30 Percent 20 10 0 Zambia Malawi Mozambique Mauritius APEI COMESA Note: APEI is Accelerated Program for Economic Integration. Source: World Bank surveys of professional services in COMESA in 2013. 19 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? overseas suppliers (16  percent), and locally from the private sector that the process is based Zambian suppliers (4 percent). more about raising revenue for the certifying body than regulating trade. Growing Zambia’s agriculture trade Looked at individually, regulatory costs Zambia could become a major food exporter may not appear large but add up quickly for to Eastern and Southern Africa.13 Relative exporters. In 2011, for example, the costs of to other countries in the region, it has an meeting regulatory requirements and border abundance of water and fertile land and a fees for formal sector maize exports to the generally favorable climate for agricultural Democratic Republic of Congo at Kasum- production. Compared with many African balesa came to around $1,136 for a 30-ton countries, it already has a well-developed truck (see annex table C1). On per-ton basis, In 2011, the costs of agribusiness sector with more than 400,000 this cost was equivalent to 15 percent of the meeting regulatory smallholder households linked to private Zambian farmgate price for maize. Such requirements for firms through vertically integrated outgrower high costs not only hit exports but also cut programs primarily for cotton and (less so) into the profits available to farmers. Stream- maize exports and sugar, tobacco, and soybeans. Large commer- lining trade regulations, therefore, is impor- crossing the border cial farms and estates also play an important tant for improving export competitiveness in at Kasumbalesa came role in Zambian agriculture and account for agriculture and boosting rural incomes. to 15 percent of the the bulk of exports of sugar, tobacco, wheat, farmgate price horticulture products, coffee, and soy. Unpredictable trade policy and FRA interventions Zambia is generally surrounded by coun- in the maize market tries with large maize deficits. Until recently, Zambia has a long history of unpredictable South Africa was the main supplier to these agriculture trade restrictions and outright deficit countries, but now produces mainly bans. This particularly concerns maize, which GMO maize and has shifted to supplying is inherently vulnerable to drought and subject other buyers outside Africa. The reorienta- to many political pressures as the main small- tion of South African maize exports com- holder crop and daily staple for almost the bined with substantial maize deficits in much entire nation.14 Zambia has also used import of the SADC region and in East Africa pro- bans to protect local wheat growers and, at vides an important strategic opportunity for various times, has imposed trade restrictions Zambia to assert itself as a grain basket for on soybeans, poultry, pork, beef, and other Eastern and Southern Africa. To do this, strategic commodities. These restrictions are however, Zambia requires a combination of often unpredictable but typically placed on improved transport links, predictable trade imports to ensure that domestic production relationships, and other policies that encour- is consumed first and on exports during bad ages both large commercial and smallholder harvest years to protect self-sufficiency. farmers to intensify production. Trade restrictions have the seeming ben- efit of keeping domestic prices low, but there Constraints is considerable documented evidence to show that trade restrictions contribute to food High regulatory costs price volatility that typically hurts the poorest For all types of agriculture commodities and members of society most (Jayne and others farm inputs, Zambia encounters a wide variety 2008; Kagira 2009; COMPETE 2010; World of requirements that make trading difficult Bank 2012). One good example is Zambia’s and expensive (box 2.3). Phytosanitary and 2005 maize marketing season when the coun- other regulations serve legitimate purposes, try suffered a food shortage and import parity yet in practice there are frequent institutional prices rose unnecessarily by more than $100 overlaps whereby traders are often required per ton, while the government decided how to obtain certificates for the same or similar to respond and when to lift import restric- things from different agencies and to submit tions (Mwanaumo and others 2005). their goods for duplicate inspections. In some FR A interventions also directly affect cases the certificates traders are required to the volume of maize available to the pri- obtain do not even correspond with actual vate sector for regional trade. While the buyer requirements, leading to complaints Food Reserve Act of 1995 mandates that 20 Box Regulatory requirements for agriculture trade 2.3 Trade permits. Each vehicle carrying agriculture produce into or out of Zambia must carry an original trade permit issued by the Agribusiness Unit of the Ministry of Agriculture and Livestock (MAL). The actual cost of a trade permit is relatively modest at only K35 each. Permits, however, are only valid for 30 days and the exporter must be registered with the Zambia Revenue Authority, thereby excluding very small traders from the legal system. Moreover, until recently, exporters needed to specify the vehicle registration number and trailer number, which in turn were recorded on the trade permit. If the designated vehicle suffered a breakdown before it reached the border, this meant the permit could not be used and a brand new one had to be applied for and issued by MAL. Longer term, traders also say the unpredictability of whether or not trade permits will be issued is an even bigger problem and major deterrent to private investment and forward contracting. Often it is not clear whether trade permits are available, and even when there is not a formal trade ban, importers and exporters complain that the lack of transparency lends itself to cronyism and rent seeking. Phytosanitary certificates. The use of such certificates is a normal and well-established part of agriculture and food trade, whereby exporters are required to demonstrate compliance with the importing country’s phytosanitary declaration conditions. In Zambia these certificates are issued by the Plant Quarantine Unit at the Zambia Agriculture Research Institute (ZARI) and cost K15.50 each plus a K54 fixed rate for inspection. Although this part of the trade process was said to work well with ZARI able to issue phytosanitary certificates from branch offices close to major borders, the permits are valid for only 15 days and often require various types of testing, treatment, and certification that cannot be done in branch locations. On top of the official charges, exporters also say they are routinely asked to collect phytosanitary inspectors from the ZARI offices and provide transport to where the commodity is stored. Non-GMO certificate. Most of Zambia’s regional trade partners including Botswana, Malawi, Namibia, Tanzania, and Zimbabwe ask for non-GMO certification as part of the phytosanitary process. Private inspectors such as SGS and SOCOTEC used to be allowed to conduct non-GMO tests for trade certification, but this procedure has now been made the sole responsibility of the Pathology Unit at ZARI. Under the new system, designated non-GMO inspectors must draw physical samples for laboratory analysis that can only be performed at ZARI headquarters at Mt. Mukulu near Lusaka. Zambia does not allow any type of genetically modified seed into the country, but still requires non-GMO testing as part of certification. There is no fee for non-GMO certification except, as with phytosanitary inspection, traders say they must collect inspectors from ZARI to get the job done and even arrange to transport the sample to Mt. Mukulu if the grain is stored far from Lusaka. Traders also report they have been required to obtain non-GMO certificates for exports to South Africa even though South Africa is not a non-GMO country and certification is not part of the buyer’s requirements. Fumigation certificate. Like non-GMO certification, proof of fumigation is also required by most Southern Africa countries as part of the phytosanitary process. Fumigation for the purpose of trade can only be done by companies registered with ZARI and costs around K4.20 per ton. On treatment, the licensed fumigator will issue a certificate that is valid for 15 days and is required to obtain the phytosanitary certificate. If the commodity is not exported within the 15-day window, the trader may apply for a single 15-day extension. If, however, the commodity is still not exported after this time, it must be fumigated again even though the chemicals are effective for two or three months. Quality analysis. Although Zambia does not require quality inspection of its agriculture exports, proof of compliance with Zambian standards is compulsory for several categories of agriculture import including animal feeds, maize flour, wheat flour, refined edible vegetable oils, and all types of fertilizer. Zambia does not recognize foreign quality certificates and importers are advised to send preshipment samples to the Zambia Bureau of Standards at least two weeks before the expected arrival date for domestic quality inspection. Product registration and testing. Before being imported to Zambia, all types of seed, fertilizer, agrichemicals, and veterinary medicines must be registered with ZARI or another statutory agency. Registration trials can take several seasons and cost many thousand dollars that must be paid for by the importer. These trials are typically done to ensure a product is safe and effec- tive. Once a product is approved, however, annual fees are also charged for re-registration. Each type of fertilizer, agrichemical, and seed that dealers plan to handle must be registered annually with the Zambia Environmental Management Agency at cost of K1,560 per product. In the livestock sector, each veterinary medicine, and even each different size vile, must be registered annually with the Zambia Medicines Regulatory Agency at a cost of K1,900 per product and with the Zambia Environmental Management Agency at a cost of K1,560 per product. On top of these fees, 2 percent of the invoice amount for all vet medi- cines is paid to the Veterinary Department as a screening charge. Given the duplicate and overlapping nature of these fees, importers and farmers’ representatives alike have complained that the charges are more about raising revenue for the statutory agency than actual trade facilitation or consumer protection. 21 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? the FRA should protect the national food mills for less than the cost of procurement reserve, the FRA has grown to dominate the and storage has led commercial mills to pull maize market, buying upwards of more than out of the maize market and rely instead on 80 percent of all maize sold by smallholder the FRA as their primary source of supply.15 farmers in some years and, from September Conversely, an improved policy environ- 2012 to May 2014, even being the only legal ment would create incentives for small or Zambian exporter of maize grain through large producers to make on-farm improve- government-to-government deals that were ments or for agribusiness firms to invest in exempted from the statutory trade ban. The input supply and marketing systems. With consolidation of maize trade in the hands of a clear commitment to allowing maize sec- the FRA, with the risk of future price inter- tor participants access to foreign markets, An improved policy ventions and restrictions on maize exports, there would be good reason for established environment will have made it impossible for Zambia to and emerging commercial farms to re-enter create incentives for develop reliable trading relations with deficit maize production. According to industry markets in the region (box 2.4). sources, these farms could produce a stable agribusiness firms to Over the long term, the lack of certainty 300,000 tons of new maize including up to invest in input supply over market access, together with the FRA’s 100,000 tons of irrigated maize for early har- and marketing systems procurement and pricing policies, leads vest that would not only provide the basis for to farmers and the private sector making export development but also create a buf- inefficient choices about production and fer stock for domestic consumption in case investment. Until roughly the mid-2000s, of drought. Smallholder farmers would also large commercial farmers in Zambia were benefit from clear market signals including important suppliers of maize to the indus- timely and competitive payments associated trial mills but then switched to growing the with export development. Despite many chal- crop mainly for on-farm use. Reasons for this lenges, recent experiences provide insight change included FRA price interventions, into the type of production arrangements prohibitions on commercial farmers sell- and trading relations that could flourish in ing to the FRA, and lack of assured access a more appropriate policy environment (box to regional parity prices and predictable 2.5). While the recent decision to lift the futures contracts. Zambia has thus become 2012 trade ban is a step in the right direction, increasingly dependent on rainfed maize the unpredictability of maize pricing policies from smallholder farmers to meet domestic and potential for similar trade bans being demand and to provide possible surpluses introduced in the future continue to deter for export. Policy uncertainty also deters much-needed private investment. productivity-raising investments by farmers and other investments by the private sector High input subsidies hinder long-term in input supply, crop storage, and food mar- competitiveness keting. The FRA practice of buying from The high level of input subsidies leaves the smallholder farmers at high, pan-territorial Ministry of Agriculture and Livestock (MAL) prices and offloading the maize to registered with few resources to develop long-term Box Are government-to-government transactions crowding out private maize deals? 2.4 Although government-to-government maize exports by the FRA were still allowed under the recent trade ban, very little grain was actually sold. The Grain Traders Association of Zambia reports that 150,000 tons were earmarked for export to Zimbabwe, but just 12,000 tons were exported and only 8,000 tons were paid for. Malawi was similarly allocated 30,000 tons by the government but only imported and paid for around 5,500 tons, while Tanzania was allocated 80,000 tons of which around 20,000 tons were taken and paid for. According to private grain traders, the poor performance of these deals is not an indica- tion of lack of demand in neighboring markets but a result of the inability of foreign governments to pay. Private imports from other world producers continued to roll into Zimbabwe and other neighboring countries while Zambian maize earmarked for export sat idle and even rotted because of poor storage. Meanwhile, because SI-85 allowed only government-to-government exports and exports by the World Food Programme, the FRA was prevented from selling the more than 200,000 ton surplus it held for export to private buyers who were ready and willing to pay. 22 Box Emerging private sector relations in agriculture 2.5 Zambia has a long history of outgrower support for smallholder cotton, tobacco, and sugar that have not been affected by trade bans or price manipulation like maize. Contract farming arrangements have also started to emerge recently for smallholder groundnuts and sunflower. Notably under many of the better established outgrower programs for cotton, private firms such as Cargill and Louis Dreyfus/NWK (which recently bought Dunavant) have been providing input loans and extension advice for maize and soybeans as part of a “whole farm” approach—that is, with maize being the household food crop that can also be sold for cash and soybeans as a nitrogen-fixing legume. In the most recent 2013/14 season, Cargill procured roughly $12 million in fertilizer and maize seed that it distributed 45,000 farmers. NWK Agri-Services also provides inputs for maize and is further supporting a smallholder mechanization program that provides tractor loans to farmers that the grower can pay for through cotton, soybean, and maize sales. Several other large private companies such as Afgri, CHC Commodities, Export Trading Group, Zamanita, and Zdenakie are also active in local commodity markets buying maize, soybeans, sunflower, and wheat from large-scale and smallholder farmers FISP input subsidies to supply breweries, stock feed manufacturers, oil processors, and other commercial users. Recent focus group discussions carried are unlikely to have out by the Indaba Agricultural Policy Research Institute in Chipata, Katete, Choma, Monze, Mkushi, and Serenje found that farm- a lasting impact on ers generally have favorable perceptions of corporate grain traders who are viewed as more trustworthy than local wholesalers and even the FRA in that the prices are transparent, scales are believed to be accurate, and payments are made immediately. agricultural output But output floor prices are not currently offered as part of private input arrangements for maize, thus putting significant or competitiveness price risk on the farmer. Private traders could guarantee floor prices through use of futures contracts traded on the SAFEX Commodity Exchange in Johannesburg, or even a revitalized ZAMACE exchange, but the risk of export bans and uncertainty of price interventions by the FRA makes this risky and impractical. If, however, grain traders were certain of being able to trade at export parity, or even sell to the FRA at export parity, these companies could hedge their contract positions to defray the price risk and in turn provide small farmers a guaranteed price. competitiveness in maize. The FISP, which subsidies transform the profitability of sup- aims to provide “vulnerable but viable” farm- ported crops, and support incentives to grow ers with subsidies for fertilizer and crop maize for participating households on a sea- seeds, primarily for maize, absorbs, with sonal basis. FISP subsidies provide consider- FRA operations, more than 50 percent of the able cash savings and incentives to increase available budget for MAL. The FISP and FRA the area under cultivation.16 Much has been together reached 91 percent of total spend- made of the FISP’s contribution to recent ing in 2010 (figure 2.14). Given the scope and bumper harvests, and although Burke, Jayne, scale of public spending on these programs, and Black (2012) find that 47 percent of the they have significant implications for MAL’s 2010 bumper harvest was due to favorable role in developing Zambia’s capacity to serve weather and not the FISP, 25 percent of the as a reliable maize exporter in the long term. increase in 2010 is attributed to increased fer- By themselves, FISP input subsidies are tilizer use and 5 percent to increased hybrid unlikely to have a lasting impact on agri- seed use. Their analysis also shows that on cultural output or competitiveness. These average 23  percent of the increase was due Figure Percent share of FISP/FSP and FRA in total MAL spending, 2003–13 2.14 FRA FISP/FSP Other 100 75 Percent 50 25 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012a 2013a Note: FSP is Fertilizer Support Programme. a. provisional. Source: Indaba Agricultural Policy Research Institute’s computation with MAL support (provisional). 23 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? to area expansion. Although the research theory, to domestic prices settling around does not look in closer detail at the reasons export parity when there is a maize surplus for area expansion, the savings on cash costs and around import parity if there is a deficit. because of the FISP surely facilitated at least If free exports result in commodities being part of the area increase. exported to neighboring countries for less Analysis by the Indaba Agricultural Policy than the total economic cost of production, Research Institute also shows that the impact it would be a welfare loss to the country. of the FISP on crop productivity is very low, Therefore, a pertinent policy question while at just 1.88 kg of maize per kg of subsidized advocating for more open borders is whether fertilizer purchased by government. Reasons Zambia would be in a position to export if for this include problems with distribution of there were no maize subsidies. Zambia would be in inputs to better-off farmers who would nor- A practical way to look at this question a position to export mally buy private inputs, distribution of Com- is to consider whether the revenue Zambia even if there were pound D basal fertilizer to all part of Zambia earns from exporting is greater than the eco- when other products would be more appro- nomic cost of producing, including the costs no maize subsidies priate in some locations, and late delivery of of subsidy provision, and whether exporting inputs sometimes by several weeks or months maize is financially profitable without the (Burke, Jayne, and Black 2012; Mason, Jayne, subsidies. To provide a framework, results and Mofya-Mukuka 2013). In 2010 a World from an analysis of the underlying economic Bank survey of five provinces found that efficiency and farm-level profitability of maize yields per hectare were around 5 per- exporting maize to Zimbabwe were devel- cent lower for households that used subsi- oped (box 2.6, with details in annex C).18 dized inputs against private inputs because of late delivery and delivery in quantities Large commercial farmers that were different from what the farmer was Results of the analysis of irrigated and rain- expecting (World Bank 2010). fed maize grown by large commercial farm- ers (LCFs) indicate that LCF growers are What if there are no subsidies? Zambia’s efficient in producing maize for export to underlying competitiveness in maize Zimbabwe at economic parity prices (table A discussion of maize trade policy has to 2.3). This is particularly true for preseason take into account the input and output sub- irrigated maize where the domestic resource sidies provided by the government to the cost ratio (DRC) of 0.33 is outstanding and sector through FISP and FRA operations. indicates a very high degree of social effi- Having invested heavily in subsidizing maize ciency. As expected, the DRCs increase as growing and mealie meal production, the export parity prices fall throughout the sea- government is keen to see that domestic son, but at a peak of just 0.51 for irrigated prices remain low.17 In the absence of physi- maize and 0.60 for rainfed maize the analy- cal limitations, open borders would lead, in sis still shows that LCF production is highly Box Domestic resource costs as a measure of competitiveness 2.6 The analysis covers large commercial farmers (LCFs) growing irrigated and rainfed maize in Central Province, and family farmers (FAMs) growing rainfed maize using high- and low-input management in Central, Eastern, and Northern Provinces. For LCF growers all transactions are based on private sector prices. For FAMs the analysis covers growers who use private inputs and subsidized FISP inputs and who sell to private traders and to the FRA. Underlying competitiveness is measured by domestic resource cost ratios (DRCs). A DRC is a ratio of the domestic resources used to produce and market a unit of tradable commodity at economic prices to the foreign profits earned at economic prices. Therefore, when a DRC is less than 1.00 the system is socially efficient, and the lower the DRC, the greater the efficiency. But if the DRC is greater than 1.00 this is because the system consumes more domestic resources than the value of tradable output it produces, meaning the system is not efficient, and the higher the DRC, the greater the inefficiency or social loss. To account for seasonal variation in export parity prices, the analysis covers four market scenarios: preseason exports of LCF irrigated maize when prices are highest; early-season exports of LCF and FAM maize shortly after the main harvest begins when prices start to drop; peak season exports when the market is flush with maize and prices are lowest; and long-season exports based on several months’ of storage for export during the next rainy season when prices start to climb. 24 Table LCF competitiveness indicators 2.3 Preseason Early Peak Long LCF irrigated (10 mt/ha) DRC 0.33 0.39 0.51 0.36 Net profit ($/ha) 569.81 165.41 (404.79) (12.19) LCF rainfed (7 mt/ha) DRC n/a 0.43 0.60 0.42 Net profit ($/ha) n/a 130.59 (309.83) (35.01) Source: Authors’ calculations. competitive and has the potential to make and financially profitable in regional export very efficient use of domestic resources even markets. The best DRCs for smallholder when regional prices are low. The DRCs for maize, for example, appear to come after rainfed maize are higher than for irrigated several months of private sector storage production, but at a range of just 0.42 to 0.60 when prices start to go up in the next rainy are still highly attractive.19 season. Financial profits from private sales On the financial side, however, the analy- are lower after long storage compared with sis points to important market risks in that early-season exports, but do improve substan- private profits depend on exporting the tially compared with transactions at peak- maize quickly when regional prices are still season prices when regional prices are low. high. Whereas irrigated and rainfed maize Yet many of the DRCs with FRA storage are can be extremely profitable if exported early, near or above 1.00 due to crop losses, excess the analysis shows there is not enough profit overheads, and other managerial inefficien- left in export parity to cover the farmer’s cies that have long plagued the state-owned costs and trader’s margin once prices drop marketing system. going into the main harvest season. Even The analysis also shows that smallholder with long storage under good private sector production is more efficient with FISP inputs conditions, prices do not recover enough and private sector sales than with private to provide farmers a financial profit at the inputs and FRA sales. Of the two subsidy pro- assumed yields and prices. Therefore, if grams, therefore, the FISP appears to be a exports are delayed due to the unavailability more competitive and efficient way to support of export permits or other trade bottlenecks, smallholder maize than pan-territorial pric- LCF maize can quickly become a loss-making ing and state-run storage by the FRA. The activity despite being highly competitive and worst efficiency scores, in fact, result from socially profitable for Zambia as a whole. using FISP inputs and selling to the FRA, meaning that participation in both govern- Family farmers ment programs is the least efficient option for The picture is less clear for smallholders or Zambia from a social efficiency point of view, family farmers (FAMs). In this case, many once the economic costs and returns from of the DRCs with FISP or FRA subsidies are these programs are taken into account. above 1.00, indicating that export trade is The data further show that a farmer’s socially inefficient once the additional costs profits can be greater for private sales than of these programs are taken into account for sales to the FRA in locations closer to (table 2.4). All the DRCs involving private the export market. In Central Province, for inputs and private sales are less than 1.00 and example, net profits are higher with FISP sometimes even indicate a very high degree inputs and private sales than with FISP of social efficiency. The financial profits inputs and FRA sales except in the peak sea- for farmers in these scenarios are mostly son when regional prices are low. In locations quite low and sometimes even negative when even closer to Zimbabwe than Mkushi, the 100 percent of the crop is sold for cash. incentives to sell to private traders would be Closer examination of the FAM results even stronger. As seen in table 2.4, a differ- reveals, however, strategic opportunities for ent situation prevails in Eastern and North- smallholder maize to be socially competitive ern Provinces when the grain is valued at 25 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Table FAM competitiveness indicators 2.4 DRCs Net profit ($/ha) Inputs Output Early Peak Long Early Peak Long Central Province (Mkushi) FAM-high (2.6 mt/ha @ 4×4) Private Private 0.60 0.76 0.58 79.49 (64.03) 37.27 FISP Private 0.81 1.01 0.78 254.46 116.46 213.86 Private FRA 0.80 1.06 0.86 26.67 26.67 26.67 FISP FRA 1.02 1.33 1.10 203.67 203.67 203.67 FAM-low (1.4 mt/ha @ 2×2) Private Private 0.73 0.92 0.71 0.75 (76.53) (21.99) FISP Private 1.01 1.26 0.98 92.08 20.32 70.97 Private FRA 0.96 1.26 1.03 (27.70) (27.70) (27.70) FISP FRA 1.26 1.65 1.36 65.67 65.67 65.67 Eastern Province (Chipata) FAM-high (2.7 mt/ha @ 4×4) Private Private 0.62 0.80 0.60 14.77 (134.27) (29.07) FISP Private 0.83 1.06 0.80 192.98 49.46 150.76 Private FRA 0.84 1.14 0.91 47.39 47.39 47.39 FISP FRA 1.07 1.42 1.15 224.39 224.39 224.39 FAM-low (1.95 mt/ha @ 2×2) Private Private 0.53 0.67 0.51 62.74 (44.90) 31.08 FISP Private 0.72 0.90 0.69 157.32 55.20 127.27 Private FRA 0.71 0.95 0.77 86.30 86.30 86.30 FISP FRA 0.92 1.21 0.99 179.67 179.67 179.67 Northern Province (Kasama) FAM-high (3.10 mt/ha @ 4×4) Private Private 0.53 0.75 0.55 10.41 (186.15) (65.37) FISP Private 0.77 0.99 0.74 166.66 1.06 117.94 Private FRA 0.79 1.10 0.86 130.30 130.30 130.30 FISP FRA 1.00 1.37 1.09 307.30 307.30 307.30 FAM-low (2.00 mt/ha @ 2×2) Private Private 0.56 0.72 0.54 2.90 (107.50) (29.58) FISP Private 0.76 0.96 0.73 100.96 (3.92) 70.10 Private FRA 0.77 1.05 0.84 96.67 96.67 96.67 FISP FRA 0.99 1.33 1.07 190.03 190.03 190.03 Note: Private yields shown, with FISP assumed 0.10 mt/ha less; yields at different levels of fertilizer use expressed in 50-kg bags of Compound D*50-kg bags of urea per hectare. Source: Authors’ calculations. ­ imbabwe export parity prices. In actual Z leads to inefficient decisions by farmers and practice, however, grain from these locations the private sector on production and invest- would likely go to Malawi or Tanzania and so ment. High input subsidies could also be could still be more profitable at regional par- coming in the way of developing long-term ity compared with selling to the FRA. competitiveness. The basic premise of this subsection’s Options for enhancing agriculture trade and analysis is that input and output subsidies, competitiveness FRA marketing interventions, and agricul- When one maps the way forward, several ture trade policy need to be looked at in opportunities stand out. The analysis in this unison when developing an approach to subsection shows that agriculture import- long-term agriculture competitiveness. An ers and exporters of all commodities face a important element is to provide a predict- number of high trade costs, lengthy proce- able policy environment for farmers and the dures, and duplicate charges that undermine private sector to make informed decisions. competitiveness. The trade policy, particu- The recent decision to lift the recent export larly for agriculture, is unpredictable, and ban on maize, for example, is a step in the combined with the FRA’s interventions, it right direction but does little or nothing to 26 encourage long-term investment as long as Commit to open borders in a sequenced manner the risk of future bans and other forms of The above discussion also showed that prog- price manipulation remain. ress in agriculture expansion has been under- mined by trade policies that limit market Reduce costs of regulatory compliance access and threaten to make private transac- The earlier discussion of trade requirements tions unprofitable. Despite Zambia enjoying showed how many duplicate and overlapping a strong economic comparative advantage procedures add to the costs of trade and in maize exports, problems with unpredict- undermine Zambia’s export competitive- able market access and manipulation of out- ness. The worst effect of these charges is felt put prices make trade risky and deter much by small-scale traders for whom the charges needed private investment at all levels of the are highly regressive and create incentives to supply chain. A stepwise approach to open A stepwise approach engage in informal transactions outside the borders and genuine free trade could pro- to open borders could legal system. vide space for the government to develop allow the government To improve matters, dialogue at the confidence that greater private sector par- to develop confidence national and regional levels on opportuni- ticipation and less government intervention ties to streamline and eliminate unnecessary would allow critical food security goals to be that greater private trade procedures would be a good practical met at the same time as maize exports grow. sector participation strategy for Zambia. One obvious area for Such an approach would provide space for and less government improvement would be to streamline the pro- the private sector to develop necessary mar- intervention would cedures for non-GMO certification. Zambia ket infrastructure and commercial linkages, allow critical food does not allow any kind of GMO seed to cross and enable the government to focus on pro- security goals to be its borders yet requires non-GMO testing of viding other support services. met at the same time all exports at Mt. Mukulu as part of its phy- tosanitary regime. In broader terms there Step 1: Adopt forward contracting with the commer- as maize exports grow could also be potential for transitioning to cial farm sector. Zambia could almost immedi- a spot-check system of GMO compliance. ately make a firm commitment to guaranteed While some small quantities of GMO seeds export parity prices for a fixed amount of may have entered the country illegally, there precontracted maize. With it, the Grain Trad- have not been any major interceptions of ers Association of Zambia (GTAZ) and other GMO crops, and random sampling of ware- exporters could contract with members of houses and grain storage depots could be a the Zambia National Farmers Union (ZNFU) much less burdensome approach to meeting to produce preseason irrigated maize that is importer requirements than mandatory test- not currently being grown and would come ing of all export consignments. on the market two to three months earlier Requirements for product registration and than rainfed production when local supplies testing could also be streamlined. Whereas are most likely to be scarce. This maize could government departments such as the ZARI be offered first to the government/FR A remit their funds to the national budget, statu- at export parity prices as a buffer for food tory agencies including the Zambia Bureau of security, and if it declines this option, export Standards, Zambia Environmental Manage- permits would be granted on a fixed date for ment Agency, and Zambia Medicines Regula- regional trade through private channels. The tory Agency depend on the revenue collected GTAZ and ZNFU have said they could easily to fund at least part of their operations. Trad- contract for 60,000–80,000 tons of “new” ers and farmer representatives have therefore irrigated maize in the first season using complained that the certification and regis- spare irrigation equipment used for winter tration requirements these agencies impose wheat. In following seasons, the GTAZ and are more about revenue collection than actual ZNFU say it would be possible to contract trade facilitation. In the case of vet medicines, for 100,000 or more tons of irrigated maize for example, having to register each product together with at least 200,000 tons of rainfed and even each different size vials with both maize that is not currently being produced. the Zambia Medicines Regulatory Agency Such an approach does not mean the and Veterinary Office is redundant and the maize would be exported automatically. If procedure could be streamlined. Zambia were facing a deficit, domestic prices 27 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? would naturally rise above export parity, improve national food security, but regional meaning the new maize would stay in the importers need to be certain of receiv- country. The additional production would ing food stocks. Simply put, for Zambia to help minimize local price swings to the ben- become the supplier of first choice, there efit of consumers and the FRA’s own price needs to be a firm and irrevocable commit- stabilizing mission. ment to keeping the country’s borders open to maize imports and exports. While it is pos- Step 2: Expand export parity contracts to the sible that food prices could sometimes rise smallholder farm sector. In the near future, sharply in the face of widespread regional export parity contracts could be extended shortage with permanently open borders, to groups of smallholder farmers connected such pressures could be moderated through To improve long-term to outgrower programs and through the local forward contracts for physical delivery competitiveness in ZNFU’s “Lima Credit Scheme” run by the and even by taking a more pragmatic stance agriculture, there Zambia National Commercial Bank.20 Simi- on possible import of GMO maize for human lar to forward contracting of commercial consumption during a true deficit, like Zim- is need to support farmer maize, the idea would to guarantee babwe has done. public and private a market-driven floor prices as an incentive investments that for increased production. In well-connected Invest in long-term competitiveness help farmers improve farm areas, export parity prices are often To complement moves toward guaranteed crop yields and greater than the FRA price, meaning this export parity pricing and eventually to per- expand farm size strategy could be a route not only to increas- manently open borders, Zambia could take ing farmer incomes but also to alleviating immediate steps to improve rural incomes budgetary pressure from the FRA. and trade competitiveness. As with commercial farm maize, con- There is need to support public and pri- tracts could be structured in such a way that vate investments that help farmers improve gives the FRA first right of refusal at a pre- crop yields and expand farm size. The determined delivery date and price. If the analysis of economic efficiency shows that FRA passes on the option because of good investments in irrigation to allow a reliable supply, the contracting firm would have the early-season harvest as well as mechanization right to export the crop without restriction. to let farmers cultivate a greater area could Or, if domestic supply is tight and the food is be good strategies to improve the profit- required locally, the FRA could exercise its ability and efficiency of smallholder maize option to buy at export parity and enjoy con- production. The government could also tai- siderable savings compared with having to lor extension messages for different parts of import difficult-to-source non-GMO maize. Zambia. Since well before economic liberal- Such an approach, therefore, would not only ization, Zambia’s extension services recom- help make the market more predictable—to mended farmers in all locations to apply four the benefit of farmers and consumers—but 50-kg bags of basal fertilizer (Compound D) would also allow the government to manage and four 50-kg bags of urea top dressing per food prices in a much more cost-effective hectare (4×4 management as modeled at the way than holding physical stocks. In outlying high input level). However, this recommenda- areas far from regional markets, FRA prices tion does not always provide the best finan- are likely to be between import and export cial profit or efficiency given differences in parity, and a case could be made for continu- soil type and market access. ing FRA purchases there. While the matter of how to improve the FISP’s effectiveness is well beyond the scope Step 3: Permanently open borders. Beyond the of this Brief, the analysis points to the impor- use of export parity prices in domestic con- tance of making real progress in this area. tracts in the near to medium term, a final Compared with spending on output mar- challenge to Zambia becoming a true “grain keting and into mill price manipulation basket” is supplying physical stocks consis- through the FRA, for example, the analysis tently. Guaranteed parity pricing, with the shows that subsidized inputs are more likely FRA having the first right of refusal, would to benefit farmer income and trade competi- do much to stimulate total production and tiveness. One way to address the problem of 28 late delivery and improve access to subsidized Durban at border crossings (TMSA 2012).22 inputs that are adapted to different loca- Zambia’s performance is particularly poor on tions, for example, would be the electronic coordination among agencies, governance, voucher approach that has been promised by and impartiality at borders, as measured by MAL for years. Opportunities also exist for OECD Trade Facilitation Indicators, which private outgrower programs to play a larger rank it significantly worse than the Sub-­ role with input delivery and even the delivery Saharan average. of subsidized inputs that would help alleviate the logistical burdens of current arrange- Efforts to improve customs and border ments, forge new market relations, and pro- management mote cost savings through increased private The government is already working to competition. improve clearance times and border opera- The government Policies that stimulate private investment tions, but much more has to be done. Some is working to in smallholder marketing depots and stor- of the initiatives undertaken include intro- improve clearance age sheds would also be useful. Wholesaling duction of pre-arrival declarations and times at borders, firms have indicated that if export oppor- improved customs data management sys- tunities were predictable, significant invest- tems, elimination of preshipment inspection but its initiatives ment would go into grain storage in the and replacement with destination inspection, have not had their northern corridor, including Chinsali, Isoka, strengthened risk management regimes, and full impact yet and Nakonde. These sheds would seek to tap one-stop border posts (OSBPs). But as dis- into export markets in Kenya and the Demo- cussed below, these initiatives have not had cratic Republic of Congo, as well as domestic their full impact yet. Complementary actions markets in the Copperbelt. The government need to be taken to get the full benefits. And has proposed to spend around K180 million an approach that gives priority to simplify- to construct and rehabilitate public grain ing procedures, streamlining requirements, storage facilities across the country. Given and improving governance before investing the pent-up demand for private sector invest- heavily in border infrastructure would be ment in storage under export parity condi- preferable. tions, and that high storage losses at FRA Anecdotal evidence suggests that inad- depots are not just a matter of poor infra- equate information about documentary structure but also relate to poor manage- requirements at borders can cause big delays. ment, these funds could likely be better spent (The burdensome documentary require- on other public services including invest- ments for agricultural products were dis- ments in farmer extension, crop research, cussed earlier.) Equally important, there is and construction of new roads and bridges to not enough readily available information on better link farmers to markets. which documentary requirements have to be met for what products. Changes to these Trade facilitation requirements are frequent and it is difficult Trade costs are high for several reasons. For for enterprises to keep track. Where docu- seaborne trade, distances to ports are long mentation is inadequate, goods can be held even though enterprises have several options at a border until traders can present the for ports, and there is little that Zambia can paperwork—often obtained only in Lusaka. do about these distances. Also the scope for Information about all documentary require- reducing freight rates on international trade ments could be made more readily available routes is limited because they are already in one place, reducing the number of cases competitive. But there is considerable scope where goods have to be held at the border. to reduce costs of crossing Zambia’s own Restricting the individual powers of minis- borders. For example, there are numerous tries to change the requirements at short (or procedural requirements at Zambian bor- no) notice could increase the predictability ders that act as bottlenecks and cause costly of trade operations. The recently revised delays.21 In 2009 the Federation of East and Technical Regulations Framework aims to Southern African Road Transport Associa- achieve this, but has yet to be implemented. tions indicated that truckers spent more than Introduction of pre-arrival declarations 50  percent of travel time from Kolwezi to has led to faster clearance at borders but 29 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? faces some constraints. With such declara- Despite significant improvements, the tions, trucks no longer wait while processing border is effectively far from being a “one- their documents when exiting Zambia. The stop” border post as coordination across the private sector attests that pre-arrival decla- border remains limited, documentation is rations have had a big impact on reducing still processed twice, and data entered are clearance times. However, truckers often do not shared between the two countries. Trad- not manage to submit preclearance docu- ers also need to use two freight forwarding mentation in time, partly because the truck agents, one in each country. This points to registration number needs to be part of the the need for regulatory reforms and the high submission (for the temporary export of the potential for further improvements. truck). This requirement does not allow large To reduce delays an OSBP must be accom- A comprehensive but logistics companies to submit preclearance panied by simplified procedures at the bor- prioritized approach enough in advance as they often do not know ders. The conditions for success are simple, covering IT and which truck will carry which trailer with the but experience shows that they are some- goods, due to fleet management demands, times difficult to fulfill. The main challenges procedural reforms until they leave the depot. are related to architectural design, clarity of besides infrastructure The Zambia Revenue Authority intro- procedures, and their implementation. Close is needed to improve duced an improved customs data manage- coordination is needed to detect fraud, while border performance ment system, ASYCUDA World, in late 2013 to the legal framework needs to allow arrests of speed up customs procedures, but so far the offenders and prosecution of cases without impact has been limited. Selectivity param- violating either country’s laws. Therefore it eters that will be included in the system to is important that procedures between the allow risk-based targeting of inspections are countries are harmonized and simplified. expected to allow better risk management Bilateral agreements should be f lexible and decentralization of valuation decisions, enough to allow for adjustment to local con- leading to faster clearance. Such a system ditions and to change over time. To realize would also reduce the scope for parallel pro- full benefits of an OSBP, it is important that cesses and rent extraction. However, there procedures are simplified and implemented are concerns that introduction at four border well; there is full use of information technol- crossings has initially led to longer clearance ogy (IT); there is transparency and shared times for some shipments because connectiv- intelligence; staff are properly trained; and ity for the Internet-based system is proving an there is overall effective change management issue. There are other operational weaknesses of the border facility for all stakeholders.24 that relate to delays in RTGS payments and A comprehensive but prioritized approach expanding the electronic payment system to covering IT and procedural reforms besides other banks. The situation is likely to improve infrastructure is needed to improve border as users get more accustomed to the new sys- performance. This Brief recommends that tem and as Internet connectivity improves. procedural reforms be given priority over OSBPs at Zambia’s main land border the physical development of new OSBPs. This crossings have been the most visible policy sequencing will ensure that streamlined pro- change. 23 Their introduction has received cedures inform the physical layout and flow much attention globally, though the experi- of goods, instead of locking outdated proce- ence at Chirundu is mixed, as reflected in dures into physical layouts that will be more the opinions of border-post users. Among difficult to correct later.25 The private sector official circles, the Chirundu OSBP is a makes the same point, arguing that there is a great success, and serves as a model for the risk in focusing too much on the border post nationwide program to convert all major facilities and sitting arrangements and over- border posts into similar operations. This looking other critical streamlining measures. group stresses reduced border clearance Procedural reforms will increase central con- times despite increased traffic. The private trol over operations at borders and reduce sector, by contrast, attributes the time reduc- opportunities for corruption as processes tion to other measures such as the introduc- become standardized. Therefore, they are tion of pre-arrival clearance facilities that the likely to be resisted by those currently bene- authorities launched at the same time. fiting from existing arrangements. Also these 30 reforms are less visible and thus less attrac- and enforce a proper scheme for accredita- tive politically. tion that ensures minimum qualifications The need for a prioritized and balanced and professionalism among CFAs, which approach is particularly relevant at cross- will also help any risk management system ing points where OSBPs may take time to be function. introduced, as with the Democratic Republic of Congo and Angola. The Kasumbalesa bor- Can Zambia become a regional logistics hub? der with the Democratic Republic of Congo With its central location in Southern Africa, suffers from congestion with long queues bordering eight countries, Zambia is par- of trucks extending for several kilometers, ticularly well positioned to establish itself even though infrastructure on both sides of as a logistics hub as regional supply chains the border is quite modern. Recent research emerge and trade f lows increase. There Issues surrounding indicates that a key factor in these delays is is a feeling in the country that Zambian border procedures poor cross-border coordination, which pre- t ruckers—a very distinct group—should be ­ and delays are an vents the border post from handling higher able to benefit from the country’s central important factor volumes in a timely manner. Some recent location and help transform it into a logistics changes have been made (for example, a hub. But several factors limit their participa- affecting the single window with parallel processing of all tion in international trucking services. Issues competitiveness of paper work) that could have positive impact, surrounding border procedures and delays Zambian truckers, but more reforms are needed. are an important factor affecting the compet- but the challenges Since 2011 the government has been work- itiveness of Zambian truckers, but the chal- go further ing to set up a framework for coordinated lenges go further, ranging from geographic border management. This framework iden- and regulatory issues to limited incentives to tifies the Zambia Revenue Authority or the participate in international trucking in the Immigration Department as possible lead current market environment. agencies. One of these will, at each border Addressing delays at borders (including post, direct and coordinate the activities of improved risk management) will benefit all agencies in their operations with traders. trucking companies in Zambia particularly, However, despite lengthy discussions, the as long delays at borders represent a pure Border Management Bill, which will establish waste of resources. Zambian truckers cross this framework, has still not been submit- these borders (with higher delays and costs) ted to Cabinet—stakeholder consultations on each trip, while that is not the case for continue. Following approval by Cabinet it other truckers. In comparison, trucking com- would be sent to the National Assembly for panies in South Africa or other neighboring consideration and enactment—and would countries operate on routes where they expe- then have to be implemented on the ground, rience fewer delays.26 likely a huge task in itself. Imbalances in trade disadvantage Zam- Improving border processes depends not bian truckers on international routes to only on border officials but also clearing and ports. While trucks leaving Zambia with forwarding agents (CFAs). There are more loads are likely to find cargo to pick up in the than 1,600 CFAs, and 30 freight forwarding ports, they are unlikely to go empty to ports companies handle more than 80 percent of to look for cargo, reducing the number of traffic. Data for 2007 show that Zambian trips taken over a fixed period as they wait clearing agents generated far longer delays for export cargo to pick up in Zambia. Trucks than their Zimbabwean counterparts at the in coastal countries, however, can more easily Chirundu border post—both for north- be deployed due to the availability of import bound and southbound traffic. Many CFAs cargo, and when in Zambia are able to com- are said to be poorly trained, and to submit pete down prices as a load will contribute to declarations with high rates of inaccura- profit as long as it exceeds the marginal costs cies or (perceived) fraud, leading to a lack of transporting the additional weight—these of trust between border agencies and CFAs trucks would otherwise have to return empty. and so higher rates of checks (absent a func- Improving access for Zambian (and other tioning risk management scheme), costs, and regional) trucks to the cargo allocation sys- delays. It is therefore important to establish tem at ports by making it more transparent 31 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? and thereby reducing information asymme- Zambia will have to decide which compo- tries will not only reduce the current bias but nents of the agreement will be implemented also make it easier for shippers to identify the when the agreement enters into force, after a best offers for transport services. transition period, and where technical assis- Differences in vehicle standards among tance for implementation will be needed. neighboring countries and in access to Commitments by all countries for implement- finance also hurt Zambian truckers. While ing the agreement’s components will be pub- all truck configurations common in Tanza- lished, increasing accountability and making nia are legal for operating in Zambia, a con- it easier to monitor progress. Technical assis- figuration of trucks particularly common in tance funds to help Zambia implement these Zambia is not permitted to operate in Tan- commitments will likely be available. A strategic approach zania. Similarly, Zambia has lower standards The agreement contains commitments to to developing the local than South Africa in the market for tank- align procedures and formalities (including supply cluster to the ers, barring Zambian tankers from entering joint controls) among border agencies, estab- South Africa where the higher standards are lish an improved risk management system, mining industry has enforced. Equally, difficulties in obtaining and introduce post-clearance audits. These to be comprehensive, low-cost financing in Zambia to buy or renew will contribute to reducing border delays. long term, and fleets is a critical issue that affects potential Increasing public access to all trade-related based on a tripartite investment, while international trucking information including relating to procedures partnership among companies that invest in Zambia apparently and documentation through the Internet will buyers, suppliers, often have easier access to financing, possibly further contribute to reducing opportunities from international or domestic markets. Dif- for rent seeking and increase transparency. and the government ferences in road-user cost-recovery systems Establishing a trade portal, as agreed with have also been blamed for negatively affect- partners under the Accelerated Program ing Zambian truckers, but this is unlikely for Economic Integration, will achieve this to be a key issue, and neither are fuel prices objective. likely to affect competition as fuel prices across the region have converged. Improving competitiveness of mining- And so incentives for domestic companies related goods and services to participate in international trucking are A coherent strategic approach to developing very limited. In addition to the above factors, the local supply cluster to the mining indus- prices on international trucking services are try has two key requirements: it has to be com- far lower than domestic or regional trans- prehensive and long term; and it should be port prices, while costs are comparable. 27 based on a tripartite partnership among buy- As a result, many companies prefer to serve ers, suppliers, and the government. The com- the domestic market where they can make prehensive element derives from the complex higher profits. With the entry of interna- nature of buyer-supplier relationships in the tional trucking companies into the domestic mining industry, which boils down to how market to allow them compete on national value addition in locally provided goods transport services under cabotage restric- and services can grow. The solution is essen- tions, domestic prices are likely to start fall- tially long term, which also derives from the ing, reducing the disincentive to participate need to ride over copper price fluctuations internationally. in the medium term, which affect existing buyer-supplier linkages.28 And finally Zam- World Trade Organization’s Agreement on bia should think of opportunities in regional Trade Facilitation markets such as the Democratic Republic of Zambia should use the World Trade Orga- Congo, hence the need for a more compre- nization’s Agreement on Trade Facilitation hensive and long-term approach. to advance the reforms outlined above. The The partnership element reflects the fact agreement is binding not only on customs that benefits from developing a competi- but on all border agencies, and presents a tive local supply cluster accrue to suppliers framework within which discussions among and buyers. Benefits to suppliers and the all stakeholders can be organized and critical Zambian economy are obvious, but a com- decisions taken. Through such discussions, petitive local supply cluster can help reduce 32 procurement costs and lead times for buyers. International suppliers have a competi- It can also help produce the best solutions tive advantage in knowledge-intensive ser- for their problems. Developing more special- vices and equipment. Also, they have close ized suppliers can enable mining companies relationships with mining companies from to outsource more noncore activities, freeing working in mining projects elsewhere—one working capital. reason why local suppliers find it difficult Since 2012, a public‑private sector–driven to break into the supply chain. Direct audit- initiative, the Zambia Mining Local Content ing and third-party certification are impor- Initiative, has been trying to develop a coher- tant for that. Successful local suppliers have ent approach to developing linkages to ben- better products, good after-sales services, efit local businesses (see annex E). larger firm size to meet demand, and (often) greater specialization. Zambia has a Current status of the local supply cluster In the short to medium term, the main relatively big supply The supply chain of mining companies in opportunities for Zambian supply firms cluster compared Zambia is highly modernized, and one that are for goods and services with intermedi- with neighboring local suppliers find difficult to enter. Mul- ate skills, capital, and technology (box 2.7). tinationals have high standards and supply From mining companies’ perspectives, these countries, but it is a chain management techniques developed in are the goods and services that require close- “shallow” cluster their global mining operations. They aim to ness of suppliers and substantial local value focus on core competence, reduce the size of addition. In the longer term, however, Zam- supply networks to fewer, bigger suppliers, set bia’s linkage development strategy should highly detailed and demanding standards for also aim at broadening and deepening its core suppliers, and closely monitor supplier manufacturing linkages upstream and down- performance. They often rely on historical stream copper mining. suppliers, making it hard for new entrants to Zambia has a relatively big supply cluster participate in their supply chains. These min- compared with neighboring countries, but it ing companies demand value-added services: is a “shallow” cluster. The cluster is a legacy suppliers should be able to provide techni- of when copper mines were nationalized and cal advice, engage in joint problem solving, development of linkages was a key compo- and devise innovations to reduce the buyers’ nent of Zambia’s industrialization strategy. transaction and production costs. Moreover, At that time, the local supply industry had suppliers are expected to have minimum high value-added content. However, follow- levels of quality, environmental and occupa- ing privatization of mines, and trade and tional health, and safety-management sys- investment liberalization, the supply chain tems in place. experienced a decline in the value-added Box Where are the opportunities for local suppliers in the global copper value chain? 2.7 There are few opportunities, if any, for local suppliers at the exploration and mine construction stages, which are usually sub- contracted to specialized project design consultancy firms and large mine-construction contractors from a handful of regions and countries: North America, Australia, and South Africa. (Annex D displays the global copper value chain, from exploration, to industrial use and recycling.) Construction contractors usually operate under lump-sum turn-key or engineering, procurement, construction, and management arrangements, which largely lock out local supply firms. The operational stage of a mining project consists of core extraction, crushing, concentration, smelting, and refining. Upstream linkages to these operations vary hugely by value-added content, entry barriers, and market concentration and usually open more opportunities for local suppliers. For example, cleaning, catering, security services, and general transport are generally low value-added content services. In addition, supply chains for capital goods—such as drilling and haulage equipment, excava- tors, handling equipment (conveyors, locomotives, and scrapers), and crushing and grinding equipment—are controlled by original equipment manufacturers from North America, Europe and a few other regions that rely on networks of local agents, subsidiaries, and sole distributors for marketing, distribution, and after-sales services. Finally, there is an intermediate category of supplies with skills, knowledge, and technological content. This includes services such as electrical and mechanical engineering, process control, civil engineering, transport, laboratory testing, and pneumatic and hydraulic equipment and services. Manufacturing products in this category include fabrication products, construction material, and rubber goods. In some African countries, such as Ghana and Nigeria, local manufacturers have entered these supply chains. 33 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? content of local activities and in its place a Upgrading is important to the survival of fast-growing number of importers emerged, local suppliers including ad hoc traders known as “brief- Zambia’s local supply chain is characterized case businessmen.” Increasingly, suppliers by a high rate of entry and exit of service pro- have moved into distribution activities char- viders. What characterizes firms with positive acterized by lower capital and skills require- sales growth? A 2009 survey of 27 service pro- ments, lower risk profiles, and shorter viders in the Copperbelt, North-Western, and project development periods. Also, the net- Lusaka provinces sheds some light.29 work of specialized second-tier suppliers is Growing firms upgrade on several fronts. underdeveloped. The most common form is process upgrad- Local suppliers can be grouped into dif- ing: of 14 firms, 10 focused on improving ferent categories according to their size, own- production processes by investing in capital ership, products, and business models: equipment, 9 on upskilling their workforce, • Agents and distributors. These are mostly and 7 on introducing or improving their small to medium Zambian-owned busi- quality management systems. Investments in nesses that supply a wide range of prod- product quality, management, or lead times ucts requiring low level of initial capital were less frequent. Four firms invested not and good market knowledge. only in process but also product upgrading • Briefcase businessmen. These are a large (distributing new products) and functional group of businesses who supply low value- upgrading (after-sales services). Some firms added goods either imported or sourced upgraded functionally and moved into more locally (from original equipment manu- demanding value chains. facturers [OEMs] or local manufactur- By contrast, firms with static or declining ers). Their businesses are characterized sales showed little upgrading. Many of these by low barriers to entry, high profits, and were micro-enterprises, owned and man- low risk. Their total number is estimated aged by a person with deep expertise. These between a few hundred to 5,000 individu- micro and small-scale firms failed to grow als, and before 2008 they represented into more complex managerial and orga- up to 80 percent of the vendors’ list of a nizational structures that could accommo- few mining companies. This group is well date upgrading processes, while individual organized for lobbying the government expertise was sufficient for them to remain and mining companies. in business. For this reason they did not take • OEM subsidiaries. These provide capi- advantage of increasing market opportuni- tal equipment and after-sales services ties in the mining value chain and struggled to mining companies directly (instead to remain competitive. None of them is ISO of through distributors or agents). The certified. A few firms with distributorship largest miming OEMs are in Europe, the agreements are one-man businesses that United States, and South Africa. have failed to expand and upgrade.30 • Specialized firms. These are a relatively Forward linkages to buyers and back- small number of skill-intensive firms. ward linkages to international parent com- Local businesses are well represented in panies play a hefty role in supporting local activities such as electrical and mechani- upgrading. All the 14 growing firms ben- cal engineering services but struggle efited from one type of linkage or a combina- to enter supply links with high capital tion of both. Where goods and services are requirements and highly specialized ser- critical to the production process and loca- vices, such as pneumatic and hydraulic tional proximity is required, several mining equipment installation. houses in Zambia engage in various levels • General services suppliers and manufactur- of buyer-supplier cooperation to upgrade ers. These suppliers provide basic services local supplier capabilities. For example, they such as cleaning, building maintenance, directly assist suppliers through information security, and so forth. Local manufactur- sharing, upfront payments, and transport ers provide metallurgical, plastic and rub- arrangements. Moreover, they are willing to ber products, engineering products, and operate through forward purchase agree- paints. ments, which provide some certainty to local 34 suppliers. There are also forms of indirect training and engineering schools was steep. cooperation, through third parties, such as Service providers are reluctant to invest the International Finance Corporation (IFC) resources in house and external training Suppliers Development Program, or a part- because of high staff turnover. Indeed, firms nership with Northern Technical College poach skilled labor from each other and and Solwezi Technical College, which offers sometimes from training colleges’ teaching technical and vocational training. staff. Suppliers such as mining OEM subsidiar- Sustained and comprehensive policy mea- ies and sole distributors for foreign manu- sures are required to develop a skilled labor facturers can also draw on another source of market and to support local technological competitiveness: backward linkages to parent upgrading. Cooperation among suppliers, companies abroad. The parent companies their parent companies, and the mining Zambian service provide them with incentives and resources houses has lifted skills. OEMs have supported providers face a (capital, knowledge, know-how) to pursue skills development in the Copperbelt region, number of structural, product and process upgrading. In fact, all which has proved partly successful. They have cost-raising factors the firms with these types of backward link- trained staff in local and overseas training ages operate on global standards. OEM sub- facilities. To address low-staff-retention prob- sidiaries are supported by parent companies lems, OEM subsidiaries have been consider- through investment in workers’ upskilling ing closer partnerships with local training (including two training centers), state-of-the- institutes. But there are limitations on the art capital equipment, and world-class qual- extent of local skills development. For higher ity control systems and internal management skilled labor, OEM subsidiaries and sole dis- structures. Their contribution to job and tributors rely on South Africa–based sub- skills creation has been significant, with local sidiaries for specialized expertise, by either subsidiaries employing hundreds of skilled flying in personnel or sending machines for workers. Similarly, through sole distributor- repair to South Africa. ship agreements, parent companies grant One important yet inadequately used ave- local distributors access to external resources nue of technological acquisition is importing and expertise, credit facilities, and exclusive capital equipment. Indeed, capital invest- access to their products. ment by local service providers is low, and Suppliers such as briefcase businessmen there is very little technological adaptation of operate at arms’ length with overseas manu- imported technologies. Investment in tech- facturers. This implies they cannot tap into nologically advanced equipment is curtailed external knowledge and resources, particu- by various factors: capital constraints, reluc- larly capital. They are neither required to tance to invest due to stiff competition from undertake nor follow an upgrading process, low-cost imports, and flat or erratic demand and the ones who have done some upgrading from mines. Moreover, firms are unwilling to did so at very shallow levels or in order to exit invest in computerized equipment because the mining value chain. of scarce local skills for maintenance and repair. Constraints to competitiveness of local Zambian service providers face a number suppliers of structural, cost-raising factors that are Skills scarcity and gaps prevent firms from common to other sectors of the economy: upgrading to high-tech repairing services • Communication, transport, and utilities and expanding business volumes. In par- are problematic on reliability and access, ticular, the competitive advantage of engi- raising the costs of doing business. Anec- neering firms is being eroded by an aging dotal evidence suggests that poor telecom workforce. Data are unavailable, but service and Internet network infrastructure has providers face skills shortages, for example lost business opportunities for smaller in mechanical and electrical engineering, firms, which have been unable to respond IT, and hydraulics. Existing mechanical and promptly to requests for quotation, or electrical engineering skills were built dur- inquiries from potential buyers. ing the mining nationalization era, when • Additionally, import procedures are public investment in technical and vocational expensive and time consuming, which 35 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? disfavor service providers in particular. in Zambia. In the past, policymakers have Also, the cost of crossing Zambia’s bor- not given enough attention to opportuni- ders is very high, with at least two impli- ties for private sector development inherent cations: established service providers that in upstream linkage development. The 2006 comply with import procedures are dis- Fifth National Development Plan, which advantaged relative to briefcase business- guided the policies of the government at the men; and because mining companies can time, noted that the copper mining sector organize bulk imports and transport at had not promoted broad-based economic cheaper rates, local service providers need growth. The underlying response of the Plan to provide a value-added service to remain was the promotion of export-oriented, pri- competitive. vate sector growth. Industries upstream to In the past, • A key challenge affecting service provid- copper mining, especially service providers, policymakers have not ers in mining is access to capital, affecting were not included in the policy initiatives for given enough attention supplier performance on lead times. Lead private sector growth. In 2007 the IFC under- times are a critical market requirement took a Suppliers Development Program. to opportunities for all mining companies. Most service This was a donor- and private sector–funded for private sector activities are import-intensive, because program, with little ownership from gov- development inherent parts, components, equipment, and con- ernment. Staff from the relevant ministries in upstream linkage sumables are imported from South Africa attended only a few initial meetings. The development or farther away. Because of long delays at project was implemented solely by the mines’ the borders, suppliers’ working capital is supply managers, with guidance from their tied up in goods in transit. Firms need CEOs, and IFC staff. There are several les- to maintain large in-house stocks if they sons to be learned (box 2.8). want to reduce lead times, but this is dif- Briefcase businessmen have benefited ficult because of poor access to banking from the lack of a coherent policy on finance. Therefore, suppliers need to rely upstream linkage development. Political con- on importing on credit by the OEMs, nections, and the pressure put on the mining which applies only to subsidiaries and companies to show some level of local sourc- sole distributors, or on the willingness of ing, enabled briefcase businessmen to gain selected buyers to operate through for- access to mining procurement and capture ward purchase agreements or upfront rents. They had almost no overhead costs payments. Firms excluded from these compared with established businesses (rent, linkages have struggled to build competi- labor, utilities) and did not spend resources tive and sustainable businesses. to add value to their products. At the same time, they often charged high prices thanks Developing a competitive local supply to irregular procurement practices. Indeed, cluster—a long-term project the primary interest of their business associa- There is a need for a comprehensive and tion has been to maintain market access to long-term approach to developing an inter- mining procurement rather than to promote nationally competitive local supply cluster local upgrading. Box Lessons from the IFC Suppliers Development Program 2.8 Linkage programs can deliver quick wins. The program has improved firm capabilities in, for example, business planning, cost management, marketing, product development, quality control, and in diversifying their markets (Newton Lungu and Associates 2010). Other lessons stand out. First, targeting critical suppliers can result in additional interest by buyers to strengthen coopera- tion and continue cooperating in future. Second, future initiatives should have a cluster approach and find internal agents of change to drive the process with buyers. Suppliers should be able to act collectively to address structural or unforeseen problems, and to set up programs that span beyond the three years of the IFC program. Third, the program focused on manu- facturers and included distributors only at the end. Service providers with high potential for upgrading skills and job creation should be included in future initiatives. Last, the program could not deliver on improving access to finance because local bank- ing institutions did not cooperate (Newton Lungu and Associates 2010). Barriers to local financing remain a critical constraint to linkage development. 36 The 2008 Mines and Minerals Develop- current customers, selling to other mining ment Act set new provisions on local supply and non-mining companies, and expand- firms: to the extent possible, mining compa- ing into regional markets. The expansion nies should extend preferences to “materials of the Democratic Republic of Congo’s min- and products made in Zambia” and to “ser- ing sector opens significant opportunities vice agencies located in Zambia and owned for Zambian suppliers to reach the econo- by Zambia citizens or citizens owned compa- mies of scale they have lacked so far. Indeed, nies.”31 This approach tries to build mutual Zambian-based OEM subsidiaries and some trust between local suppliers and the mining sole distributors already supply Democratic industry rather than setting compulsory reg- Republic of Congo mining buyers, either ulations on local sourcing (Kasanga 2012). directly or through Democratic Republic of For service providers the Act focuses on Congo–based firms. The expansion of the firm ownership rather than value-added To pursue these goals, an institutional Democratic Republic of content. The risk, however, is that if this partnership among the government, mining Congo’s mining sector is not coupled with supplier development companies, and local suppliers is needed. opens opportunities programs, preferential procurement will The strategy of developing a local supply encourage rent seeking rather than genuine cluster cannot be unilaterally pushed by local for Zambian suppliers upgrading. The experience of briefcase busi- suppliers or the government. For the strategy to reach the nessmen has shown that large expenditures to be successful and its outcomes sustainable, economies of scale by mining companies on local procurement it has to be well informed and designed to they have lacked so far through small-scale Zambian-owned import- make local sourcing economically and finan- ers do not necessarily result in skills and cially attractive to buyers. Annex E details technological development, or firm upgrad- aspects of such an institutional partnership. ing into more productive value chains. On To help build confidence among par- the contrary, this process can be counter- ticipants and develop the agenda for the productive because it has pushed established initiative, it will be important to develop suppliers out of the mining value chain. transparency about procurement by mining The long-term approach would have the companies. This includes providing infor- following goals. First, to increase local value- mation on the importance of price, quality, added content, by increasing the techno- and local value-added content in procure- logical, skills and capital intensity of local ment decisions. Mining companies should activities, and by facilitating their upgrad- be invited to share procurement data in a ing processes. It is very important that this format that facilitates the monitoring and goal is not confused with the goal of simply evaluation process (for example, data should increasing turnover for Zambian-owned busi- be provided on fuel, electricity, and contrac- nesses. Increasing the degree of local value tors’ expenses and disaggregated by services/ addition can kick-start knowledge intensifi- goods and other useful categories). An elec- cation, industrialization, and employment tronic procurement system could be a step generation. in this direction. Past efforts to set up such Second, to expand the number of new a system failed because of misunderstand- entrants in the mining supply chain, which ings and poor consultations between stake- will increase the range of services provided holders, underscoring the importance of locally and promote competition. Such an consultations before and after procurement objective should be coupled with efforts reforms. to facilitate the specialization of suppliers. There is a misalignment between the min- Summary of findings and policy ing companies’ demand for specialized local implications suppliers, and the suppliers’ offer of a broad How can Zambia use its resource endow- range of services with little value addition. ments of copper, good arable land, and water A better understanding of market require- to grow faster and create more jobs? The ments by suppliers is critical. analysis in this section focused on improving Third, to expand market opportunities competitiveness of private sector and grow- for existing service providers. These market ing trade as an approach to answering this opportunities consist of expanding sales to question. The experience all over the world 37 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? has been that trade is associated with higher relatively smaller firms. Reducing the costs of growth, largely due to productivity improve- crossing the borders should thus be a policy ments accompanying higher trade. This Brief priority. Reducing border costs will also help notes that there is considerable potential to a large number of small traders, including grow non-copper trade within the region. women, who carry out informal trade with Besides, improving competitiveness by reduc- neighboring countries and for whom trade is ing costs of production and technological an important source of livelihood. upgrading could result in more productive Growth of agriculture trade in the past jobs through domestic production of goods decade is also a part of the story of growth in and services that are otherwise imported. For non-copper exports. Zambia’s recorded agri- Zambia the need to improve competitiveness culture exports have grown at an average of is particularly relevant in producing mining- 27 percent a year since 2000. Compared with related goods and services. many African countries, Zambia already has relatively well-developed agribusiness with The potential to expand the non-copper more than 400,000 smallholder households trade and get more out of copper linked to private firms. With the right poli- A review of Zambia’s performance in the past cies in place, Zambia can emerge as the grain decade brings up the following six salient basket of Southern Africa. outcomes: Zambia also has considerable potential to • Non-copper merchandise exports have grow its production of mining-related goods grown briskly alongside copper exports. and services. Zambian suppliers account for • The number of exporting firms and a very small share of value-added to min- exported products has grown, but exports ing industry’s local purchases. Apart from have low survival rates. directly creating jobs, increasing the degree • Zambia is trading more with its regional of local value addition can kick-start knowl- partners, including through informal edge intensification and industrialization. channels. • Zambian enterprises face high trade costs. Constraints to growing agriculture trade and • Zambia has scope to expand export of policy direction services. Although Zambia has generally done very well • Zambia has scope to improve competitive- in agriculture trade when measured by total ness of mining-related goods and services. value and the trade balance, this Brief has These outcomes point to the opportunities identified policy constraints, including prob- available to further diversify production and lems with high costs of regulatory compliance, exports. Data from export transactions over unpredictable export policy and FRA inter- more than a decade show a large increase ventions in the maize market, and reliance in the number of exporting firms, which on high input subsidies that undermine Zam- is encouraging. These firms are exporting bia’s agriculture competitiveness by diverting mainly to regional markets that can provide a resources from long-term improvements. springboard to success in the global market. High regulatory costs arise from the But—a big but—these export transactions wide variety of requirements. Phytosanitary are generally small in value-added terms, and other certificates, quality analysis, and and are conducted largely with neighboring product registration and testing all serve countries, several of them landlocked, which legitimate purposes, yet in practice there are do not face the full force of global competi- frequent institutional overlaps that increase tion. Also, these transactions are unstable regulatory compliance costs. These costs over time. They come and go, as do the firms are particularly onerous for small traders. involved in export transactions, raising ques- To improve this situation, dialogue at the tions about their inherent competitiveness. national and regional levels on opportuni- From a trade perspective, these export trans- ties to streamline and eliminate unnecessary actions are frequent and small. Therefore, trade procedures and requirements would be the costs involved in crossing Zambia’s bor- a good practical approach. ders are a big share of the value exported, A second set of trade constraints relate to probably hindering competitiveness of these unpredictable agriculture trade policy and 38 FRA interventions that act as a major deter- declarations, an improved customs data man- rent to farmers in producing for exports and agement system, and OSBPs. making on-farm investments and to private As a policy direction, this Brief suggests sector investments in input supply, crop stor- adopting a comprehensive but prioritized age, and marketing. Policy unpredictability approach covering infrastructure, IT, and also leads to farmers and private operators procedural reforms. Within this comprehen- making inefficient choices about what crops sive approach, procedural reforms should be to grow. The consolidation of maize trade in given priority over physical development of the hands of the FRA, with the risk of future new OSBPs. price interventions and restrictions on maize This brief also recommends using the exports, has made it impossible for Zambia to World Trade Organization’s Agreement on develop reliable trading relations with deficit Trade Facilitation to advance the reforms. markets in the region. The agreement, binding not only on cus- The high level of input subsidies contrib- toms but on all border agencies, presents a ute to higher maize output in a given crop framework within which discussions among year, yet they do not have any lasting impact all involved stakeholders can be organized. on agricultural output. Instead, they divert resources away from other investments that Improving competitiveness of mining-related could develop long-term competitiveness in services agriculture. Analysis conducted for this Brief Zambian suppliers have not been able to shows that even without input and output sub- benefit much from the strong expansion of sidies, commercial farmers would be efficient copper mining industry in the past decade. producers of additional irrigated and rainfed While the local supply cluster is relatively maize for exports to neighboring countries, big in terms of number of suppliers, it is which would also help in stabilizing domestic very small in terms of value-added content. prices. This is particularly true for preseason A large number of suppliers are into dis- irrigated maize. Market sources estimate that tribution activities characterized by lower these farms could produce a stable 300,000 capital and skills requirement. There are tons of new maize including up to 100,000 several constraints to competitiveness of tons of irrigated maize for early harvest given local suppliers. These include, among oth- predictable policies. Toward growing agricul- ers, skills scarcity and gaps that prevent firms ture exports and improving competitiveness, from technological upgrading and business the Brief therefore recommends: expansion; and structural, cost-raising fac- • Reducing the cost of regulatory compli- tors such as high cost of finance, high border ance by streamlining trade procedures costs, and the like. and eliminating unnecessary ones. The long-term approach to improving com- • Putting in place a mechanism that pre- petitiveness of local supply cluster would have commits the government to allowing the following goals. First, to increase local agreed amounts of private maize exports value-added content, by increasing the tech- and moving to a policy of open borders nological, skills, and capital intensity of local over time. activities, and by facilitating their upgrading • Ploughing back savings from farm input processes. It is very important that this goal is subsidies into measures aimed at improv- not confused with the goal of simply increas- ing long-term competitiveness. ing turnover for Zambian-owned businesses. There is a misalignment between the min- Reducing costs at the borders ing companies’ demand for specialized local Reducing costs of crossing the borders is suppliers, and the suppliers’ offer of a broad a high priority for Zambia if it is to play a range of services with little value addition. A central role in regional markets and value better understanding of market requirements chains and, possibly, emerge as logistics hub by suppliers is critical. Second, to expand the for intraregional trade. Delays at its borders number of new entrants in the mining supply are lengthy and do not appear to be going chain, which will increase the range of ser- down despite efforts to improve customs and vices provided locally, and promote competi- border management, including pre-arrival tion. Third, to expand market opportunities 39 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? for existing service providers. These market companies, and local suppliers is needed. An opportunities consist of expanding sales to existing public‑private sector–driven initia- current customers, selling to other mining tive, the Zambia Mining Local Content Ini- and non-mining companies, and expanding tiative, could be used to energize the process. into regional markets. The expansion of the The strategy of developing a local supply Democratic Republic of Congo’s mining sec- cluster cannot be unilaterally pushed by local tor opens significant opportunities for Zam- suppliers or the government. For the strategy bian suppliers to reach the economies of scale to be successful and its outcomes sustainable, they have lacked so far. it has to be well informed and designed to To pursue these goals, an institutional make local sourcing economically and finan- partnership among the government, mining cially attractive to buyers. 40 ANNEX A Economic data Table GDP growth by main sectors, 2005–13 (percent, unless otherwise stated) A1 Constant price = 1994 2013 Indicator 2005–09 2010 2011 2012 preliminary Primary sector 4.6 10.2 2.2 2.9 –2.3 Agriculture, forestry, and fishing 2.4 6.6 8.0 6.8 –7.4 Mining and quarrying 8.3 15.2 –5.2 –2.7 5.9 Secondary sector 8.1 6.5 8.5 10.1 8.3 Manufacturing 3.1 4.2 8.0 7.2 4.5 Electricity, gas, and water 4.5 7.4 8.2 4.1 5.9 Construction 14.8 8.1 8.9 13.6 11.4 Tertiary sectora 6.1 6.6 7.8 7.4 8.6 Wholesale and retail 2.4 4.2 7.5 4.0 5.2 Restaurants, bars, and hotels 5.8 10.2 7.9 –2.6 2.2 Transport, storage, and communications 15.1 14.9 13.7 12.8 12.4 Financial institutions and insurance 5.0 6.0 4.9 12.0 12.2 Real estate and business services 3.1 3.0 2.9 3.7 3.1 GDPb 6.0 7.6 6.8 7.3 6.4 GDP less mining 5.8 6.8 8.2 8.2 6.4 Gross national income (GNI) 6.7 1.9 9.6 12.3 4.5 Memorandum items (ZMW millions): GDP at current market prices 47,250.4 77,666.6 93,332.5 106,015.2 120,780.2 GNI at market prices 43,133.0 71,128.3 87,716.6 104,298.7 116,704.8 a. Includes community, social, and personal services and others. b. Includes taxes (less financial intermediary services indirectly measured). Source: Authorities, IMF, and World Bank staff estimates. 41 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Table Central government finances, 2010 –14 (percent of GDP, unless otherwise stated) A2 2013 2013 2014 2010 2011 2012 budget preliminary budget Revenue 19.6 21.7 22.7 21.8 20.9 22.8 Tax 16.4 19.3 18.2 19.5 17.7 17.6 Income taxes 8.9 11.4 9.7 10.6 8.1 7.7 Value-added tax 4.1 4.3 4.5 5.0 6.1 5.8 Excise taxes 1.8 1.8 2.1 2.1 1.9 2.3 Customs duties 1.6 1.8 1.9 1.8 1.5 1.7 Nontaxa 1.4 1.6 2.9 1.3 2.9 3.7 Grants 1.8 0.8 1.7 1.0 0.4 1.5 Expenditure 22.6 23.9 26.1 26.2 27.7 29.4 Current expenditure 19.4 19.7 19.6 19.0 21.2 22.2 Out of which wages and salaries 8.1 7.9 8.9 9.1 9.9 11.1 Out of which interest payments 1.8 1.2 1.6 1.7 1.8 2.6 Out of which Fertilizer Support Program 0.8 1.0 0.8 0.4 0.9 0.4 Out of which Strategic Food Reserve 1.6 1.8 1.1 0.2 0.9 0.7 Out of which fuel subsidy 0.1 0.3 0.7 0.0 1.3 0.0 Capital expenditure 3.2 4.2 6.5 7.2 6.6 7.2 Overall balance (including grants)b –3.0 –2.2 –3.3 –4.5 –6.8 –6.6 Financing 3.0 2.2 3.3 4.5 6.8 6.6 External (net) 0.3 1.2 2.2 2.9 2.2 5.0 Domestic (net) 2.7 1.0 1.1 1.5 4.7 1.6 a. Includes mineral royalties. b. On cash basis, excluding arrears. Source: Ministry of Finance, IMF, and World Bank. 42 Table Financial soundness indicators, 2008 –13 (percent) A3 2008 2009 2010 2011 2012 2013 Capital adequacy Regulatory capital to risk-weighted assets 18.6 22.3 22.1 19.2 21.3 26.8 Tier 1 regulatory capital to risk-weighted assets 15.7 18.9 19.1 16.8 19.4 24.5 Capital to total assets 9.9 11.2 10.4 10.2 12 14.1 Asset quality Past due advances (NPL) to total advances 7.2 12.6 14.8 10.4 8.1 7.0 Loan loss provisions to nonperforming loans 104.6 86.6 80.3 76.7 73.5 83.2 Bad debt provisions to advances 6.1 10.9 11.9 8 6 5.8 Loan concentration Households 30.1 30.9 32.2 30.8 34.3 34.5 Government and parastatals 1.9 3.1 4.6 4.7 3.9 2.1 Agriculture 16 19 17.6 17.7 22.6 20.2 Mining 5 4 3.2 4.2 5.7 6.6 Manufacturing 11 12 12.7 12.2 11.3 9.5 Construction 4 3 5.8 4.2 3.7 3.5 Services 9 8 7 7.1 3.9 4.1 Others 23 20 16.9 19.1 14.6 56.1 Earnings and profitability Return on average assets (cumulative) 3.6 2.1 2.9 3.7 3.9 3.4 Return on equity (cumulative) 20.8 9.4 12.1 25.5 20.8 18.2 Gross interest income to total gross income 66.6 65.1 58.6 59.3 61.3 64.5 Gross noninterest income to total gross income 33.4 34.9 41.4 40.7 38.7 35.5 Net interest margin 10.4 10.7 9 8.1 8.4 8.3 Liquidity Liquid assets to total assets 35.5 38 43.8 40.3 36 38.9 Liquid assets to total deposits 49.9 52.6 58.5 53.3 49 52.6 Advances to deposits ratio 66.3 60.1 53.1 57.1 66 61.4 Exposure to foreign currency Foreign currency loans to total gross loans 42.1 36.4 32.8 39.1 28.7 25.6 Foreign currency liabilities to total liabilities 35.8 38 39.6 39 22.9 30.4 Net open position in foreign exchange to capital 6.9 2.5 4.1 5.5 2.8 3.6 Source: Bank of Zambia. Table Selected balance of payments indicators, 2009–13 ($ millions, unless otherwise stated) A4 2013 2009 2010 2011 2012 preliminary Current account 583.3 1,205.5 704.7 802.6 216.5 Trade balance 905.7 2,703.7 2,205.6 1,450.5 1,402.3 Exports 4,242.8 7,261.7 8,512.3 9,204.6 10,398.5 Out of which copper 3,179.3 5,767.9 6,659.7 6,294.5 6,941.3 Out of which nontraditional exports 899.7 1,190.0 1,596.6 2,693.5 3,312.0 Imports –3,413.4 –4,709.9 –6,454.2 –7,925.5 –9,234.8 Out of which petroleum –535.8 –618.1 –530.5 –930.6 –1,200.5 Services (net) –419.7 –567.0 –723.6 –768.3 –821.4 Income (net) –418.7 –1,363.0 –1,155.3 –333.5 –753.3 Current transfers (net) 64.8 –1,075.8 –368.5 –7.1 –512.3 Capital and financial account 64.8 –1,075.8 –368.5 –7.1 –512.3 Capital account 237.3 149.7 151.0 223.0 101.0 Financial account –172.5 –1,225.5 –519.5 –230.1 –613.3 Out of which FDI and portfolio investments 350.4 707.5 1,180.6 3,351.1 1,742.4 Overall balance 540.1 83.3 243.8 726.7 –344.9 Financing: change in NIR (minus indicates an increase) –540.1 –83.3 –243.8 –726.7 344.9 Memorandum items Current account (percent of GDP) 4.6 7.4 3.7 3.9 1.0 Gross international reserves 1,758.4 1,896.5 2,166.9 2,456.7 2,395.6 in months of imports cover 5.2 4.1 3.4 3.2 2.7 Source: Zambian authorities, IMF, and World Bank staff estimates. 43 ANNEX B Analysis of firm-level trade transactions The survival of export f lows by product exports to nearby countries and this even and destinations and their determinants is if only nontraditional export products are modeled using a Cox proportional hazard considered. The exchange-rate variable is model. The dependent variable is a hazard a measure of month-on-month variability function of a trade relationship, which is a of the kwacha exchange rate with respect multiplicative function of an unspecified to the currency of the relevant destination time-dependent baseline hazard function country. The estimated coefficients on this and an exponential function of gravity vari- variable are statistically significant and posi- ables, various spell characteristics such as ini- tive, suggesting that exchange-rate volatil- tial value and size of transaction, a dummy ity is indeed a driver of firm-level export for multiple spells, and various product and instability. firm characteristics: where h 0(t) character- In the second exercise, the impact of rely- izes how the baseline hazard changes as a ing on imported inputs is explored. All six function of time, the covariates X affect the regression models include the same control hazard rate independently of time, and β is a variables as those shown in table B1, but are vector of parameters. not shown below to save space (table B2). The These parameters are estimated by maxi- results suggest that importing does not make mizing the partial likelihood as opposed to exporters more vulnerable—quite the con- the likelihood of an entirely specified para- trary. The variable “Import exposure” yields metric hazard model. Resulting estimates negative and statistically significant coef- are not as efficient as maximum-likelihood ficient estimates throughout. This suggests estimates; however, no arbitrary, and possibly that exporting firms that are also import- incorrect, assumptions about the form of the ers have more stable export patterns. How- baseline hazard need to be made. Estimation ever, “Import exposure” captures all sorts results are reported in terms of coefficients of imports, and not only imported inputs. (in contrast to hazard ratios) with clustered We therefore augment the model with two standard statistics in parentheses. In these measures of the intensity to which export- models a positive coefficient implies that the ing firms import upstream products that are relevant variable is associated with higher likely to enter as inputs into their production hazard rates—that is, that the variable con- destined for export. We use two measures: tributes to making exports more unstable. a narrow one (“Intermediate imports (1)”) The control variables in the model and a broad one (“Intermediate imports largely behave as expected: exports are (2)”). The narrow measure is likely more pre- more stable if they imply larger volumes and cise, whereas the broad one is available for a economically larger destination markets. larger number of observations. Interestingly, though, exports to more dis- As seen in table B2, it makes no qualita- tant markets seem to be more stable than tive difference which measure of imported 44 Table Regression model B1 (1) (2) Variables All products Nontraditional products Log of export value at the initiation of spell –0.0254*** –0.0173*** (0.007) (0.006) Number of suppliers serving the same product to a destination market –0.0105** –0.0101* (0.005) (0.005) Number of destinations served by a firm at the beginning of a spell 0.0071*** 0.0093*** (0.002) (0.001) Number of products served by a firm to the same destination market –0.0004 –0.0006* (0.000) (0.000) Multiple spell dummy –0.0469*** –0.0572*** (0.015) (0.013) Log of destination market population 0.0671*** 0.0531** (0.023) (0.025) Log of destination market GDP –0.1338*** –0.1245*** (0.020) (0.023) Dummy for common official of primary language 0.2103*** 0.2082*** (0.056) (0.058) Dummy for common colonizer after 1945 –0.1668** –0.2752*** (0.074) (0.048) Log distance between Zambia and destination country –0.4281** –0.6026** (0.183) (0.259) Normalized annual exchange rate volatility (sd/mean, cross rate) 0.7590*** 1.0070*** (0.156) (0.155) Observations 19,121 18,567 Note: Clustered standard error in parentheses (clustering is done by broad product category). Table Regression model: Imported inputs B2 (2) (4) (6) (1) Nontraditional (3) Nontraditional (5) Nontraditional Variables All products products All products products All products products –0.0750** –0.0783** –0.0973** –0.0995** –0.1884*** –0.1946*** Import exposure (0.033) (0.035) (0.046) (0.048) (0.038) (0.041) 0.0509** 0.0515** Intermediate imports (1) (0.020) (0.021) 0.0771*** 0.0796*** Intermediate imports (2) (0.017) (0.018) Observations 45,224 44,398 17,611 17,535 34,986 34,311 Note: Clustered standard error in parentheses (clustering is done by broad product category). inputs one uses, nor whether one looks at all significantly. This means that, other things exports or only at nontraditional exports: in equal, the more a firm relies on imported all cases, imported input intensity is found inputs, the more unstable its export spells to increase export hazard rates statistically become. 45 ANNEX C Zambia’s competitiveness in maize production Methodology and key assumptions the other hand, all taxes including any import The analysis was prepared using a spread- duties and value-added tax are excluded from sheet template custom-built for this Brief to the economic analysis since they are not costs look at the costs and profitability of maize in to Zambia but instead represent transfers from financial and economic terms. one part of the economy to another. Economic On the financial side, the analysis mea- revenue, in turn, is measured by parity prices sures per hectare profitability in net terms worked back to the market depot in each farm after depreciation for growers who sell area net of any taxes or subsidies. The parity 100  percent of their output for cash. The price assumptions used for the analysis are analysis thus does not aim to show whole summarized in table C2 based on different farm profits since this depends on the total storage periods for each crop and market sce- area cultivated and on the imputed value of nario described above. As shown, FRA maize home retentions. Similarly, whereas the FISP is assumed to have a much lower value at the is currently designed to provide participat- market depot than private sector maize. This ing households inputs for 0.5 ha of maize at is because of the additional costs of FRA mar- recommended levels of use, the results are keting and very high storage losses conserva- expressed per hectare so they do not show tively estimated at 10–20 percent. Beyond the the profits for individual families but for each matter of physical losses due to poor infra- hectare of subsidized maize. Additionally, the structure, FRA marketing is affected by other value of family labor is not counted at the managerial problems including grain going financial level since this does not require cash out the back gate only to be resold and paid expenditure and the net profits are therefore for again at the front. Moreover, the FRA is best thought of as returns to labor. not well geared to reject grain on reception, For both FAM and LCF farmers, finan- and exporters say they often have to visit sev- cial profits from private sales are based on a eral depots at a reported cost $2.50 per ton selling price of $10 per ton less than export per place inspected to find maize that meets parity for each location to cover the trader’s the buyer’s quality specifications. margin. For FRA sales, a fixed price of K65 The price assumptions, farmer yields, and per 50-kg bag ($236.36 per ton) is used for other production coefficients including stor- all locations and regardless of when the age costs and losses are based on conserva- maize is sold or exported.32 tive estimates drawn from various sources At the economic level, all costs and rev- including indicative crop budgets data pro- enues are revalued in social terms to reflect vided by the Zambia National Farmers Union, their true scarcity value to Zambia. The oppor- smallholder farm surveys by the Indaba Agri- tunity cost of family labor is thus counted at cultural Policy Research Institute with the this level, as are the costs of FISP and FRA Central Statistical Office, and recent discus- subsidies paid for by Zambia as a whole. On sions with crop production and trade experts. 46 Table Costs of formal sector border crossing at Kasumbalesa C1 30-ton truck 7-ton truck $/truck $/ton $/truck $/ton Notes Cost to exit Zambia Exports permit for maize or mealie meal 8.76 0.29 5.32 0.76 $150 for 510 tons (valid 30 days) Phytosanitary certificate 3.13 0.10 3.13 0.45 $62.50 for book of 20 (1 per truck) Non-GMO certificate 30.00 1.00 30.00 4.29 Needed for Zambia permits, not required by the Democratic Republic of Congo ASYCUDA fee 10.00 0.33 10.00 1.43 Fixed cost per customs entry Clearing agent 75.00 2.50 75.00 10.71 Typically $50 to $100 depending on agent Crossing fee-out (to government) 133.00 4.43 48.00 6.86 Varies by truck size Total cost to exit Zambia 259.89 8.65 171.45 24.50 Cost to enter/exit the Democratic Republic of Congo Quality testing (fee) 30.00 1.00 30.00 4.29 Quote price Quality testing (loss of 1 bag as sample) 28.00 0.95 28.50 4.07 Value of 1 bag per truck at Lubumbashi wholesale Import duty 45.00 1.50 10.50 1.50 COMESA Certificates of Origin not accepted Entry card 80.00 2.67 80.00 11.43 Quoted price Tourism card 25.00 0.83 25.00 3.57 Quoted price Insurance card 100.00 3.33 100.00 14.29 Fixed price per truck Visas (for driver and mechanic) 90.00 3.00 90.00 12.86 Quoted price Health cards (for driver and mechanic) 20.00 0.67 20.00 2.86 Quoted price Clearing agent (customs entry) 125.00 4.17 95.00 13.57 Estimate based on higher rate than in Zambia R/T crossing fee (to concessionaire) 200.00 6.67 80.00 11.43 Slightly cheaper than toll on Zambia side Total cost to enter/exit the Democratic Republic of Congo 743.00 24.79 559.00 79.87 Costs to return to Zambia (empty) Crossing fee (to government) 133.00 4.43 48.00 6.86 Varies by truck size Total costs of formal crossing 1,135.89 37.87 778.45 111.23 As percent of Zambia farmgate price 15 43 As percent of Lubumbashi wholesale 7 20 Source: Authors’ calculations from visit to Kasumbalesa in November 2011. Table Parity price assumptions ($/ton, non-GMO white maize) C2 Preseason Early Peak Long CIF Harare 390.00 360.00 320.00 380.00 Approximate delivery date April/May June/July Sept./Oct. Jan./Feb. FOB Central Province (Mkushi) LCF—irrigated 280.00 239.56 82.54 221.80 LCF— rainfed n/a 250.00 191.54 230.80 FAM—private sales n/a 248.50 193.30 232.26 FAM—sales to FRA n/a 218.20 160.80 178.40 FOB Eastern Province (Chipata) FAM—private sales n/a 216.10 160.90 199.86 FAM—sales to FRA n/a 185.80 128.40 146.00 FOB Northern Province (Kasama) FAM—private sales n/a 181.30 126.10 165.06 FAM—sales to FRA n/a 151.00 93.60 111.20 Note: n/a is not available. 47 ANNEX D Copper mining global value chain Geochemical services Exploration Logistics services Geophysical services Design Mine construction Construction services Mining support Mining OEMs, services spares, and components Generic services Consumables Concentration Engineering Fabricated products products Re ning Physical Financial services infrastructure Legal services Water Accounting services Energy ITC services Fabrication Wires, rods, bars, sections, tubes, sheets, foils, plates Electrical and Industrial Consumer Construction Transport electronic products equipment goods Scrap collection Source: Authors’ compilation from various sources. 48 ANNEX E Some design issues about the institutional partnership to develop the local mining services supply cluster In 2013 the Chamber of Mines of Zambia Mining companies’ CEOs would need to and the Zambia Association of Manufactur- be actively involved in the design and imple- ers, working closely with government, min- mentation of any local content strategy. Their ing companies, and other key stakeholders, involvement in a stakeholders’ alliance would launched the Zambian Mining Local Con- signal a commitment to improve local sup- tent Initiative (ZMLCI). The World Bank and plier capabilities and increase local content International Finance Corporation (IFC) through a longer term and comprehensive are providing facilitation support to the strategy. Currently, the commitment of CEOs ZMLCI. The ZMLCI aims to identify actions varies across mining companies. Some min- to enhance local content. It can provide the ing companies have shown willingness to be basis for partnership, especially given that it involved in such initiatives, but others have has received support at the highest political been slow to participate. level. Participation, however, would need to be Local suppliers would need to cooperate broadened to a wider group of stakeholders and participate in a cohesive manner. Sup- and its objectives would need to be broadened ply firms in the Copperbelt province are to tackle structural factors affecting supplier geographically agglomerated, but horizontal development. Also currently, the ZMLCI cooperation between them has so far been appears to be focused on local manufacturers weak: knowledge sharing and joint actions only; it would need to include service provid- (such as joint bids or joint bulk purchases) are ers and second-tier suppliers as well. scarce, and the cluster is largely populated by For the partnership to be effective, the nonspecialized suppliers with few linkages to government would need to commit to this second-tier suppliers. Cooperation through process at the high-government or senior the Kitwe Chamber of Commerce and Indus- official level, allocate sufficient resources try has not dealt with structural issues affect- to every stage of this initiative, and provide ing suppliers’ competitiveness. public goods required to improve the min- A number of institutions would be ing cluster competitiveness. The Ministry involved in the design and implementation of Commerce, Trade and Industry could stages of specific activities. These include the lead the process and facilitate interminis- Zambia Bureau of Standards, the Engineer- terial coordination. Among other govern- ing Institution of Zambia, universities and ment institutions that should be part of the technical institutes, business development stakeholders’ alliance are: the ministries service providers, and international institu- responsible for finance, mines and mineral tions such as the IFC. development, education, technology, and This Brief does not recommend areas or infrastructure; Zambia Development Agency; subjects of focus by the stakeholders’ alliance. National Technology Business Centre; and In the past the following areas have shown up TEVETA. as relevant and should be considered: 49 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? Skills development for labor and manage- Science, Technology and Vocational Train- ment would be critical to all the objectives of ing could work with the ministries respon- the strategy to develop a local supply cluster. sible for finance and industrial development Access to a more skilled labor force would to design firm-level incentives to invest in enable both upgrading into new functions new equipment and training (for exam- and expanding their operations. For exam- ple through matching grant programs), ple, distributors would be able to move into and by encouraging technology transfer after-sales services, customized assembly, and agreements. stock management; engineering firms could To facilitate new entrants, specialization, expand their capacity and invest in comput- and linkages between parent companies and erized equipment. Availability of skills will local suppliers, government should continue also create incentives for foreign firms to set promoting foreign direct investment and up local firms. encourage technology transfer and joint The stakeholders’ alliance could review ventures. The investment regime is relatively current legislation and regulations ham- open, but transnational corporations prefer pering local supplier competitiveness, and to operate at arms’ length rather than part- formulate proposals to the government to ner with local firms because of low knowl- improve their design or implementation. edge and trust of local businesses and weak This constitutes a “low hanging fruit” in local capabilities (skills, finance, and so on). terms of resource requirements. One of the The Ministry of Commerce, Trade and Indus- priorities could be reviewing the tax exemp- try could take several mitigating actions tion regime for the mining sector.33 Stake- in this regard. For the short term, possible holders should formulate proposals that, actions include promoting business-to-busi- while ensuring that the mining companies ness events to facilitate linkages, and, for the are not negatively affected, would remove the long term, collaborating with the Ministry cost disadvantage faced by suppliers. of Justice to improve contract enforcement One particular aspect of operation man- mechanisms. agement of small and medium enterprises Besides actions specific to mining indus- is becoming increasingly important: qual- try, there are a number of relevant areas for ity management. Some mining companies private sector development as a whole. These require their suppliers to have internal qual- have been identified as priorities elsewhere ity management systems in place. In the and are well known. future they will require such systems to be For example, access to capital is critical internationally certified. The stakeholders’ for supplier upgrading and to expanding alliance should devise a program to help operations to the new mining areas in Zam- selected local suppliers comply with these bia and the region, particularly the Demo- requirements. ISO certification is costly and cratic Republic of Congo. The IFC Suppliers requires sophisticated internal firms capabil- Development Program did not manage to ities. Some dynamic firms are willing to work tackle this factor. The ministries responsible toward ISO certification because they expect for industrial development and finance, in this to be a future market requirement. Their partnership with all stakeholders, should certification process should be financially establish a small and medium enterprise supported, because costs are high due to financing scheme. lack of accredited certification bodies. Other Another area is fostering regional inte- firms should be supported in establishing gration, which can open market oppor- internal quality control systems, which could tunities for Zambia’s local supply cluster. be a stepping stone for future international Regional integration efforts should pri- certification. Such programs should be inclu- oritize infrastructure development and sive of second-tier suppliers. trade facilitation­— both are indeed impor- Given Zambia’s early stage of develop- tant to cut operational costs across the ment, technological innovation should be board for local firms, as well as to facilitate pursued by supporting technology adop- their insertion in regional value chains. tion and adaptation rather than high-value The SADC, COMESA, and the Tripartite research and development. The Ministry of (COMESA-EAC-SADC) frameworks offer 50 ideal platforms to raise investment in infra- free trade agreement, should aim at improv- structural projects and to harmonize export ing market access for local suppliers to the and import procedures, custom transit, and Democratic Republic of Congo mining value transport regulations. Trade in goods nego- chain. These negotiations should be accom- tiations with the Democratic Republic of panied by negotiations on trade facilitation Congo, which is not implementing the SADC and nontariff barriers. 51 Notes 1. In particular, company tax from the particular Zambia Electricity Supply mining sector underperformed by more Corporation’s debt), for which we do not than 50  percent as mining companies have a consistent estimate. anticipated a change in regulation that 7. The share of non-copper exports com- would lead them to be able to claim less puted from official trade statistics is of their capital allowances in 2013 and likely to be underestimated, as these therefore claimed them before the end figures do not account for unreported of 2012, thus leading to higher refunds flows. Informal cross-border exports of in 2013. some primary and manufactured prod- 2. The outstanding debt stock result- ucts may be high; for example, as much ing from these bridge loans was as 80 percent of gemstones exports are K1,397.5  million as at end-December thought to go through unofficial chan- 2013, and it is not included in the central nels and are not recorded (AfDB and government domestic debt stock. The others 2013). interest rate on BoZ bridge loans is the 8. As recently as mid-2012, Zambia was inflation rate plus 2 percent. regarded as having the largest stockpile 3. In 2013 the government announced of non-GMO white maize in the world that it would eliminate the difference and was attracting considerable interest between the FRA’s buying and selling from the World Food Programme and price for maize. Moreover, the price of private buyers in Kenya and beyond. fertilizer under the FISP was doubled. 9. The large increase in the number of Bringing FRA activities on to the central exporting firms is encouraging. Recent government budget means that all pro- evidence suggests that regional trade ceeds from maize sales will be coming can provide a springboard to success in to the Treasury through a designated the global market: for example, Bren- account at the central bank and that the ton and others (2012) find that African FRA’s operations will be adequately bud- firms that initially start by exporting to geted for in the budget. the regional market have a higher rate 4. In May 2013 retail fuel prices were raised of success (survival) when they export by an average of almost 22 percent. to the global market compared with 5. See World Bank (2013) for more details. firms that go straight to exporting to the 6. If one includes the outstanding debt global market. stock resulting from the BoZ bridge loan 10. Arvis and others (2013) estimate trade and the FRA debt, this ratio increases costs as the price equivalent to the slightly to 32.5  percent. This figure reduction in trade compared with the also fails to include parastatal debt and potential implied by domestic produc- debt guaranteed by the government (in tion and consumption in the origin and 52 domestic markets. This broad concept of and trade. From a farmer’s perspective, trade costs has several elements amena- maize may also involve less risk com- ble to policy, such as logistics costs and pared with nonfood cash crops as it can underlying policies, and costs of crossing always be retained and used for home borders. The Diagnostic Trade Integra- consumption. tion Study update in 2014 covers most of 14. Responding to rising food prices and them. This section of the Brief focuses uncertainty for the 2012/13 harvest, the mainly on customs and border man- government introduced export restric- agement and discusses how to reduce tions on maize in December 2012 that costs associated with regulatory, docu- ended plans negotiated with the FRA mentary, and procedural requirements and other stakeholders to begin trading related to international trade at borders. Zambian maize on the SAFEX Futures 11. The increase results from a roughly Exchange in Johannesburg. In light of even increase in total time on the Zim- further concerns for domestic supply, babwean and Zambian sides. On aver- a formal ban on all private exports on age for 2013, total clearance times for maize grain, maize bran, and “number goods entering Zambia were twice as 3” maize meal was introduced in Septem- long as clearance times for goods enter- ber 2013 (Statutory Instrument Number ing Zimbabwe at Chirundu, where total 85 of 2013). Government-to-government clearance time covers export and import exports and exports by the World Food procedures in both countries. This dif- Programme were exempted from the ference may partly be explained by the trade ban, but only “number 1” break- fact that goods entering Zambia are fast meal, “number 2” roller meal, and often consolidated final imports (trucks stock feeds containing maize bran could carry multiple shipments) compared be exported by private agents. The ban with goods entering Zimbabwe, where on maize exports was lifted in early May shipments are more likely to be full loads 2014 through Statutory Instrument (SI) and transit trade—and procedures are No. 35. The MAL anticipates exports of generally lighter. about 300,000 tons of maize to neighbor- 12. A recent report notes that “a tripling of ing countries in 2014. the proportion of inputs manufactured 15. For a period in 2012, for example, the locally to about 15 percent of total goods FRA was buying at depots all around the procurement (probably what could be country at K1,300 per ton (about $250) achieved realistically in the medium and selling to a list of approved mills for term) would add some $160  million only K1,400 per ton ($270) including to local suppliers’ turnover, of which delivery to the miller’s gate, effectively between a third and half would be value precluding all types of private trade and added in Zambia. While this would cer- competition. As of March 2014, the FRA tainly be significant at the local level and was still buying from farmers at the same would results in more than 10,000 new pan-territorial price but had raised its direct jobs, it is an order of magnitude selling price to K1,700 per ton (about less than the amounts paid by the min- $310) with the buyer providing transport. ing companies in taxes” (ICMM 2014, 16. At one point, the subsidy reached 75 per- 69). cent of the commercial price of fertilizer 13. The discussion focuses on maize exports but was scaled back in 2013 to 50 percent and competitiveness. Many other agri- alongside a reduction in the quantity of culture products offer good export inputs each participating household is potential for smallholder participation, meant to receive from 400 kg of fertilizer but they tend to be more complicated to 200 kg and from 25 kg of hybrid seed to produce and market on a wide scale. to 12.5 kg. Compared with these other crops, maize 17. The Indaba Agricultural Policy Research is generally lower value (so is unlikely Institute’s analysis of Central Statistical to provide high cash income except on Office data shows that the FISP has had an extensive scale), but is easier to grow only a modest impact on output prices of 53 ZAMBIA ECONOMIC BRIEF—PROMOTING TRADE & COMPETITIVENESS: WHAT CAN ZAMBIA DO? maize. Using price data and FISP alloca- per ton/km from Lilongwe to Lusaka tions for 50 districts over the 2000/01 (Malawi DTIS). through 2011/12 marketing years, 22. Similarly, a train from Ndola to Durban, Ricker-Gilbert, Jayne, and Shively (2013) before exiting the port, spends 67  per- find that doubling the mean volume cent of total time at the Victoria Falls of FISP fertilizer allocated to each dis- and Beitbridge borders (430 hours travel trict reduces retail maize prices by just time, 120 hours at Victoria Falls, 168 1.8 percent to 2.4 percent, all else equal. hours at Beitbridge), before arriving at Therefore, FISP subsidies are essentially Durban, where it also spends a long time transfers to farmers and the risk of them before final delivery. being exported in an open border policy 23. The government enacted the Zambia regime is low. One-Stop Border Control Act (No. 8) in 18. Zimbabwe is currently Zambia’s largest 2009. The act enables the negotiation market for formal sector maize exports and signature of bilateral agreements but is far from the only foreign buyer. with each country with which Zam- Further analysis could use the methodol- bia wants to establish an OSBP. This is ogy developed here to analyze Zambia’s already the case with Zimbabwe and competitiveness in other markets and for Tanzania—agreements were signed in other commodities. 2007 and 2010. 19. The low DRC and high economic via- 24. Experience from other countries sug- bility of all LCF production models is gests that systems for efficient customs driven by economies of scale and the and transit data exchange, management, high yields due to use of advanced seeds and reporting can have a huge impact. and fertilizers adapted to each farm’s Recent procedural changes at the Mal- location and soil types. The results for aba border crossing between Uganda irrigated maize further benefit from use and Kenya targeted border management of irrigation equipment that is otherwise agencies, clearing agents, and truck driv- left idle during the summer months and ers (by enforcing lodging of pre-arrival on land that is usually left fallow. More- declarations and revising traffic and over, for commercial farms that grow parking rules), thus reducing border tobacco, curing barns can be used to dry crossing times from more than 12 hours early-season maize. in late 2011 to 3 hours in early 2012, even 20. Under the Lima program, small farm- without investment in infrastructure. ers can receive seasonal credit for maize 25. In Chirundu, parking lots have sprung through their local ZNFU branch, up in areas close to the border where known as a District Farmers Association. truckers now wait for their preclearance Loans are given out on a group basis in documents to be processed, reducing which members are jointly and sever- official border crossing time but not nec- ally liable for repayment. Borrowers are essarily total crossing time. required to put forward 50 percent cash 26. A truly functional regional bond scheme, collateral and are charged 14  percent which is unlikely to be established in interest including 9  percent base rate the short run, would also contribute plus 5 percent for insurance. Loan funds to reducing delays and costs across the are disbursed in kind through the input board—but this would also demand suppliers who deliver the inputs to the improved capacity among CFAs, which District Farmers Association for onward would have to be linked to the system. distribution to the farmer group. 27. Raballand, Kunaka, and Giersing (2008) 21. High regional transport costs are, in estimated that operating costs were in part, due to long delays at borders. To the area of 4.0 cts per ton/km for cross- give an example, transport costs from border vehicle operations, and 4.7 cts Ndola to Durban or Dar by road are per ton/km for domestic operations. approximately $0.18 per ton/km (assum- 28. The impact of the 2008 decline in cop- ing 15 tons per twenty-foot equiva- per prices on Zambia’s supply industry lent unit), while they are about $2.30 was significant. The mining houses had 54 to cut costs and look for value-added ser- major restrictions on access to foreign vices. Many traders were pushed out of exchange and it is further assumed the the supply chain. Established suppliers financial and economic exchange rates had to diversify and to reduce risk. are equivalent. 29. Based on directories of private sector 33. Under the 1995 Mines and Minerals organizations and data shared by the Development Act, and later the 2008 mining companies, the total number of Act, mining companies benefit from first-tier suppliers in 2009 was 150–200 value-added tax exemption and the firms, mostly in the Copperbelt. The esti- elimination of custom and excise duties mate explicitly excluded briefcase busi- on capital equipment. The tax regime nessmen, occasional suppliers, and firms only applies to the firms holding mining exiting the supply chain. Utilities and rights, which includes most the mines financial companies and labor contrac- but not their suppliers. Therefore, local tors were also excluded (Fessehaie 2012). service providers have to pay customs 30. The non-OEM subsidiary in this group duties ranging from 15 to 25  percent was supplying goods that became tech- for some goods—unless these goods nologically obsolete. qualify for Southern African Develop- 31. See Section XIII of the 2008 Mines and ment Community free trade agreement Mineral Development Act. preferences—plus value-added tax on all 32. The analysis was prepared in early imports. The fiscal regime confers a cost March 2014 using an exchange rate penalty on local suppliers which should of $1.00  =  K5.50. Zambia imposes no be urgently redressed. 55 References AfDB (African Development Bank), OECD Fessehaie, Judith. 2012. “What Determines (Organisation for Economic Co-opera- the Breadth and Depth of Zambia’s Back- tion and Development) Development ward Linkages to Copper Mining? The Centre, UNDP (United Nations Develop- Role of Public Policy and Value Chain ment Programme), and UNECA (United Dynamics.” Resources Policy 37 (4): 443–451. 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