Zambia on the recovery path

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ZAMBIA has achieved a historic single digit inflation rate remarkably posting an improvement of 100 percent in the last one year; thanks to reduced public spending and prudent fiscal and monetary discipline by government in the last four years

The current 9.4 percent inflation announced by the country’s Central Statistical Office is the lowest in 35 years. In May 2005 the inflation stood at over 18.6 percent. The CSO predicts the monthly inflation for this month will drop to around 8 percent.

In 1991 when the current capitalist-leaning
government took power from socialist government of President Kenneth Kaunda, inflation had skyrocketed to as high as high 230 percent.
The privatization of the country’s major assets – chiefly the copper mines – relieved the government from the punishing mammoth losses generated by the industry and greatly improved chances for copper mining to return to profitability and spur economic growth.

Financial Markets Association of Zambia president, Miles Sampa, says the lowering inflation is greatly helped by the strengthening local currency, the Kwacha, which has posted a gain of 40 percent since February 2005 due to increasing copper prices on the global market and reduced foreign debt servicing since the country qualified for massive debt relief under the International Monetary Fund and World Bank plan.

“There are new investments in the mines and lately the release of more dollars on the market by those who were hording it for speculative reasons is helping the gain in the value of the local currency,” said Sampa.

Never before has the Kwacha gained so consistently hence some players are speculating the value would fall within a short time.
Experts predict the Kwacha may rest at K2500 by the end of the year.

Zambia’s copper output has increased steadily since 2003, due to higher prices and the opening of new mines in the country’s North-Western Province. Privatized mines have also seen massive recapitalization since 2000. The Chamber of Mines—the influential body of mine investors—said up to US$ 1 billion had been invested in the mines in 2005 alone.

The harvest of maize—the country’ staple cereal–has increased in the last four years while cooperation with international aid agencies and donor nations improved from about 2003 when President Levy Mwanawasa launched Zambia’s largest crackdown against corruption since independence in 1964.

Buoyed by high copper prices, significantly reduced government borrowing from the open market and reduced foreign debt servicing, the Kwacha has fast gained against the major international currencies.

In 2002 when Mwanawasa became head of state, the Kwacha traded at about K7, 000 to US$1. Now the exchange rate is K2, 900 against the greenback.
As a direct result of the gain, however, the agricultural sector estimates it would incur an exchange loss of up to K680 billion. (US$ 1 equals K2900.)

Copper prices on the global market have reached a record high of US$8000 per metric tone and price is forecast at US$10 000 by December 2006.
Zambia is the fourth largest copper producer in the world. In 2005, it turned out some 500 000 metric tones and the Chamber of Mines say this year the country would produce 600 000 metric tones.

Kansanshi Mine, a multi-million dollar operation owned by Canadian giant miner, First Quantum Mining Limited, has had to bring forward its large-scale expansion program to this year that was set to last 15 years.

Mine owners say the good copper price on the global market has forced them to fast-forward the expansion project.

The Zambia Chambers of Commerce and Industry (ZACCI) say reduced food prices will help to keep
the rate of inflation even lower. Chief executive officer Justin Chisulo says food inflation accounted for 60 percent of the overall country’s inflation. The expected bumper harvest from the just ended farming season is likely to help keep food prices low.

However, ZACCI fears that salary adjustments which are due anytime from now when trade unions complete negotiations, would offset inflation stability.

Most labor unions have collective agreements reviewed between April 1 and June 30.
A wave of strikes in the civil service—teachers, nurses and doctors—in the last three weeks threaten industrial relations stability and may cause a disruption in national productivity.

The Bank of Zambia (BOZ), the country’s central bank, has asked commercial banks to cut interest rates to between 19 and 25 percent given the gain in the value of the Kwacha and reduced inflation.
BOZ governor Caleb Fundanga says he does not understand why lending base rates must exceed 20 percent given the positive growth and confidence in the economy.

Three key commercial banks have cut lending rates to between 19 and 23 percent.

In 2003 interest rates were as high as 57 percent making it impractical for productive private sector borrowing. This left only government as the major borrower, always crowding out the private sector from the market.

Sherry Thole, chairperson of the Bankers Association of Zambia, says commercial banks have reduced their interest rates to an average of 23 per cent and downwards. She predicts the reduction of interest rates would continue.

“Commercial banks were working on reducing their interest rates since the economic indicators were showing positive growth in the economy. The low inflation rate, liquidity on the market and government decision to reduce corporate tax from 45 per cent to 40 per cent were positive factors”.
International cooperating partners are giving Zambia thumbs up for its tight monetary and fiscal discipline.

The IMF issued a statement in Lusaka on Thursday saying it impressed with Zambia’s sustained and robust economic growth in the last sixteen months.
IMF Resident Representative, Joseph Kakoza, says the Bretton Woods institution’s which visited Zambia between April 25 to May 11 this year, welcomed and continued decline in inflation, and recognized the contribution of prudent fiscal and monetary management to this favorable outcome.

“Zambia’s external position improved markedly, supported by strong copper and non-traditional export receipts and extensive debt relief under the enhanced HIPC initiative,” he said.
“The improvement in economic fundamentals and future prospects bolstered market confidence and underpinned a strong appreciation of the Kwacha,” said Kakoza adding that economic prospects had continued to improve in 2006. He said boosted by higher copper output and prices, a recovery in agricultural production, and sustained growth in construction and tourism, gross domestic product growth was projected to rise to 6 per cent this year.