By Kalima Nkonde
Story highlights
- Zambia is rich in minerals but we haven’t fully managed to convert that wealth for the benefit of the people. We need to know where to improve and what changes to make so we can harness this wealth to benefit not only current but also future generations of Zambians.(Ina Ruthenberg, Zambia World Bank Country Manager, 2016)
- Chinese investment does have the potential to address Africa’s infrastructure gap, but its approach has encouraged corrupt deals, led to mounting debt and created few jobs in most countries( former US Secretary of State, Rex Tillerson, March,2016 )
- China have and will continue to work alongside African countries to take practical measures to appropriately solve problems in trade and economic cooperation so that African countries gain more from that cooperation ( Chinese President Xi Ping, in Dar-es- Salaam 2013)
- China is the most significant contributor to the debt crisis in three African countries, Congo Republic, Djibouti and Zambia ( China-Africa Research Initiative (CARI), Johns Hopkins University)
- Despite Zambia being endowed with vast mineral resources, the country has not realised maximum benefits from the sector’s potential to support growth and enhanced socio economic development. The contribution of the mining sector revenue as a percentage of GDP remains low at 4 percent ( Former Finance Minister, Alexander Chikwanda 2015 budget speech)
- Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. But recent work also points to some potential risks: Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign. (IMF’s Finance and Investment Magazine )
- Last year, Zambia exported US$8.1 billion worth of goods around the globe. You will note that the mining sector contributed more than US$6 billion. Ask me how much of that money hit the accounts in Zambia and you will be shocked, less than a billion (less $1 billion) hit the accounts here at home ( Opposition Green Party President, Mr. Sikamba August 2018)
- I want to see greater participation of the Zambian people in this economy. This is 55 years after independence, we should be building our own roads, and we should be building our own bridges.( Finance Minister, Dr. Bwalya Ngándu, February 2020 )
The recent embarrassing and defiant action by Mopani Copper Mines to ignore the Zambian government’s pleas to keep the mines open; and the arrogance of giving the government 24hours notice to place their operations under care and maintenance, opens a Pandora’s box for debate on a number of issues. One of the long outstanding issues is what benefits are we deriving from these investments as a nation given that at the slightest excuse, Zambian workers can be laid off workers in thousands with little regard to the impact on them and the nation. It appears, only the shareholder matters to Mining houses. The other issue is: who is more powerful and calls the shots in Zambia on mining policy issues between the “Sovereign” State and the Mining houses?
The Minister of Mines and Mineral Development, Mr. Richard Musukwa warned Mopani Mines not to go ahead to place the mines under Care and Maintenance and threatened to enforce the law if they went ahead.
“There is no justification for Mopani to undertake this unfortunate incident. And any attempt to break the law by Mopani will be met with the full force of the law because it is clear that many mining houses want to take the law in their hands and circumvent the provisions of the mines and minerals act at will. This is a matter that they cannot do in any jurisdiction and Zambia is not an exception. The government has written to Mopani to halt the entire process,” The Minister was quoted by News Diggers when addressing the press briefing.
Mopani Mines has since gone ahead and closed the Mines, literally daring the government to do whatever it wants! Now, the jury is out as to what the government will do next in the light of its earlier threats.
This article is not about the stand-off between MCM and government in particular or the quarrels the mining industry, in general, has had with the Zambian government. Instead, it is an analysis that is looking at the entire current foreign direct investment model and its impact on Zambia so far. It has, however, been prompted by the behavior of Mopani Copper Mines.
Zambia is in a terrible economic crisis at the moment and COVID- 19 will just make the situation worse. The numbers, which are all in public domain, do tell the full story and need not be repeated here. The single most important statistic is the Kwacha exchange rate and it tells the full story as it is approaching K20 to a US Dollar. But what is baffling is, why should Zambia be in such a state economically? The article presents one very important angle but it is by no means the only one, as incompetence has also played a major role. There are a number of questions that one would want to pose.
Why is it that the country is in such an economic mess with all the billions of foreign investment and foreign borrowings that have been poured in such a small economy in a very short period of time? How is it possible that a country which has attracted over $17billion – as at 2017- of foreign direct investment in the last 20years, still experiences such high unemployment? How is it possible that a country that has had a construction boom in the past nine years, having borrowed over $11.2billion in foreign exchange is still having such a low rate of economic growth? How is the construction industry which is used by many countries as the main stimulus for the economy has had no effect in Zambia? How come that a country with a flourishing export-oriented mining sector which earns billions of dollars in foreign exchange, has such low levels of gross reserves of only $1.45 billion which is 2.1months of import cover and its currency is one of the worst-performing in the world?
Unless, and until some of these questions are answered, the solutions to our current economic problems will not be solved in the long term. I have done some deep thinking and analysis and attempted to come up with some of the possible answers. I outline my personal views in a bid to share with my countrymen in a very simple and non-technical fashion with the hope that those in power as well as those aspiring for power, can understand where to look, for solutions to our economic problems.
Foreign direct investment should be encouraged by all countries including Zambia and can be beneficial to the host country but Zambia has not benefited sufficiently from foreign investment in the four main areas: job creation, foreign exchange, tax revenue, promotion of supply chain industries as well as skills and technology transfer.
Foreign Exchange and kwacha depreciation
In theory, copper mining contributes 70% to Zambia’s export earnings. This figure is misleading as very little comes back in the country as it is retained by the mines. If sufficient export earnings were to come back in the country, the kwacha could have been stronger than now and the cost of living could be lower as we can import-dependent countries. The issue of Zambia deriving insufficient benefits from copper exports is one independently confirmed by the International Monetary Fund (IMF) in one of their country report.
“Care is needed with the interpretation of the export shock in the case of Zambia. Given that not all the copper export proceeds return to the country because most mines are foreign-owned. Staff estimates that at least 40% of exports do not return to the country.” The IMF report noted.
The Kwacha exchange rate, of course, has also been affected by the massive outflows paid to foreign contractors, the massive debt servicing costs as well as the over dependency on imports for almost everything.
Insufficient Tax Revenue
Foreign direct Investment in mining which accounts for 62% of total investment FDI in Zambia has not benefited ordinary Zambians as far as revenue generation through taxation is concerned. It is generally agreed that Mining houses are not paying sufficient taxes to cater for social needs such as health, education, water and sanitation and for development projects. This low revenue contribution by mines and other foreign investors, has partly contributed to the accumulation of the potential $25 billion public debt (including $7billion pipeline debt) and a myriad of taxes levied on ordinary Zambians to cover for the revenue shortfall.
In order to put mining contribution to the Zambian treasury in perspective, it is vital to compare Zambia with two neighbouring countries. In Namibia, mining revenue contribution to government revenue is about 25%, whereas Botswana mining contribution to government revenue is 45% .On the other hand, Zambia’s mining contribution to Government revenue is estimated at a paltry 4% of GDP.
The majority mining houses that have been here for over twenty years and have never paid any income tax as they declare tax losses all the time but in the meantime their shareholders abroad have been receiving dividends. The former Minister of finance, Mr. Alexander Chikwanda alluded to this in his speech to Parliament in 2015, when he bemoaned the lack of benefits from mining.
“Sir, despite Zambia being endowed with vast mineral resources, the country has not realised maximum benefits from the sector’s potential to support growth and enhanced socio economic development. The contribution of the mining sector to the national budget has remained minimal even after the Government doubled the mineral royalty rate from 3 to 6 percent. Mr. Speaker, the tax structure was simply illusory as only two mining companies were paying Company Income Tax as most of them claimed that they were not in tax-paying positions.”, he complained.
Lack of Forward and Backward Linkages
Zambia has not benefited from foreign direct investment especially from the mines as the sector is not contributing to the development of backward and forward linkages through the mining supply chain. Mines have not actively promoted the establishment or expansion of indigenous firms that might supply them with intermediate products but instead opted to import these goods from overseas even from affiliates.
In 2016, the World Bank Mining Investment and Governance (MInGov) Study, observed the following: “Throughout the survey, key stakeholders noted the need for the mining industry to more effectively use local products and services. Currently, there is no national supplier development policy for the industry. Consequently, 95% of goods and services used by the mining industry are imported.”
The situation of lack of benefits from foreign investments is not lost on our leaders as President Lungu observed in August 2018 on the Copperbelt, but there is a lack of political will to take bold action.
“It is of great concern to note that despite showing a positive picture, the mining industry has not stimulated corresponding growth in other sectors. The performance of this sector will now be assessed on the basis of growth of linkages with other sectors and impact on the lives of ordinary Zambians”, he said.
There should be a paradigm shift by the Zambian government through equal or more focus on local investors and promoting entrepreneurship among Zambians with more joint ventures unlike now where 100% foreign owned businesses have all the incentives. The Zambian Minister of Finance is also in support of Zambians taking a more active role in the economy. He made his views known at the press conference on the State of the economy on February 12, 2020, as quoted by the Mast Newspaper.
“I want to see a greater participation of the Zambian people in this economy. As you know, we are a mining country but we don’t have Zambians who own mines or who have equity interest or financial interests in mining companies. This is something that has to change. This is 55 years after independence, we should be building our own roads, we should be building our own bridges,” The Minister lamented by the lack of participation and ownership of the economy by Zambians.
Chinese Government Investments in Zambia
In regard to the Chinese’s infrastructure projects– roads, bridges, airports, etc- in Zambia, they have been financed by loans from Chinese state-owned banks and carried out by their State Owned Enterprises (SOE). In spite of the fact that the contracts are in billions of dollars, the impact on the Zambian economy and ordinary Zambians in terms of benefits, in the short to medium term has been very little, as the 4Ms- money, material, men and machinery-involved in the projects, have largely benefited the Chinese economy by and large. There has been little positive multiplier effect on ordinary Zambians. Chinese investment in Zambia is approximately $4billion.
The money from Chinese loans does not come to Zambia but remains in China to purchase materials and machinery. Chinese Contractors on infrastructure projects, in large measure, use their own skilled and unskilled labour. Zambians employed on these projects are mainly those doing low skilled, low paying jobs like digging trenches, and in the process, there is very little skills transfer to locals. Also, there are no joint ventures formed between Chinese and Zambian companies like China requires all foreign investors investing in China. There is no technology transfer to Zambian companies so as to build capacity for Zambians to enable them to build their own roads, power stations, bridges, airports etc in future like the Chinese do at home.
The Chinese government is aware of this lop sided relationship and this has been admitted at the highest level. Chinese investments and trade relationships thus far with African countries including Zambia have not sufficiently benefited the continent. President Xi Jinping admitted this in Tanzania in 2013 that his government would take corrective action regarding African continent’s complaints about the lopsided economic relationship.
“China have and will continue to work alongside African countries to take practical measures to appropriately solve problems in trade and economic cooperation so that African countries gain more from that cooperation. We will strengthen mutually beneficial cooperation with African countries in agricultural, manufacturing and other spheres, helping these countries convert their resource advantages into developmental advantages,” President Xi Jinping said.
Foreign investors and the Chinese contribution to Zambia’s debt crisis
Foreign direct investment has indirectly contributed to Zambia’s debt crisis. Zambia has been forced to borrow, albeit, irresponsibly, due to the fact that the western foreign investors have not been paying sufficient taxes to fund the infrastructure development projects and yet foreign shareholders have been receiving their dividends. Foreign investors have been accused of being engaged in illicit financial flows and sophisticated transfer pricing schemes to avoid paying taxes in Zambia. In addition, the huge foreign exchange outflows and retentions by the mines have contributed to the kwacha depreciation thereby more than doubling the foreign debt in kwacha terms.
The Chinese government, on the other hand, has had a lassie faire and cavalier attitude towards lending to Zambia with alleged opaque deals. China’s critics have accused it of engaging in debt trap diplomacy towards Zambia and other African countries. Critics argue that China has intentionally lent Zambia excessive funds with the hidden long term (20-50 years) objective of taking over some of our resources when we fail to honour debt obligations and the current leaders would have been long dead leaving future Zambian generations to be at the mess of their Chinese counterparts. This is given credence because the loan deals’ conditions are shrouded in secrecy and are not made public. There are Zambian critics who feel that China has invested in some vanity projects such as airports and some uneconomic roads in Zambia which will not generate enough revenue to repay the loans. The Chinese, it appears, have been very liberal in their lending policies doing no proper due diligence on some projects to ascertain to their commercial viability as most lenders do. The question is, what is their motivation and benefit in financing such vanity projects in Zambia and Africa?
Recommendation
In order to address the economic problems we are in, which have been mainly caused by excessive debt and the current structure of the economy being too import oriented and too foreign dependent, a number of steps, both short term and long term ought to be undertaken. These include the following: lobbying for the return of the IMF country representative so as to fast track the bail out, renegotiate deals with the Chinese by changing current non-viable projects like roads leading to nowhere, and moving the funds to projects in agriculture, manufacturing, green energy, electric cars. We also need to restructure the current debt with the Chinese, reduce the 95% importation by mines by persuading them to have their suppliers relocate to Zambia and have joint ventures with Zambians, renegotiate the percentage retention of forex proceeds by mines to a lower figure reduction say 20%, provide equal incentives to local investors as those available to foreign investors, legislate or incentivise foreigners to enter in joint ventures with local entrepreneurs and enforce the local empowerment legislation. On the basis of my international experience with successful countries, the majority of the proposals should only be undertaken after proper studies are done. Independent studies will help government to make informed decisions and arm them with facts and figures when negotiating with the Chinese and other foreign investors having done proper impact assessment of the status quo. The past knee jerk way of policy making should be done away with as it has resulted in numerous embarrassing reversals
Conclusion
Although the article may appear to be critical of the Chinese and other foreign investors, I am in no way advocating for Zambia to do away with cooperating with the Chinese or not attract foreign direct investment. But we need to ensure that we enter into deals that benefit both parties unlike now where the ordinary Zambian is not seeing the benefits but suffering from consequences of the resulting debt and depreciating kwacha. Our leaders need to take responsibility for the mess we are in. The promotion of locally grown entrepreneurs especially among the youth in equal measure is important. There is also need to make some changes with the economic model of attracting foreign investment as the current one has failed to bring the desired benefits.
I strongly believe that Zambia’s economy can easily be turned around within 18 months with the utilization of the intellectual capital available in the country and in the diaspora, and just a bit of political will with visionary thinking to address the issues I have raised in this article. Levy Mwanawasa proved it. However, we need leaders who are at or close to the self-actualization stage of Dr. Abraham Maslow‘s hierarchy of needs like Levy Mwanawasa appeared to be.
We do not need leaders who are motivated by material stuff or who nurse inferiority complexes that impair rational decision making, neither do we need leaders who want power to satisfy personal egos. The best political leadership models are those of former US Presidents Barack Obama and Bill Clinton. The two leaders’ doctrines are to surround oneself with the best brains to give one the best advice and people who are able to disagree with the leader and not “yes men”. Unfortunately in Zambia, all political parties are led by “great” leaders to an extent that most political parties aspiring for power don’t even show the public their shadow cabinets, if at all they have. It is the “great leaders” who dominate the headlines and are on TV and radio stations all the time. We simply don’t know their teams. The current menu of leaders is neither appetising nor inspiring to a knowledgeable and independent person as they are not giving the voter the opportunity to vote for something rather than against something. They need to up their game.
The writer is a Chartered Accountant by profession. He is an independent, non- partisan finance and economic commentator/analyst and a genuine Patriot.
