By Edward Chisanga

In its pursuit of trade as an engine for economic development, Zambia has a history of overly-underutilizing markets it is member to. Examples include the European Union, the United States, Canada, Japan and even lately, China and India. Albeit free market access, our country’s exports continue to drop instead of rising as Table 1 below shows. Another statistic not shown here shows that in 2001, Zambia ranked number sixteen among the forty-eight Sub-Sahara excluding South African countries in exports of all products to the EU. But in 2020, this ranking dropped to number twenty-seven.

Table 1: Zambia’s exports of all products to UK, USA, EU in $ millions

Source: Unctadstat

But right in the backyard, Zambia is member of regional trade integration comprising largely COMESA and SADC, the latter perhaps the richest, most qualitative and even quantitative market in Africa because of the presence of South Africa. Just as most progressive countries in the world crave to export to the USA, similar ones in Africa thirst for exporting to South Africa but are thwarted by high import tariffs. But Zambia being member of SADC means it exports to South Africa free of duty for most goods. Do Zambians and their leaders know that to South Africa, Zambia’s exports of all products totaled only $ 181 million in 2020 shown in Table 2 below? While some may jump to concluding that it was due to Covid19, I will ask them to look at data many years prior to Covid 19 in the same Table. In the period shown, Zambia’s highest peak of exports to South Africa was only in 2007 when they reached $494 million. In 2000, Zambia ranked number six in top exporters to South Africa from Sub-Sahara Africa excluding South Africa. However, by 2020 that ranking had slumped to number fifteen, meaning other African countries had overtaken our country and you don’t hear this in Cabinet meetings as if it doesn’t matter.

Table 2: Zambia’s exports of all products to South Africa and SADC in $millions

Source: Unctadstat

Of course, Zambia has key trading partners in SADC other than South Africa with Namibia accounting for 37% and DRC 36% respectively as shown in Table 3 below. In SADC, these three markets including Zimbabwe and Malawi account for 94% of Zambia’s total intra-SADC exports, hence its main markets. It means about ten SADC members are not Zambia’s main export markets. But it is only fair to also say that Zambia’s exports have been rising in SADC in terms of absolute values up to about $2 billion in 2020.

Table 3: Zambia’s main export markets in SADC in proportions

Source: Unctadstat

But, is $2 billion exports really Zambia’s potential in a SADC lucrative market with South Africa where our country exports more primary commodities instead of manufactured goods? To Namibia, our country’s main export market in SADC, Zambia’s exports of primary commodities in total account for 99%. So, in the whole SADC market, exports of primary commodities in total account for about 70% with manufactured goods taking the least share of only 30%. To DRC, Zambia exports more manufactured goods than primary commodities in proportional terms but absolute numbers were only $418 million in 2020. And these goods exports comprise mainly sulphuric acids, copper ores and concentrates, non-alcoholic beverages and cement and common things like foods, maize, cane sugar, salts, vegetables, etc. Clearly, Zambia’s focus on the DRC and Namibia and other markets in Africa and divesting from the South African market is largely a result of failure to compete with other African countries in exports of manufactured goods. In 2020, Zambia ranked number eleven in top Sub-Sahara Africa exporters of manufactured goods. Yet, in 2000, its ranking was number six.

In intra-SADC trade, Zambia imports more than it exports leading to trade deficits every year. As an example, in 2020 the deficits in both all products and manufactured goods shown in Table 4 below reached over $1 billion for manufactured goods and almost $1 billion for all products. With trade deficits, the country fails to leverage external revenue from exports leading to shortage of cash for development and it means regional trade is not playing a significant role to help lift Zambians from poverty. I can hence understand why some Zambians are asking why Zambia should not leave some of these regional groupings where it may be reaping more political than economic benefits.
Table 4: Zambia’s intra-SADC trade in $ millions

Table 4: Zambia’s intra-SADC trade in $ millions

Source: Unctadstat

But, despite an awful record in SADC, Zambia has joined the Africa continental free trade area (AfCFTA) to export to the rest of Africa. When I asked a former permanent secretary of the Ministry of Commerce, Trade and Industry in the PF government, why Zambia was entering a larger market before fulfilling the SADC market, her stunning answer was, “If Zambia has liberalized trade with half of Africa (COMESA, SADC and EAC) under the TRIPARTITE arrangement, what’s wrong with doing so with the rest of Africa?” She did not talk about persistent trade deficits. Neither did she mention the products that the country would export to Nigeria, Ghana, Cote D’Ivoire, Morocco, Tunisia, Algeria and other more competitive countries than Zambia with which it currently has no trade partnerships and free trade arrangements.

I conclude by saying that I personally tried to advise government then to focus on building the supply and productive sector; to increase production and industrialization as a matter of priority and forget about looking for more free markets where the country would not export due to lack of products. Industrialization is what Zambia needs. Zambia sometimes should learn to disappoint its fellow African countries by refusing to join groupings that don’t contribute to industrialization. I advised that blind solidarity will not help Zambia to develop. Countries that are developing in Africa are largely those that don’t invest in blind group solidarity, They chose their own national vision and avoid group populism which is often more political than economic.

The African Union is preaching so many things to African member states. So many economic programs are on its website. Yet, it has allowed Viet Nam, a small country in Asia to overtake the whole Africa in exports of manufactured goods. Zambia would do better to build economic partnerships with such countries than responding positively to blind African group solidarity. I advised that when the impact of trade liberalization hits Zambia, the solution for Zambia will not come from the African Union but from Zambia and Zambians. Then solidarity will be ignored. Zambia cannot think that now that it has joined the AfCFTA, then industrialization will be created by these market forces. Viet Nam first built a strong industry which is now producing competitive products, then joined regional trade arrangements. China did not open its trade doors to the world until it developed the supply side.

I hope the new Zambian government will appreciate that group African solidarity cannot be its economic priority. No country in the world developed because of group solidarity. They developed on their own first, then joined groups. Developed countries began by protecting their countries from outside trade, developed then looked for group markets like the World Trade Organization (WTO). Asian countries depend largely on trade with developed countries which is then complemented by intra-Asian trade.

While Africa thinks it can reduce poverty through intra-Africa trade of currently only $70 billion exports, and in future by African countries exporting more to each other, Viet Nam and other Asian continues to increase exports to the rest of the world complimented by almost half inside Asia. Wealth is made by trading with wealth nations. That is what Asan countries do. Because Africa has no industrial products to export, the conclusion by its elite is that the continent has not benefited from trade with rich countries. Asians don’t share that view because they have developed products only wanted by rich countries. Zambia will not develop by trading with DRC, Namibia, Senegal or Benin which are all poor countries without wealth. Zambia should develop its supply side and focus on trading with South Africa and rich countries.

By Sean Tembo – PeP President

1. Last evening l wrote an article in which l condemned the decision by the central bank’s monetary policy committee to increase the monetary policy rate by 50 basis points from 8.5% to 9%, as a way of trying to arrest inflation. My argument was that such a measure was ill-advised because our inflation is largely cost-push and not demand-pull, and also that credit is not a major source of purchasing power in our economy as it accounts for less than 13% of GDP. I further went on to argue that increasing the MPR will have the detrimental effect of hindering economic growth as well as increasing the cost of living at household level. However, as l was going through some comments related to last evening’s article, l noticed a recurring theme in which readers requested that l provide alternative solutions of how to arrest inflation if not by increasing the MPR. This article seeks to do just that.

2. As argued yesterday, our inflation here in Zambia (both food and non-food) is largely cost-push and not demand-pull. We can further sub-categorize this cost-push inflation into imported and domestic, of which imported cost-push inflation accounts for more than 80% of all the cost-push inflation. Why is this the case? Well, because we are an import-dependent country as we import everything from fuel to toothpicks. Even for the little manufacturing that we do, a large portion of the raw materials are often imported. This largely exposes us to an increase in prices on the world market. For instance, when the prices of oil go up on the world market, the pump prices of fuel has to go up, and fuel being a key production input, it will have a ripple effect as it will increase the cost of transport and generally adversely impact the cost of all goods and services.

3. However, the larger component of our imported cost-push inflation arises from a depreciation of the local currency, the Kwacha. Since for us to import goods to this country, we cannot use the Kwacha but need to use hard currencies such as the US Dollar, when the exchange rate between the Kwacha and the US Dollar depreciates from say K16 to K17.5, as it has done in the past three months or so, then the cost of importing the same amount of goods will go up, even though the person from whom we are importing has not increased their prices. In this particular example, the cost of importing goods would have gone up by approximately 9% [(17.5-16)/16*100]. Suffice to mention that apart from the recent disruption to global supply chain systems due to COVID-19, prices of most goods are generally stable on the world market.

4. So for us to effectively arrest the imported cost-push inflation, we need to address the issue of the depreciation of the Kwacha against major convertible currencies. There are a number of factors that influence the exchange rate of the Kwacha to other currencies which include market confidence, but the most significant is the supply and demand of the hard currencies. For instance, if there is more supply than demand for US$ on the forex market, the Kwacha will appreciate against US$. Now, you may wish to note that our demand for US$ is pretty stable. We need US$ to service our external debt, to import fuel etcetera. In other words, we can easily project with reasonable certainty how much US$ we shall need at what point in time.

5. The supply side of US$ is also quite predictable. In as much as we have tried over the decades to promote non-traditional exports, we have not succeeded much and the mining sector still accounts for more than 90% of our forex supply. Every now and then, foreign direct investment (FDI) does compliment the mining sector, but the mining sector remains the backbone of forex supply. Now, the demand side of forex is largely cast in concrete and steel and we cannot really fiddle with it. I mean we have to service our external debt, whether we like it or not. Similarly, we need to import fuel whether we like it or not. So we cannot do much to manipulate the demand side of forex, but what about the supply side?

6. Well, as a matter of fact, there is a lot that we as a nation can do to increase the total supply of forex into the economy. I have argued before in almost all the PeP Alternative National Budgets that we have prepared since 2017, that the mines remit less than 30 percent of the gross proceeds of mineral exports back to the country. What happens is that let us say XYZ mine (no relation to Slap D) exports $100 million worth of copper to a customer in China, when that customer pays, the $100 million will not land in XYZ mine’s bank account here in Zambia, no. The $100 million will go to XYZ mine’s parent company in Canada, India, Brazil, South Africa or any such country. And then the parent company of XYZ mine will only remit back to Zambia a small amount such as $20 million out of the $100 million to meet local expenses such as salaries, Zesco bills, etcetera. Meanwhile theoretically we are recording an export of $100 million and when we calculate the balance of payment position, we record a surplus. But that surplus is just on paper, in reality we have a perpetual deficit because the $100 million did not enter the Zambian banking system, only $20 million did.

7. In order to address the problem outlined above, Government simply has to pass a regulation that will compel the mines to remit the gross proceeds of their mineral exports. If Slap D’s mine, XYZ exports $100 million worth or copper to China, then the customer has to remit the entire $100 million to XYZ mine’s bank account here in Zambia at Indo, Investrust, ZICB, Natsave or whichever commercial bank XYZ mine maintains an account with. Once the $100 million is remitted back to Zambia, XYZ mine can then make the payments that it needs to in order to sustain its operations, including foreign payments. At the end of the year, once XYZ mine prepares its financial statements, if it declares a profit, it can then proceed to declare a dividend and remit such a dividend to its parent company in Canada, India, Brazil, South Africa etcetera, of course after paying the requisite corporate tax on the profits and withholding tax on the dividends. The measure of compelling all mining companies to remit the gross proceeds of their mineral exports back to Zambia would not only be a game changer in terms of pushing down the exchange rate and addressing imported cost-push inflation, but it would also assist with addressing issues of tax compliance by the mines.

8. So the question then becomes; why hasn’t any administration implemented this measure? Well, as a matter of fact Bashikulu Ba Sata’s administration did attempt to enforce this measure through Statutory Instrument No.55 that was issued through gazette notice number 419 on 25th June 2013. But it was haphazardly conceived and implemented as it sought to achieve too many things at once. The key thing about reforms is that you keep them simple and make them gradual over time, so that you learn as you go. The other challenge was that SI 55 focused largely on outward remittances from Zambia to the outside world, but the larger problem is with regard to inward remittances from the outside world to Zambia for Zambia’s exports.

9. I actually envy most of Sata’s policies. I believe that he had a fair understanding of what the problem was in various sectors of the economy and perhaps his only challenge was that he wanted to achieve everything at once instead of having a gradual approach.

10. Anyway, back to the issue at hand, the question remains; why hasn’t anyone made a sincere effort to compel the mines to remit the gross proceeds of their mineral exports back to Zambia, both in previous and current administrations? I personally believe that it is not an issue of competence. But rather, it is an issue of having the backbone to do it. I mean, one does not need to be an economist to see that if copper prices are shooting up on the world market, having recently crossed the $11,000/tonne all-time record, then why should the Kwacha be depreciating? Isn’t the value of the Kwacha also supposed to be at an all-time high? Why the opposite? So the technocrats in Government know where the problem is, and the political leadership is also equally aware. But the problem is that no one has the backbone to implement the necessary reforms to compel the mines to remit the gross proceeds of their mineral exports back to Zambia. This is because you are talking about billions of dollars here. So for each administration that comes into office, the mining companies can afford to open a numbered offshore bank account for each member of Cabinet and deposit a ka $30 million in each account. Then the issue will simply die a natural death, until a new administration goes into office, then the cycle is repeated. And while all this happens, our economy is damaged and the common Zambian is suffering from the ravaging effects of a high cost of living that is largely brought about by imported cost-push inflation which can easily be addressed by compelling mining companies to remit the gross proceeds of their mineral exports back to Zambia. The solution is right before our eyes and yet not reachable.