This research comprises six main chapters. Chapter two documents a detailed overview of the macroeconomic environment in Zambia with special reference to factors which have influenced growth since independence. An investigative review of critical literature
is done in chapter three: containing a section on empirical literature and another on theoretical literature review. Chapter four describes the methodology employed in the study while chapter five is dedicated to the analysis of empirical results and interpretations. Finally, a summary of the research findings with corresponding conclusions and policy implications is done in Chapter Six.
1.6 Conclusion
It has been observed that world economic growth is dependent on national and regional growth. While some regions such as Europe and Central Asia are experiencing declining growth, the story is remarkably different for sub-Saharan Africa. In the case of the Republic of Zambia, sustained economic growth has been a great challenge ever since independence in 1964. The nation only experienced sustained positive growth in the decade after the start of the 21st century. Based on the popular view that Zambia’s Economic growth is directly linked to international Copper prices and other macroeconomic factors, a problem statement and a set of specific objectives have been formulated. Additionally, it has also been made very clear that this research is aimed at influencing policy decision in Zambia.
CHAPTER TWO
OVERVIEW OF THE ZAMBIAN ECONOMY
2.1 Introduction
This chapter presents an overview of Zambia’s economic performance and highlights some key macroeconomic characteristics which are important to understanding its economy. The chapter is divided into four sections: section 2.2 presents Zambia’s recent economic performance, section 2.3 highlights it economic prospects while section 2.4 documents some of the economic challenges the nation is currently facing. Finally, the macroeconomic status of Zambia is presented in section 2.5.
2.2 Economic performance 2.2.1 Gross domestic product
Zambia has historically faced a great deal of challenges in increasing it level of gross Domestic product. Even though the country has been exporting massive amounts of copper since before its independence in 1964, Gross Domestic product remained very low for the most part of the past 50 years. It is very disheartening to note that for almost 40 years, Zambia could not significantly increase its Gross Domestic Product. Since 1961, GDP only crossed the US $5 billion mark in 2004. However, from 2005 to date, Zambia has experienced sustained rapid economic growth. In only 10 years, Zambia increased it GDP from US $6.2 billion in 2004 to US$ 27.1 billion in 2014. This implies that GDP increased over four times as much in the last decade as compared to its
increase in the first four decades after independence. Figure 2.1 shows Zambia’s Gross Domestic product from 1961 to 2014.
Figure 2. 1: Zambia's gross domestic product, 1961-2014
(Source: World Bank, 2015) 2.2.2 Economic growth
Zambia’s growth rate has been one of many swings and periodic negative spirals. The nation has seen it all when it comes to economic growth rates: an outstanding positive growth rate of 16.65 percent in 1965, a devastating negative growth rate of -8.63 in 1994 and a remarkable positive growth rate of 10.3 percent in 2010. Over the past 54 years, Zambia has had an average growth rate of 3.4 percent-a situation attributed to too many negative spirals of growth. However, the average growth rate from 2003 to 2014 increased to over 7 percent. This period can rightly be termed the period of sustainable
economic growth in Zambia. Figure 2.2 shows Zambia’s economic growth from 2003 to 2014.
Figure 2. 2: Zambia’s economic growth, 2003 to 2014
(Source: World Bank, 2015)
Figure 2.2 indicates that the country generated real GDP growth of 6.7 percent in 2013 but suffered a declined in 2014 believed to have been as a result of a fall in copper prices. Despite this external shock, Zambia’s economy remains strong with growth expected to increase above 6% in 2016 .The African Development Bank (2015) predicts that Zambia is likely to record a growth rate of 6.6 percent in 2016. This prediction is, however, not likely to be accurate because it was made before the 2015 to 2016 electricity shortage the nation faced. In the year 2014, Zambia was the 7th fastest growing economy in sub-Saharan Africa and the 10th in the world (MFNP, 2014).
6.9 7.0 7.2 7.9 8.4
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GDP Growth (%)
Year
Zambia GDP growth rate
GDP growth
2.3 Cross-country economic comparatives
2.3.1 Gross domestic product
Based on the 2014 World Bank gross domestic product (GDP) estimates, Nigeria was the largest economy in Africa with GDP of US$568.5 billion followed by South Africa with a GDP of US $ 350 billion. Zambia was the 17th largest economy in Africa with GDP of US $27.066 billon-ranking above Uganda, Botswana and many others. Figure 2.3 shows the levels of GDP for some selected African Countries.
Figure 2. 3: 2014 Gross domestic products, selected African countries
(Source: World Bank, 2015)
The two top economies in Africa, Nigeria and South Africa, have a considerable lead.
Nigeria’s economy is over 9 times as large as the Kenyan economy while the South African economy is over 5 times bigger than the Kenyan Economy. However, after these
14.2
two large economies, the gaps in GDP tend to be very small. For example, the Kenyan economy is only about twice as big as the Zambian economy even though there are 14 economies in between the two.
2.3.2 Per-capita gross domestic product
Due to huge variations in population size; from Nigeria’s 173.6 million to Botswana’s 2 million, the per capita GDP ranking of the above selected African countries is quite different from the GDP rankings above. According to the World Bank (2016), in 2014 South Africa and Botswana had per-capita GDP of US$ 6,472.1 and US$ 7,153.4 respectively. Figure 2.4 shows per capita GDP for selected African countries.
Figure 2. 4: 2014 Per capita gross domestic product, selected African countries
(Source: World Bank, 2016)
Zambia’s 2014 per capita Gross Domestic product was estimated to be US $1,726.0.
This is greater than the per capita GDP of Ghana, Kenya, Tanzania, Zimbabwe and Uganda. Assuming per capita GDP is a good measure of standards of living; Zambians are more than twice as better off in terms of standards of living as compared to Ugandans. Even though Ghana and Kenya have larger economies, Zambian standards of living are better because of a lower population of 15 million people as compared to 26 million in Ghana and 45 million in Kenya.
2.4 Structure of the Economy 2.4.1 Sector Contributions
The Zambian economy has undergone considerable structural transformation over the years. Based on the 2014 National Accounts estimates, the leading sector in terms of sector contribution to GDP is wholesale, retail and repairs of motor vehicles. The mining sector, though being the second largest contributor to GDP, experienced a contraction in the year 2014. Table 2.1 presents the contributions of Zambia’s major sectors to the economy.
Table 2. 1: 2014 Sector contributions to GDP
Sector Share of GDP Growth Rate Share of
Source: Central Statistical office of Zambia (2015)
2.4.1 The Role of Copper Mining
Since Zambia is estimated to hold 10 percent of the world’s copper deposits and happens to be the world’s largest cobalt producer, its economy is greatly dependent on mining activities. The mining sector is said to contribute between 9 and 10 percent to GDP and accounts for between 60 and 70 percent of the country’s exports. However, studies conducted by the International Monetary Fund (IMF) and World Bank suggest that the nation is not significantly benefiting from its mining sector (Reuters, 2012). The sector only accounted for 1.4 percent of the total employment in 2014.
Mining taxes accounted for less than 16 percent of total Government revenue before 2008. Ever since then, there has been considerable effort by the Zambian government to increase revenue generated from the mining sector. In 2012, the sector contributed over 30 percent of total tax revenue. Thus, the mining share of total revenue collected is currently higher than in other low and middle-income mineral-driven countries (Chamber of Mines of Zambia, 2014).
Copper mining has dominated the Zambian economy since the early 1920s when the first commercial mine was opened in the region called the Copperbelt Province. At the time, the British colonial government used Zambia's copper mineral wealth to develop industrial, social, educational and governmental infrastructure in Zimbabwe. This is because the two nations where merged to form the so called Rhodesia. It is thus accurate to infer that the vast infrastructural development that Zimbabwe received was at the indulgence of Zambian copper. Ever since then, Zambian copper wealth has traditionally
been used for developmental purposes. It is for this reason that international copper prices are said to influence the development prospects of Zambia (Meller, 2011).
2.4.2 The Role of Agriculture
Zambia has a total land endowment of approximately 42 million hectors and estimates suggest that only as low as 1.5 million hectors is used for agricultural production every year. Despite this great underutilization, the Agricultural sector has often been said to be the back-born of the Zambian economy. This is because the sector accounts for almost 50 percent of the total employment. “Agricultural output in Zambia increased from 18 percent of the GDP in 2008 to about 20 percent of GDP in 2009. The sector’s contribution to GDP in 2014 was 9.0 percent. Primary agriculture accounts for about 10 percent of the total export earnings for the country” (Zambia Development Agency, 2015)
2.4.3 The Role of Manufacturing
The nation also has a dynamic and rapidly growing manufacturing sector. The growth of Zambia’s manufacturing sector is largely driven by agro processing (food and beverages), textiles and leather subsectors, metal processing and material production (cement, fertilizer, chemicals, explosives, etc). According the Central Statistical office (CSO) (2015), the sector accounted for 8.1 percent of the country’s GDP and grew at an annual growth rate of 2.3 percent. The Manufacturing sector accounted for only 3.8 percent of total employment.
It is no surprise that most of the country’s locally produced commodities are not exported but rather consumed domestically. This is a common phenomenon among sub-Saharan countries. Thus the share of Zambia’s manufacturing sector in total exports averaged 2.1 percent between 2006 and 2010 (Dinh, 2013). Though this has been increasing in the recent past, there is need to promote the exports of locally produced goods in order to diversify the economy and make it more robust to external shocks.
2.5 Economic prospects
The Republic of Zambia is one of the few African countries, which has experienced sustained peace for over 50 years after independence. The nation’s peaceful political environment is arguably one of its most important characteristics. It has had 6 democratically elected presidents since 1964, two of which were peaceful elections of opposition political parties. Thus it is no wonder that Zambia is said to have one of the most advanced and stable democratic systems in Africa. This political stability has led to some significant economic gains for the nation. Many companies and organizations view Zambia as a stable investment destination. Consequently, Zambia’s business environment has improved drastically on every major indicator since 2003 (World Bank, 2009).
This democratic standing of Zambia is well known by the international fraternity. The World Bank Group (2015) declared that “Zambia is a peaceful, democratic country with enormous economic potential, now grounded in its rich endowment of natural resources.” In this optimistic statement lays another of Zambia’s economic prospects:
natural resource endowment. The nation has more fresh water resources than any other nation is southern Africa. This allows Zambia to generate hydro power for local and regional consumption among other things. In terms of mineral endowments, Zambia has deposits of copper, cobalt, gold, zinc, emeralds and many other minerals - although mining has traditionally concentrated on copper and cobalt.
In order to harness and manage this national endowment, Zambia has been developing a growing human capital stock. The country has a growing labor force of over 6 million people out of the total population of 15 million. Current estimates indicate that Zambia’s unemployment rate has been relatively stable at approximately 13.2 percent for the past four years (Trading Economics, 2015). This means the economy has been able to absorb almost all the net increase in the labor force. Once the economy is stimulated further, it is believed that the unemployment rate will fall.
In terms of infrastructure development, “More than 80 percent of Zambia’s paved road networks are in good or fair condition, on par with the middle-income neighbors and well ahead of typical performance of resource-rich countries in Africa” (Foster &
Dominguez, 2010). Since Zambia is one of the most urbanized countries in sub-Saharan Africa, most infrastructure developments such as the electricity grid and communication networks are concentrated in urban areas along the main lines of rail and roads. This offers great opportunity for economic activities in these urban centers. Furthermore, Zambian cities have adequate safe water supplied through tap-systems by provincial water utility companies.
2.5 Economic challenges
One of the major drawbacks of the Zambian economy is over dependence on mineral exports. The manufacturing sector accounts for only 2.1 percent of exports as compared to the mining sector’s 70 percent. This situation makes Zambia very vulnerable to external shocks. “Zambia needs to diversify its exports into manufactures and services”
(World Bank, 2009). In line with this advice, the nation has been striving to expand its manufacturing sector but the sector’s growth has been limited by a rising cost of doing business relative to that in other countries.
Perhaps the most recent demonstration of Zambia’s economic vulnerability was in the second half of 2015. According to the International Monetary Fund (IMF) (2015), The Zambian economy was under stress. Low copper prices and a severe electricity shortage were straining economic activities. The Zambian kwacha lost half of its value since the beginning of the year. It was the expert opinion of the IMF team which visited Zambia that the pressure on the economy reflected the impact of external shocks and waning confidence. Thus, if Zambia seeks to stabilize and grow its economy, diversification is imperative.
The IMF Team which assessed the 2015 Zambian economic challenges was also quick to point out that the economic hardships were partly due to poor fiscal management on the part of the government. Zambia has had sustained and increasing budget deficits for the past 8 years. In 2012, the nation recorded a deficit of 2.8 percent of GDP. This escalated to 6.7 percent in 2013 and 5.5 percent of GDP in 2014 (Trading Economics,
2015). “Zambia needs to lower its fiscal deficit and improve fiscal discipline if it is to restore market confidence” (IMF, 2015).
Rather than cut government spending in order to reduce its deficit, the government of Zambia has turned to the international bonds market for debt. In 2012, Zambia issued a US$750 million Eurobond and then issues two more Eurobonds; US$1 billion in 2014 and US $1.25 billion in 2015. Though the government claims that the funds were for infrastructure related projects in the area of road, energy, education, health, water and transport sectors in order to improve the lives of the people, it is publicly known that the country was securing the funds to plug a budget deficit that could swell to US2.64 billion in 2015-a deficit generated by gross misallocation of funds. The Nation’s debt to GDP ratio stood at 31 percent in 2014 (Trading Economics: 2015)
It is no wonder therefore that despite the political stability and resource endowment, the majority of Zambians are still living in poverty. According to the World Bank (2015),
“60 percent of the Zambian population is below the poverty line and 42 percent are considered to be in extreme poverty. Moreover, the absolute number of the poor has increased from about 6 million in 1991 to 7.9 million in 2010, primarily due to population growth.” poverty rates are higher in rural areas as compared to urban areas such as Lusaka. The poverty levels in the capital, Lusaka, are estimated to be as low as 22 percent of the population compared to the rural 70 percent poverty rate. To eradicate poverty, there is need to develop pro-poor development goals and implement them in a cost effective manner.
2.6 Macroeconomic status
The Zambian central Bank is called the Bank of Zambia (BoZ) and is mandated by law to oversee the macroeconomic status of the nation. “The BoZ’s mandate to take leading role in oversight and regulation of the payment system is derived from its governing legislation, in which the BoZ is given the responsibility to promote a stable and efficient payments mechanism as well as the liquidity, solvency and proper functioning of the financial system” (Johnson, 1998).
In line with this mandate, BoZ has been prioritizing inflation rate stability through money supply adjustment. Even though the central bank seeks to maintain exchange rate stability, it does so only in order to main low inflation rates. Figure 2.5 shows Zambia’s inflation rate as measured by the Consumer Price Index (CPI).
Figure 2. 5: Zambia’s inflation rate, 1986-2014
(Source: World Bank, 2015)
0 50 100 150 200
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Inflation (%)
Year
inflation-CPI
inflation-CPI
It is apparent that Zambia’s inflation rate stabilized in the past decade and fell to single digit level. This reflects the central bank action in taking proactive measures to stabilize the economy. For instance; in the early part of 2015, the inflation rate projection was tending towards the 2015 target of 7% and hence the policy rate was maintained at 12.5%. However, towards the end of the first quarter, exchange rate volatility increased threatening to undermine the inflation objective and thus BoZ took action to stabilize the economy (BoZ, 2015).
Although the inflation rate is the first central bank priority, private sector expectations seem to be based on exchange rate stability. Zambia has an import dependent economy and thus exchange rate stability is key to maintaining domestic prices. Consequently, since these two goals are usually complementary, the BoZ has historically taken action to defend the exchange rate within a defined range. For the Kwacha-to-US Dollar exchange rate, the BoZ has traditionally sort to maintain a single digit rate of less than 10 Kwacha to 1 US dollar. Unfortunately, the Kwacha lost over half of its values in 2015 and the rate changed from 6.4 Kwacha to over 12 Kwacha to a dollar before the central bank took action to prevent further deprecation in the currency.
2.7 Conclusion
Zambia has generated positive sustained economic growth for the past decade. The nation has recorded average growth rate of 6 percent in the recent years and this level of growth in expected to continue. In cross-country comparisons, it was clear that although Zambia’s GDP is considerably lower than the largest economies in Africa, standards of
living in Zambia are better than in most African Countries. However, it has been discovered that the economy is prone to external shocks due to its overdependence on the mining sector. Consequently, the nation has been advised to diversify its economy towards manufacturing and services sectors. Overall, Zambia is a nation of great economic potential anchored on its huge resource endowment and political stability.
Though most of Zambian population is still grappling with poverty, the nation has been making considerable effort in bettering the lives of its people.
CHAPTER THREE LITERATURE REVIEW
3.1 Introduction
Economic growth has always received overwhelming interest. Many scholars and researchers have investigated the determinants of economic growth in many countries and various theories of economic growth have been developed. This chapter contains two sections; section 3.2 presents some key theories of economic growth and section 3.3 proceeds to analyze the most relevant empirical research that has been conducted on
Economic growth has always received overwhelming interest. Many scholars and researchers have investigated the determinants of economic growth in many countries and various theories of economic growth have been developed. This chapter contains two sections; section 3.2 presents some key theories of economic growth and section 3.3 proceeds to analyze the most relevant empirical research that has been conducted on