Quarterly Bulletin

 With the current rising copper prices, the low inflation rates, strong local currency, finding good ways of utilizing resources from commodity revenues becomes a key way of making sure that all involved benefit. Tevor Simumba, an Economics Association of Zambia (EAZ) member shares some of the ways of meaningfully using commodity revenues. The full paper was presented at a Workshop, organised by the Copperbelt University (CBU), on Translating Future Commodity Revenues into Development in Zambia on 09 May 2008 in Kitwe, Zambia.

Oil and mineral commodity prices have been undergoing a strong and steady rise on local and international markets. The key factor is the fast increasing demand from China and from the rest of Asia. About 50 developing or transition countries are resource dependent, and two-thirds of world’s most impoverished live inside their borders on less than US$2 a day.

But is this price rise a resource curse or boom? The general view is that commodity exporting countries have limited options either: they suffer from deteriorating terms of trade over the long run; or translate sudden booming prices into effective development, which has proven to be difficult.

The Zambian economy has performed well in recent years. This reflects strengthened macroeconomic policies, a favourable external environment, and extensive debt relief. But there has been minimal impact on poverty reduction with rural poverty bearing the major brunt of the decline in living standards (80% of rural people live below the poverty datum). Despite the significance of economic diversification and trade expansion in Zambia’s reform programme, the country is yet to see real growth in non-traditional exports. Our exports are still dominated by metal exports and primary agricultural products.

MORE POVERTY

Zambia still suffers from poor social and economic infrastructure, and the bulk of inputs used in industry, mining and agriculture are still imported. The copper boom in Zambia has coincided with at least three other factors that are driving an appreciation of the real exchange rate: (a) a write-off of the external debt under the HIPC initiative, (b) an increase in non-traditional exports (NTE’s), and (c) a higher inflow of foreign aid.

These factors have jointly contributed to a steep appreciation of the real exchange rate since 2004 and to a variation of relative prices in the economy. This has had a major negative impact on the key growth sectors of tourism, agriculture and manufacturing, putting at risk Zambia’s economic growth forecasts.One commentator has described high value commodity resources as “…the devil’s excrement. It brings trouble … waste, corruption, consumption, our public services falling apart, and debt, debt we shall have for years.”

It should be noted that Zambia enjoyed a similar boom in the 1970’s. Result was the accruing a large debt and the spending of excess money on big projects some of which remain white elephants to this day. This should give us food for thought on how to handle this boom and possible “Dutch disease.” Botswana is one of the few widely cited development “success stories.” Botswana has achieved strong real GDP growth over a prolonged period of time (on average, almost 9 percent since the 1970s). Inflation has generally been low, and large fiscal and current account surpluses have been recorded in many years.

A number of measures were taken to achieve the above success. The most important one was the setting up of three funds in an effort to anticipate problems and opportunities. These funds were established to provide for stabilization reserves, public debt service, and local development opportunities. It was important to develop vehicles for prudent management of cash resources.

A related important strategic policy choice to note is that all these special funds (which could be seen as budget surplus funds) are invested to generate more financial resources, building financial assets. Botswana also operated a strict rule on current expenditures.

Debate among economists about the “save it vs. spend it” choices gives no clear practical guidance on how to maximize the development impact of their spending. Advice from the World Bank and IMF has overly focused on the dangers of “Dutch disease” and inflation. The result is policies where poor countries use most of their windfall to finance the US budget deficit – e.g., creating a fund that is invested in US government bonds, while roads, schools, hospitals in their country go un-built.

The windfall revenues should be used in the following priority areas:

1. Establish a Revenue Stabilisation Fund that will ensure that we stabilize revenue even when the cycle turns against us in a bust;
2. Set up a special National Equity Fund that will lend to citizens as defined in Zambia’s Citizens Economic Empowerment Act at lower discounted interest rates;
3. Establish a Development Fund that would finance big infrastructure projects on a Public Private Partnership basis;
4. Establish a Public Service Debt Fund to reduce Government’s indebtedness to local suppliers of goods and services;
5. Rehabilitate the refinancing of all the public universities and upgrade our technical vocational colleges.

CONCLUDING REMARKS

There is mixed evidence on the effects of the copper boom on the Zambian economy. One message that is quite uncontroversial is that the economy needs to be flexible enough to adapt to changing conditions, whether they are increasing or decreasing copper prices. The analysis of the Zambian experience points to the importance of the ownership of natural resources in shaping the potential impact of the foreign exchange inflow on the economy.

The special funds proposed should be used exclusively for investment, and not for recurrent expenditure, so that unsustainable current expenditure is avoided. They should be applied towards economic diversification and rural infrastructure development. Further, the policy stance should support measures aimed at preventing excessive exchange rate appreciation or compensating for it using the revenue stabilisation fund.

Trevor Simumba
Economics Association of Zambia
Lusaka