Quarterly Bulletin

 In recent months, beginning from mid-2008, the global economic downturn has been a topic of major discussions not only in international circles but also locally. The downturn, primarily caused by a global financial system that cannot sustain itself due to making profits by overproduction while minimising the cost of the production, has led to lack of capacity to absorb the increased production. Most of the impacts that developing countries are facing due to the downturn are because of their dependency on the global economy through trade and foreign investment. Tina Nanyangwe-Moyo discusses the impacts that the downturn has on Zambia's economy and its people.

In spite of this attractive economic outlook in 2007, developed countries experienced financial system failures whose effects have now spread to low income countries. The 2008 Zambia Economic Report informs us that in the later part of last year the country’s macroeconomic stability weakened significantly, posing great challenges in the execution of the national budget.

Zambia is currently a stunning example of a low income country that has been hard hit with the economic crisis, with thousands of job losses in less than three months. Several websites and blogs carry stories on how bad the Zambian mining sector has been hit. Others have even gone beyond by forecasting how worse the situation might get if extraordinary measures are not employed to curb these adverse effects.  The effect of the global economic crisis has been more severe at the household level than at the national level.

ORIGINS OF The Crisis

But just how exactly did the financial meltdown begin leading into the economic crisis and subsequently into official economic recession for several developed countries?

The crisis is a USA born contagion which began with the lending by commercial banks of home mortgages to subprime customers who could not afford to obtain these mortgages at the then bank rates. The USA government during the Clinton administration put in place policies and competitive pressures several years prior to the crisis which encouraged higher risk lending practices. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages. During the period 2005-2006, interest rates more than doubled and default rates on these high risk mortgages became widespread.

The signs of a financial crisis became evident as the availability to credit for borrowers reduced tremendously due to a crunch in liquidity and solvency. As the financial crisis deepened, the effect on economies of developed countries worsened. These countries experienced sustained slowing growth   leading   to    a   decline   in     demand     for commodities at the international level. In the short term, ripple effects of these economic developments have been falling commodity prices, major cuts in global production operations and escalating job losses. Global forecasts have demonstrated that as a result of the economic crisis and recession, the world economic growth will fall by 2 percent from 9 percent in 2007 to 7 percent. The Organisation for Economic Co-operation and Development (OECD) countries’ growth will decline by 4.3 percent in 2009 and global job losses are estimated at 25 million. The European Union has described the current economic crisis as the deepest and most synchronized recession ever.

It was estimated that Zambia’s domestic economy will in 2009 only grow by 5 percent compared to 6 percent in 2008. But with unprecedented reduction in the real economy, extraordinary measures will have to be put in place to realise even the estimated 5 percent.

 

Is Africa immune from the crisis?

The past few months have just made it clear that the developing countries, particularly low income countries, are not immune to the Western-borne infectious economic crisis. Although the effects of the crisis to those not fully integrated in the financial system may escape the first generation effects of the crisis, the impact of the global economic recession will be felt intensely in ensuing generation effects.

It has long been observed that Africa is a continent that is extremely rich in minerals and now has many developing markets based around mineral exports. Specifically, Zambia and the Democratic Republic of Congo (DRC) produce copper ore of very high concentrations when compared to most other copper mines worldwide (India, Australia, USA, and so on). The economic crisis has directly affected the market for copper at the international market.

EFFECTS of the Economic Crisis ON Zambia’s employment levels

I will highlight two major sectors that have already been adversely affected by the crisis – the tourism and mining sectors.

First in the tourism  industry: The sector is among the worst hit sectors in the country. I feel there are two major reasons that can be attributed to the rapid growth in the five-year period of economic boom cited above. Firstly, the success in the mining sector   and   the  general  stable   economic   outlook stimulated much interest to visit the country with United States, the United Kingdom and recently Asia accounting for the greater part of Zambia’s overseas tourist market. The second reason can coincidentally be linked to the political turmoil in neighbouring Zimbabwe. Zambia seems to have significantly benefited more than it has lost from Zimbabwe’s political and economic nightmare. By this I mean that whereas in the past Zimbabwe received more tourists than Zambia, the situation changed in stages after the year 2000 when President Mugabe and his government institutionalised the famous land policy that repossessed massive land owned by white farmers. I need not go in detail, but that was the beginning of better days for the Zambian tourism sector.

Several lodges and hotels sprang up predominately in Livingstone and Lusaka to accommodate an influx of tourists most of whom would have otherwise preferred to visit Zimbabwe. This perceptibly meant more jobs and more foreign exchange. Tourist centres and lodges created jobs, businesses and incomes and improved peoples livelihoods.

Due to the crisis in developed countries and decrease in the number of tourists coming to the country, the sector has already recorded massive job losses. Although Central Statistical Office is unable to accurately measure the severity of the impact of the global economic crisis on individual households, life stories being told by affected families are poignant.

Second in the mining industry: The Zambian flagship industry and a major income earner in the economy has shrunk due to the economic crisis. The industry has until recently accounted for about 90 percent of Zambia’s exports and directly employing about 50,000 workers. If we use the scope of the JCTR Basic Needs Basket and assume that each of the 50,000 workers is a breadwinner for a family of six, we will be right to infer that mines provide sources of livelihoods to about 300,000 Zambians. But in the Zambian tradition and culture, a nuclear family of six would probably be offering direct support to more than two members of the extended family, so 300,000 is basically a bare minimum highlighting dependency on the sector.

In highlighting the extent of the global economic crisis on the industry, the Minister of Mines and Minerals Development, Honourable Maxwell Mwale, listed the number of mines that downed tools because of the harsh conditions prevailing on the international market. He stated in his Ministerial Statement that Bwana Mkubwa Processing Plant closed down in the fourth quarter of 2008 and laid off over 345 workers, Luanshya Copper Mine and Chambishi Metals suspended mining and metallurgical operations in January 2008 and laid off 1,716 and 1,011 respectively.

However, the above figures in principle ignore a massive number of workers on contractual jobs. These are providing repair and maintenance and mine development services that have been declared redundant. During a visit to Luanshya during the JCTR Outreach Programme capacity building workshop, one participant, a former miner, narrated to me how life had became unbearable for him. He said “just last December (2008), I never worried about providing breakfast for my family but now I have no idea where the next meal will come from.” He continued to account how he has failed to take two of his sons who had passed to go to grades eight and ten to school. I found it hard to listen to his story as I could not provide any immediate help to him. I felt like saying “God will help you” but the more he recounted, the more I realised he needed more financial help than mere consolation. I however managed to end the conversation at a good note.

Effects of the crisis on our public debt position

The current international financial crisis poses cunning challenges for the Zambian economy to maintain its debt sustainability. Zambia is a beneficiary of debt relief received through Highly Indebted Poor Countries and Multilateral Debt Relief Initiatives. These significantly reduced the large external debts and the debt service burden by over 86 percent. Whereas approximately US$170 million was spent to service public debts annually, the amount was noticeably reduced to nearly US$50 million. The improved debt sustainability has helped create, to some extent, investor and donor confidence as can be evidenced by sizable Foreign Direct Investment and aid flows over the recent past. And, a lower debt servicing burden has also freed greater resources for development spending.

Unfortunately, higher borrowing to help offset the impact of the crisis will pose serious risks because with high inflation levels, servicing interests on debts has became costly. The government has already received US$200 million from the International Monetary Fund (IMF) to boost the national dollar reserve that fell very significantly. And the government seems to be riding on the IMF advice that the economy is external debt sustainable until the year 2023. But if this appetite to borrow continues to cushion the effects of the crisis, public debt will soon rise way beyond sustainable levels. This can worsen with the lack of reforms in the debt management.

ConclusioN

The rapid growing unemployment levels in the country a huge effect on the livelihoods on many vulnerable households and obviously major fiscal pressures on the government to provide for these households. But if unabated, poverty statistics, presented in the 2007/2008 UNDP Human Development Report, will deteriorate. This Report measures three dimensions of human development, namely; living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income).

In adding a human face to theory, perceptions and thoughts, the BNB for the month of February indicated that a family of six residing in Lusaka needed ZMK654,750 for basic food stuffs only. But with a fall in unemployment levels, very few would afford this amount, denoting that a large number of the population is struggling to earn a decent standard of living.

Tina Nanyangwe-Moyo
JCTR Staff
Lusaka