In 2017, Global Economist and former Publish What You Pay (PWYP) Zambia coordinator, Mtwalo Msoni, challenged the developing world to change its focus from merely focusing on revenue collection to include effective utilization of revenues collected from natural resources, to contribute to the improvement of people’s lives. The recommendation was drawn from the fact that Zambia has over the years recorded copper price booms and yet poverty levels remained elevated at an average of 60%.
Zambia, being dependent on copper for its foreign exchange and exports has been affected by world happenings. Towards the end of 2019, the advent of the coronavirus pandemic reduced consumption of copper by China resulting in dwindling copper prices, which led to Zambia recording a reduction in the performance of various economic indicators. Inflation broke its upper bound of 8% in 2019, and continued rising, recoding a record high of 24.6% in July 2021. The exchange rate also depreciated against major currencies with the Kwacha depreciating from K13.98/USD on 10th January 2020 to K22.96/USD on 12th July 2021.
Signs of recovery loom large for Zambia with the country recording growth at 8.1% in June 2021, in comparison to a negative growth of 0.3% in June 2020. Increases in copper prices have been instrumental to the growth, reaching an all-time high of US$10,700 per tonne in May 2021, from US$5,000 in March 2020. Coincidentally, Zambia collected 43% of tax above forecast in June 2021. This resulted in an improvement in exchange rate performance, appreciating from K22.64/USD to K21.39/USD in July 2021, further appreciating to K19.92/USD in August 2021.
In as much as increases in natural resources prices can be very beneficial to the economy, failure to harness natural resource wealth can result in what is known as the “Dutch disease”. The Dutch disease refers to the effects of having a strong exchange rate which in turn affects the growth of non-resource sectors such as manufacturing, due to increased imports. On the other hand, non-resource exports become uncompetitive as they tend to be very expensive.
Many African countries continue to face the “Dutch disease”, because they tend to spend on consumption and not investment, as observed on their budget allocations. For instance, Zambia spends about 50% of its budget on salaries, while Zimbabwe spends about 80%. Thereby, reducing the disposable income relevant for investment in development projects.
Revenues from high natural resources prices should be invested in a more sustainable sector, in this case the manufacturing sector. History has repeatedly shown that the single most important characteristic that distinguishes rich countries from poor countries is basically their higher capabilities in manufacturing. As observed in Australia, investment into their industrial sector and promotion of local content initiatives, resulted in the economy being one of the technologically advanced economies.
Productivity is generally higher in the manufacturing sector which tends to grow an economy faster than agriculture. The manufacturing sector has the ability to grow other sectors through its strong backward and forward linkages. An increase in demand for inputs in the manufacturing sector leads to an increase in production in other sectors to meet the demand. For example, growth of the textiles industry will lead to an increase in demand for cotton. Further, it will also lead to growth of intermediate sectors such as transport and logistics.
To ensure that revenues earned are invested, funds earned from the boom could be channeled towards funding of innovation, skills development and enterprise mentoring. However, investment into the identified areas is not an easy process and risks promoting corruption and incompetence if not managed correctly. Henceforth, Government will need to work with the private sector for purposes of accountability. A key outcome will not only be the promotion of the manufacturing sector but also develop the moral obligation to pay tax by these companies.
Moreover, the deliberate stance by the Government of the Republic of Zambia (GRZ) to develop Micro, Small and Medium Enterprises (MSMEs) through the elaboration of the MSMEs policy and other important Government programs is worth commending. In primary respects, Government efforts to develop MSMEs have collectively proven to be very important drivers of economic development around the world. However, MSMEs remain constrained by lack of finances and this demands for a deliberate allocation in the National Budget towards funding these enterprises.
In order to achieve rewarding success, the funds allocated to MSMEs should be directed towards technical and quality trainings. Notably, although a number of trainings have been undertaken by Government and its respective agencies over the years, the projects have often been funded by cooperating partners. As a consequence, this made it unsustainable especially in cases where concurrent funds were not provided by Government and hard to monitor.
Further, Government in liaison with private sector associations should identify a number of best performing companies, that should be provided with the necessary requirements to competitively perform not only domestically but also on international markets to effectively achieve intended results of industrial development. Government should also help these companies acquire regional market access while ensuring that they meet both quality and quantity requirements.
Investing in manufacturing companies will benefit Government by way of a broadened tax base while supporting the manufacturing sector will result in much-needed employment creation across various sectors.
