Zambia: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
16 Jun 2015
eISBN:
9781513556253
Language:
English
Keywords:
ISCR; CR; cost; Zambia; rate; IMF staff calculation; government strategy; poverty rate; faces growth bottleneck; tertiary sector; staff calculation; Inclusive growth; Productivity; Business environment; Civil society organizations; Infrastructure; Africa
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Zambia: Selected Issues

Abstract

Zambia: Selected Issues

Toward More Inclusive Growth in Zambia1

A. Introduction

1. In the last decade, Zambia has sustained high growth in line with fast-growing peer countries in sub-Saharan Africa. Supported by market-liberalizing reforms in the 1990s and strong copper prices since 2004, real GDP growth has averaged about 7 percent since 2003 (Figure 1), above the average of about 5½ percent for sub-Saharan Africa (SSA). Over the same period, improved policies for macroeconomic stability helped bring inflation down from about 20 percent to single digit. Strong growth resulted in sustained increases in GDP per capita, which more than tripled from about US$500 in 2000 to about US$1,800 in 2013, albeit still below the peak level of US$2,000 reached in the 1970s (Figure 2).

Figure 1.
Figure 1.

Real GDP Growth

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.
Figure 2.
Figure 2.

GDP Per Capita

(Constant 2012 US$)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.

2. However, Zambia’s strong growth has not been sufficiently inclusive to benefit all Zambians. The overall growth effect in reducing poverty in Zambia is on par with those experienced in other developing countries (Figure 3). For each percentage point increase of growth in 1998–2010, Zambia’s extreme poverty rate declined by about 1.1 percentage points, and the overall poverty rate declined by about 0.7 percentage points, in line with the SSA average. But the rural-urban divide is significant. While the urban poverty rate has fallen to about 30 percent in 2010, the poverty rate in the rural areas—where 2/3 of the population lives—remains above 70 percent, much higher than the SSA average poverty rate of 48 percent (Figure 4). Growth incidences for 2006-10 also exhibit a sharp rural-urban divide on the consumption impact (Figures 5 and 6). In urban areas, consumption growth has been positive for all households and higher among poorer ones. In contrast, the impact has been regressive in rural areas, where the consumption of poorer households even declined. Similar urban-rural disparity exists in social indicators. From 2007 to 2010, the prevalence of underweighted children in urban areas dropped from 12.8 percent to 10.8 percent, while the indicator in rural areas declined from 15.3 percent to 14.2 (UNDP 2013). As a result, inequality has worsened, with the Gini coefficient increasing from 0.47 to 0.52 over the last decade (World Bank, 2013).

Figure 3.
Figure 3.

Growth-Poverty Elasticities in Developing Countries, 1999–2008

(ratio of decline in poverty to real GDP growth per capita)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: R. Ram, 2013, Applied Economic Letters, and staff calculations.Note: Data for Zambia refer to extreme and overall poverty respectively for 1998–2010.Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.
Figure 4.
Figure 4.

Overall Poverty Rate

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.
Figure 5.
Figure 5.

Rural Growth Incidence

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.
Figure 6.
Figure 6.

Urban Growth Incidence

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: Central Statistical Office (CSO) of Zambia, ICMM, and World Bank and IMF staff estimates.1. Median of Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, and Uganda.

3. What explains the lack of inclusive growth in Zambia? The following sections address this question by analyzing Zambia’s growth and productivity patterns as well as growth constraints in infrastructure and the business environment.

B. Sources of Growth

4. The economic structure has changed but still shows strong dependence on mining. During 2000–13, the economic structure showed increasing diversity. The share of the primary sector declined from about 30 percent to 20 percent of GDP. Within this sector, this decline was driven by agriculture, while the share of the mining and quarrying sub-sector rose from about 4 percent to about 10 percent of GDP. The share of the secondary sector has remained stable at about 20 percent of GDP. The tertiary sector recorded a significant increase (Figure 7), and its share in GDP rose from about 50 percent in 2000 to close to 60 percent in 2013. In addition, overall growth continues to exhibit high correlation with copper output (Figure 8), indicating strong linkages between mining and other sectors. Thus, furthering economic diversification remains a challenge.

Figure 7.
Figure 7.

Sector Shares in GDP

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: CSO, IMF staff estimates, and Zambia Institute for Policy Analysis and Research staff estimates.
Figure 8.
Figure 8.

Real GDP Growth and Copper Output

(Percent change)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: CSO, IMF staff estimates, and Zambia Institute for Policy Analysis and Research staff estimates.

5. A growth decomposition analysis shows strong contributions from capital accumulation and labor, while productivity gains are also rising. During 2000–10, capital and labor accounted for 27 percent and 24 percent of GDP growth (Figure 9), in line with low-income countries (LICs) overall. However, the human capital contribution of 7 percent is lower than the LIC average of 11 percent. Overall productivity growth, in contrast, has been strong and accounted for 42 percent of overall growth. But the high productivity growth is related to a low base from more protracted declines compared to other LICs prior to 2000.

Figure 9.
Figure 9.

Growth Decomposition

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: CSO, IMF staff estimates, and Zambia Institute for Policy Analysis and Research staff estimates.

6. Recent productivity data by sector show low growth, particularly in sectors important for jobs and structural transformation (Figure 10).2 Agriculture is estimated to employ about 60 to 70 percent of the labor force, and while its productivity growth was largely positive during 2009–12 it has declined recently. The mining sector showed some positive productivity growth, but this reversed in 2011–12, which could be explained by operational problems experienced in some mines. In the secondary sector, productivity growth has shown an upward trend in recent years, although the rate is still negative. Moreover, the job-rich tertiary sector showed a small but continued decline in productivity. In addition, data for informal and formal sectors show a consistent trend, indicating the prevalence of the productivity challenge across the economy.

Figure 10.
Figure 10.

Recent Labor Productivity by Sector

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: CSO, IMF staff estimates, and Zambia Institute for Policy Analysis and Research staff estimates.

C. Constraints to More Inclusive Growth

7. Zambia faces several key constraints to structural transformation and inclusive growth. Zambia’s growth potential remains strong given its rich resources, young and growing labor force, and strategic central position to engage and link neighboring countries in trade. Recent studies (MCA and Zambian authorities, 2012; World Bank, 2013) find that Zambia faces growth bottlenecks from poor infrastructure services, low quality of human capital, and weak business environment. In addition, the fast-growing sectors (mining and construction) have not created sufficient jobs, while the more labor-intensive agriculture and services sectors require strong productivity boosts to bring prosperity to more Zambians. These constraints are analyzed further in the following sections.

8. One major constraint to more rapid and inclusive growth is the weak business environment. Some recent reforms has helped improve Zambia’s Doing Business (DB) ranking, but it has declined from 107th to 111th in DB2015 (Figures 11 and 12). While most indicators are on par with the lower-middle income countries, some indicators are unfavorable relative to the well-performing peers in Africa (e.g., Botswana, Rwanda, and South Africa). For example, Zambia is strong in the ease of “starting a business,” but weak in “trading across borders” and “registering property,” and lags behind the best performers in “getting electricity”. Zambia’s rankings are relatively strong in “getting credit” and “paying taxes,” but these are based on de jure laws and regulations and need to be assessed together with relevant implementation and results. For example, the impasse over VAT refunds to exporters has been damaging to the business environment; and the significant changes in the mining tax regime without sufficient public consultation has created high levels of uncertainty. These challenges underscore the importance for more dialogue between business and government to find win-win solutions and minimize policy uncertainty.

Figure 11.
Figure 11.

Overall Doing Business Ranking

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: World Bank Doing Business and World Development Indicators databases; and IMF staff calculations.
Figure 12.
Figure 12.

DB Component Indicators

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: World Bank Doing Business and World Development Indicators databases; and IMF staff calculations.

9. Among the business environment indicators, one specific bottleneck for inclusive growth is the financial sector. Studies based on survey and result indicators (e.g., World Bank, 2014; IMF, 2013; and Chapter 2 on financial inclusion) show that low access to finance—which is critical for Small and Medium Enterprises (SMEs) to create jobs and diversify the economy—is a key constraint. About 70 percent of Zambians have no access to either formal or informal financial services, while the respective ratios in the best-performing peers range from about 20 to 50 percent.3 In the 2013 Enterprise Surveys, the share of firms that find that access to finance is the major obstacle has increased to 27 percent, almost a doubling of the share in 2007. Moreover, affected by the high yield offered by government securities, the cost of financing is also a major concern for business, and this also reduces business’s access to credits. Concerned about poor access to credit by SMEs, the government imposed lending rate caps in 2013, but only to find the unintended result of further credit rationing. For example, recent data indicate that the actual SME access to credits has reduced (World Bank 2014c). More incentive-compatible policies are needed to address the constraint.

10. Another constraint to inclusive growth is human capital. In education, cross-country spending and result indicators show that while Zambia increased spending significantly from 2001 to 2010, the results have lagged behind peer countries, particularly in terms of the average completed years of schooling. In health, the spending level is lower than peer countries and so are the results (Figures 13 and 14). The urban-rural disparities in poverty and social indicators, as identified earlier, also call for better matching of spending with needs. Accordingly, both higher spending and higher efficiency of spending are needed to improve the quality of human capital. In addition, recent studies (e.g., World Bank 2013, ICMM 2014) find poor availability of some specific skills required by businesses. Improved quality of education and targeted vocational training to better translate schooling to skills would thus be needed to help Zambians obtain more job opportunities.

Figure 13.
Figure 13.

Education Spending and Result

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: World Bank Doing Business and World Development Indicators databases; and IMF staff calculations.
Figure 14.
Figure 14.

Health Spending and Result

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A003

Sources: World Bank Doing Business and World Development Indicators databases; and IMF staff calculations.

11. To encourage job creation, it will also be important to balance workers’ rights with costs of labor to business. Zambia’s average minimum wage of the private sector is about 110 percent of per capita GDP, and that of the public sector is about 350 percent. The minimum wage in neighboring countries (Angola, Botswana, Mozambique, South Africa, and Tanzania) ranges from 20 to 220 percent. Keeping competitiveness in the private sector requires balanced consideration to support job creation, particularly to address high underemployment among the urban youth and to accommodate a fast-growing labor force. In particular, the perceived attempts—as shown in some official’s public comments—to push private firms to apply the public sector minimum wage could be detrimental to job creation. Promoting labor-intensive employment through better quality of education and a more favorable business environment would be more effective in raising employment levels and broad-based wealth creation. Such an approach would also help promote economic diversification and structural transformation over time.

12. Finally, infrastructure bottlenecks remain a constraint. Zambia has made significant progress in building infrastructure. Nevertheless, DB indicators and firm surveys reveal that poor electricity supply and transport adversely affect production and cross-border trade. The electrification rate is about 23 percent nationally but only 3 percent in rural areas (World Bank, 2013). Critical for trade, road and rail infrastructure has been limiting Zambia’s substantial trading potential with neighboring countries. Zambia’s domestic transport cost was found higher than some regional peers (e.g., South Africa, Malawi, and Ethiopia), reducing Zambia’s competitiveness. While the paved road network has increased in size, it is concentrated in a few provinces with limited benefit to all Zambians (MCA 2012). To generate the fiscal space to meet infrastructure investment needs while maintaining macroeconomic stability, government spending needs better prioritization and higher efficiency.

D. Conclusions

13. Zambia’s government strategy is well targeted to address the constraints to inclusive growth, but implementation requires continuous improvement and adaptation. The revised Sixth National Development Plan (2013–16) commits to developing infrastructure and human capacities, promoting employment, and developing rural areas to facilitate diversification and inclusive growth. These objectives are well aligned with the country’s needs, but implementation could be more focused and adaptive. In agriculture, more efficient support (e.g., extension services and promotion of agri-business and cash crops) could replace the ineffective and regressive subsidies. Facilitating private sector participation would also help enhance productivity. In addition, reallocating government spending towards the social cash transfer program could greatly improve targeting and efficiency, with this program showing strong promise for more effective poverty reduction. In the financial sector, while the lending cap did not achieve the intended result and requires change, other government efforts in supporting credit information and collateral registry, facilitating agency banking, and improving bankruptcy resolution show good progress. Furthermore, improving infrastructure calls for efficient collaboration between the public and private sectors, with commensurate capacity building and monitoring and evaluation to guide effective implementation.

References

1

Prepared by Qiang Cui.

2

The sector productivity data refer to output per full-time employee equivalent as compiled by the Zambia Institute for Policy Analysis and Research in 2014.

3

World Bank, 2014, FinStat database.

Same Series

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Cover IMF Staff Country Reports
Zambia: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 153
Publisher:
International Monetary Fund
ISBN:
9781513556253
ISSN:
1934-7685
Pages:
32
DOI:
https://doi.org/10.5089/9781513556253.002

Real GDP Growth

GDP Per Capita

(Constant 2012 US$)

Growth-Poverty Elasticities in Developing Countries, 1999–2008

(ratio of decline in poverty to real GDP growth per capita)

Overall Poverty Rate

Rural Growth Incidence

Urban Growth Incidence

Sector Shares in GDP

Real GDP Growth and Copper Output

(Percent change)

Growth Decomposition

Recent Labor Productivity by Sector

Overall Doing Business Ranking

DB Component Indicators

Education Spending and Result

Health Spending and Result