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«2015 Bilateral debt Multilateral 8000 7000 poverty 6000 goals 5000 sustainability 4000 3000 macroeconomic millennium 2000 1000 0 1995 1996 1997 1998 ...»

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To date, the poor have been marginalized in export trade since agricultural products (such as maize), which the majority of rural small-scale farmers can produce within their competences and environments, have been highly politicized. Maize exports often face domestically imposed bans by the authorities in the interest of so-called “food security.” 3 Whether such products are actually internationally competitive or not is not brought into question. Due to such strategies as the domestically imposed export bans, the goods are automatically excluded from export markets. Moreover, maize and other food products also encounter other politically motivated indirect price controls on domestic markets, often to the extent that the rewards to the producers are insufficient compensation for their factor inputs, especially their labour.

Further still, the supply-side constraints imposed by poor and dilapidated infrastructure in transport, communication, and energy, as well as weak extension services, research and emergency response systems within the agricultural sector all contribute to limiting market access, export diversification, growth and development. Lacking infrastructure (roads, railway line, communication lines, etc), a weak steward for the agricultural sector – the Ministry of Agriculture and Cooperatives (MAC) – and weak agricultural services and systems are perhaps the most important factors that have limited the realization of Zambia’s agricultural potential.

In that regard, the government should in practice – not only in principle – treat agriculture as a real priority. Dedicating more resources to the MAC and the agriculture sector will help to increase the ministry’s internal capacity to manage and use human and financial resources. As a result this could ease the above-mentioned supply-side constraints, leading to improvements in the agricultural systems and structures, and the sector’s ability to conduct scientific research and deliver extension veterinary and cropping services. Through such policies and strategies, benefits could be expected for instance in the development of early maturing, drought resistant crop varieties; more productive seeds with higher germination rates; more environmentally friendly and cost effective fertilizers and pesticides; more effective and locally compatible livestock vaccines; better livestock epidemic early warning systems; improved credit, micro financing and extension service systems; etc. Ultimately, one would expect significant improvement in livestock and crop inputs, productivity and outputs in agriculture.

Given the significance of the population that directly depends on agriculture for a livelihood and considering that most of that population includes poor and vulnerable people residing is disadvantaged rural areas, improving performance in the agriculture sector is likely to yield important and sustainable poverty reduction outcomes.

34 Zambia: Debt Strategies to Meet the Millennium Development Goals

Towards achieving these gains, the MAC should provide considerably more leadership and policy oversight on how business shall be conducted in the agricultural sector.

Preferably, competitive markets for agricultural products should be fostered through the consistent application of appropriate policies and strategies. The application as is often done of blunt, inconsistent and highly inequitable instruments such as ‘across-theboard’ export bans obviously interferes with market pricing and efficient resource allocation in the agriculture sector, much to the detriment of poor and vulnerable subsistent farms. One must bear in mind that small scale and subsistence farmers receive payments for their economic participation only once a year, when they sell their harvest. If this 3 happens at less than competitive prices (i.e., at prices below market prices), then the farmers are heavily disadvantaged since they not only wait one year to get the rewards of their labour, but also get paid less than what the market would have determined in the absence of market interferences such as export bans18.

3.5 International Trade: Structure and Performance, Policies and Prospects In a wider context, using the international trade restrictiveness index of the IMF, Zambia has one of the most liberal trading regimes in Africa (Yagci and Kirk, 2005). This largely stems from the government’s implementation since 1992, of a comprehensive trade reform program in the context of a broader liberalization package. The trade reforms included a significant reduction in import duties and other charges, the elimination of quantitative restrictions and export taxes, the introduction of a market determined exchange rate, and the introduction of a system of export incentives (duty drawback, manufacturing under bond). These reforms started to establish a more appropriate environment for encouraging diversification away from copper and for augmenting the economic growth rate.

To date, however, Zambian international trade performance and profile has largely designated the country as a net importer. The country experienced trade surpluses in the 1990s with the highest surplus recorded in 1999. From 2000 onwards however, the trend reversed as a trade deficit has been recorded since the turn of the century, which is projected to persist during 2007 and 2008.

The export structure is dominated by traditional exports (of mainly copper and cobalt), with a few non-traditional exports (NTEs) such as sugar cane, electricity and cut flowers gaining some prominence in recent times (though not to the extent of overtaking the traditional exports). This reflects the traditional dependence of the Zambian economy on copper exports and the limited success of the country’s export 18 For that matter, agencies such as the Food Reserve Agency (FRA) should be provided with resources to ensure they are able to settle payments on demand for the crops (e.g., maize) that the government bans and commits to buying domestically during food insecurity times. Payments by promissory notes to poor and vulnerable people that get incomes only once a year are highly anti-poor biased, unjust and not acceptable.

35 Zambia: Debt Strategies to Meet the Millennium Development Goals

diversification efforts.

The imports trade profile has been characterized by the highly valued consumption of intermediate and capital goods. This pattern of import trade is partially attributed to the high capital requirement for investment in the industrial (mainly mining and construction), agriculture, and transport and communication sectors amid domestic supply-side constraints that inhibit domestic production to respond to the demand for capital items;

ultimately items have to be imported. Relatively high import values compared to revenue earnings on exports have perpetuated negative trade balances since 1999. South Africa dominates Zambia’s trade profile as the main source of African imports for the country.

3 Thus, while the EU’s importance as a trading partner has decreased, SADC countries now account for over 75 percent of total imports, with South Africa accounting for almost 70 percent of this amount.

Unilaterally, Zambia does not have an explicit trade policy or clear trade strategies.

Towards developing a national trade strategy, the national trade authorities (Ministry of Commerce, Trade and Industry (MCTI)) has been working with the Cooperating Partners and external consultants to develop an integrated framework through a Diagnostic Trade Integration Study (DTIS). The DTIS (Yagci and Kirk, 2005) reviewed Zambia’s trade policies and performance, assessed its potential for export diversification, identified the main constraints to increasing exports, and developed an action matrix which summarizes the policy reforms and technical assistance needed to remove these constraints.

The purpose of the DTIS was to support the Zambian government to (a) build national consensus around the reforms, (b) mainstream trade priorities into development and poverty reduction strategies, and (c) enhance trade capacity in and outside government to formulate and implement trade policies, to negotiate trade agreements, and to tackle supply-side challenges in responding to new market access opportunities.

Interestingly, with the crudely cross-matching information in the DTIS, which was finalized in October 2005 with information in the Commerce and Trade chapter of the FNDP, one get the sense that the FNDP carries or reflects fairly well the sectorspecific strategies formulated and proposed for implementation by the MCTI and its Cooperating Partners. Only a few points of emphasis in the Integrated Framework (IF) for trade such as the private-public mix in trade and the creation of a business enabling environment are somewhat less emphasised in the FNDP.

Zambia has essentially anchored its trade strategies to regional arrangements, including predominantly the Common Market for Eastern and Southern Africa (COMESA) regional arrangement and to a somewhat lesser extent, the Southern African Development Community (SADC) Trade Protocol. Pursuant to the COMESA Free Trade Area (FTA) Agreement, Zambia has since 2000 eliminated the tariffs on products originating from the other FTA members, and granted trade preferences to the COMESA states not in the FTA. The country is currently investigating the effects of the proposed COMESA Customs Union and the adoption of a common external tariff (CET).

36 Zambia: Debt Strategies to Meet the Millennium Development Goals

One notable stumbling block to this end is Zambia’s simultaneous membership in SADC, which is the main trade partner because of South Africa. The situation is further complicated by the forthcoming negotiation of the Economic Partnership Agreement (EPA) with the EU, which has to be done on a regional basis. This means firstly that Zambia has to decide on whether it will stick with its decision to negotiate within COMESA or will shift its negotiations to within SADC19, and secondly that the country may experience further revenue losses from integration. The former point is a political choice issue that we shall not comment on here. In relation to the latter, according to the regional comparative study of Munalula et al (2006)20, relative to other 3 Eastern and Southern Africa (ESA)21 countries, Zambia is projected to experience a somewhat modest overall tariff reduction of 12.7 percent (compared to 44.1 percent as the ESA average). Bearing in mind that Zambia has already expressed intentions to join the COMESA Customs Union as part of its regional integration ambition, Munalula et al assume – based on the COMESA Customs Union Roadmap – that this will happen before the ESA bloc negotiates to enter into the envisaged Free Trade Area (FTA) or EPA with the EU. During this transitional stage of entering into the Customs Union, Zambia is projected to experience overall revenue losses of about 4 percent as it phases down its tariffs within the Union to zero and aligns external tariffs to a Common External Tariff system. Thus, further integration into the EPA will result in overall revenue losses of about 8.7percent as the revenue reduction directly ascribable to FTA integration. It is in this context that the assertion is made that the EPA will most likely not have an overly deleterious revenue consequence for Zambia if a COMESA Customs Union is first implemented and then the EPA is entered in to, in that order. Approximately one-third of the overall revenue losses will be absorbed during the transition to a Customs Union while the remainder will be from the EPA.

Another widely posited argument that is not extensively explored in Munalula et al 19 It will be noted that although Zambia is currently negotiating under the East and Southern African (ESA) group within COMESA, anecdotal claims from local officials are that the authorities are not fully satisfied with the expected benefits of trade integration under ESA compared to the potential benefits of a SADC-led EPA negotiation. The authorities have therefore continually commissioned studies to provide further policy information on whether Zambia should continue with the ESA negotiation or pull out of COMESA all together. As stated theses claims are currently anecdotal to a large extent and presented here simply to underscore that Zambia’s decision to pursue further trade integration through the ESA is not “cast in stone”.

20 This study provides an extensive and rigorous simulation exercise of the potential revenue effects of an EPA between the EU and ESA states, including Zambia, under several scenarios and assumptions.

It therefore presents a reasonable empirical assessment of what to except from the EPA, controlling for other factors.

21 The ESA bloc (comprising of Burundi, Comoros, DR Congo, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia and Zimbabwe) is the regional grouping within COMESA, which has committed itself to negotiating an EPA with the EU.

The EPA will take the form of a Free Trade Area (FTA)

37 Zambia: Debt Strategies to Meet the Millennium Development Goals

(2006) is that removing tariff restrictions on imports (such as under a Customs Union or the EPA) could create significantly more imports on which additional non-discriminatory taxes such as VAT can be applied, to the extent of compensating for the tariff revenue losses Moreover, on the export side in relation to an EPA with the EU, it should be stressed that tariff-based market access restrictions are not currently a binding constraint to export growth. Most of Zambia’s existing exports face zero or low tariffs and qualify for preferential access to the EU and regional markets. However, Zambia needs to participate actively in global and regional trade negotiations to ensure that its longer-term 3 interests are adequately safeguarded in the outcome. It should work towards reversing its declining share in world exports by accelerating export diversification and regional trade.

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