/ 23 August 2010

Zambia on red metal alert

Zambia On Red Metal Alert

Zambia’s mineral wealth is a mixed blessing. Although the country’s economy is enjoying a period of strong growth, it remains overexposed to the mercurial global commodities market.

Zambia has vast reserves of metals, gemstones, industrial minerals and potential energy resources, including coal, hydrocarbons and uranium, but its copper draws the largest attention globally. It is the largest producer of copper in Africa and its economy remains heavily reliant on the metal. In the mid-Sixties copper prices were at an all-time high, accounting for a third of the country’s gross domestic product and 80% of foreign income.

The newly independent Zambia embarked on development plans aimed at centralising the economy and launched social welfare and development programmes. In 1971 a second plan saw an increase in parastatals and a strong move towards nationalising the mining sector.

The oil crisis and subsequent stock market crash of 1973 took a serious toll on copper prices and threw Zambia’s economy into crisis. The government began borrowing heavily, creating an almost unmanageable foreign debt. This didn’t help the copper miners and the mining parastatal was haemorrhaging up to a million dollars a day in 1990.

Elections in 1991 saw a more reformist government take the reigns of power and the beginning of economic liberalisation. Working with the International Monetary Fund, Zambia completed a heavily indebted poor-countries agreement and managed to reduce its debt by $6-billion, freeing funds to invest in domestic development.

The Brenthurst Foundation’s discussion paper, “Mobilising Zambia”, released earlier this year, mentions a “second wind” in the Zambian copper industry. The report makes reference to ongoing privatisation and new operations as positive indicators for the economy.

Copper production for 2009 rose to 700 000 tonnes, the highest in 30 years, and, although slightly lower, Zambia is expected to produce 660 000 tonnes in 2010. But, Heinz Pley, an expert principal at McKinsey’s Basic Materials Institute and global leader of its Mining Service Line, says Zambia is still too reliant on the red metal, which could adversely affect the stability of the
local currency. “Zambia remains a victim of ‘Dutch disease’.

Cobalt mining has balanced the risk slightly, but the Zambian economy is still not sufficiently diversified to lower its risk profile,” said Pley. Dutch disease refers to the negative impact on an economy after a sudden inflow of foreign currency (as would happen in a natural resource boom) leading to currency appreciation.

Economists hold that this ultimately leads to de-industrialisation as the country’s other exports become less competitive on the global market. Another danger for Zambia is its stockpile of copper reserves.

A 2010 report on metals and mining by McKinsey shows that, although copper proved to be the most resilient of metals during the recession, its immediate prospects remain at risk. Between 2008 and 2009 Mc-Kinsey estimates that copper stocks increased by between 1.2-million and 1.5-million tonnes a year, more than doubling traditional inventory levels.

Global investors took advantage of the low commodity prices and low interest rates in 2009 and invested $20-billion in commodities, 20% of which went into copper. The prices reacted and moved up to reflect the sudden demand. An increase in interest rates, a slow economic recovery and the possibility of a lower demand from Chinese manufacturers could lead to volatility in the market and thus in the Zambian economy.

The McKinsey analysts said, based on their analysis of copper’s fortunes, there was a risk that stockpiles built during the crisis could bring downside volatility to the copper price in the short term. The government is aware of the need to diversify its economy and, although this has been on the policy agenda for many years, it has expressed a renewed interest in achieving a more even GDP sector contribution.

Situmbeko Musokotwane, the finance minister, has said on a number of occasions this year his government is looking closely at options to stimulate foreign investment in other sectors. One of those is tourism and, given the natural beauty of the country, the opportunities to attract foreign tourists should be obvious.

The Brenthurst researchers say that, although Zambian tourist industries failed to capitalise on the country’s potential as a foreign tourist destination in the past few years, things were beginning to look up. According to their figures, tourism grew at an average of 4% a year between 1995 and 2009.

In 2008, a relatively poor year, tourism still generated $200-million in foreign exchange and the combined contribution of travel and tourism to GDP is forecast by the researchers to be 4.6% or $709-million in 2009. Musokotwane also noted that the Fifa 2010 World Cup in South Africa was a key marketing tool and believes all Southern African
Development Community countries will benefit from the event in the next few years.

E-tourism Frontiers is an initiative to develop a sustainable tourism sector in emerging markets. Its chief executive, Damian Cook, has spent years dealing with African companies and governments looking at how the internet can be used to drive international interest in the continent.

“The majority of travellers these days use the internet both to research, plan, book and now pay online for their trips. This number rises to 90% of travellers in dominant markets such as the United States and the United Kingdom. “If a small tourism business is not online, if they are not able to take real-time reservation bookings and if a potential client can’t pay online, then the business will be at a disadvantage,” said Cook.

This poses a problem for Zambia where internet penetration levels remain very low — just 5.9% of the population has access to the internet. Cook said it was critical for the Zambian government to realise the power of the internet and how it could help to reposition and boost the country’s tourism sector.

“Without strong development of both the information technology and communication structures across the country, the tourism sector will be overtaken by other markets and there are plenty of competitors at hand.” Researchers pointed to a number of inhibiting factors for a profitable tourism sector.

In 2008 labour costs in naturebased tourism were 360% of average labour costs in neighbouring countries and labour productivity was 30% of that in Thailand or Malaysia. Import tariffs, corporate tax, bureaucratic red tape, expensive airfares and high visa costs also made it less attractive than its neighbours. Cook said there were a number of initiatives spearheaded by commercial entities in other regions, with the support of their governments.

“In our East Africa conference coming up in early September Kenya Commercial Bank will unveil a new e-commerce product specially designed for the tourism sector that will allow online payment and real-time reservation payments, through a company called Nightsbridge. This e-commerce product will make a huge difference, particularly to small and medium businesses in the region,” Cook said.

He is hopeful that, with government support, education and improved infrastructure, Zambia can become a major tourist destination. Building a diverse and vibrant economy remains key to guaranteeing the future growth of the country but, as every government knows, balancing the short-term gains to be made from a global market that has a growing appetite for copper with longer-term goals remains a challenge.