Zambia

The transformation can be largely attributed to the economic and public-sector reforms initiated in 1991. Privatisation of the mines in the late 1990s removed a major drain on the government’s finances by putting and end to a long history of funding intended to offset the continued losses of the then state-owned mining companies. The liberalisation of the Zambian economy, begun in 1991, has also facilitated substantial foreign investment in mining – boosted by the copper-price boom – and in other sectors of the economy such as tourism and non-traditional agriculture.

In addition, the government has improved its fiscal discipline since 2004. The fiscal deficit (which averaged 12.3% of GDP in the 1970s, 13.8% in the 1980s and 6.0% in the 1990s) was cut from 6.0% in 2003 to 2.9% in 2004 and was kept below this level until the recent pressures of the global crisis pushed it up to 3.0%. Overall fiscal discipline enabled the government to: i) bring domestic debt and interest rates down substantially; and ii) reach the Heavily Indebted Poor Countries (HIPC) Initiative completion point, resulting in the cancellation of most foreign debt. Multilateral debt stock fell from an average of 103.8% of GDP in 1995-2004 to 16.2% in 2005-08, while bilateral debt fell from an average of 85.8% of GDP to 3.6% respectively.

Improved fiscal discipline (and a prudent monetary policy) also helped bring end-year inflation down to single figures in 2006 and 2007 for the first time in Zambia’s history. The sharp appreciation of the Zambian kwacha (ZMK) in 2005/06 – mainly a result of the copper boom – further dampened inflation, at the expense, however, of non-traditional exports such as cotton. With a growing trade surplus, increasing foreign-exchange reserves and an exceptionally low level of public debt, by mid-2008 macroeconomic performance was at its best in nearly 30 years.

In structural terms, Zambia has focused since 1991 on policies aimed at reducing the dominance of the mining sector in the country’s economic activity. These have resulted in economic growth being increasingly led by the private sector. More recently, policies have concentrated on implementing a relatively ambitious diversification programme. Key economic reforms in the late 1990s have delivered tangible benefits: a greater focus on fiscal discipline, better governance and the promotion of privately led economic growth. Other notable structural reforms include ongoing public-sector governance reforms implemented through specific action programmes such as the Public Expenditure Management and Financial Accountability (PEMFA) programme, the Decentralisation Implementation Plan (DIP), social-security, pay and pension reform, and rural-development programmes designed to reduce the relatively high level of rural poverty (greater than 65%) and to drive rural economic development.

Infrastructure development, most particularly in the rural areas, is one of the major needs for Zambia’s development and is upheld in both the Fifth National Development Plan, about to be completed, and the Sixth National Development Plan, soon to be launched, as well as in the National Vision 2030. Most of the infrastructure is still state-owned. The country continues to suffer a huge power deficit leading to frequent load shedding. Only 28% of rural areas have access to mobile phone services, and although there were plans to extend coverage to 77% of the population by the end of 2009, reforms in this area have remained very slow. The sparse population distribution makes the installation of infrastructure very costly. Teledensity in Zambia is still low, with ratios per 100 inhabitants at 0.77 for fixed-line subscribers, 22.66 for mobile subscribers (98% of which are using prepaid tariffs) and 0.14 for Internet users at the end of 2007.

Regarding public-resource mobilisation, Zambia has introduced key policy and institutional reforms since 1994 that have helped to improve its overall capacity to mobilise domestic resources to support economic development. Since 2000, overall tax revenues have increased by 400% and non-tax revenues by 270%, for an average annual growth of 23% and 6% respectively. The tax share of all revenues has stood at a 75% average, increasing in recent years to 80%. Total revenue covers, on average, 90% of public expenditure. The major challenge to tax administration remains the large size of the informal sector.

Official development assistance (ODA) increased from 300 million US dollars (USD) to USD 553 million. This increase between 2005 and 2007 can be attributed to the cancellation of Zambia’s debt by bilateral and multilateral donors after attainment of the Heavily Indebted Poor Countries (HIPC) Initiative completion point. Moreover, ODA flows have not been affected by the global financial crisis so far, and more than 90% of the initially confirmed 2009 budget-support commitments were disbursed. The slight shortfall in disbursed ODA experienced in 2009 was due the country’s failure to meet governance requisites, but the situation has improved and the indicative budgetary support for the medium term remains positive.

Because mining accounts for nearly 70-80% of Zambia’s exports, the dramatic fall in the price of copper from almost USD 9 000 to USD 2 800/tonne between June and December 2008 was widely expected to have a major negative impact on the economy and on poverty. First economic turnouts, however, suggest that the impact was not as bad as had been anticipated. The immediate impact of the crisis was felt in two key areas, namely the current-account deficit and the mining sector. The current-account deficit, including grants, expanded from 4.7% of GDP in 2007 to 5.6% in 2008, and the exchange rate vis-à-vis the US dollar depreciated by more than 40%. Available data shows, however, that total revenue declined marginally, by 0.8%, between 2007 and 2008 while tax revenue declined by 0.1% and trade taxes (customs and excise duties) actually increased by 1.6%.

The mining sector was affected by falling copper prices, which eroded mining profits and resulted in mines performing rapid cuts in costs. Luanshya, a high-cost mine, suspended operations, and overall, some 8 500 mine workers (out of a total of about 30 000) were laid off across the industry – with a similar order of job losses amongst subcontractors. Nevertheless, the mining sector seems to have inadvertently benefited from the crisis or at least to have been partially protected from it. The crisis appears to have presented an opportunity for the mining companies to address the overstaffing inherited by the mines during the privatisation process. The crisis also led the government to drop the windfall-profits tax, which helped mining companies to cope with the crisis.

Copper production was expected to reach 662 000 tonnes in 2009, compared to just less than 570 000 tonnes in 2008 and just over 200 000 tonnes in 2002. This was largely a result of substantial investment since 2000 and the commissioning of a major new mine, Lumwana, in December 2008.

Since the new capacity is low-cost, production was not affected by the drop in prices. Thanks to an increased production that partly offset the impact of lower prices on export revenues in the early phase of the crisis, and the rebound in the copper price to USD 7 500/tonne (compared to USD 2 000 at the time of privatisation) combined with the planned commissioning of Konkola Deep in 2010, the prospects for the mining sector are thus again healthy.  Luanshya mine reopened under new Chinese owners, and 1 500 of the 8 500 job losses have been regained.

The impact of the crisis on growth and poverty was cushioned by a bumper maize harvest, increased sugar production and increased production in the mining sector, as well as ODA inflows. Zambia has been one of the main African beneficiaries of the increase in Special Drawing Rights (SDR) allocations, receiving USD 630 million in SDR in 2009. This boosted the international reserves position to approximately 4.0 months of import cover, a steady increase from 1.3 months in 2003. 

In order to consistently and effectively implement its medium- to long-term development programme, the government’s fiscal programmes are planned and executed using the instrument known as the Medium Term Expenditure Framework (MTEF), the country's three-year rolling budgetary and expenditure plan. The annual national budgets are prepared based on this MTEF. The strategic direction for the MTEF aims in turn to finance the policies and priority development programmes set out in the Fifth National Development Plan (FNDP) (2006-2010), Zambia’s long-term plan for economic growth, development and poverty reduction. These national plans and strategies are also in line with the country’s intention to reach the internationally ratified Millennium Development Goals (MDGs) by 2015. Work in preparing the successor to the FNDP, the Sixth National Development Plan (SNDP), has begun and will further guide the formulation of subsequent MTEFs.

As indicated above, the global financial crisis and economic recession had a negative impact on Zambia’s fiscal sector, resulting in a reduction in government revenues. Revenues from key sectors such as mining, tourism and manufacturing have plummeted since the advent of the crisis. Furthermore, revenues from trade in general and imports in particular also declined, though marginally. Accordingly, fiscal performance was relatively weak in the first half of 2009. Total tax revenues, which rose from 16.0% of GDP in 2006 to 17.2% in 2008, were projected to decline to 15.0% of GDP in 2009 as a result of reduced economic activity but are expected to increase slightly in 2010, to 15.9% of GDP thanks to the recent rebound in overall economic activity, supported by the improved tax administration expected from the ongoing capacity-enhancement initiatives of the independent Zambia Revenue Authority (ZRA).

Broadly speaking, total expenditure moved in line with revenues and grants. In 2006, real total public expenditure shrank by 2.4% compared to 2005 and then increased by 14.6% and 12.1%, in 2007 and 2008 respectively. As a percentage of GDP, total expenditure rose from 20.1% of GDP in 2006 to 22.3% in 2008. Thereafter, expenditure is projected to decline to 21.2% of GDP in 2010.

The key driver of the rise in recurrent expenditure continues to be financing of constitutional/statutory obligations and national processes such as voter registration, national census, settlement of cases decided against the government, etc. Growth in the civil-service wage bill has also been a major factor, as seen in the rising share of personal emoluments from 26.9% of total public expenditure in 2001 to 35.8% in 2008. Growth in the wage bill has been driven by net recruitments in health, education and public safety. The wage freezes attempted by the government between 2003 and 2008 did not stop the wage bill from increasing.

Monetary policy continues to focus on meeting an inflation target of 10.0% or less. The authorities envisaged that in the first half of 2009, both reserve and broad money would grow by no more than 2.6%. To achieve this, the Bank of Zambia was to rely mainly on Open Market Operations. This was to be completed by the auctioning of government securities and prudent fiscal management. Average reserve money declined by 2.7% to ZMK 3 213.7 billion at end-June 2009, or 5.3 percentage points lower than the projected end-period growth of 2.6%. This decline in reserve money was mainly driven by an increase in the net sale of foreign exchange. The slowdown in money growth largely reflects the monetary authority’s conservative monetary position as it aims to contain inflation.

In the foreign-exchange market, the demand pressures that had led to the depreciation of the kwacha in the second half of 2008 continued into the first four months of 2009. Influence of the monetary authorities towards a reversal of portfolio flows in government securities and the stock market continued throughout 2008 and 2009. Demand for food imports and servicing the financing facility for oil procurement, particularly during the first four months of the year, exerted significant pressure on the exchange rate of the kwacha against major currencies, accelerating depreciation during the first quarter of 2009.

The kwacha, however, started to recover in the second quarter of 2009, reflecting an improvement in investor sentiments following the progressive rebound of copper prices from the beginning of the year. The recovery was also supported by the Bank of Zambia’s aggressive policy response of increasing net sales of foreign exchange, from USD 184.0 million in the last half of 2008 to USD 256.5 million in the first half of 2009. Furthermore, the Bank of Zambia acted to curb speculative currency trading by issuing a directive prohibiting commercial banks from granting loans to non-residents in local currency with a maturity period of less than one year. These interventions also helped restore stability in the foreign-exchange market in the last quarter of the year, with the kwacha appreciating by 7.2% between April and June 2009. Overall, the 2009 average exchange rate reflects a depreciation of the kwacha vis-à-vis the US dollar when compared to the 2008 average exchange rate. Thus, despite the current exchange-rate management regime, the Kwacha is projected to continue depreciating in the medium term.

In December 2009, the Bank of Zambia introduced its overnight lending facility (OLF) to operate on a repo or collateralised (secured) basis, addressed to commercial banks with adequate collateral to back loans obtained on an overnight basis. The proposed collateral for use with the facility will be government securities (treasury bills and government bonds) with less than 180 days to maturity. The OLF is expected to improve the management by commercial banks of short-term liquidity, enhance monetary-policy implementation, contribute to money-market development and provide a mechanism that can act as an early warning system to detect emerging liquidity problems in the banking sector.

About 80% of the country’s export earnings derive from copper and copper derivates, while its non-traditional exports include some agricultural goods (tobacco, cotton, sugar, cut flowers and fresh vegetables). A small manufacturing sector is developing (mostly in agribusiness, some in equipment) but is not yet competitive enough to export within the region. Major export partners are South Africa (21.5% of total exports), the Democratic Republic of Congo (DRC) (19.8%), the UK (14.5%) and China (10.3%). The share of exports to the EU has declined to around 8-9%.

On the import side, major products include machinery and equipment, largely feeding into the mining industry, as well as crude oil (refined locally in a rather inefficient plant) and fertiliser for agriculture. Similar partners emerge: South Africa (nearly 50% of imports) followed by the DRC, Kuwait, India and China. The EU share in imports revolves around 12-15%. Overall, the Zambian trade balance is extremely dependent on copper prices, and will remain so until the country’s diversification agenda takes off effectively.

Foreign direct investment (FDI) inflows into Zambia have surged in recent years, from USD 121.7 million in 2000 to USD 939 million in 2008. The bulk of these flows have gone into the mining, tourism, agriculture and energy sectors. The increasing trend is also attributed to the rise in economic activity as a result of the privatisation of the mines, and favourable concessions and mining tax regimes. The main sources of FDI are China, India, South Africa and Canada. Pledged investments amounted, by the third quarter of 2009, to USD 1.241 million, about the same as the annual pledged investment in 2008 of USD 1.250 million. Foreign investors, mostly from South Africa, are also increasingly present in the retail-distribution and tourism sectors, and in early 2009 a Malaysian investor set up a plant to assemble mobile phones for resale in the region. With time, Zambia should take fuller advantage of the regional integration efforts carried out under the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA).

Zambia’s balance-of-payments position and outlook weakened significantly with the decline in mining exports and in FDI. Preliminary data indicate that Zambia recorded a merchandise trade surplus (c.i.f.) of USD 58.5 million in the first half of 2009 compared with a merchandise trade deficit of USD 535.8 million recorded for the second half of 2008. This was mainly explained by a 37.8% decline in the merchandise imports bill, which more than offset the 19% decline in export earnings. Moreover, Zambia’s current-account deficit had narrowed to USD 207.2 million from USD 1.1845 billion in the second half of 2008.

Reserve accumulation fell short of the IMF programme target in 2008 and reserves stood at 2.1 months of imports at the end of 2008, lower than the 2.5 months at end-2007 and than the programme target of 3.2 months. Nonetheless, as indicated above, with the USD 630 million increase in the IMF’s SDR allocation, Zambia’s reserve position went up to an equivalent of 4.3 months of import covers.

As mentioned, the global financial crisis led to a dramatic collapse of commodity prices, beginning in 2008 and extending into the first half of 2009. World oil prices, which had reached record highs of USD 147 per barrel in July 2008, took a sharp fall to USD 48 per barrel at the end of the year. The resulting high fuel and food prices recorded in the first half of the year led to significant inflationary pressure.

The inflationary pressure only began to subside towards the end of 2008, mainly thanks to the contraction in global demand. Overall, the global developments had negative effects on growth, inflation, the exchange rate and the terms of trade. Reduction in revenue, in particular from lower import VAT receipts, had a direct influence on the exchange rate (depreciation). The government’s decision in 2009 to scrap the mining-windfall tax it had introduced added to the domestic financial challenges. Fiscal revenue from the mining industry in 2008 was ZMK 364.1 billion, significantly below the ZMK 917.36 billion target.

To address this problem, the government committed to maintaining macroeconomic stability. It pursued a limited expansionary fiscal policy that would restrict the budget deficit to no more than 3% of GDP. The expansionary stimuli were targeted at government spending on infrastructure, health and education. The government managed to maintain the budget limits as anticipated. Nevertheless, there was pressure on the budget both from reduced domestic revenues as a result of the global crisis and from reduced donor support to the budget as a result of governance issues in 2009. The government protected expenditures in education and health while at the same time scaling down expenditures in sectors it considered to be of lesser priority. The government increased its borrowing in 2009 to 3% of GDP, more than the planned 1.9%. Nonetheless, it continued to maintain a conservative monetary and fiscal position.

At the end of 2003, Zambia’s total external debt was USD 6 815.40 million, a large part of it to multilateral institutions, mainly the World Bank. Zambia’s debt is mostly contracted on concessional terms from bilateral creditors with more than half from the Paris Club. Prior to reaching the HIPC Initiative completion point in April 2005, Zambia’s external debt stock stood at USD 7.02 billion. Once the country started benefiting from HIPC relief and later from the Multilateral Debt Relief Initiative (MDRI), the external debt fell to USD 2.1 billion in 2008. This resulted in a radical change in the composition of the public debt, with a significant increase in the domestic component, on the rise in recent years. The share of domestic debt accounted for about 53% of total debt at the end of 2008.

However, the total external debt stock increased modestly, by 8.6% between 2007 and 2008. The major increase was in the private and parastatal debt, which rose by 16.7% in 2008, largely due to continued investment in the mining sector in the first half of the year.

The government of Zambia has focused since 1991 on policies to encourage increased economic growth led by the private sector. Economic reforms in the late 1990s brought some tangible benefits, with a greater focus on fiscal discipline, better governance and promoting privately-led economic growth. The fundamental keys in these policies have been the privatisation of state-owned enterprises, and the desire to attract foreign and local investment in a variety of sustainable economic activities. Despite economic growth, however, the past few years’ performance of the private sector has not yet met the desired expectations of fostering meaningful economic growth and poverty reduction.

In line with the above objective, the government recognised the major challenges to private-sector development in 2004 when it prepared its first private-sector-development reform program (PSDRP I). The overall objective of PSDRP I (2006-08) was to lay the foundations for faster, sustained private-sector-led growth by improving the investment climate. The programme was developed around the following six reform areas: i) policy environment and institutions; ii) regulations and laws; iii) infrastructure development; iv) business facilitation and economic diversification; v) trade expansion; and vi) local empowerment. In addition, Zambia launched its Public/Private Sector Partnership (PPP) policy in 2008 and an enabling law, the PPP Act, is in preparation. In September 2009, the government launched the second private-sector-development reform programme (PSDRP II), a framework that will guide implementation of the key reforms in order to relax the above-mentioned constraints.

In terms of progress, the 2010 World Bank Doing Business report stated that Zambia had reduced the costs of business, as demonstrated by its improved ranking in the Ease of Doing Business category (at 90 out of 183 countries in 2010, up from to 99 in 2009 and 102 in 2008). The report notes that Zambia’s scores are above average in terms of Getting Credit (ranked 30), Paying Taxes (36), Protecting Investors (73), Closing a Business (83) and Enforcing Contracts (87). On the other hand, its rankings are worse for Starting a Business (94), Registering Property (94), Employing Workers (116), Dealing with Construction Permits (151) and Trading Across Borders (157). In order to make substantive gains, the main private-sector stakeholders have encouraged the government of Zambia to press ahead with effective reforms in other major areas such as transport, telecommunications, energy and the financial sector. A number of critical second-generation policy-reform measures are being proposed for the medium to long term.

In addition, under the USD 4.3 million Millennium Challenge Account Threshold Project, Zambia implemented a series of programmes from 2006 to 2008 targeting administrative corruption by helping to streamline business processes, such as supporting the newly instituted Zambia Development Agency to simplify business registration, licensing and inspection procedures, supporting provincial offices of the Patent and Companies Registration Office, and facilitating trade by simplifying procedures at the borders. As a result, Zambia met its anti-corruption target and was determined in December 2008 by the Millennium Challenge Corporation to be compact-eligible.

To reduce reliance on mining and to achieve equitable and meaningful economic growth, Zambia has, since the late 1990s, set up key reform measures and programmes to implement its national diversification agenda. The theme for 2009 and 2010 is ‘Enhancing growth through competitiveness and diversification’. The government is to promote diversification and enhance national competitiveness through structural reforms and infrastructure development. Emphasis will be placed on agricultural development, the development of tourism infrastructure and promoting the manufacturing sector. All major planning and economic-development frameworks are geared towards meeting this objective. These include the National Vision 2030, the FNDP/SNDP and the annual budgets (MTEF budget allocations). The national budget for 2010 clearly outlines the following actions/steps for implementing the diversification programme: i) accelerating the regulatory reform process by reviewing business-licensing procedures, which has been done, and a number of bills will be presented to parliament for necessary approval; ii) introducing a legal framework for PPPs, which has been done, and the government has moved to review and initiate proposals for PPPs swiftly in key areas of infrastructure development such as roads, bridges and energy projects; iii) revising electricity tariffs to enhance investment in the energy sector while ensuring improvement in service-delivery levels by the electricity provider, Zesco, which has been done; and iv) reducing international telecommunications gateway licensing fees to regional averages, which is ongoing, and privatisation is expected to be completed before the end of 2010.

Regarding export diversification and in line with the above government measures, it should be noted that Zambia’s low export sophistication is symptomatic of market failures (coordination failures and information asymmetries). Looking forward, the country will need to provide enterprises with non-traded inputs and needed complementary goods and services for them to innovate, market their products successfully and make profits. Such complementary goods and services link the supply chain between producers and consumers and require simultaneous, large-scale investments in various sectors of the economy. Infrastructure, as well as education and health to provide a high-quality human capital stock to investors are the obvious examples. 

The government’s Public Sector Reform Strategy includes a programme of public-expenditure management and financial-accountability reforms. Its objective is to contribute to government efforts to improve its capacity to mobilise and utilise public resources effectively and efficiently, i.e. to improve public-expenditure management and to strengthen overall financial accountability. As part of the overall public-expenditure management strategy, the implementation of a treasury single account in 2010, the continued roll-out of Integrated Financial Management and Information Systems and reforms to public procurement are being pursed to strengthen budget execution. The introduction of the treasury single account is expected to help bring down interest rates and encourage banks to mobilise savings.

Pay reform in Zambia is needed to tackle two important issues: improving salary levels that are too low to attract and retain essential technical, professional and managerial staff; and fixing a distorted payment system where various allowances can boost the basic salary by up to 200%. Even though a new pay policy with higher base salaries and fewer allowances was approved by the cabinet in 2003, it was not implemented due to strong resistance from labour unions and the Ministry of Finance. A new pay policy was drafted in 2009 and is expected to be submitted to the cabinet soon. Meanwhile, payroll management is to benefit from computerisation. All payrolls managed by the Ministry of Finance and the Cabinet Office have been converted to the new system. In the process, ghost workers have been eliminated and the tasks of all ministries more clearly defined.

Towards improving social-security arrangements, Zambia has been implementing pay and pension reforms since 1998 with the institution of the Pensions and Insurance Authority as the main regulatory authority. A key aspect of the overall reform has included revamping the National Pensions Scheme Authority to promote cost-efficient measures intended to reduce administrative costs, set up a transparent governance structure, and restructure the contribution and benefit parameters to promote long-term sustainability. The Public Service Pension Fund needs to be further reformed to promote financial sustainability.

In an effort to narrow the rural-urban gap in living conditions, the government is to pay special attention to investment programmes such as infrastructure development in rural areas. In particular, the early successes in building education infrastructure, especially in remote rural areas, under the community mode of construction will be further developed in the medium term. In addition, the government will increase funding for the operational requirements of rural road equipment, rural electrification and rural institutional housing for sectors such as police, immigration, health and education.

In support of the National Decentralisation Policy and in order to make the provision of grants to local councils more transparent, equitable and predictable, starting in 2010, the government will implement formula-driven grant allocation and disbursement procedures. These formulae will be based on population but weighted by poverty and other district deprivation factors in order to assist poorer councils in delivering basic local services.

Infrastructure development, most particularly in rural areas, is one of the main needs for Zambia’s developments and is upheld in both the Fifth National Development Plan (FNDP), about to be completed, and the Sixth National Development Plan (SNDP), soon to be launched, as well as in the National Vision 2030. Most of the infrastructure is still state-owned. A number of donor-funded projects are, however, planned for the improvement of critical infrastructure. One of these is a North-South transport/transit corridor connecting southern African ports via the copper belt in Zambia and the DRC to Dar es Salaam, Tanzania. The project is part of the Aid for Trade initiative overseen by a Joint Task Force comprising the East African Community (EAC), the COMESA and the SADC. It aims to remove the main bottlenecks to trade flows within the region by reviewing regulatory, administrative and infrastructural constraints to transport and transit as a whole.

The country continues to suffer from a huge power deficit leading to frequent load shedding. Upgrading of the Kafue Gorge hydropower station was expected to be completed by 2009 and would add 210 MW to the current capacity, but has been delayed. Additional operations are the Itezhi Tezhi hydropower project with a 120 MW capacity, estimated to cost USD 250 million, and the Kariba North Bank Extension with a 360 MW capacity. Electricity tariffs (estimated at USD 0.037 cents) are amongst the lowest in southern Africa despite a 27% increase in 2008. The plan is to raise tariffs to cost-recovery levels (USD 0.08 cents) by 2013. This would more than double the tariffs for private customers. The plan includes charging four times more for peak-time electricity than for off-peak consumption and continuing to extend the metering of customers.

Energy-saving measures such as tax exemptions for energy-saving light-bulbs are expected to reduce household demand by 10%. Efforts to improve the efficiency of Zesco are making slower progress through such measures. Regarding ICT, in 2008/09 the installation of 5 000 kilometres of optical fibre cables countrywide, including provincial towns, was undertaken at a cost of USD 48 million. A connection to the undersea cable is planned for 2010. Lower frequencies are reserved for rural connectivity, as they are more efficient for longer distances. New mobile-telephony technologies such as broadband and 3G have been set up and are available for leasing. Three satellite earth stations owned by the Internet service provider Zamtel provide international telephone services. The capacity is not, however, sufficient to satisfy demand, leading to frequent difficulties in making international calls.

Mobile services are available in all district capitals. In 28% of rural areas, however, there is no access to mobile service. Although providers were planning to extend coverage to 77% of the population by the end of 2009, progress in this area has been very slow. Some rural areas are very sparsely populated, making the installation of infrastructure very costly. Teledensity in Zambia is still low: the ratios per 100 inhabitants at the end of 2007 were 0.77 for fixed-line subscribers, 22.66 for mobile subscribers and 0.14 for Internet users. The vast majority of mobile subscribers (98%) use prepaid tariffs.

Zambia has two targets under natural-resource management: integrating the principles of sustainable development into country policies and programmes, and reversing the loss of environmental resources. The percentage of land covered by forest (originally 51.7%) continues to decline, mainly due to wood harvesting (charcoal, timber, agriculture and human settlement). According to Mongabay.com, the global website on forest cover and wildlife, Zambia has experienced an average annual deforestation rate of 0.91%. In total, between 1990 and 2005, Zambia lost 13.6% of its original forest cover (equivalent to about 6.672 million hectares). The percentage of land protected to maintain biological diversity has, however, remained constant in the recent past. Carbon-dioxide emissions are increasing due to increased mining, and industrial and agricultural activities. Consumption of chlorofluorocarbons (CFCs) is declining and a Carbon Emission Tax aimed at raising funds for mitigation activities has been instituted for motorists. A national policy on the environment was launched in July 2009 and is supported by a number of legal and regulatory frameworks. A climate-change facilitation unit has been set up in the Ministry of Tourism, Environment and Natural Resources. The Environmental Council of Zambia enforces regulation related to environmental management. Steps to link the natural-resources sector with other sectors are laid out in the FNDP and are being implemented through various policy-dialogue and aid-management channels such as the Natural Resources Consultative Forum. Nonetheless, this remains a slow process due to institutional rigidities.

Reforms in the agricultural sector are also relatively slow. Despite a good national policy document, actual implementation on the field continues to promote a dominant public sector over private-sector participation. The sector is still characterised by limited levels of public investments in key activities such as livestock extension, support to crops other than maize, and support to research and development, and by the dominance of input and output marketing subsidies (more than 70% of budgetary resources). There is an apparent parallel growth of the private sector, devoid of public support systems. Outgrower schemes offer an opportunity to address some of the perennial constraints to agricultural growth. The land market is growing and large-scale farming enterprises are expanding, but more than 90% of the land is still under traditional property. Yields and productivity have not improved, and the agricultural sector remains stagnant. Its contribution to GDP revolves around 15% when it could rise potentially to 25%.

Zambia’s tax policy in recent years has been aimed at expanding the tax base and reducing the size of the informal sector, and has been set in terms of the need to mitigate the effects of taxation on those with low incomes, balanced against the need to increase revenue. The existence of a clear tax policy and the institution of an autonomous tax-administration body, the Zambia Revenue Authority (ZRA), have been instrumental in achieving increased tax compliance and improving tax administration in the country. In addition, membership to regional trade zones has been a factor in a tax policy, also intended to lead to the harmonisation of trade tariffs.

In terms of overall performance, tax revenue increased by 400% and non-tax revenue by 270%, averaging an annual growth of 23% and 6% respectively between 2002 and 2007. Taxes have represented on average 75% of total revenue in the past ten years; in recent years, the share has increased to 80%. Total revenue covers, on average, 90% of public expenditure. In the years preceding the global crisis, Zambia experienced an improvement in revenue performance as a result of a rising, high demand for commodities and a consumption boom. Revenues as a proportion of GDP were projected, however, to decline to 19% in 2009, due to the global recession.

Tax law is governed by three principal Acts: the Customs and Excise Act, the Income Tax Act and the Value Added Tax (VAT) Act. All the Acts are continually amended by Statutory Instruments. The 1993 Zambia Revenue Authority Act No. 23 established an autonomous tax administration body. Zambia ranks favourably for the payment of taxes in the World Bank 2010 Doing Business survey, at 33 out of 183 countries.

Direct taxes have on average represented 45% of tax revenue and 8% of GDP, though in recent years (2002-2008) the share has increased to almost half of all tax revenue. Indirect taxes have on average stood at about 29% (3% of GDP), but this share has fallen to less than 23% in recent years. Import duties constitute on average one-third of all tax revenue and 6% of GDP, a share that has been increasing in recent years.

To become VAT-registered, a company needs to display an income of ZMK 200 million. All other businesses pay a turnover tax. Personal income taxes are levied through a Pay as You Earn (PAYE) system, hence are withheld by the employer. Company taxes are assessed through returns submitted to the ZRA. Personal income taxes are charged at three rates – 25%, 30% and 35% – and there is also a tax-free segment. Companies are generally taxed at 35%, although different rates apply to different sectors: mining companies are subject to preferential taxation agreements; organisations deemed to be ‘public-benefit organisations’ can claim exemptions on import duty for certain eligible products; non-traditional exporters are subject to a preferential tax rate of 25%.

Tax policy has been geared towards expanding the tax base, removing exemptions and providing greater relief for low-income earners and those with disabilities. Membership in the SADC and in the COMESA has made harmonisation of taxes crucial. Further reforms will continue the efforts to expand the tax base and increase revenue-earning potential. Personal tax rates have changed, and the threshold at which tax is payable has been increased for low-income earners and those with disabilities. Differentiated corporate tax rates have also been introduced for priority sectors such as agriculture, mining and non-traditional exports. The VAT rate was also reduced from 17% to 16% in 2009.

In terms of institutional arrangements, the ZRA was set up in 1994 as an autonomous corporate body. The ZRA is in charge of collecting revenue on behalf of the government. It also works closely with the government in designing and implementing tax policy. Schemes to enhance tax compliance include: the centralisation of all fiscal administration; a Large Taxpayer Office set up in 2006 and further plans to institute a Small and Medium Taxpayer Office; and piloting a ‘one-stop shop’ initiative on the Zambia-Zimbabwe border. The ZRA also operates regional offices, where it replicates many of the centrally administered functions.

In 2007, the ZRA accounted for 2% of total public expenditure, roughly 0.5% of GDP. Employee benefits make up 73% of this expenditure and the remaining is spent on administration and operational expenses. Salaries at the ZRA are generally higher than those in other government departments in order to fend off possible corruption. While the Aid budget is not necessarily reserved specifically for tax administration, the ZRA does receive technical assistance from international organisations.

The informal sector is a major issue, as the formal sector could be considered overtaxed. There is also greater reliance on direct taxes, whereas the global trend is to capture revenue from indirect taxation. The large size of the informal sector affects compliance, as there is no clear mechanism for taxing this segment of the economy. The most common complaints against the ZRA include perceived unprofessional conduct and inefficiency within the system.

Overall, tax collection has improved thanks to a stronger ZRA enhancing compliance, amongst other tax-administration measures. Informality, however, remains a challenge, with barriers to formalisation including the length of time it takes to register a business, as well as imposing accounting costs on small businesses. A flat-rate ‘base tax’ for rural areas has therefore been introduced along with ‘presumptive taxation’ of 3% on gross for urban areas. A ‘peddler’s licence’ is also issued to street sellers. An Advanced Income Tax is charged at 6% for importers who have not registered, which can be reclaimed once registration is completed. Public-awareness campaigns are also conducted. To increase mining revenues, there is a clear need to renegotiate the current mining-development agreements, including reinstating the windfall tax. The revenue outlook is very strong based on ongoing measures intended to improve tax-administration efficiency and to reduce the informal sector, as well as tax evasion.

The institution of the ZRA could be seen as a success story in combating tax evasion. Tax-education campaigns have helped to make the public more aware, thereby increasing awareness and voluntary compliance. Linking the ZRA to company registration enables the ZRA to identify organisations liable for taxation. VAT registration is also encouraged, as it allows companies to reclaim VAT. Continuing challenges lie with formalising the informal sector and the cash economy, which leaves no audit trail, hence is difficult to tax.

ODA – or capital grants – and multilateral and bilateral external borrowing are important components of Zambia’s revenue position. ODA inflows into Zambia increased from USD 300 million in 2003 to USD 553 million in 2008. The increase between 2005 and 2007 can be attributed to the cancellation of Zambia’s debt by bilateral and multilateral donors after Zambia reached the HIPC Initiative completion point. The country has also continued to receive a substantial amount of resources through project support, mainly for health, education and other social sectors. Zambia’s main donors are the African Development Bank, the UK, the US, Japan, Sweden, Denmark and the EU. Overall, ODA flows have not so far been affected by the global financial crisis. Of the total 2009 budget-support commitments (USD 284.5 million), the government received USD 226.3 million in the course of the year.

The shortfall is explained by the fact that some major bilateral donors either suspended or delayed their disbursement of budget support on account of the country’s failure to meet the governance triggers (a set of overall actions to reduce levels of corruption and enhance the quality of governance) as stipulated in the Joint Assistance Strategy for Zambia (JASZ): Sweden suspended and the Netherlands delayed. Major bilateral donors to the health sector did not disburse committed funds on time because of failure of accountability by the government at the Ministry of Health in 2009. The situation has, however, improved, and the indicative budgetary support for the medium term remains positive. Total commitments for 2010 (general-budget support and sector-budget support combined) stand at USD 240 million. This amount could increase with the proposed ‘EU Vulnerability FLEX’ instrument, designed to assist developing countries worst hit by the downturn in trade and falling revenues, from which Zambia received an additional USD 40 million in 2009.

Following the death in August 2008 of Levy Patrick Mwanawasa, the third President of the Republic of Zambia, the current administration led by Rupiah B. Banda came to power on 3 November 2008 following a free and fair presidential by-election. The main opposition party, the Patriotic Front (PF) led by Michael Sata, came in second with 38% of the total votes cast.

President Banda’s first cabinet kept several ministers from the Mwanawasa administration. Since then, there have been a number of cabinet changes, with the dismissal of some of the country’s long-serving and senior ministers, notably the former Minister of Finance and National Planning, the former Minister of Environment, Tourism and Natural Resources and the former Minister of National Defence. The current government is to be in power until November 2011, when a new one is expected to be formed after the next general elections. There have also been several changes in the higher levels of the civil service, in which the Head of State has reshuffled most Permanent Secretaries and dropped a few, including the Attorney General and the former director of the Zambia National Procurement Authority. Preparations are underway for the next presidential and parliamentary elections. They include updating the national voter register followed by the issuing of voter and national registration cards. In preparation for the next elections, the two main opposition political parties, the PF and the United Party for National Development (UPND) formed a pact, which has served them to win two recent parliamentary by-elections, including one previously dominated by the ruling party.

The current administration has declared zero tolerance for corruption, a continuation of the efforts of the previous government. A number of corruption cases were reported and some were addressed in 2009. Due to capacity challenges within the legal and judicial systems, however, not all the higher-level cases have been disposed of in court. In 2009, the judiciary handled a number of corruption-related cases, including notably that of Xavier Chungu, Intelligence Director General under the presidency of Frederick Chiluba (1991-2002), and that of Henry Kapoko, the former Human Resources Director at the Ministry of Health, who allegedly misappropriated billions of kwachas from the Ministry.

Transparency International (TI)’s Corruption Perception Index 2009 showed that Zambia had made significant progress in the fight against corruption. Zambia was ranked 99 out of 179 (6 positions better than in 2008) with a score of 3.0 (2 points better than in 2008). The Corruption Perception Index report results, however, came at a time when the government increased its exposure of corruption tendencies in the activities of both the private and the public sector. Specific exposed corruption cases included alleged financial improprieties in the health and roads sectors. The findings of the official audit investigations carried out in the respective sectors are still awaited.

The 2009 TI report also came in the wake of the landmark judgment that acquitted former President Frederick Chiluba of corruption accusations levied on him after his tenure in office. Chiluba’s presidency raised reservations in some sections of both the Zambian and the international community regarding Zambia’s commitment to fighting corruption.

In 2009, an Ethics Code for public service was developed, and ethics committees were set up. The Ethics Code aims to make civil servants more accountable for their actions and should help to increase efficiency in the public sector. The government also continued with its commitment to ensure and enhance transparency in the mining sector by implementing the guidelines of the Extractive Industries Transparency Initiative in the 2009-11 MTEF. Despite some delay, the Decentralisation Implementation Plan (DIP) formulated in February 2006 is expected to be implemented before 2011. Initially, the government and stakeholders had failed to reach a consensus regarding the financing of the DIP. Another area of contention was the initial focus of the DIP: whilst the Ministry of Local Government and Housing wanted to promote local capacity building and, as a parallel process, the deployment of functions from line ministries, the majority of the cabinet was of the opinion that capacity building should come first. Capacity building was performed in the area of finance and audit for local councils. In 2009, the government scored a win by guiding approval for the DIP, with the hope that this would help to transfer the responsibility for local development to local populations.

Dissemination of information by the government and participation of the private sector and civil society in decision-making processes are improving, especially through the active participation of the latter in sectoral advisory groups, which provide a forum for discussion amongst stakeholders from the government, the private sector and civil society.

With its current effort to address poverty and socio-economic development, Zambia is on course to meet more than four of the eight United Nations MDGs. The 2009 Mid-Term Review (MTR) report of the government’s FNDP, however, notes that there has been limited progress towards addressing rural poverty. The report further notes that poverty levels have remained high, at 64% of total population since 2006. The current poverty situation has been compounded by slow progress in the performance of the agriculture sector, which employs the majority of the rural poor. Urban poverty reduction, however, shows a positive trend mainly due to the recent upturn in economic activity, which is largely urban-based but has been transmitted via increased employment opportunities in the mining sector.

The FNDP MTR report further notes that there has been remarkable progress in Zambia’s health indicators, especially those relating to maternal and child health. HIV/AIDS incidence is reported to have declined from 16% to 14% between 2002 and 2009. This improvement is associated with increased access to HIV and AIDS counselling and testing services, as well as the resulting change in sexual behaviour. Major sectoral challenges remain in the areas of health-care personnel and infrastructure development.

In the education sector, emphasis has been placed on improving the quality of education through increased access, implementation of reforms in curriculum development, improving syllabus design, vocational-teacher enhancement, and creating an environment more conducive to learning. Focus has also been extended to generating equitable service delivery, including addressing gender disparities, as well as increasing education opportunities for the vulnerable groups. In terms of programme performance, the sector presents a mixed picture. Whereas there has been remarkable improvement in access and equity, key challenges remain regarding quality and infrastructure development within the sector. For instance, although completion rates are high in Zambia compared to other sub-Saharan African countries, learning outcomes remain weak. According to the latest national learning assessment results (2008) only one-third of grade-five (5) pupils meet the minimum requirements for mathematics and the English language. The shortage of English and mathematics teachers is in fact still a key challenge. The high-school exam pass rate has stagnated at 70% for the past four years. The tertiary system is also fragmented and poorly responsive to the labour market. Moreover, the newly developed Tertiary and Vocational Education Training (TEVET) system is yet to be fully implemented.

The proportion of Zambians with access to an improved water source has risen to more than 53% nationwide but with notable rural-urban disparities (rural access stands at 37% and urban access at 86%). The percentage of households with access to improved sanitation services has risen to 65%, again with a large rural-urban divide (57% rural and 80% urban). The national water policy developed in 1994 is under review. The National Water and Sanitation Council (NWASCO) has a Devolution Trust Fund to finance water and sanitation projects. A multi-donor-funded rural water and sanitation project is being implemented in the country. The Water, Sanitation, Hygiene and Education (WASHE) programme continues in place.

The data gaps in the water and sanitation sector present a key challenge to a good analysis of sectoral performance. The sector has been unable to provide data on the key performance indicators due to the absence of a well-functioning information-management system. The main challenge to sectoral performance is over-dependence on donor resources, which makes the sector vulnerable to change in donor commitments.