ZAMBIA ECONOMIC BRIEF AN AGRO-LED STRUCTURAL TRANSFORMATION SEPTEMBER 2018 ISSUE 11 1 1 th Z A M B I A E C O N O M I C B R I E F AN AGRO-LED STRUCTURAL TRANSFORMATION September 2018 @ 2018 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved. This report was prepared by the staff of the Macroeconomic and Fiscal Management Global Practice of the World Bank Group. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. Cover design: Katarina Zeravica Photos: World Bank, Zambia and stock images ICONTENTS Acronyms i Foreword ii Acknowledgements iii Executive Summary 1 Section 1: Recent Economic Developments 5 A. Regional Economic Developments 5 B. The State of the Zambian Economy 9 C. Economic Outlook, Risks and Policy Challenges 22 Section 2: An Agro-Led Structural Transformation 27 D. Zambia’s Experience with Structural Transformation 30 E. Towards a More Effective Structural Transformation in Zambia 37 F. Ideas to Enhance Agro-Led Structural Transformation in Zambia 43 Endnotes 44 Boxes 1 The government’s fiscal consolidation measures 11 2 A new debt sustainability framework for low-income countries 12 3 Ideas for calming the ‘hidden debt’ noise 14 4 Restructuring debt under difficult market conditions: some lessons from Ghana 15 5 Policy context on industrialization and structural transformation in Zambia 30 6 Labor productivity in agriculture might not be lower than that for non-agricultural sectors in urban areas 31 7 Can farm blocks support rural development and agricultural transformation? 42 Figures 1 Commodity prices have been volatile 6 2 Eurobond spreads have narrowed in 2017 7 3 Fiscal deficits in some countries are facing a high risk of external debt distress 8 4 SSA growth has picked up 8 5 Fiscal deficits have widened and budget credibility deteriorated 9 6 External debt has increased sharply since 2012 12 7 Public and publicly guaranteed debt as a percent of GDP 13 8 Interest payments have crowded out other spending lines 14 9 The cost of external debt service has increased 15 10 The kwacha has come under pressure in 2018 17 11 Inflation picking up, but remains within the target (6-8%) 18 12 Lending rates remain high despite looser monetary policy 18 13 Economic activity is expected to remain subdued in 2018 19 14 Copper production was ramped up in H1 2018 20 15 Labor reallocation plays a large role in productivity growth 28 16 Agricultural labor productivity 29 17 Reallocation of labor has occurred between 2000 and 2010 32 18 Sector value added per worker and employment: 1996 versus 2015 33 19 Evolution of sectoral employment in primary and secondary cities 35 20 Share of income of bottom 40 percent has fallen despite GDP growth 35 21 Poverty is predominantly a rural phenomenon 36 22 Growth of income groups in share to total population 36 Tables 1 Fiscal trends 10 2 Balance of payments (US$ million) 16 3 Quarterly GDP growth (year-on-year) 20 4 Private sector credit growth remains subdued since 2016 21 5 Key Macroeconomic Data 22 6 Poverty and Inequality in Zambia and the Kyrgyz Republic 29 7 Non-mining output growth is sensitive to copper prices 31 Maps 1 Zambia’s new agro-processing firms in 2010 42 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N IACRONYMS BoZ Bank of Zambia CEMAC Central African Economic and Monetary Community CPIA Country Institutional and Policy Assessment DMFAS Debt Management and Financial Analysis System DSA Debt Sustainability Analysis EPZ Export Processing Zones FISP Farmer Input Support Program FRA Food Reserve Agency FI FDI Foreign Direct Investments FQM First Quantum Minerals GDP Gross Domestic Product GER Gross Enrolment Rate HIV Human Immunodeficiency Virus IAPRI Indaba for Agricultural Policy Research Institute ICT Information and Communications Technology IFC International Finance Corporation IMF International Monetary Fund IPP Independent Power Producers INDC Intended Nationally Determined Contributions LCMS Living Conditions Monitoring Survey LIC Low Income Countries MFEZ Multi-Facility Economic Zones OPEC Organization of the Petroleum Exporting Countries PER Public Expenditure Review PFM Public Financial Management PV Present Value R&D Research and Development SME Small and Medium Enterprises SSA Sub-Saharan Africa SOE State-Owned Enterprises TEVETA Technical Education, Vocational and Entrepreneurship Training Authority TVET Technical and Vocational Education and Training VAT Value Added Tax WTO World Trade Organization ZAMACE Zambia Commodity Exchange ZANACO Zambia National Commercial Bank Plc ZIAMIS Zambia Integrated Agriculture Management Information System ZRA Zambia Revenue Authority i 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N IFOREWORD I am pleased to share the eleventh Zambia Econom- To reduce poverty and boost shared prosperity, it ic Brief with a focus section on agro-led structural is critical to raise productivity in sectors where most transformation for poverty reduction and prosper- poor people are engaged (in particular, agriculture). ity. This Brief is part of a series of short economic Expediting the transition from a maize-centric ag- updates produced twice a year by the World Bank. ricultural policy, investing in agricultural infrastruc- Each Brief includes two sections: the World Bank’s ture, linking farmers to domestic and regional value assessment of recent economic developments and chains, supporting human capital development and the outlook in the short to medium term, and its strengthening macro-fiscal management are vital. analysis of a specific development topic or theme. Previous Briefs covered opportunities for revenue We hope that the findings of this Economic Brief will collection, public expenditure, the power sector, stimulate a healthy debate around these questions mining, jobs, trade, debt management, and finan- so that Zambia can shift to a path of more inclusive cial inclusion and can be found on the World Bank’s growth. Zambia website. Economic growth in 2018 is projected to be below 4 percent, reflecting the poor agricultural harvest, low- er copper prices and fiscal-debt challenges that are crowding out private sector growth. Government’s own debt sustainability analysis in H1 2018 has now Ina-Marlene Ruthenberg confirmed the conclusion from the 2017 IMF-World Country Manager for Zambia Bank debt sustainability analysis that Zambia’s risk The World Bank of external debt distress has increased to ‘high’ from ‘medium’ in 2015. In response, the government has announced plans to implement fiscal consolidation measures to return debt towards sustainable levels. If fully implemented, the fiscal consolidation meas- ures recently announced by the government pro- vide a solid framework to move the debt towards sustainable levels, create fiscal space for pro-poor and productive spending, and unlock private sector lending and growth. An IMF financial program would be instrumental in supporting the measures, by pro- viding an immediate disbursement into reserves, enhancing credibility on the macro-fiscal reforms, facilitating budget support from other develop- ment partners, cementing market sentiments, and improving the government’s and private sector’s ac- cess to financing at more favorable terms. The past decade and a half of growth was not suf- ficiently pro-poor and the benefits have accrued mainly to the richer segments of the population in urban areas. Poverty remains predominantly a rural phenomenon. Eighty percent of the poor are rural subsistence farmers. ii 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N IACKNOWLEDGEMENTS The eleventh Zambia Economic Brief has been prepared by Zivanemoyo Chinzara, Sebastien Dessus and Christine Heumesser (World Bank). Keiko Kubota, Alex Sienaert, Tihomir Stucka, Manohar Sharma, Ashesh Prasann, Erwin De Nys and Willem Janssen (World Bank), and Annelies Raue (DFID) all provided very useful comments. The report was edited, and the layout and front cover designed by Katarina Zeravica. Paul Noumba, the Zambia Country Director; Ina-Marlene Ruthenberg, the Zambia Country Manager; Mathew Verghis, Practice Manager for the Macroeconomics, Trade and Investments Global Practice; and Sebastien Dessus, Program Leader for Zambia, provided overall guidance. Carlyn Hambuba and Sombo Samunete led the dissemination activities with support from Gebisa Chisanga and Hellen Mungaila. iii 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N EXECUTIVE SUMMARY Regional economic developments In 2017, fiscal consolidation was achieved on a Sub-Saharan Africa’s (SSA) economic recov- commitment basis. The fiscal deficit (commitment ery continued to gain momentum in H1 2018. basis) declined to 4.4 percent of GDP in 2017 from Growth is forecast to improve to 3.1 percent in 8.9 percent of GDP in 2016, reflecting the clearance 2018, from an estimated 2.6 percent in 2017, but of K 6.4 billion in public expenditure arrears, and remains below its long-term trend. Economic recov- below budget spending in subsidies (by 5 percent); ery has been underpinned by favorable supply and goods and services (by 14 percent); and social ben- demand shocks, and an improved environment for efits (by 20 percent). However, spending on roads growth. However, risks remain, including an abrupt was scaled up by 37 percent and the cost of debt monetary tightening in the United States that would service was 17 percent above the programmed reduce investor appetite for riskier assets in frontier target. As a result, the cash fiscal deficit rose to 7.8 markets and tighten global financing conditions; a percent of GDP, from an initial programmed level of slowdown in China (due to escalated tariff wars) that 7.0 percent. Over H1 2018, the fiscal deficit (commit- would reduce commodity prices; as well as slower ment basis) was 1.4 times above its mid-year target domestic reforms to address macroeconomic im- as revenue gains from value added tax have been balances and structural bottlenecks that would un- outweighed by large spending overruns on foreign- dermine private sector recovery. financed public investments and external debt ser- vice. The state of the Zambian economy Preliminary estimates suggest the Zambian The government announced plans for fiscal economy expanded by 3.4 percent in 2017 com- consolidation after results from their DSA con- pared to 3.8 percent in 2017. Despite higher cop- firmed that Zambia is at ‘high’ risk of external per prices, expansive monetary policy and a bumper debt distress. The government’s debt sustainabil- crop harvest in 2017, revised data suggests that real ity analysis (DSA) in H1 2018 confirmed the conclu- GDP growth slowed to 3.4 percent in 2017 from 3.8 sion of a joint IMF-World DSA (published in October percent in 2016. Economic activity has faced a drag 2017) that Zambia is at ‘high’ risk of external debt from a deteriorated fiscal and debt situation. Large distress. Under the ‘business as usual scenario’, the domestic public expenditure arrears increased non- IMF-World DSA found that the present value (PV) of performing loans (to 13.4 percent of outstanding external debt-to-GDP ratio would breach its thresh- loans in May 2018, from 9.7 percent in 2016), lead- old ‘for high risk of external debt distress’ (40 per- ing to lower private sector lending. Private sector cent) in 2019, if external public and publicly guar- lending has been further crowded out by increased anteed debt stock increased from US$ 7.9 billion in government domestic borrowing at high yields. In 2016 to US$ 8.4 billion in 2017, US$ 10.2 billion in addition, the non-mining industry and services have 2018 and US$ 11.4 billion in 2019. Yet, external pub- been affected by low private investments and con- lic and publicly guaranteed debt accumulated faster, sumer demand. Meanwhile, the costs of foreign reaching US$ 9.5 billion at end-2017, and US$ 10.7 borrowing have increased for both government billion at mid-2018. Meanwhile, high domestic public and firms due to tighter financing conditions and borrowing at high yields continues to place upward increased sovereign risk premia. Weak economic pressure on lending rates and to crowd-out private activity has constrained job creation, leading to an sector lending. This could be worsened if new public increase in the unemployment rate from 11.7 per- expenditure arrears are accumulated in 2018. cent in Q1 2017 to 12.2 percent in Q1 2018. The unemployment rate is higher among females (14.6 percent) than males (10.6 percent). 1 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Exports improved to support the balance of- es (resulting from trade tensions) following the reso- payments, however, increased costs of exter- lution of a labor dispute at the world’s largest mine nal debt service remain a risk to the balance in Chile. Meanwhile, if new arrears are accumulated of payments position. Although there was a goods and lending rates remain high, this could undermine trade surplus of 1.6 percent of GDP in 2017 (from a private sector growth further. Reflecting on these trade deficit of -0.02 percent of GDP in 2016), the developments and that the 2017 revised growth is current account deficit only narrowed to 4.5 percent now lower than the initial estimate, we have revised of GDP (from 4.6 percent of GDP in 2016). Large pri- Zambia’s real GDP growth projection for 2018 to 3.3 mary income outflows in 2017 (of US$ 1.1 billion percent, down from 4.3 percent in the previous is- compared to US$ 654 million in 2016), mostly re- sue of this Economic Brief. Growth is expected to lating to interest payments on external public debt, improve slightly in 2019 (3.6 percent) and in 2020 constrained the narrowing of the current account (3.8 percent). The medium-term forecast assumes a deficit. Data from the Bank of Zambia (BoZ) suggest recovery in agriculture, that an orderly fiscal consoli- that public debt service (including amortization) was dation and reforms to strengthen the financial and US$ 707 million in 2017, accounting for 63 percent operational sustainability of ZESCO Limited will be of annual foreign currency outflows. As a result, for- implemented, and a gradual improvement in private eign exchange reserves fell to US$ 1.8 billion (2.1 sector lending and growth. months of import cover) in June 2018 from 2.4 bil- lion a year earlier. The current account has been The medium-term outlook is subject to risks. largely financed by the net inflow of foreign direct The external downside risks include the possibility (i) investments (FDI). of a reversal of the recent copper price stabilization, for example due to slower growth in China (which The kwacha has remained fairly stable – be- could be triggered by a more severe than currently tween K 9.3 to K 10.4 – despite low reserves. expected ‘trade war’ impact) that would weigh on However, interbank foreign currency trade has re- Zambia’s exports and reserves, (ii) that oil prices mained subdued. Inflation has remained low, sup- will increase due to production cuts by OPEC and ported by a stable kwacha, but breached the upper non-OPEC producers leading to import costs and band of its medium-term target range of 6-8 per- inflation, and (iii) of a quicker than expected nor- cent in August 2018, reflecting high food prices (due malization of interest rates in the United States that to low harvest), and increased transportation costs. would tighten global financing conditions, and fur- ther increase the cost of external financing for Gov- The increased interest payments on debt are ernment and the private sector. The main domestic crowding out fiscal space for other social and downside risk is the delayed implementation of the economic sectors. For example, as the cost of debt fiscal consolidation reforms announced by the gov- service has averaged 21 percent above its budget ernment, which would worsen the debt burden and between 2011 and 2017, the following sectors have the foreign exchange reserve situation, resulting in a seen their actual disbursement below budget al- forced and costly macroeconomic adjustment. locations: education (by 35 percent), health (by 12 percent), social benefits (by 14 percent), and eco- Policy challenges nomic sectors (by 25 percent). Zambia’s multi-year fiscal expansion, financed by expensive borrowing, has increased debt Medium-term outlook towards an un­ sustainable levels.’ Increased Exogenous shocks from low rains and trade costs of debt servicing are constraining space for tensions are a concern for the medium-term spending on productive and social services and growth outlook. On June 14, 2018, the govern- threatening external balance stability. While strides ment announced fiscal consolidation measures to have been made with some fiscal and structural re- calm debt accumulation (box 1). It is critical that forms in Zambia Plus, they need to be cemented by these measures are implemented expeditiously to sticking to planned fis­ cal targets, and passing and contain the fiscal deficit within the 2018 budget tar- implement announced progressive reforms (e.g. the get (6.1 percent of GDP). If the H1 2018 fiscal stance Loans and Guarantee Act and the Procurement Bill) is maintained, the cash fiscal deficit would be higher to enhance the credibility of new policy announce- than planned and public expenditure arrears and ments. In addition, chal­ lenges at state-owned enter- the debt burden would increase, undermining me- prises (SOE) would expose substantial risks to fiscal dium-term fiscal consolidation and growth. positions if they are not addressed urgently. In this regard, we believe the following are of immediate Key sectors of the economy face headwinds. priority: (i) reducing the pace of debt accumulation; Agricultural output has contracted in 2018 due to (ii) improving debt management; (iii) building foreign poorly distributed rains and an El Niño is forecast currency reserves; and (iv) addressing ZESCO Lim- for the 2018-19 season. Copper prices have fallen ited’s financial situation. by 20 percent from their four-year highs that were reached in June 2018 due to weaker demand from China, and could fall further as global supply increas- 2 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Government should consider ways to slow new Global experiences have shown that an IMF program debt disbursements, in line with its announced would make it easy to attract direct budget support fiscal consolidation plans. If the trend in foreign- if fiscal and external imbalances are large; the risk of financed projects continues as in H1 2018, the debt external debt distress is ‘high’; and fiscal deficit over- burden would worsen further. Evidence from the runs are high, as an IMF program can build the need- Eurozone debt crisis and the pre-debt relief period ed policy commitments. An IMF program would also in Zambia shows that an increased debt burden un- allow easy access to concessional financing for re- dermines macroeconomic stability and the provision structuring debt. For example, with an IMF Program of social services by (i) increasing debt service costs in place, in 2015, Ghana secured a 15-year tenor Eu- (thus crowding out pro-poor and other productive robond at a 200 basis points cheaper cost than the spending lines); (ii) reducing foreign reserves; (iii) market rate, through the support of a policy-based increasing the cost of new financing for the govern- guarantee from the World Bank to restructure its ment and private sector, and thus growth and em- debt (box 4). ployment, and (iv) increasing the cost of restructuring the existing debt. Failure to address the debt situa- Progress with debt management reforms could tion urgently would risk a spiral of debts, where new be cemented further. The role of the Ministry of borrowing would be channeled towards paying back Finance as the sole contractor of public debt, with pre-existing debt, and not towards financing devel- the approval of the National Assembly, needs to be opment and wealth creation. Government would strengthened. While the quality of debt recording has reduce debt accumulation by reprioritizing public improved with the implementation of the new Debt spending and focusing limited public resources on Management and Financial Analysis System (DMFAS) investment projects with high economic returns. In and the development of systems to collect informa- this regard, the government needs to urgently im- tion on debt disbursed directly to foreign contractors plement debt reduction measures announced in timeously, it is now critical to develop and implement the new fiscal consolation plans, including postpon- a strategy for publishing annual debt reports, quar- ing the contraction of some pipeline debt, cancelling terly debt statistical bulletins, ad-hoc information on some of the contracted loans that are yet to be dis- debt and risks, and analytical reports. A website dedi- bursed, and ceasing the issuance of guarantees and cated to debt management and an investor relations letters of credit. unit in the debt management office would also be important. In addition to these operations and com- In addition to fiscal consolidation measures, munications measures, it is critical to update the me- Zambia has also announced plans to renegoti- dium-term debt management strategy annually, in ate and restructure some of its debt. If the re- line with the Medium-Term Expenditure Framework structuring efforts succeed, Zambia would reduce (MTEF). exposure to rollover risks. Tighter global financing conditions, wider Eurobond spreads, falling copper Systems for monitoring and analyzing risks prices and recent ratings downgrades will be key from SOEs (including ZESCO) to the fiscal posi- factors affecting the restructuring. Implementing fis- tion are critical. A ZESCO reform plan has been ap- cal consolidation and strengthening policy commit- proved but needs to be implemented in order for it ments (in particular, staying within the programmed to access cheaper financing and address its financial fiscal deficit) would, in part, improve the conditions and operational challenges. Moreover, systems for for restructuring. Any offers by the private sector to monitoring and publicly reporting debt and arrears finance the restructuring should be analyzed judi- (both guaranteed and non-guaranteed) of state- ciously, as experiences from other countries show owned enterprises, and for analysing the risks that they may be flouted by hidden costs. they pose to fiscal operations, need to be developed. Rebuilding foreign exchange reserves is a mac- An agro-led structural transformation roeconomic policy priority. Low foreign exchange Income inequality in Zambia is high and rapid reserves make Zambia vulnerable to terms of trade GDP growth between 2004 and 2014 benefited or global monetary policy shocks, which would trig- only better-off segments of the population. Ac- ger currency depreciation and increase the cost of cording to the 2015 Living Conditions Monitoring external debt service. Slowing external debt accumu- Survey (LCMS), the top 10 percent of households lation and reinforcing the ongoing debt management earned 56 percent of the total income, while the bot- reforms are key to the broader plan of rebuilding re- tom 50 percent of households earned just 7 percent. serves. Real GDP increased by 7.4 percent in the decade to 2014, yet the incidence of poverty increased in rural Development partners could support Zambia’s areas from 73.6 percent in 2010 to 76.7 percent in efforts towards rebuilding reserves and debt 2015. restructuring. For example, an IMF program would support reserves, cement policy commitments and Effective structural transformation has been market confidence, and attract additional conces- the missing link between growth and poverty sional and private financing at favorable terms. reduction in Zambia. Structural transformation is 3 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N a fundamental driver of sustained economic develop- and around secondary and tertiary towns, and to justify ment, which typically begins with productivity increases spatially targeted public and private investments, are a in the key sectors of the economy (particularly agricul- key starting point. This could be followed by targeted in- ture), creating the necessary conditions for other sec- centives for firms to move to these areas. Local councils tors to emerge, and production factors (labor, capital) need to be empowered to drive the spatial development to be reallocated towards the most productive sectors. agenda and implement locally relevant policies which Such reallocation is not only critical because it induces further agri-business development and job-creation. an increase in aggregate total factor productivity and per capita income, but also because it can significantly Strengthening human capital to improve labor reduce poverty. productivity and mobility. Zambia needs to improve education and health outcomes, especially for poor and In Zambia, however, pro-poor structural transfor- rural segments of the population. The National Health mation has been elusive because (i) it was not driven Insurance Bill is a positive step, but its effective imple- by sufficient reallocation out of agriculture; (ii) it was not mentation is critical. On education, focus needs to not preceded by productivity increases in agriculture, where only be on access, but quality. In addition, the syllabus of the majority of the population works; (iii) it was led by Technical and Vocational Education and Training (TVET) non-traded sectors, which are characterized by low pro- institutions could be transformed to promote an agro- ductivity and have remained highly vulnerable to copper led transformation agenda by blending technical cours- price shocks; and (iv) job growth in the non-agricultural es with entrepreneurship and agri-business courses. sectors was outpaced by growth in the working age population. Strengthening macroeconomic management and public investment management would support Agriculture has a high potential to support effec- structural transformation. Copper prices are a key tive structural transformation, not only because source of exchange rate volatility, which creates uncer- Zambia has vast fertile lands and water, but also be- tainty and hurts traded sectors. With elevated external cause it is surrounded by seven neighboring countries. debt levels, exchange rate volatility will likely increase the Increased regional and urban demand for diversified cost of debt service. Any development plans over the and processed products provides opportunities to sup- medium-term must ensure that borrowing is kept with- port the development of the manufacturing sector, spe- in sustainable limits, as unsustainable debt levels would cifically in agro-processing, which will provide employ- undermine spending productive and social spending in ment and government earnings. Below are ideas on the future. In the long run, a stabilization fund or larg- how Zambia can take advantage of these opportunities. er external buffers would go a long way in smoothing volatility. In addition, strengthening public investment Policy recommendations management would strengthen the link between debt, The progressive agricultural reforms that began productive investments and structural transformation. in the 2015/2016 season should be expedited. Prior to subsidy and agricultural reforms which started in the 2015/2016 season, maize-centric fiscal policy and agri- culture policy inconsistencies have been constraints to agricultural transformation. Other ongoing government reforms to scale up livestock and fisheries production will enhance agricultural diversification. Agriculture re- forms should be expedited to facilitate investments in infrastructure, market information, extension services and research and development (R&D). Linking farmers to local and regional value chains. The World Bank estimates that SSA’s demand for food will increase by 60 percent between 2015-30. In Zambia, food demand is expected to grow more than threefold in the next 15 years, to over US$25 billion. This offers prospects for agro-led industrialization for Zambia. Linking small farmers to local and regional value chains is key. Infrastructure for such linkages should be devel- oped within the confines of the fiscal space to ensure that debt sustainability will not reverse future progress. Moreover, reforms to tackle policy inconsistency and high costs of cross-border trade are critical. Spatial planning and developing secondary cities. Policies and investments can be spatially targeted to ar- eas with high potential to attract agri-business. Spatial diagnostic studies to assess agri-business potential in 4 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N 1 SECTION RECENT ECONOMIC DEVELOPMENTS A. REGIONAL ECONOMIC DEVELOPMENTS Sub-Saharan Africa’s economic recovery continued to gain momentum in H1 2018. Growth is fore- cast to improve to 3.1 percent in 2018, from an estimated 2.6 percent in 2017, but remains below its long-term trend. Economic recovery has been underpinned by favorable supply and demand shocks, and an improved environment for growth. However, risks remain, including an abrupt tightening cy- cle in the United States, a collapse in commodity prices triggered by a slowdown in China, and slow fiscal consolidation. According to the World Bank’s Africa’s Pulse (April 2018 edition)1 and Global Economic Prospects (June 2018 edition)2, favorable external and domestic con- ditions for growth continued to bolster economic activity in SSA in the first quar- Strong global ter of 2018. The region’s growth rebounded to 2.6 percent in 2017, following growth, robust a slump of 1.5 percent in 2016 (the lowest in two decades), and is expected to global trade and firm to 3.1 percent in 2018. easier financing conditions are expected to drive Improved external conditions have been underpinned by strong global growth SSA growth in and robust global trade. Global output is estimated to have expanded by 3.1 2018. percent in 2017 from 2.4 percent in 2016, reflecting increased investment in advanced economies. Meanwhile, global trade volumes expanded by 4.8 per- cent in 2017 compared to 2.7 percent in 2016 and are expected to remain strong at 4.3 percent in 2018, despite the tariff wars. Energy and minerals account for two-thirds of the region’s exports. In 2017, metal prices firmed by 22 percent from their 2016 level on strong demand from China (figure 1) and remained relatively high in H1 2018. Oil prices rose Global trade by 23.3 percent over their 2016 level, bolstered by robust demand and produc- volumes expanded tion cuts by most OPEC and some non-OPEC oil producers. The faster increase by 4.7 percent in in oil prices has been moderated by increased production of shale oil from the 2017 compared to United States. 2.7 percent in 2016. Eased financing conditions are allowing some SSA countries to increase public investments. Portfolio inflows to SSA have continued to increase in early 2018. Côte d’Ivoire, Kenya, Nigeria, and Senegal have issued Eurobonds to finance public investments. The region’s growth performance continues to be divergent. The aggregate 5 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure Commodity prices have been volatile 1 Energy and minerals account for two-thirds of the region’s exports. Source: World Bank Commodity Markets Data growth fluctuations typically mirror events in Nigeria, South Africa and Angola Economic activity – the largest economies that account for more than 60 percent of the region’s is expected to output. Nigeria’s improved growth prospects reflect improved oil production, remain subdued expansion in agriculture and stronger consumer demand. As for South Africa, in oil-exporting growth is now projected to be slower than anticipated. countries. Elsewhere, economic activity is expected to remain subdued in oil-exporting countries, especially within the Central African Economic and Monetary Com- munity (CEMAC), as its member countries continue to be strained by the effects of low revenue from oil. Growth picked up slightly in some metals exporters External pressures on the back of a recovery in metal prices. Increased consumer spending (sup- are subsiding ported by low food prices, increased remittances inflows and looser monetary in commodity policy) is also supporting growth in many countries in SSA. exporters supported by External imbalances have narrowed in commodity exporters supported by im- improved terms of trade. proved terms of trade and in some countries a compression in imports. The median current account deficit in oil-exporting economies narrowed to 4.8 per- cent of GDP in 2017 from 10.3 percent in 2016 and is expected to narrow fur- ther in 2018. In mineral exporters, the current account narrowed by more than 4.0 percentage points to reach 11.0 percent of GDP in 2017. However, current Zambia’s account deficits have remained wide in some non-resource countries that have Eurobonds spreads scaled up public investments over the past few years. have widened. Current account deficits have been largely financed by increased inflows of for- eign direct investments, portfolio flows and bonds. FDI has largely flowed to non-oil infrastructure projects (e.g. in Ethiopia). Non-resident portfolio flows to Nigeria, South Africa, Ghana and Kenya have increased substantially in search of high yields. Eurobond issuance doubled to 14.4 billion in 2017, and global Despite improved financing conditions have remained positive in 2018. Sovereign spreads have current accounts, narrowed in most Eurobond issuers, except in Zambia (figure 2). external buffers have remained low Despite improved current account balances, external buffers have remained in many countries. low in many countries, with the median foreign reserves for the region remain- ing at three months of import cover in 2017, as in 2016. Some SSA countries have reserves below three months of import cover. Building reserves remains critical for these countries to reduce vulnerability to external shocks. 6 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure Eurobond spreads have narrowed in 2017 2 Daily soverign spreads Source: Bloomberg Fiscal policy remained Prices have remained stable in many SSA countries, supported by better ag- contractionary in ricultural harvests and stable exchange rates. Exchange rate stability reflects many commodity high commodity prices, improved trade balances and increased capital inflows. exporters. Low inflation has allowed for the easing of monetary policy to support growth. Fiscal policy has remained contractionary in many commodity exporters, as they attempt to contain deficits accumulated due to falling commodity revenue and high spending in 2015 and 2016. In oil-exporting countries, the median fiscal deficit narrowed from 4.2 percent of GDP in 2016 to 3.4 percent in 2017 and is expected to narrow further to 1.9 percent in 2018. In non-resource rich countries, the fiscal deficit narrowed from 4.7 percent of GDP to 3.9 percent, and is expected to narrow further to 3.7 percent in 2018. However, the fiscal deficit for mineral exporters widened to 5.1 percent of GDP from 4.3 percent. The number of countries facing Indebtedness has increased in SSA following large fiscal expansions. As at high risk of debt March 2018, the number of countries facing a ‘high’ risk of external debt dis- distress increased tress had increased to 18 compared to 8 in 2008. The median debt level for the to 18 in March region increased from 47 percent of GDP in 2016 to 53 percent in 2017. Some 2018 from 8 in countries in high risk of external debt distress embarked on fiscal consolidation 2016. (figure 3). Outlook for Sub-Saharan Africa The region’s GDP growth is forecast to reach 3.1 percent in 2018, 3.5 percent in 2019, and 3.7 percent in 2020 (figure 4). The medium-term outlook assumes stable oil and metal prices, robust global trade and favourable global financing conditions. Faster growth is possible if structural reforms are implemented. The medium-term outlook is subject to both downside risks and potential up- side developments. On the upside, stronger than expected activity in advanced economies would boost exports demand, investments and remittances. On the downside, externally, (i) an abrupt monetary tightening in the United States 7 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure Fiscal deficits in some countries facing high risk of external debt distress 3 Fiscal balance (% of GDP): cash basis Source: World Bank (2018): MFMOD Note: f= forecast Addressing would reduce investor appetite for riskier assets in SSA and tighten global fi- macroeconomic nancing conditions; and (ii) a slowdown in China would reduce commodity imbalances prices; while domestically, (iii) slower reforms to address macroeconomic im- and structural balances and structural bottlenecks would undermine private sector recovery. bottlenecks would improve private sector recovery. Figure SSA growth has picked up 4 GDP growth (%) Source: CSO Zambia and Ministry of Finance f = forecast 8 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N B. THE STATE OF THE ZAMBIAN ECONOMY The Zambian economy is estimated to have expanded by 3.4 percent in 2017, compared to 3.8 per- cent in 2016, despite high copper prices, expansive monetary policy and a bumper crop harvest. Large public expenditure arrears accumulated in 2016 (resulting in non-performing loans) and high public domestic borrowing at high yields constrained the reduction of lending rates, leading to low private sector lending and growth. Public debt has risen sharply over the past few years, and the costs of debt service are crowding out other spending lines and impacting foreign currency reserves. The implementation of government’s fiscal consolidation measures is critical for returning debt to- ing, rebuilding reserves wards sustainable levels, creating fiscal space for social and productive spend­ and unlocking private sector economic activity. Fiscal challenges remain Large fiscal deficits have been a recurring feature since 2013 (figure 5). Three factors have driven the fiscal deficit. First is the expansion of public investments and subsidies, leading to an average structural fiscal deficit of 6.9 percent of GDP between 2013 and 2017 (prior to 2017 subsidy reforms). Second is lower copper prices and slower GDP growth that led to a fall in revenue, resulting in average cyclical fiscal deficits of 0.3 per- cent of GDP.3 Third is expensive external borrowing from non-concessional sources, Fiscal deficits and followed by a currency depreciation in H2 2015, which increased the interest payments budget credibility (from 9 percent of domestic revenue in 2013 to 23 percent in 2017). Fiscal expansion have deteriorated has put a strain on budget credibility. In 2015 and 2016, revenue mobilization was since 2013. undermined by lower copper prices while debt service increased following currency depreciation. In addition financing challenges increased ahead of the 2016 elections. Spending was adjusted to meet these new realities leading to an increase in the stock domestic public expenditure arrears rose K 19 billion at end-2016 from K 5 billion at end-2014. Figure Fiscal deficits have widened and budget credibility deteriorated 5 Fiscal balance (% of GDP): cash basis To clean up after 2016, the government committed to a well-planned fiscal consolidation. Source: Ministry of Finance and World Bank; Note: Inverted scale To clean up after 2016, the government committed to a well-planned fiscal consolida- tion – targeting a cash fiscal deficit of 7 percent of GDP in 2017, while clearing payment arrears to boost economic growth. This was to be done along with several structural and debt management reforms and rebuilding foreign currency reserves. These com- mitments were reinforced when the government launched its Economic Stabilization and Growth Program4 (dubbed Zambia Plus) in Q4 2016 and subsequently a medium- term debt strategy (MTDS). 9 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Domestic arrears The fiscal deficit (commitment basis) was reduced to 4.4 percent of GDP from 8.9 per- fell to K 12.7 billion cent in the previous year (table 1). This was on account of (i) a 5 percent fall in spending at end-2017, from on subsidies following fuel, electricity and agriculture subsidies reforms; (ii) the reduc- K 19.1 billion at tion of spending on goods and services (by 14 percent below budget), and (iii) the re- end-2016. duction of domestic arrears from K 19.1 billion to K 12.7 billion. However, the cash fiscal deficit was still above the target of 7 percent of GDP due to overruns on spending on roads (by 21 percent) and higher than programmed interest payments (by 17 percent). Spending on social cash transfers was 42 percent below target. Table Fiscal trends % GDP unless stated 2014 2015 2016 2017 2018f 1 Actual Actual Actual ActualForecast Revenue and Grants 19.0 18.8 18.1 17.6 18.0 Domestic revenue 18.2 18.6 17.9 17.4 17.8 Tax revenue 15.5 14.4 12.9 14.9 14.9 Non-tax revenue 2.7 4.2 5.0 2.5 2.9 Grants 0.8 0.2 0.2 0.2 0.2 Expenditure 24.4 28.2 23.8 25.4 25.5 Current expenditure 19.1 21.2 19.9 20.2 19.4 Revenue Wages and salaries 9.5 8.8 8.7 8.3 8.3 Goods and services 3.1 2.9 2.2 2.1 2.0 performance has Interest payments 2.2 2.8 3.4 4.0 4.7 been in line with Social benefits 0.4 0.5 0.2 0.8 0.6 expectation in H1 Subsidies 2.0 3.9 3.5 3.2 2.6 2018. Intergovernmental transfers 1.9 2.3 1.9 1.8 1.4 Public investment (includes foreign projects) 5.3 7.0 3.9 5.2 6.2 Primary balance -3.2 -6.6 -2.3 -3.8 -2.9 Fiscal deficit (cash basis) -5.4 -9.4 -5.7 -7.8 -7.5 Fiscal deficit (including change in payment arrears) -8.3 -12.0 -8.9 -4.3 -7.6 Financing 5.5 10.0 5.7 7.8 7.5 Domestic financing 0.8 1.7 3.8 4.9 3.0 External financing 4.7 8.3 2.0 2.9 4.5 Public and publicly guaranteed debt (including arrears) 35.3 61.4 60.5 63.8 66.9 o/w Central government debt (including arrears) 32.9 56.4 56.9 60.7 62.0 o/w Stock of arrears 2.9 5.5 8.7 5.3 5.4 o/w Publicly guaranteed debt 2.3 3.9 3.5 3.6 4.9 GDP (Current ZMW, millions) 167,053 183,381 217,225 244,704 270,384 Source: Ministry of Finance and World Bank projections Budget performance in H1 2018 In 2018, the government committed to a fiscal deficit (cash) of 6.1 percent of GDP. Rev- Expenditures have enue (including grants) were programmed to increase to K 52 billion (from K 43 billion been above target in 2017). Public expenditures were programmed to increase to K 71 billion (from K 65 in H1 2018. billion in 2017). Allocation to debt service was programmed to increase by 40 percent, while allocations to sectors that are key for diversification were cut by 14 percent. Between January-May 2018, revenue performance was in line with expectation, but there were variations across key revenue lines. Income tax was below target (by 7 per- cent) reflecting weak economic activity. This was also the case with customs and excise duties (by 25 percent). Value added tax (VAT) was 30 percent above target on the back of VAT reforms implemented in 2017 and increased VAT-rated imports. Total expenditures were 20 percent above budget largely due to overruns in foreign debt-financed projects (by 74 percent) and goods and services (by 26 percent). In ad- dition, interest payments were 21 percent above target, prompting the government to allocate an additional K 3 billion towards debt service. This was largely because some public investments projects were completed ahead of time. On the other hand, wages If the H1 fiscal and salaries and social spending have been below target. stance is maintained, fiscal If the H1 fiscal stance is maintained, fiscal deficits (cash) would be higher than planned deficits (cash) in 2018. With limited appetite for treasury bills in H1 2018, the stock of arrears has in- would be higher creased to K 13.9 billion, from K 12.7 billion in December 2017. than planned in 2018. The government has announced fiscal consolidation measures to slow the pace of debt accumulation (box 1). The success of the measures will hinge on bold implementation. Developing and publishing an implementation plan and timelines would be critical. 10 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Box The government’s fiscal consolidation measures 1 In a statement on June 14, 2018, the Minister of Finance noted that Zambia is at ‘high risk’ of debt distress and announced fiscal measures to return debt to ‘medium risk’. The expenditure measures include suspending/postponing capital projects which are below 80% to completion; reducing the wage bill by moving the payroll to the Ministry of Finance; restricting travels and workshops; disposing of some government vehicles; setting up a committee to determine other poor-quality expenditures to be dropped; renegotiating electricity supply contracts with independent power producers; reviewing SOEs with a view to restructure the non-performing ones; and setting up a committee to assess all capital expenditure projects before they are submitted to cabinet. Revenue measures include curbing tax evasion by fuel smugglers; improving revenue collection from mobile users; introducing a tax on precious metals; introducing elec- tronically verifiable stamps on high risk imports to curb smuggling; and scaling up land titling. While these measures strike the right tone, most of them are still at policy level, and work is required to turn them into implementable plans, including specifying the timeline for implementation and the fiscal resources that will be saved. This will likely be done in the medium-term expenditure framework (2019-21) and 2019 budget. Meanwhile, the 2018 fiscal deficit is projected to be well above target. Source: Ministry of Finance (2018).5 External debt rose Public debt has increased and has become more non-concessional to US$ 8,7 billion Larger than programmed public spending in 2017 and H1 2018 triggered a faster ac- at end-2017 from cumulation of debt than the IMF-World Bank DSA (released in October 2017) had pro- US$ 6.9 billion at jected under a ‘worst-case scenario’. External central government debt rose to US$ 8.7 end-2016. billion at end-2017, compared to the DSA’s projection of US$ 8.0 billion and up from US$ 7.0 billion in 2016. By end-June 2018, external central government debt is esti- mated to have reached US$ 9.4 billion.6 At the end of March 2018, publicly guaranteed debt was estimated at US$ 1.2 billion, from 131 million at end-2012. Debt has returned to the spotlight just a decade after Zambia benefited from US$ 6.6 billion debt relief in 2005-06 under the Heavily Indebted Poor Country initiative. The share of external debt from multilateral development banks and bilateral lenders (which are largely concessional) has declined from 77 percent in 2011 to 23 percent in The share of debt 2018. Debts from commercial sources (52 percent) and trade credit (25 percent) now from multilateral dominate the external debt portfolio, and of this, 44 percent are Eurobonds, while 35 development percent is from Chinese lending institutions. A small part is comprised of syndicated banks and bilateral loans and external arrears converted into debt. sources declined to 23 percent in 2018, from 77 percent in Domestic debt (excluding arrears) has also increased from K 33 billion in 2016 to 48 2011. billion in 2017, and to K 52 billion at the end of June 2018. A joint IMF-World Bank DSA (released in October 2017) elevated Zambia’s risk of ex- ternal debt distress to ‘high’ from ‘medium’ in July 2015 (box 2). This result has been confirmed by the government’s own DSA in H1 2018. According to the IMF-World Bank DSA, if the pace of debt accumulation had continued under the ‘business as usual sce- nario’, the PV of external debt-to-GDP would breach the 40 percent threshold during 2019-23, while the PV of debt service to revenue ratio would breach its threshold (20 percent) in 2022 and 2024, when amortizations for the first two Eurobonds are due. Yet, debt has continued to increase faster than the ‘business as usual scenario’. A government DSA in H1 2018 Revising the debt limits may help to moderate the pace of debt accumulation. In 2016, confirmed that the parliament increased the debt limit to US$ 16 billion from US$ 6 billion in 20117. It Zambia faces a might be critical to revise it down to sustainable and binding levels. This would need to ‘high’ risk of debt be coupled by strengthening commitment controls to curtail the accumulation of new distress. arrears. 11 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure External debt has increased sharply since 2012 6 The external debt limit was increased from US$ 6 billion in 2011 to US$ 16 billion in 2016. Source: Ministry of Finance, IMF and World Bank Box A new debt sustainability framework for low-income countries 2 In October 2017, a joint IMF-World Bank DSA elevated Zambia’s risk of debt distress to ‘high’ from ‘medium’. A DSA conducted by the government in H1 2018 confirms the same results. As at March 2018, Zambia is among 18 Sub-Saharan countries with a high risk of debt distress. The IMF-WB DSA is usually conducted annually and a new DSA for Zambia is expected by end-2018. The IMF-World Bank DSA framework for low income countries has been recently revised to (i) adapt to increased commercial borrowing and heightened liquidity risks in low income countries (LICs); (ii) to reduce false alarms without impairing the ability to correctly flag debt events; (iii) to expand the use of relevant country-specific information in risk assessment; (iv) to reduce the number of threshold and redundant indicator; (v) to provide for more information content of stress tests and risk scenarios; and (vi) to enhance transparency and engagement between IMF-World Bank teams and country authorities. The major change is the methodology used for determining debt carrying capacity. Instead of being solely dependent on the Country Policy and Institutional Assessment (CPIA) in determining debt carrying capacity (as in the previous DSA framework), the new framework considers CPIA (45 percent weight) and other inputs, including expected GDP growth, remittances and international reserves. Moreover, more tailored stress tests will be conducted for contingent liabilities, natural disasters, commodity price shocks and market-financing shocks. Finally, the new framework will enforce a more consistent application of judgement. Source: IMF and World Bank (2018) 12 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure Public and publicly guaranteed debt as a percent of GDP 7 Public and publicly guaranteed debt and arrears (% of GDP) Source: Ministry of Finance, IMF, World Bank Debt management reforms are taking shape, but more is needed Over the past year, the Ministry of Finance has made progress with debt management reforms. Notable progress includes the publication of the medium-term debt strategy in 2017; conducting a DSA in H1 2018; reorganizing and increasing capacity in the debt management office; and improving debt records by migrating to the latest DMFAS.8 Systems have also been put in place to get information on disbursements by lenders directly to foreign contractors’ accounts in a timely manner. It is critical to build on these reforms and improve on debt reporting, investor relations and managing the costs and risks. A strategy for Debt reporting could be strengthened reporting debt It is critical to develop and implement a debt reporting strategy, which includes pub- numbers is needed. lishing an annual report and quarterly statistical bulletins, ad-hoc information on debt risks and analytical reports. The Ministry of Finance website could be strengthened by adding a dedicated debt management area; and an investor relations unit could be established in the Investment and Debt Management department. In line with global reporting guidelines and constitutional obligations, sovereign debt guarantees should be published in debt reports. Furthermore, it would be critical to provide information on arrears (by sector) regularly. These improvements would give the Ministry of Finance control over debt information and prevent damaging allegations of ‘hidden debt’ as has been the case in the past few months (box 3).9 Interest payments Management of costs, risks and maturities could be strengthened accounted for The cost of debt service has increased substantially. In 2017, interest payments as a 23 percent of percent of domestic revenue rose to 23 percent from 6 percent in 2011. External debt domestic revenues service accounts for 54 percent of total debt service and has become the main source in 2017. of foreign currency outflows. Foreign currency outflow to service external public debt was US$ 706 million in 2017, from US$ 63 million in 2013 (figure 9).10 In Q1 2018, debt service has already consumed over a third of its annual budget, prompting the govern- ment to increase the initial budget allocation to debt service by 26 percent. The cost of debt service has gradually reduced fiscal space for social services and productive spending (figure 8). For example, as the cost of debt service has averaged 22 percent above its budget between 2011 and 2017, the following sectors have seen their actual disbursement below budget allocations: education (by 35 percent), economic sectors (by 25 percent), social benefits (by 14 percent), and health (by 12 percent). 13 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Box Ideas for calming the ‘hidden debt’ noise 3 Having issued non-concessional debt, Zambia now faces a high demand for timely and comprehensive debt reports. Yet, annual debt reports were last produced in 2012, and quarterly debt reports are not being published. Aggregate debt (for central government and on lending) is only published in monthly economic reports (with a two-month lag), and disaggregated debt (by creditors) is only published in annual reports with a four-month lag. Although global debt reporting guidelines recommend, and the current Loans and Guarantees Act requires that guarantees are reported regularly, they are not recorded along with the debt numbers. However, since July 2018, the Minister of Finance has started announcing guarantees in quarterly statements made on the state of the economy. The omission of guarantees creates discrepancies between government debt numbers and those from other sources. Furthermore, pipeline loans are only reported in the yearly economic report. These gaps in debt reporting have created confusion and room for speculation (by the public, media and analysts) about Zambia’s debt level, leading to allegations of ‘hidden debt’. These allegations undermine investor sentiments as reflected, in part, by the widening of Eurobond spreads. Global experiences show that lack of adequate debt information opens room for negative specula- tion. This was the case with some Asian countries in the late 90s, and they responded by publishing compre- hensive debt information and timely reports. In Africa, many commercial debt issuers are putting mecha- nisms in place for transparent and timely debt reporting. For example, Ghana now publishes both quarterly and annual debt reports, all government projects (including PPPs), and information on investor relations on its Ministry of Finance website. Zambia too can build on its recent progress towards debt management by publishing more debt information (annual reports, quarterly statistical bulletins, ad-hoc information on debt risks and analytical reports); by strengthening its website through a dedicated debt management area; and establishing an investor relations unit in the debt management office. Source: Ministry of Finance, Ghana11 Three factors are behind the fast increase in the costs of debt service. First is the suc- Three factors cessive increase in the cost of external commercial debt issuances. For example, the are behind the coupon on Eurobond issuance increased from 5.4 percent in 2012 to 8.5 percent in fast increase in 2014, and 9.0 percent in 2015. Second is the depreciation of the kwacha in 2015, which the costs of debt led to a substantial increase in the cost of external debt service. Third is the high pro- service. portion of Treasury bills (40 percent) in domestic debt, which makes domestic debt vulnerable to changes in interest rates. Figure Interest payments have crowded out other spending lines 8 Share of Domestic Revenue (%) Source: Ministry of Finance 14 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Zambia’s debt maturities are highly concentrated. As the redemption date for the 2012 Zambia’s debt maturities Eurobond approaches, the government has begun discussions on restructuring its are highly debt. It has announced plans to engage China on restructuring some loans and a team concentrated. has been set up to look at the modalities of dealing with the Eurobond. Factors that will influence the terms of restructuring include high global interest rates, falling copper prices, wider spreads on existing Eurobonds, sovereign downgrades, and the level of debt distress. Of these factors, the government can partly influence the latter three by implementing its fiscal consolidation measures and other structural reforms. Zambia could also learn from the experience of Ghana with debt restructuring (box 4). Figure The cost of external debt service has increased 9 Note: FX = foreign exchange reserves; lhs = left-hand side; rhs = right-hand side Source: Bank of Zambia and Ministry of Finance Box Restructuring debt under difficult market conditions: some lessons from Ghana 4 In 2015, Ghana wanted to borrow US$ 1 billion to meet pressing refinancing deadlines, extend debt ma- turities to reduce fiscal pressure, and smooth out its debt service profile. Despite having an IMF pro- gram, the conditions for market access were not favorable for Ghana due to falling oil and commodity prices, an unstable and depreciating currency, high market volatility for emerging markets, and poor sov- ereign ratings (due to a high debt burden). Therefore, Ghana requested the World Bank for support with market access. An agreement was reached for a policy-based guarantee and budget support, in which the World Bank guaranteed a maximum exposure of 40 percent (i.e. US$ 400 million), in addition to US$ 150 million in-budget support. This enabled Ghana to refinance its existing debt stock at favorable terms. The direct benefits of World Bank’s policy-based guarantee included, (i) given World Bank’s AAA rating, the rating on Ghana’s US$ 1 billion issuance being revised by two notches: e.g. Moody’s revised the rating from B3 to B1; Ghana managing to issue the longest ever Eurobond tenor (15 years) by a Sub-Saharan African country (except South Africa); yields at issuance reducing by 200 basis points compared to the market rate; and the issue being 100 percent over-subscribed with a diversified investor base compared to standalone bonds. Other countries that have accessed commercial borrowing at cheaper costs with the support of a World Bank policy-based guarantee are Albania, Angola, Argentina, Colombia, Macedonia, Montenegro, Pakistan and Serbia. Evidence suggests that the benefits brought from a policy-based guarantee and budget support can only be sustained if the macroeconomic and fiscal framework is robust, for example, (i) fiscal and exter- nal imbalances and debt should be at sustainable levels, (ii) there is a track record of meeting fiscal targets and policy commitments, and (iii) commitment controls should be strict to contain the accumulation of ar- rears. For this reason, the World Bank only uses these instruments in countries where the macroeconomic and fiscal framework is robust, or if there is an IMF program in place to cement policy commitments and support the country in implementing plans to achieve such a framework. Source: World Bank (2016);12 Independent Evaluation Group (2017).13 15 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N High debt service Trade balances are improving, but the current account deficit remains wide costs have The current account deficit only narrowed by 0.1 percentage point to 4.5 percent of continued to exert GDP in 2017 from 4.6 percent of GDP in the previous year (table 2). This was in spite pressure on the of (i) a narrowed trade deficit (from US$ 512 million to US$ 296 million 2017) on a 39 current account percent increase in copper exports; and (ii) a 69 percent increase in secondary income and foreign inflows. The main driver of the wider current account deficit was increased by primary exchange reserves. income outflows (from 654 million to US$ 1.1 billion), largely reflecting interest pay- ments of external government debt. Over H1 2018, the trade deficit has narrowed by 38 percent compared to H2 2018, but the current account has remained under pres- sure due to external interest payments. The current account has been largely financed by the net inflow of foreign direct investments, which increased from US$ 486 million to US$ 1,600 million in 2017. Net portfolio inflows have been much lower than the levels experienced in 2012, 2014 and 2015 when Zambia issued Eurobonds. Gross foreign High costs of external debt service have led the successive deteriorations of foreign currency reserves currency reserves since 2015. Gross international reserves fell from US$ 3.0 billion in were US$ 1.8 billion December 2015 (4.5 months of import cover) to US$ 1.8 billion in June 2018 (2.1 month in June 2018. of import cover). External public debt service (including amortization) now accounts for close to 63 percent of foreign currency outflows. Successive loosening of monetary policy since November 2016, in particular the reduc- tion of the statutory required reserve ratio from 18 percent in November 2016 to 5 percent in February 2018, has led to outflows of foreign currency from the central bank to commercial banks. In addition, reserves have been worsened by the structure of some commercial debts, which involves a one-way outflow of foreign currency. These debts are directly disbursed to foreign contractors overseas, yet they are serviced by an outflow of foreign currency. Balance of Payments (US$, unless stated otherwise) Table Balance of payments (US$ million) 2 2014 2015 2016 2017* 2017 2018f* 2018f Current Account 581 -831 -954 -918 -1,006 -776 -1,209 o/w Balance on goods and services 832 -645 -512 -740 -296 -594 -323 0.730 Balance on Primary Income -552 -412 -654 -642 -1,070 -598 -1,253 o/w Interest on public debt -134 -204 -314 -371 -545 -387 -510 Balance on Seconday Income 301 227 212 464 359 416 367 0.693 Capital Account 202 81 55 59 58 65 57 Financial Account -463 353 783 735 1,011 1120 1,001 o/w FDI inflows (net) 3,195 1,177 486 1,600 1,072 1699 1,120 Portfolio inflows (net) 1,197 1,223 417 200 193 100 171 Other investments inflows (net) -4,879 -2,029 -135 -1,084 -322 -570 -400 o/w Amortisation (Public debt) -128 -188 -169 -209 -162 -387 -380 Errors and Omissions 1 4 -65 0 22 0 0 Overall Balance 322 -393 -181 -123 86 509 -201 Financing -322 393 181 123 -86 -509 201 o/w Gross reserve change -315 446 250 185 -12 -448 261 o/w Use of Fund resources -29 -53 -69 -62 -74 -61 -60 Current account (percent of GDP) 2.1 -3.9 -4.6 -3.6 -4.5 -2.8 -4.6 Gross International Reserves 3,078 2,977 2,366 2,180 2,081 2,629 1,900 Note: * IMF-WB Baseline in the 2017 DSA Source: Bank of Zambia, IMF and World Bank -262 -392 -483.7 -580 -707 -774 -890 16 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N The kwacha remains stable despite low reserves The kwacha appreciated slightly, from K 9.86/US$ in January 2018 to K 9.52/US$ in April 2018 (figure 10), due to high copper exports, increased portfolio inflows in the Lower non-resident domestic public debt market, and foreign currency inflows from a large multinational participation in to settle quarterly tax obligations (between end-February and end-March).14 However, Treasury bills auctions in H1 the kwacha came under pressure from mid-April to mid-June 2018, depreciating by 10 2018 also weighed percent. Fundamentally, this depreciation is linked to increased foreign currency out- on the kwacha. flows to service public external debt and to import fuel, a high fiscal deficit and debt, and tightened global financing conditions. Lower non-resident participation in Treasury bills auctions in H1 2018 also weighed on the kwacha. The foreign currency interbank market has remained subdued, with transactions totaling US$ 1.4 million in H1 2018 compared to US$ 3.6 billion in H1 2015. Figure The kwacha has come under pressure in 2018 10 With low level of reserves, the kwacha is vulnerable to global shocks in commodity prices and monetary policy. Note: inverted scale: a decline is a deprecation Source: Bank of Zambia With a low level of reserves, the kwacha is vulnerable to global shocks in commodity prices and monetary policy. In the event of a depreciation, reserves are too low for BoZ intervention in the foreign exchange market as was the case following the deprecia- tion in H2 2015. At that time, reserves were at a record high (US$ 3.2 billion) following the issue of a US$ 1.25 billion Eurobond, and the BoZ was able to sell US$ 822 million between Q3 2015 and Q1 2016, in order to smooth volatility and prevent further de- preciation. Monetary policy remains expansive as inflation is low Year-on-year inflation increased to 7.5 percent in Q2 2018 from 6.5 percent in the pre- vious quarter, and breached the upper band of the 6-8 percent target range in August 2018.15 Food price inflation rose from 4.8 percent in December 2017 to 8.3 percent in May 2018, reflecting low crop harvests (figure 11). Non-food inflation rose from 7.5 per- cent in December 2017 to 7.8 percent in August 2018, driven by increased transport Inflation has costs. The risks to medium-term inflation are on the upside, and they include high fiscal increased deficits and external debt, and a strengthening of the US dollar. slightly. Monetary policy has remained accommodative (figure 12), facilitated by inflation re- maining within BoZ’s medium-term target range since December 2016. In February 2018, BoZ reduced the policy rate to 9.75 percent, the lowest since January 2014. This followed a cycle of five consecutive rate cuts, since November 2016. In August 2018, the policy rate was left unchanged, reflecting the need to balance private sector lending with containing risks of food inflation. However, BoZ has signaled that monetary policy may be tightened in the future if it breaches the upper bound of the medium-term target range.16 17 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Public domestic As monetary policy became looser since November 2016, average nominal lending borrowing has rates have declined slowly, reaching 24.0% in May 2018 from a peak of 29.5% in De- constrained faster cember 2016. Real lending rates have not declined as much, given the deceleration in reduction in inflation (figure 12). A slower reduction in lending rates reflects the impact of govern- lending rates. ment domestic borrowing at high yields and increased non-performing loans (resulting from government arrears).17 Figure Inflation picking up but remains within the target (6-8%) 11 Source: CSO Zambia Government’s Historically, small and medium enterprises (SMEs) have faced high lending rates in efforts to establish Zambia due to low collateral and a shallow financial system. High lending rates are also loans- guarantees due to low levels of savings. Zambia is largely a cash economy, with an estimated K 6.4 could lead to billion circulating outside the banking sector.18 Interventions are needed to improve improved lending national savings, increase financial inclusion, and enhance financial sector competition. to SMEs. The recently launched Nations Financial Inclusion Strategy (NFIS 2017-2022) and the government’s efforts to establish loans-guarantees could lead to improved lending to SMEs.19 Figure Lending rates remain high despite looser monetary policy 12 Source: Bank of Zambia 18 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Macroeconomic challenges have constrained economic activity The macroeconomic challenges highlighted above and other domestic shocks (in par- ticular low rains in the 2017-18 season) are constraining growth. Over the Q1 2018, growth slowed to 2.6 percent from 3.4 percent in the previous quarter. After slowing to 3.4 percent in 2017, from 3.8 percent in 2016, economic growth is expected to slow further to 3.3 percent in 2018 (figure 13 and table 5). Macroeconomic Agriculture is expected to make a negative contribution to growth in 2018 (figure 13), vulnerabilities reflecting low crop harvests in the 2017-18 farming season, especially in the southern are undermining half of the country. A recent crop survey suggests that the production of key crops economic activity. contracted, including maize (by 34 percent), Irish potatoes (by 57 percent), cowpeas (by 45 percent), wheat (by 41 percent), sorghum (by 24 percent), barley (22 percent), soya beans (14 percent) and sweet potatoes (by 11 percent).20 Crops account for close to 90 percent of output from the agriculture, forestry and fisheries sector. The sharp contractions in crop production do not reflect a substantial deviation from the five-year production trends, but is largely because a bumper harvest was recorded in the previ- ous season. Accordingly, the low harvest, while reducing aggregate economic output growth, is not expected to compromise food security. Figure Economic activity is expected to remain subdued in 2018 13 Real GDP growth Low harvest is not expected to compromise food security. Note: f=forecast Source: CSO Zambia and Ministry of Finance ZESCO’s financial Low rains have not restrained domestic electricity production because the catchment situation is a key areas of rivers that feed Zambia’s main hydro-electricity reservoirs received normal risk to reliable rains. On July 16, 2018, the country’s largest electricity reservoir, Kariba Dam, was at 86 power supply. percent of full capacity compared to 55 percent on the same date in 2017. Approxi- mately 95 percent of electricity generation in Zambia is linked to hydro, and therefore the high water level in reservoirs is expected to improve power generation. In addition, the coming on stream of other power stations like Maamba has improved the energy mix. However, ZESCO has accumulated substantial arrears to independent power pro- ducers, and if Government’s plan to deal with these arrears and improve the opera- tional efficiency of ZESCO is not implemented urgently, there will be risks to reliable electricity supply over the medium term. Higher tariffs are The mining sector has performed well in Q1 2018 on the back of strong copper pro- key for future duction. The sector expanded by 12 percent on the back of a 16 percent increase investments in in copper output (year-on-year). In Q2 2018, copper output increased further, by 6 power generation. percent (year-on year). High copper production in H1 2018 was driven by high copper prices, breaching US$ 7,000 per metric ton in January and February (figure 14). How- 19 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N ever, copper prices have softened by 19 percent between June and August 2018 on weak economic data from China, and may decline further as output is ramped up at the world’s largest copper mine in Chile following the resolution of a labor dispute. Table Quarterly GDP growth (year-on-year) 3 2014 2015 2016e 2017f 2018 % Growth Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Agriculture, forestry 1.7 -0.6 -0.2 2.5 -8.5 -7.8 -6.1 -7.7 3.1 -1.0 0.7 -4.8 17.6 15 16 -6 -17.3 and fishing The non-mining Mining and 3.5 -10.1 -0.7 -2.4 -4.7 17.1 -2.0 -6.1 8.0 7.5 5.0 7.8 -5.1 4.2 3.5 9.1 14.1 quarrying industry is Manufacturing 9.7 11.7 0.2 5.1 5.1 1.8 8.7 6.2 1.1 4.4 3.7 1.3 1.8 6.6 2.6 6.4 2.1 expected to expand Electricity 4.1 1.4 0.7 1.7 8.8 7.2 -2.9 -18.9 -15.4 -16.9 -3.2 17.5 25.6 27 20 23 11.4 faster in 2018 than Construction -6.5 15.3 10.7 22.2 37.4 20.5 3.8 15.4 9.1 11.7 14.8 3.3 2.6 6.6 15 2 3.3 in 2017. Wholesale and retail -0.4 6.4 8.8 -0.9 1.8 -1.2 3.7 1.5 0.8 -1.0 -1.4 2 1.9 -1 -0 2.1 2.0 trade Financial and 7.2 19.4 14.2 19.9 3.7 7.6 21.6 14.9 4.7 4.8 -9.2 -8.2 -0.8 0.3 -6 -1 22.6 insurance GDP activities at market 2.5 5.6 5.5 5.2 4.1 2.6 3.8 1.3 3.2 4.7 3.1 2.7 3.1 3.6 4.4 3.3 2.6 prices Source: CSO Zambia Figure Copper production was ramped up in H1 2018 14 Source: CSO Zambia and World Bank Pink Sheets However, there are risks to higher copper production. First is the dispute between the government and a few mines over the higher power tariffs. Higher tariffs are important for ZESCO’s financial sustainability and future investments in power generation. Second is a tax dispute between Zambia’s largest copper producer, First Quantum Minerals (FQM21) and the Zambia Revenue Authority (ZRA).22 In March 2018, ZRA presented FQM with a US$ 7.4 billion bill (which includes tax, penalties and interest costs) for alleged Wholesale and tax evasion. Third is delayed VAT returns to the sector, which is affecting decisions on retail trade is the future investments in the sector. largest sector of the Zambian Activity in the non-mining industry has been subdued in Q1 2018 due to a slowdown in economy. construction activities and manufacturing, reflecting low access to credit. Year-on-year growth of the manufacturing sector slowed to 2.1 percent in Q1 2018 from 6.4 percent in the previous quarter. Growth in the construction sector improved to 3.3 percent in Q1 2018 from 2.0 percent in the previous quarter, but is far below the trend of 11.7 percent over the past four years. The services sector is expected to remain subdued in 2018, due to a slow recovery in wholesale and retail trade and financial services. The two sectors combined account 20 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N for a quarter of Zambia’s GDP and 44 percent of the services sector output. Wholesale and retail trade is the single largest sector of the Zambian economy, accounting for 22 Credit extension to percent of GDP. The growth of wholesale and retail trade has remained subdued over the private sector the past two years, due to weak consumer spending – resulting from lower real incomes remains low. and low access to credit. Low real income reflects high costs of goods and services imposed by a high inflationary environment in 2016 and 2017. In Q1 2018, consumer spending grew by only 0.3 percent (year-on-year), and the wholesale and retail sector grew by 2.0 percent compared to 2.1 percent in the previous quarter. Despite accommodative monetary policy, the financial sector remains fragile. Non-per- forming loans rose to 13.4 percent of outstanding loans in April 2018, from 12.2 per- cent in December 201723, as many suppliers owed by the government could not service loans and expand their operations. With high non-performing loans, commercial banks have lost appetite for private sector lending. Arrears clearance Meanwhile, increased domestic borrowing by the government at high yields has at- is key for tackling tracted commercial banks, at the expense of riskier private sector lending. Accordingly, non-performing although the total credit extended by the financial sector expanded by 0.3 percent in loans. Q1 2018, it largely went to households and the government, while credit to the private sector contracted by 3.5 percent (table 4). Consolidating the fiscal position and clearing payment arrears are critical for tackling non-performing loans and unlocking private sector lending and growth. Table Private sector credit growth remains subdued since 2016 4 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Total credit growth -3.8 0.7 4.9 1.1 6.5 6.5 6.1 4.9 0.3 o/w Government -11.8 9.0 15.7 10.2 18.1 11.3 8.9 5.3 1.7 Public entreprises -11.0 -0.3 -3.1 -9.2 -10.0 28.9 89.3 -15.6 -1.7 Private sector 3.6 -5.2 -1.3 -4.6 -4.8 1.4 -2.2 8.3 -3.5 Household -2.4 -2.1 -0.9 -7.1 -0.3 1.3 7.6 1.3 3.1 Total credit growth (excl. Gov.) 1.1 -3.7 -1.7 -5.4 -3.2 1.6 3.0 4.5 -1.3 Source: Bank of Zambia Poverty is projected Poverty and shared prosperity to fall slightly is expected to contribute only modestly to poverty reduction in 2018 (ta- GDP growthSource: Bank of Zambia from 56.8 percent ble 5). Both the spatial distribution of rainfall and its timing have not been conducive in 2017 to 56.2 to the maize crop, especially in the southern half of the country. Moreover, a cholera percent in 2018. outbreak and the measures implemented to contain its spread have led to a transitory loss of income of some urban poor and rural farmers who depend on urban markets. The proportion of people living under the US$ 1.90/day poverty line is projected to fall slightly from 56.8 percent in 2017 to 56.2 percent in 2018. Poverty is largely a rural phe- nomenon, with 77 percent of the poorest households located in rural areas. 21 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N C. ECONOMIC OUTLOOK, RISKS AND POLICY CHALLENGES We forecast GDP growth rates of 3.3 percent in 2018; 3.6 percent in 2019; and 3.8 percent in 2020. Slow growth in 2018 reflects a contraction in agriculture output and the macroeconomic headwinds confronting Zambia. The medium-term forecasts assume agriculture will recover; copper production from new and refurbished mines will remain strong; and the government will prudently implement its fiscal consolidation measures. In the long term, efforts are needed to ensure that growth is not just faster, but is more inclusive by boosting the productivity of sectors and activities within which poor segments of the population are engaged. Medium-term outlook We revise our GDP forecast for 2018 to 3.3 percent (from 4.3 percent), and for 2019 to 3.6 percent (from 4.7 percent) in our December 2017 issue. The revisions reflect a Weather forecasts lower than expected growth outturn for 2017 (3.4 percent, against an initial estimate suggest a 70 of 4.1 percent), a lower crop harvest, and heightened macroeconomic headwinds. The percent chance of medium-term outlook is underpinned by three assumptions: El Niño in Southern Africa in the 2018- i. The recovery of agricultural production will be weak in 2019 due to low rains. Weath- 19 season. er forecasts suggest a 70 percent chance of El-Niño in Southern Africa in the 2018-19 season. Over the medium term, new irrigation projects; improved distribution of farm- ing inputs; and policy certainty are expected to improve agriculture output.24 ii. Government’s fiscal consolidation measures are implemented, along with measures to improve (i) foreign exchange reserves; (ii) debt management; and (iii) the financial and operational sustainability of ZESCO (including the ZESCO reform plan). iii. The pending structural reforms in Zambia Plus will be implemented. Pending structural Table Key Macroeconomic Data reforms in Zambia Plus need to be 5 2015 2016 2017e 2018f 2019f 2020f implemented to Real GDP growth, at constant market prices 2.9 3.8 3.4 3.3 3.6 3.8 boost the private Private Consumption 4.9 2.0 3.4 2.1 3.3 3.4 sector. Government Consumption 3.9 2.1 -0.3 0.2 -1.2 -0.5 Gross Fixed Capital Investment 4.9 1.1 -0.2 5.6 3.5 3.9 Exports, Goods and Services -11.0 -10.0 9.8 10.9 10.6 10.3 Imports, Goods and Services -7.1 -10.6 8.5 8.8 9.0 9.1 Real GDP growth, at constant factor prices 2.9 3.8 3.4 3.3 3.6 3.8 Agriculture -7.7 3.7 9.8 -2.1 3.9 4.64 Industry 6.8 5.6 4.9 5.9 5.3 5.3 Services 2.2 2.8 1.8 2.6 2.6 2.8 Inflation (Consumer Price Index) 10.1 17.9 6.6 7.7 8.9 11.9 Current Account Balance (% of GDP) -3.9 -4.6 -4.5 -4.8 -4.2 -3.4 Fiscal Balance (% of GDP): cash basis -9.4 -5.7 -7.8 -7.5 -6.0 -5.5 Public and Publicly Guarateed Debt (% of GDP) 61.4 60.5 63.8 66.9 67.3 67.5 Poverty rate ($1.9/day PPP terms) 57.5 57.1 56.8 56.2 55.8 55.1 Source: CSO Zambia, Ministry of Finance and World Bank forecasts Risks to the Outlook The domestic There are three major external risks to the medium-term outlook. First is the possibil- risk would relate ity of a reversal of copper price gains; on the back of slower growth in China (due to to delayed an ongoing tariff war with the United States) and higher global supply.25 Copper prices implementation have already fallen by 19 percent since June 2018, reflecting these factors. Lower cop- of the fiscal per prices would worsen foreign exchange reserves, leading to currency depreciation adjustment and tighter monetary policy. Second is the possibility that oil prices will increase (due measures to production loses arising from geopolitical events and production restraints by OPEC announced in June and non-OPEC producers), leading to increased production costs and inflation. Third is 2018. a quicker than expected normalization of interest rates in the United States that would tighten global financing conditions, leading to higher costs of external financing. 22 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N On the domestic front, the main domestic downside risk would relate to the delayed implementation of the recently announced fiscal consolidation measures. This would worsen debt and foreign exchange reserves further, leading to a kwacha depreciation, high prices, tighter monetary policy, and a strained financial system. In addition, a rever- sal of the reforms relating to export bans, subsidies, and procurement would increase policy uncertainty and cloud the investment climate. Finally, the delayed implementa- tion of ZESCO reforms would worsen its financial situation and undermine reliable en- ergy supply over the medium term. Policy challenges Zambia’s immediate challenges relate to addressing the existing macro-fiscal challeng- es. Below are proposals for addressing these vulnerabilities, and creating a more resil- ient and inclusive economy. • Implement the fiscal consolidation measures. The fiscal consolation measures an- nounced by the government in June 2018 set the right tone, but should now be turned into actionable and costed plans, and implemented immediately to move the debt to- wards sustainable levels. A sustainable debt would enhance macroeconomic stability, create space for social and productive spending, and unlock private sector growth and employment. In addition to the ideas that the government has already outlined, other ideas for cutting less productive spending are available in the seventh Economic Brief, ‘Beating the Slowdown: Making Every Kwacha Count’26. • Strengthen debt management reforms on debt contraction and reporting. The Annual and quarterly debt implementation of the Loans and Guarantees Act should be strengthened to ensure reports, and other that only the Ministry of Finance is responsible for debt contraction with the approval debt information of the National Assembly. While progress has been made in improving debt record- should be timely. ing by implementing the new DMFAS system and systems to collect information on debt disbursed directly to foreign contractors timeously, the recent rumors of ‘hidden debt’ suggest that debt reporting needs to be strengthened. It is critical to develop and implement a strategy for publishing annual debt reports, quarterly debt statistical bul- letins, ad-hoc information on debt and risks, and analytical reports. Given the increase in commercial lenders, it is also key to establish a website dedicated to debt manage- ment and an investor relations unit in the debt management office. The tenth Economic Brief ‘How Zambia Can Borrow Without Sorrow’27 provides more details on this reform agenda. At least 4 months • Rebuild foreign exchange reserves is a macroeconomic policy priority. Cur- of import cover rently, reserves are just 2.1 months of import cover, the lowest since 2008. At least 4 is required to months of import cover is required to reduce Zambia’s vulnerability to terms of trade cushion Zambia’s or global monetary policy shocks, especially given high costs of external debt servicing. vulnerability to Slowing external debt accumulation and reinforcing the ongoing debt management global shocks. reforms are key to the broader plan of rebuilding reserves. An IMF program offers an immediate solution as it entails direct disbursement into the reserves account. Moreo- ver, an IMF program would trigger budget support from other cooperating partners and increased private capital inflows. • Improve the transparency and management of SOEs and manage fiscal risks. ZESCO’s debt and arrears pose substantial risks to energy supply and fiscal operations. It is critical for Cabinet to implement the ZESCO reform plan it recently approved as this will unlock financing at favorable terms. Moreover, systems need to be developed Systems for monitoring and for monitoring and publicly reporting the debt and arrears (both guaranteed and non- publicly reporting guaranteed) of SOEs, and for analyzing the risks that they pose to fiscal operations. The debt of SOEs are publication of such data can reinforce accountability, and thus reduce fiscal risks. required. • Approve key pending bills and legislation. In 2016, several pieces of legislation that are critical for enforcing fiscal credibility, public finance and debt management, and value for money were promised in the Economic Recovery and Stabilization Plan. Only the Public Financial Management (PFM) Act has been approve so far. The PFM Act would work effectively if it is complemented by the pending bills, including the Loans and Guarantees Act, the Planning and Budgeting Act, and Procurement Bills. 23 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N A strong public • Strengthen macroeconomic management and public investment management investment to support structural transformation and diversification. Copper prices are a key management source of exchange rate volatility, which creates uncertainty and hurts traded sectors, system would and with elevated external debt levels, exchange rate volatility will likely increase the enhance the link cost of debt service. Any development plans over the medium term must ensure that between borrowing borrowing is kept within sustainable limits, as unsustainable debt levels would under- and structural mine productive and social spending for structural transformation. In the long run, a transformation. stabilization fund or larger external buffers would go a long way in smoothing volatility. In addition, strengthening public investment management would strengthen the link between borrowing, productive investments and structural transformation. 24 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N 25 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N 26 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N 2 SECTION AN AGRO-LED STRUCTURAL TRANSFORMATION Structural transformation is a fundamental driver of long-term growth and development. Typically, it begins with productivity increases in the key sectors of the economy, agriculture in particular, creating the necessary conditions for other sectors to emerge and production factors (labor, capital) to be reallocated towards more productive sectors. Such reallocation is not only critical because it induces an increase in aggregate total factor productivity and per capita income, but also because it can significantly reduce poverty. In many countries, structural transformation occurred alongside industrialization and urbanization. Structural Structural transformation and agricultural productivity transformation Structural transformation involves the reallocation of labor and capital from low- involves the productivity sectors such as agriculture to more productive sectors or activities within reallocation a sector. The higher the productivity gap between the sectors, the larger the potential of labor and for aggregate productivity growth. Over time, the productivity gap between sectors capital from low- declines and returns to labor, i.e. wages, across sectors should be equalized. productivity sectors such as agriculture Structural transformation typically starts with agricultural productivity gains, which to more productive reduce the relative price of food and allows real wages (in other sectors, industry in sectors. particular) to remain competitive (as the consumption basket of wage earners is highly skewed towards food and textile items). The same argument holds for agricultural products which are direct inputs into industries.28 Structural Agricultural productivity gains can also create production surpluses. It permits farmers transformation to break the vicious circle of subsistence farming, where nearly everything produced is typically starts consumed within the same harvest cycle. Enhanced productivity releases workers or with agricultural time for other activities within the sector or allows them to move to more productive productivity gains, sectors. Increased production and income increases the potential for savings and which create investments including in human capital. Improved agriculture earnings allow parents to surpluses and keep their children in school, thus can serve as a springboard to a better life and provide permit farmers the children of farming households with a broader set of economic opportunities, to break the breaking the cycle of poverty. This can reduce farmers’ vulnerabilities and raise their vicious circle ability to take productive risks. Furthermore, higher incomes increase demand for non- of subsistence agricultural goods. This can be crucial for other sectors to take off. farming. Structural transformation provides an opportunity for households to diversify their sources of income towards non-agricultural sources, thus reducing their vulnerability and probability of falling into poverty after a shock. For example, if crop harvests are poor due to a drought, wage incomes from members of a household employed in other sectors of the economy can keep up the consumption pattern of the household and help purchasing inputs for the next farming season. This argument for income diversification is also valid at the macroeconomic level: If structural transformation results in the creation and strengthening of other productive sectors, it can strengthen a country’s resilience to external shocks. This can ensure that growth is more sustainable and helps manage exchange rates and inflation. 27 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Empirical evidence A recent World Bank analysis29 on the impact of labor movements across sectors on shows that labor GDP growth (1991-2015, 156 countries) strongly suggests that productivity-enhancing reallocation plays labor reallocation (i.e. effective structural transformation) had the largest contribution an important role to overall productivity increases in low-income countries (left panel of figure 15). During in productivity episodes of rapid agricultural productivity growth (right panel of figure 15), the positive growth. effects of labor reallocation were most pronounced. Figure Labor reallocation plays a large role in productivity growth 15 Note: Av = Average; Agr = Agriculture; Svs = Services; Ind = Industry Source: Merotto, et al. (Forthcoming) Several key Several key factors need to be activated to foster an effective structural transformation: factors need an investment climate conducive to the development of new sectors; well-functioning to be activated labor, land and capital markets to facilitate labor reallocation; good urban and territorial to foster an planning to efficiently absorb labor moving out of agriculture;30 and skills development effective structural to prepare the labor force for the use of new technologies. transformation. Agricultural productivity growth matters for poverty reduction There is ample global evidence to suggest that increased agricultural productivity is a fundamental driver of effective structural transformation, leading to both economic growth and poverty reduction. The World Development Report of 2008 found that output growth in the agricultural sector is many times more effective in raising incomes among extremely poor households than output growth in other sectors, most of which are located in cities.31 Our simple computations illustrate these points for Zambia, where agriculture still employs close to 48 percent of the population, approximately 80 percent of whom are poor. An annual growth in GDP per capita of 2 percent over the period 2015-30 would lift 0.9 (1.3) million more people in urban (rural) areas out of poverty by 2030, in comparison with a zero-growth scenario; an annual growth of 4 percent would lift 1.4 (2.7) million more people out of poverty in urban (rural) areas.32 There is widespread agreement about the basic linkages connecting agriculture and economic growth and the existence of an ‘agriculture multiplier’, which is greater than one. To achieve this, agricultural productivity growth is crucial. Evidence shows that no Zambia did not country can sustain a rapid transition out of poverty without raising productivity in its manage to raise agricultural sector.33 agricultural productivity in Zambia has not managed to raise agricultural labor productivity in recent decades and recent decades. has experienced a widening gap in poverty between rural and urban areas. The recently completed Systematic Country Diagnostic for Zambia34 associates such a growing divide with Zambia’s failure to raise the productivity of agriculture for small-holder farmers. A comparison between Zambia and the Kyrgyz Republic also illustrates this point. Zambia’s and the Kyrgyz Republic’s characteristics are comparable in many respects. Both countries are landlocked and rich in mineral exports: copper accounts for three- quarters of Zambia’s export earnings, while gold accounts for over 40 percent in the 28 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Kyrgyz Republic Kyrgyz Republic. In the early 90s, both countries experienced high levels of poverty managed to reduce and inequality (as measured by the Gini Index), and most employment and output poverty faster than were concentrated in agriculture. With the commodity boom starting in the early Zambia. 2000s, growth and services picked up, before slowing down from 2013. Over the period 2000-2011, per capita GDP growth averaged 4.0 percent in Zambia and 3.3 percent in the Kyrgyz Republic. Yet, the poverty impact of the growth episode was starkly different. In Zambia, the proportion of the population living under US$ 1.90 per day increased from 42.1 percent in 1998 to 57.5 percent in 2015. In the Kyrgyz Republic, however, this proportion declined sharply from 30.6 percent in 1998 to 2.5 percent in 2015 (table 6). During the same period, the Kyrgyz Republic recorded substantial gains Kyrgyz Republic in agricultural productivity, while Zambia experienced a sharp decline (figure 16). In recorded addition, the Kyrgyz Republic managed to move a higher proportion of its labor force substantial gains out of agriculture than did Zambia. Between 2000-2010, the Kyrgyz Republic moved in agricultural 11 percent of its labor force out of the agricultural sector while Zambia moved only productivity, and 5 percent. Zambia losses. Table Poverty and inequality in Zambia and the Kyrgyz Republic 6 Inequality Poverty (US$ 1.90 per day) 1998 2010 2015 1998 2010 2015 Kyrgyz Republic 46.5 30.1 29.0 30.6 4.1 2.5 Zambia 49.1 55.6 57.1 42.1 64.4 57.5 Source: World Bank (2018), World Development Indicators (WDI) Figure Agricultural labor productivity 16 Output per worker (US$) Source: World Bank (2018), WDI 29 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N D. ZAMBIA’S EXPERIENCE WITH STRUCTURAL TRANSFORMATION Following its independence, Zambia implemented several policy interventions to promote growth and industrialization. However, growth remained sensitive to copper price volatility. Within-sector productivity35 growth took off in the late 1980s, followed by some reallocation of labor from agricul- ture to non-traded sectors (retail, informal services and construction). Yet, such reallocation did not generate large gains in poverty reduction because (i) it was not preceded by increases in labor pro- ductivity in agriculture; (ii) non-traded sectors did not record sufficient increases in productivity gains and remained highly vulnerable to copper price shocks; and (iii) sectors with higher productivity did not absorb a large share of the labor force. Rapid yet unbalanced output growth across sectors Despite several policy attempts to diversify the economy (box 5), copper prices have Copper prices have remained the predominant driver of Zambia’s growth (table 7). The correlation between remained the key growth and copper prices remains strong at 88 percent. The high sensitivity of growth driver of Zambia’s to copper prices does not imply that new economic sectors were not created in Zambia. GDP growth. In fact, mining output’s share in GDP declined from 40 percent in 1965 to 14 percent between 1980 and 1990, and 12 percent between 2000 and 2015. Rather, it means that the copper economy still influences the non-copper economy through aggregate pub- lic and private sector demand and sector competitiveness (because of exchange rate fluctuations). This is evidenced by the trends presented in table 7: with a steep decline in copper prices between 2012-2016, average growth in all sectors declines, compared to past years. Box Policy context on industrialization and structural transformation in Zambia 5 Zambia has implemented at least three industrial strategies since independence. First was the nationalization and import substitution industrial approach (1968-90). This was premised on the government’s ownership of key sectors of the economy, and using preferential procurement, subsidies (from copper revenue) and import restrictions to support local industries. This proved unsustainable because the over-dependence on copper and imprudent macroeconomic management exposed the country to external shocks. Furthermore, the urban-rural divide, which existed during the colonial era, worsened as public investments and subsidies were urban-biased. Large external debt and low copper prices led to economic stagnation and a debt crisis from the 1980s. The structural adjustment and open market-based industrialization policy (1991-2000) were aimed at correcting macroeconomic, external and fiscal imbalances caused by low copper prices and by the previous policy. Despite improving macro-fiscal stability, structural adjustments exposed Zambia’s already uncompetitive industrial sector to competition with imports (following trade liberalization), leading to deindustrialization, in a global context that saw China joining the World Trade Organization (WTO). Post-2001, an export-oriented industrialization policy emerged with an emphasis on balancing macroeconomic stability and export promotion. Export promotion was facilitated through the Export Processing Zones (EPZ) Act of 2001, and more recently through multi- facility economic zones (MFEZ). Since 2006, these policies have been integrated into national development plans. However, the development of non-copper exports has been undermined by an overvalued exchange rate, poor implementation of national plans, and policy inconsistencies relating to exports and import bans. Source: Mudenda (2009)36 The volatility of the kwacha (linked to copper price changes) has been deterring invest- ment in exports of high quality non-mining products, thus undermining export diversi- Dependency fication.37 The key sectoral drivers of the non-copper output over the last 15 years have of growth on remained predominantly non-traded. These include construction, wholesale and retail copper prices also trade, informal services and real estate, and they account for over 50 percent of GDP. manifests through They grew strongly with high copper prices between 2006 and 2011 but slowed with public revenues. falling copper prices between 2012 and 2016. The high dependency of growth on copper prices also manifests through public rev- enues. Public revenue from copper accounts for between 27-31 percent of total do- mestic revenue, depending on the level of copper prices. An absence of countercyclical 30 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N fiscal policy instruments to smooth government spending in the face of terms of trade shocks results in booms and busts in public expenditure and investments, with a per- vasive impact on the non-copper sector. Since 2011, the pro-cyclicality of public policies was exacerbated by increased external borrowing, eventually raising risks of external debt distress (e.g. default) to ‘high’ in 2017 from ‘medium’ in 2015. The result has been the crowding out of private sector growth and heightened financial sector vulnerabili- ties, which have in turn curtailed efforts towards diversification into agriculture and other sectors of the economy. Table Non-mining output growth is sensitive to copper prices Average Growth Average Share of GDP 7 2000-2005 2006 - 2011 2012-2016 2000-2005 2006- 2010 2012-2016 Copper prices (US$/MT) 10.6% 16.5% -10.3% Domestic public revenue 3.4% 10.9% 7.3% Agriculture, forestry, and fishing -1.1% -0.3% -0.8% 19.9% 11.9% 8.1% Mining and quarrying 17.6% 17.6% 0.6% 5.9% 10.4% 10.7% Manufacturing 5.4% 5.6% 4.8% 9.8% 8.6% 7.9% Construction 14.4% 6.3% 5.3% 9.2% 11.7% 9.4% Wholesale and retail trade 6.8% 9.0% 6.5% 19.6% 19.1% 22.5% Financial and insurance activities 0.0% -1.3% 2.6% 3.5% 6.5% 3.6% Real estate, prof. and admin. activities 8.9% 5.6% 4.4% 7.8% 7.6% 6.6% Community, social, and personal services 6.2% 11.4% 7.7% 10.6% 13.1% 14.8% Source: CSO Zambia, Ministry of Finance and World Bank Pink Sheets Despite becoming Meanwhile, agricultural sector output has on average contracted between 2000 and food secure, 2016 (table 7). The contraction reflects a bias in government agricultural policies and agricultural output spending towards food security in staple crops at the expense of investments in sector has on average transformation, such as agricultural infrastructure and support services, for example ir- contracted. Zambia rigation systems, extension services, research and development, technology adoption, has not managed education and market information.38 Most farmers depend on rainfed agriculture, and to transform 80 percent of these farmers live under the poverty line.39 They have a lower crop yield agriculture. per hectare; and they are also likely to be under employed, i.e. they work fewer hours than in other sectors (box 6). Box Labor productivity in agriculture might not be lower than that for non-agricultural sectors in 6 urban areas Despite national accounts-based estimates suggesting that labor productivity in non-agricultural sectors is up to 6 times higher than in agriculture, the large share of African labor remains in rural areas. This suggests that national accounts may underestimate labor productivity in agriculture, because it does not consider the differences in hours worked in agriculture versus other sectors. In many developing countries, subsistence agriculture labor is underemployed because they only work during the rainy season. Evidence based on micro-data from Tanzania, Uganda, Ethiopia and Malawi shows that while non-agricultural labor is on average 3.3 times more productive than agricultural labor based on national accounts, the productivity gap between non-agriculture and agriculture decreases to 1.4 times once controlling for hours worked in each sector.40 In line with these findings, Merotto (2017) shows that for Zambian rural youth (between 15-24 years), 69 percent were underemployed while working in the agricultural sector, while only 48 percent were underemployed working in industry. In the service sector in rural areas, average underemployment was even at 75 percent. This supports the finding that (i) within-sector productivity growth is crucial for structural transformation and suggests that scaling up productivity and work hours in agriculture could have a higher impact on overall productivity; and (ii) it suggests that the productivity gap between the agriculture and non- agricultural sectors is lower than expected, confirming that productivity in the manufacturing and services sector equally needs to be increased to support an effective structural transformation. Source: McCullough (2018)41, Merotto (2017) 31 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Zambia’s agricultural sector is characterized by a dualistic structure, with organized and technically efficient medium and commercial farmers on the one hand, and small- holder subsistence farmers (approximately 75 percent of farmers with less than 5 Zambia also has hectares) on the other. Zambia has an increasing share of commercial and emergent commercial and farmers who are more productive as they have invested in mechanization, technology emergent farmers adoption and have better access to markets. Between 2001 and 2014, the number of who are more productive. farms measuring between 10 and 20 hectares (ha) grew by 79 percent, while the num- ber of small-holder farmers with less than 2 ha grew at 27 percent. Between 2001 and 2012, the real agricultural income among medium-scale farmers increased at a rate of 83 percent faster than in the small-scale sector.42 With respect to crop productiv- ity, the 2016/17 season showed that small-scale soybean farmers achieved 0.93 MT/ ha, compared to commercial farmers whose average yield was 2.87 MT/ha. Thus, of the 351,416 MT total production, small-holder farmers only accounted for 42 percent of the production.43 However, despite the growth of commercially-oriented farmers, their export potential is undermined by an overvalued kwacha, policy uncertainty on agricultural exports and high costs of doing business. Despite labor reallocation, structural transformation is considered ineffective The post-2000 growth was associated with gains in within-sector productivity as well as the reallocation of labor towards more productive sectors. The question arises whether these trends reflect an effective structural transformation in Zambia. Using the McMillan and Rodrick (2011)44 approach, we decompose total labor productivity Within-sector productivity began into within-sector productivity and labor reallocation across sector elements (figure gaining momentum 17). The results suggest that Zambia experienced aggregate productivity losses be- in the late 1980s. tween 1975 and 1987. This was due to falling copper prices45, negative productivity growth in manufacturing, agriculture and transport, as well as productivity stagnation of wholesale and retail trade. Loss of productivity in manufacturing firms largely re- flects a lack of exposure to global competition, leading to slow technology upgrading and loss of competitiveness. Figure Reallocation of labor has occurred between 2000 and 2010 17 Labour reallocation from agriculture to non-traded sectors occurred after 2000. Source: Authors computations using GDDC (2014) data 32 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Within-sector productivity growth started gaining momentum in the late 1980s, after liberalization. During the same time, the contribution of labor reallocation towards sectors with higher productivity remained negative, largely because liberalization led to the movement of labor from state-owned enterprises towards low productive in- While the formal services and subsistence agriculture. reallocation has generated After 2000, productivity gains were recorded in mining, utilities, construction, trans- productivity gains, port, and the informal sector (community, social and personal services). This was fol- it has not benefited lowed by labor reallocation from agriculture to non-traded sectors (including trade the rural and services, construction and the informal services). Until 2010, this reallocation gener- urban poor. ated productivity gains because these sectors were more productive than agriculture. However, a large share of employment growth occurred in trade, and thereof a large share in the informal sector, which is low paid and often insecure. While construction and high value services, where value added per worker is high, also generated jobs, these sectors tend to benefit the higher-income groups in urban areas. The manufac- turing sector, which shows an increasing value added per worker, does not generate much employment (figure 18). While labor reallocation has generated productivity gains, it has not sufficiently benefitted the rural and urban poor.46 Figure Sector value added per worker and employment: 1996 versus 2015 18 Structural transformation was not preceded by increases in labor productivity in agriculture and productivity gains in non-traded sectors were low. Structural transformation has been ineffective in significantly a poverty in Zambia. Source: Authors calculations using CSO data 33 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Despite some reallocation of labor and overall productivity growth, structural transfor- mation has been ineffective in significantly reducing poverty for several reasons. First, it has not been preceded by increases in labor productivity in agriculture where most of the poor are engaged (figure 16). Second, productivity gains in non-traded sectors, to which most of the labor force moved, were low. The demand for non-traded goods is limited by the low aggregate domestic demand, which is itself dependent on copper revenues. From 2010, most non-agricultural sectors recorded declines in labor pro- ductivity, despite a scale-up of public investments since 2012, reflecting the influence of copper prices. And third, it is likely that the difference in productivity levels between agriculture and the informal non-agricultural sector is lower than suggested by data which stems from national accounts, which emphasizes that productivity in non-agri- cultural sectors also needs to increase to achieve poverty reduction (see box 6). Rapid yet unsustainable urbanization Urbanization The reallocation of labor from agriculture towards non-traded sectors correlates with has been largely trends in increasing urbanization in Zambia. The proportion of the urban popula- concentrated in tion increased from 35 percent in 2000 to 45 percent in 2015. While the share of cities along the the population in rural areas continually declined over the last years, the growth in traditional line-of- urban areas was a lot more focused in the capital city of Lusaka than in the country’s rail. secondary and tertiary towns in rural areas. This growth pattern is in contrast with other low-income countries, where growth of secondary and tertiary towns typically exceeds growth in capital cities.47 Increased urbanization has supported the expansion of non-traded sectors, including wholesale and retail trade, housing and construction, and transport and communica- tion.48 Zambia’s growth since the 2000s benefitted Lusaka far more than other areas in the country. Lusaka appears to have developed the status of a ‘consumption city’, which is consistent with cities of many other resource-rich countries, where urbaniza- Urbanization has tion is rarely correlated with increased manufacturing, but is characterized by high supported the import dependency (including food), employment in non-tradable services, pollution, expansion of non- congestion, slum formation, poor service provision and high unemployment.49 These traded sectors. patterns are reflective of Lusaka’s low absorptive capacity and its inability to gener- ate agglomeration effects that support productivity gains and competitiveness. This is also reflected in employment trends by sector: Lusaka saw the largest increase in employment in wholesale and retail, from 10 percent in 1990, to 24 percent in 2000 and 30 percent in 2010 (figure 19). Unsurprisingly, the rural-urban divide is also reflected in the share of investments and lending. Investments are skewed to urban centers. FDIs are concentrated in the traditional mining cities along the railway, except the emerging mining town of Solwezi Poverty has in the North-Western Province.50 Domestic bank lending is more balanced across sec- increased in tors, and could support structural transformation. However, apart from being low, do- provinces that mestic lending is also highly concentrated in the provinces along the railway, with Cop- have received less perbelt, Central, Lusaka and Southern provinces receiving 88 percent of total lending investments. in 2016.51 It is thus unsurprising that these provinces have seen the largest reduc- tion in poverty since 2010.52 The predominantly rural Northern, Western and Luapula provinces received only 4.6 percent of total domestic credit combined. Poverty, which was already very high in these provinces in 2010, has since increased further. Increasing poverty and spatial inequality, in the midst of high growth As was evident from trends in productivity across sectors and low labor productivity in the agricultural sector, Zambia’s post-2000 growth has not been inclusive. The pro- portion of people living under the US$ 1.90 a day increased sharply from 49.4 percent The share of income for the in 2002 to 64.4 percent in 2010 before declining to 57.5 percent in 2015 (figure 20). bottom 40 percent Over the same period, inequality as measured by the Gini coefficient increased from halved to 8.9 0.42 in 2002 to 0.57 in 2015. The share of income of the bottom 40 percent of the percent in 2015 population almost halved to 8.9 percent in 2015 from 16.3 percent in 2002. Poverty is from 16.3 percent predominantly a rural phenomenon, where it rose to 76.7 percent in 2015 from 73.6 in 2002. percent in 2010, while urban poverty fell from 25.7 percent in 2015 to 23.7 percent in 2010 (figure 21). 34 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Figure Evolution of sectoral employment in Lusaka and secondary cities 19 Employment by sector, in Lusaka Employment by sector, in secondary towns Source: Randolph (2018) Figure Share of income of bottom 40 percent has fallen despite GDP growth 20 Percent Constant kwacha Source: World Bank (2018), WDI Over half of Meanwhile, inequality and poverty have also increased within major cities. Segments Zambia’s urban of the high-income urban population increased (figure 22), while poverty also in- population creased within poor segments of the population. Over half of Zambia’s urban popu- lack decent lation lack decent accommodation, 45.6 percent have no access to electricity and accommodation. 16.4 percent have no access to water.53 Only 11 percent of the urban population is 35 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N in formal employment, while the majority, 89 percent, is trapped in non-productive informal employment, which does not contribute sufficiently to the fiscal revenue. Inequality has also increased between cities. While Lusaka benefitted from growth in the 2000s, this cannot be said for urban areas outside Lusaka. Urban population growth trends between 2000 and 2014 show that the share of low-income groups in Inequality has increased between total population grew mostly outside the largest city (figure 22). These trends empha- cities. size that the country’s economic growth since the 2000s benefitted Lusaka far more than other areas in the country. While employment in retail and services grew in Lu- saka, this cannot be said for other areas: Secondary cities saw the largest increase in the agricultural sector from 20 percent in 1990 to 50 percent in 2000 and 40 percent in 2010 (figure 19). For tertiary cities, the share in employment in agriculture remained the same, around 70 percent in 1990 and 2010.54 Figure Poverty is predominantly a rural phenomenon 21 a. Moderate Poverty b. Ultra Poverty 80% 60% 40% 20% 0% RURAL URBAN ZAMBIA RURAL URBAN ZAMBIA 2010 2015 Source: LCMS 2010 and 2015 Figure Growth of income groups in share to total population 22 Urbanization by Income Groups, 2000-2014 1.5 AVERAGE ANNUAL GROWTH IN SHARE TO TOTAL POPULATION (%) 1 5 0 -5 HIGH INCOME UPPER MIDDLE LOWER MIDDLE LOW INCOME INCOME INCOME URBAN POPULATION OUTSIDE LARGEST CITY URBAN POPULATION IN LARGEST CITY Source: Merotto (2017) 36 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N E. TOWARDS A MORE EFFECTIVE STRUCTURAL TRANSFORMATION IN ZAMBIA Zambia has the potential to use agriculture as an engine for effective structural transformation, leading to gains in poverty reduction. This is particularly so given its (i) endowment with 44 million hectares of suitable land for agriculture (yet only 11 million is cultivated); (ii) abundance in water for irrigation (40 percent of the water in Central and Southern Africa); and (iii) proximity to eight neighboring countries – which are potential ex- port markets. Increased regional and urban demand for diversified and processed products provides unprece- dented opportunities to support the development of the manufacturing sector, specifically in agro-processing, which will provide employment and government earnings as well as upstream linkages to agriculture. This is expected to have a positive impact on growth, employment and poverty reduction. Agriculture is one of Zambia’s most important sectors, and is crucial for ensuring an There is potential effective structural transformation. However, agricultural productivity was low in the to make Zambia’s 1990s and remained low during the economic recovery period, with rural poverty rates structural remaining high. There is scope to stimulate productivity gains in agriculture, and indus- transformation more effective and trialization by connecting small-holder farmers with large-scale farmers and to higher- sustainable. value value chains of domestic supermarkets, and strengthening the agro-processing sector for import substitution and export. Evidence shows that agro-processing firms tend to develop in proximity to agglomeration centres also outside the line-of-rail. Thus, one way to strengthen structural transformation and enhance rural livelihoods is to stimulate agricultural and agro-processing activities in and around secondary and tertiary towns in rural areas, where a large part of the population lives. This Brief looks specifically at the following areas: (i) Reorienting public spending on agriculture, and increasing spending in agriculture infrastructure, research and services to increase agricultural productivity; (ii) supporting commercialization and agri-business growth; (iii) improving human capital, and (iv) spatially targeting investments in the ag- riculture and agri-business sectors to maximize impact. We argue that spatial planning around secondary and tertiary towns has beneficial effects on the agricultural sector In Zambia food and agri-business development, both of which are key to structural transformation. demand is projected triple to Changing food demands provide unprecedented opportunities US$25 billion by An important reason to focus on agro-processing as a driver for an effective structural 2030. transformation is the changing and growing demand for food, as a consequence of population growth, rapid urbanization and growth in income. World Bank (2013) esti- mate that urban food markets in Africa will increase fourfold and exceed a market value of US$ 400 billion by 2030.55 Thereby, a shift in dietary patterns is expected, a so-called ‘nutrition transition’, which is characterized by an increased consumption of animal products, vegetable oils and highly processed foods.56 Similar trends are expected in Zambia, where food demand is expected to grow more than threefold in the next 15 years, to over US$ 25 billion. For instance, demand for some product categories such as poultry have already tripled between 2012 and 2015 (from 3 kg per capita to 9 kg per capita).57 Between 1996 and 2015, food expenditures for maize declined from 23 percent to 14 percent. Wealthy urban households increased expenditures on wheat (outweighing the share of maize expenditures), rice, potatoes and animal foods; rural households increased expenditures on coarse grains and tubers. While both urban and rural households increased expenditures for perishable and processed foods, there are large disparities between income groups and rural and urban areas – another indi- cator of the country’s pervasive inequality.58 The increasing and shifting food The increasing and shifting food demand provides large opportunities for domestic demand provides production in the agricultural sector and agro-processing, which can supply local as well opportunities for agriculture. as regional markets. Upgrading to meet local demand can be a stepping stone towards increased regional food exports, where neighboring countries may face constraints in agricultural production and are undergoing a similar nutrition transition. Between 2007 and 2017, Zambia registered trade surpluses in several food groups, specifically in un- processed and partially processed commodities (e.g. cereals, oilseeds and oleaginous fruits but also sugar and products of the milling industry). But changing local demands are visible in Zambia’s trade statistics, where Zambia registered consistent or increasing trade deficits in food product groups such as fish, or processed fruits and vegetables dairy, bakery goods.59,60 For some of them, there may be potential for domestic produc- 37 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N tion, especially if transport costs can be reduced. In other cases, such as for canning, packaging costs may outweigh the benefits of producing the food locally.61 In addition, the evolving dietary patterns can incentivize a change in primary production towards productive diversification, which can enhance on-farm productivity, increase farmers’ income through access to different markets at different times of the year, miti- gate climatic and market risks, and enhance households’ nutrition outcomes as on-farm food-availability changes as well.62 FISP and FRA Reorienting public spending on agriculture have helped food Between 2000 and 2018, Zambia increased its agriculture spending from below 2 per- security, but at cent of the budget in the early 2000s to 10 percent in 2010-11, and it has fluctuated the expense of between 5 percent and 10 percent since. This is in line with Zambia’s commitment un- productivity and der the Malabo declaration 2015, to increase agricultural spendings to 10 percent. This diversification. topic is further elaborated in the ninth Economic Brief ‘Reaping Richer Returns from Public Expenditure Agriculture’.63 However, expenditure remained skewed towards supporting one staple crop – maize. Inefficient public spending was at the core of low productivity and specialized production systems. Between 2008 and 2016, on average 79 percent of the agriculture budget between 2008 and 2016 was spent on production (Farmer Inputs Support Program - FISP) and market support (Food Reserve Agency - FRA) subsi- dies. While the programs have helped to turn Zambia into a structural surplus producer for maize, they have not managed to enhance productivity, ensure nutrition security, or sustainably reduce poverty.64 For instance, participation in the program raises maize production by 188 kg per 100 kg of FISP fertilizer, which is considerably smaller than in Kenya, where participation in a similar program raises maize production by 361 kg.65 The question remains whether maize production, even with increased productivity, will Maize-centric support Zambia’s structural transformation agenda and address the growing and more production diversified local and regional food demands, as well as provide the poor population with may increase nutrition-dense foods. Furthermore, it remains questionable whether a maize-centric vulnerability production strategy would be most resilient to climate change. Zambia’s Intended Na- towards climate tionally Determined Contributions (INDC) indicates that climate variability and change change. have become a major threat to the country. Crop yields are projected to grow at a slow- er rate (be­tween 2.9 percent for groundnut and 8.7 percent for maize) until 2050, com- pared to a situation without climate change.66 Thus, productive diversification towards non-maize crops, combined with the adoption of climate-smart agriculture practices (e.g. introducing crop rotation, conservation agriculture, or agroforestry) which are well- adjusted to bio-physical and socio-economic conditions, can support farmers’ resilience by decreasing variability and reducing losses. This is expected to support agricultural productivity and contribute to the country’s structural transformation agenda. The government recognized the challenges with FISP and FRA and began reforms since the 2015/2016 season. Recent reforms to the FISP aimed at reducing public expendi- The government began reforming ture on input delivery by reducing the number of beneficiaries to 1 million farmers and FISP and FRA. introducing a flexible electronic voucher system, an electronic FISP (e-FISP). The e-FISP Savings from FISP aims at improving the targeting, efficiency (following a reduction in costly procurement and FRA reforms and transportation), transparency, and input choice, and incentivizes crop diversifica- can be reallocated tion towards higher-value and resilience-enhancing commodities.67 In addition, a weath- towards er index insurance program was introduced to compensate farmers in case of weather- complementary induced (e.g. early or late dry spells, excess rainfall) losses.68 FRA reforms are intended investments and at reducing the volume of maize procured to below 500,000 metric tons, thereby saving services. the fiscus and enhancing private sector participation in marketing maize, specifically through the Zambian Commodity Exchange (ZAMACE). This has been complemented by a commitment to better policy predictability in the sector. A monitoring report indicates successes and challenges of the e-FISP. For instance, dur- ing 2017/2018 season,approximately 752,000 farmers activated their electronic cards; competition among agro-dealers has increased and 1,364 agro-dealers were registered and trained; and farmers’ transactions could be tracked through the Zambia Integrated Agriculture Management Information System (ZIAMIS). Areas that can be improved are the release of program funds, the timely recruitment and accreditaion of agro-dealers, the improvement of network infrastructure and more mobile banking facilities. Farm- ers’ choice of production inputs still remains skewed towards maize seeds and fertilizer. 38 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N This could be improved by increasing the level of sensitization among farmers on the diverse inputs and allowing different timing of redeeming inputs, which was around the rainy season when production choice seemed to be biased towards field crops.69 Due to challenges in rolling out the e-FISP to 100 percent of beneficiaries, the government has decided to target approximately 60 percent of beneficiaries in the 2018/2019 sea- son.70 The fiscal savings can then be reallocated towards complementary investments such as Evidence suggests agricultural infrastructure (irrigation, feeder roads), agricultural research and develop- that agricultural ment, and extension services and technology adoption. For instance, irrigated toma- R&D contributes toes and cabbage production multiply returns by more than 150 times compared to up to 51 percent maize production.71 However, currently, irrigation is barely used in small-scale crop- in productivity production, and of the total irrigable land, 70 percent is not irrigated.72 Studies based increases. on SSA countries suggest that agricultural R&D contributes to up to 51 percent of pro- ductivity increases.73 The rate of return on investment on agricultural R&D is estimated at 43 percent in developing countries and 34 percent in SSA. Studies also suggest that economic and trade policy reforms (especially those that change the terms of trade for agriculture), farmer education, and irrigation play a substantial role in increasing productivity.74 Yet, these activities are severely underfunded throughout the continent. Currently, Zambia spends less than 1 percent of its agricultural GDP on agricultural R&D. To en- sure that modern technologies, improved management practices and skills are trans- ferred to farmers, the extension system or other mechanisms of providing agricultural advisory services provided trough information and communications technologies (ICTs) cannot be overemphasized. Similar studies on China, India, Tanzania, Malawi, and Uganda emphasize the importance of spending on public goods, not only on agricul- Agro-processing tural research and development, but also the improved connectivity of rural areas, a accounts for 60 modernized extension system and irrigation, which are associated with high returns.75 percent of Zambia’s manufacturing Supporting commercialization and agri-business growth sector Supporting commercialization and agri-business and agro-processing growth, linking farmers to local and regional markets and value chains, and improving the agriculture business environment are crucial for an effective structural transformation. Agro-pro- cessing accounts for 60 percent of Zambia’s manufacturing sector,76 thus strengthening the sub-sector can (i) provide important upstream linkages to the agricultural sector and be a vital driver of productivity; and (ii) support an allocation of labor and resources towards agri-business and agro-processing (storage, transport, processing, wholesale and retail of food), which provides additional income opportunities for rural populations and is expected to enhance the effectiveness of Zambia’s structural transformation. Commercial farming and Zambia has plenty of opportunities: Commercial farming and agro-processing expand- agro-processing ed in recent years, and agro-based goods account for almost half of non-mining ex- have increased in ports, while agro-processing jobs accounted for 52 percent of non-service jobs in 2010 Zambia. (while mining accounted for 25 percent).77 Compared to other countries in the region, it has a well-developed agri-business sector, with more than 400,000 small-holder house- holds linked to private firms through vertically integrated out-grower programs. The target crops are primarily cotton, and (less so) sugar, tobacco, and soya beans. Large commercial farms and estates also play an important role in Zambian agriculture and account for the bulk of exports of sugar, tobacco, wheat, horticulture products, coffee, and soya beans.78 However, small-holder and emergent farmers are facing challenges related to access Small-holder and emergent farmers to finance and technical support to take advantage of domestic and regional market face challenges potential. The Rural Agriculture Livelihood Survey 2015 suggests that only 15 percent related to access of farmers had access to credit.79 Due to customary land tenure systems and a subse- to finance and quent lack of collateral, but also a lack of credit culture and high transaction costs, com- technical support. mercial bank credit to small-holder farmers remains low and access to finance through out-grower schemes remains most common (9.7 percent). While emergent farmers are rather market-oriented, often having access to off-farm income and the social and eco- nomic capital to participate in land markets, they may still need support or the skills to access private finance. Therefore, suggestions for the establishment of support funds to emergent farmers were put forward.80 Such projects can build on past experiences 39 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N of innovative pilots such as the Zambia Emergent Farmers’ Program (by the Zambia Na- tional Commercial Bank Plc (ZANACO), International Finance Corporation (IFC) and Rabo Development), which provided commercially-based finance and agri-business support services to 124 farmers between 2010 and 2012. Recently, the government has es- tablished the Zambia Credit Guarantee Scheme as a private company. The company is tasked to develop a guarantee scheme to address the challenge of access to afford- able financial products and services for small and medium-scale enterprises in priority sectors, including the agro-processing and agro-trade subsectors. At least in the initial years, primary agriculture is not expected to be covered. In addition, the establishment Barriers to the of a warehouse receipt system can support access to finance for agriculture for emer- development of gent and small-holder farmers alike. ZAMACE, which is not yet fully operational, can play the agri-business an important role in the future. Thus, to support agri-business development, increasing sector include the outreach of financial institutions and agricultural financial services in rural areas inadequate supply and considering the use of specialized funds and matching grants to off-set risks, and and quality of raw offer adequate training for target beneficiaries are crucial.81 materials or weak institutional and The growing local consumer demand, also reflected in the increase in supermarket physical market chains mainly from South Africa82, are a starting point for developing the agri-business infrastructure. and agro-processing sector. There are numerous barriers to entering this market, including the inadequate supply and quality of raw materials; weak institutional and physical market infrastructure such as packing houses, cold chains, certification pro- cesses or credit facilities; limited capacity to access and maintain technologies or the failure to compete against imports; or the inability to develop differentiated products to move into higher-value market segment.83 To ensure the possibility for exports and Proximity to rural roads has compliance with consumer demand, consistent regulation and infrastructure (e.g. labo- significant effects ratories) to ensure food safety and quality, as well as pest and animal diseases control, on agri-businesses. remain important. In addition, the cost of trade, which is consistently higher than in neighboring coun- tries, is an impediment to competitiveness, as is the availability of power and other infrastructure.84 Norman et al. (Forthcoming)85 find that road development is signifi- cantly associated with the development of new, small agro-enterprises in Zambia. If the cost-distance to a paved road is decreased by about 30 km, the expected count of new agro-firms increases by a factor of 1.4, even in remote wards with low bio-physical production potential. In addition, the availability of skilled labor is a crucial incentive for The link between agri-business development. Human capital (as a share of the university educated) has a funding and positive impact on the establishment of agro-processing firm and jobs. educational outcomes is weak Improved human development in Zambia. In addition to being key inputs to within-sector productivity growth, education and health can also facilitate labor mobility towards more productive sectors. Zambia’s commitment to improving education has been seen by an increased budget for public education (from 3.2% of total public spending in 2010 to 4.8% in 2017). However, there is a need to improve the use of the education and health budgets as past studies sug- gest that increased spending does not result in better education and health outcomes. In relation to education, most of the challenges resemble the global challenges high- lighted in the World Bank’s recent global report on education.86 For example, a 2015 Rural girls are public expenditure review (PER) on education suggests that the link between resources largely excluded allocation and education outcomes is weak because of poor targeting of beneficiaries at higher levels of and ineffectiveness in the implementation of policies and education delivery. Education learning. delivery is undermined by an insufficient number of teachers, teachers’ absenteeism, poor school management and supervision of teachers, and a lack of textbooks. Rural girls are even more excluded at higher levels of learning due to financial con- straints, social norms and early pregnancies.87 The LCMS 2015 suggests that, while the Gross Enrollment Rate (GER) of secondary education for boys is 68 percent, that for girls is 62 percent. In TVET, female trainees account for 45 percent (TEVETA, 2012). In addition to paying attention to these challenges, there is value in transforming the syllabi of higher education institutions to make them more suitable to the structur- al transformation agenda. For instance, agriculture training needs to go beyond just teaching the technical aspects of farming, and should rather put entrepreneurship and agri-business at the core of the agriculture syllabus. 40 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Spatial planning and targeting of secondary and tertiary towns The agricultural sector and rural-nonfarm economy benefit from the proximity to urban areas, which provides opportunities for education, market access and commercializa- tion, opportunities for agricultural diversification, and access to modern agricultural vareities and technologies. Empirical evidence shows that all of the above can have a strong impact on agricultural and rural non-farm income.88 Secondary and tertiary89 towns are expected to enhance these positive effects, being strong connectors be- The agricultural tween rural and urban economies by (i) functioning as traditional market towns for sector and rural- agricultural outputs; (ii) providing an accessible labor market and seasonal job oppor- nonfarm economy tunities; (iii) facilitating growth by providing services such as primary education, health benefit from the care, water and sanitation infrastructure as well as administrative centers; and (iv) due proximity to urban to their proximity to rural areas, they allow urban migrants to maintain social family ties areas. and lower living costs.90,91 Thus, secondary towns – compared to large towns like Lusaka – can have a larger im- pact on poverty reduction.92 While large cities theoretically yield faster economic growth because of larger agglomeration economies, empirical evidence shows that the positive relationship between average city size and economic growth as observed in developed countries, does not hold true in developing countries, where the effect is either statisti- cally insignificant or negative.93 While average growth is largest in large cities, inequal- ity also tends to be higher. Behrens and Robert-Nicoud (2014)94 identify a rising per Secondary towns capita income and rising inequality gradient from rural areas to cities of increasing size. can have a larger Christiaensen and Todo (2014)95 show that as people moved from agriculture to the impact on poverty rural non-farm economy in Ghana, the proximity to intermediate cities reduced poverty reduction than more than in metropolitan urban areas. Overall, the inclusive nature of growth associ- large towns and ated with the expansion of secondary towns seems to outweigh the possible loss in cities. terms of average growth).96 Empirical evidence by Norman et al. (Forthcoming) shows that agro-processing firms and jobs in Zambia, which are indicators for structural transformation, are found in the proximity of agglomeration centers and are more often located outside the traditional line-of-rail corridor compared to non-agricultural firms. While there is a high concen- tration of jobs around the cities and towns in the central corridor, specifically smaller agro-firms are also located closer to areas of high poverty density outside the line-of- In Zambia agro- rail, where the share of self-employment in farming is high, specifically in the Eastern, processing firms Luapula, Northern and Muchinga provinces (compare MAP 1). Evidence also shows that are in proximity a large number of new agro-processing firms have been growing in areas where already of agglomeration existing firms were located, and where commercial farms and subsistence farms are centers and in present. Thus, agro-processing firms have a large potential to better link producers to areas of high commercial farms in the proximity of agglomeration centers. poverty density. These findings point towards the need for spatial targeting of investment to support growth of agro-processing firms in and around rural agglomeration centers and inclu- sion of small-holder farmers into the respective value chains. For instance, investment can strengthen the emergence of ‘growth clusters’97 outside the central corridor and in proximity to secondary and tertiary towns (e.g. Chipata, Petauke, Mwansa, Kasama and Mongu) which show initial growth in agro-processing and jobs and can have a positive impact on the economic development of the surrounding rural areas. The government has started to target investments in farm blocks, which show slow progress in imple- To enhance the mentation (box 7). To ensure spatially targeted investment can increase agricultural positive effect of sector performance and rural livelihoods, it is important to build on and enhance ex- secondary and isting market infrastructure and value chains, support value chains that respond to tertiary town, a domestic demand, support small-holder farmers to raise productivity on their own land targeted approach and enable them to build linkages with existing commercial and emergent farmers and to spatial and agro-processors. urban development and investment In addition to strengthening incentives for agri-businesses, policy measures should should be adopt a targeted approach to spatial and urban development. The above-cited empiri- considered. cal evidence showed that supporting urban areas and creating a network of cities and towns can have a positive effect on rural Zambians and Zambia’s structural transfor- mation agenda. Several ideas have been put forth to support a spatial approach to economic transformation, which could include (i) undertaking a spatial diagnostic of 41 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N urban-rural linkages around secondary and tertiary towns with a view to developing ag- riculture and agri-business; (ii) introducing place-sensitive reforms for urban planning with an aim to benefit local businesses and workers and incentivize investment, includ- ing the facilitation of access to credit, subsidies for capital investment, preferential tax rates or opportunities for skills and labor force development and improved matching between firms and workers; and (iii) developing and empowering local councils, pos- sibly with support from representatives of relevant ministries (commerce, agriculture livestock, water), which have the capacity to drive the spatial development agenda and implement locally relevant policies which further agri-business development and job- creation.98 Box Can farm blocks support rural development and agricultural transformation? 7 Since 2006, Zambia has identified farm blocks as core to its rural development policy and has integrated the idea in all its past 5-year national development plans (including the current one). The thrust behind farm blocks is targeted investment in agricultural infrastructure in selected farming land. Such targeted investments are expected to attract foreign and domestic investments into agriculture and link them to local communities through easier access to markets. An assessment by the Indaba Agricultural Policy Research Institute (IAPRI) in 2017 suggests that the implementation has been slow despite substantial budgetary allocation. In addition, they suggest that small-holder farmers have not been integrated into farming blocks. Other challenges include key infrastructure is either incomplete or missing; the development of the farm blocks is rather haphazard and not following the original plan; districts have usually diverted funds meant for developing farm blocks towards other spending lines; there is no communication equipment, making services requiring internet impossible; small-holder farmers lack knowledge on how to obtain land in farm blocks; and banks have been reluctant to finance unestablished small-holder farmers located in the farm blocks. Poor progress with farm blocks generally reflects the poor implementation of national development plans, as they are usually too broad and overambitious. A better approach would be focusing on piloting one farm block, fully developing it, and learning some lessons before developing a new one. Source: Samboko, et al. (2017)99 Map Zambia new agro-processing firms in 2010 1 Source: Norman et al. (2018) 42 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N F. HOW CAN ZAMBIA PURSUE AN AGRO-LED STRUCTURAL TRANSFORMATION? Agriculture offers an option for effective structural transformation in Zambia, given its vast fertile lands and water, and its proximity to eight neighboring countries. Increased regional and urban de- mand for diversified and processed products provides opportunities to support the development of the manufacturing sector, specifically in agro-processing, which will provide employment and gov- ernment earnings. Below are ideas on how Zambia can take advantage of these opportunities. • Expediting agriculture reforms away from maize-centric policies to enhance productivity growth. Maize-centric fiscal policy and agriculture policy inconsistencies have been constraints to agriculture transformation. Agriculture reforms which began in the 2015/2016 season should be expedited to facilitate investments in infrastructure, market information, extension services and R&D to enhance productivity growth in the agricultural sector. • Linking farmers to local and regional value chains. The World Bank estimates that SSA’s demand for food will increase by 60 percent between 2015-30. This offers prospects for agro-led industrialization for Zambia, which can increase labor realloca- tion to the manufacturing sector and has important upstream impacts. Linking small farmers to local and regional value chains is key. Infrastructure, access to information and strengthening local institutions to support such linkages should be developed and strengthened, but within the confines of the fiscal space to ensure that debt sustain- ability will not reverse future progress. Moreover, reforms to tackle policy inconsistency and the high cost of cross-border trade is critical. • Spatial planning and developing secondary and tertiary cities. Policies and investments can be spatially targeted to areas with a high potential to attract agri-busi- nesses. Spatial diagnostic studies to assess the potential of agribusiness potential in and around secondary and tertiary towns, and to justify spatially targeted public and private investments are a key starting point. This could be followed by targeted incen- tives for firms to move to these areas. Local councils need to be empowered to drive the spatial development agenda and implement locally relevant policies which further agri-business development and job creation. • Strengthening human capital to improve labor productivity and mobility. Zambia needs to improve education and health outcomes, especially for poor and rural segments of the population. The National Health Insurance Bill is a positive step, but its effective implementation is critical. On education, focus needs to not only be on access, but quality. In addition, the syllabi of TVET institutions could be transformed to promote an agro-led transformation agenda by blending technical courses with entrepreneur- ship and agri-business courses. • Strengthen the link between macroeconomic management, public invest- ment management and structural transformation. Public investments play a cru- cial role in enhancing structural transformation, if high-value investments are selected and executed carefully and are spatially targeted. In this regard, the passing of the new Loans and Guarantees Acts with provisions for a thorough appraisal of public invest- ments should be expedited. In addition, the multi-sector public investment appraisal board promised as part of the government’s austerity measures should be set up ime- diately. It is also critical to improve transparency (including parliamentary and civil soci- ety oversight) in the selection and execution of projects. 43 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N IENDNOTES 1 World Bank. 2018. “Africa’s Pulse.” Volume 17, April 2018, World Bank Group, Washington DC. http://documents.worldbank.org/curated/en/292931523967410313/Africas-pulse 2 World Bank Group. 2018. Global Economic Prospects, June 2018. Washington DC: World Bank. 3 Commitment basis entails a cash deficit plus new public expenditure arrears accumulated during the same fiscal year. A ‘cyclical’ fiscal deficit occurs as part of the business cycle e.g. if the economy is slowing, revenue declines and spending increases, leading to high cyclical deficit. A structural deficit is a fundamental imbalance in government revenue and spending, once cyclical elements are removed. 4 Zambia, Ministry of Finance. 2016. Economic Stabilization and Growth Program – Zambia Plus, by the Government of the Republic of Zambia, Lusaka. 5 Ministry of Finance. 2018. “Statement on Addressing Fiscal and Debt Challenges for Sustained Macroeconomic Stability and Growth.” Lusaka, June 14, 2018. http://www.mof.gov.zm 6 Ministry of Finance. 2018. “Statement of the State of the Economy.” Lusaka, July, 2018. http://www.mof.gov.zm 7 Lusaka Times. 2016. “How the Debt Limit and Excessive Borrowing Delay Civil Servant Salaries.” March 3. https://www.lusakatimes.com/2016/03/03/how-debt-ceiling-and-excessive-borrowings- delay-civil-servants-salaries/ 8 For an elaborate discussion of the past debt management challenges, see: World Bank. 2017a. How Can Zambia Borrow Without Sorrow? Economic Brief No. 10, Washington DC. http://docu ments.worldbank.org/curated/en/782221512459934813/Zambia-economic-brief-how-Zambia-can-borrow-without-sorrow 9 Ministry of Finance. 2018. “On the Treasury Government of Zambia US$ 500 Million Sovereign Guarantee Issued to Stag African Investments Limited.” Lusaka, May 30, 2018. http://www.mof. gov.zm 10 Bank of Zambia. 2018. “Fortnightly Statistics.” Statistical report for June, Lusaka. http://www.boz.zm/fortnight-statistics.htm 11 Ghana, Ministry of Finance. “Investor Relations.” https://www.mofep.gov.gh/investor-relations/bond-investors 12 World Bank. 2016. Ghana Policy-Based Guarantee. Financial Solution Brief, Washington DC. http://pubdocs.worldbank.org/en/800221518206127385/Briefs-Guarantees-GhanaPolicy.pdf 13 Independent Evaluation Group. 2017. Findings from Evaluation of Policy-Based Guarantees. Washington DC. https://ieg.worldbankgroup.org/evaluations/lessons-policy-based-guarantees 14 The kwacha usually appreciates in the first two weeks of January, April, July, and October due to increased inflow of foreign currency to meet quarterly tax obligations. See: Zambia Revenue Services. ‘Tax Due Dates for 2013.’ https://www.zra.org.zm/commonHomePage.htm?viewName=TaxCalendar 15 Central Statistical Office. 2018. June Monthly Report. Government of the Republic of Zambia, Lusaka. 16 Bank of Zambia. 2018. Monetary Policy Committee Statement for Q2 2017. August, Lusaka. 17 Bank of Zambia. 2016. Interest Rates and Bank Charges for Personal Accounts and Other Retail Accounts. December, Lusaka. 18 Bankers Association of Zambia. 2017. “Why Interest Rates Remain High.” Presented at the Zambia Institute for Policy Analysis and Research (ZIPAR) Debt Management Conference, Lusaka, October 26. 19 Government of the Republic of Zambia. 2017. National Financial Inclusion Strategy 2017 – 2022. Lusaka. http://www.boz.zm/National-Financial-Inclusion-Strategy-2017-2022.pdf 20 Central Statistical Office. 2018. 2018 Crop Survey. Lusaka, Government of the Republic of Zambia. 21 FQM accounts for more than 50 percent of Zambia’s copper production and public revenue from copper mining through its Kansanshi and Kalumbila mines, and stakes in other mines such as Mopani Copper Mine (MCM). It also accounts for over 50 percent of public revenues from the mining sector. 22 Bloomberg. 2018. “Zambia Slaps Miner First Quantum with US$ 8 Billion Tax Bill.” March 20. https://www.bloomberg.com/news/articles/2018-03-20/first-quantum-confirms-7-9-billion-zambian- tax-assessment. 23 Bank of Zambia. 2017. Monetary Policy Committee Statement for Q3 2017. November, Lusaka. 24 Ministry of Finance. 2018. Medium-Term Expenditure Framework 2019-21. Lusaka, Government of the Republic of Zambia. 25 World Bank. 2018. Commodity Market Outlook. April, Washington DC, World Bank. http://pubdocs.worldbank.org/en/248071492188177315/mpo-zmb.pdf 26 World Bank. 2016. Beating the Slowdown - Making Every Kwacha Count. Zambia Economic Brief No. 7, Washington DC. http://documents.worldbank.org/curated/en/804591467989562427/ Zambia-economic-brief-beating-the-slowdown-making-every-kwacha-count 27 World Bank. 2017. How Can Zambia Borrow Without Sorrow. Economic Brief No. 10, Washington DC, World Bank. http://documents.worldbank.org/curated/en/782221512459934813/Zambia- economic-brief-how-Zambia-can-borrow-without-sorrow 28 Barrett, Christopher B., Luc Christiaensen, Megan Sheahan, and Abebe Shimeles. 2017. “On The Structural Transformation of Rural Africa.” Policy Research Working paper 7938, World Bank, Washington DC. https://openknowledge.worldbank.org/bitstream/handle/10986/25947/WPS7938.pdf?sequence=1&isAllowed=y 29 Merotto, Dino, Michael Weber, and Reyes Aterido. Forthcoming. “Jobs Diagnostics: Facts and Findings.” World Bank, Washington DC. 30 Jedwab, Remi, and Dietrich Vollrath. 2015. “Urbanization without Growth: A Historical Perspective.” Explorations in Economic History 58: 1- 21. 31 World Bank. 2007. World Development Report 2008: Agriculture for Development. Washington DC: World Bank. https://openknowledge.worldbank.org/handle/10986/5990 32 For the sake of simplicity, these estimates assume constant urbanization rates and unchanged income distribution within rural and urban areas respectively between 2015-30. A more rapid urbanization rate would only marginally attenuate the higher poverty impact of rural development, in spite of optimistically assuming that higher population growth in urban areas would not impact urban poverty rates. 33 Timmer, C. Peter. 2005. “Agriculture and Pro-Poor Growth: An Asian Perspective.” Working Paper No. 63, Center for Global Development, Washington DC. 34 World Bank. 2018. Zambia Systematic Country Diagnostic. Washington DC, World Bank. https://openknowledge.worldbank.org/handle/10986/29702 35 We decompose aggregate productivity growth into ‘within-sector’ productivity and ‘across sector (structural transformation’ productivity, using the approach in McMillan and Rodrik (2011). The technical methodology for this decomposition as follows: : where the left-hand side shows aggregate productivity, and on the right-hand side, the first component measures within sector productivity and the second measures across-sector productivity. 36 Mudenda, Dale. 2009. “Trade and Industrialisation Policies Experienced from Zambia.” Trade & Industrial Policy Strategies, Lusaka. 37 Rankin, Neil, and Joseph Simumba. 2017. “Exports, Imported Intermediate Inputs and Exchange Rate Volatility in Zambia.” Working Paper No. F-89214-ZMB-1, International Growth Centre, Lusaka. https://www.theigc.org/wp-content/uploads/2016/11/Rankin-Simumba-2016-working-paper.pdf 38 World Bank. 2017. Reaping Richer Returns from Public Expenditures in Agriculture. Zambia Economic Brief No. 9, Washington DC, World Bank. https://openknowledge.worldbank.org/han dle/10986/27521 39 Merotto, Dino. 2017. Zambia Job Diagnostics. Volume 1: Analytics, Jobs Series Issue No. 7, Washington DC. https://openknowledge.worldbank.org/handle/10986/27008 40 McCullough, Ellen B. 2018. “Agricultural Labor is Not So Unproductive in Africa.” In Agriculture in Africa: Telling Myths from Facts, edited by Luc Christiaensen and Lionel Demery. Washington DC: World Bank. https://openknowledge.worldbank.org/handle/10986/28543 41 Ibid. 42 Sitko, Nicholas J., Jordan Chamberlin, and Brian Mulenga. 2015. “Unpacking the Growth of Medium-Scale Farms in Zambia: What are the Implications for the Future of Smallholder Agriculture.” Working Paper No. 100, Lusaka, Indaba Agricultural Policy Research Institute. http://www.iapri.org.zm/images/WorkingPapers/wp100.pdf 43 Chapoto, Antony, Brian Chisanga, and Mulako Kabisa. 2017. Zambia Agriculture Status Report 2017. Lusaka, Indaba Agricultural Policy Research Institute. http://www.iapri.org.zm/images/ WorkingPapers/AgStatus_2017.pdf 44 McMillan, Margaret S., and Dani Rodrik. 2011. “Globalization, Structural Change and Productivity Growth.” Working Paper No. 17143, National Bureau of Economic Research, Cambridge. http:// www.nber.org/papers/w17143.pdf 45 Commodity price movements can also directly impact productivity measures, as affecting firms’ utilization rates. While absence of data on utilization rates in Zambia prevents estimating their impact, it is likely that lower demand for goods and services stemming from lower copper incomes generated a decline in the firms’ utilization rate of capital and labor. See: Adler, Gustavo, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova, and Marcos Poplawski-Ribeiro. 2017. “Gone with the Headwinds: Global Productivity.” IMF Staff Discussion Note SDN/17/04, International 44 1 1 th Z A M B I A E C O N O M I C B R I E F - A N A G R O - L E D S T R U C T U R A L T R A N S F O R M A T I O N Monetary Fund, Washington DC. 46 Resnick, Danielle, and James Thurlow. 2017. “The Political Economy of Zambia’s Recovery: Structural Change without Transformation?” In Structural Change, Fundamentals, and Growth: A Framework and Case Studies, edited by Margaret S. McMillan, Dani Rodrik, and Claudia Sepúlveda, 235-266. Washington DC: International Food Policy Research Institute. https://www.ifpri.org/ publication/political-economy-zambias-recovery-structural-change-without-transformation 47 Merotto, Dino. 2017. Zambia Job Diagnostics. Volume 1: Analytics, Jobs Series Issue No. 7, Washington DC. https://openknowledge.worldbank.org/handle/10986/27008 48 Tembo, Yohane. 2014. Rapid Urbanization in Zambia : The Challenges Facing Our Cities and Towns. Norderstedt: GRIN Verlag GmbH. 49 Gollin, Douglas, Remi Jedwab, and Dietrich Vollrath. 2016. “Urbanization With and Without Industrialization.” Journal of Economic Growth 21 (1): 35-70. 50 Bank of Zambia. 2016. Foreign Private Investment and Investor Perception Survey. Lusaka. 51 Bank of Zambia. 2016. Credit Market Monitoring Report. Lusaka. 52 De La Fuente, Alejandro, Manuel Rosales, and Jon Jellema. 2017. “The Impact of Fiscal Policy on Inequality and Poverty in Zambia.” Policy Research Working Paper 8246, World Bank, Washington DC. https://openknowledge.worldbank.org/handle/10986/28907 53 Randolph, Gregory, and Dhruv Jain. 2016. “Promoting Job-Rich Urbanization in Zambia.” Policy Paper No. 2, Zambia Institute of Policy Analysis and Research, Lusaka. 54 Randolph, Gregory. 2018. Boosting Urban Job Creation Beyond Lusaka: How to Catalyze Balanced, Job-Rich Urbanization in Zambia. Lusaka, JustJobs Network Inc. 55 World Bank. 2013.Growing Africa. Unlocking the potential of Agribusiness. Washington DC: World Bank. Washington DC. https://openknowledge.worldbank.org/handle/10986/26082 56 Hawkes, Corinna, and Barry M. Popkin. 2015. “Can the Sustainable Development Goals Reduce the Burden of Nutrition-Related Non-Communicable Diseases Without Truly Addressing Major Food System Reforms?” BMC Medicine 13: 143. 57 World Bank. 2016. Zambia Agribusiness and Trade Project. Project Appraisal Document - P156492, Report No. PAD 1880, Washington DC, World Bank. http://documents.worldbank.org/curated/ en/459181482116462283/Zambia-Agribusiness-and-Trade-Project 58 Chisanga, Brian, and Olipa Zulu–Mbata. 2017. “The Changing Food Expenditure Patterns and Trends in Zambia: Implications on Agricultural Policies.” Working paper 119, Indaba Agricultural Policy Research Institute, Lusaka. http://www.iapri.org.zm/images/WorkingPapers/wp119_final.pdf 59 Fessehaie, Judith, Reena Das Nair, Phumzile Ncube, and Simon Roberts. 2015. “Growth Promotion Through Industrial Strategies: Zambia.” Working Paper, International Growth Centre, Lusaka. https://www.theigc.org/wp-content/uploads/2015/06/Roberts-et-al-2015-Working-paper.pdf 60 Source: United Nations Commodity Trade Statistics (UN COMTRADE) Database, Harmonized System (HS) Chapters 2-4, 7-12, 16-22, United Nations, New York (accessed September, 2018), http://comtrade.un.org 61 International Growth Centre. 2015. Growth Promotion Through Industrial Strategies In Zambia. Lusaka, International Growth Centre. https://www.theigc.org/wp-content/uploads/2015/06/2015- Policy-note1.pdf 62 World Bank. Forthcoming. Productive Diversification in African Agriculture and Impacts on Resilience and Nutrition. Washington DC, World Bank. 63 World Bank. 2017. Reaping Richer Returns from Public Expenditures in Agriculture. Zambia Economic Brief No. 9, Washington DC, World Bank. https://openknowledge.worldbank.org/han dle/10986/27521 64 World Bank. 2017. Reaping Richer Returns from Public Expenditures in Agriculture. Zambia Economic Brief No. 9, Washington DC, World Bank. https://openknowledge.worldbank.org/han dle/10986/27521 65 Mason, Nicole M., Thomas S. Jayne, and Nicholas van de Walle. 2016. “The Political Economy of Fertilizer Subsidy Programs in Africa: Evidence from Zambia.” American Journal of Agriculture Economics 99 (3). 66 CIAT (International Center for Tropical Agriculture), and World Bank. 2017. Climate-Smart Agriculture in Zambia. CSA Country Profiles for Africa Series, CIAT and World Bank, Washington DC. 67 Kuteya, Auckland N., Chinyama Lukama, and Vincent C. Malata. 2018. Review of the E-FISP Performance During 2017/2018 Agricultural Season. Monitoring Report May 2018, Lusaka, Indaba Agricultural Policy Research Institute. http://www.iapri.org.zm/images/PolicyBriefs/Review_of_e_FISP_Performance_for_2017_18_Ag_Season_as_at_May_30_EDITED_ac.pdf 68 Ibid. 69 Ibid. 70 Katambo, Michael Z. J. 2018. Ministerial Statement on the Implementation of the Farmer Input Support Programme (FISP) in 2018/2019 Farming Season. Presented on July 11, 2018, Lusaka, Zambia, Ministry of Agriculture. http://www.parliament.gov.zm/node/7605 71 Hichaambwa, Munguzwe, Jordan Chamberlin, and Stephen Kabwe. 2015. “Is Smallholder Horticulture the Unfunded Poverty Reduction Option in Zambia? A Comparative Assessment of Welfare Effects of Participation in Horticultural and Maize Markets.” Working paper 96, Lusaka, Indaba Agricultural Policy Research Institute. http://www.iapri.org.zm/images/WorkingPapers/wp96_re vised.pdf 72 World Bank. 2018. Republic of Zambia Systematic Country Diagnostic. Washington DC, World Bank. https://openknowledge.worldbank.org/handle/10986/29702 73 Fuglie, Keith O., and Nicholas E. Rada. 2013. Resources, Policies, and Agricultural Productivity in Sub-Saharan Africa. Economic Research Report 145, Washington DC, United States Department of Agriculture, Economic Research Service. 74 Goyal, Aparajita, and John Nash. 2017. Reaping Richer Returns: Public Spending Priorities for African Agriculture Productivity Growth. Washington DC: World Bank. https://openknowledge. worldbank.org/handle/10986/25996 75 Goyal, Aparajita, and John Nash. 2017. Reaping Richer Returns: Public Spending Priorities for African Agriculture Productivity Growth. Washington DC: World Bank. https://openknowledge. worldbank.org/handle/10986/25996 76 Fessehaie, Judith, Reena Das Nair, Phumzile Ncube, and Simon Roberts. 2015. “Growth Promotion Through Industrial Strategies: Zambia.” Working Paper, International Growth Centre, Lusaka. https://www.theigc.org/wp-content/uploads/2015/06/Roberts-et-al-2015-Working-paper.pdf 77 Merotto, Dino. 2017. Zambia Job Diagnostics. Volume 1: Analytics, Jobs Series Issue No. 7, Washington DC. https://openknowledge.worldbank.org/handle/10986/27008 78 Chisanga, Brian, and Olipa Zulu–Mbata. 2017. “The Changing Food Expenditure Patterns and Trends in Zambia: Implications on Agricultural Policies.” Working paper 119, Indaba Agricultural Policy Research Institute, Lusaka. http://www.iapri.org.zm/images/WorkingPapers/wp119_final.pdf 79 IAPRI (Indaba Agricultural Policy Research Institute). 2016. Rural Agricultural Livelihoods Survey. 2015 Survey Report, Lusaka, IAPRI. 80 Sitko, Nicholas J., and Thomas S. Jayne. 2012. “The Rising Class of Emergent Farmers: An Effective Model for Achieving Agricultural Growth and Poverty Reduction in Africa?” Working Paper 69, Indaba Agricultural Policy Research Institute, Lusaka. http://www.iapri.org.zm/images/WorkingPapers/wp69.pdf 81 CABRI (Collaborative Africa Budgeting Reform Initiative). 2014. Zambia Case Study: Innovative Financing of Agriculture in the SADC Region. Centurion, CABRI. https://www.cabri-sbo.org/en/ publications/ensuring-value-for-money-in-agriculture-innovative-financing-of-agriculture-in-the-sadc-region-case-study-zambia 82 For instance, Shoprite entered the Zambian market in 1995 and has currently 22 sectors, employing 2,500 people. Source: International Growth Centre. 2015. Growth Promotion Through Industrial Strategies In Zambia. Lusaka, International Growth Centre. https://www.theigc.org/wp-content/uploads/2015/06/2015-Policy-note1.pdf 83 International Growth Centre. 2015. Growth Promotion Through Industrial Strategies In Zambia. Lusaka, International Growth Centre. https://www.theigc.org/wp-content/uploads/2015/06/2015- Policy-note1.pdf 84 World Bank. 2016. Zambia Agribusiness and Trade Project. Project Appraisal Document - P156492, Report No. PAD 1880, Washington DC, World Bank. http://documents.worldbank.org/curated/ en/459181482116462283/Zambia-Agribusiness-and-Trade-Project 85 Norman, Therese, Dino Merotto, and Brian Blankespoor. Forthcoming. Spatial Analysis of Agro-Firm Location and Jobs Potential in Zambia. Washington DC, World Bank. 86 World Bank. 2018. World Development Report 2018: Learning to Realize Education’s Promise. Washington DC: World Bank. https://openknowledge.worldbank.org/handle/10986/28340 87 World Bank. 2018. Zambia Systematic Country Diagnostic. Washington DC, World Bank. https://openknowledge.worldbank.org/handle/10986/29702 88 Binswanger-Mkhize, Hans P., Timothy Johnson, Paul Chimuka Samboko, and Liangzhi You. 2016. “The Impact of Urban Growth on Farm and Rural Non-Farm Growth in Kenya.” Paper presented at the 5th International Conference of the African Association of Agricultural Economists, “Transforming Smallholder Agriculture in Africa: The Role of Policy and Governance,” Addis Ababa, September 23-26. 89 The definition of city size is not straightforward. District typology from Randolph, G. (2018): secondary city districts with a presence of urban settlement containing between 100,000-500,000 residents as of 1990 are Chingola, Kabwe, Kitwe – which are on the ‘line of rail’. Tertiary city districts contain 10,000-100,000 residents and encompass: Chipata, Kalulushi, Livingston, Mansa, Mazabuka, Mongu and Solwezi. 90 World Bank. 2009. World Development Report 2009: Reshaping Economic Geography. Washington DC: World Bank. https://openknowledge.worldbank.org/handle/10986/5991 91 Randolph, Gregory. 2018. Boosting Urban Job Creation Beyond Lusaka: How to Catalyze Balanced, Job-Rich Urbanization in Zambia. Lusaka, JustJobs Network Inc. 92 Christiaensen, Luc, and Ravi Kanbur. 2016. “Secondary Towns and Poverty Reduction: Refocusing the Urbanization Agenda.” Policy Research Working Paper 7895, World Bank, Washington DC. https://openknowledge.worldbank.org/handle/10986/25698 93 Frick, Susanne A., and Andrés Rodríguez-Pose. 2016. “Average City Size and Economic Growth.” Cambridge Journal of Regions, Economy and Society 9 (2): 301–18. 94 Behrens, Kristian, and Frédéric Robert-Nicoud. 2013. “Survival of the Fittest Cities.” The Economic Journal 124 (581): 1371-1400. 95 Christiaensen, Luc, and Yasuyuki Todo. 2013. “Poverty-Reduction during the Rural-Urban Transformation: The Role of the Missing Middle.” Policy Research Working Paper 6445, Wordl Bank, Washington DC. https://openknowledge.worldbank.org/handle/10986/15587 96 Ravallion, Martin, Shaohua Chen, and Prem Sangraula. 2007. “New Evidence on the Urbanization of Global Poverty.” Population and Development Review 33 (4): 667-701. 97 “A growth cluster can be defined as: a concentration of producers, agribusinesses and institutions that are engaged in the same agricultural or agro-industrial subsector, and interconnect and build value networks when addressing common challenges and pursuing common opportunities.” (Gálvez-Nogales, Eva. 2010. Agro-Based Clusters in Developing Countries: Staying Competitive in a Globalized Economy. Rome, Food and Agriculture Organization. http://www.fao.org/docrep/012/i1560e/i1560e.pdf) 98 Randolph, Gregory. 2018. Boosting Urban Job Creation Beyond Lusaka: How to Catalyze Balanced, Job-Rich Urbanization in Zambia. Lusaka, JustJobs Network Inc. 99 Samboko, Paul, Ballard Zule, Munguzwe Hichaambwa, and Auckland Kuteya. 2017. “Are Farm Blocks a Viable Model for Smallholder Farming in Zambia.” Working Paper 129, Indaba for Agricul tural Policy Research Institute, Lusaka. http://www.iapri.org.zm/images/WorkingPapers/wp129_rev.pdf 45 The World Bank Group Lusaka Country Office 2nd Floor, Bank ABC House 746 Church Road P.O. Box 35410 Lusaka, Zambia Tel: +260 211 373200 +260 211 373217 Fax: +260 211 373248 www.worldbank.org/zambia commszambia@worldbank.org ZAMBIA ECONOMIC BRIEF AN AGRO-LED STRUCTURAL TRANSFORMATION