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21. Zambia’s Bilateral Investment Treaties Review and Evaluation

Author:
Joseph Simumba
Publication Date:
11-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
Zambia attracts foreign direct investments (FDI) from many countries that vary in terms of income levels and geographical location. In the last two decades, the country witnessed a rapid increase in bilateral investment treaty (BIT) activities triggered by massive economic liberalisation of the early 1990s. From a single ratified BIT with Germany prior to 1990, there are now 31 BITs locally called Investment Promotion and Protection Agreements (IPPAs) of which two (2) are ratified, eleven (11) are signed and eighteen (18) exist in draft form. However, BIT activities in Zambia have plummeted in line with a post 2010 global slowdown, a situation linked to rising uncertainty caused by a surge in the number of investment treaty-based cases at international tribunals. Foreign investors are suing host states over disputes ranging from direct expropriation to claims of adverse business regulation especially in the energy and extractives sectors. This study reviews Zambia’s BITs and evaluates their impact on the accumulation of FDI stocks using data collected from the Private Investment and Investor Perception Surveys conducted by Bank of Zambia, Central Statistical Office and Zambia Development Agency for the period 2007-2014 were data is publicly available. The findings show that BITs significantly matter for accumulation of FDI stocks in Zambia. The group of countries with a ratified BIT (Germany and Switzerland) maintain 1.6 times more FDI stocks than the corresponding group with only signed BITs controlling for income groups and geographical location and their interactions based on the World Bank classification. The groups of countries with a draft or without a BIT maintain FDI stocks that are less than four times lower than FDI stocks maintained by the group of ratified BITs countries. This evidence is robust to several potential confounders of the relationship between BITs and FDI stocks. Therefore, ratified BITs work for Zambia’s FDI stocks, a result that challenges some pessimism against IPPAs in Zambia.
Topic:
Treaties and Agreements, Foreign Direct Investment, Economy, and Investment
Political Geography:
Africa and Zambia

22. Scaling the Eurobond Debt Wall

Author:
Shebo Nalishebo and Florence Banda-Muleya
Publication Date:
11-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
The writing is on the wall - Zambia is at a high risk of debt distress: The country risks defaulting on repaying the principal amounts of the three Eurobonds due during 2022-2027. A default could lead to exclusion from the international capital markets, a dented reputation which would culminate into a decline in Foreign Direct Investments and reduced credit to the private sector and credit rating downgrades. This would ultimately result in an economic contraction which would affect future payments and further compounding the default. Government has to pay back US$750 million in 2022, US$1 billion in 2024 and US$1.25 billion over 2025-2027. Between 2018 and 2022, Government will spend about US$237.4 million per annum in interest payments towards the three Eurobonds – this annual amount is about the same as the entire social protection budget in 2017. Policy measures have been put in place to manage the debt, but they seem inadequate: The measures include a debt management strategy that will guide borrowing decisions in the medium term. The Government has also signalled its intensions to set up a sinking fund and/or refinance the debt – essentially replacing the old loans with a new loan offering different, perhaps more favourable, terms. To set up the sinking fund, Government intends to set aside K100 million in 2018, K800 million in 2019 and K3.97 billion in 2020. But setting up the fund requires an excess of K6 billion per annum between 2018 and 2022. No clear indication has been given with regard to when refinancing will be considered. So the plans put in place may not be adequate to pay back the Eurobonds. Government should not wait until it is too late: In order to meet the principal and interest payments on the three Eurobonds, Government needs to start the strategies for paying back the Eurobonds sooner rather than later. Government has already lost time as a pay-back plan should have been instituted for the Eurobonds as soon as they were issued. But without any budget surpluses, and with foreign financing having somewhat dried up, Zambia has to look to more domestic resource mobilisation to raise the funds needed to pay back the Eurobonds.
Topic:
Government, Economy, Public Debt, and Eurobonds
Political Geography:
Africa and Zambia

23. Towards An Inflation Targeting Regime in Zambia

Author:
Caesar Cheelo and Thulani Banda
Publication Date:
06-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In this paper, I seek to discuss the conduct of monetary policy in an inflation targeting framework. The objective is to understand structural and institutional nuances in settings where this framework is successful in controlling inflation and challenges that emerge in the implementation of inflation targeting. I deal with the question: which institutional conditions should exist to support the successful implementation of inflation targeting in countries that use it? I find several institutional and legal elements which are common and can potentially explain much of the success in the implementation of inflation targeting among their monetary authorities. I benchmark these elements with the concepts of transparency and accountability of the central bank which are central tenets in the discussion of inflation targeting. I note that central bank credibility is a key outstanding element in explaining the success of inflation targeting. Components such as central bank independence and commitment to low stable inflation as the overriding objective of monetary policy represent critical preconditions for inflation targeting and can sustain the credibility of monetary policy.
Topic:
Monetary Policy, Inflation, Central Bank, Transparency, and Financial Institutions
Political Geography:
Africa and Zambia

24. A Tightening Balancing Act: Economic Implications of Zambia's Balance of Payments Performance

Author:
Caesar Cheelo and Thulani Banda
Publication Date:
06-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
International trade and investment are primary drivers of globalization, international trade and development. In 2014, Zambia’s trade openness – in terms of total monetary flows on all export and import transactions combined – was estimated at 79.6% of GDP while the total (cumulative) stock on inward FDI was 66.5% of GDP. The recent economic headwinds in Zambia and abroad motivated this review of the country’s external position relative to the rest of the world. This paper highlights the changes in the balance of payments (BOP), a key tool for monitoring Zambia’s economic performance vis-à-vis the rest of the world. The balance of payments shows the Zambia’s financial transactions with other countries in the world, recoding the flows of money into and out of the economy through a number of payments accounts. Checking the economy’s balance of payments position offers useful insights about its external sector’s health. In a sense, the monetary flows through the balance of payments reflect Zambia’s net dependency on the rest of the world. The context of the analysis in the paper is the economic malaise of 2015. The paper thus demonstrates that the economic debacle of 2015 is not an unfamiliar experience for Zambia. It draws on the country’s economic recent history, identifying parallels between the past and the present. It seeks to offer guidance to policy-makers, towards fostering foster effective and reliable responses to the external balance challenges. Particularly, the paper analyses the fundamental elements of Zambia’s balance of payments, describing their recent behaviour and highlighting some of the main drivers of imbalances in the different payments accounts. It recommends measures for correcting some of the imbalance in the balance of payments, seeking to contribute to the improvement of the external sector’s performance.
Topic:
Economics, International Trade and Finance, and Trade
Political Geography:
Africa and Zambia

25. China-Africa Trade Developments and Impacts: Case of China-Zambia Relations

Author:
Caesar Cheelo, Pamela Nakamba-Kabaso, and Zhun Che
Publication Date:
09-2017
Content Type:
Policy Brief
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
At a glance, China and Zambia – just like China and Africa – are strikingly different in many ways. They followed markedly different paths to development. They achieved significantly divergent trade and development results. However, they also have many striking commonalities, including a shared long history of developmental cooperation and relations. But, what are the lessons of China-Zambia relations for Zambia’s developmental goals and aspirations, including those in the Vision 2030? This study sought to undertake a critical comparative assessment of the trade (and other underpinning socioeconomic) developments in China, Africa and Zambia, with a view to understanding their impetus as well as their consequences, both positive and negative, for China- Africa and China -Zambia ties. It offers unique perspectives and understanding about China-Africa and China-Zambia relations. It takes a look at the history and present-day China- Africa and China-Zambia relations, considering the social and cultural ties that have defined cooperation as well as the political and diplomatic relations that have been forged over time. It unravels the trade and development implications of these relations for Zambia, Africa and China.
Topic:
International Relations, Development, Bilateral Relations, and Trade
Political Geography:
Africa, China, Asia, and Zambia

26. Economic Distress and the Inevitability of an Economic Recovery Programme

Author:
Zambia Institute for Policy Analysis & Research (ZIPAR)
Publication Date:
03-2017
Content Type:
Policy Brief
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
Zambia is emerging from a major economic downturn. The copper price collapse, electricity shortages, huge fall in the value of the Kwacha and high inflation in 2015 left the economy stalling. Growth in 2015 was 2.9% and possibly 3.4% in 2016, significantly below the long-term average rate of 6.9%. The downturn was compounded by a tightening of monetary policy which made it harder for businesses to borrow, and by a continuation of expansionary fiscal policies which increased the budget deficit and Government debt. Because the scale of the challenge was so significant, the Government announced it would launch Zambia Plus, a home-grown recovery programme to put the economy back on track. A credible recovery programme will be essential to instill fiscal discipline, create conditions for growth, and support poverty reduction. A failure to the programme will result in significant adverse consequences for the economy and Zambian households. Without Zambia Plus, the budget deficit (measured as a percentage of GDP) is likely to continue performing worse than the authorities’ targets. Thus, the overall debt level will keep growing, possibly reaching an average of 58.6% of GDP over 2017-2021, up from an average of 23.3% over 2007-2014. More debt will mean a bigger budget taken to meet debt servicing obligations. For instance, in 2017 alone the Government allocated almost ¼ of the budget to debt servicing and arrears payments. This is the equivalent of over K15 billion that could otherwise be spent on tackling poverty or supporting growth. The current path is unsustainable, and the consequences of failing to act are likely to be felt hardest by the poor, who already bear the brunt. Analysis of the 2015 Budget reveals that when the economic downturn set in the most significant underspends were on social cash transfers, the economic empowerment fund and the public service pension fund. So, the absence of Zambia Plus will do bigger and longer lasting damage to the lives of poor Zambians than will the few challenges of the programme.
Topic:
Financial Crisis, Economy, and Public Debt
Political Geography:
Africa and Zambia

27. A Cautionary Tale of Zambia’s International Sovereign Bond Issuances

Author:
Shebo Nalishebo and Albert Halwampa
Publication Date:
03-2015
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In recent years, Zambia has been faced with the increased need to plug huge infrastructural gaps. However, the slowing down of bilateral and multilateral financing due to austerity measures in developed economies has made the country diversify its budget and project financing options by issuing Eurobonds. Eurobonds are commercial borrowings by governments in currencies other than their own - in Zambia’s case, the borrowing is denominated in US dollars. Since 2012, the Zambian Government has issued two ten-year sovereign bonds collectively worth US$1.75 billion mainly to finance infrastructure projects. Eurobonds bring with them opportunities for economic development, but there are risks. This report assesses the current legal and institutional frameworks governing borrowing from international capital markets in Zambia, including the role of credit rating agencies. It also examines the benefits, costs and risks associated with the issuance of sovereign bonds, including the cost and risk of sovereign defaults. It also proposes the mitigation of these costs and risks. Eurobonds offer African countries easy access to monies that are free from the stringent conditionalities that often come with the traditional concessional borrowing. Eurobonds also strengthen macroeconomic discipline and are used as a benchmark for pricing subnational bonds. If the borrowed funds are spent on projects that offer a greater scope for augmenting revenue earnings and creating employment opportunities, this would accelerate economic growth and reduce the high poverty levels that Africa faces.
Topic:
Economy, Economic Development, Public Debt, Bonds, and Eurobonds
Political Geography:
Africa and Zambia

28. Eurobonds Repayment: Limiting the Risks

Author:
Shebo Nalishebo and Albert Halwampa
Publication Date:
03-2015
Content Type:
Policy Brief
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In recent years, the Zambian economy has been growing strongly and the country has increasingly been faced with the need to plug huge infrastructural gaps. However, the slowing down of bilateral and multilateral financing due to austerity measures in developed economies and the World Bank’s reclassification of Zambia as a lower middle income country has led financiers to divert concessional loans to other needy countries in the low income bracket. Consequently, Zambia has had to diversify its budget and project financing options by issuing Eurobonds which are commercial borrowings by governments in currencies other than their own - in Zambia’s case, it is denominated in US dollars. Since 2012, the Zambian Government has issued two ten-year sovereign bonds collectively worth US$1.75 billion to mainly finance infrastructure projects. These two bonds amounted to 37% of Zambia’s external debt in 2014. With an average coupon rate of 6.9%, the two bonds have bullet repayment structures, implying that lump sum principal payments will be paid at the end of their respective ten-year maturity periods. The coupon rate is the interest rate at the time of issuance. Notwithstanding the high interest payments of over US$125 million annually, the bullet structure of the two bonds may have significant repayment risks as the country is expected to pay out the US$1.75 billion within a two-year period (in 2022 and 2024). The country may experience difficulty in repaying or refinancing the face value at maturity if the money is not spent in activities with high economic returns and if there are adverse changes in its exchange rate or international market conditions. The risks are already on the horizon – the recent depreciation of the Kwacha has increased debt servicing costs, while the low copper prices have reduced the much-needed export revenues used to service debt. Has Zambia dug itself into another debt hole? What measures can be put in place to mitigate the risk of a pending default?
Topic:
Economy, Economic growth, Bonds, and Eurobonds
Political Geography:
Africa and Zambia

29. Second-Hand Motor Vehicle Imports in Zambia: Juicing from Lemons?

Author:
Thulani Banda and Zali Chikuba
Publication Date:
12-2014
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
The sustained positive growth of the Zambian economy has resulted in many shifts in consumption patterns of Zambian households. One notable change is the increased consumption of consumer durables, particularly motor vehicles. Motor vehicle ownership has increased substantially since 2004. The increase in motor vehicle ownership owes in part to the highly unbridled access to second hand motor vehicle imports. The downside of the relaxed motor vehicle import regulations as observed in Zambia is the ageing of the motor vehicle fleet and deterioration in fleet safety. Second hand motor vehicles imported in the country may be fine, but they may also be unreliable – commonly referred to as lemons in economic literature – and costly to maintain thereby generating serious financial, road safety and environmental concerns. Considering that Zambia is one of the highest road fatality risk countries in Africa with 23.7 road traffic deaths per 100,000 people, the ageing fleet of motor vehicles only compounds the risk. Thus, more deliberate measures to ensure lives are safeguarded and consumers get value-for-money on motor vehicle imports should be devised and implemented urgently.
Topic:
Regulation, Economy, Imports, and Motor Vehicles
Political Geography:
Africa and Zambia

30. Uncovering the Unknown: An Analysis of Tax Evasion in Zambia 2014

Author:
Shebo Nalishebo and Albert Halwampa
Publication Date:
12-2014
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
The Government of the Republic of Zambia, like many other governments in the world, significantly relies on tax revenue to finance both its key infrastructure development and social services. Zambia’s tax revenue declined from 30% of GDP in the 1970s to only an average of 13% of GDP in the 1990s mainly due to the decline in mining revenue and weak tax administration. To address this decline, significant tax reforms were undertaken that included the creation of the Zambia Revenue Authority (ZRA). Despite these reforms, tax revenue collection has to a large extent been unsatisfactory, recording average tax revenue-to-GDP of 17% in the last five years. This study investigates the extent and causes of tax evasion in Zambia including the review of the current legal and administrative measures used by the ZRA in addressing this problem. To investigate tax evasion in Zambia, several methodologies or approaches are used. These include carrying out a qualitative survey on a small sample of large taxpayers to find out their perceptions on the causes of tax evasion in Zambia. In investigating the extent of tax evasion, the tax gap with respect to Pay-As-You-Earn (PAYE) personal income tax of the self-employed and paid employees is estimated using data from the nationally representative 2010 Living Conditions and Monitoring Survey (LCMS). Further, a comparative assessment of Zambia‘s tax revenue performance relative to countries in the Southern Africa Customs Union (SACU) and Sub-Saharan Africa (SSA) is undertaken. The study also reviews the current legal and administrative measures used to address tax evasion.
Topic:
Government, Tax Systems, and Tax Evasion
Political Geography:
Africa and Zambia