Scotland Independence : Yes or No Review by Paul Krugman and Joseph Stiglitz

Britain is under 72 hours away from a once-in-a-lifetime vote on Scottish independence that could break up the 307-year-old United Kingdom, splitting apart one of America’s key global allies (JAMIESON, 2014). With polls suggesting that a Scottish split from the rest of Britain is a real possibility; lawmakers including Prime Minister David Cameron are making urgent appeals to save Britain its biggest constitutional upheaval since the Wars of Independence that led to the creation of the United States.
What will be voted on?
More than 4.2 million people in Scotland -- or 97 percent of the adult population -- have registered to vote on whether or not to remain part of the United Kingdom.
Scotland was an independent country until 1707, when the Act of Union with England led to the creation of Great Britain and, ultimately, the United Kingdom -- which also includes Northern Ireland.
As Scotland contemplates independence, some, such as Paul Krugman, have questioned the "economics".
“Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it's all too likely that it would end up becoming Spain without the sunshine.” – Paul Krugman
Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. Also like Scotland, it is politically to the left of that giant neighbor. And what the Canadian example shows is that this can work. Canada is prosperous, economically stable (although I worry about high household debt and what looks like a major housing bubble) and has successfully pursued policies well to the left of those south of the border: single-payer health insurance, more generous aid to the poor, higher overall taxation.

Joseph Stiglitz

Does Canada pay any price for independence? Probably. Labor productivity is only about three-quarters as high as it is in the United States, and some of the gap may reflect the small size of the Canadian market (yes, we have a free-trade agreement, but a lot of evidence shows that borders discourage trade all the same). Still, you can argue that Canada is doing OK.

But Canada has its own currency, which means that its government can't run out of money, that it can bail out its own banks if necessary, and more. An independent Scotland wouldn't. And that makes a huge difference.

Could Scotland have its own currency? Maybe, although Scotland's economy is even more tightly integrated with that of the rest of Britain than Canada's is with the United States, so that trying to maintain a separate currency would be hard. It's a moot point, however: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster. Which is where the cautionary tale of Spain comes in.


Read more here:
http://www.sunherald.com/2014/09/16/5803335_paul-krugman-the-scots-should.html?rh=1#storylink=cpy


Stiglitz
Would Scotland, going it alone, risk a decline in standards of living or a fall in GDP? There are, to be sure, risks in any course of action: should Scotland stay in the UK, and the UK leave the EU, the downside risks are, by almost any account, significantly greater. If Scotland stays in the UK, and the UK continues in its policies which have resulted in growing inequality, even if GDP were slightly larger, the standards of living of most Scots could fall.

Cutbacks in UK public support to education and health could force Scotland to face a set of unpalatable choices - even with Scotland having considerable discretion over what it spends its money on.

But there is, in fact, little basis for any of the forms of fear-mongering that have been advanced. Krugman, for instance, suggests that there are significant economies of scale: a small economy is likely, he seems to suggest, not to do well. But an independent Scotland will still be part of Europe, and the great success of the EU is the creation of a large economic zone.

Besides, small political entities, like Sweden, Singapore, and Hong Kong have prospered, while much larger entities have not. By an order of magnitude, far more important is pursuit of the right policies.

Another example of a non-issue is the currency. There are many currency arrangements that would work. Scotland could continue using sterling - with or without England's consent.

Because the economies of England and Scotland are so similar, a common currency is likely to work far better than the euro - even without shared fiscal policy. But many small countries have managed to have a currency of their own - floating, pegged, or "managed."

The fundamental issue facing Scotland is different. It is clear that there is, within Scotland, more of a shared vision and values - a vision of the country, the society, politics, the role of the state; values like fairness, equity, and opportunity. Not everyone in the country agrees on the precise policies, on the delicate balance.

But the Scottish vision and values are different from those dominant south of the Border. Scotland has free university education for all; England has increased student fees, forcing students with parents of limited means to take out loans.

Scotland has repeatedly stressed its commitment to the NHS. England has repeatedly made moves towards privatisation. Some differences are of long standing: even 200 years ago, male literacy in Scotland was 50% higher than in England, and Scottish universities charged one-tenth of the fees for Cambridge and Oxford.

Differences in these and other related policies can, over time, lead not only to markedly different growth rates, and thus to markedly different levels of GDP per capita - swamping any slight short run impact - but also, and more importantly, to differences in the distribution of income and wealth. If the UK continues on its current course, imitating the American model, it is likely that the results will be like those of the US - where the typical family has seen its income stagnate for a quarter century, even as the rich get richer.

Independence may have its costs, although these have yet to be demonstrated convincingly, but it will also have its benefits.

Scotland can make investments in tidal energy, or in its young people; it can strive to increase female labour-force participation and provide for early-years education - both essential for creating a fairer society. It can make these investments, knowing that the country will recapture more of the benefits from them through taxation.

Under current arrangements, while Scotland bears the cost of these social investments, the extra tax revenue resulting from the additional growth from these investments will go overwhelming south of the Border.


Analysis

The first is: whatever Scots decide, all decent people in the world will welcome Scotland, one of the pleasantest nations there are, in their midst.

Whether, as now, part of the UK or as an independent nation-state, doesn't matter.

The second has to do with the nature of independence in the modern world.

Today, more than in millennia of past History, fully independent nations are a myth. We are all constrained by trade, incredible ease of communication, moral international rules, zillions of clauses in treaties, huge movement of masses of different nationalities.

In practical terms the life of Scotland and Scots will change very little, if at all, whichever decision Scots make.

Apart a few days of either euphoria or relief, practically nothing will change much.

Markets, finance, debt, currency, all that matter very little: see Europe's periphery with her recent speculators induced upheavals and Brazil, with some half a dozen different currencies in 40 years, as examples.

"Iffy" questions are forbidden but I doubt the practical life of the denizens of these two parts of the world would be any different if those changes hadn't occurred.

We give too much importance to minor matters.

What will change definitely is emotions. Pride in becoming an independent nation-state, pride in being part of a successful and prosperous union of nations.

Both equally justifiable but different in nature.

For Scots to decide which they prefer.

Emotions do count. Scots will certainly and wisely choose the ones they prefer.

Let us wish full happiness to Sots and Scotland whichever decision they make.

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Food Prices: Why are prices high despite production surpluses? by Kampamba Shula

1.1. Background
Government has challenged food security researchers to provide comprehensive answers for the continued high food prices despite having food surplus in the country.
Agriculture and Livestock Permanent Secretary Julius Shawa observed that the issue of food prices is complex and requires the involvement of all stakeholders.
During a policy dialogue meeting on food security and nutrition in Zambia organised by the Indaba Agricultural Policy Research Institute (IAPRI) and the International Food Policy Research Institute (IFPRI) in Lusaka, Mr Shawa noted food security had become more complicated with many issues that were cross-border and needed to understand the complexities in order to make strategic decisions.
“Our policy makers are asking why food prices continue to accelerate despite the surpluses the country has been recording lately,” Mr Shawa said. “Researchers and us as policy advisers need to look at that and provide answers.”
He noted that there were various issues that keep coming up regarding high food prices such high cost of production, marketing and that sometimes the blame goes to the middle men. Mr Shawa observed that researchers were key in provide the true findings because good decision making depended on solid evidence and rigorous information.
This paper is an answer to this call for comprehensive answers on the high food prices in Zambia.
1.2. Introduction
For all intents and purposes this article will mainly focus on the price of maize, even though prices of other food commodities have been rising. The reason for this is due to the apparent contradiction that a surplus in maize production coupled with higher prices has perplexed some of the policy makers. This paper will aim to shed light in this regard.
 
1.3. Review
Since 2009/2010 production season, maize harvests have been above 2.5 million metric tons each year
• Projected maize surplus between 2010 & 2012 was 4.4 million MT of which FRA purchased 83%
• Despite maize surpluses, there were widespread maize meal shortages & skyrocketing m/meal prices
The question that seems to perplex stakeholders is how could Zambia face maize shortages and high prices despite three consecutive bumper harvests, large subsidies to mills, and significant maize held by the FRA?
As its initial mandate, FRA was established to maintain national strategic food reserves
• After amendment of Food Reserve Act in 2005,
• FRA has become a major player in the maize market
FRA purchased nearly all surplus maize between 2010 & 2012
Because FRA bought more maize than what they could handle, there were greater levels of FRA maize spoilage estimated at 32% (2013 ministerial statement by MAL Minister). This loss translates to K2.5 billion - loss equals 60% Euro bond. Private sector loss is only about 5%
• Retail maize markets became thinly traded as many traders were forced out of business
• Informal sector squeezed out of market
FRA’s procuring nearly all surplus maize and selling it at subsidized rates to a few selected commercial mills squeezed out informal milling sector
Selected subsidies to large millers provided un-levelled playing field.
• Not all large millers received heavily subsidized grain
• Others lost market share and exited the market
• Concentration of the milling sector
Undermined competition as such mealie meal prices did not come down.
Because FRA purchased majority of the maize, commercial mills’ access to maize directly from the market became limited and this resulted into:
• increased risk of bottlenecks in maize supply chain
Exit of commercial farming sector from maize production
• Because large millers started waiting for cheap FRA maize, it led to loss of forward contracts with commercial farmers
 
1.3.1. Summary
Less competition within large-scale milling sector which resulted into concentration of the sector
• Shortage of maize and mealie meal on the market
• Informal traders and retailers squeezed out of the market
• Overall surplus diminished by spoilage/wastage
• Commercial farmers’ maize production declined
• Major cost to national treasury & big opportunity cost to investments in R&D, extension, irrigation & infrastructure
Total estimated loss to national treasury through FRA maize marketing from 2010 – 2012
Total estimated operating LOSS: total grain sold x average loss/MT = (2.5 x 1,680)
• 4.2 billion kwacha rebased
• Loss more than Euro bond
1.4. Who sets the price for Maize?
Determining an FRA purchase price is a complex matter as it affects a multiplicity of factors that influence the performance of Zambia’s agricultural sector. The sustainability of a maize farmer, however, depends on that farmer’s price competitiveness, both locally and on the regional export market. Issues of adoption of new agricultural technologies and public goods investments that will reduce costs – such as feeder roads, improved agronomic practices, more productive seed varieties, meaningful extension messages, and ensuring the availability of fertilizer at the appropriate time -- are critical for the future competitiveness and viability of Zambia’s farm sector.
The FRA purchase price has normally been below the Lusaka wholesale price. The FRA must incur transport, handling and storage losses associated with moving grain from the outlying production areas to urban areas. As long as the FRA selling price to millers reflects these marketing costs, its selling price will be higher than its buying price. Hence it is unsurprising that the FRA purchase price should be set below the price in urban markets (otherwise its selling price to millers and other buyers would be uncompetitive compared to grain sourced by private traders). Therein lies the problem and effectively, the loss.
A major topical issue that can be informed with accurate production cost estimates is the price offered to farmers by the Zambian Food Reserve Agency (FRA) each year. The FRA sets its maize buying price each year to compensate farmers for the costs incurred during production and provide a reasonable return to their own land, labour, mechanical, and animal inputs. However, the setting of FRA’s producer price has never benefitted from national farm survey evidence on production costs. Rather, illustrative figures are provided by various stakeholder groups to lobby and influence the setting of FRA purchase price levels (Burke, Hichaambwa, Banda, & Jayne, 2011).
A key observation by a report done by (Burke, Hichaambwa, Banda, & Jayne, 2011) is that the FRA pan-territorial pricing policy does not reflect the wide geographic differences in costs and even among farmers in the same village. Geographic variation in production costs follow differences in agro-ecological suitability for maize production and input costs. The average production cost per bag in 2010 varied from as low as ZMK 34 in the Eastern and Northern Provinces (representing 35% of national production) up to ZMK 53 in the Copperbelt and Western Provinces (10% of national production). Within-village production cost differences arise due to differences in farmer ability and knowledge and the various management decisions they make.
These sources of variation result in a wide range of production costs in Zambia, which leads to the conclusion that there is no single “cost of maize production”. There is only a distribution of production costs across the millions of maize farmers in Zambia. This analysis reports the range of production costs for all maize farmers surveyed in the 2010 Crop Forecast Survey. The most productive 20% of farmers in the 2010 CFS produced maize at a mean of ZMK 15.567 per bag.
The next most productive 20% of farmers produced maize at ZMK 29.078 per bag. Mean production costs for the third and fourth quintiles of production costs were ZMK 42.776 and ZMK 64.341 per bag, respectively. The least productive maize farmers’ production costs were well over ZMK 100 per bag, which in many cases likely reflected unexpected events leading to partial or near total crop losses. In such cases, production expenses are extremely high when.
The wide variations in production costs per bag are due to variations in farmers’ production costs per unit of land planted, but especially due to variations in farmers’ yields.
The second key observation from the analysis of 2010 production costs is that 86% (2.06 million MT) of Zambia’s total maize output was produced at a total cost lower than the ZMK 65 FRA buying price. The mean cost of production per bag was ZMK 40.739. Cash expenditure on inputs per bag was ZMK 18.630 on average.
Thirdly, the majority of Zambian maize could be sold at a profit competitively in regional markets. At the beginning of the 2010 harvest season, the export parity price (the landed cost of maize in Lubumbashi, Democratic Republic of Congo (DRC), minus transfer costs from Kabwe to Lubumbashi) was roughly ZMK 59. Meanwhile, 1.8 million metric tons of Zambian maize was produced at costs lower than 50 ZMK/bag. It was found that smallholder households selling or expecting to sell maize produced maize at somewhat lower costs than the average (roughly 38 ZMK/bag). Among this group, 76-82% of the maize produced could have been competitive in regional export markets.
Fourth, there is a strong correlation between higher yields and lower costs of production. This is not surprising. Clearly, a key factor in increasing Zambian maize producers’ comparative advantage in the region will be the promotion of productivity enhancing technologies and agronomic practices.
Rural smallholder production remains highly labour-intensive. On average, family labour accounts for 62% of the total cost of maize production in Zambia’s small- and medium-scale farm sector. Promoting the identification and adoption of practices and technologies that save labour and /or identifying labour-productivity-enhancing technologies through research and development will therefore help to make Zambian maize more competitive and allow farmers to maintain profitability even at lower producer prices.
 

1.4.1. High Maize Price
Truth be told, Zambia’s agriculture sector revolves around maize, never mind the growing of other crops and livestock. The bulk of the maize is grown by peasant farmers who are faced with regular droughts during the rainy season, an unreliable and expensive supply of fertilizer, and difficulties transporting the commodity to markets.
In 1986, Zambians in the Copperbelt and Lusaka regions rioted because the price of maize increased several fold when incomes were stagnant. Four years later, unrest over price increases even sparked a coup attempt.
High maize prices disadvantage many poor rural households Research results indicate that, unfortunately, the majority of households in Zambia, both rural and urban, are not sellers but buyers of maize.
Moreover, the rural poor in Zambia tend to be buyers of maize. Hence, a rise in the maize price surface to ZK 85 per bag would have adverse income distributional effects by transferring income from the majority of the population in Zambia who are relatively poor net maize buyers to large commercial farmers and to about 25% of the nation’s smallholder households who sell relatively small amounts of maize.
In perfectly competitive markets, prices in the domestic country are fully determined by international conditions. Therefore, price setting does not involve any local factors, such as cost or market structures (Dreger & Kholodilin, 2007). From the perspective of consumers an equal amount of money could buy the same bundle of goods and services at home and abroad.
1.5. Imports and Exports
The importance of import prices it is also expected that the FRA purchase price should be lower than the cost of importing grain from South Africa. This has indeed been the case for each year that the FRA has set a purchase price since 2005. As long as the Government of Zambia tries to keep maize prices in the country below import parity levels, the FRA’s buying price will be below the landed cost of imports.
The surplus crop of maize achieved in recent years presents an opportunity to export value added products to the region, thereby increasing demand for the local produce, which will in turn raise the maize prices for the farmers (Cottan, 2006).
DRC has the largest export potential, but lack of signed bilateral trade agreements between Zambia and DRC is restricting the formal flow of exports. The estimated population for the Katanga province including Lubumbashi is 9.5 million.
However, there is very stiff competition mostly, mainly from South Africa and Tanzania for both Maize Meal and Wheat flour. The Zambian millers should therefore find ways and means to minimise the cost of production in order to remain competitive on the export markets.
 

1.6. “Price Floor”
A “price floor” is a government- or group-imposed price control or limit on how low a price can be charged for a product (McGraw-Hill, 1994). A price floor must be higher than the equilibrium price in order to be effective.
A “price floor” set above the market equilibrium price has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.
Taken together, these effects mean there is now an excess supply (known as a "surplus") of the product in the market to maintain the price floor over the long term.
1.7. The Dilemma
The government has finally announced the maize “floor price” of K70 per 50 Kg bag of maize. Maize, Zambia’s staple food is grown by over 2.7 million agricultural households. The crop is not only used as source of food but is a source of income for many of the rural households. The income obtained from maize sales enables the families meet other basic necessities for livelihood and provides the resource needed to purchase inputs for the upcoming agricultural season.
According to (Nguleka, 2014) it is important to consider the economic conditions that farmers face especially in view of the fact that the floor price was last revised in 2009  (6 years ago). Taking inflation as the starting point, the prices of most goods and services in Zambia have continued to rise, with the magnitude of the increment varying from month to month and year to year. As mentioned earlier, the maize floor price has been static from 2009 at ZMK65/50Kg bag which means that while the prices of commodities that farmers face just like any other consumer has been rising the incomes of farmers remained unchanged. Looking at the inflation statistics below, the floor price was eroded by 36.6% from May 2010 to May 2014.  Had this taken into consideration, the maize price would have ranged from K70.79 in 2010 to K92.26 in 2014
Furthermore the costs of major inputs such as fertilizer and seed have been increasing. Fertilizer prices have risen by about 25 percent from ZMK160/50Kg bag during the 2009/10 agricultural season to about ZMK200/50Kg bag in the 2013/14 agricultural season in Lusaka. In other parts of the country, further from Lusaka, the prices of fertilizer are even higher.  The price of seed has also risen from about ZMK120/50 kg bag in 2011 to ZMK310/25 kg bag in 2013.
Other cost centres that should have been considered are;
The cost of fuel was adjusted upwards in April this year by 7.22% on petrol, 8.75% on diesel and 9.54% for kerosene. Increase in the price of fuel immediately raises the cost of transportation for the maize from farm gate to the market and the cost of transporting inputs onto the farmsteads.
The depreciation of the Kwacha drives upwards the cost of all imported farm requirements such as packaging bags, insecticides, fuel, etc.
Interest rates have gone up. The emergent and small scale farmers who have pushed up maize production get seasonal loans through a group lending scheme, the Lima Credit Scheme by depositing 50% of the value of the inputs as collateral to get double the value of inputs. Since last year the policy rate has been adjusted several times upwards and since April it is at 12% hence the cost of money has gone up hence commercial banks’ lending rates have gone up signalling a rise in seasonal finance costs in future.
Maize production is labour-intensive and wage related costs have gone up from ZMK12.200 to ZMK19.03 per man-day.
The general cost of doing business has gone up, the most recent is the increase in electricity tariffs which went up by 5.11% on large power MD3 /MD4 customers to 24.63% the highest on residential consumers. Small power MD1/ MD2 customers and Commercial consumers face an increase of 19.49% and 15.38% respectively while consumers falling in the social services bracket will face a 15.38%. Now since farming has different sizes of farmers falling in different electricity consumption groups what is not in dispute is that most farmers are faced with a double digit increase of 15.38% to 24.63% in the cost of electricity.
 Besides all the factors listed above, it is important to recognize that during the year, new fees/charges were introduced by some local council including toll fees on some main roads meaning that transporters will be adding all these costs to the cost of inputs. And for now since maize marketing is taking place, these costs will reduce the price paid to the farmer making farmers poorer and discontented. Therefore, the FRA floor price has an important bearing on the price that other traders pay the farmer.
At farm level, the rising costs of inputs means that a farmer producing maize at a yield of 2.26 Tons/ha which is the national average yield in 2014 requires a price of at least ZMK83/50Kg bag of maize grain just to break even without considering the fixed cost of production.  A price of ZMK108/50Kg bag of maize grain would make economic sense if the fixed costs were considered as well.  Some districts recorded yields as low as 1.5 tons per hectare, implying that farmers in such districts would need a price of at least ZMK159/50Kg bag to break even.
The inadequate return on the maize affects the productivity of small-scale farmers as they are forced to use less and less of the recommended inputs which reduces the yields even further.  This year, a national average yield of 2.26tons/ha of maize for small and medium scale falls way below the yield potential of hybrid maize varieties currently available on the local market.
Therefore, the maize floor price of ZMK70/ 50 kg bag announced is a source of misery because to a farmer in Kaputa with a yield of just 2tons/ha for a maize crop which cost over ZMK4, 700 per hectare to grow and whose breakeven price is K118.70 for a 50 Kg bag is a total disincentive especially that a fellow farmer in Zimbabwe is getting a price equivalent to ZMK119/50Kg bag (US$390/ton).  This will discourage farmers to continue growing maize because the price does not allow a farmer to cover the variable cost of production. It should therefore not come as a surprise that the yields will continue to remain low while farmers remain poor.

The farmers of Zambia have remained committed to producing the much needed food for the entire Zambian population and this has been demonstrated by the continued positive food balance sheet the country has enjoyed over last six years.  It is rather disappointing and difficult to comprehend that farmers should to get an upward adjustment of only one ngwee/kilogram as a reward after working so hard to produce a bumper harvest and more so after waiting for so long since 2009 when the price was last adjusted.

1.8. Analysis
Let us first understand that price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price.
Now here is the issue. FRA sets a “floor price” of K70 per 50kg bag. Then the FRA buys ALL the maize from farmers at that price. FRA then sells this maize to millers who in turn place their mark up and sell to end consumers.
It must be noted that the control that FRA places on the maize price is a PRICE CEILING and not a price floor. These two terms cannot be used interchangeably because they mean two different things. So as long as the Zambian government regards the price ceiling as a price floor, then policy direction on this issue will be misguided.
Now one might ask why it should be called a price ceiling instead of a price floor. The reason lies in what exactly is the effect of the actions of the FRA. Let us break it down, FRA “recommends” a price at which farmers should (I use this term loosely) sell their maize to FRA. Now the farmer has two options, he can either sell his maize lower than the price at which FRA sets to other “briefcase” dealers or he can endeavour to sell it at a price higher than what the FRA sets. Selling maize lower than the FRA price is possible but selling higher is impossible because any other dealer would not pay for maize at a price higher than what the FRA is paying. This is the reason this is a price ceiling and not a price floor because it prevents farmers from selling at a higher price but allows them to sell lower at a disincentive of course.
A price floor can only be effective if it is above the equilibrium price level. Factoring in inflation and other costs of production which have increased since the last time the “price floor” was set in 2009, the equilibrium price is actually higher than the price FRA sets. This means FRA is actually setting a price ceiling rather than a price floor. Which means whilst they might believe they are helping the farmers in an effort to keep prices low and protect consumers they are actually hurting farmers.
Now what does this mean effectively? The logic for having a price floor and a price ceiling by government are very different. The main reasons why a lot of government will try to fix the prices of a commodity below a certain limit is that they want to protect consumers from exploitation by suppliers. However the effects of prices control can hurt the economy if it is carried out for long periods without adjustments. If the government continues to impose the price ceiling the supply will continue to reduce hence negatively affecting that sector (This is seen by the increase in disincentive of some farmers to farm maize). The government should therefore not impose policies to protect consumers from exploitation when the real problem is undersupply not exploitation.

Apart from having a price ceiling, the maize market in Zambia is dominated by millers who purchase maize from FRA and resell to consumers. These millers have not always passed on price cuts to consumers (as was evidenced by the unsuccessful subsidies on grain programme).
With the presence of FRA in the maize market there are effectively three mini markets which make up the whole maize market.
The first market is a closed market with occasion intruders between Farmers and FRA. This market is occasionally intruded by briefcase dealers looking to buy from farmers at a low price and sell to FRA at a higher price. This is the market in which FRA sets a price ceiling which it unfortunately mistakes for a price floor.
The second market is the market between FRA and Millers. This was the market in which the subsidies where introduced. FRA would sell subsidized maize to millers in this market but millers never passed on the cost saving to consumers.
The final market is the one between Millers and Consumers. This is the market in which the ordinary person buys the mealie meal which the take home and consume.
If the market was liberalised this would be a two way market, one between farmers and millers and one between millers and consumers. But this is not the case. What is happening is that government is actually setting a price ceiling in the Farmer-FRA market and a price floor in the Miller- Consumer market. What government intends to do is actually set a price floor in the Farmer-FRA market and a price ceiling in the Miller-Consumer market.
This is distortion of policy is what is creating the illusion that higher surpluses will translate to lower prices while the market dynamics between the three mini markets do not support such an assertion.
There is always a trade-off. Government will have to decide an appropriate way to address the welfare of consumers as well as households who make their income from maize. But to do this Government will need to see the maize market for what it really is, a three tier market with little homogeneity formed into one. Under these market dynamics production surpluses will not translate into price decreases due to the inherent difficulty in such a market structure.

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Bibliography
Burke, W. J., Hichaambwa, M., Banda, D., & Jayne, T. S. (2011). FOOD SECURITY RESEARCH PROJECT: The Cost of Maize Production by Smallholder . Lusaka: FOOD SECURITY RESEARCH PROJECT .
Cottan, P. (2006). PROSPECTS FOR REGIONAL . Lusaka: Millers Association of Zambia (MAZ).
Dreger, C., & Kholodilin, K. (2007). Price convergence in the enlarged internal market. European Commission.
McGraw-Hill. (1994). Economics.
Nguleka, E. (2014, June 24). Zambia National Farmers’ Union- Press Statement On Maize Floor Price. Retrieved September 15, 2014, from http://www.znfu.org.zm/: http://www.znfu.org.zm/article/zambia-national-farmers%E2%80%99-union-press-statement-maize-floor-price

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Zimbabwe Economy Profile: Invest in Zimbabwe by Kampamba Shula

Invest in Zimbabwe
If all you read and hear about Zimbabwe is from mainstream media you will probably miss out on key investment opportunities in Zimbabwe. The news that is inspiring rarely gets the kind of limelight its negative counterparts receive.But numbers don’t lie, Zimbabwe’s stock exchange was the third best performer in Africa in 2012, but you probably may have not known that. Either way, whether you are conversant with the remarkable investment opportunities in Zimbabwe or not this economic profile of the Zimbabwean economy will prove food for thought for any investor, whether local or international.

Overview
Real GDP growth is estimated to have decelerated to 3.7% in 2013 from an estimated 4.4% in 2012. This reflects a continued slowdown in the economy as a result of limited sources of capital, policy uncertainty and the high cost of doing business. Real GDP growth is projected to marginally improve to 4.0% in 2014. In 2013, inflation averaged about 4.1% and is projected to slightly slow down to 4.0% in 2014. Inflation developments will continue to be influenced by the USD/ZAR exchange rate, international oil prices and local utility charges. Persistent liquidity shortages combined with low effective demand and a weak South African rand will dampen inflationary pressures in the economy. The country experienced a decline in money supply in 2013. At the same time, the South African rand depreciated by about 20% in 2013.
Zimbabwe is experiencing a structural regression, with the acceleration of deindustrialisation and informalisation of the economy. On an annual basis, the share of the manufacturing sector in GDP peaked at 26.9% in 1992 before collapsing to 7.2% by 2002. The various Confederation of Zimbabwe Industries (CZI) Manufacturing Sector Surveys suggest that industrial capacity utilisation declined sharply from 35.8% in 2005 to 18.9% by 2007 and to less than 10.0% by 2008. It increased to 33.0% in 2009, 43.7% in 2010 and 57.2% in 2011, before declining again to 44.2% in 2012 and 39.6% in 2013. In 2004, 80% of jobs in Zimbabwe were in the informal sector, with the 2011 Labour Force Survey suggesting the rate had further increased to 84%.
The poor performance of domestic revenue inflows and the rise in recurrent expenditures will continue to constrain fiscal space, while the continued use of the multi-currency regime will result in monetary policy largely remaining unchanged. In 2013, the government unveiled the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimASSET, 2013-18). ZimASSET has a number of positive elements, such as the adoption of results-based management and a clear implementation matrix.
Zimbabwe has faced an unprecedented sequence of events in the recent past years. The controversial land reform as well as hyperinflation that few countries have had the misfortune of experiencing lead to a situation where Zimbabwe now uses the US Dollar as its primary trading currency.
Given such a backdrop most investors would shy away and look for other emerging markets to invest in which is the precise point that I wish to differ with conventional investment views.
Let me explain it like this hyperinflation is indeed a phenomenon that no one wants in an ideal scenario. This Hyperinflation that occurred created an unusual incentive for investors to put their money in the stock exchange in Zimbabwe. The reason investors did this was to hedge their money against inflation. This had a startling effect the Zimbabwean stock exchange performed so well and was the 3rd best performing stock exchange in Africa for the year 2012.
Zimbabwe scored a year to date growth rate of 22.3% with an average weekly trading volume in the range of $7.2m.The Zimbabwe Stock Exchange, or ZSE, is the official stock exchange of Zimbabwe. It has been open to foreign investment since 1993. Despite the shrinking of the economy since 2000, the stock market inversely reacted to the factors that affected the economy negatively. The ZSE was driven mainly by speculation as investors sought to hedge against hyperinflation  (Kosmas Njanike, 2009).
The Zimbabwean government plans to demutualize the ZSE in order to expose it to market forces in line with global trends.
Zimbabwe is starting to show the first signs of an economic boom that could transform the country into one of the leading economic powers on the African continent.
“After decades of economic mismanagement and chaos, the country’s economy has been stabilized and an end has been put to the period of ruinous hyperinflation. The introduction of the US dollar as the national currency has in actuality eliminated the exchange rate risk and the conditions for doing business are better than in many neighboring countries. The arguments in favor of doing business in Zimbabwe include a high level of education and training among the population, a relatively large domestic market with purchasing power, natural resources and a good basic infrastructure that is still in place (SAFRI, 2013).
The Zimbabwe economy has traditionally been based on agriculture with tobacco being dominant. Other agricultural products are maize, cotton, tobacco, wheat, coffee, sugarcane, peanuts; sheep, goats, pigs. Mining has taken over as the main anchor of the economy with coal, gold, platinum, copper, nickel, tin, diamonds, clay, numerous metallic and nonmetallic ores as the main minerals (Deloitte, September 2012).
The other industries that make up the economy are steel; wood products, cement, chemicals, fertilizer, clothing and footwear, foodstuffs, beverages. Due to the prolonged period of economic stagnation opportunities are abound in Zimbabwe.
Zimbabwe’s rapid growth does put it in the recent company of some other sub-Saharan African countries. An analysis by The Economist finds that between 2001 and 2010, six of the world’s 10 fastest-growing economies were in sub-Saharan Africa.
Dubbed the “Lion Kings,” these countries include Angola, Chad, Ethiopia, Mozambique, Nigeria, and Rwanda. Over that decade, their annual GDP growth averaged between 7,9 and 11,1% and by 2011 Zimbabwe was out-performing all of them.
Zim Asset
In pursuit of a new trajectory of accelerated economic growth and wealth creation, The Zimbabwean Government formulated a new plan known as the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset): October 2013 - December 2018. Zim Asset was crafted to achieve sustainable development and social equity anchored on indigenization, empowerment and employment creation which will be largely propelled by the judicious exploitation of the country’s abundant human and natural resources.
Any investment in Zimbabwe in this period would need an accurate understanding of the Zim Asset to precisely quantify the risks involved.
This Results Based Agenda is built around four strategic clusters that will enable Zimbabwe to achieve economic growth and reposition the country as one of the strongest economies in the region and Africa. The four strategic clusters identified are:
• Food Security and Nutrition;
• Social Services and Poverty Eradication;
• Infrastructure and Utilities; and
• Value Addition and Beneficiation.

Economic Profile
Zimbabwe experienced a deteriorating economic and social environment since 2000 caused by illegal economic sanctions imposed by the Western countries. This resulted in a deep economic and social crisis characterised by a hyperinflationary environment and low industrial capacity utilization, leading to the overall decline in Gross Domestic Product (GDP) by 50% in 2008.
Zimbabwe is endowed with natural resources that are in abundance and these include rich mineral deposits, arable tracks of land, flora and fauna, abundant sunlight and water. Furthermore, one of the resources that give Zimbabwe a comparative advantage over regional and other international countries is its economic complexity, which includes the stronghuman resource base, which is an outcome of a deliberate educational policy instituted by the ZANU PF Government at Independence in 1980.
Zimbabwe’s economic complexity as defined in the “Atlas of Economic Complexity, Mapping Paths to Prosperity”, reflects the immense social accumulation of knowledge that has been embedded in the socio-economic ecosystem and productive structures of its economy. This may explain the resilience of the economy in the face of the debilitating illegal economic given the knowledge base and productive resource endowment of Zimbabwe, the country is projected to be a growth leader in Sub-Saharan Africa towards 2020.
After the economic decline from 2000, the cocktail of measures that were adopted by Government in 2009 resulted in some modicum of economic stabilisation, with Zimbabwe achieving a real GDP growth rate of 5.4% in 2009, 11.4% in 2010, reaching a peak of 11.9% in 2011. However, the recovery remained fragile as growth declined from 11.9% in 2011 to 10.6% in 2012 and 3.4% in 2013.
Drivers: Projected Growth Targets.
The key drivers for this growth and employment creation will be accelerated development through value addition processes in the:
i. Mining sector;
ii. Agriculture sector;
iii. Infrastructural sectors primarily focusing on power generation;
iv. Transport sector;
v. Tourism sector;
vi. ICT sector and
vii. Enhanced support for the SMEs and Co-operatives sector.
Debt
The economy has also been saddled with a high debt overhang with an estimated debt stock of US$10 billion as at December 2012 caused by the country’s failure to access international capital and investment inflows as illegal economic sanctions have not been removed.

Agriculture

However, Zimbabwe’s economy has struggled, agriculture more so than most other sectors, to cope with the combined effects of the Fast Track Land Reform Programme (FTLRP), hyperinflation, capital constraints and government controls on markets. Zimbabwe’s real GDP declined by more than 71% between 2000 and 2008 (Robertson, 2011) with overall agricultural production declining by 30% over the same period (Sukume & Guveya, 2009). The government’s land reform programme and the subsequent collapse of the agricultural sector, which once provided 400 000 jobs and was the country’s main source of export revenues and foreign exchange, are seen as the prime cause of the prolonged economic crisis (Richardson, 2004). The deterioration of commercial agriculture and the sector in general, which led to the country becoming a net importer of food by 2002, has resulted in a substantial fall in formal employment opportunities, output, exports and secondary demand generated by the modern or capitalised sector (World Bank & Government of Zimbabwe, 2010).
Ever since the imposition of illegal sanctions, Agricultural production was also severely affected, resulting in the country depending on imports to meet the demand for domestic consumption and industrial needs.
The agricultural sector, being the backbone of the economy underpinning economic growth, food security and poverty eradication, continues to experience severe systemic challenges within its entire value chain ranging from lack of agricultural financing to lack of affordable inputs. This has also been exacerbated by prolonged periods of drought caused by climatic changes.
Zimbabwe’s agricultural sector has emerged from a prolonged period of structural change, in the context of shifts in the social, political and economic environments. Of particular note are the shifts in the scale of operations and the composition of the farming sector since 2000. This occurred concomitantly with major financial upheaval, which involved protracted periods of hyperinflation, followed by the liberalisation of markets and the eventual shift to the use of foreign exchange in late 2008.
Zimbabwe’s agricultural sector has long been key to its economic stability and growth. Not only does it form the basis of the direct and indirect livelihoods of almost 70% of the population, but economic growth is also directly linked to the performance of this sector. The growth and development of agriculture are expected to support the improvement and growth of the other sectors of the economy, namely industry and services. Although the agricultural gross domestic product (GDP) is expected to decrease slightly (to 12%), it will remain significant for Zimbabwe’s transitional economy (Robertson, 2011), contributes 30% of formal employment (Kapuya et al., 2010) and representing the largest single source of export earnings.
Despite various arguments about specific approaches to re-establishing Zimbabwe’s agriculture and economy, a number of characteristics and challenges will have to be considered:
Productivity is low, which is related to a low level of capital endowment, leading to a restricted uptake of productive farm technologies and, subsequently, to low yield and output (ZimVAC, 2009). A first objective for Zimbabwe’s agricultural reconstruction will be to increase productivity levels again (perhaps not to the levels seen before 2000, as the sector’s structure has changed, but at least to levels similar to or higher than what communal and small-scale farmers were reaching before fast track land reform). With the production bases in place, the result of a well-structured sector before 2000, revitalisation of the sector will often not take much. This makes the Zimbabwean case different from that of many failed states. A good example of revitalisation is the significant growth in the tobacco and cotton sectors. Although Zimbabwe’s reconstruction should be broad-based, including a wide range of agricultural and non-agricultural subsectors, it makes sense – in the framework of this project – to focus first on basic food crops that require minor investments, such as maize and extensive livestock production. Reaching past production and productivity levels in these sectors would enable Zimbabwe to reach food autonomy. Other crops, such as small grains (irrigation-sensitive) and poultry (capital-intensive), will follow rapidly once the basic conditions have been established.
The mobilisation and investment of financial resources in agriculture need the requisite factors of production and exchange. The necessary conditions for any effective sectoral recovery strategy (as with any other economic activity) would include: the rapid reorientation of all farming efforts to respond to available markets; a gradual increase in efficiency in production at all scales of operation; the availability and adequate quality of inputs and services; affordable financial arrangements for working capital and seasonal operations, as well as investment in productive assets; and positive expectations among farmers, entrepreneurs and all others operating in value chains. Attaining these fundamental groundwork goals will require a concerted investment of government resources in the agricultural sector.
Zimbabwe has an enviable resource endowment for agricultural development, in terms of land and water resources, sunk investments, expertise, demand for exports and even a conducive climate, notwithstanding the unpredictability of rainfall patterns within seasons and between years (World Bank & Government of Zimbabwe, 2010). However, the agricultural sector is now characterised by an entirely new structure. It is mainly composed of small-scale and newly resettled farmers, practicing their activities on non-titled land. In contrast, a decade ago, the sector was composed of well-established, large-scale commercial enterprises on private land. This raises new questions and requires new instruments.

Despite the modest contribution of agriculture to the GDP, the importance of the sector should not be underestimated, all the more so since the post-2000 collapse of the economy.First, agriculture forms the basis of the direct and indirect livelihoods of almost 70% of Zimbabwe’s population. With the economic crisis, formal sector employment started to decline. From a peak of 1 241 500 in 1998 (i.e. a 68% unemployment rate), it fell to 1 012 900 in 2002 (i.e. 80% unemployment) and to an estimated 400 000 presently. The formal employment rate is estimated at between 5% and 10%.3 This represents a compound annual growth rate of –5.0%. A large element of this was the loss of the formal agricultural employment: estimated at 345 100 in 1998, it fell to below 100 000 after the country’s controversial land reform programme (Luebker, 2008). Non-agricultural employment also fell from 896 400 in 1998 to 300 000 (which includes about 245 000 public servants).
Finance: Agricultural Finance Problem
The formal banking sector has been reluctant to service the agricultural sector, owing to a number of factors, particularly land insecurity. The commercial banks held that the nationalisation of land under the land redistribution programme has rendered land a ‘dead’ asset, which cannot be used as collateral for agricultural loan applications. In its November 2005 report to Parliament, the Portfolio Committee on Lands, Land Reform, Resettlement and Agriculture said that it was ‘concerned to note that the current financing facilities are tailor-made for large-scale commercial farmers at the expense of smallholders’. So officially, there is a policy on agriculture finance, but it is not being implemented.Provisions in this framework were overtaken by events before implementation. It was later abandoned for the National Agricultural Strategy Framework, 2005–2035,

Mining

The mining sector continues to be a major foreign currency earner and has potential to become the pillar for economic growth through value addition and beneficiation. However, the sector continues to be constrained by energy and transport infrastructure challenges, depressed international mineral prices and shortage of utilities among other factors.
The Government, through the 2014 National Budget, announced proposals to amend the mining laws, thereby decriminalizing the operation of small-scale miners to allow more locals to participate in the exploitation of the country’s mineral wealth. The amendment of mining laws will allow the government to repossess unused mining claims from holders on a “use it or lose it” basis. The repossessed mining claims will be allocated to small-scale miners in accordance with the indigenization and economic empowerment drive.
With rock ages spanning a period of more than 3000 million years, Zimbabwe's heterogeneous geological environment is favourable to occurrences of a varietyof minerals.
• Zimbabwe has over 60 known economic minerals BUT only 40 have commercially been exploited.
• Despite the huge mineral endowment, exploitation both upstream and downstream has been limited.
• Some of the commonly exploited minerals include diamonds, gold, PGMs, chrome, tantalite, granite and coal
There are also other pieces of legislation that govern foreign investment such as:

• The Zimbabwe Investment Authority Act and
• The Indigenization and Empowerment Act
•  The Minerals Marketing Corporation Act
• The Zimbabwe Mining Development Corporation Act
• Precious Stones Trade Act

Mining Investment Opportunities

Opportunities exists through Joint Ventures with

• ZMDC (Government),small scale miners, and other mining companies facing financial constraints.
• Most mining operations suffer from undercapitalisation and are, therefore, in need of recapitalisation through financial injections. Most mines are currently operating slightly above 50% of their capacities due to lack of finances for recapitalisation.
• Companies also face shortage of relevant skilled personnel for their mining operations
• Opportunities also exist in the provision of mining equipment and technical services relevant to mining.

Greenfield Exploration – previous exploration concentrated around ancient workings.

• Brownfield exploration – opportunities exist for re-valuating the over 4000 known mineral deposits.

There are opportunities for using modern exploration techniques such as high resolution geophysics, satellite imagery and geochemistry that have not been used to greater extent in the country.

• Government through Zimbabwe Mining Development Corporation (ZMDC) has resuscitated a Government owned exploration company called Mining Promotion Corporation (MPC) (Pvt) Ltd to spearhead exploration and development of mining projects through undertaking feasibility studies.
•  Partners are therefore being invited to work with MPC in undertaking exploration and later on mining of identified potential projects.
• Skilled staff are also required to capacitate the company to effectively conduct its operations.

Tourism
Tourism has, as a sector, demonstrated tremendous potential, particularly benefiting from the successful co-hosting of the 20th Session of the United Nations World Tourism Organisation (UNWTO) General Assembly by Zimbabwe and Zambia. The sector however, still faces some challenges, key among them, perceived country risk, poor connectivity of local destinations and absence of a revolving fund to support the hospitality industry, especially SMEs and Co-operatives in tourism.
In the wake of the successful co-hosting of the 20th Session of the UNWTO General Assembly by Zimbabwe and Zambia, the tourism sector has proven to be a major economic pillar currently contributing 10% of the Gross Domestic Product. The contribution is expected to increase to 15% by 2015. Furthermore, this key economic driver will be supported by implementing a National Tourism Policy, continued improvement of the country’s image and aggressive marketing efforts.

Real Estate and Housing
On the housing front, the country faces a huge backlog estimated at 1,25 million units due to rising housing demand in urban and resettled areas as a consequence of the Land Reform

Manufacturing
Problems
The manufacturing sector remains in crisis with capacity utilisation declining from an average of 57% in 2011, 44% in 2012 and 39% in the 3rd quarter of 2013. This is attributable to structural and infrastructural bottlenecks such as erratic power supply, obsolete machinery and dilapidated infrastructure as well as lack of and high cost of capital, hence negatively affecting value addition and beneficiation as well as employment creation.
Opportunities
In the manufacturing sector, Government is totally committed to resuscitating distressed and closed companies with a view to increasing capacity utilization to optimum levels, generatingemployment and substituting imports as well as building asustainable basis for export led growth. In this regard, the Industrial Development Corporation (IDC) will be recapitalized and its operations refocused as one of the key investment vehicles to assist ailing industries.
One of the key strategies in the Zim Asset is implementing an Import Substitution programme (particularly to address machinery, equipment, fuels, chemicals and consumer products). To fully capitalise on this an investor can place their production in a specific product that aligns itself with this strategy so long as it is part of their initial product range.

Energy

Energy is a key enabler to productivity and socio-economic development. However, the sector has experienced challenges largely due to dilapidated and obsolete generation equipment and infrastructure as well as inadequate financing and capitalisation and other structural bottlenecks. Sustainable Energy Pioneer
It is no secret that sustainable energy and alternative energy is an industry for the future and in this regard Zimbabwe is a pioneer in Africa. It may not look like the case now with political clouds hanging over Zimbabwe but if you take a closer look at Zimbabwe you will observe that they are spearheading in sustainable clean energy.
Global warming sentiment is something that developed nations are trying to address the problem here is that their economies were built on fossil fuels which has placed the bulk of their drive leveraged on this fact.
It may seem hard to understand for some but the truth is that for developing nations there is a greater opportunity to base their growth and development on sustainable energy sources in comparison to their developed counterparts across the globe.
Ethanol has been successfully produced from sugarcane in Zimbabwe over the past ten years whilst maintaining a favorable energy output to input ratio of 1:1.9. It is shown that it is practicable to improve this ratio to between 3.8 and 4.1 by operational changes such as maximizing ethanol production during the cane crushing season and storing surplus bagasse for use during the off crop season in place of coal which is presently used. Further improvements are also possible by the introduction of more efficient boilers, increasing surplus bagasse availability during the off crop season, and the greater use of stillage as a fertilizer (A.D. Rosenschein, 1992).
The rising cost of lead additives and of gasoline, and the falling cost of ethanol and sugarcane, has created favorable economic conditions for fuel-ethanol production. In Africa, where lead additives are still heavily used and where sugarcane production is high, ethanol can be a cheap source of octane. More than enough sugarcane is produced in Africa to replace all the lead used in African gasoline; this would require Africa to produce about 20% of amount of ethanol currently produced in Brazil, and would require the shift of some sugar production to ethanol production. At a more modest scale, African countries that could replace lead with ethanol using primarily their by-product molasses production include Zimbabwe, Kenya, Egypt, Zaire, Zambia, Sudan, Swaziland, and Mauritius (Valerie Thomas, November 2001).
There is increasing interest in Zimbabwe in the use of renewable energy sources as a means of meeting the country's energy requirements. Biomass provides 47% of the gross energy consumption in Zimbabwe. Energy can be derived from various forms of biomass using various available conversion technologies. Crop residues constitute a large part of the biomass available from the country's agriculture-based economy.
Currently, Zimbabwe has 70 MW of capacity for electricity from sugarcane bagasse. In addition to bagasse, sugarcane processing also produces molasses, which is used for the production of ethanol.
Bio Diesel Jatropha

Biodiesel has attracted considerable attention during the past decade as a renewable, biodegradable and non-toxic fuel alternative to fossil fuels. Biodiesel can be obtained from vegetable oils (both edible and non-edible) and from animal fat. Jatropha curcas Linnaeus, a multipurpose plant, contains high amount of oil in its seeds which can be converted to biodiesel. J. curcas is probably the most highly promoted oilseed crop at present in the world. The availability and sustainability of sufficient supplies of less expensive feedstock in the form of vegetable oils, particularly J. curcas and efficient processing technology to biodiesel will be crucial determinants of delivering a competitive biodiesel. Oil contents, physicochemical properties, fatty acid composition of J. curcas reported in literature are provided in this review. The fuel properties of Jatropha biodiesel are comparable to those of fossil diesel and confirm to the American and European standards (Parawira, 2010).
There is increasing interest in Zimbabwe in developing a biofuels industry based on the production of biodiesel using Jatropha as the main feedstock. This has led to the introduction of Jatropha as a commercial energy crop in the country.
Due to its perceived benefits, the growing of the J. curcas is shifting from small-scale farmers to tight-controlled corporate production either on large plantations or through stringent contract production in India, Burma, Saudi Arabia, Malaysia, Indonesia, Philippines, China, Ghana, South Africa, Senegal, Nigeria, Tanzania, Ethiopia, Zambia and Zimbabwe among other countries. Introducing an alien species at large scale in the environment, even if it can potentially contribute to rural employment and poverty alleviation, needs serious consideration. The claimed tolerance of J. curcas to pests and diseases on few dispersed trees might not apply in general to trees in plantations. Indeed Jatropha can grow in the semi-arid lands but may be without any commercial yield being achieved. There is increasing evidence that seed yields are sensitive to soil fertility and moisture availability (Parawira, 2010).
Zimbabwe’s Jatropha biodiesel project remains in limbo amid indications that the government is still carrying out tests to assess the viability of the project five years since a plant was commissioned (NewsDay, 2013).
In an apparent U-turn, Science and Technology minister Heneri Dzinotyiwei said government had no immediate plans to produce fuel from the jatropha plant on a commercial scale. He added that  there has been misconception on the production of Jatropha fuel on a commercial scale.
Dzinotyiwei said nowhere in the world is Jatropha produced at a large scale.
Opportunities
Zimbabwe is endowed with mineral deposits. Major mineral resources include: gold, diamonds, copper, coal, nickel and platinum, among others. Links between sectors, particularly manufacturing and mining, is key for Zimbabwe’s broad-based growth.
An African Development Bank (AfDB) study estimates Zimbabwe’s infrastructure gap at a daunting USD 14billion.

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Zambia 2014 First Half Economic Review: H1 2014 by Kampamba Shula

Zambia 2014 First Half Economic Review: H1 2014
This is the first ever edition in the series which highlights the performance of the Zambian Economy in the first half of 2014.

Growth

Industrial Performance: Whole sale and retail grew by 31% while real estate and construction grew by 9.5% and 9.1% respectively
• The Whole sale and retail was the best performing sector in the first quarter growing by 31%.
• The real estate sector was the second best performing sector growing by 9.5%
• Construction was the third best performer growing at 9.1%
• Other sector performance
• Financial services growth of 2%
• Transport sector growth of 2%
• Energy sector was the worst performer contracting by 23%
• Manufacturing contraction by 14%
• Mining contraction by 2%

Agriculture

In terms of the National Food Balance Sheet for the 2014/2015 agricultural marketing season, the country has a significant maize surplus above the national maize requirement. Other crops expected to register an increase include rice, tobacco, millet, and groundnuts.
• The stock of maize held by the Food Reserve Agency (FRA) declined to 349,120.3 mt as at end-May 2014 from 644,682.4 mt at end-December 2013.
• Similarly, the stock of rice held fell to 1,560.0 mt from 1,948.5 mt during the same period. The decline in stocks is typical during the lean period, which runs from October to May. However, with the crop marketing season commencing soon, the stock of maize is likely to increase significantly.
• According to the Crop Forecast Survey results for 2013/2014 the country is expected to produce 3,350,671 mt of maize, 32.3% higher than 2,532,800 mt produced during the 2012/2013 agricultural season.
Construction

The Zambia Government propped up construction expenditure on the Link 8000 and Pave 2000. K245 Million was released to the National Road Fund Agency.The Zambia Development Agency (ZDA) has disclosed that the country recorded US$3.3 billion in foreign direct investment (FDI) pledges in the first quarter ended 31st March, 2014.
The pledge of US$3.3 billion is mainly in the construction sector which accounted for US$3 billion
Construction was the third best performer growing at 9.1%

Mining

China has began to revaluate its use of copper as collateral for loans. This coupled with lower manufacturing sentiment has contracted demand for commodities like copper.
• Mining sector contracted by 2% in Q1 but rebounded slightly in the second quarter
• Copper prices fell by 7% in Q1
• Weaker demand constrained supply of the usual foreign exchange reserves from the Mining sector
MOPANI Copper Mines in Mufulira has increased copper production by 2,500 tonnes in the first quarter of 2014 highlighting a growth rate of 10 per cent
First Quantum Minerals (FQM), the owner of Kansanshi copper mine in Solwezi, recorded a 43 per cent rise in copper production during the first quarter ended March 31 2014.
The increase is due to sound management of the factors under the mines control and benefits from the investments in process improvements.
Copper prices have trended down since reaching an all-time high in early 2011 and fell by more than 10% during the first quarter of 2014 (mainly in March), owing to market concerns about the Chinese economy, and linked to this the ability of Chinese firms to continue to use copper as collateral in trade financing which has supported higher global prices
Copper output rose to 473,249 mt during the period January to May 2014, compared to 399,515 mt produced during the same period last year. However, cobalt production was lower at 1,951 mt when compared with 2,709 mt produced during the corresponding period in 2013.
Energy
Fuel prices rose in Q1 by 7.22% for petrol, 8.75% for diesel and 9.54% for kerosene on the back of foreign exchange rate losses on the oil import bill.

In the energy sector, total electricity generation during the period January 2014 to May 2014, increased to 5,731,907 Mwh from 5,467,181 Mwh during the corresponding period in 2013. This reflects the investments made in power generation in order to raise power supply required to meet the high demand arising from increased economic activity in the country.
Inflation
Inflation has been on an upward trend since the beginning of the year with annual inflation rising to 7.9% in June from 7.1% in December 2013

Factors contributing to these inflationary pressures include
• The seasonal supply factor (lean pre-harvest period October-May), removal of Government subsidy on maize,
• Pass-through effects of the depreciation in the exchange rate, higher fuel prices
• Increase in excise duty on cigarettes and alcoholic beverages
Foreign Exchange Market

The exchange rate of the Kwacha against the US dollar has exhibited a depreciation trend since the beginning of the year. As at 11th June 2014, the Kwacha had depreciated by 14.9% against the US dollar to trade at K6.3348/US$ compared to K5.5126 per US dollar at the close of December 2013. This was mainly due to intra-day mismatches between supply and demand for foreign exchange in the domestic market on account of the following:
• A reduction in the supply of dollars to the market, particularly from the mining sector which accounts for the bulk of foreign exchange supply.
• The decline in copper price by 9.1% to US$ 6,691.00 per tonne as at 11th June 2014 from US$7,360.00 per tonne at the end of December 2013, which impacted on market sentiment.
• Deterioration in the current account balance to a deficit of US $260.7 million during the first quarter of 2014, from a surplus of US $28.7 million in the fourth quarter of 2013, mainly on account of stronger imports relative to exports and higher service payments.
•  A significant build-up of liquidity over the fourth quarter of 2013 into the first quarter of 2014 (after civil service wage increase) and expanding informal trade sector which supported demand for foreign exchange.
•  The strengthening of the dollar on the international financial markets has also impacted on the Kwacha, leading to a corresponding weakness in then Kwacha through financial flows.
Government and Private Investments

During the first quarter of 2014, the Treasury released K1 Billion for Investments and Special Projects
• K245 Million was released to the National Road Fund Agency
• K140 Million was targeted at remodelling works at the Kenneth Kaunda International Airport
• K35 Million for ZESCO rehabilitation works
Other Investments included
• K15 Million for recapitalization of the Government Printing Department
• K6.8 Million as GRZ support to the Millennium Challenge Account Compact.
• K6.4 Million was released for the Youth Skills Development Programme
Government Spending

Ministry of Finance released K168 Million grants to various institutions of government to facilitate their operations and efficient programme implementation in Q1
The Treasury has also released K84 Million for road maintenance, rehabilitation, and construction. K20.7 Million was released to the Ministry of Local Government and Housing for water and sanitation programs.
A further K166 Million was released for salaries for civil servants in various government institutions, compensation and awards, and for emoluments for personnel in Zambia’s Missions Abroad.
Foreign Direct Investments 

Zambia recorded US$3.3 billion in foreign direct investment (FDI) pledges in the first quarter ended 31st March, 2014.
China recently emerged as Zambia's biggest source for FDI with inflows estimated at about US $1 billion, mostly into mining, manufacturing and construction sectors.
• Pledges reflect an increase in foreign direct investment in 2014 as compared to 2013 during the same period which recorded pledges of US$2.3 billion
• US$3.3 billion is mainly in the construction sector which accounted for US$3 billion, with the manufacturing sector accounting for US$132 million while other sectors contributed the rest of the FDI.
• The increase in FDI in the first quarter of 2014 as compared to the same period in 2013 further explains that regardless of how the economy is performing, increase in FDI is dependent on what the investor is looking for in terms of resources, market and the expected returns.
• Projection for the second quarter, the month of April has already recorded US$98 million in FDI pledges with pledged employment of one thousand forty five jobs from 25 projects.
Monetary and Fiscal Policy

During the period January to May 2014 monetary policy remained focused on achieving the end-year inflation target of 6.5%. In line with this objective, the Bank of Zambia (BoZ) tightened monetary policy by raising the policy rate from 9.75% in January 2014 to 10.25% in March, and then 12.0% in April 2014. The statutory reserve requirement was also increased by 600 basis points to 14% with effect from 10th March 2014. Following persistent volatility in the exchange rate, the Bank of Zambia took further measures to tighten liquidity in the banking system by extending the application of statutory reserves to government deposits and vostro accounts, as well as tightening the maintenance regime for statutory reserves.
Money market liquidity, as measured by commercial banks current account position, decreased by 46.8% to K593.6 million at end-March 20145 from K1,115.7 million at end-December 2013.
This was mainly on account of
• Net statutory reserve withdrawals
• Net Government securities sales
• Net sales of foreign exchange
Weighted lending rates

Commercial banks’ nominal interest rates recorded a mixed performance during the review period. The average lending rate rose to 18.1% in May 2014 from 16.4% in December 2013, following the rise in the BoZ policy rate. However, the 30-day deposit rate for amounts exceeding K20,000.00 and the average savings rate for amounts above K100.00 was little changed at 5.4% and 3.5% from 5.3% and 3.6%, respectively in December 2013.
Yield rates on Government securities have however trended upwards, largely reflecting higher Government domestic borrowing. The weighted average composite yield rate for Treasury bills closed 410 basis points higher at 19.4% in June 2014 from 15.3% in December 2013, while the weighted average bond yield rate gained 180 basis points to close at 18.1% from 16.3%.
In terms of the outstanding stock of Government securities, Government Treasury bill marginally declined to K9,881.2 million in June from K9,942.9 million in December 2013, while the stock of Government bonds rose to K10,576.8 million from K9,429.1 million in December 2013. Commercial banks remained the largest investors in Treasury bills with holdings of K6,160.9 million at face value, representing 62.4% of the total bills in circulation as at end June. The non-bank public accounted for 26.9% while the Bank of Zambia holdings stood at 10.8%. In the Bond market, the non-bank public were the largest holders at 53.0% (K5,601.7 million), while commercial banks accounted for holdings of 30.0% or K3,167.4 million. The Bank of Zambia held 17.1% or K1,807.6 million.

Fiscal Policy: Debt Management

As at end of April, 2014, external debt stood at US $4.2 Billion or 22 % of GDP whilst domestic debt stood at K20 Billion or approximately 16.4 % of GDP. In this regard, both external and domestic debt levels remain below the international thresholds of 40% and 25%, respectively.
For the period from January, 2014, total external debt service (principal plus interest payments) now stands at USD 52.2 Million of which USD 2.6 Million is a payment made in April, 2014. According to Ministry of Finance projections, the total external debt falling due over the next 12 months stands at USD 249 Million or 1.3% of GDP.
For the period from January, 2014, total domestic debt service related to Government securities (principal plus interest payments) now stands at K3.2 Billion of which K544.6 Million is a payment made in April, 2014. In the same month, Government issued K458 Million Treasury Bills in the domestic market. According to Ministry of Finance projections, the total domestic debt falling due over the next 12 months stands at K9.8 Billion or 8% of GDP.

External Sector Developments

Preliminary data shows that Zambia’s international trade performance during the first five months of 2014 was unfavourable. The merchandise trade surplus narrowed by 16.1% to US $271.1 million from US $323.7 million recorded over the corresponding period in 2013. This was largely attributed to a higher decline in merchandise export earnings relative to the merchandise imports bill.

Merchandise export earnings declined by 5.0% to US $4,264.3 million from US $4,488.9 million realized the same period in 2013, explained by a decline in non-traditional exports and cobalt earnings.
During the first five months of 2014, Non-traditional export earnings, at US $1,009.5 million were 30.0% lower than US $1,441.9 million registered during the corresponding period last year. This was largely on account of lower earnings from the export of copper wire, burley tobacco, cotton lint, fresh flowers, fresh fruits and vegetables, gemstones, cement and lime, and maize.
Similarly, cobalt export earnings declined by 23.2% to US $45.7 million from US $59.5 million recorded during the corresponding period in 2013, largely on account of a 37.0% decline in export volumes to 1,725.6 mt from 2,740.1 mt registered the previous year. The realized monthly average price of cobalt, however, increased by 22.0% to US $26,491.91 per ton from US $21,709.42 per ton registered during the same period in 2013.
However, copper export earnings grew by 7.4% to US $3,209.1 million during the first five months of the year from US $2,987.5 million recorded over the same period last year, driven by higher export volumes. Copper export volumes, at 477.485.3 metric tons (mt), were 19.4% higher than 399,919.8 mt recorded during the corresponding period in 2013. The average realized price of copper, however, declined by 10.0% to US $6,720.86 per ton from US $7,471.77 registered during the same period last year.
Meanwhile, the year-to-date (May 2014) merchandise imports bill declined by 4.1% to US $3,992.6 million from US $4,165.2 million registered in 2013. This was due to lower import bills of commodity groups such as industrial boilers and equipment, motor vehicles, chemicals, plastic and rubber products, and paper and paper products.
There was a decrease in the total value of metal exports from K 3,631 Million in January to K 3,458 Million in March 2014.
The overall contribution of metals and their products to the total export earnings averaged 75 percent.
The share of Non Traditional Exports recorded an average of 25 percent in revenue earnings between February and January 2014.
Gross International Reserves
Gross International Reserves (GIR) rose to US $3,387.13 million as at end-May 2014 from US $2,683.8 million at end-December 2013, largely due to the receipt of the second Euro bond proceeds. The level of reserves in May 2014 represents about 3.5 months of import cover as opposed to 3.0 months of import cover in December 2013.
Banking Sector
The banking sector financial performance and condition continued to be satisfactory and stable. As at 31 May 2014, the banking sector was adequately capitalized, with the aggregate capital adequacy ratios at 21.7% and 23.8%, which were well above the minimum requirements of 5.0% and 10.0% for the primary and total regulatory capital, respectively. In addition, the sector continued to post strong earnings

Projections for Third quarter 2014 and Rest of the year
Inflation is expected to edge downwards by the end of the third quarter of 2014. This projection is premised on expected improvement in the supply of various food stuffs as well as the lagged effects of the kwacha strengthening following monetary policy tightening in recent months. However, upside risks include cost push factors emanating from the recent increase in fuel prices and electricity tariffs.

The Bank of Zambia projects an annual growth rate of 6.5% of rebased GDP. We estimate a growth rate slightly higher at 6.8% of rebased GDP on the premise of a rebound in the third quarter driven by the mining sector, construction (especially railways and roads),energy, Agriculture and tourism driven by the 50th Jubilee independence celebrations.

Disclaimer: All speculation given in this article is plausibly deniable.

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