Zambia 2014 Budget Analysis by Kampamba Shula

2014 Budget Analysis

On the 11th October 2013 , the honorable Finance minster presented the 2014 Budget address to the national assembly.This is an analysis based on  the information in the Address. All Graphs and Calculations belong to to the author and no claim can be made by any who choose to use the analysis in this article.

Overview of the Global and Domestic Economy Sectors in 2013

The global economy continues to recover slowly with global growth projected at 2.9%.This underscores the slowdown in emerging markets like Brazil, Russia, China and India whose growth in the recent years has been a pillar of the global economy. Weaker growth in the United States and the extended effects of the Eurozone recession have looked to further undermine global growth.

Sub-Saharan Africa’s performance has been relatively stronger in light of this with a real Gross Domestic Product (GDP) projected at 5%.

Commodities

Commodity prices have generally been lower in 2013 compared to 2012 partly due to lower demand form emerging Market like China and increased supply by copper producers like Chile. Copper prices fell from an average of US$7,960 per metric tonne in 2012 to US$7,416 between January and September 2013 (see graph above).

Zambia’s GDP growth is projected to remain strong above 6%.This is on the backdrop of strong performance in the mining, construction,manufacturing ,transport and communication sectors. With the decline in agricultural output, this projected out turn is lower than our budget forecast of above 7 percent

Inflation

In 2013, monetary policy focused on achieving an end-year inflation of 6 percent. As at end-September, 2013, inflation remained above target at 7 percent, following inflationary pressures largely associated with the removal of fuel and maize subsidies. To address these inflationary challenges, the Bank of Zambia raised the Policy Rate over the first half of the year to 9.75 percent from 9.25 percent in December, 2012. To complement this, the Central Bank undertook aggressive open market operations to curb money supply growth.

Lending rate

Average commercial bank lending rates have remained relatively stable at 16.5 percent as at end-September, 2013. The Government still believes that these rates are unacceptably high and are holding back domestically financed investments.

Exchange Rate

With regard to the exchange rate, this has stabilized at around K5.4 to the US dollar, reflecting improvement in the supply of foreign exchange during the third quarter of 2013.

Exports of gemstones, cement, electricity, sugar, tobacco, cotton lint, maize and maize seed all registered strong growth and this demonstrates the increased diversification and resilience of the Zambian economy

Gross International Reserves as at end-September 2013 stood at US$2.7 billion, about US$200 million higher than a year earlier, translating into 3 months of import cover.

With regard to fiscal policy, Government undertook measures to address long-standing structural challenges relating to fuel and maize subsidies as well as distortions in the public service pay structure. This was done to reinforce fiscal prudence, as well as enhance productivity for better public service delivery. As a result of these developments, the projected fiscal deficit for 2013 will be 8.5 percent of GDP, compared to the budget estimate of 4.5 percent.

Macroeconomic objectives

The Sixth National Development Plan has been revised to align it with the PF Government’s development agenda.

Macroeconomic objectives for 2014 are to:

a) Achieve real GDP growth of above 7 percent;

b) Create at least 200,000 decent jobs;

c) Attain end year inflation of no more than 6.5 percent;

d) Increase international reserves to over 3 months of import cover;

e) Maintain a fiscally sustainable public external debt level so that debt service and amortization do not exceed 30 percent of domestic revenues;

f) Increase domestic revenue collections to over 21 percent of GDP; and

g) Limit domestic borrowing to 2.5 percent of GDP and contain the overall deficit to no more than 6.6 percent of GDP

To ensure that Government is able to better capture the jobs created in the economy; data collection will be strengthened so that comprehensive labour market information at national and sub-national levels can be produced in a timely manner

Agriculture, Forestry and Fisheries

In the 2012/13 farming season, crop and livestock production had mixed results. The outbreak of army worms at the time of planting and lower than normal rainfall in the southern half of the country led to reduced maize output.

More regrettable was the significant decline in cotton production due to poor pricing in the previous year. Burley tobacco, soya beans, wheat and sunflower however, were among the crops which registered higher production levels. The livestock sub-sector has continued to grow in 2013, with cattle numbers increasing by 10 percent to almost four million and the number of poultry increasing by 18 percent to over 92 million.

Tourism Sector

Zambia successfully co-hosted the United Nations World Tourism Organisation’s 20th General Assembly this year. This is because Government provided targeted tax incentives for the tourism sector in 2013. In addition, Government heavily invested in expansion and rehabilitation of infrastructure at the Harry Mwaanga Nkumbula International Airport, as well as in road infrastructure and social amenities in Livingstone.

Government intends to build on this raised international profile to achieve its development targets for tourism. These include the promotion of product diversification and further investment in tourism infrastructure, including the Kenneth Kaunda International Airport. The aim is to diversify the tourism base by improving accessibility to our national parks, heritage sites and natural attractions. Government will also continue to streamline licensing procedures and enhance capacity in the hospitality industry.

Government has already introduced the hologram to protect income rights of musicians and film makers. In 2014, Government will also complete work on national film policy.

Manufacturing Sector

Government released K106.9 million to the Development Bank of Zambia to support the financing needs of industry, particularly Small and Medium Scale Enterprises. These enterprises also benefited from the resumption of funding through the Citizens Economic Empowerment Fund.

The linkages between the manufacturing and agriculture sectors have been strengthened through the rehabilitation of Nitrogen Chemicals of Zambia.

The removal of customs duty on most electrical and mechanical industrial equipment in 2013, allowed manufacturers to import major capital items at relatively lower costs. As a result of this measure and other initiatives under the Private Sector Development Programme, the manufacturing sector is expected to grow by 4.3 percent in 2013.

In 2014, Government will continue to promote the diversification of manufactured products, especially those with export market potential by, among other things, accelerating the development of the Multi-Facility Economic Zones. The Government remains committed to facilitating value addition in manufacturing with a view to exploiting regional and international export markets and creating more jobs for our youths

Mining Sector

Mining sector performance in the first half of 2013 remained positive. Copper production increased by 13.2 percent in the first half of 2013 to over 374,000 metric tonnes, compared to production over the same period in 2012. This was due to improved mining production techniques, the opening of Lubambe mine and ramping up production at Mulyashi copper mine. On the basis of this performance, copper production from large scale mines is projected to exceed last year’s production level.

Local auctioning of gemstones commenced this year. Government will continue to encourage this initiative and urge small scale gemstone miners to use this approach so that they get better value for their gemstones. Local auctioning will also improve Government’s ability to collect appropriate revenues from the sub-sector.

Private Sector Development

Government will continue to implement reforms aimed at building and enhancing a sustainable legislative and regulatory environment for private sector-led growth. This will include the continuation of business registration and licensing reforms. Key among these are the establishment of provincial one-stop shops for business registration, and the decentralisation of certain elements of the filing procedures for registration to Local Authorities to reduce the cost of doing business.

Infrastructure Development

Transport and Communications Infrastructure

In 2014, Government will continue to implement the Link Zambia 8000 programme. Under this programme, which commenced last year, work is progressing well on over 1,500 kilometres of roads. These include the Pedicle; Mongu-Kalabo; Kalabo-Sikongo-Angola border; Kasama-Mporokoso-Kaputa; Mbala-Nakonde; Mansa-Luwingu; Chipata-Chadiza-Katete; Chama-Matumbo; Isoka-Muyombe-Chama; Kitwe-Chingola; and the Leopards Hill-Chiawa roads as well as the bottom road from Munyumbwe to Chaanga. The programme is expected to promote development of local contracting capacity and create 24,000 jobs throughout the country. Already, 16,000 workers, mainly youths, have been employed.

His Excellency the President launched the Pave Zambia 2000 programme in September this year and work has commenced in Chawama in Lusaka and Petauke in Eastern Province. The Government will scale up this programme in 2014 to cover all the provinces. Once fully operational, this programme will generate income for up to 20,000 workers.

In addition to township roads, the Lusaka 400 programme was launched this year with the aim of decongesting the capital city by constructing 400 kilometres of link roads. I am pleased to report that work on this project has progressed significantly with over 150 kilometres of roads to be completed by the end of this year. This programme is expected to be completed by 2016.

Energy

Government continues to work with the private sector to increase installed electricity generation capacity and improve the transmission infrastructure. The extension of the Kariba North Bank Power Station will add 360 megawatts of hydro power to the installed capacity. By the end of this year, 180 megawatts will be added and the balance will come on stream in 2014. In addition, the Ndola Energy heavy fuel generating project is nearing completion and will contribute 50 megawatts by the end of this year.

With respect to Itezhi-tezhi, financing has been secured and works have progressed, whilst for the Kafue Gorge Lower power station, the tender process to engage a strategic equity partner is in progress. Itezhi-tezhi is expected to come on stream in 2015 with 120 megawatts, while the Kafue Gorge Lower power station with the capacity of 750 megawatts is expected to come on stream in 2019.

Two provincial fuel depots will be completed this year and a third in 2014, with installations in other provinces to follow thereafter. While efforts to upgrade Indeni Oil Refinery will continue in 2014, Government will also explore other options including construction of a new refinery with sufficient capacity to meet the ever increasing demand of our robust economy with surpluses for export.

Health Sector

Government remains committed to bringing affordable and quality health care as close to the family as possible. Accordingly, Government will continue to develop regional hubs to decentralise storage and distribution of medical drugs and supplies to better ensure their availability to all Zambians. Two hubs, in Chipata and Choma have already been established with two more in Mongu and Kasama planned for 2014. In 2014, Government will procure specialised medical equipment and requisite supplies for tertiary level hospitals to ensure non-interruption of services and reduce the number of referrals abroad. Further, Government will continue investing in district hospitals, especially for those districts that are currently not served with first level referral services and will also continue with its programme of constructing 650 health posts.

Education and Skills Development

Government will accelerate the re-introduction of the primary and secondary school system; promote the teaching of life skills to enable learners cope with the demands of self-employment in the labour market; promote the teaching of science and mathematics subjects; construct more technical schools and provide laboratory equipment.

With regard to tertiary education, Government will increase the number of students accessing quality and affordable university and college education by:

a) expanding student accommodation, lecture rooms and libraries at the University of Zambia, the Copperbelt University and Mulungushi University;

b) continuing with the development of infrastructure at Chalimbana and Palabana universities in Lusaka Province, Paul Mushindo and Robert Kapasa Makasa universities in Muchinga Province, Mukuba University on the Copperbelt and Kwame Nkhrumah University in Central Province; and

c) commencing the construction of Luapula University in Luapula Province and King Lewanika University in Western Province.

Monetary and Financial Sector Policies

The Bank of Zambia will maintain price and financial system stability by continuing to implement monetary policy through its interest rate targeting framework. Further, it will strengthen the regulatory framework governing the financial sector by updating and harmonising legislation.

Government will continue to maintain a flexible exchange rate regime with the Bank of Zambia only intervening to smoothen short term volatility. Additionally, the Bank of Zambia will continue to build international reserves to over 3 months of import cover.

Public Financial Management Reforms

With regard to public procurement, the Zambia Public Procurement Authority has already been transformed from an executing institution to an oversight and regulatory institution with procurement functions decentralised to spending agencies.

Therefore, under the Public Financial Management Reforms, Government will accelerate the establishment of a Treasury Single Account to enhance Government’s ability to oversee its accounts and avoid the accumulation of idle funds. Currently, Government is using the Treasury Single Account to fund personal emoluments, transfers to grant aided institutions and capital programmes. Beginning 2014, this will be extended to funding other categories of expenditure.

2014 Budget

Government proposes to spend a total of K42.68 billion or 30.7 percent of GDP. This will be financed through domestic revenues of K29.54 billion as well as grants of K2.63 billion from our cooperating partners. The balance of K10.51 billion will be met through foreign and domestic borrowing.

Allocations

General Public Services

Government has set aside K10.73 billion or 25.1 percent of the Budget for General Public Services which includes allocations for infrastructure development for the new districts, inter-governmental fiscal transfers and debt payments. Combined, these three account for 56.5 percent of this allocation.

Economic Affairs

Government has allocated K11.94 billion to economic sectors, representing 28.0 percent of the Budget.

·         Key interventions include the countrywide construction of dip tanks and silos for which an allocation of K231.9 million has been provided. The target is to increase the number dip tanks to combat animal disease and increase grain storage capacity to 1.3 million metric tonnes by the end of 2014. In addition, K80.9 million has been allocated to develop irrigated agriculture.

·         K500 million for the Farmer Input Support Programme to facilitate the provision of affordable crop and livestock inputs for our small scale farmers.

·         To secure and maintain the 500,000 metric tonnes of strategic food reserves, K1.0 billion has been set aside in the 2014 Budget.

·         K6.07 billion or 14.2 percent of the Budget has been allocated to the transport sector to construct, rehabilitate and maintain road, rail, water and air infrastructure.

·         K5.13 billion of this is earmarked for the Link Zambia 8000 Programme, PAVE Zambia 2000 project, the Lusaka 400 project and feeder roads in the rural areas.

·         With regard to the rail subsector, Government has allocated K339.8 million to recapitalise TAZARA and rehabilitate Zambia Railways Limited. The quality of rail travel for both goods and the public will improve and the negative impact on the nation’s roads from heavy commercial traffic will be mitigated.

·         K250 million for other critical interventions in the transport sector. These include the procurement of radars to bring our air safety levels to world standards, and dredging equipment and water vessels to improve water transport in the country.

·         In the energy sector, K550 million has been set aside for the power rehabilitation project under Zesco while K65 million has been allocated for the Rural Electrification Programme.

Education

·         K8.61 billion or 20.2 percent of the Budget on education. Out of this amount, K1.28 billion will go towards the construction of education infrastructure which will include 53 new secondary schools and the upgrading of 220 basic schools into secondary schools. Government will also construct an additional 150 primary school classrooms in the rural areas with corresponding 150 teacher houses, by using the community mode method.

·         Included in the education sector infrastructure budget is K404.3 million for university and other tertiary infrastructure, in particular student hostels at the University of Zambia, Copperbelt and Mulungushi Universities while an additional K395.3 million has been provided for operational grants for universities, student tuition and bursaries.

Health

·         9.9 percent of the Budget, or K4.23 billion on health services in 2014. Within this amount, K245.7 million is provided for the construction and rehabilitation of district hospitals, health centres, training schools and the upgrading of tertiary health care.

·         In order to enhance the availability of essential drugs and medical supplies, the budget in 2014 for these items has been increased by 24.3 percent to K738.7 million from K594.1 million in 2013. A further K66.6 million has been provided for medical equipment including the specialised equipment I mentioned earlier.

Public Order and Safety

·         K2.12 billion. To begin to redress the deplorable conditions in our prisons, K21.9 million has been allocated for expanding and improving prison infrastructure with a further K22.6 million allocated to prison farms so as to improve the nutrition of in-mates.

·         K27.2 million to procure digital forensic equipment and a mobile forensic laboratory, among others.

·         A total of K661.0 million has been allocated for housing and community amenities. Of this amount, K417.8 million has been budgeted for the provision of safe water and sanitation in both rural and urban areas.

Social Protection

·         K1.18 billion for social protection programmes in 2014. A large part of this increase arises from higher allocations to the Public Service Pension Fund, which will receive K754.2 million, in addition to the employers’ contribution.

Revenue Estimates and Measures

Revenue Measures

·         Increase excise duty on airtime from 10 percent to 15 percent.

·         Duty on clear beer from 40 to the duty rate of 60 percent. The revenue gain from these measures is K514.8 million.

·         Increased the property transfer tax rate from the current 5 percent to 10 percent. The measure is expected to generate an additional K100 million.

·         Charge at the rate of 0.2 percent of the value transferred on money transfer service to a recipient within or outside the Republic of Zambia. This measure will bring to the Treasury K180 million.

Rationalisation of the Tax System

·      Expand the Value Added Tax base by shifting several categories of zero rated goods and services to the standard rated category. This will generate a revenue gain of K151 million.

·      To equalize tax treatment between branches and subsidiaries and prevent tax avoidance, I propose to extend the withholding tax to profits distributed by branches of foreign companies. This will generate additional revenues of K1 million.

·       withholding tax on payments to non-residents on royalties, management and consultancy fees is at 20 percent

·      Withholding tax on commissions, public entertainment fees and payments made to non-resident contractors to 20 percent. This measure will result in a revenue gain of K71.7 million

·      Change the taxation of rental income by reducing the withholding tax to 10 percent from 15 percent and make this a final tax. As such, turnover tax on rental income shall not be applicable.

·      As a way of further stimulating the booming property sector, which is a source of employment creation, It has been propose to exempt from withholding tax interest arising from the debenture part of a property linked unit paid to Zambian investors in any Property Loan Stock Company listed on the Lusaka Stock Exchange.

·      In order to broaden the tax base, I propose to introduce a withholding tax of 20 percent on winnings from gaming, lotteries and betting and make it a final tax.

Streamlining of Tax Incentives

Any investor, foreign or local, who pledges to invest at least half a million United States dollars in a priority sector or product, as declared under the Zambia Development Agency Act, is entitled to tax incentives. In particular, they are exempt from paying duty for the first five years, are entitled to a five year income tax holiday and benefit from a further five years of preferential income tax rates.

Align the sectors declared as priority under the Zambia Development Agency Act to the Revised Sixth National Development Plan

Current PAYE Regime Income Band	Tax Rate
0 - K2,200 per month	0%
K2,201 – K3,000 per month	25%
K3,001 – K5,900 per month	30%
Above K5,900 per month	35%

Proposed PAYE Regime Income Band	Tax Rate
0 - K3,000 per month	0%
K3,001 – K3,800 per month	25%
K3,801 – K5,900 per month	30%
Above K5,900 per month	35

                                                                    

 Non Tax Revenues

·         As part of its comprehensive land reform programme, Government has launched the Integrated Land Management Information System whose benefits, among others, are to strengthen the administration of land and regularise land ownership through surveying and titling of land country wide. This measure will improve certainty of land location and ownership, enhance security of tenure for both customary and state land, improve transparency in land transaction procedures and increase revenue collection among others.

·         Toll fees collected from toll gates based on the Road User Pay principle is one of the most sustainable sources of financing for the roads. The Government has embarked on tolling of selected major roads whose proceeds will be channelled to the rehabilitation and maintenance of roads country wide. Tolling of commercial traffic will commence before the end of this year using the existing weigh bridge infrastructure.

·         Revise upwards various fees and fines to bring them to appropriate cost recovery levels of providing the respective services. These fees include those collected by the Ministry of Lands. Natural Resources and Environmental Protection, Ministry of Information and Broadcasting Services, Ministry of Mines, Energy and Water Development and Ministry of Home Affairs. These measures will take effect from 1st January, 2014.

·         Government will raise an estimated K550 million from these non-tax measures in 2014.

Short Comings (Authors view)

This Budget is a decent attempt at creating equity in resource allocation, that being said they are some shortfalls.

In my personal view there are certain short comings in this budget which need to be addressed in this budget.

Public sector reforms

Public sector pay has been characterised by distortions in salary levels and inequities in other conditions of service. In 2013, Government has fast-tracked the implementation of the reforms, especially to benefit the lower paid public workers.

Review of public pensions

Enhancement of the public service performance management system and the creation of a public service credit union to replace the various loan schemes  that are currently in place need to be managed with the utmost prudence.

Pension Reforms

A good pension system should subscribe to the basic principles of affordability, sustainability, portability, wide coverage and adequacy. The current pension systems, particularly the public pensions, clearly fall short of these principles. The public pension funds for instance, are fiscally unsustainable, not transferable between jobs and are unable to meet the minimum living requirements of retirees. Over the medium to long term, Government will implement wider reforms.

The Public Service Pension Fund has huge deficits that are projected at K2.9 billion in 2014, K2.6 billion in 2015 and K2.8 billion in 2016. Given that the Public Service Pension Fund is wholly owned by Government, it means that these deficits have to be funded from tax payers’ money. Against the backdrop of significant fiscal challenges that we are experiencing to mobilise sufficient resources for development, pension reforms can no longer be avoided.

Government intends to implement changes to the Public Service Pension Fund that will include changing the retirement age; revising the basis for calculating the pensionable emoluments and reviewing the commutation factors. My concern is here is that if the retirement age is increased, the number of job openings will reduce for incoming graduates and other workers. In essence this could change labour demographic dynamics in a negative way.

Agriculture

The allocation of K500 Million and K1 Billion to the FISP and FRA respectively heavily skews agricultural finance to none research oriented projects. A little portion of this money could have gone into strengthening the research capacity. More research can be done in disease and crop marketing. However the constructing multi-purpose dams and irrigation schemes to limit dependence on rain-fed agriculture is a welcome initiative.

Tourism Sector

Value added Standard rate for the supply of All distinct tourism services including game viewing, bungee jumping, and Pre-booked tour packages booked after 1 January, 2014, could possibly hurt the tourism Industry depending on the elasticity of such services

Manufacturing Sector and SMEs

It appears that incentives for investors remain skewed towards big corporations with finance to qualify for MFEZ and ZDA tax incentives. The portion of finance allocated to the growth of SMEs is at K106.9mil is relatively small What SMEs need is not only finance but a healthy environment that fosters their growth. In this regard some more key incentives for SMEs could be implemented to cushion some of their costs. SMEs hire their most people in the labour force and will help create the much needed Job growth.

There was not sufficeient finance allocated to the value addition process, especially in agriculture and copper.

Infrastructure

K618.5 million from the Eurobond proceeds was earmarked for track rehabilitation and procurement of rolling stock for Zambia Railways. Progress has been lethargic due to procurement delays and administrative bottlenecks. This sort of management of infrastructure funds is not prudent and serves to undermine the completion of earmarked projects. The reason Eurobond money was under the auspice that the projects had already been identified. A bureaucratic procurement process doesn't help at all.

References

2014 Budget Address by the Minister of Finance

London Metal Stock exchange

Bank of Zambia

Central statistics Office

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Mealie Meal Subsidy removal analysed by Kampamba Shula

The Government of the Republic of Zambia has resolved to remove the subsidy on Mealie meal.

Agriculture and Livestock Minister Bob Sichinga has announced that cabinet has approved the removal of Maize subsidies He said if the current subsidy was to be maintained, it would mean FRA would continue to be in a loss making position and for it to survive it had to stop depending on Government to support such subsidies. Mr Sichinga said currently the FRA had been buying maize at KR65 and selling it to millers at KR60, with a resultant loss of KR5 for every 50 kg bag sold or KR100 per tonne. He said the FRA would this farming season purchase 500, 000 tonnes of maize and any maize that would be left after the private sector buys the maize from the farmers (Lusaka Times, 2013).
In 2010 and 2011, Zambia achieved record maize harvests of 2,795,483 and 3,020,380 metric tons respectively (Nkonde et al. 2011). Towards the year of elections (2011), the FRA purchased roughly 1.5 million metric tons of maize that it could not fully store, mainly due to inadequate storage facilities. Further, the state could not sell its surplus maize profitably, either in the region or in international markets due to the high price at which it purchased maize locally (Mason and Myers 2011). Moreover, regional transport capacity constraints have limited the volumes that Zambia could export even at a financial loss. Hence, in mid- 2011, and leading into national elections later in the year, the country faced the dilemma of how to offload the large and partially deteriorating maize stocks from the 2010 harvest to make room for incoming maize purchases from the 2011 harvest. Starting in September 2011, the government via FRA offloaded maize to millers at US$140 per metric tonne (roughly 35,000 kwacha per 50kg bag). After accounting for the FRA’s marketing costs and storage losses on top of the 65,000 kwacha per 50kg bag purchase price, it is likely that the FRA lost at least 85,000 kwacha ($340 per tonne) on every bag traded during this period. Further, the government continued to subsidize maize exports within the SADC region at a loss despite the country having to incur high production costs. Thus, while the FRA was spending K65,000 (roughly US$260 per metric tonne) to purchase maize from farmers and incurring additional marketing and storage costs of at least $100 per tonne, it was selling the same maize to other countries within the region at a cost of not more than US$170 per tonne (Lusaka Times 2012).
In September 2011, the Government of Zambia started heavily subsidizing the price of maize held by the Food Reserve Agency (FRA) to maize millers. The expectation was that, by receiving maize at subsidized prices, millers would pass along the subsidy to Zambian consumers in the form of lower retail maize meal prices (Jayne, September 2012).
Over the eleven-year period from 2000 to 2011, inflation-adjusted retail prices for breakfast meal have declined. However, after the subsidy was conferred to millers in September 2011, the mill-to-retail marketing margins have increased significantly. Retail maize meal prices have remained virtually constant since September 2011. These findings indicate that very little of the treasury costs incurred in providing FRA grain to millers at below-market prices have benefited urban consumers.
Moreover, the FRA maize subsidies are only conferred to some millers, not all of the maize millers in Zambia. Millers that did not receive the FRA subsidized maize, in particular the informal and small/medium-scale millers were greatly disadvantaged because they could not acquire maize grain at as low a price as millers receiving subsidized maize from the FRA. This has led to an unbalanced playing field between the millers who benefited from the FRA subsidized maize grain and those who did not. Such an un-level playing field will negatively affect the future competitiveness and market structure of Zambia’s maize milling industry.
Policy Implications
First, because the FRA maize subsidies to millers have so far not been transmitted to Zambian consumers, policy makers might reconsider the policy of providing maize to selected millers at highly subsidized prices, if the aim of doing so is to reduce the price of maize meal to consumers. Second, selective subsidies to particular millers disadvantage other millers plus many informal small-scale millers who are not able to receive the subsidy. Over time, this is likely to entrench the market share of the selected millers having access to subsidized maize supplies, force non-selected millers out of business, and adversely affect the degree of competitiveness within the milling industry. Third, for the Government to achieve its goal of lower maize meal prices to help poor urban consumers, policies should be considered that encourage rather than disadvantage the informal and small/medium-scale food millers and retailers, on whom a large share of Zambian consumers rely.
Conclusions
Research findings agree very well with Chapoto and Jayne (2006) as well as Kuteya and Jayne (2011) that maize meal prices in real terms have been declining over time. However, the rate at which these prices were decreasing after state intervention was less than that of maize grain. As such, the impact of this costly move was not felt by consumers. The mill-to-retail market margins increased tremendously immediately after FRA offloaded maize grain to commercial millers at 400 kwacha per kilogram. These maize grain subsidies which drained the state treasury appear to have benefited large millers alone since the move did not reduce mealie meal prices at the same rate as maize grain from FRA. If government’s objective from these subsidies was also to reduce maize meal prices for the benefit of consumers, it does not appear to be supported by the econometric model results (Jayne, September 2012).
Maize subsidies are perceived as government’s indirect support to commercial millers. But it is a well-documented fact that even small millers (hammer mills) play a major role in ensuring competition in the grain milling industry in the country. Therefore, if the playing field is not leveled, their activities are hampered by selective subsidies and as a result lessening competition in the grain milling industry. The end results are high marketing margins between wholesale maize grain and breakfast meal retail prices. The foregone analysis indicates that selective subsidies conferred to certain players in the market do not necessarily have desired consequences when the market is not fully competitive. If the market were competitive, then subsidies conferred to millers would be passed along fully to consumers, which appear not to be the case in Zambia. Subsidies to maize millers have instead proved to be a drain on the government treasury without trickling down anticipated benefits to intended beneficiaries – urban consumers in this case.


References

Jayne, A. N. (September 2012). Is the Government of Zambia’s Subsidy to Maize Millers. Lusaka Zambia: Indaba Agricultural Policy Research Institute (IAPRI).
Lusaka Times. (2013, May 15). Mealie Meal prices set to go up as Government announces removal of Maize subsidies. Retrieved May 16, 2013, from Lusaka Times: http://www.lusakatimes.com/2013/05/15/mealie-prices-set-to-go-up-as-government-announces-removal-of-maize-subsidies/
Nkonde, C., N.M. Mason, N.J. Sitko, and T.S. Jayne. 2011. Who Gained and Who Lost from
Zambia’s 2010 Maize Marketing Policies? FSRP Working Paper No. 49. Lusaka: Food
Security Research Project.
Mason, M.N. and J.R. Myers. 2011. The Effects of the Food Reserve Agency on Maize
Market Prices in Zambia: Are There Threshold Nonlinearities? FSRP Working Paper
No. 60. Lusaka: Food Security Research Project.
Chapoto, A. and T.S. Jayne. 2006. Trends in Breakfast Meal and Maize Marketing Margins
in Zambia. FSRP Policy Synthesis No. 14. Lusaka: Food Security Research Project.
Kuteya, A.N. and T.S. Jayne. 2011. Trends in Maize Grain, Roller, and Breakfast Meal
Prices in Zambia. FSRP Policy Synthesis No. 47. Lusaka: Food Security Research
Project.

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Mealie Meal Crisis Analysed by Kampamba Shula

The Cause of the Crisis

The roots of the current mealie-meal crisis lie in the seemingly insatiable demand for the commodity from neighbouring countries, particularly the Democratic Republic of Congo (as well as in the broader Great Lakes Region and beyond), which demand has been made even worse by last season’s poor harvest in the United States and Mexico. Here is a summary of the challenge: South Africa has produced about 12 million metric tonnes of maize this year and is able to supply mealie-meal to the Congo more cheaply than Zambia because of its efficient system of planting, harvest, storage, finance and generally well-supported agricultural sector. This year, however, South Africa is not exporting to the Congo because its exports are covering the shortfalls in the North American markets (which were a result of last year’s drought in that region). The massive vacuum in the Congo supply chain has created even greater pressure on Zambian maize. Due to the basic rules of supply and demand, Zambian maize has simply become hot property in the DRC and beyond, pushing up the local sale price to unprecedented levels.

When you add to the regional demand factor, the various problems resulting from (i) the Food Reserve Agency’s confusing role in the maize market (exporting maize when our markets are facing erratic supplies); (ii) infrastructure challenges preventing maize from being collected from rural areas when roads are impassable during the rains and there is no effective storage in these locations; (iii) long-term structural problems in maize marketing; (iv) delays in providing inputs and payments to farmers;

Structural problems from the FRA

Local traders have traditionally had mandates from mills to buy and stock maize for them for release later on in the year but this business has been obliterated by FRA. The reason is simple. If a trader is not sure whether the FRA will also begin releasing maize at a cheap price to millers in the middle of the year, that trader will not want to hold stock that he might have purchased at a high price. This is because even a small reduction in the FRA price to the market could bankrupt a miller that has pre-purchased maize stock for releasing later into the market.

Most millers rely on bank finance but the lack of clarity and planning on the part of FRA makes both the millers and the lending institutions nervous and therefore cautious. They have no certainty as to when the FRA will intervene in the market. The only solution is to focus on the export market or buy limited amounts of stock that they can quickly sell if the FRA drops the price of maize. The financial sector generally prefers to lend to FRA because such lending comes with a Government guarantee. Millers would therefore rather fill their storage sheds with only a few months of stock when FRA is not participating in the market between May and October (a restriction set by the Food Reserve Act).

Further, because not every miller is able to accesses cheaper FRA maize, there is a distortion in the market. A close look at production figures shows that the more efficient producers of maize – essentially the large scale farmers – have tended to diversify into other commodities such as soya beans and tobacco. FRA has therefore only served to promote inefficiency. Current maize yields in Zambia average about 2 tons per hectare when they are supposed to be 5-10 tons per hectare. With its 1.3 million small-scale farmers, Zambia can easily match the average annual South Africa production of 10-12 million tons of maize and feed the continent!

It is also important for Government to begin the exercise of re-thinking our dependence on maize as a staple food as part of a broader crop diversification programme. Consuming huge quantities of maize meal, particularly the refined breakfast meal contributes to the high rates of preventable illnesses – particularly diabetes.

It is important to recall that the private sector has been asking for the recognition of a Warehouse Receipt as a document of title from as far back as 2004. The MMD Government only moved on this in 2010 in an attempt to replace the Agricultural Credits Act. However, the 2012 Act remains unimplemented. This action should be delayed no further. Similarly, an Agricultural Marketing Bill went through stakeholders consultation in 2010 but it is not clear when it will be taken to Parliament despite a Parliamentary Committee report recommending the immediate presentation of the Bill to the National Assembly. It contains important provisions for the improving the sector and curtailing adverse political interference. A Commodity Exchange Bill also underwent stakeholder consultation in February 2010, although it is not clear what stage the Bill has reached.

Current Situation

THE Indaba Agricultural Policy Research Institute (IAPRI) has attributed the hike in mealie-meal prices to lack of competition among large scale millers accessing subsidized maize that have squeezed informal traders out of the market.

 Last month, Government allowed milliers to increase the wholesale price of 25 kilogramme bag of breakfast mealie-meal to KR55 (K55,000) to avoid continued shortages of the commodity on the market.

Making a presentation on Fundamental causes and costs of mealie-meal prices in Lusaka , IAPRI research associate Auckland Kuteya said there has been little benefits transmitted to consumers from the Food Reserve Agency (FRA)’s maize subisidies to millers.

“The question is who is capturing the maize subisidies from FRA…why are retailers or millers able to keep prices so high despite subsidies,” he wondered.

 Mr Kuteya said Government has created a problem where only a few retailers or millers are able to benefit from maize offloaded by FRA, which has squeezed out the informal milling sector.

 He said the millers that are not receiving subsidised maize cannot compete on the market.

 “The Government has brought this problem upon itself by buying most of the marketed maize grain through FRA and selling at too low a price to few millers. If the grains were readily available on the market, the informal milling system could be booming right now,” he said.

 Mr Kuteya said increased demand for Zambian maize in the region has exposed problems in the marketing system which has led to shortages and high prices of mealie-meal.

 He said during the 2010 and 2012 period, the national treasury lost about KR3.8 billion (K3.8 trillion) through FRA due to large scale wastage, transport costs, storage/handling costs and storage losses.

 “Millers are doing what any self-interested business man would do if they had the opportunity. Government can end this behaviour by stopping subsidised millers from operating. Millers should be weaned off the maize subsidies,” he said. He said cross-border traders, millers and traders are not fundamental causes, but the maize marketing system that is not functioning effectively.Mr Kuteya said FRA should concentrate only on strategic food reserves and allow the private sector to get involved in marketing. He acknowledged the difficulties involved in stopping informal cross- border traders from exporting maize or mealie-meal to the Democratic Republic of Congo (DRC) as it offers a good market.

 Speaking at the same function, IAPRI research director and country coordinator Nicholas Sitko said demand for Zambia’s maize and mealie- meal in DRC will always be there as people need food daily.

“If the demand is not met formally, this will create room for informal trade. If mealie-meal cannot be transported on a big truck, people will resort to bicycles and this will push the price of the commodity up as transport costs increase,” he said.

THE IMF says government’s recent increase of mealie-meal prices to cushion transport costs incurred by millers will help improve the availability of maize across the country.

Responding to a press query, International Monetary Fund country representative, Tobias Rasmussen, however said to fully capture the available potential, it would be important for the country to let market forces work.

 “In the present situation, mandated pricing and limits on exports have kept Zambian maize prices well below those in neighbouring countries. This has led to smuggling and is discouraging production. Fixed pricing has also impeded incentives to distribute maize to remote areas where transport costs are high,” Rasmussen said.

Conclusions

FRA should NOT market maize. FRA is like a fork, I am not saying it shouldn't be on the dining table, but you don’t use it to drink soup.

FRA still has a big role to play in the market but not as a marketer but as a store of strategic reserves. Zambia Agricultural and Commodities exchange (ZAMACE), the agricultural commodities exchange must come in to fill in the marketing role. ZAMACE using Options and Futures on Global market prices will be able to secure Farmers a steady market for their crop. Farmers will never be paid late because derivatives like Futures will allow farmers to even be paid up front for crop.

Next, the subsidies of Maize will inevitably have to be reduced and eventually stopped. It is unsustainable in the long run. Maize will need to be depoliticized as a crop; we can’t have the President dictating to Millers at how much they should sell their Maize, Business doesn’t work that way.

Sherlock Holmes (my Favorite fictional character) said that once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth. For Mealie meal prices the impossible is preventing market forces from operating, the improbable is that Zambian must consume less Mealie Meal.

Zambians must eat less Nshima and more cassava, millet or whatever. I know this may sound as disconcerting news but it’s true. Market prices are determined by Supply and Demand. Given that Supply is distorted by FRA and will require Political will to empower ZAMACE, demand is something that as a community and a nation we can begin to address on our own.

The Zambian Government cannot solve all the problems of the country, it is up to ordinary Zambians to stand up and be agents of Change. In this case we have to diversify the Food basket and include other variety of foods.

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