This is an extract from the transcript of the IMF/World bank media briefing that took place on 25th April 2009 in the US. Only the parts relevant to the Zambian situation are captured in this extract. Great thanks to Mr Ben Kangwa, First Secretary (Press) at the Zambian Embassy in Washington, USA, for making the full transcript available to us
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MR. DIENG: Good morning, everyone. This is the African Finance Ministers’ Press Conference. I’m Ismaila Dieng from the IMF’s External Relations Department. Joining us today for this press conference: Mr. Charles Koffi Diby, Minister of Economy and Finance for Côte d’Ivoire, Mr. Mustafa Mkulo, Minister for Finance and Economic Affairs Tanzania and Mr. Situmbeko Musokotwane, Minister of Finance and National Planning for Zambia. The ministers will have each some introductory remarks, and then they will be happy to take your questions. Thank you.
MR. DIENG: Thank you, Minister Mkulo. Minister Musokotwane.
MR. MUSOKOTWANE: It is also a pleasure from my side to be able to share with members of the press the perspectives of the crisis from Zambia. I will present my remarks on the basis of about three broad headlines. First of all, I’m going to talk about the effects that this crisis has presented in the specific case of Zambia. Then I’ll talk about the reaction, what measures we have taken in the reaction to the crisis. And then, finally, I will talk about the international perspective to the crisis. Therefore, let me start with the effects as we have seen them in the case of Zambia.
Let me begin with our banking sector because the crisis originated from the advanced world via the banking sector. Here, I would say that we have not–obviously, our banking sector is not as much integrated with the countries where the crisis originated from. Therefore, we did not, our banking sector did not consume any of the toxic assets that the others did, and, as a result of that, the crisis came and found the banking sector to be fairly stable. We believe this remains to be the case, but obviously we are watching very carefully because the second round effects, which I’ll talk about later, these could negatively impact on the banking sector.
But that is not to say that the entire financial market was fully immunized from the crisis. We suffered in the case of our portfolio investments that had come to Zambia. Since the economy began to improve about six, seven years ago, we saw lots of interest in investors from the advanced world coming to buy treasury securities, treasury bonds and, indeed, even investments into our stock market.
These investors, as the conditions became difficult, we saw an increasing tendency whereby they were no longer rolling their investments. They were not even bringing any new investments. To the contrary, they were taking out their money. So, obviously, that put a lot of pressure on the exchange rate.
In addition, of course, the fact that the general public, as they saw their current account deteriorating and foreign exchange becoming less available, this led to a very quick depreciation of our currency by about 45 percent in nominal terms between about mid-2008 to the end of the year.
Our ability to finance imports, therefore, saw a decline from about 3.8 months of import cover to just about 2 or something like that. So this is one area where we have seen us being adversely affected.
It is clear to the problems in terms of our ability to service our extended debt. Obviously because of the depreciation, the local currency equivalent of that is much higher.
On the other hand, there are obviously some positive aspects about this depreciation, which is an important point to raise because in the seventies and eighties when we had a similar crisis, the response via the exchange rate mechanism was quite slow, not just in Zambia but in many African countries, and I believe that this is one aspect in previous times that contributed to the heavy accumulation of debt during that time. Consumption patterns tended to remain constant, whereas the external sector had declined. Therefore, a lot couldn’t financed by more borrowing which led to the debt pileup and to the HIPC initiative.
Obviously, with the more rapid reaction through currency depreciation that has happened, we believe that part of that problem has now been put aside.
But much more fundamentally, the way we’ve been affected has been through the real economy. We have, like my colleagues have said, we have also revised our growth projections from the average of 6 percent that we have achieved in the past few years to something lower. That could be 5 or even 4.
But, more specifically, Zambia is a major mining country exporting copper. And, as the price of copper fell, just like the prices of many commodities, we saw a number of mining companies closing or shedding of labor. Obviously, in our case, I think we have lost about 12,000 jobs directly in the mining sector, and that creates social and economic problems.
Social in the sense that when people are thrown out of jobs, you know what happens, but also economically in the sense that the second round effects have launched. There are some towns which are entirely mining towns. So, if you close the mine, it means the shop owners, the bus drivers, the farmers in the neighborhood, obviously, they get affected.
So, for us, really, I think the biggest pain that we’ve suffered is in the mining industry because of labor shedding and also because their contribution to the tax revenue as a result of lower prices. Both have declined.
So, in summary, therefore, three things: Banking, not so much. Financial sector, we have seen depreciation, but much more severely the economic side through the mining industry.
So what have we done? The biggest priority has been to try and save as many jobs as possible and in the mining sector. So, in the budget that we presented earlier this year, we had to take some fiscal measures, lowering some taxes, aspect of taxes in the mining sector, so that jobs, those jobs that we can save, we would be able to save them, and also encouraging through tax measures certain aspect value addition in the mining sector so that new jobs can be created. Smelting capacity has increased. So we wanted to create jobs around this.
The other thing that we have done is that obviously there is less room for a stimulus package in a country such as Zambia, but in a limited fashion we’ve had to do that. So we saw the domestic borrowing increasing from 1.4 percent of GDP last year to 1.8 percent of GDP this year, most of this money arising from the increased deficit. We have put it on education. We will put it on health so that we protect all levels of society. But, much more importantly or so, we have put it on specific infrastructure that we believe if implemented, and this is what we are doing, can create the basis for private sector investment.
Obviously, this crisis is not going to last forever and ever. We want to find ourselves in a situation whereby when the crisis comes to the end, the basis for private sector investment will have been enhanced. So, therefore, the stimulus package can be seen from the expenditure side in that perspective.
But, also, it is to be seen on the side of tax cuts. We have to introduce some tax cuts in certain aspects, particularly those that we believed would help to save jobs in the mining sector as I indicated early on. But we also cut taxes in certain other aspects of the economy, particularly agriculture, constructing, so that some of the people losing jobs on the mining side, they could find jobs in the other sectors.
Now, I think the point to emphasize here once again is that this crisis will not last forever and ever. In the past few years, Africans, most of us, have made good progress. You’ve heard it from my colleague in Tanzania and Cote d’Ivoire. Growth has been increasing.
And, what we have seen is that growth was increasing. The impact of that on poverty reduction, I think was quite powerful. We saw jobs being created. We saw many companies being created. We believe that this is really the future for Africa, to join in the leagues of what the Asian countries did some decades ago. So, for us, this is really an opportunity to reorganize ourselves, to diversify the economy, create conditions for private sector investment to come in because we believe this is the future.
My final remark is on the international perspective. Obviously, we welcome the announcements made by the G20 to provide more resources for international financial institutions, such as the World Bank and the IMF, to provide more resources to us.
The major point I wish to stress is that we have seen similar announcements in the past, and sometimes when it comes to implementing these announcements, that’s where there’s been disappointment. We all recall how the HIPC initiative started. It was a very noble idea. When it came to implementing that, all types of problems, conditionalities and so forth. As at the launch, there are still some countries today which are still struggling to get out of debt.
Similarly, I want to say that this time around, let’s ensure that this noble idea of providing more resources, it actually happens on the ground. Let’s not see another lot of all types of obstacles being created by bureaucracies to prevent this from happening.
My final point is that obviously this crisis did not start from Africa. It started from here. And, we urge the rich countries to take more definite action to ensure that this crisis is as short as possible.
As the global economy grew, we saw ourselves also benefiting from that. Most of us have taken painful measures in the last 15, 20 years, so that we have become part of the global economy. And, this has happened with such success, and we believe that this success can be more sustainable if the global economy begins to grow. So we urge the rich nations to take these necessary actions to ensure that the crisis is as short as possible.
Thank you.
MR. DIENG: Thank you, Minister. We’ll now take questions.
QUESTIONER: Would that our finances were in as good shape as those of Zambia. Unfortunately, this isn’t the case. One of the things that one notices here is that you talk about the crisis, but you don’t explain the cause of the crisis. So, without making a speech, may I please tell you what the cause of the crisis is? It’s called fraudulent finance. And, the most interesting thing that the minister from Zambia said was at the very beginning, namely, that you had not absorbed any toxic assets. Now, don’t, because they’re trying to revalidate them and they will try and sell them all over the world. Do you understand this factor and, if not, will you be discussing it with your colleagues in the international fora?
MR. DIENG: Minister Musokotwane?
MR. MUSOKOTWANE: Well, I thank the speaker for those comments, and if indeed these assets are circulating, I think we’ve been alerted, and we’ll take note of that. Let me take seconds just to say something about the dependence on the IMF. First of all, I think everybody agrees that many of us in Africa have made tremendous progress in the last decade or so. So, we’re really beginning to see ourselves disengaging from aid dependency–not immediately, but I think it’s something that was on track, and I think this is positive.
The fact that a crisis has come, which we did not cause, is just unfortunate. And, if we are to come and ask for financing to deal with that, I don’t see anything embarrassing about that.
And, by the way, I think in this global economy it’s not just us who depend on external financing. Let’s look at the deficit that has been created in this country, the U.S., close to $2 trillion. Where is this money coming from? Is it from the U.S.? No. Most of this money, I believe is coming from outside the U.S.–China and other countries that were running surpluses. So, if it is proper for an economy such as this to access funding, what is wrong with the African countries accessing financing from outside?
QUESTIONER: I was wondering if you have an original framework through which you help one another share experiences apart from approaching the international institutions, not just because of the current crisis, but for the future of the continent, especially in terms of economy.
Secondly, Mr. Charles Diby, you did mention that some countries spend about 30 percent of their budget financing debt. Minister Musokotwane, you said that your country’s debt is going to be or has risen from 1.4 percent of your GDP to 1.8 percent. This obviously raises a serious concern. So how are you working to make sure that you don’t drag yourself back into debt, which is a huge problem?
MR. DIENG: Minister Musokotwane?
MR. MUSOKOTWANE: At a time like this, when we interact, we interact a lot among ourselves. Certainly, in the region where we are, we have very regularly SADC meetings. We meet very frequently. Similarly, I think we have interactions at the level of the A.U., and I think sometime in June, actually, there’s a meeting by the African Ministers of Finance to discuss the crisis and share experiences in a more detailed fashion.
Now, on the debt, first of all, I don’t think you clearly understood what I was saying. What I was talking about is the deficit to GDP ratio which has increased this year from 1.4 percent last year to 1.8 this year. That, obviously, has a net effect of increasing our indebtedness. But, for us, the external debt is quite low after the HIPC and the MDRI. So I think we are like our colleagues in Tanzania here. We don’t consider external debt to be a burden right now.
But, obviously, we have to watch out because a crisis such as this can lead to a potential for us piling up debt. This, as I indicated earlier on is how the debt problem of the seventies and eighties arose in the first instance, and I also indicated very clearly that this time around we responded more swiftly. We have allowed our currency to depreciate which means that the level of balance of payments problems, I think will be curtailed much sooner than before.
And, of course, now we are much more aware. In the ’70s and ’80s, our appreciation of these things was low. Now I think we understand these relationships very carefully, and we are watching our debt situation very carefully so that we don’t drift back into the pre-HIPC days.
MR. DIENG: Thank you,
This brings to an end our press conference with African Finance Ministers. We are running out of time, and we have to bring this to a close. So, thank you very much for your attendance.
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