21 January 2014
Zambia’s is a story replete with possibilities. But while blessed with abundant natural beauty and resources, it still has some way to go on its development path. Here, the country’s Central Bank Governor Michael Gondwe tells us about progress made, and progress still to come.
Zambia: country of contrasts. Home to the legendary Victoria Falls, the wild Zambezi River and one of the world’s fastest-growing economies, it nonetheless retains its share of development challenges. For example, not only is the country in danger of missing several of its Millennium Development Goals, but, in addition, less than half of its young children have enough to eat. As one would expect, addressing such issues is ranked high among the priorities of the country’s policy-makers, as well as its Central Bank which, since December 2011, has been overseen by its Governor, Michael Gondwe.
The Bank’s remit is wide-ranging. While primarily focused on “achieving and maintaining price and financial system stability for balanced macroeconomic development,” it is also aiming to serve as a “dynamic and credible central bank that adds value to the economic development of Zambia.” Such commitments give Gondwe ample opportunity to influence policy and help move his country forward.
Enabling financial inclusion
Take the Zambian economy for example. Despite having had high levels of growth in recent years, much of the country’s population continues to face a daily struggle against poverty — a fact not lost on Gondwe. “African governments have done quite a lot when it comes to creating an environment for growth, and perhaps one needs to find out exactly what is not working,” he says. “When talking about entrepreneurship and access to finance, what we need to do in a big way is to focus on financial inclusion and, in particular, financial literacy. I think we need to emphasize what proper financial literacy is all about. When people know how to manage money, they also have the discipline to run their businesses so that when they borrow, they are able to succeed and pay back to the banks they borrow from.”
As a result, the Bank of Zambia has undertaken the challenge to achieve financial inclusion to 50% of Zambia’s population by 2015 from the current level of 37.3%, thereby giving poorer people greater opportunity to benefit from opportunities arising from financial access and growth. “Better access to finance increases economic growth and, at the same time, also helps to fight poverty and reduce income inequality between the rich and the poor in society,” says Gondwe. “This is why the role of financial services in an economy is sometimes compared to that which blood plays in the human body. No economy can function efficiently, if at all, without financial products and services.”
But it’s not all bad news — far from it. With the country’s strong recent economic growth expected to continue, democratization has taken strong root and, as a consequence, it also offers one of the more business-friendly environments in Africa, according to The World Bank’s Doing Business rankings. There has also been increased investment not only into the mining sector, but also into a range of other activities in the manufacturing and services sectors. And, according to EY’s 2012 Africa attractiveness survey, FDI in-flows to Zambia over the next five years are set to average about US$1.9b p.a., with approximately 27,000 new jobs created as a result.
Trade secrets
As part of its drive to achieve real poverty reduction and move toward its vision of becoming a prosperous middle-income country by 2030, Zambia’s policy-makers are also targeting reduced trade barriers and increased opportunities for business. “The role that trade plays in the economic growth and development of a country cannot be overemphasized,” says Gondwe. “There are many regions and countries of the world that have been able to lift their people from poverty to prosperity through trade. However, although Africa in general, and Zambia in particular, has an economy that is characterized by a relatively high degree of openness, trade has not been utilized to an extent of achieving rapid and sustainable economic development necessary to eliminate poverty.”
Cross-border collaboration, he says, should not be limited to trade. On the contrary, effectively addressing the persistent challenge of unemployment, one of Zambia’s — and Africa’s — most challenging problems, is something that should occur on a regional basis, he believes. “Africa has attracted a lot of investors and they’ve been given all manner of incentives,” says Gondwe. “To some extent, Africa has walked an extra mile and given investors more incentives than they actually need. Through these incentives, investors are expected to benefit the local communities through the creation of quality jobs and opportunities for building SMEs. However, what is generally felt is that quite a number of investors ship out benefits through transfer pricing, tax avoidance and other schemes, and export of jobs by importing all their supplies and subcontracting their subsidiaries. The G20 is now showing concern on tax avoidance, which is a positive development, as it might lead to a global approach to a solution.”
He goes on to say that while not all the investors abuse incentives, some carry out abuses, including tax avoidance, thereby denying African countries much-needed funds that could be used to stimulate development. “What is happening throughout Africa is that some investors take their incentives and each time they expire, they create new conditions for additional incentives, which they continue to abuse and, in the process, deprive the local communities the benefits to eradicate poverty,” he says. “African governments will need significant revenues to build infrastructure. If investors — particularly those in fast-growing sectors such as the extractive industries — are not really contributing, then it is going to be very difficult. This will not be tackled by one country alone — the region needs to come up with a collective approach. This notwithstanding, FDIcontinues to play a significant role in the economic development of most African countries. In Zambia, for instance, we have over the years seen increased output in almost all the sectors of the economy, such as agriculture, mining, manufacturing and energy. This improvement in productivity is attributed to greater use of technology and availability of resources provided by FDI.”
Gondwe’s strong belief in the power of a region working together was influenced by his recent stint as President of the Eastern and Southern African Trade and Development Bank, a leading regional development bank, until April 2012.
This role, together with his current position, has exposed him to the ongoing drive to address Africa’s infrastructure deficit, in particular, the need to secure the necessary financing to underpin various projects, often via PPPs.
“PPPs will not make a bad project a good project,” he says. “I think that is correct. The basic problem comes down to the question of capacity in countries. The capacity to undertake a thorough and sufficient appraisal of the projects in question, capacity to source appropriate partners with the financial muscle and technical knowhow, and capacity to negotiate and to produce agreements that mirror the interests of the countries, a win-win position, are critical to the success of PPPs.”
Effectively managing this process, one that tests countries in both the developed and developing world, is not straightforward, he adds. But succeeding in doing so will open the door to faster progress and a development path owned by Africans themselves. “We are sitting on resources that need to work for Africa,” he concludes. “This means Africa has to create its own future — and we are doing so, there’s no doubt about that.”
This feature was first published in the December issue of EY's Dynamics
