Final Economic Report 2006
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Republic of Zambia Economic Report 20200606 Ministry of Finance & National Planning Contents Section Topic Page Foreword V CHAPTER 1 DEVELOPMENTS IN THE GLOBAL ECONOMY 1 Overview 1 Developments in Industrial Countries 3 Developments in Other Emerging Markets and Developing Countries 3 Developments in Sub-Saharan Africa 5 Commodity Price Developments 5 The impact of Global Developments on the Zambian Economy 5 Outlook 5 CHAPTER 2 DEVELOPMENTS IN THE DOMESTIC ECONOMY 6 Overview 6 Macroeconomic Conditiond in 2006 6 Domestic Output 7 Social Sector Developments 13 Domestic Debt 13 Structural Reforms 14 CHAPTER 3 BUDGET PERFORMANCE 17 Overview 17 Policy Objectives 17 Revenue Performance 17 Total Expenditures 20 Budget Deficit 26 Outllook 26 CHAPTER 4 MONETARY AND FINANCIAL SECTOR DEVELOPMENTS 27 Overview 27 Policy Objectives 27 Monetary Developments 32 Banking Sector Developments 33 Non-Bank Financial Institutions 33 Other Developments 35 Outlook 35 CHAPTER 5 CAPITAL MARKETS DEVELOPMENTS 36 Overview 36 Stock Marke t Activity 36 Trading Activity 38 Outlook 39 CHAPTER 6 EXTERNAL SECTOR DEVELOPMENTS 40 Overview 40 Policy Developments 40 External Debt Position in 2006 40 Balance of Payments Developments 41 Outlook 44 i Contents Section Topic Page CHAPTER 7 AGRICULTURE 45 Overview 45 Policy Developments 45 Sector Performance 45 Other Developments 47 Food Security Position 47 Poverty Reducing Programmes 48 Outlook 53 CHAPTER 8 LAND 54 Overview 54 54 Policy Developments Sector Performance 54 Outlook 55 CHAPTER 9 MINING AND QUARRYING SECTOR 56 Overview 56 Policy Developments 56 Sector Performance 56 57 Other Developments Outlook 58 CHAPTER 10 TOURISM 59 Overview 59 Policy Developments 59 Sector Performance 59 Poverty Reducing Programmes 62 Outlook 62 CHAPTER 11 ENERGY AND WATER DEVELOPMENT 63 Overview 63 Policy Developments 63 Sector Performance 63 Outlook 68 CHAPTER 12 MANUFACTURING 69 Overview 69 Policy Developments 69 Sector Performance 70 Outlook 70 CHAPTER 13 TRANSPORT, STORAGE AND COMMUNICATIONS 71 Overview 71 Policy Developments 71 Sector Performance 71 Poverty Reducing Programmes 76 Outlook 76 ii Contents Section Topic Page CHAPTER 14 BUILDING AND CONSTRUCTION 78 Overview 78 Policy Developments 78 Sector Performance 85 Outlook 85 CHAPTER 15 SCIENCE AND TECHNOLOGY 86 Overview 86 Sector Performance 86 Poverty Reducing Programmes 87 Outlook 87 CHAPTER 16 EDUCATION AND TRAINING 88 Overview 88 Policy Developments 88 Sector Performance 89 Poverty Reducing Programmes 97 Outlook 97 CHAPTER 17 HEALTH 98 Overview 98 Policy Developments 98 Sector 98 101 Outlook CHAPTER 18 GENDER AND DEVELOPMENT 104 Overview 104 Policy Developments 104 Gender in Decision Making 104 Gender-based Violence 104 Outlook 101 CHAPTER 19 SOCIAL PROTECTION 104 Overview 104 Policy Developments 104 Sector Performance 104 CHAPTER 20 ECONOMIC PROSPECTS AND POLICIES IN 2007 110 Global Outlook 110 Domestic Economy 110 iii Foreword The Economic Report is prepared through a collaborative effort within the various government ministries and departments, statutory boards and some private sector institutions, to whom I am appreciative for the support rendered in the preparation of this Report. Economic growth has maintained momentum and picked up in 2006 to a preliminary estimate of 5.8 percent, largely driven by expansion in mining, transport and construction sectors. This growth was underpinned by favourable macroeconomic conditions. Macroeconomic conditions remained favourable with inflation reaching single digit levels for the first time in more than three decades. The fiscal deficit continued to be within sustainable levels whilst interest rates, though relatively high, were edging downwards. It is evident that implementation of prudent monetary and fiscal policies is paying off coupled with debt relief received from international creditors. Supply-side factors, such as increased food supply following a good harvest in 2006, also contributed to reducing inflation. The world economy continued to be strong with emerging markets and developing countries enjoying exceptional growth. Global economic expansion was supportive of growth in the domestic economy as it led to continued high demand and prices for commodities such as copper, which is Zambia's chief export commodity. The rise in the price of copper positively affected the trade balance, which recorded a significant surplus in 2006. Consequently, the current account deficit reduced by a large margin. However, rising oil prices exerted pressures on the prices of petroleum products and inflation in general. On the social front, marginal progress was recorded as evidenced by improvements in some health service delivery and education indicators. However, service delivery in general remains a source of concern with outcomes still precarious especially in the health sector. The health sector continued to operate below 40 percent human resource capacity for nearly all categories of staff. This is a huge challenge which will require concerted efforts to overcome. While noting the pick up in economic growth, it is important to note that mining expansion has strongly contributed to this growth. To make major strides in uplifting the living conditions of many of the poor people, major inroads have to be made to accelerate and achieve higher growth rates in the key sectors of manufacturing and agriculture. This is consistent with the growth and poverty strategy outlined in the Fifth National Development Plan (FNDP). Enhancing the business environment to to facilitate easier entry in these key sectors is also essential. Moving ahead, it is imperative that the reforms under the private sector development programme are accelerated together with infrastructural improvements in line with the FNDP. C. Evans Chibiliti Secretary to the Treasury Ministry of Finance and National Planning v CHAPTER 1 DEVELOPMENTS IN THE GLOBAL ECONOMY Overview The global economy continued to grow in 2006, registering a growth of 5.1 percent compared to 4.3 percent in 2005. This growth was led by the United States, the euro area and Japan. Additionally, continued growth in emerging markets and developing countries added impetus to world output. This phenomenal growth in emerging markets was led by China. In line with the expansion in the global economy, the volume of world trade grew by 8.9 percent from 7.2 percent in 2005. Inflation in advanced economies in 2006 increased modestly to 2.6 percent from 2.3 percent in 2005, mainly on account of the high oil prices. However, inflation in emerging markets and developing countries was lower. Interest rates in major advanced economies were relatively higher, against a background of rising inflation and continued growth. Developments in Industrial Countries Gross Domestic Product (GDP) growth in industrial countries was 3.1 percent compared to 2.6 percent in 2005. This growth was led by the U.S economy, which increased by 3.4 percent compared to 3.2 percent in 2005, mainly on account of increased corporate investment supported by high capacity use and strong profitability. Nonetheless, the slowdown in the housing market dampened private consumption and residential investment (see table 1.1). Growth in the euro area was highest in six years at 2.4 percent, up from 1.3 percent in 2005, with Germany leading the growth. This growth was mainly on account of stronger corporate balance sheets that paved the way for higher investment, rising employment, and a better balanced expansion. However, in Italy, profitably was weaker and corporate debt was on the increase. The Japanese economy continued to grow and registered a growth of 2.7 percent compared to 2.6 percent in 2005. The base of this expansion was the continued growth in private final domestic demand. Private fixed investment, in particular, continued to be buoyant, underpinned by robust profits and a turnaround in bank credit. Private consumption also increased but at a moderate rate. In the newly industrialized economies (NIEs), growth strengthened with a pickup in exports especially of electronic goods due to rapid growth in China and the strong global economy. 1 Table 1.1 Overview of the World Economic Outlook (Annual Percent Change unless Otherwise Stated) 2004 2005 2006* World output 5.3 4.9 5.1 Advanced economies 3.2 2.6 3.1 United States 3.9 3.2 3.4 Euro area 2.1 1.3 2.4 Germany 1.2 0.9 2 France 2.0 1.2 2.4 Italy 1.1 - 1.5 Spain 3.1 3.4 3.4 Japan 2.3 2.6 2.7 United Kingdom 3.3 1.9 2.7 Canada 3.3 2.9 3.1 Other advanced economies 4.6 3.7 4.1 New Industrialized Asian economies 5.9 4.5 4.9 Other emerging market and developing countries 7.7 7.4 7.3 Africa 5.5 5.4 5.4 Sub-Sahara 5.6 5.8 5.2 Central and eastern Europe 6.5 5.4 5.3 Commonwealth of Independent States 8.4 6.5 6.8 Russia 7.2 6.4 6.5 Excluding Russia 11.0 6.7 7.6 Developing Asia 8.8 9.0 8.7 China 10.1 10.2 10.0 India 8.0 8.5 8.3 ASEAN-4 5.8 5.1 5 Middle East 5.5 5.7 5 Western Hemisphere 5.7 4.3 4.8 Brazil 4.9 2.3 3.6 Mexico 4.2 3.0 4.0 Memorandum European Union 2.4 1.0 2.8 World growth based o market exchange rates 3.9 3.4 3.8 World trade volume (goods and services) 10.6 7.0 8.9 Imports Advanced economies 9.1 6.0 7.5 Other emerging market and developing countries 16.4 11.9 13.0 Exports Advanced economies 8.8 5.5 8.0 Other emerging market and developing coun tries 14.6 11.8 10.7 Commodity prices (U.S. dolla rs) Oil1 30.7 41.3 29.7 Non fuel (average based on world commodity export w eights 18.5 10.3 22.1 Consumer price s Advanced economie s 2.0 2.3 2.6 Other emerging market and developing coun tries 5.6 5.3 5.2 London interbank offered rate (LIBOR,perc ent) On U.S.