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Investment bankingJune 30 2008

Obstacles and optimism

As the rest of Africa ponders how to feed its inhabitants in the next few years, Zambia’s finance minister Ng’andu Magande tells Charlie Corbett that there is no food crisis in his country – but there are other obstacles to future prosperity.
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Zambia’s abundant supply of copper and other raw materials has made it one of the chief African beneficiaries of the commodities boom. But it is not just copper that will fuel economic growth in the next year. The soaring prices of staple foods, combined with a bumper harvest in 2007 will guarantee that Zambia’s economy remains in good health in the medium term.

As finance ministers across Africa search for answers to the galloping inflation affecting food prices, Zambia’s minister of finance, Ng’andu Magande, has a right to feel smug. “Luckily for us, we are not affected by the global food crisis. We have been self-sufficient in food for the last three or four years now – ever since President [Levy] Mwanawasa introduced a programme of supporting small-scale farmers with subsidised fertiliser,” Mr Magande says.

“We have carry-over stocks [of grains] of about 250,000 tonnes [from last year] and from this harvest we expect a surplus of 350,000 tonnes so we could easily have half-a-million tonnes of grains to sell to outsiders.”

Food, glorious food

Despite the price of wheat dropping by about 17% to $362 a tonne between March and April this year, it is still at almost historic highs. A tonne of barley cost $237 in April, up from $95 in 2005, and maize was trading at $247 a tonne, up from $98 in 2005. It is the price of rice, however, that will cause the most concern for African leaders because it is one of the biggest imports of staple foods to the continent. In April, rice was ­trading at a staggering $1015 a tonne, up almost 100% on the figure for ­March, and 400% up on the average price in 2005, when it traded at $288 a tonne.

For a country such as Zambia, which has a grain surplus, it is not only a tremendous opportunity to sell to its neighbours but also a huge cost saving not having to import food from abroad. “With prices the way they are, I am sure we will find a buyer, and if not then we’ve got the World Food ­Programme.

“We could be in an advantageous position where we earn foreign currency from our small-scale agricultural production,” Mr Magande says.

Zambia, however, is a landlocked country. With oil trading at about $130 a barrel and an average 2000 to 3000 kilometre journey to the nearest ports, the sheer cost of transporting goods, both imports and exports, will leave a huge dent in the nation’s coffers. Mr Magande remains upbeat. “On balance, you can’t complain too much, all commodities are going up... we should be able to mitigate the negative effects of the fuel prices going up,” he says.

Zambia’s rich supply of copper is one commodity that will help to offset the high price of fuel. Zambia privatised government-owned copper mines in the 1990s, and since then, output has steadily increased. With copper prices at about $8000 a tonne – up from just $2000 a tonne in 2000 – the copper industry is a ‘cash cow’.

“Our copper mines are beginning to produce and we think that by the end of the year we could be hitting between 600,000 and 700,000 tonnes of copper produced,” Mr Magande says.

Zambia also recently opened its first nickel mine, he says, a commodity that was trading at about $23,000 a tonne when The Banker went to press.

Power struggle

Despite the healthy state of the commodities sector, Mr Magande accepts that Zambia still faces big obstacles to its future prosperity. According to data from the United Nations, about 68% of Zambians live below the recognised national poverty line, with rural poverty rates standing at about 78% and urban rates at 53%.

To bring such vast swathes of the population into the formal economy, one of the first things Zambia needs to do is invest in its infrastructure. The commodities sector might be booming, but if there are not sufficient roads and railways to transport goods, and no electricity to power the mines, then Zambia will never benefit.

Mr Magande is aware of the problem and places high priority on fixing Zambia’s infrastructure issues, in particular electricity generation. “Right now, I have a crisis of energy. That’s why I need money. I need money yesterday – not only in generating energy, but in conserving energy,” he says.

“Right now I am load shedding... but that is not the best solution. We want to make sure that people, as they find their way and get into the middle income [bracket], continue to enjoy themselves and don’t have their domestic lives disrupted by things such as load shedding.”

Load shedding involves monitoring electricity usage and shutting down pre-arranged electric loads if a specified upper threshold of electric usage is reached.

Mr Magande says that he has identified three potential sites in Zambia for power stations that could potentially generate a further 1000 megawatts of electricity by 2012. But that is a long time coming and will require huge investment. A site feasibility study alone can cost up to $4m, according to Mr Magande, before any building work has even started. “I am only generating 1200 megawatts and it has been overwhelmed completely by the country’s industries,” he says.

Rosy outlook

Despite the difficulties it faces over power generation, the overall economic outlook for Zambia is rosy. The country is politically and economically stable. Its gross domestic product (GDP) has grown at an average of 5% to 6% in the past few years, and is forecast to continue to do so; and inflation is under control, at or below10% for the past 26 months.

Zambia has also benefited by having $6.75bn-worth of national debt wiped out last year by the Heavily Indebted Poor Countries Initiative (Hipic). And Mr ­Magande expects the nation to achieve a sovereign debt rating by the end of the year after a tender for proposals from major credit ratings agencies closed in April.

Such stability has allowed Zambia’s banking sector to flourish. According to recent estimates, loans and advances by the sector rose by 50% last year and deposits increased by 30%. Total lending stood at K5600bn ($1.2bn) by December last year, up three times on 2004’s figure.

Such is the allure of Zambia that it is attracting foreign banks to set up there. Nigeria’s Access Bank has been granted a licence to open a branch in Zambia’s capital city, Lusaka, and Intercontinental Bank, also of Nigeria, is planning to follow suit.

Even more encouraging, says Mr Magande, is Barclays Bank’s renaissance in the country. “Barclays Bank shocked us because it left in 2004 and closed 11 branches, but since last year it has opened more than 50 branches. It is even operating out of tents.”

Standard Bank is another African institution that is expanding operations in Zambia. “If you came now to Lusaka, just look for blue. All our towns are blue,” says Mr Magande, referring to Barclays’ and Standard’s corporate colour.

“We have a joke in Zambia that banks now are auctioning loans,” he says. “Right now, I don’t have to quarrel with my civil servants getting loans; they just go to a bank and they have got their money for the weekend.”

The vast majority of lending by indigenous banks, however, remains on the corporate or government level. With no effective credit bureaux and a largely cash-based economy, access to finance for local people remains paltry and prohibitively expensive. The Bank of Zambia’s base rate of interest was 18.3% at the end of last year and local banks were lending kwacha at an average of 24.4%. Local banks do not yet have the scale to benefit from the big mining and infrastructure projects taking place in the country, which remain the preserve of global multinationals.

Copper bottomed

Looking ahead, Mr Magande does not foresee any slowdown in Zambia’s economic progress. “I am keeping my spirits very high. Myself and the governor of the central bank [Caleb Fundanga] have agreed we will not spend more than 10 seconds trying to see whether we need to revise our [growth] projections. We think we are still on track,” he says. “We have now over $2bn-worth of reserves, which is the first time it has ever happened in ­Zambia’s history.”

With the commodity boom looking unlikely to ease in the near future and a healthy forecast for Zambian copper production, it is not hard to share in Mr Magande’s optimism. “If I can get a million tonnes of copper at $6000, then why should the kwacha still be at 3000 to the dollar?” he says.

NG'ANDU PETER MAGANDE: BIOGRAPHY

2003 Appointed finance minister.

1996–2000 Secretary-general of the ACP Group of States (Brussels).

1994–1996 Engaged in consultancy projects on behalf of the Zambian ­government, African Development Bank and World Bank.

1986–1994 Seconded as managing director of Lima Bank, then managing director of Zambia Commercial Bank, executive director of the Industrial Development Corporation, then group executive director of Zambia Industrial and Mining Corporation.

1983-1986 Permanent secretary – serving in the ministries of commerce, trade and industry, local government, agriculture and national commission for development, planning.

1971 Joins Zambian civil service as economist.

Source: African Development Information Services.

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