ZAMBIA NOVEMBER 2008 ECONOMIC ROUNDUP

UNCLAS SECTION 01 OF 02 LUSAKA 001163 DEPARTMENT FOR AF/S AND EEB/CBA - DENNIS WINSTEAD COMMERCE FOR 4510/ITA/IEP/ANESA/OA SIPDIS E.O. 12958: N/A TAGS: ETRD EMIN ENRG EINV ECON ZA SUBJECT: ZAMBIA NOVEMBER 2008 ECONOMIC ROUNDUP REF: LUSAKA 302 ¶1. SUMMARY -- Inflation Remains High -- Local Currency Continues To Depreciate -- Farmers Union Acquires Stake in Financial Sector -- ZESCO To Disconnect Power Supply To Lumwana Mine -- Zambia Prepares to Launch Small Claims Court -- Civil Servants To Receive Subsidized Fertilizers Inflation Remains High ¶2. According to the Central Statistical Office, year-on-year inflation rose to 15.3 percent in November, representing a slight (0.1 percent) increase from October. Bank of Zambia Governor Caleb Fundanga attributed the increase to higher food prices. Fundanga optimistically opined to the Ambassador that inflation would decline in 2009 due to lower fuel prices and improved agricultural productivity. Early indications, however, suggest that the maize crop will be short. Large-scale commercial farmers are having trouble securing production credit and are shifting to other crops. The price of fertilizer will diminish smallholder usage, and the Zambian Government's fertilizer support is once again too late to have its optimal impact. Local Currency Continues to Depreciate ¶3. The Zambian Kwacha continued to fall in November, despite a brief period following the October 30 presidential election when it performed well against other major currencies. Its depreciation began in late June, following announcements of late President Levy Mwanawasa's illness. Economists attribute the Kwacha's drop to global financial instability, rising inflation in Zambia, and declining world copper prices. Several business leaders opined to emboffs that the Kwacha would remain weak until copper prices rebound. Farmers Union Acquires Stake in Financial Sector ¶4. The Zambia National Farmers Union (ZNFU) has acquired a four percent share in Zambia National Commercial Bank (ZANACO). This move is part of the strategy of the Netherlands-based Rabobank, which owns a 45 percent share in ZANACO, to increase its presence in rural areas. ZANACO and ZNFU immediately launched several projects to increase small- and medium-scale farmers' access to credit. The development appears to be a market response to commercial under-lending within the agricultural sector. According to an IMF representative, agricultural lending by commercial banks in Zambia grew by less than two percent in 2008, despite a 48 percent increase in overall commercial lending. ZESCO To Disconnect Power Supply To Lumwana Mine ¶5. A commercial dispute between Lumwana Mining Company and the state-owned electricity provider ZESCO is likely to culminate in London-based arbitration. Until the issue is resolved, ZESCO intends to stop providing power to Lumwana Mine, effective January 26, 2009. Lumwana, which is owned by the Canadian/Australian Equinox Minerals, does not have an alternative source of power and, therefore, the termination will interrupt its operations and delay its launch that was scheduled for early 2009. The dispute relates to a connection agreement for a 330kV power line. When launched, Lumwana will be Africa's largest copper mine, producing an estimated 122,000 tons of copper per year. Zambia Prepares to Launch Small Claims Court ¶6. High Court Registrar Mwamba Chanda announced the appointment of 20 commissioners to the Small Claims Court, which will be launched in December. The commissioners, who are attorneys by profession, will have jurisdiction to resolve private sector civil disputes of claims that are less than K 20 million (USD 4,500). Plaintiffs will be allowed to argue their own cases, without the representation of an attorney. Initially the court will maintain offices in Lusaka and Ndola, although the judiciary intends to open similar courts throughout the country. If successful, these courts could help decongest Zambia's legal system, which is considered to be under-resourced and inefficient. The courts will also benefit small- and medium-sized enterprises, which will no longer need to risk long and costly litigation to resolve relatively simple civil suits. Civil Servants to Receive Subsidized Fertilizer ¶7. President Rupiah Banda has promised to fulfill his campaign pledge to make the government's K500 billion (USD 110 million) Fertilizer Support Program (FSP) available to farm-owning civil LUSAKA 00001163 002 OF 002 servants and military personnel. In the past, civil servants typically had purchased FSP fertilizer in the secondary market from small-scale farmers. The President's directive has caused some concern that GRZ employees are apt to benefit disproportionately from the GRZ-administered program. Perhaps more importantly, the move shows the government's increased commitment to a program that distorts the market, interferes with the development of commercial fertilizer providers, and tends to benefit those farmers who need it least. Consequently, an even greater number of farmers will delay planting their crops as they wait for government fertilizer that comes late, if at all. According to the donor community, Zambia's prospects for food security will be weak as long as the government continues to divert its agricultural spending from more productive investments such as infrastructure (roads and irrigation),research, extension services, and marketing systems. KOPLOVSKY