Economy not in recession – BoZ

Economy not in recession – BoZ
Written by Kabanda Chulu
Thursday, June 25, 2009 3:23:08 PM

BANK of Zambia (BoZ) deputy governor Denny Kalyalya has said the country’s economy
is not in recession despite the current global economic crisis since it has not recorded negative growth for two successive quarters.

And Dr Kalyalya has disclosed that the impact of the recession in South Africa is already being felt on Zambia with trade earnings with that country declining in the first quarter of 2009 by 40 per cent to US $ 346.8 million compared to US $578.3 million recorded in the same period last year.

Commenting on reports that the Zambian economy was going into recession, Dr Kalyalya said the Central Bank was facing challenges since there are limited tools to use to manage the economic indicators.

“There is need to bridge the information gap because we are having difficulties with having latest data, for example, the Central Statistical Office, do not have latest data on employment, it is not available but having limited tools to use to manage economy does not mean we are in a recession,” Dr Kalyalya said.

“We have been affected but not in the way others have been, mainly the Zambian financial sector is affected through the secondary wave since the mines have been working side by side with other sectors such as non-performing loans mainly from salaried employees who lost jobs but the banks are dealing with that issue, so we are not in a recession since we have not experienced two successive quarters of what is known as negative growth.”

He explained that an economy would slide into a recession when it experiences two successive quarters of what is known as negative growth.

“For this to happen, the total amount of goods and services produced by an economy, known as gross domestic product (GDP), will have to decline on a quarter by quarter basis for a total period of six months and the obvious signs of a recession include such indicators of decline in economic activity as decreases in employment, investment and corporate profits,” Dr Kalyalya said.

He further said it was regrettable that the rate of inflation was increasing around this time which was unusual.

“We are watching the situation very carefully because after harvest prices normally come down but this is not happening and it is regrettable that inflation is increasing in the second quarter,” he said.

On the expected effects of the recession in South Africa on the Zambian economy, Dr Kalyalya said 43 per cent of Zambia’s external trade was with South Africa.

“South Africa is a vital trading partner and recession there will lead to a decline in Zambia’s exports to that country due to falling demand. On the other hand, falling production in South Africa will leave little for exports to other countries including Zambia hence Zambia will have to look for other sources for imports, most probably at higher cost due to longer distances,” Dr Kalyalya said. “Therefore, a recession in South Africa will imply a fall in exports and a higher import bill and this will worsen Zambia’s balance of payments position, for instance, the impact is already being felt with trade earnings in the first quarter of 2009 falling by an estimated 40 per cent to US $ 346.8 million from US $ 578.3 million recorded in the corresponding quarter in 2008.”

He said many Zambian nationals were currently working in South Africa and remitting money back to Zambia to support their families.

“A recession may lead the incomes of some of the workers to decline and in other cases, the remittances may cease all together for those who may lose jobs following the recession. In that event, Zambians working in South Africa will send much less money to their families back home and Zambian families who rely on these remittances will experience economic difficulties and a fall in remittances will also lead to a reduction in the supply of foreign exchange in Zambia,” Dr Kalyalya said.

On South African foreign investment, Dr Kalyalya said declining economic activity in South Africa would also imply lower investment inflows from that country into Zambia.

“Zambia has received a substantial amount of foreign direct investment from South Africa in recent years resulting in a number of companies opening entities in Zambia but with recession, these companies may cut back on their expansion programmes in Zambia,î Dr Kalyalya said. ìOverall, the recession in South Africa, which is the largest economy in the region, may negatively affect the Zambian economy due to our strong trading relationship with that country and the South African recession is a reminder to us of the need to accelerate the diversification efforts that the country is implementing in terms of both production and directions of trade.”

And appearing before the parliamentary committee on Economic and Labour Affairs last week on the impact of the global economic crisis on Zambiaís economy and the operations and stability of the financial markets, Dr Kalyalya said the current financial regime had worked well in the country but needed further improvements.

“The situation is not as bad as it is been portrayed, it may look desperate for us but for those making comparisons, we are still an attractive investment destination and the liberal system has served us well, off course there are challenges and the impact is there since we share information and other linkages with other financial systems thus some spillover effects may affect us,” he said.

And responding to Luena MP Charles Milupi, who wanted to know what BOZ was doing to those foreign owned banks that were mopping up funds hence squeezing on lending so that money is taken back to their headquarters to sort out the crisis, Dr Kalyalya said BoZ was engaging the banks through the financial sector development plan to address those issues.

“The spread can be quiet high among banks but despite being foreign owned, normally the banks operate as subsidiaries and not as branches and we have stepped up supervision to ensure that they are not used,” said Dr Kalyalya. “We have also put measures in place such as not allowing borrowing on foreign markets for speculative behavior unless it is proved that money required will finance long term projects.”