Diversification towards agro-processing in Zambia: A CGE analysis of financial and fiscal incentives

Nhlane, Robert (2016-12)

Thesis (MSc)--Stellenbosch University, 2016.

Thesis

ENGLISH SUMMARY : The Zambian economy has in the past decade experienced steady annual growth with real Gross Domestic Product (GDP) growth rate averaging 6.7 percent per annum. However, reports by the Ministry of Finance and National Planning revealed that in 2015, the Zambian economy grew by only 3.6 percent. Volatilities in the global economy have in recent times negatively affected copper prices and output which has resulted into widening trade deficit, rapid depreciation of the local currency, rising cost of living and anticipated declining economic growth. To promote economic resilience, there is need therefore to diversify the economy away from copper. Hence, one of government’s macroeconomic objectives is to promote and accelerate diversification of the Zambian economy towards among others the primary agriculture and agro-processing sectors. The main objective of the study was to assess the impact of providing fiscal and financial incentives to the agro-processing sector on the Zambian economy as a whole. The model was calibrated to Zambia’s most recent dataset, the 2007 Social Accounting Matrix (SAM) developed by the Zambia Institute for Policy Analysis and Research (ZIPAR) in collaboration with the International Food Policy Research Institute (IFPRI) and the United Nations University’s World Institute for Development Economics (UNU-WIDER). This SAM is suitable for this study as it contains information on various taxes, production factors, households (both urban and rural) and various industries including primary agriculture and agro-processing. To analyze the effects of fiscal and financial incentives, a comparative static computable general equilibrium (CGE) model developed by Lofgren, Thomas and El-said (2002) was used. Four alternative scenarios were constructed and their individual effects analyzed and compared. These scenarios were introducing export taxes on primary agricultural commodities, increasing import tariffs on agro-processed commodities, introducing production subsidies on primary agriculture and increasing government direct transfer payments to households. All increased to 30 percent. Findings suggest that the production subsidy and export tax policies are effective at promoting the domestic agro-processing sector. The subsidy policy increased quantity of exports of agroprocessed commodities by 2.0 percent and reduced imports by 8.55 percent though quantity of domestic sales dropped by 0.8 percent. Furthermore, primary agriculture and agro-processing sectors contribution to GDP at factor costs rose by 27 percent and 8.19 percent. The subsidy policy also may lead to improvements in welfare of most households as shown by the compensating variation (CV) results. Export tax policy is also effective at promoting domestic agro-processing as the intermediate input price and quantity of imported agro-processed commodities dropped by 0.22 percent and 3.14 percent while both quantities of domestic sales and exports increased by 0.3 percent and 2.5 percent respectively. With regards to the import tariff policy, although it led to an increase in quantity of domestic sales (1.8 percent), the corresponding decline in imports of agro-processed commodities (-33 percent) was huge for such a small gain and therefore this policy can have negative effects on consumer welfare. The contribution to GDP of most sectors dropped with only agro-processing that increased (4.82 percent). Finally, the transfer payment policy had positive but small effects on domestic sales (0.2 percent), exports (0.2 percent) and imports (0.2 percent). It is recommended that the Government of Zambia use either production subsidies or export taxes to promote subsectors such as, cotton yarn and woven fabrics of cotton, high value tobacco products (such as cigars), refined sugar as well as some milling products. Alternatively, direct transfer payments in form of cash transfers to households may be implemented which would possibly help mitigate the negative effects caused by economic challenges faced. Finally, there is need to develop a strong and reliable mechanism for monitoring and evaluation of fiscal and financial incentives.

AFRIKAANSE OPSOMMING : Die Zambiese ekonomie het in die afgelope dekade bestendige jaarlikse groei ervaar met ‘n reële bruto binnelandse produk (BBP) groeikoers van gemiddeld 6.7 persent per jaar. Maar verslae deur die Departement van Finansies en die Nasionale Beplanningskommissie het aan die lig gebring dat in 2015 die Zambiese ekonomie met net 3.6 persent gegroei het. Skommelings in die globale ekonomie het in die afgelope tyd die prys en uitset van koper negatief beïnvloed, wat gelei het tot die vergroting van die handelstekort, vinnige verswakking van die plaaslike geldeenheid, stygende lewenskoste en verwagte dalende ekonomiese groei. Om ekonomiese veerkragtigheid te bevorder, is dit dus nodig om die ekonomie weg van koper te diversifiseer. Dus, een van die regering se makro-ekonomiese doelwitte is om diversifisering van die Zambiese ekonomie ten opsigte van onder andere die primêre landbou- en landbouverwerking te bevorder en te versnel. Die hoofdoel van die studie was om die impak van die verskaffing van fiskale en finansiële aansporings aan die landbou-verwerking sektor op die Zambiese ekonomie as 'n geheel te evalueer. Die model is gekalibreer met Zambië se mees onlangse datastel, die 2007 Sosiale Rekeninge Matriks (SAM) vir Zambië, ontwikkel deur die Zambiese Instituut vir Beleidsanalise en Navorsing (ZIPAR) in samewerking met die Internasionale Voedsel Beleid Navorsingsinstituut (IFPRI) en die Universiteit van die Verenigde Nasies se Wêreld Instituut vir Ontwikkelingsekonomie (UNU-WIDER). Die SAM is geskik vir hierdie studie aangesien dit inligting oor verskeie belastings, produksiefaktore, huishoudings (beide stedelik en landelik) en verskeie industrieë, insluitende primêre landbou en landbou-verwerking, bevat. Om die uitwerking van fiskale en finansiële aansporings te ontleed, is 'n vergelykende statiese berekenbare algemene ewewig (CGE) model, wat ontwikkel is deur Lofgren, Thomas en Elsaid (2002), gebruik. Vier alternatiewe scenario's is ontwikkel en hul individuele effekte is ontleed en vergelyk. Die scenarios is: die instelling van uitvoerbelasting op primêre landbouprodukte, die verhoging van invoertariewe op landbou-verwerkte kommoditeite, die instelling van die produksie subsidies op primêre landbou en die verhoging van direkte oordragbetalings van die regering aan huishoudings. Alles het tot 30 persent gestyg. Bevindinge toon dat die produksie subisidie en uitvoerbelasting beleid effektief is vir die bevordering van plaaslike landbou-verwerking. Die subsidie beleid lei daartoe dat die hoeveelheid van die uitvoere van verwerkte landbouprodukte verhoog met 2.0 persent en invoere met 8.55 persent verminder al het die hoeveelheid binnelandse verkope met 0.8 persent verminder. Verder het die bydrae van primêre landbou en landbou-verwerking tot die BBP teen faktorkoste gestyg met 27 persent en 8.19 persent onderskeidelik. Die subsidie beleid kan ook lei tot ‘n verbetering in welvaart van meeste huishoudings soos aangedui deur die resultate ten opsigte van die variasie van vergoeding. Uitvoerbelasting beleid is ook effektief om plaaslike produksie van landbou-verwerkte produkte aan te moedig, aangesien die prys van intermediêre insette en die hoeveelheid ingevoerde verwerkte landbouprodukte met 0.22 persent en 3.14 persent onderskeidelik afneem, terwyl hoeveelhede van binnelandse verkope en uitvoere met 0.3 persent en 2.5 persent onderskeidelik toeneem. Met betrekking tot die invoertarief beleid, hoewel dit gelei het tot 'n toename in die hoeveelheid van binnelandse verkope (1.8 persent), was die ooreenstemmende afname in die invoer van verwerkte landbouprodukte groot (-33 persent) vir so 'n klein voordeel en dus kan hierdie beleid negatiewe gevolge inhou vir die welvaart van verbruikers. Die bydrae tot die BBP van die meeste sektore daal, met slegs landbouverwerking se bydrae wat styg (4.82 persent). Ten slotte, die oordragbetaling beleid het ‘n positiewe maar klein uitwerking op binnelandse verkope (0.2 persent), uitvoere (0.2 persent) en invoere (0.2 persent) gehad. Dit word aanbeveel dat die Regering van Zambië subsidies of uitvoerbelasting gebruik om subsektore soos katoen en weefstowwe van katoen, hoë waarde tabakprodukte (soos sigare), verfynde suiker asook 'n paar gemaalde produkte te bevorder. Alternatiewelik, kan direkte oordragbetaling in die vorm van kontant oordrafte aan huishoudings, geïmplementeer word om moontlik te help om die negatiewe effekte veroorsaak deur ekonomiese uitdagings, die hoof te bied. Op die ou end moet daar 'n sterk en betroubare meganisme vir die monitering en evaluering van fiskale en finansiële aansporings ontwikkel word.

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