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JOURNAL OF BUSINESS IN DEVELOPING NATIONS

VOLUME 1 (1997)  ARTICLE 2

 

Zambia’s SAP— A response to Sam Okoroafo's Paper: "Managerial Perceptions of the Impact of Economic Reform Measures on the Economic Reforms and Firm Performance in Restructuring Economies: A Comparative Assessment"

Gerry Nkombo Muuka, Murray State University (gerry.muuka@murraystate.edu)

The author is indebted to the Commonwealth Commission (London) and Lonrho Zambia Limited (Lusaka) for financial support towards a wider research and a national conference on the multifaceted impact of Zambia's 1983-93 Structural Adjustment Program (SAP).
 

ABSTRACT

Based on an empirical study of the impact of the SAP on 43 manufacturing companies in Zambia, this study builds upon a similar one by Sam Okoroafo on (among 127 others) 13 companies in Zambia, previously published in the journal. Major experiences (both negative and positive) of the manufacturing sector during the early 1990s are explored. Among the major problems and issues that emerged from the 43 companies are: lack of foreign exchange for importation of raw materials on which the sector is dependent (as Okoroafo also found out), inability to do any strategic planning due to the stop-go, unpredictable Zambian policy environment, costly and unreliable local transportation, stiff competition as a result of trade liberalization, inadequate credit and adjustment loans from development finance institutions (DFIs), lack of knowledge about foreign markets, shortage of local managerial talent, and inability (among multinational companies) to remit dividends and royalties.

 

INTRODUCTION

In his seminal work, Sam Okoroafo summarizes structural adjustment program (SAP) policy measures in five African countries: Ghana, Kenya, Nigeria, Uganda and Zambia.  He found, among other things, that "the majority of environmental changes have not enhanced firm performance" in the five countries.

A kind of structural adjustment program (SAP) mania appears to have gripped many teachers, researchers, and students in universities in Africa, Europe, and North America since the late 1980s. This focus of so many scholarly endeavors is, in the author’s opinion, an obvious reflection of the increasing importance that many nations—especially those in Africa—have come to place on SAPs in their quest for economic turnaround and survival. There has been a shift, in recent years, towards the impact of World Bank and International Monetary Fund-sponsored SAPs to be studied at the micro-level, as opposed to the previous overwhelming focus on the macro-level. Such micro-level studies (on industry in Africa, for instance) are, however, still carried out mostly by the two Bretton Woods Institutions (BWIs- the World Bank and the IMF), and not by independent researchers such as Okoroafo.

Suspicion, in fact, still surrounds BWI-sponsored studies that claim successes of SAPs in various areas and along various criteria/dimensions. Such suspicion on the "positive" results emanates from the fact that the BWIs are, after all, the architects of such programs. But when a study such as Okoroafo's comes along that is not only independent of the BWIs but is also comparative in nature (i.e., covering more than one country), it injects a fresh breath of air for those of us who have a long-standing interest in (and involvement with) structural adjustment programs in Africa and the many/controversial debates surrounding these programs.
 

PURPOSE

This paper has one major objective: to build upon Sam Okoroafo's study of 13 Zambian manufacturing companies between 1990 and 1993. This is done by presenting collaborative evidence from an empirical study of the impact of Zambia's SAP on 43 manufacturing companies in that country. Okoroafo's study is significant in many respects, including its comparative data on the impact of the SAP on 127 firms in the five different countries mentioned earlier. The benefits of breadth such a study provides cannot be overemphasized. Necessarily, though, such breadth as found in Okoroafo's comparative study does mean that some of the depth that accrues from covering one country is lost. The 43-company survey, carried out in Zambia from 10th January to 6th May 1992 (at about the same time as Okoroafo carried out his study), is an attempt to provide the depth of understanding one can only achieve from looking at one country (instead of several). This depth is achieved by assessing the impact of Zambia's SAP on 43 manufacturing companies using various criteria. This examination is carried out on a comparative basis— along six sub-sectors within the manufacturing industry, as well as by type of company (whether parastatal, or multinational companies, MNCs). The question "what does Zambian manufacturing consider to be their most important challenges during the early 1990s as a result of the SAP?" is answered. This assessment is, in turn, intended to lead to ideas on performance improvement and/or constraint reduction, which are essential ingredients to any future industrial development strategy in Zambia specifically, and in Africa generally.

 

METHODOLOGY

A research trip by the author was made to Zambia from 10 January to 6 May 1992, sponsored by the Commonwealth Commission in London. Lonrho Zambia Limited in Lusaka (thanks to Managing Director Deb Basuthakur) also provided a lot of support, including hotel accommodation in Kitwe and Lusaka for the author and three international "experts" on SAPs that attended the national conference on Zambia's SAP. That conference is discussed towards the end of this methodology section.

The personal survey method was used for collecting the primary data. Whenever feasible and possible, available company documents (diaries, memoranda, letters, financial statements, operating manuals, committee minutes, and customer or client records) were also collected and analyzed. The data collection instrument (the questionnaire) was mailed in advance of the actual visit to respective companies. This arrangement gave respective top managers ample time to identify which of their functional-area managers should handle what aspects of the questionnaire, a copy of which can be obtained from the author.

The author then made at least six visits, on average, to each of the companies that agreed to cooperate. In all, 15 Managing Directors, 21 General Managers, seven Financial Controllers, 33 Chief Accountants, 10 Personnel Managers, 20 Marketing and Sales Managers, 20 Production Managers and 11 Purchasing Managers were interviewed in the 43 companies that agreed to cooperate. Quite obviously, these are the people most knowledgeable about what has been going on in their firms. The 43 companies were located in Zambia's three biggest industrial cities: Lusaka (the capital), as well as Ndola and Kitwe on the Copperbelt. Of the 43 companies, only seven (7) were foreign-owned (multinationals), while the rest were either parastatal or private Zambian companies.

Two aspects of the personal interview method were used. First, since the questionnaires were sent to respective companies well in advance, managers were able to complete/answer a number of sections in it. Since they were told (in the accompanying letter of introduction) that the author would be coming around to see them personally, those questions they wanted clarification on were left unanswered. These were completed either by the author or by respective managers during the face-to-face interviews conducted on company premises. There were times when managers were not in their offices at agreed times (for quite understandable reasons), hence the reason six visits were made (on average) to each of the responding companies in the three cities.

Justification for use of the personal interview method: although potentially the most expensive, this method was used because of the following advantages it offered over mail or telephone: (i) complexity of subject: the subject of structural adjustment does not lend itself to easy comprehension, neither does that of business strategy. The need for cross-consultation, reducing misunderstanding, and flexibility, therefore, precluded the use of mail or telephone. (ii) reduction in non-response/missing values: in this survey, as indeed in almost any other, it was critical to minimize the incidence of missing values and non-response. Both were detected during the interview, and were corrected immediately or, in the 18 cases where no access and response was possible at all, they were immediately replaced by other companies from the extra 30 to whom letters of introduction were sent earlier. The 18 included four MNCs that refused to give any data at all, citing "global policy not to divulge any information, no matter how worthy the cause"; eight parastatals that were clearly terrified of the imminent privatization (which started in 1992) and feared (in the author's view) that they would give themselves away; and six that either were no longer in business or were too young to be of any value to the research.

Another important feature of the trip is that a good number of the managers were asked and did not object to interviews being voice-recorded. Tape-recording the interviews allowed the author to concentrate on listening and probing, so that spontaneity and flow were not interrupted. A further advantage is that the original words of the managing directors and general managers were not lost, to which note-taking is often prone. Hand-written notes were still taken as a contingency measure.

Sampling frame.  The sampling frame was constructed from a combination of the 1987/88 Zambia Commercial and Industrial Directory, the 1988 list of exporters of non-traditional (non-copper) exports (both published by the Ministry of Commerce and Industry), and the 1989 edition of Export Board of Zambia's classified list of Zambian export companies. Together these publications list, inter alia, 340 companies in the agricultural and manufacturing sectors. Our original sample of 60 firms would represent 17.6 percent of the sector, while the 43 responding firms would represent 12.6 percent of the sector. The publications, unfortunately, are by no means comprehensive. There may be many more manufacturing concerns in Zambia than are listed. Seshamani and Samanta (1985) for example, put the total number of manufacturing companies in Zambia at 523 in 1965; 725 in 1975; and 539 in 1980. Under the circumstances, however, the three publications were the best that there was to go by, and they certainly sufficed.

Sample size.  A sample size of 60 companies was randomly selected, from a stratified sample of the six main sub-sectors of the manufacturing sector. The sub-sectors being referred to are: (a) Agro, Food, Drink and Beverages sub-sector, (b) Chemicals, Plastics, and Petroleum Products sub-sector, (c) Wood and Paper products sub-sector, (d) Textile and Garments sub-sector, (e) Health-Care/Pharmaceuticals sub-sector, and (f) Metal and Machinery manufacturing sub-sector.

In the event, 43 successful interviews were held, representing a 72 percent response rate (from the original 60), with sub-sector representativity ranging from 5.2 percent for the agro-based, food and drinks sub-sector to 71.4 percent for the health-care sub-sector.

National conference on Zambia's structural adjustment program.  During the same research trip to Zambia in 1992, the author both organized and directed the first national conference on the country's SAP after the new government (the Movement for Multiparty Democracy, MMD, under President Frederick T. J. Chiluba) came to power in October 1991. The conference, held at Kitwe's Hotel Edinburgh from 21st to 23rd March 1992, attracted a total of 90 participants, including:

The Zambian Vice President (then Honorable Levy P. Mwanawasa); two Cabinet Ministers; the three foreign presenters/resource persons (Professor Tony Killick from Overseas Development Institute, ODI, in London; Professor Charles Harvey from the Institute of Development Studies, IDS, in Sussex; and Ms Carolyn Jenkins, Senior Lecturer at the University of Natal in Durban, South Africa); four full Professors; eight Ph.D. holders; representatives from UNDP; UNICEF; World Bank; UNIDO (Dr. Earle A.S. Taylor, then UNIDO Regional Representative, but now in Vienna); four senior economists from the National Commission for Development Planning (NCDP) in Lusaka; six senior economists from the Bank of Zambia (Central Bank); two Ph.D. students (Ms Inutu Lukonga from IDS, University of Sussex—now with the IMF in Washington, and Mr. Obed Mailafia—a Nigerian student from Oxford University ); Representatives from non-governmental organizations (NGOs); 11 students from the Copperbelt University in Kitwe; Managing Directors and Functional-area Managers from both the Public/Parastatal and Private Sectors (including some of the 43 companies that inform this study); Representatives from the Zambia Institute of Marketing (ZIM), the Zambia Association of Manufacturers (ZAM), the Economics Association of Zambia (EAZ), the Kitwe and Ndola Chambers of Commerce, and the Zambia Confederation of Industries and Chambers of Commerce (ZACCI); and representatives from all major industries in Zambia: mining, trading, financial services, agriculture, and tourism, etc.

Important methodological and publication-ethics note: The reader should be aware (1) that the methodology described above was used for a much larger study of the impact of Zambia's 1983-93 structural adjustment program on business strategy, and, (2) that the author has published the following papers using essentially the same methodology and study of the 43 companies: "Wrong-footing MNCs and Local Manufacturing: Zambia's 1992-94 Structural Adjustment Program," forthcoming (in 1997) in the International Business Review; and "Do Multinational Corporations really out-perform both Private and State-owned Enterprises? The Evidence from Zambia," Business and Public Affairs, 22(1) (Fall 1995): 16-22.

 Description and characteristics of the six sub-sectors studied

 (1) Agro-based, Food, Drink and Beverages Sub-sector: in our 43-company survey this sub-sector encompasses animal products (such as beef, day-old chicks, hides), agricultural products (such as coffee, cotton lint, tobacco), soft drinks and beverages, and processed foods (such as cereals, canned foods, and refined sugar). A total of seven companies were covered in our survey, five state-owned enterprises (SOEs) and two privately owned firms.

 (2) Chemicals, Plastics, and Petroleum-related Products Sub-sector: twelve firms, or 28 percent of the sample, were covered from this sector. They included two multinational companies, four parastatals, and six private companies. Among the major products of the sector are acids, agro-chemicals, copper oxychloride, fertilizers, oxygen gas, zinc oxide, bitumen, diesel, kerosene, petrol and lubricants.

 (3) Wood and Paper Products Sub-sector: the timber industry, dating back to 1912, was the first manufacturing industrial activity recorded in Zambia. It was established to supply both the Rhodesia Railways (now Zimbabwe Railways) and the Union of South African Railways with sleepers (see Muzandu, 1985, p.17). We examined four companies in this sub-sector—one parastatal company and three private firms.

 (4) Textile and Garments Sub-sector: in 1992, Zambia's textile industry comprised 32 established mills that produced mainly cotton yarn and cotton fabrics. The industry as a whole involves spinning, weaving, knitting, and finished fabrics as the main product lines. Such companies as Mukuba Textiles of Ndola, who have to import polyester from South Africa, Taiwan and Switzerland, also produce synthetic blended fabrics. Our survey examined seven of the 32 firms—one multinational company and six private firms.

 (5) Health-Care/Pharmaceuticals Sub-sector: we surveyed five firms in this sub-sector, three MNCs and two private, Zambian-owned firms. Major products of the sector include drugs (both human and veterinary), body lotions, and oral care products.

  (6) Metal and Machinery Manufacturing Sub-sector: we surveyed eight firms in this sub-sector— one multinational company, three parastatals, and four private firms. Major products include brass ingots, iron and steel products of various descriptions, copper rods, telephone and power cables, farm machinery, and mining drilling products.

 

FINDINGS AND DISCUSSION

 Table 1 presents a list (and ranking) of the major problems facing Zambian manufacturing in the early 1990s. The ranking range is from 1 to 9, with 1 denoting a very serious problem. A ranking of 9 means the problem is not very serious. Each of the problems identified in the table is discussed next.

 Foreign exchange (forex)-related problems

 Table 1 reveals that forex shortages have been the number one problem throughout the period. Of the 36 firms in our sample who ranked this problem, 24 (or 67 percent) gave it a first ranking, while 7 gave it a second or third ranking as the most significant problem. In all, 86 percent of our sample gave it a ranking of 1, 2 or 3. Only one company in our sample—Swarp Spinning Mills—gave forex shortages a ranking of 9, indicating they do not consider it a pressing problem. The reason is that Swarp has taken over as the largest foreign exchange earner in the textile category. Swarp alone accounted for 59 percent of all textile exports in 1991, and our interview with the Managing Director revealed that the firm has been operating at 90-97 percent of capacity. It currently exports between 60-65 percent of its total output, with exports rising from a mere $90,000 in 1986 to $6 million in 1992? making it one of the top five non-traditional exporters according to the Export Board of Zambia (EBZ, 1992).

 Because most firms are imported raw material-dependent (see Muuka, 1997; Okoroafo, 1997), the SAP period has witnessed a vicious circle: where persistent forex shortages have limited their capacity to import, starving them of essential raw materials, spare parts and capital goods— thereby leading to low capacity utilization rates—which has in turn stifled exports and efficiencies.
 


Table 1: Ranking of the 9 most vital problems facing Zambian firms by type of ownership.
                                          MKT  FOR TALE  POL  COM  CRE  TRA  RAT  REM
Factor Sum                               148   72  152  110  131  137  117  108  161
Factor Ranking                             7    1    8    3    5    6    4    2    9
Total Responding Comp. on Factor          22   36   24   33   25   26   24   37   22
Total Missing Values on this Factor       21    7   19   10   18   17   19    6   21
Total 1st Rankings on this Factor          0   24    0    7    0    0    2    3    1
Total 2nd Ranking on this Factor           1    3    3    8    2    3    2   15    0
Total 3rd Rankings on this Factor          1    4    1    4    5    5    5    8    3
Sum of 1st+2nd+3rd Rankings of Factor      2   31    4   19    7    8    9   26    4
Total 4th Rankings on this Factor          1    2    3    5    5    4    1    9    1
Total 5th Rankings on this Factor          3    0    2    3    3    3    3    0    1
Total 8th and 9th of Factor                9    1   11    2    6    6    4    1   15
 
Ave Rank of Factor by all Manufacturing    8    1    7    3    5    6    4    2    9
Ave Rank of Factor- Parastatals            6    1    8    7    4    5    3    2    9
Ave Rank of Factor- Private Firms          8    1    7    2    5    6    4    3    9
Ave Rank of Factor- Multinationals         8    1    9    2    6    7    5    3    4
 
Factors = problems being ranked:
MKT= Lack of knowledge about foreign markets;
FOR= Lack of foreign exchange;
TALE= Absence of adequate local management talent;
POL= Inability to do any strategic planning due to the stop-go, unpredictable Zambian policy environment;
COM= Stiff competition as a result of trade liberalization;
CRE= Inadequate credit and adjustment loans from Development Finance Institutions (DFIs);
TRA= Local transport is both costly and unreliable;
RAT= Interest rates are too high;
REM= Inability to remit dividends and royalties.
Source of Data: The 43-company survey
Source of Ranking Method: Jankowicz (1991, p.214)

Liquidity squeeze, high interest rates and inflation

 Our sample ranked high interest rates as the second most serious problem. But we have to discuss this factor in conjunction with three other related problems: shortage of bank credit (which our sample ranked 6th) and the liquidity squeeze and high inflation—both not included in our questionnaire but which emerged during our interviews as equally serious problems affecting all companies. We examine, first, borrowing rates and rates of inflation for selected years as shown in Table 2.
 


Table 2: Inflation and bank lending rates in Zambia, 1981 - 1992
 
  1981 1982 1984 1986 1988 1989 1990 1991 1992
Inflation (%) 18 14 24 40 59 70 80 120 225*
Lending rate (%) 11 12 17 30 35 35 36 40 70
Real interest rate (%) -7 -2 -7 -10 -24 -35 -44 -80 -155
 
* The Zambian government had budgeted for 45% inflation in 1992, but ended up with 225%.

Source: Compiled from CSO (1981-1989); Seshamani (1992); GRZ (1989, p.28); African Business (November 1992); Colgate Palmolive (Zambia) Management Fact Book (March 1992); NFZ (23 November-11 December 1992); and Price Waterhouse (1993).


 
Table 2 shows that the rate of inflation in Zambia has in fact been growing higher and faster than commercial bank lending rates, resulting in negative real interest rates throughout the period. In a typical Western economy, companies would not have much cause to complain about such a scenario since the table indicates that companies are paying little for the money borrowed in the inflationary situation. But in a third world economy like Zambia's, factors such as those we discuss next show that the story is radically different.

 We share the view by Killick and Martin (1990, p.21) that it is not enough in a country like Zambia to recommend that real interest rates should be positive, that is interest rates should be higher than the rate of inflation. Killick and Martin point out that if inflation is rapid— as in Zambia— then reducing it is likely to be more beneficial to the financial sector and overall economic performance than raising nominal interest rates. "Positive real interest rates", they argue, "are a moving target". Raising nominal interest rates may contribute to further inflation by increasing working capital and other production costs, and countries like Zambia with significant inflation levels should give priority to counter-inflation policies— such as reducing government deficits and borrowing— rather than acting on nominal interest rates.

 In his letter to this author (dated November 1992), German-based economics Professor Andrew Kamya— who spent 14 years to February 1992 studying the Zambian economy— said of inflation in Zambia:

Inflation is a dangerous evil, basically because of its adverse impact on incomes, wages, interest rates and other costs of production. The main source of inflation in Zambia has been, apart from the supply gap and imported inflation, the government's huge budget deficit indicating that government expenditure by far exceeds its revenue, so that the difference is generally financed through money creation— central bank borrowing.

 Returning to our sample, we find that of the 37 firms in Table 1 who ranked unavailability of credit as a problem, a total of 26 (or 70 percent) gave it either a first (3), second (15), or third ranking (8 firms). The 70 percent interest rates in 1992 reached what firms described as "distress levels", beyond most firms' reach. Despite the higher inflation than borrowing rates—which discourage people from saving as they would rather buy assets whilst they can— firms claimed they simply did not have the money to pay back because overall demand for goods and services was weak. They attributed this to the continuously deteriorating spending power of Zambians and Zambian firms, coupled with the rise in costs due to inflationary pressures and the general economic recession. Zambian firms have had a difficult time because they have had to import inputs, machinery and spares at the imported inflation rates while not being able to increase local prices to the level of inflation.

 Tightening of monetary policy by the Bank of Zambia (BOZ) as part of SAP has also in recent years resulted in a severe liquidity squeeze. The Bank of Zambia has induced the liquidity squeeze— to try and control inflation— in several ways. Statutory reserve deposits— that is interest-free deposits placed by commercial banks with the Bank of Zambia on an enforced basis— were as high as 35 percent of all current account deposits and 26 percent of all other deposits in June 1990 (Standard Bank Zambia, 1990). In addition all commercial banks have had to hold liquid assets of as high as 55 percent of all deposits from the public, meaning they could only lend 45 percent of deposits received. Their reserve requirements— the amount of money commercial banks are required by law to keep with the BOZ— have also been increasing and, coupled with BOZ-induced limitations on over-draft facilities— have all tended to limit the amount of liquid assets banks can lend and transact with companies and individuals. This point is supported by Killick and Martin (1990, p.18), who point out that such central bank requirements as these tend to distort interest rates. Given the low to zero interest rates commercial banks receive on their reserves, they are forced to institute wider margins on lending rates in order to make profits.

 For a sector over-dependent on imported raw materials, intermediate goods and machinery, the repeated devaluations of the Kwacha (Zambia's currency) had put an enormous strain on the cash-flow position of both private and public firms. The high borrowing rates— companies claimed— worked against manufacturing but in favor of trading, both legal and "brief-case". As Magande's Kitwe national conference paper (1992) confirms, banks have not helped this situation since most of them prefer short-term lending which, in the hitherto uncertain economic climate, is more profitable and less risky than long-term lending.

 Policy instability

 Economic policy instability emerged as the third most serious problem in our rankings. 19 of the 33 firms— or 58 percent— ranked it as first (7), second (8) and third (4 firms). They blamed uncertainty and the stop-go policies of the Zambian government for their inability to do any strategic planning. Only two of the 33 firms (Ndola Lime Limited and Scaw Limited)— both parastatals— gave this factor a ranking of 9, perhaps reflecting the favored treatment that state-owned enterprises (SOEs) have enjoyed from the government.

 During Bank of Zambia forex allocations, for instance, parastatals are understood to have been favored over private firms in forex allocations. By contrast, the 1985-87 forex auctioning period was governed to some degree by ability to raise Kwacha cover— which most parastatals did not have. One of the reasons the auction failed (see among others Onimode, 1989, p.40) is that it turned out that 90 percent of the forex auctioned went to only 100 firms, 99 percent of whom were foreign-owned. Onimode, quoting the Bank of Zambia governor, says the use to which the successful multinational bidders put their forex allocations was not in harmony with Zambia's long-term development needs:

 In referring to the abolishing of the auction system, the governor of the BOZ pointed out that ... many of these foreign companies expended the scarce forex frivolously on some goods that were readily available locally, including dog food!.

 Other problems in Table 1 relate to unreliable local transport (ranked 4th); increased competition due to trade liberalization (ranked 5th); lack of knowledge about foreign markets (ranked 7th); and inadequate local management talent (ranked 8th). Of the 22 companies who ranked inability to remit dividends and royalties, 15 (or 68 percent) gave it a ranking of 8 or 9, meaning it has not been a problem. This makes sense, given that only foreign-owned or multinational companies— we had only 7 in our sample— would normally have any reason to make such remittances. Table 1 reveals that only MNCs gave inability to remit dividends the highest average ranking— of 4. Colgate Palmolive (Zambia) Limited gave it the maximum ranking of 1.

 

 OTHER SIGNIFICANT SECTOR-SPECIFIC PROBLEMS THAT EMERGED DURING OUR INTERVIEWS

 (a) The agro-based sector and effects of the drought: as the field research was being wound up in early May 1992, fears were emerging in Zambia in general and among our sample in particular, regarding the impact of the 1991/92 drought. Companies in the agro-based and textile sub-sectors— who have the strongest backward linkages to agriculture— expressed the most concern regarding the shortage of rains, fearing that this would in turn affect their raw material supplies.

 (b) The textile sub-sector: the seven textile firms we interviewed told us that the following production constraints have also affected their performance: (i) the effects of trade in second-hand clothes (called Salaula) from Zaire and Europe; (ii) preference by local garment manufacturers to use imported fabrics which they deem to be better and cheaper; (iii) inability to import spare parts for machinery initially due to lack of foreign exchange, now due to the high cost of foreign exchange which is obtainable at the market rate. During the foreign exchange auction period in 1985 one clothing manufacturer— whose identity we were asked to keep confidential— is known to have remarked:

Of even greater concern is the situation with regard to imports. With local supplies restricted to a limited range of fabrics and elastics, an adequate supply of imported sewing thread and trimmings is essential. But it's becoming more and more difficult to obtain import licenses and the forex to back them. To make matters worse, the Ministry of Commerce and Industry seems unable to appreciate that clothing cannot be made from fabric alone, and the Ministry has declared that clothing manufacturers are to be removed from the list of importers. This decision is so patently ridiculous that it is hard to take it seriously. Unfortunately, however, the Minister and his officials have shown little understanding of industry in general and the clothing sector in particular.

 Other significant sub-sector problems relate to (iv) lack of a local dye-production and processing plant; (v) low cotton production in recent years because the two main source areas— Southern and Central Provinces— have in recent years been the most drought-prone; and finally (vi) firms complained of payment problems from such export markets as Zaire (now Congo) and Angola due partly to political instability in these countries.

 (c) The health-care/pharmaceuticals sub-sector: firms in this sub-sector complained of unfair competition from what they told us are "cheap, unlicensed imports of drugs, which are sold across-counter without prescription".

 (d) Captivity to the mining industry by the metal and machinery sub-sector: the overwhelming majority of companies in this sub-sector told us they are inextricably tied to the mining industry, the Zambia Consolidated Copper Mines (ZCCM). ZCCM accounted for in excess of 70-75 percent of their sales. The dangers of this captivity, given the expected diminishing role of the mining industry in Zambia in the foreseeable future, need no further elaboration. Already, a number of firms complained about poor settlement of invoices by ZCCM (reportedly due to its own poor liquidity), leaving them with large accounts receivable balances.

 

OTHER FINDINGS COMMON TO THE MANUFACTURING SECTOR

There are other issues that emerged during interviews with the 43 companies that this paper would be remiss not to mention. They include the following:

Transfer pricing: the inability of multinationals and joint ventures hitherto to remit dividends out of Zambia due to reasons such as shortages of hard currency and government-controlled forex allocations is a well-documented fact. It is not surprising, therefore, that a number of affected Managing Directors and General Managers freely admitted (to this author) to using transfer pricing practices to channel income remission. They have been doing this by overpricing imports from abroad and/or under-pricing exports.

Passive versus Active exporters: our interviews among exporting firms revealed a preponderance of passive exporters over active ones, that is those firms who simply wait for unsolicited orders or inquiries but are unwilling to seek orders— as opposed to others such as Swarp Spinning Mills Limited of Ndola, who adopt a planned approach to the search for overseas market opportunities. The Managing Director of Swarp, for example, told this author that he conducts market research and follow-up visits to the United Kingdom— accompanied by members of the marketing department. They encourage foreign customers— such as Burnet & Walker of Glasgow in Scotland— to pay reciprocal visits to Ndola for an on-the-spot check of products and production facilities and other related matters.

The 100 percent forex retention scheme: the foreign exchange retention scheme (FERS) introduced in 1992, was up to that point undoubtedly one of the most popular of the government's strategies to encourage non-traditional exports. The retention rate was 50 percent between 1985 and January 1992, when it rose to 100 percent. The FERS allowed exporters of non-traditional exports (NTEs, defined as all non-copper exports) to retain 100 percent of their forex earnings in their local accounts and either to use it for their own needs or to sell it to other firms at a freely negotiable exchange rate.

The rationale for allowing the 100 percent retention, in a forex-starved economy like Zambia's, was that: (a) this would allow companies, the majority of whom are raw material import-dependent, to buy inputs directly from their own earnings, therefore those who earned enough did not have to queue for forex allocations from BOZ, and, ultimately, that (b) this would not only increase capacity utilization rates, but that it would also encourage non-exporters traditionally used to getting forex from BOZ to start looking for and entering external markets themselves. A combination of factors— the high Kwacha value of the retention rate, the continuing shortage of forex nation-wide, and other government measures— was meant to force manufacturers to take the issue of backward integration to available local sources of raw materials more seriously.

The South African factor: trade between Zambia and South Africa had been going on, underground, long before the on-set of apartheid reforms that in 1994 culminated into a majority/Nelson Mandela-led government of national unity. The trade was in breach of UN sanctions against Pretoria. By 1992, however, there was open trade with Zambia and other countries in Southern Africa. For Zambian manufacturers of both export and local products, the competition was (in 1992) already proving severe as they ran head-on into South African traders not only in their own "back-yards", but also in the neighboring states of Malawi, Zimbabwe, Angola, Mozambique, Tanzania, Kenya, Namibia and Botswana. The pressure stemmed from the enormous strength and dominance of the South African economy— estimated at 3 times the combined economies of Eastern and Southern Africa— as well as the superiority of South African products.

The South African government has been providing more attractive incentives to exporters. They include cash payments on exported goods and tax deductions of up to 200 percent of export manufacturing expenditures. South African exporters can also claim marketing costs such as 50 percent of return air tickets to new market countries, 50 percent of transport costs of samples and accommodation costs of up to 300 Rands (in 1992 the equivalent of US $109) per day (see African Business, September 1992, p.12). Other strengths that South African manufacturers have had (over Zambia's) include a broader raw material base, much better production facilities, lower finance costs, better access to foreign exchange, and far more superior products than Zambia's.

By comparison, Zambia does not have much to offer by way of export incentives. The 100 percent forex retention scheme introduced in 1992 was (in the early 1990s) by far the country's best export incentive. The Export Board of Zambia (EBZ, 1990, p.3) reports that as late as 1990 companies were paying import levy, sales tax and import duty up-front on imported raw materials for export sales? which the EBZ says was taxing on any firm's profitability, made worse by the credit squeeze, high interest rates and the cumbersome duty draw-back scheme. The EBZ (1990, p.25) argued then that with the liquidity difficulties companies were experiencing, the duty drawback scheme did not give any relief to exporters as it necessarily meant tying up working capital in paid— though reimbursable—duty. The creation of the scheme was well intended, but its practical operation proved disappointing. The procedure in claiming refunds under the scheme appeared unclear to most exporters. Moreover, claiming duty refunds was considered by most firms as a cost both financially and in terms of man hours lost as claimants entered into lengthy correspondence with the reimbursing authorities. The EBZ further questioned (and rightly so) the government's scrapping of Article 50— the Customs and Excise regulation introduced in 1990 to permit the importation of plant and machinery duty-free.

The AIDS factor: a number of managers we interviewed pointed out that AIDS threatened the manufacturing sector with problems of falling efficiency and productivity due to disability, rising sick leave and time taken off work to care for others and, of course, finding replacements for premature casualties. It was impossible to get any statistics. They could not provide specific figures because it was not easy to ascertain hospital records due to the secret nature, at the time, of AIDS-related illnesses.

Retention-lags: it took too much time—any where from two to eight months, we were told— for firms to actually get their forex from Bank of Zambia once it arrived in the country because, as one Managing Director pointed out, the Bank of Zambia, the Ministry of Commerce, Trade & Industry, the Ministry of Finance, and Customs did not know what the other was doing!. Instead of working together to ensure that the system was efficient, they at times seemed to work at cross purposes. The result was unnecessary transaction costs for exporters as they had to lobby Ministers and queue up for their own forex.

A 3CI+WIF Syndrome: a kind of syndrome therefore emerges to describe the major problems in Zambia's manufacturing sector, as gleaned from our 1992 empirical survey of 43 companies. We choose to call it the 3CI+WIF Syndrome, referring to: sluggish consumer demand, the credit squeeze, capacity under-utilization, high interest rates (which have put credit out of the reach of most manufacturers), working capital/liquidity deficiencies, inflationary trends, and foreign exchange shortages.

 

CONCLUSIONS AND IMPLICATIONS

Our task in this paper has been to attempt a first-hand account of the impact of Zambia's structural adjustment program on the manufacturing sector, along sub-sector and ownership lines. Three major features still characterized Zambia's manufacturing sector in the early 1990s much as was the case two decades earlier: heavy import-dependence, lack of forex self-sufficiency, and minimal backward linkages with the rest of the economy. Coupled with the impact of the SAP, it is not surprising that the 3CI+WIF syndrome has been identified here as a major hindrance to manufacturing recovery.

Zambia's manufacturing sector lacks the dynamism required to not only transform the sector but, even much more basically, to meet the sector's own foreign exchange requirements. The lack of dynamism is also reflected, inter alia, in the paucity of management talent, non-existent to inadequate export financing schemes, and a lack of any visible aggression in the early 1990s towards both market and marketing research. Equally, dynamism and the killer-instinct were lacking on the sector's export front, with the resultant foreign exchange shortages a clear recipe for recurrent balance-of-payments disquilibria in the Zambian economy.

The most crucial constraint of the sector— lack of forex for imported raw materials on which it is dependent—is also the most difficult to address. Forex difficulties frustrate not only procurement and export production, but also the planning of production and meeting contractual commitments on delivery dates. A vicious circle has therefore emerged: where imported raw-material-dependent firms suffer from forex shortages— limiting their capacity to import, starving them of raw materials and spare parts, thereby leading to low capacity utilization rates which in turn stifle exports.

Real interest rates— inflation rates minus lending rates— are found to have been negative every year between 1981 and 1992. However in a country like Zambia with high and increasing levels of inflation, it is not necessary— according to Killick and Martin (1990, p.21)— that interest rates should be positive, as this just contributes to more inflation. Measures to reduce inflation levels are more beneficial than those raising nominal interest rates.

In concluding his own paper and recommending areas for further research, Okoroafo (1997) had this to say:

there are still other intervening variables such as brain drain, skill level, poor commercial, media or physical infrastructure, inappropriate or ineffective execution of strategies, etc, which may be responsible for the current (poor) results…other variables related to firm strategy in the, say, marketing, management, finance etc areas …can provide further insights to firm response (to measures introduced as part of structural adjustment programs in Africa.

This paper has discussed the impact of Zambia's structural adjustment program on 43 manufacturing companies. It is based on a study that was carried out at the same time as Okoroafo's (smaller) study of 13 companies in Zambia, but which had a wider coverage in the sense that Okoroafo's study was comparative— covering some 127 companies in five different countries, including the 13 in Zambia.

A variety of dimensions of the challenges facing Zambian manufacturing during adjustment have been explored in this paper, including: foreign exchange related difficulties, the liquidity squeeze, high interest rates and levels of inflation, policy instability, stiffer competition due to trade liberalization, lack of knowledge about foreign markets, transfer pricing among MNCs, the foreign exchange retention scheme, the South African factor, the AIDS factor, as well as other problems germane to individual sub-sectors of Zambia's manufacturing sector. In so doing, this author hopes that the paper is not only a timely (albeit partial) response to Okoroafo's recommendation for other areas to be addressed, but that it also hopefully builds upon Okoroafo's study in several significant ways—including the benefits of a deeper understanding of the impact of the SAP that accrues to studying one country instead of several.

 

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Updated: 2000-10-16, 09:11