Bank of Zambia

BANK OF ZAMBIA SUBMISSION TO THE COMMITTEE ON NATIONAL

ECONOMY, TRADE AND LABOUR MATTERS ON CHINA-ZAMBIA
RELATIONS VIS-A-VIS TRADE AND INVESTMENT

06 February 2019
Contents

...................................................................................................................................................................... 0
A. Introduction ....................................................................................................................................... 2
B. FDI Flows by Industry and by Source Country..................................................................................... 3
C. FDI Stocks by Industry and by Source Country ................................................................................... 4
D. The advantages of China’s foreign trade and investment in Zambia................................................... 5
(i) Employment ...................................................................................................................................... 5
(ii) Taxes on Income............................................................................................................................ 6
(iii) Contribution to Salaries ................................................................................................................. 6
(iv) Contribution to value addition ...................................................................................................... 7
E. Factors that contribute to increased FDI inflows ................................................................................ 7
F. Conclusion ......................................................................................................................................... 8

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A. Introduction

This addendum augments submission made by the Bank of Zambia on December 21, 2018 in
response to the request by the Parliamentary Committee on National Economy, Trade and Labour
Matters. The Committee asked BoZ to address the following issues:
i. The adequacy of the policy and legal framework governing foreign direct investment
(FDI) in Zambia;
ii. The advantages of China’s foreign trade and investment in Zambia;
iii. China’s investment contribution to the major sectors of the national economy;
iv. The deliberate trade and investment strategies the Government has put in place for
the country to benefit from Chinese investment;
v. Challenges (if any) the country is facing with regard to trade and investment relations
with China; and
vi. Recommentations on the way forward with regard to trade and investment relations
between China and Zambia.
In assessing China’s role in the economy, it is important to keep as a key reference point Zambia’s
overall development goals as outlined in the Vision 2030 and the Seventh National Development
Plan (7NDP). As Honourable Members are aware these two documents have the following
overarching goals:
To transform Zambia into a “prosperous middle income country by 2030” built on the
following key principles: sustainable development; upholding democratic principles;
respect for human rights; fostering family values; a positive attitude to work; peaceful
coexistence; and upholding good traditional values.
 The 7NDP focuses on five key strategic areas which are seen as creating the platform to
achieve these goals, which include:
o economic diversification and job creation (with a focus on agriculture, mining,
tourism, industrialization (manufacturing), information and communication
technology; and trade facilitation);
o poverty and vulnerability reduction;
o reducing development inequalities;
o enhancing human development; and
o creating a conducive governance environment for diversified and inclusive
economy.
In summary, the adequacy of the policy and legal framework for investment must be judged against
these objectives. Similarly, it is our view that all investors, both Chinese and non-Chinese,
domestic and foreign must contribute to and be assessed against the achievements of these national
goals. In section B below we provide some evidence of the magnitude and impact of Chinese FDI
flows in Zambia based on survey data produced by BoZ. However, before we do so, we wish to

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re-emphasise some points with regards to the policy and legal framework that we covered in our
preliminary submission.
Zambia’s policy and legal framework is spelt out in the Zambia Development Act of 2006 and as
amended in 2014 and the Income Tax Act. In addition, there are broader economic policies that
impact on the investment climate. These include fiscal and monetary policies as well as land
policy. Incentives under the ZDA Act typically cover both fiscal and non-fiscal elements, with
fiscal incentives limited to investors who invest at least US $500,000 in Multi-Facility Economic
Zones, industrial parks, priority sectors or in rural enterprises as prescribed in the Act. These fiscal
incentives include:
 zero percent tax on dividends for five years from the year of fist declaring dividends;
 zero percent tax on profits for five years from the first year of operation; and
 zero percent import duty rate on capital goods and machinery for five years.
In addition, there are non-fiscal incentives which include investment guarantees and protection
against state nationalization; and facilitation for application of immigration permits, secondary
licenses, land acquisition and utilities. For investors with investment of not less than US $250,000
which are not provided for a priority sector or product under the ZDA Act, benefits are only with
respect to non-fiscal incentives. All of these incentives have been streamlined over time and are
available to all investors both Chinese and non-Chinese. Other incentives are also enshrined in
the Income Tax Act as well as through sector specific sector agreements such as the power
purchase agreements with the mining sector.
With these general points, in Sections B, C, and D below we now cover China’s investment
contribution to the Zambian economy through employment, value addition, taxes, and salaries
relative to other major source countries of FDI in Zambia. This contribution can be said to be the
practical advantages of Chinese investments in Zambia. In section E we summarise some of the
key factors that contribute to increased FDI inflows generally.

B. FDI Flows by Industry and by Source Country

Foreign Direct Investment (FDI) is increasingly seen as an important stimulus for productivity and
broader economic growth for both developing and developed countries. The benefits of FDI far
outweigh any potential side effects that may arise due to foreign ownership of business enterprises.
FDI is generally less volatile than other capital flows given its long term nature. Multinationals'
funding and expertise is beneficial to local businesses through the transfer of technology,
management skills, business know-how and marketing experience. Additionally, FDI generates
tax revenue to finance public expenditures, such as, infrastructure development. For foreign
investors, FDI is a way of gaining access to markets, resources, efficiency gains through relatively
cheaper cost of production, and acquisition of strategic assets. In view of this, many countries have
designed and followed pro-FDI policies to enhance its inflows.
It is important to note that according to the World Investment Report 2018, in 2017 China’s
outward FDI stock was approximately US $1.5 trillion compared to global outward FDI stock of
US $30.8 trillion. China’s FDI outflows amounted to US $124.6 billion in 2017 compared with
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FDI outflows of US $417.8 billion for Europe and US $419.3 billion for North America. China is
therefore a major player on the global stage.

Turning to Zambia, with regards to FDI flows by industry, cumulatively, mining and quarrying
accounts for the biggest share of FDI flows in Zambia. Excluding the period after 2015 when FDI
inflows in the mining sector dipped, the industry on average accounted for 65.7% of total FDI
flows. This share has declined to 53.9% of total flows for the period 2009 to 2017. Mining and
quarrying is followed by manufacturing at 24.3%, wholesale and retail trade at 6.7% and deposit
taking corporations at 6.6%.
In terms of source countries, China accounted for 13.9% of total FDI flows after Canada (17.1%)
and Switzerland (15.0%). It is important to note that while FDI flows from Canada, the United
Kingdom and Switzerland have been declining in the recent past, that from China and South Africa
has generally been stable with a tendency to increase over the relevant period.
Chart 1: FDI Flows by Source Country
Total Cumulutive FDI Flows (US $ Millions): 2009 - 2017 800
Canada
Switzerland 600
China PR
South Africa 400
UK
India 200
Mauritius
VI (British) 0
2009

2010

2011

2012

2013

2014

2015

2016

2017
Nigeria
Ireland -200
Netherlands
France
-400
1200

1700

2200
-300

200

700

UK South Africa China PR

Switzerland Canada
Source: Bank of Zambia, PCF Surveys

C. FDI Stocks by Industry and by Source Country

Total stocks of FDI liabilities are dominated by the mining and quarrying industry. As at end-2017,
about 64.6% of total stocks of FDI liabilities in the country were estimated to be in the mining and
quarrying industry. This was followed by manufacturing, wholesale and retail trade and deposit
taking corporations at 11.7%, 7.4% and 4.5%, respectively.
The top five source countries for FDI stocks comprised Canada (20.0%), Switzerland (14.1%),
British Virgin Islands (12.5%), China PR (10.7%) and South Africa (9.4%).

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Chart 2: FDI Stocks by Source Country
4500
Canada 4000
Switzerland
3500
VI (British)
China PR 3000
South Africa 2500
Mauritius 2000
Ireland
1500
India
Netherlands 1000
UK 500
Nigeria 0

2009

2010

2011

2012

2013

2014

2015

2016

2017
1500
0

500

1000

2000

2500

3000

3500

4000
South Africa China PR VI (British)
2017 Total FDI Stocks Switzerland Canada
Source: Bank of Zambia, PCF Surveys

D. The advantages of China’s foreign trade and investment in Zambia

Several advantages accrue to the Zambian economy as a result of significant FDI flows from
China. Relative to other major source countries, Chinese companies contribute significantly to the
Zambian economy in terms of employment, value addition, taxes and salaries. The assessment
below is based on a survey of 193 Majority Owned Foreign Affiliates (MOFAs)1.

(i) Employment
In 2017, China was the highest contributor to employment among all the MOFAs surveyed.
MOFAs from China contributed 21.7% (18,525) of the total number of employees by MOFAs
(85,525).

Chart 3: Percentage Share of Employees (%)

CHINA PR 21.7
UNITED KINGDOM 18.0
CANADA 13.6
MAURITIUS 8.8
SWITZERLAND 8.4
SOUTH AFRICA 8.2
OTHERS 21.3
(3.0) 2.0 7.0 12.0 17.0 22.0
Source: Bank of Zambia, PCF Surveys

1
MOFAs are enterprises with 50% and above of share capital attributable to foreign investors.

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 (ii) Taxes on Income
In terms of taxes on income, MOFAs from China were fourth, contributing 8.5% (US $57.4 million) of the
total taxes remitted by the surveyed MOFAs in 2017 (US $675.5 million).
Chart 4: Percentage Share of Taxes on Income (%)

CANADA 35.0
SWITZERLAND 13.0
UNITED KINGDOM 8.6
CHINA PR 8.5
SINGAPORE 7.1
SOUTH AFRICA 5.5
OTHER 22.3
(4.0) 1.0 6.0 11.0 16.0 21.0 26.0 31.0 36.0

Source: Bank of Zambia, PCF Surveys

(iii) Contribution to Salaries

Chinese MOFAs were among the top-five contributors to salaries drawn by workers who worked for
these companies in 2017. Companies from China accounted for 6.6% (US $72.2 million) of total salaries
drawn by workers in MOFAs (US $1,089.7).
Chart 5: Percentage Share of Salaries (%)

CANADA 23.2
SWITZERLAND 14.2
UNITED KINGDOM 12.9
SOUTH AFRICA 11.8
CHINA PR 6.6
TANZANIA 5.8
OTHER 25.4
(4.0) 1.0 6.0 11.0 16.0 21.0 26.0

Source: Bank of Zambia, PCF Surveys

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 (iv) Contribution to value addition
MOFAs from China came second in their contribution to value addition in 2017. As a group, they
contributed 22.5% (US $2,107.1 million) of the total value addition by MOFAs (US $9,381.9).

Chart 6: Percentage Share of Value Addition

CANADA 30.5
CHINA PR 22.5
IRELAND 7.4
MAURITIUS 7.3
SOUTH AFRICA 6.6
FRANCE 4.3
OTHERS 21.4
(4.0) 1.0 6.0 11.0 16.0 21.0 26.0 31.0

Source: Bank of Zambia, PCF Surveys

E. Factors that contribute to increased FDI inflows

Among the factors that attract FDI in a country, the following stand out:

Institutions: Evidence suggests that economic freedoms, political and civil rights have varying but
important effects on FDI inflows. On the political front, poor institutions that enable corruption add to
investment costs and reduce profits. Good governance is therefore associated with higher FDI inflows
and economic growth.

Market size and growth potential: Larger host countries’ markets may be associated with higher FDI
due to larger potential demand and lower costs due to scale economies.

Openness: Through complementarity of trade and FDI flows, an increase in openness is associated with
more FDI, as investing firms benefit from less trade barriers and larger export markets.

Exchange Rate Valuation: A weaker real exchange rate is expected to increase FDI as firms take
advantage of relatively low prices in host markets to purchase facilities or, if production is re-exported,
to increase profits on goods sent to a third market.

Political stability: Political stability is expected to increase FDI because it increases certainty. Investors
prefer a stable investment climate and social order as well as consistent economic policies as they imply
less investment risks.

Macroeconomic Conditions: FDI is a long-term commitment of capital. For this reason, a stable
macroeconomic environment, such as, low and stable inflation rates, a stable foreign exchange rate, and
a sustainable external sector are particularly important as they affect real returns on investment.

Investment Incentives: Investment incentives are a major part of strategies to attract FDI. However, FDI
incentives such as fiscal incentives (tax rebates and exemptions), financial incentives (subsidised loans

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and grants) and non-financial incentives (e.g. infrastructure provision) cannot be a substitute for the
other factors. In-fact, taken by themselves, evidence suggests that investment incentives are often
ineffective at attracting FDI.

Clustering effects: By clustering with other firms, new investors benefit from positive spill-overs from
existing investors in the host country. Some beneficial clustering effects include linkages among
projects, lower search costs as new investors mimic past investment decisions by other investors in
choosing where to invest. This is because a larger existing FDI stock is regarded as a signal of a benign
business climate.

F. Conclusion

All in all, FDI investments from China have contributed to the Zambian economy through employment,
value addition, taxes, and salaries. Relative to other major source countries of FDI inflows into Zambia,
China’s contribution is significant. This contribution can be said to be the practical advantages of Chinese
investments in Zambia. To maximize these benefits, it is important that the country institutes measures
to attract more FDI into the country, whether from China or elsewhere. And monitor closely so that real
benefits can accrue to the citizens.

It is important to note that China provides both FDI flows as well as investment financed by Government
external borrowing. Government investment financed through debt from China does have its challenges.
Some of the challenges include the fact that external borrowing from China often does not include the
flow of financial resources to the host country and hence the accumulation of external reserves. This is
because all aspects of the debt contracts are typically executed by Chinese counterparties (financiers and
project implementers) resulting in physical capital being built in the country, but with minimal financial
flows. As a country we need to be more assertive so that the necessary capacity to sustain our economy
is created.