Department of Agricultural Economics

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Browsing Department of Agricultural Economics by Subject "Agricultural diversification -- Zambia"

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    Diversification towards agro-processing in Zambia: A CGE analysis of financial and fiscal incentives
    (Stellenbosch : Stellenbosch University, 2016-12) Nhlane, Robert; Punt, Cecilia; Stellenbosch University. Faculty of AgriSciences. Agricultural Economics.
    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.