ASSESSMENT OF TRADE IN SERVICES IN ZAMBIA. Manenga Ndulo. University of Zambia

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1 AN ASSESSMENT OF TRADE IN SERVICES IN ZAMBIA Manenga Ndulo University of Zambia January 2001

2 TABLE OF CONTENTS INTRODUCTION 3 The Role of Services in the Zambian Economy 3 The Contribution and Growth of Services in Zambia 4 Structure of External Trade 7 Trade in Services by Mode of Supply 9 Cross Border Supply 9 Consumption Abroad 10 Investment in the Services Sector 11 Presence of Natural Persons 13 Capacity, Efficiency and Competitiveness of the Services Sector 14 Tourism and Travel related Services 15 Health Services 17 Financial Services 19 Telecommunications Services 21 LIBERALISATION OF MARKET ACCESS AND BARRIERS TO THE EXPORT OF SERVICES 25 Unilateral liberalisation 25 Regional integration 27 Zambia and the GATS 27 CONCLUSION 28 2

3 ASSESSMENT OF TRADE IN SERVICES IN ZAMBIA Introduction One of the major results of the Uruguay Round was the creation of a General Agreement on Trade in Services (GATS). The GATS established multilateral rules and disciplines on policies affecting trade in services. Built in to the Agreement is the need to examine how much services sector liberalisation has been generated by GATS at both the global level and in the individual Member countries. The assessment of trade in services is mandated under GATS Article XIX: 3. The importance of the assessment of trade in services is to facilitate the establishment of negotiating guidelines and procedures and determine the level of services trade liberalisation in respective WTO Member countries. This will help, a country like Zambia, a least developing country, ascertain how it can further benefit from progressive liberalisation as outlined under GATS Article IV on the increasing participation of developing countries. In order to assist the negotiations of GATS liberalisation at the national and regional levels with reference to the objectives of GATS Articles IV, V and XIX, this paper seeks to assess services trade liberalisation in Zambia. The assessment will look at the role of trade in services in the economy, the productive capacity of the domestic services sector; its efficiency and competitiveness, and the liberalisation of market access and barriers to the export of services. However, caution needs to be exercised. A study of this nature is fraught with data limitations on service production and on the regulatory framework. The analysis is therefore bound to be weighed heavily by qualitative information and proximate data. The Role of Services in the Zambian Economy The services sector has become very important in the process of real growth and sustainable development and in enhancing the country s participation in international trade. It has a significant impact on the growth of real per capita incomes, employment opportunities and on the efficiency of the economy and thus on the 3

4 economic performance of the whole economy. Furthermore the recent advances in information, communications and transport technologies have added to the importance of the sector. The aim of trade policy is therefore to create an efficient and low cost domestic services sector that produces a low cost, readily available, qualitative product. Inefficient and high cost domestic services sectors, which are common place in many developing countries, hold back the expansion of domestic output and ultimately external trade in both goods and services. Thus adversely affecting the country s participation in international trade. The Contribution and Growth of Services in Zambia The significance of the domestic services sector to the economy can be discerned if we look at its contribution to GDP, employment and trade between 1995 and In 1999, the services sector contributed about 66 per cent to real GDP. Between 1995 and 1999, it has contributed an average of about 63 per cent of value added to real GDP. This is clearly an underestimation if one takes in to account the various informal activities in the services sector that go underreported. This contribution of the services sector to GDP has rather been constant, increasing only by about 5 per cent between the period. Real services sector growth has been double that of real GDP growth. Between 1996 and 1999, real services sector growth was about 6 per cent per year, while that of real GDP was 3 per cent per year. Table 1 shows the contribution of the services sector to real output. The wholesale and retail trade services sector stands out. It consistently dominates the services sector over the period. In 1999 it contributed about 33 per cent to services sector output. It is followed by the financial and business and real estate sectors. These contributed 15 per cent and 13 per cent to total services sector output respectively. 4

5 Table 1 Contribution of the Services Sector to Value Added, (billion kwacha) Services sub-sector Electricity and water Construction Wholesale and retail trade Hotels and restaurants Transport and communications Financial services Business services and real estate Other services Total services sub-sector 1 1,160.0 (60.2) 1,263.3 (61.4) 1,329.6 (62.5) 1,338.3 (65.6) 1,439.5 (66.4) Total value added 2 1, , , , ,166.4 Source: Ministry of Finance and Economic Development 1 Services sector GDP as percentage of GDP shown in parenthesis 2 GDP at factor cost at constant 1994 prices. The services sector is also a major contributor to employment opportunities. It creates more jobs in the formal sector than either the primary or manufacturing sectors. Table 2 depicts total employment in the economy. In 1999 the services sector employed about 298,305 workers. This was about 63 per cent of total formal sector employment. The dominant sub-sectors in the services sector are social and personal services, trade and distribution and transport and communications. These supplied 62 per cent, 17 per cent and 15 per cent of the services jobs respectively. Employment in the trade and 5

6 distribution sub-sector has increased significantly over the past few years because of an expansion in the sub-sector through new entrants brought about by increased foreign direct investment in the sub-sector. The foreign investment has been principally attracted by the privatisation of the state-owned companies in the sector, which has been in place since Table 2 Contribution of Services Sector to Employment 1 Sector Primary 95,810 (25.4) 121,300 (25.0) 109,700 (23.2) 98,521 (20.6) Manufacturing 50,940 (13.5) 55,700 (11.5) 44,500 (9.4) 46,000 (9.6) Services 230,200 (61.1) 307,900 (63.5) 318,100 (67.4) 298,305 (62.5) Total 376, , , ,508 Source: Economic Reports, Ministry of Finance and Economic Development. 1. Percentages in parenthesis. As a least developed country, the country s increased participation in international trade is very important and is provided for under GATS Article IV. The country s increased participation will help boost real growth and per capita incomes. Table 3 shows Zambia s structure of external trade. The country has been in a crisis since the late 1970s (World Bank, 1996). This is reflected in the poor performance of the external sector as exhibited by the pattern of both merchandise and services trade. This is shown in table 3. 6

7 Table 3 Structure of External Trade (million USD) Merchandise Trade Services Trade Year Exports Imports Exports Imports , , , Source: Bank of Zambia. Total merchandise trade was in 1999 at USD 1,625 million. This was about 48 per cent of GDP. Total services trade was USD 385 million. This is 19 per cent of total goods and services trade and 11.4 per cent of GDP. This indicates a great potential to diversify export trade into services trade. Table 3 further shows that between 1995 and 1999, the merchandise trade account was on average in deficit with USD 11.3 million per year. Merchandise exports declined, on average, by 7.5 per cent per year, while merchandise imports declined by about 2 per cent per year between 1995 and Till about the late 1970s, the country always had a surplus on the merchandise trade account. The collapse of the external sector and the deteriorating economic crisis reversed this. Since the late 1980s, the country has attempted to correct this by reforming its trade policy (Hill, 1999). Thus tariffs have been reduced to between 0 and 25 per cent. However, there has been a missing link in the trade reform, which has affected the overall effectiveness of trade policy. This is the reform of the services sector especially the stalled privatisation and de-regulation of the network industries. Trade liberalisation in the absence of service liberalisation could well result in negative effective protection of goods, and therefore contracts both merchandise and service exports. 7

8 However, the country has always been a net services importer on the current account. In 1999, it received services export receipts of USD 87 million and made services payments of USD 298 million. Between 1995 and 1999, the deficit on the services account averaged USD 245 million per year. Services exports declined at average of 4.8 per cent per year, while services imports declined by 6.4 per cent per year. Table 4 Structure of Services Trade (million USD) Services Exports Transportation Travel Communication Business services Other services Total Services Imports Transportation Travel Communications Business services Other services Total Source: Bank of Zambia Table 4 shows the structure of the services trade account between 1995 and 1999.The structure shows a great potential for the country to develop its services trade. Both services exports and imports cover a narrow range of sectors; transport and travel. The services exports are also dominated by the transport and travel services sector. In 1999, these contributed 58 per cent and 38 per cent of total services export earnings respectively. This represented 96 per cent of total services export earnings. 8

9 Services imports are dominated by the transport, travel and business services sector. In 1999, these contributed to 68 per cent, 14 per cent and 5 per cent of total services imports. This represented 87 per cent of total services imports. Zambia has, since the late 1970s, unsuccessfully tried to diversify its export base away from its domination of copper. Policywise, the diversification has been perceived as an expansion of merchandise trade. There is need to change this perception to a focus on services trade. An expansion of services trade offers great potential to earn foreign exchange not only through increased services exports, but also through increased merchandise exports made possible by the reduction of the economic efficiency of service industries which are major intermediate inputs into the production of merchandise exports. Trade in Services by Mode of Supply In order to assess the overall size of international trade in services and make it relevant to GATS negotiations, we also look at the trade in services by mode of delivery and attempt to estimate their relative importance in the economy. We do this with the proviso that given the definitional and statistical problems with statistics on services trade, the data is proximate ( Karsenty, 2000:33). We estimate the significance of trade in services for the cross-border, consumption abroad and movement of natural persons. We also discuss foreign investment in the domestic services sector. Cross Border Supply GATS describes four ways by which trade in services arises. One of these ways is by the supply of a service from the territory of one Member into the territory of any other Member. This is known as cross-border supply. We use an indicator in the balance of payments accounts defined as commercial services minus travel services as a proxy for measuring cross-border supply (Karsenty, 2000: 36). Table 5 shows the exports and imports of services by cross-border supply. Unfortunately, we do not have information to show the country s destination and source of the exports and imports. However, one can speculate that regional markets dominate most services trade. 9

10 Table 5 Exports and Imports of Services by Cross-Border Supply (million USD) Year Exports Imports Exports share in GDP (%) 1 Exports share in total trade Source: Bank of Zambia 1 Total exports of services 2 Percentage of total exports of goods and services. Exports of cross border services were estimated at USD54 million in This is 1.6 per cent of GDP. They declined by 43 per cent between 1995 and The share of services exports in GDP and total exports of goods and services has been averaged 2 per cent and 3 per cent per year respectively and declining over the period. This is a reflection of the poor performance of the export sector over the period. Obviously, cross border trade in services can be a significant component of International trade and can contribute to the growth of incomes. This has not been the case in Zambia because of the economic crisis and lack of capacity in the domestic Services sector. Consumption Abroad GATS defines consumption abroad as the supply of a service in the territory of a Member to the service consumer of any other Member. To get some quantitative understanding, we proximate this mode by the travel services category of the balance of payments accounts (Karsenty, 2000; 41). Table 6 shows that exports of travel services were USD33 million in This is 1 per cent of GDP and 1.6 per cent of the total exports of goods and services. There is an erratic trend. They fell in 1996 to USD 17.8 million and increased to USD 40 10

11 million in Furthermore, exports of cross border services are greater and therefore more important than exports of travel services. Exports of travel services averaged 0.8 per cent of GDP and 1.2 per cent of total exports of goods and services over the period. This is interesting because in most developing countries, exports of travel services are an important source of revenue because of the importance of the tourism sector. Exports of travel services normally outpace the exports of cross border services. This therefore indicates to the great potential that exists in the tourism sector. Table 6 Exports and Imports of Services by Consumption Abroad ( million USD) Year Exports Imports Exports share in GDP (%) 1 Exports share in total trade Source: Bank of Zambia 1.Total exports of services 2. Percentage in total exports of goods and services Investment in the Services Sector The GATS defines commercial presence as the supply of a service by a service supplier of one Member, through commercial presence in the territory of any other Member. To depict this mode we need information on foreign direct investment in the services sector. It is difficult to get such statistical information. In the absence of such information we look at the data from the Zambia Investment Centre on investment pledges in the services sector as an indication of the importance of this mode. 11

12 Table 7 shows total investment pledges by foreign investors between 1995 and Total investment pledges have fluctuated from a low of USD136.0 million in 1996 to a high of USD1, million in Sector pledges to the services sector show an increasing trend. They increased from USD 51.9 million in 1995 to USD140.5 million in This represented a share of 16.5 per cent and 49.2 per cent in 1995 and 1999 respectively. Table 7 Pledged Investment in the Services Sector (million USD) Sector Construction and engineering Tourism Transport Other services Sub-total % of total Total investment , Source: Zambia Investment Centre and Economic Report 1999 The privatisation of state companies and the liberalisation of the economy have triggered off the interest in the services sector, which has been in place since the early 1990s. Most of the investment is pledged in the construction and engineering and tourism sectors. There have also been major investments in the wholesale and retail trade sector. Table 8 shows the distribution of the pledged investment in the tourism sector in It is dominated by accommodation, which got 94 per cent of the pledges. It was followed by tour operations, which got 4 per cent of the pledges. 12

13 Table 8 Pledged Investment in the Tourism Sector, 1999 Category Investment (USD million) Percent of Total Potential jobs To be created Accommodation ,075 Tour operations Travel agency Car hire Restaurants/night Clubs Total ,396. Source: Economic Report Foreign direct investment in the services sector is therefore likely to continue as an important mode of services delivery as long as government pursues appropriate policies that encourages it. There is also a lack of data to capture the phenomena. The pledged investment in the sector from the Investment Centre merely expenses an intention to invest in the sector. Presence of Natural Persons The presence of natural persons is defined as the supply of a service supplier of a Member, through presence of natural persons of a Member in the territory of any other Member. This is an important mode of export interest to most developing countries. But for a least developing country, it is also important on the import side. In order to build capacity in the services sector, the country needs access to specialists and professionals from abroad easily. Most firms in Zambia still need to import skilled workers at middle management and supervisory and professional levels. However, the way work permits are granted suggests that this is a significant barrier to trade (Ndulo, 2000: 16). It would therefore be interesting to try and measure how much services trade takes place through the presence of natural persons. With all the limitations, we use the compensation of 13

14 employees in the balance of payments accounts as a proximate indicator of the presence of natural persons (Karsenty, 2000:50). Table 9 Exports and Imports of Services by Presence of Natural Persons (million USD) Exports Imports Source: Bank of Zambia Table 9 shows that service exports through the presence of natural persons are negligible. The mode is dominated by import of services. The table suggests that labour mobility is not a major factor in services export trade. However, caution needs to be exercised here. This might be because of the limitations on the use of the balance of payments category compensation of employees as an indicator for this mode of supply. One therefore needs to confirm this finding. In order to do so, one needs information as regards to; the number of persons working abroad, their gross earnings and the remittances they send back to Zambia. On a casual observation, the number of persons working abroad seems to be significant. Capacity, Efficiency and Competitiveness of the Services Sector The inefficient, high cost and unreliable service products see the lack of domestic capacity in the Zambian services sector. The major impediment to developing capacity in the services sector is the lack of access to technology and regulatory reform. These two are interrelated because regulatory reform of the domestic services sector can lead to improved access to technology. Regulatory reform that focuses on foreign ownership, competition and the quality of regulation (Mattoo, 1999) would remove the constraints that reduce the economic efficiency of service industries. Unfortunately, in the case of Zambia, the major network industries, such as telecommunications, energy and financial services are looked at as strategic industries 14

15 that cannot be privatised. This position is a result of the lack of awareness of the key role that such intermediate services play in the development process. The potential gains for Zambia s GATS membership will result from liberalising access to domestic markets of export interest to the country and in key service industries. Only then will the country be able to participate effectively in international trade and be able to strengthen its capacity to provide internationally competitive services. Service sector liberalisation is unlikely to be successful without first creating the conditions for a thriving, productive and innovative sector. This requires urgent regulatory reform especially that focused at network service industries and those sectors of export interest to Zambia. In this section we look at the studies on selected domestic services sector. Tourism, health, telecommunications and financial services sector. The tourism and health services sectors are of major export interest to Zambia. The telecommunications and financial services sectors are key network industries supplying intermediate inputs to the productive sector. Studies reveal a high cost and inefficient organisation of the sectors. Tourism and Travel related Services Tourism is a sector of export interest to Zambia and to most developing countries. It can contribute to the growth of incomes through the generation of foreign earnings, creation of employment opportunities and in the development of supporting infrastructure in transport, financial services and telecommunications. It can be an agent in the access to technology, distribution channels and information networks with spillover effects to the other sectors in the economy. The tourism sector is relatively underdeveloped. The realisation of its potential has been constrained by the inefficient and high cost supporting industries such as telecommunications, transport, financial services and energy. The technology in the sector is inadequate. Firms have inadequate computer facilities. This adversely affects 15

16 their ability to take advantage of cost reducing information technology in their operations. The tourism sector is liberal and competitive. It is dominated by the private sector. It has been estimated that about 64 per cent of the investment are foreign, 24 per cent are joint foreign and domestic and 12 per cent is local. The sector was originally dominated by parastatal companies especially hotels and tourist lodges. These have slowly been privatised since The sector is regulated and supervised by the Zambia National Tourist Board through an Act of Parliament. The country has also regional co-operation agreements with Tanzania, Malawi, Namibia and Congo Democratic Republic and is a member of the Regional Tourism Organisation of Southern Africa and the World Tourism Organisation. Table 10 Selected Indicators for the Tourism Sector, Category Visitors Foreign 163, , , , ,151 Domestic 75,727 47,032 97, , ,630 Total 238, , , , ,781 Revenue USD million Room Occupancy rate Source: Economic Report Table 10 shows the performance of the sector between 1995 and There has been a steady growth in the sector over the period. The number of tourist visitors increased from 238,727 visitors in 1995 to 580,781 visitors in This is an increase of 143 per cent and an average growth rate of 25.5 per cent per year. This has nearly doubled revenue from the sector.. It increased from USD46.7 million in 1995 to USD

17 million in The low room occupancy rate indicates that the facilities are underutilised with an average occupancy ratio of 43.8 per cent. The accommodation subsection generates the highest revenue followed by the travel and tours subsections. These respectively earned 39 per cent, 34 per cent and 14 per cent of the total tourist revenue in The tourism sector is an important sector of export interest in the country. However, the tourist product is high cost and of low quality. In order for it to grow and participate fully in international trade, it needs to improve its domestic capacity efficiency and competitiveness. This will enable it generate a low cost, efficient, good quality and competitive product. It is being constrained by the inadequate supporting services in transport, telecommunications and financial services and the inadequate skilled human resources. The development of services markets in these sectors is connected and key to the development of the tourism sector. Health Services The health services sector is a human resource development sector and therefore very important to the process of economic growth. It is a sector of export interest to many developing countries. An open, well regulated and competitive health services sector can be a reliable source of export earnings and at the same time help upgrade the quality of health services through imports and the greater mobility of health suppliers can significantly contribute to the upgrading of medical knowledge in the country. The health services sector is composed of both public and private service providers. It is dominated by the private sector. There was a large expansion of health facilities during the first decade of independence ( ). The government built many hospitals and health centres. Health services were provided free and funded wholly from the government budget. The private sector was discouraged until about the late 1980s. Since 1991, there has been a big reform effort to re-organise and liberalise the sector. Major changes have taken place. These include the decentralisation of health services from large hospitals to district hospitals. The introduction of a referral system. The government s role is restricted to policy formulation, mobilisation of 17

18 resources, making rules and regulations and the co-ordination of international cooperation. An autonomous statutory body manages the public health providers. The private and public health service providers compete in the market for health services. However, the private health services sector is relatively underdeveloped compared to that of Zimbabwe and South Africa, two of the major markets. The major export markets for health services are South Africa, Zimbabwe, Lesotho, Namibia, Canada and the United Kingdom. This export of health services takes place through the presence of natural persons. The regional market dominates it. It mainly involves doctors and nurses. The number of doctors and nurses leaving the country temporarily to work elsewhere is not available. However, the magnitude can be deduced from the number of certificates of good standing issued by the Medical Council of Zambia each year. This is depicted in table 11 between 1995 and This movement of natural persons, especially into the regional markets, is significant and should be fostered by policymakers. Table 11 Number of Practitioners issued with Certificate of Good Standing Profession Medical Practitioner Dental Surgeon Pharmacists Total Source: Medical Council of Zambia 18

19 On the whole, the domestic health services sector is underdeveloped. This is mainly because of the inherited dominance of the public health services sector over the private health services sector. There is need to build its domestic capacity so that it can improve on its quality and efficiency. One way of doing this is to bring about competition through participation in international trade in health services. This will also enable the other modes in the export of health services develop. Apart from the low development and limited range of services in the domestic health services sector, the major barriers to the increased export of health services are the professional registration and licensing requirements, the availability of medical insurance, the lack of domestic private and foreign investment and the inadequate development of the telecommunications infrastructure (Ndulo and Chanda, 1999). Financial Services Financial services are a major intermediate service that networks all economic activities. Firms need an orderly and effective supply of financial services in order to organise their production efficiently and effectively and in order to be competitive in both the domestic and international trade. Therefore, a well-regulated, efficient and low cost domestic services sector is important for the country s participation in international trade. The financial services sector plays a major role in the domestic economy. Between 1995 and 1999, it has on average contributed about 10 per cent to GDP. This contribution has grown substantially over the past decade. This has been translated in the growth of both output, employment and the number of financial sector firms. The financial sector is dominated by commercial banking. The other sub-sectors are insignificant. The commercial banking sector is open and competitive. The market has been relatively open but was fully liberalised in In that year, there were 11 commercial banks, by 1997; the number of banks had increased to 21. Of the 21 banks, 5 are foreign owned. Of the five biggest banks, four are foreign owned and one is a state bank. The largest loan portfolio falls in the hands of the five banks. The 19

20 commercial banking sector experienced a series of closures of local banks between 1995 and Eight banks were closed. The major reasons were found to be undercapitalization, high levels of non-performing loans and contagion. The Bank of Zambia Act 1998, the Banking and Financial Services Act 1994, the Insurance Act 1997, the Securities Act 1993 and the Companies Act regulate the financial services sector. The regulations cover, licensing, ownership, capital adequacy, lending restrictions, exposure limits, reserve requirements, accounting for asset quality and deposit insurance. The insurance sector is dominated by a state- owned company. The liberalisation of the insurance market has brought about a rapid expansion in the number of service providers in the country. In 1998, there were 8 insurance companies, thirty insurance brokers and 15 insurance agents. Of the insurance companies, one is state-owned, one is wholly foreign owned, one is indigenous and the rest are a partnership between local and foreign investors. The insurance market is growing and profits are increasing. The sector, however, has had inadequate supervision. An Insurance and Pensions Authority was set up in 1998 to ensure adequate supervision. There is need for more participation in other areas of insurance especially specialised insurance, such as medical insurance. There are no restrictions on foreign ownership. However, all business units in Zambia have to insure their assts with Zambian insurers and that assets invested outside are not considered as admitted assets for the purpose of calculating solvency margins. The securities market is a recent development. Although an Act to establish a stock market was in existence since 1970, it was not until 1994 that any active trading began after the 1970 Act was repealed and the Securities Exchange Act of 1993 enacted. By 1997, there were 11 dealers, 19 dealers representatives, 3 advisors and 9 listed companies. Major trade is in government securities. For a foreign company to be listed on the stock exchange, it must be listed on a recognised foreign stock exchange in the country of incorporation. 20

21 The country has carried out autonomous liberalisation in the financial services sector. Some of the reforms have been carried out with the support of the IMF and World Bank. The attempt to reform the financial services began in the late 1980s. However, serious reforms did not start until In 1992, interest rates were liberalised and the current account freed. The domestic services sector was liberalised in 1993 and in the same year a flexible exchange rate was adopted. Exchange controls were abolished in 1994 and the following year foreign exchange deposits were introduced. Although, autonomous liberalisation and reform has increased the number of service providers in financial services sector, the market is still dominated by commercial banking. Commercial banking is also dominated by five large banks that at the end of 1997 held 77 per cent of total deposits. The remaining 16 banks holding only 23 per cent of the deposits. Waiting time at commercial banks is still long, operating costs, bank tariffs and commissions are still very high. Non-performing loans continue to be high and are highest amongst local banks. Positive developments include the presence of automated teller machines, charge cards, and interest bearing accounts, Foreign Service transactions and electronic banking. Telecommunications Services The telecommunication services sector is a key network industry that is critical for the process of growth and development of the economy. Telecommunications is both an important consumer and producer service facilitating trade and investment. The recent advances in technology and the liberalisation of the industry have revolutionised global telecommunications. Furthermore, the impact of globalisation has meant that advanced technologies and global financial resources are available for investment in telecommunication throughout the world where the investment climate is attractive. At independence in 1964 a government department, the General Post Office (GPO), controlled the domestic telecommunications sector. The GPO run both postal and telecommunication services. The technology employed was manual step by step switching equipment. The transmission was by open wire carrier system. In 1964, 21

22 the total installed telephone capacity was 20,000 lines with 15,000 working direct lines while the telex network had an installed capacity of 64 lines. The sector was restructured between with funds from the World Bank. The infusion of funds from the World Bank made it possible to expand and upgrade the telecommunications network in the country. During this period the GPO was transformed into a quasi government commercial entity - the Posts and Telecommunications Corporation (PTC). The network grew to about 120,000 installed lines and covered nearly all districts in Zambia. The new transmission net work made it possible to extend radio and television broadcasting to all provincial centres in the country. The sector was restructured further in 1994 with the passing of the Telecommunications Act, which liberalised and deregulated telecommunication in the country. The Act set up the Communications Authority to regulate telecommunications services in the country. PTC was split into two autonomous companies Zambia Telecommunications Company (Zamtel) and the Postal Services Corporation (Zampost) Demand and Supply Despite progress made in the liberalisation of the sector, Zamtel still remains the dominant player owning the PSTN infrastructure and operating both long distance and international services. Analysis of the demand for telecommunications services for the period shows a very interesting trend and co-relation between demand and economic activities in the country. Between , the number of working lines stagnated. This was coupled with a fall in the demand and the waiting list. This can be attributed to economic pressures as a result of various economic reforms that the country was going through. In particular the dismantling of the parastatal sector through privatisation and closures of companies meant that the demand for working lines also declined. Another impact on demand was the fact that during this same time the country also went through a financial crisis induced by the fall of key financial institutions. Since these 22

23 institutions were large consumers of telecommunications, their closure had an adverse effect on the sector. The country s communications sector is still relatively underdeveloped. The demand for telecommunication services is greater than supply. In most areas, the telephone penetration ratio is still less than 1 per population of 100. There is also a huge disparity in the supply of telephone services between the urban and the rural areas. In the urban areas for example, the density is estimated at 1.2 telephones per population of 100 as compared to that in the rural areas estimated at 0.4. Organisation of the Sector Zamtel is the dominant supplier. This is a state owned company. Liberalisation has brought in new companies in the market. These are Telecel, Zamnet, Zynex and Zamcell and CopperNet. Telecel and Zamcell operate mobile telephone services and Zynex offer payphone services. Zamnet and CopperNet are Internet service providers. Most companies have ambitious plans to invest in new telecommunications facilities using appropriate state of the art technology provided appropriate policies are put in place in the sector. Profitability of the Sector The telecommunications sector, like other industries in the country, has also been affected by the general structural problems of the economy. Financially, the burden has been felt more by Zamtel especially through government policies such as taxation, the cash budget principle, lack of incentives on new investment and heavy customer debt. Zamtel has a big tax burden in that it has to meet value added tax payments before collecting from it from customers. The Government operates on a cash budget and hence is not always able to pay Zamtel in time. Customer debt, in particular that from government, has been difficult to resolve since government is also the largest single client. Currently, government debt due to Zamtel stands at K43 billion with current commercial debt at K31 billion. This has rendered Zamtel operations difficult. Zamtel has also found it difficult to service its external loans, which are quoted in foreign exchange, due to the continuous depreciating of the Kwacha against international currencies. 23

24 Tariffs The government has for many years controlled tariffs in the country and as such it has not been possible for Zamtel to make a positive return on the investment. Domestic rates have lagged behind international tariffs, basically because of political considerations. Zamtel has found it easier to increase international tariffs in keeping with foreign exchange rate fluctuations. International tariffs charged by Zamtel have been relatively quite high. On average, the tariffs are more than 100 per cent higher than those applicable in developed countries for equivalent routes. When Zambia s domestic tariffs are compared with those of South Africa, it is clear that there is need to review the time charge rates on certain routes in order to assist far off places enjoy equitable cheap rates. These are the places that badly need telecommunications. The Regulatory Framework Regulation of the telecommunications sector in Zambia is by a number of legislation, which include the Companies Act, the Competition and Fair Trading Act, the Investment Act and the Telecommunications Act. However, the principal Act is the Telecommunication Act that was passed in This marked the beginning of the liberalisation of the sector and the set-up of the Communications Authority as the regulatory body. The liberalisation of the telecommunication sector has not been as smooth as expected because of poor co-ordination between the principal institutions that have an interest in the sector. In addition, the Telecommunication Act has been found to be lacking some key provisions such as the obligation of Zamcel to enter into interconnection agreement with other operators, the management of the telecommunications development fund, universal service provision and the hand over to the Authority of some of the regulatory functions previously carries out by Zamtel such as being signatory of international organisations like the Intelsat, etc. The telecommunications sector in Zambia is high cost and inefficient. Liberalisation has induced some growth activities in the sector. However, a lot needs to be done to reduce costs and provide readily available good quality service. 24

25 Liberalisation of Market Access and Barriers to the Export of Services There are three major benefits to services trade liberalisation. These are the contribution of services trade to the efficiency of the domestic services market and the production process, to export earnings and access to imported inputs, know-how and networks. These benefits are interrelated and have ultimately to do with the capacity and degree of openness of the domestic services sector. As we have seen the domestic services sector in the country is inefficient, high cost and provides a low quality product. They are low export earnings and the range of service exports is limited. Access to technology is not widespread and fully integrated into the production process. Yet if the country has to effectively participate in international trade it must first build the capacity of the services sector through lowering costs, improving quality and establishing a reputation for the service products. The building of competitive services sectors is being constrained by inadequate human resource development, underdeveloped infrastructure services such telecommunications, financial services, and transport, and a regulatory framework for services. There has been significant services sector liberalisation in the country. Most of it has been part of the IMF-World Bank supported economic reform programme. Below we assess the three ways that Zambia has pursued services trade liberalisation. It has done this unilaterally, through regional co-operation and GATS. Unilateral liberalisation Zambia has liberalised parts of the domestic services sector as part of the overall IMF- World Bank reform programme that started in the early 1990s. The liberalisation is a spill over from the liberalisation of the merchandise sector. It is autonomous and unrelated to the liberalisation taking place at the regional and multilateral levels. However, it has been substantial and credit needs to be given. This should be taken into account in negotiating strategies at the regional and multilateral level. Liberalisation has been significant in energy, financial, telecommunications, distribution, and health and tourism services. Most of these sectors have been opened up and regulatory reform initiated. The liberalisation efforts have triggered a national 25

26 debate on the need for effective regulatory framework to manage the services sectors. However, the focus of the debate has been on consumer protection and not how the regulatory system can spur efficiency, reduce costs and provide a quality service. The major drawback to the services sector liberalisation in Zambia is that it lacks focus and strategy. Consequently, it has not led to an improved product in all the sectors that have undergone substantial liberalisation. This is true whether you are talking about telecommunications, financial services, and tourism or health services. The country therefore needs to build a strategy, which as a least developing country, is related to its development process. One way to do this would be to identify key clusters of services sectors that would be subject to trade liberalisation and regulatory reform. The services industries can be grouped into three clusters for network industries, human resource industries and industries of export interest to Zambia. The network industries would consist of sectors that provide intermediate inputs into the production process. These should include telecommunications, financial, transport and energy services. Improved supply in these sectors will increase output of both goods and services and make Zambia more competitive in the regional and world markets. The human resource industries are necessary for building up the stock of human capital. This is a very important ingredient for the long growth performance of a least developing country. These should include health and higher education services. The third cluster will then consist of those industries of export interest to Zambia. Candidates for this cluster are the tourism, health and transport sector. Trade liberalisation and regulatory reform would then be targeted at these three clusters. This would be in keeping with GATS ArticleXIX: 2 that allow developing country Members to open fewer sectors in line with their development situation. 26

27 Regional integration The SADC Protocol provides for the liberalisation of services trade. However, the protocol does not contain substantive liberalisation obligations, as is the case on merchandise trade, and no mechanism has been developed to effect this process. There is much experience and work done in the co-ordination of key services sectors, such as telecommunications, transport, finance, and tourism. But this is short of trade liberalisation. GATS Article V enables Member countries to enter into regional arrangements on services trade liberalisation, provided there is substantial sectoral coverage and eliminates all discrimination substantially. What is urgent is for SADC to develop a viable framework for services trade liberalisation. In developing the framework for services sector liberalisation, the region should not go too fast in liberalising services. The aim should be to strengthen the services sector at the region in those sectors that are relevant to the development process. This would allow the region to consolidate itself and is in keeping with GATS Article XIX allowing the liberalisation of a few sectors. SADC should therefore identify specific sectors that can contribute to building a regional capacity in the services sector for regional services liberalisation. SADC liberalisation could target services industries clustered as network services human resource services and those industries of export interest in the region. The regional experience could then be used for GATS negotiations at the multilateral level. Zambia and the GATS Zambia as a least developing country has little to offer in its individual capacity in multilateral trade negotiations. The potential gains with GATS will primarily result from liberalising access to export markets. This can best be achieved if it negotiates as a region at GATS. GATS can then be used to remove the barriers to exports in sectors and modes of current and potential export interest to the region, of course, taking in to account the individual interests of SADC Member states. Zambia has made full commitments in four services sectors. These were made at the end of the Uruguay Round. It means the country has bound itself to the specified 27

28 levels of market access and national treatment and undertakes not to impose any new measures that would restrict entry into the markets or the operation of the service Sectors. The sectors committed are health services, tourism, business services and construction (Ndulo and Bwalya, 1999). At the time of scheduling the commitments to WTO the country lacked the technical skills and the capacity to meaningfully analyse the implications of the commitments in the four sectors. The commitments excluded the major network industries- telecommunications and financial services. The major policy issue for Zambia is whether or not the commitments have generated liberalisation in the specific services sectors. The experience is that it has not. In all the four sectors the government has not followed up the commitments with meaningful regulatory reform. In some of the sectors the obligations are being violated. For example, Zambia gave full commitments in the health services sector. However, the Medical Council of Zambia still insists that foreign doctors pay higher practice fees than the local doctors. This is a violation of the National Treatment obligation in the sector. The basic problem is that, although the country made commitments at WTO, there has not been any follow up to WTO decisions. The country needs to set up an institutional and administrative framework to manage GATS commitments. This would also serve as a source of information for both domestic and foreign services sector providers. Conclusion The domestic services sector is a major contributor of value-added, employment opportunities and foreign exchange in the country. The size and range of services exports is small and narrow. This indicates a potential to diversify exports away from copper to services exports, while at the same time benefiting from increased domestic capacity in services production. The dominant mode of delivery for exports is cross border supply and consumption abroad. Movement of natural persons might of export interest for Zambia especially in regard to health services. Most of Zambia s services trade is within the region. The domestic services sector is inefficient, high cost and unreliable. There is need to increase it capacity and competitiveness through trade liberalisation and regulatory reform. To do so, one needs a strategy that relates trade liberalisation to the 28