Overcoming Import Dependency Through Local Content

By Michelo Maunga

The Zambian economy.is heavily reliant on imports, with sectors such as manufacturing importing a large share of inputs annually, as revealed through various surveys conducted by the Zambia Association of Manufacturers.  By consequence, the Zambian Kwacha tends to perform poorly against other major currencies such as the United States Dollar and the British Pound. Various measures have been undertaken to reverse the trend over time. For instance, the Government has listed several commodities produced locally for a surcharge and has been driving the development of linkages between different sectors of the economy through local content and the Proudly Zambian Campaign.

Simply defined, local content relates to; the consumption of domestically produced goods and services, employment of locals, infrastructure investments in host communities and supplier development, among others. It represents the spread of economic benefits within a community, district, country or region. Without this, economic growth results in uneven development halting efforts at increasing household incomes and reducing poverty. It was, largely, such a growth that the Zambian economy experienced Post debt forgiveness under the Highly Indebted Poor Country initiative, wherein, despite record growth rates between 2006-10, multi-dimensional poverty as measured by the Human Development Index, increased.

Around the world the jurisdiction hailed for its LC framework is Norway. In the Oil and Gas sub-sector, the Norwegian Government saw to it that contracts were awarded to domestic firms when they were of comparable quality, price and delivery time. Investing companies were encouraged to form Research and Development partnerships with domestic firms and institutions. Today Norway has developed expertise in state of the art Oil & Gas technologies with many companies domiciling their R&D operations in that country.  The resulting competencies developed have positioned Norway as a leading nation in the global energy sector. A second country that has adopted LC regulations with substantial success is Brazil, particularly in the above industry. Here, LC accounts for 20% of the points granted in the concessionaire bidding process. Additionally, firms are required to receive LC certificates from suppliers and submit investment reports to the regulatory agency for the petroleum sector. In the event that targets are not met, penalties are imposed. The results have been pronounced with average LC commitments rising from 26% to 80% between 1999 and 2008 (Advocates Coalition for Development and Environment, 2017).

At the premise of LC are industrial linkages at diverse points in a given value chain. These are categorized into upstream (backward) and downstream (forward) linkages. The former concerns a given firm’s local sourcing of raw materials while the latter refers to the further processing or value addition to this production. This is operationalized through the flow of information or goods between firms or sectors and is predicated on the notion of value addition to raw materials or intermediate goods. At the heart of this discussion is the breadth and depth of these linkages, with upstream breadth implying the amount of raw materials sourced locally whilst downstream breath is concerned with the amount of produce processed by local firms. The depth, on the other hand, relates to the extent of value addition, either upstream or downstream. Generally, these concepts, represent the scale of local sourcing and processing, as well as degree of value addition; with a direct bearing on capital formation structures and thus, industrial development not to mention diversification. The resulting inter-firm linkages boost product specialization and division of labour, with the effect of increased division of labour and productivity.

The guiding document with respect to Local Content within the Zambian context is the National Local Content Strategy, which, running from 2018 to 2022, stipulated a 35% threshold to be allocated to consumption of local goods and services in sectors in which Zambia has a comparative advantage. While its publication was a significant milestone, positioning it as the sole Government document dedicated entirely to LC, its impact has been limited. Additionally, in the year 2024, 2 years would have elapsed since its end date. Therefore, at the present moment, there exists very little, if at all anything, by way of an operating framework concerning Local Content.

In conclusion, our recommendation is that a piece of legislation be urgently prioritized and passed by the National Assembly. This will legalize the provisions that were made in the Local Content Strategy, providing for immense traction in the drive to increase Local Content and thus reduce import dependency. The benefits will be numerous and across several aspects of our economy, particularly the Exchange Rate. Separately, costs of production will moderate due to the replacement of imports with domestically sourced inputs. Altogether, there will be untold and immense positive spillovers, from incentivizing the consumption of local goods and services, at all levels.