Zambia - Economic position and prospects

RESTRICTED FILE COPY Report No. AF-81a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ECONOMIC POSITION AND PROSPECTS OF ZAMBIA August 21, 1968 Africa Department  EQUIVALENTS CURRENCY US $1 K 714 or 71. 4 ngwee Kwacha (K.) 1 = US $1. 40 K 1, 000, 000 US $1, 400, 000 K. 1 100 ngwee (n. ) WEIGHTS 1 Long Ton = 2, 240 lbs. 1 Short Ton = 2, 000 lbs.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FILE COPY CTE R68-163/1 FROtI: The Secretary August 30, 1968 ZAMBIA Corrigendum The following correction should be made in the list of currency equivalents printed on the inside front cover of the report entitled "Economic Position and Prospects of Zambia!' (AF-81a), which was dis- tributed on August 27, 1968 (R68-163): In place of US$ 1 - K 714 or 71.4 ngwee Insert US$ 1 - K 0.714 or 71.4 nguee. Distribution: Executive Directors and Alternates President PresidentIs Council Executive Vice President, IFC Vice President, IFC Department Reads, Bank and IFC   This report is based on the findings of a mission to Zambia in October/November, 1967, composed of Messrs. Bruce, Dean and Basoah.  TABLE OF CONTENTS BASIC DATA, SUMMARY AND CONCLUSIONS ........................* e e.. oe i - V I. Introduction ...........***..***...**.*.***..**** 1 II. Recent Economic Developments ...... ............... 4 A. General ........................................... 4 B. Agriculture ................................ 6 Structure of Agriculture .................0 6 Tobacco ............... .. .... .. ...... . 6 Maize 7 Groundnuts ....... . ........... 8 Cotton 8 Cattle ............. 8 Development Organizations and Agricultural Credit 9 Agricultural Policy 9 C. Mining and Quarrying ........................ 11 D. Building and Construction .......1........... 14 E. Inidustry . .....0. ..... 15 F. Transport ... ...... 17 G. Power ........ .19 H. Tourism . .20 I. Planning .... ............... 21 J. Public Finance . .......... o........ * ... 23 Introduction .......23 Recent Budgetary Development ............. 24 Outlook for the Future .........25 K. Money and Credit *........................ 32 L. External Trade and Financial Position ....... 33 III. Prospects ...** * ** . .... ............... *...*. 39 (Continued)  TABLE OF CONTENTS (Continued) APPENDICES Al. Projection of Govermnent Revenue 1967-71 B. Statistical Tables MAPS  ZAMBIA 1/ BASIC DATA Area: 752,617 square kilometers (290,587 square miles) Population: (June 1966) 3.8 million, of which 98% African Rate of Growth (1954-66): 2.8% a year Population density (1966): About 50 per square kilometer Political Status: Independent Republic within the Commonwealth since October 24, 1964. Gross National Product at current Factor Cost (1966): K.703.4 million ($984.8 million) Rate of Growth - 1956-66: 8.5% - ].966: 23.9% Per Capita: K. 183 ($259) Gross National Product at Constant Market Prices Growth at constant 1954 prices, 1956-64: 6.5% Growth at constant 1965 prices, 1965: 25.5% 1966: -5.3% Gross Domestic Product at Factor Cost, 1966: K.761.4 million ($1,066 million) Of which, Mining: 46.8% Agriculture: 8.1% Manufacturing: 6.6% Building and Construction: 8.5% Government: 8.3% Other: 21.7% Percent of GDP at Market Prices 1966 Average - 1963/66 Gross Domestic Investment 28.2% 21.8% Gross Domestic Savings 43.3% 40.8% Gross National Savings 36.4% 31.3% Balance of Payments Current Account Surplus 16.3% 19.11% Net Investment Income Payments 7.5% 7.8% Government Tax Revenue 29.9% 23.1% Resource Gap as % of Investment, 1966 - none - / No i967 figures have been officially published at the present time (July, 1968).  Money and Credit Relationship to large monetary or customs area: Member of Sterling Area Percentage Change June 1967 June 1965 to June 1967 Tottal Money Supply K.113.5m. 67.1% Time and Savings Deposits K. 42.8m. 45.2% Commercial Bank Credit to Private Sector K. 36.6m (1966) 18.8% Change in Prices, June 1966- June 1967 (Combined Consumers Price Index) 4.3% 12.5% Annual Average Growth Public Sector Operations 1966 Rate 1957/66 Government Current Receipts K.254.2m 23.0% Government Current ExpendituresK. 131. 4m 20.7% Curr,ent Surplus K.122.8m 26.0% Government Capital ExpendituresK.118.6m 18.6% Total External Assistance to Public Sectors K. 4.2m - External Public Debt: (in U.S. $ million) June 1967 Annual Average Growth Rates Total Public Debt 189.0 2.7 (1965-1967) Total Annual Debt Service 15.4 (1964-1966) Debt Service Ratio ?.3 2.9 (K million) Annual Average Growth Rate Balance of Payments 1966 1962 - 1c66 Merchandise Exports 444.2 16.4 Merchandise Imports 263.2 19.3 Net Services -54.8 -3.4 Net Ihvestment Income -58.0 4.3 Net Transfers - 7.2 - b/ Current account balance (excl. transfers) 68.2 38.0 a/ Current account balance (incl. transfers) 61.0 35.0 a/ Commodity Concentration of Ecports, 1966 Copper - 93% a/ 1963 - iyo6. b/ Large annual fluctuations.  Gross Foreign Exchange Reserves: K.164m (June 1967) (or 7 1/2 months 1966 imports) IMF Position (US $ million) June 1967 1966 Quota 50.0 50.0 Drawings _ _ External Financial Assistance (US $ million) Outstanding on June 30, 1967 Average 1963/1965 Major Donors, Commitments Disbursed Commitments Disbursements U.K. 43.1 40.5 12.86 USA 14.0 6.7 .. 0.25  SUNNARY AND CONCLUSIONS 1. The landlocked Republic of Zambia, since it became independent in October 1964, has been led by President Kaunda and his United National Independence Party. Cabinet changes in September 1967 reflected the results of party elections, and have had some unsettling effects on the civil service. 2. Copper dominates the Zambian Economy, producing nearly half the GDPland two-thirds of government revenues and comprising over 90 percent of exports. The copper mines pay the highest wages and salaries; 74 per- cent more than the average for all African wage earners (60 percent more for non-Africans). 3. Apart from copper and a few relatively far less important minerals, Zambia is an agricultural country. Many areas of the north and northwestern provinces have poor soil fertility, a sparse population, and consequently low production. The eastern and central provinces have high production potentials. During the colonial era, European agriculture was concentrated in these relatively richer areas, especially along the "line of rail" between Livingstone in the south and the Copperbelt in the north- west, and in the Eastern province around Chipata (Fort Jameson). The European farmers have a much higher productivity than the African subsis- tence farmers. 4. The long-term problems connected with Zambia's economic structure have been overshadowed during the past 2-3 years by Rhodesia's Unilateral Declaraticn of Independence (UDI) in November 1965. The most serious of these has been in transport. Zambia has attempted to reduce' her use of Rhodesia Railways, which carried the bulk of Zambian traffic in and out of the!country, to a minimum. This has resulted in delays, interruption of production and trade and considerable increases in costs. 5. In dealing with both her short- and her long-run problems, Zambia is handicapped by a shortage of educated, trained and experienced person- nel. All sectors of the economy are heavily dependent on expatriate skills and will continue to be so for some time, despite the large expansion of the;educational system which is now being made. 6. Reductions in output of copper in 1966 were more than offset by steep rises in prices. GDP at current market prices rose 28.8 percent in 1965 and 21.3 percent in 1966, compared with 20.1 percent in 1964. GNP I/ per capita rose from K 116 in 1964 to K 153 in 1965 and K 183 in 1966. 7. Price increases during the period 1964 to 1966 were substantial. Nevertheless, real incomes of all wage earners appear to have increased, which has stimulated the move to the towns, where unfortunately opportuni- ties for employment are inadequate. There have been some very large wage 1/ At current factor cost.  - ii - incr'eases, particularly in the copper industry, which have widened already large differentials and have made it more difficult for Zambian products, both agricultural and industrial, to be competitive with those from other sources of supply. 8. Zambia's agricultural policy is designed to rectify as much as poss;ible the imbalances inherent in the existing structure of the sector, in which 80 percent of Zambians are engaged, mainly as subsistence farmers. The Government is trying to increase the productivity of African farmers by such means as training schemes for tobacco farmers. There is much emphasis on the regional nature of agricultural development schemes and an attempt to ensure that the bulk of investment does not go to the better- endowed areas and so increase existing disparities. The problem here is wher,e to draw the line between this social/political objective and the need to obtain the greatest economic returns to investment. It can be argued that, in terms of natural endowment, infrastructure investment, management and exterior revenues, investment in resettlement schemes in the richer areas could make better economic sense, and might have a better andlquicker chance of narrowing the differential in incomes and social amenities. 9. Output of the major export crop, tobacco, has been declining since Independence, mainly because of lower production of flue-cured tobacco, which is grown by European farmers. The profit margins of these farmers were squeezed by falling prices and rising labor costs. Prices rose again in 1967, but labor costs also increased as a result of the Government increasing minimum wages and fringe benefits. In the same year also, the Government increased significantly the maize subsidy. Since maize-growing is much less labor-intensive than tobacco, European farmers further reduced their tobacco output and greatly increased their maize production. Domestic consumption of maize is about 2 million bags (of 200 lbs.), but as a result of the subsidy, maize production rose to 4 .2million bags and the bulk of the surplus had to be exported at a con- siderable financial loss. Cotton production has continued to increase, with the increase coming largely from African farmers. Initially, the Government is concentrating its efforts to develop the livestock industry by increasing cattle production on state ranches, but it hopes to broaden this program to cover the whole livestock industry. There is need for a thc- ugh review of agricultural pricing policies. 10. The volume of mining output increased by 7 percent in 1965 but fell by 14 percent in 1966. This was due to a shortage of fuel from Rhodesia, resulting from transport difficulties connected with UDI. Zambia is now developing her own coal mines, and when a coal washing plant is operating by the end of 1969, it is hoped that the copper indus- tryi will be independent of the need for coal from Rhodeaia. Shortages of fuel and the increased cost of transporting it in have raised fuel costs per ton of copper by 200 percent since UDI. Transport costs of copper itself have also increased by 62 percent. The copper industry is making big efforts to 'Zambianisell its labor force, and has extensive training schemes. A commission, set up to inquire into conditions of service in  - iii - thelindustry, found that the disparity in conditions between expatriates andjlocal employees was largely unjustified. It recommended an immedi- atel22 percent increase in wages of local employees, and the adoption of a unified basic scale at the new local level. This recommendation was accepted by the Government and the copper companies and was implemented in 1966. It has, together with an earlier award, raised wage costs by K 16 per ton of copper, compared to the 1965 level. As a result, Zambia is now one of the highest cost producers of copper in the world. Future prospects are that copper prices will continue to fall from the abnormal- ly high levels of the past two years. It is therefore necessary for the good, both of the companies' profits and the Government's revenues from copper taxation, that costs be reduced wherever possible. When the Great North Road is upgraded by 1971, transport costs should fall to some extelnt. 11. Output of the construction industry expanded by 116 percent be- tween 1964 and 1966; of the increased output, 92 percent was on Govern- mentl account. The Government is greatly concerned over the increase of prices in the industry and is attempting to encourage new foreign con- struction firms to enter Zambia, in an effort to reduce what it consi- dersiare excessive profit margins. The industrial sector also grew rapidly during the same period, stimulated to a large extent by the acti- vities of the Government's Industrial Development Corporation (INDECO). The President recently announced that the Government would take a majority shareholding in 26 companies, limit remittances abroad by foreign compan- ies to 50 percent of profits or 30 percent of capital, theremaining prof- its to be reinvested in Zambia, would limit local bank borrowing by expa- triate business, and would restrict certain sectors (road transport, small contracting) to Zambians. It is too early to discern clear lines of re- action, although there is a general feeling that the effects of the measures will not be nearly so far-reaching as was thought at first. 12. The development of alternative transport routes to reduce Zambia's dependence on the route via Rhodesia to Beira has had top Government priority since UDI. The Great North Road to the Tanzanian port of Dar-es-Salaam has been the main alternative route chosen, and it is being reconstructed and resurfaced along its entire length, with United Kingdom, United States, Swedish and Bank/IDA help. The Great East Road Ito Malawi, which provides an outlet via Malawi Railways, and also to Beira;, is being upgraded to all-weather standard. In addition, an oil pipeline has been constructed from Dar-es-Salaam to Ndola on the Copper- belt.' Arrangements have been made to increase traffic through the port of Lobito in Angola, via Congolese rail routes. Agreement has been reached for China to construct a railway linking the existing line to the Copperbelt to Dar-es-Salaam. Surveys are now being made, but if construc- tion is begun in 1970, it will probably be 1977 or thereabouts before the line is operational. 13. The Zambian and Tanzanian Governments, with Italian partners, set up a transport company, Tan-Zam Road Services, to haul copper, petro- leum products (POL), and general goods along the Great North Road. Despite many problems, it succeeded in moving about 290,000 tons in 1966.  - iv - 14. Zambia Railways is now operationally separate from Rhodesia Railways, although division of the assets and legal arrangements have not been agreed. Central African Airways (CAA) has also been disbanded and Zambian Airways now operates independently, being managed under contract by Alitalia; no;agreement has yet been reached on the division of CAA assets. 15. Power developments have been affected by the deterioration in relations with Rhodesia following UDI. The integrated power system for Northern and Southern Rhodesia, which was set up after construction of the Kariba dam and power station in 1959, continued to operate after the Federation was dissolved in 1963, and after Zambia's Independence in 1964. Since UDI, however, the Higher Authority,comprising two Ministers from eachicountry, has not functioned, and the Board of the Central African Power Corporation (CAPC) has had to operate as a "committee", without clear legal status, on a day-to-day basis. The CAPC has therefore been unable to take decisions on future expansion of capacity. As a result, the system seems likely to be short of power in 1972/73. The original plan at the time of the construction of Kariba was that another power station would be built on the north bank when further capacity was re- quired. But after UDI, Zambia was unwilling to remain dependent upon power supplies controlled in any way by Rhodesia, and decided, therefore, to build a power station at Kafue gorge; the contract for this station was let in early 1968. Additional capacity has also been installed at Victbria Falls and at the Copperbelt Power Company (diesel turbines). On present demand forecasts, however, capacity at both Kafue and Kariba north bank will be needed by about 1980. 16. It was unfortunate that Zambia's First National Development Plan 1966-70 was launched just as the early consequences of UDI in Rhodesia gave rise to short-term problems that interfered with the attainment of the medium- and long-term objectives of the plan. The diveirsion of the extremely limited amount of technical and managerial skills available to the solution of such problems as the break-up of CAA and Rhodesia Railways, the building of Kafue, and the emergency use of unusual transport modes and routes has prevented the proper prepara- tionilof plan projects of long-term significance, in such sectors as edu- cation, agriculture and mining. 17. Zambia has been saved from financial difficulties during this period by the boom in copper prices, which has bolstered Government revenues and foreign exchange receipts. Thus, desp-te a rise in Govern- ment expenditures which tripled on current account between 1963 and 1966, and doubled each year during the same period on capital account, Govern- ment'savings were so high that an overall deficit did not appear until 1966;, when there was a small one of K 6 million. But the appearance of this'deficit points to the weakness of Zambia's current financial posi- tion+; copper prices are now falling and the overall Government deficits wil1iquickly get larger. Thus, more external finance will be required in future to finance capital investment. Zambia's fiscal situation, which has been so satisfactory because of large and increasing revenues  from the copper industry, is virtually certain to become worse in the near future, as raission projections demonstrate. Thus, in 1968, the cur- rent account surplus will be drastically reduced and deficits will appear therleafter unless action is taken to increase revenues from non-copper sources. The Government, therefore, must carefully examine all possible methods for broadening the tax base and increasing receipts from sources other than copper. At the same time, recurrent expenditures and the capi- tallinvestment program of the Government must be kept within the bounds of efficient use of available resources and the main priorities of economic andlsocial policy. This approach will become more a matter of necessity than~ choice, as copper prices and Government revenues from copper fall. 18. The Zambian balance of payments situation has been satisfactory, but the future outlook is less favorable, for the same reasons as those applying to the public finances, namely, the trend of copper prices. So far, very great increases in imports, especially of transport equipment and machinery, have been financed at the same time as reserves have in- creased, because of large export receipts from copper sales. In the future, as copper prices fall, the surplus in the current account will falliand increasing deficits appear and there will be pressure on these reserves, which will reinforce that coming from internal deficit financing caused by budget deficits due in part from the same cause - falling copper prices. Even so, projected import levels will only be attainable if sub- stantial amounts of aid from external sources are forthcoming. 19. Zambia's prospects are good, though qualified by the conse- quences of falling copper prices and the worsening of relations with Rhodesia. It is of course assumed that there will be no interruption of power supply from Kariba and that Rhodesian railways will not be cut off to residual Zambian traffic. Lower copper prices are, however, a virtual certainty, and are likely to cause budget and external deficits. Never- theless, Zambia can be considered creditworthy for substantial lending on conventional terms.  I. INTRODUCTION 1. The independent Republic of Zambia is less than four years old. As Northern Rhodesia, it formed part of the Federation of Rhodesia and Nyasaland, and gained a separate nationhood status when the federation was dissolved 1/. The country is landlocked with its nearest point more thanll,000 miles from the sea. 2. Since Independence, political power has rested exclusively with,the United National Independence Party (UNIP), led by Kenneth Kaunda, who is the country's President 2/. There are some inter- tribal 3/ tensions and rivalry, which until recently were kept under control by means of a careful balance of power in the Cabinet. The 1967 elections to the Central Committee of the Party, followed by Cabinet changes which reflected the results, have upset the previous balance and have!led to some dissatisfaction and unrest within the party. This has had an unsettling effect on government, since it has involved changes in civil service appointments. 3. The Zambian economy is beset with several forms of economic inequality. There is an imbalance between the copper mining sector and the rest of the economy; there are in addition imbalances among the wagelearning sectors, between the urban and rural sectors, between traditional and modern agriculture, and, finally, between poorer and the richer provinces. These differences have made the choice of a development strategy more difficult. The mining sector accounts for about, 48% of total GDP, over 90% of total export earnings and nearly 70% of government revenue. The average money wage of African mine workers is about five times the national average. And, although the proportion of the labor force affected by the operations of the copper mines (the most important type of mining) is small, as we shall see later,, the influence of this dominant sector is pervasive. 4. For the bulk of the population of about 3.8 million - mostly African - agriculture offers the only mode of livelihood. However, agricultural productivity varies from region to region and from commercial farming to traditional farming. There are many areas in the north and 1/ m!ne fcederation formally came to an end on December 31, 1963. In J,anuary 1964, an internal self-governing constitution was granted, and on October 25, 1964 the Republican Constitution was promulgated. 2/ At 1964 general election (UNIP) the ruling party won 55 of the main roll seats and the African National Congress the remaining ten seats. The National Progressive Party secured all the 10 reserved seats. The reserved seats are shortly to be abolished. 3/ There are more than 80 different tribes in Zambia, which can be grouped by language into Bemba-speaking (35% total population), Tonga (17%), Nyanja (16%), North-western (12%), Barotse (9%), Mambwe (5%) and Tumbuka (3%). The so-called tribalism is perhaps more correctly de- sgcribed as regionalism.  North-Western provinces where soil fertility is poor, population is sparse, and consequently production is low. On the other hand, the Eastern and Central provinces have high production potentials. In these relatively richer areas along "the line of rail" are settled a snall number of conmer- ciallfarmers - mainly European - who by using better production techniques have achieved a productivity many times that of the African subsistence farmers. The example and experience of the European farmers in commercial farming has, however, had little or no effect on the traditional ways of the African farmer. Thus, the division between copper and non-copper is superimposed upon yet a further division in agriculture which for both historic and economic reasons has tended almost to coincide with division between the poorer and richer regions. The problem which Zambia, like other countries, faces in her agricultural development is how to move farmers from the large subsistence sector into the commercial sector. There is considerable potential for agricultural development (including livestock, forestry and fishing) both in areas where the European farmers have settled and outside those areas. It will, however, require price incentives, credit and technical advice to bring about significant changes. 5. Although statistics on the division of the labor force into wage- earners and non-wage earners are not reliable, it is clear that the wage- earning sector of the economy is relatively small. Wage employment is confined to mining and construction, agriculture, the Government, banking and the few industrial and trading concerns in the cities. The average annual income of wage-earners in Zambia is high relative to income in both the non-wage sector and to other African countries. In 1966, for example, the average annual African wage was about K 886 in mining, K 612 in trans- portiand communication, K 456 in manufacturing and K 482 in commerce. These figures compare with the average of about K 176 in agriculture and the national per capita income of about K 183. The high money income of wage earners in Zambia is due mainly to the influence of copper mining wages. The small size of the working force, especially of expatriates, in mining and their strategic importance, combined with the profitability of the industry, made it possible for expatriate miners to obtain rela- tively high wages. Since Independence, wage differentials between expa- triates and Africans have been reduced by raising African rates. This has led to increases in wage rates in other industries, since the Government did not want to accept a widening of the differential between mining and other wages. Thus, the Government increased minimum wage rates and fringe benefits. 6. In addition to the long-term problems arising from its economic structure, Zambia has been faced with short-term problems resulting from the emergency that followed Rhodesia's Unilateral Declaration of Inde- pendence (UDI). Access to the sea and transport costs are in any case important economic matters for land-locked Zambia. The situation which Zambia inherited at Independence, in which the main transport route to the sea was via Rhodesia, was considered unsatisfactory by the Government because it was to some extent an artificial dependence, administratively created. Under the arrangements made, it provided the cheapest route for the bulk of Zambia's international trade, but the government did not like the way in which it helped to orientate most of Zambia's economic  relationships toward the South. The Rhodesian UDI and the subsequent policy of sanctions, which Zambia has supported as much as possible, im- posed an immediate requirement to "disengage" 1/ from Rhodesia. This has resulted in serious dislocations of transport, difficulties in trade and production, and substantially higher costs. 7. The single most important impediment to the solution of both the long- and short-run problems in Zambia is the shortage of educated, trained and experienced personnel. Although about 98 percent of the total population is African, all sectors of the economy are heavily dependent upon the expatriate labor force. When the country gained her independence, she had fewer than 100 African university graduates and fewer than 1000 Africans with secondary school leaving qualifications. Since Independence, the!Government has made a large effort to increase the number of men and women educated at primary, secondary and university levels, but the full effect of this expanded educational system will not be felt for the next 5-1$ years. As a result, the expatriate labor force is crucial for the country's economic development during this period. 1/ Both in the sense of not using the transport routes through Rhodesia, and in the sense of reducing the dependence on imports originating in Rhodesia.  - 4 - II. RECENT ECONOMIC DEVELORMENTS A. General 8. As far as measurable economic development is concerned, "as goes1copper, so goes Zambia". During the last two years the value of copper output has been high and rising; prices recently have been so highlas to more than compensate for the reductions in output due mainly to transport difficulties. According to provisional figures provided by the Central Statistical Office, the Gross Domestic Product (GDP) at market prices rose by 28.2% in 1965 and 20.7% in 1966, compared with 17.9% in 1964. 'GDP at factor cost, excludinig mining, rose by ll.9 percent in 1964, by 37.9 percent in 1965 and by 19.3 percent in 1966. Official figures of GDP at factor cost are not comparable with earlier years because since 1964 mineral royalties have been treated as in- direct taxes, and do not appear in the GDP at factor cost, 1/ the proportion produced in the mining sector was over 15 percent during those three years. Production in this sector grew at an annual average of 15 percent duriing the period 1964-66. However, the less significant sectors grew even!faster, such as construction (80 percent a year), public administra- tion'(34 percent a year) manufacturing (34 percent a year), and trade (28 percent a year). 2/ The changes in concept and coverage of these statistics make these comparisons to some extent inaccurate, and cer- tainly some sectoral figures (e.g. distribution) show spurious "statistical growth". 9. The figures given above are at current prices and are there- forei,,ot a true indication of the real increase in the domestic product, since some rise in prices did occur during the period. The mining sector in fact produced less in 1966 than in 1965 or 1964, because copper out- put was curtailed due to fuel shortages caused by transport problems resuiting from UDI in Rhodesia. At constant 1964 prices,3/ output of 1/ Before 1964 they were treated (rightly in our view) as rent, that is, as a direct tax on the mining sector. Moreover, export tax on copper is also now treated in Zambia's national accounts as an in- direct tax. There is more justification for doing so than in the case of royalties, though even here it can be argued that because the price of copper is set on the world market, the export tax cannot be passed on to the consumer, and therefore falls directly on the industry. All three East African countries treat all their export taxes as direct taxes in their national accounts. Through- out this report and in Appendix B, the copper royalty and the export tax have been treated as direct taxes. 2/ See Table 11, Appendix B. 3/ Obtained by deflating the GDP of the mining sector by applying the unit value added per ton in 1964 to the physical production of the mining i,ndustry (see Table 17, Appendix B) in 1965 and 1966.  the mining sector rose by 6.6 percent in 1965 and fell by 14.4 percent in 1966. If the GDP of the non-mining sectors is deflated, using the official comLined consumer price index I/ (which rose by 5.9 percent in 1965 and 7.8 percent in 1966), it shows a growth of 30.1 percent in 1965 and 9.7 percent in 1966. Combining the two sectors, the total GDP at factor cost (including mining royalties and export taxes) at constant 1964 prices rose 18.5 percent in 1965 and fell 1.0 percent in 1966. 10. Gross national product at factor cost (GNP) rose from K 416.6 million in 1964 to K 567.8 million in 1965 and K 703.4 million in 1966. Thesle are in current prices, and with a 1964 population of 3.6 million and 'an assumed annual rate of growth of 2.8 percent, they show a per capita GIP rising from K 116 in 1964 to K 153 in 1965 and K 183 in 1966. Excluding the mining sector, GNP per capita increased from K 49 in 1964 to K 79 in 1965 and to K 91 in 1966. l1. The limitations of the cost of living indices also make it moreldifficult to assess the change in the real standard of living of the Zambian population since 1964. The index for lower incomes shaos a risel of 7.6 percent in 1965 and 10.7 percent in 1966, with prices of foodi alone rising even faster, by 8.7 percent in 1965 and 13.3 percent in 1966. The index for higher incomes (all items) shows a 4.2 percent rise!in 1965 and 5.5 percent in 1966. These figures reflect a dis- turbing trend, especially in the greater rise for lower income families. Average earnings of Africans in all occupations rose from K 382 in 1964 to K! 508 / in 1966, or by 33 percent, while prices for low income groups, as we have seen, rose by 19 percent in that period. For non- Africans, average income rose from K3,294 in 1964 to K4,388 in 1966, also a rise of 33 percent while the pr-ce index for higher incomes rose by 10 percent. The indices for 1967 so far show a reduction in the rate of increase, so that it may be that inflationary pressures were being reduced during the course of the year, partly due to steps taken by the Central Bank to reduce the rate of increase of money supply.3J 12. From the preceding figures, it appears that real incomes of all wage-earners have increased since Didependence, and this has undoubtedly stimulated the move to the towns, where unfortunately, the opportunities for employment are inadequate. The number of vacancies notified to the labor exchange more than doubled (from 14,800 in 1964 to 32,800 in 1966), but the numbers registered as unemployed at the end of each month averaged 16,300 in 1966, compared with 10,900 in 1964. 1| The official cost of living indices are based on budget surveys which are out of date, and, according to the Director of Statistics, the deficiencies in their coverage impart a downward bias to the indices. To use them in deflating GDP figures will not entirely eliminate, therefore, the effect of rising prices on the growth of GDP. 2 hsTimates, based on earnings in the first quarter 1966. Source: Digest of Statistics 3J See Table 27- Appendix B.  6 B. Agriculture Structure of Agriculture 13. Zambian agriculture is characterized by three factors, which havelgreatly influenced the government's development policies. First, although agricultural production contributes less than 10 percent of total GDP at factor cost, over 80 percent of the population derive their livelihood from the land. Second, there is considerable regional dis- parity of soil fertility, climate and agricultural infrastructure. The