Economic studies
Zambia

Zambia

Population 16.2 million
GDP per capita 1,351 US$
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Synthesis

major macro economic indicators

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 4.7 2.9 3.0 3.9
Inflation (yearly average) (%) 7.8 10.1 19.1 13.0
Budget balance (% GDP) * -6.6 -9.2 -9.2 -8.4
Current account balance (% GDP) -2.4 -5.8 -6.3 -5.0
Public debt (% GDP) 33.6 56.3 56.1 58.8

 

(e) Estimate (f) Forecast

* excl grants

STRENGTHS

  • Mineral wealth (copper: leading producer in Africa, cobalt, uranium, gold, diamonds, manganese)
  • Significant hydroelectric potential
  • International financial support

WEAKNESSES

  • Dependence on copper
  • Landlocked and reliant on communication channels of neighbouring countries
  • Electricity generation almost totally hydroelectric, unreliable transport network
  • Extreme inequalities, health, education and administrative failings

RISK ASSESSMENT

 

Growth remaining weak

Mining production (around 15% of GDP) could increase again in 2017, following the sharp fall recorded in 2016 as a number of companies decided to cut capacities because of low copper prices. The Sentinel mine, opened in 2015, should gradually reach its production potential. Activity in the industrial sector could however continue to be held back by electricity shortages. The drought in the country in 2016 resulted in a drastic reduction in energy production, almost wholly from hydroelectric power plants. Improved climatic conditions should make it possible to improve the supply of electricity in 2017, but production capacities remain well below the level needed by companies and households.

The agriculture sector should feel the benefits of more favourable weather conditions than in 2016 and the services sector (telecommunications, retail, financial services), accounting for more than half of GDP, should make a positive contribution to economic growth.

The high rate of interest (15.5% at the end of 2016) and weak demand will drag down investment. Household consumption is likely to feel the impact of more restrictive budgetary policies and rising prices.

Inflation is expected to be lower in 2017 than in 2016, but still remain at a rate well above the central bank’s target rate (7%). Prices of food products are likely to remain high but will not increase sharply, provided that there is an improvement in the meteorological conditions with the ending of the El Niño phenomenon. In addition, any settling down in kwacha exchange rates would help limit price rises for imports. Nevertheless, the prices of some products (most notably petrol) are set to rise with the reduction in subsidies.

 

Towards enhanced budget discipline and slight improvement in the current account balance

The public deficit should start falling in 2017 as the rate of increase in expenditure slows. Following the generous wage rises (+29%) granted ahead of the elections in August 2016, the government is expected to bring growth in spending under control. In addition, a number of subsidies are set to be reduced (in particular that on petrol), especially if Zambia signs an agreement with the IMF: Financial support from the IMF is conditional on implementing budget discipline. At the same time, tax revenues should increase as a result of any upturn in mining activity (accounting for around 12% of State revenues). However, the cost of servicing the public debt, 65% denominated in foreign currencies, increased significantly following the depreciation of the kwacha in 2015 and is a burden on the budget. In addition, the arrears accumulated by the State with regard to state-owned companies are also likely to hinder any improvement in the public finances.

The increase in copper production (almost three-quarters of export earnings) should offset the continuing weakness in prices and help reduce the deficit. At the same time, increasing domestic electricity production should contribute to limiting the cost of imported energy. The inward flow of investments is expected to remain small but the decline in the mining sector investment should come to an end. The firming up in the exchange rate for the kwacha against the dollar seen in 2016 (+12% between January and the end of October) should continue in 2017, provided an agreement can be reached with the IMF (negotiations are scheduled to start in early 2017).

 

The disputed outcome of the presidential election has tarnished Zambia’s image

Edgar Lungu, elected in January 2015 to complete the presidential term of Michael Sata, who died in October 2014, was re-elected as head of state in September 2016. The victory of the Patriotic Front (PF) candidate, with barely 50.3% of votes in the first round, has been contested by the leading opponent, H. Hichilema, the candidate of the United Party for National Development (UPND), which obtained 47.6% of votes. Allegations of fraud, and the arrest in early October of the leader of the UPND, for inciting violence, have tarnished the mature democratic image of Zambia. Economic issues are exacerbating discontent within the increasingly divided population under the domination of the PF. Sporadic strikes cannot be ruled out, in particular in a context of the reduction in State spending.

Zambia’s performance in terms of governance is better overall than most other countries in the area and improving. But its performance is poor in terms of corruption (119th out of 209 countries) and government effectiveness (140th).

 

Last update: January 2017

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