Wirtschaftsanalysen
Zambia

Zambia

Population 17.2 million
GDP 1,491US$
D
Country risk assessment
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Business Climate
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 3.8 3.4 3.9 3.4
Inflation (yearly average, %) 18.2 6.6 7.5 8.4
Budget balance (% GDP) -5.7 -7.9 -7.5 -6.9
Current account balance (% GDP) -4.6 -4.5 -4.8 -4.4
Public debt (% GDP) 60.7 63.1 66.9 69.2

(e): Estimate. (f): Forecast.

STRENGTHS

  • Mineral wealth (copper, cobalt, uranium, gold, diamond, manganese)
  • Agricultural wealth (maize, tobacco)
  • Significant hydroelectric potential

WEAKNESSES

  • Dependence on copper, which is further accentuated by dependence on China, the main importer of ore
  • Landlocked and dependent on the transport routes of neighbouring countries
  • Electricity generation is insufficient and based almost exclusively on hydropower; unreliable transport networks
  • High levels of inequality; healthcare, educational and administrative deficiencies

RISK ASSESSMENT

Stronger growth subject to downside risks

Growth is expected to increase in 2019, mainly driven by the mining sector, which will continue to be the number-one target for private investment. Higher copper prices, compared with the low levels of 2016, should continue to support an increase in production volumes. Investment should also benefit related sectors such as transport, energy and construction. Conversely, hikes in mining taxes and waning investor confidence could be a drag on the increase in investment. In addition, the impact on copper demand of a slowdown in the Chinese economy could constrain export growth. Economic activity will also suffer from spillover effects linked to rising concerns about external debt. Inflation in the cost of debt service may therefore prompt authorities to trim public spending. Fiscal consolidation efforts, though cautious, will also affect public consumption and investment, with, in particular, many projects being suspended or postponed. Meanwhile, the slowdown in credit growth, following the rise in the cost of credit, is likely to depress private consumption. Although a rebound in agricultural production is on the cards for 2019, household consumption is expected to continue to feel the effects of the poor 2018 performance by the sector, on which nearly half of the population depends. Household income may also be eroded by inflation, which could increase given the deflationary pressures on the kwacha.

 

Debt sustainability in jeopardy

In 2019, the large fiscal deficit, resulting from increased public investment and subsidies, lower copper prices and higher debt service, is expected to shrink only modestly. The 2019 budget forecasts revenue growth through a change in tax regime for the mining sector and tax hikes, among other things. Furthermore, by focusing capital expenditure on projects that are at least 80% completed, the authorities hope to rationalise public expenditure. Despite these measures, however, lowering the budget deficit is expected to remain a slow process, partly due to debt service, which will continue to eat into public resources: in 2017, debt service absorbed almost a quarter of revenues, up from 6% in 2011. The rapid accumulation of public debt since 2011 (21% of GDP), and particularly of non-concessional external debt, which went from 23% of external debt in 2011 to 77% in 2017, is at the root of the increase in debt service. The risk of debt distress now looks high and contingent on a depreciation of the kwacha.

The current account deficit is expected to remain substantial. While the goods surplus is set to increase further on higher copper exports and lower capital goods imports, the deterioration in the income balance is expected to continue to weigh heavily. In addition to profit repatriations by foreign companies, debt service payments are expected to continue to affect the balance. External debt service, which is responsible for nearly two thirds of the country's foreign exchange outflows, has drained the foreign exchange reserves, which now stand at two months of imports. In this context, the kwacha is expected to remain under significant pressure, especially since negotiations on an IMF programme have stalled. The deficit in the balance of services, mainly related to mining, and the surplus in the balance of transfers, particularly from expatriates, are expected to remain relatively stable. The current account deficit is generally financed by FDI inflows.

 

Corruption scandals undermine the credibility of governance

Since the tense elections of 2016, which were won by Edgar Lungu (Patriotic Front), the political situation seems to have deteriorated. After being criticised for authoritarian abuses, in March 2018 the President and his government were the subjects of a motion to impeach tabled by the main opposition party – the United Party for National Development – for violation of the constitution. Although it was unsuccessful, the motion illustrates the difficult political climate surrounding Edgar Lungu's presidency. Within President Lungu’s own party, tensions persist over whether it is legal for him to run again. Zambia’s constitution limits the number of terms to two, and Mr Lungu served as interim leader in 2015 after the death of President Michael Sata. However, these tensions could subside after the Constitutional Court ruled in December 2018 that President Lungu could run in 2021.

Corruption scandals that were uncovered in 2018, including the misappropriation of USD 4.3 million in social protection subsidies, are fuelling perceptions of economic mismanagement in the country. In response to this scandal, four countries (United Kingdom, Sweden, Finland and Ireland) decided to freeze aid to the country, contributing to a deterioration in the credibility of governance and the fight against corruption at international and domestic levels. Although relatively favourable compared to its peers in sub-Saharan Africa, the business climate still suffers from shortcomings (87th out of 190 countries in the 2019 Doing Business ranking), particularly in terms of cross-border transport costs.

 

Last update: February 2019

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