Economic studies
Zambia

Zambia

Population 18.9 million
GDP per capita 1,023 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 1.4 -3.0 3.1 3.3
Inflation (yearly average, %) 9.1 15.7 22.6 15.0
Budget balance (% GDP) -9.5 -14.2 -10.4 -7.2
Current account balance (% GDP) 0.6 12.6 9.5 8.1
Public debt (% GDP) 88.4 130.4 130.0 130.5

(e): Estimate (f): Forecast

STRENGTHS

  • Mining wealth (copper, cobalt, uranium, gold, diamonds, manganese)
  • Agricultural wealth (maize, tobacco)
  • Major 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 production is insufficient and based almost exclusively on hydropower; transport networks are unreliable
  • High levels of inequality; healthcare, educational and administrative deficiencies
  • Sovereign default in 2020 and unsustainable external debt

RISK ASSESSMENT

Despite fiscal pressures, the recovery continues

High copper prices, the commissioning of the Kafue Gorge Lower hydroelectric plant, and a return to normal rainfall patterns allowed the economy to resume growing in 2021 after its first year of recession since 1998. In 2022, while still facing many challenges, activity should strengthen on the back of private consumption. Household incomes should benefit from the easing of inflationary pressures, which were fuelled in 2021 by the pass-through effect of kwacha depreciation and rising food prices. Renewed investor confidence following the change in government and favourable copper prices should help contain pressure on the currency, supporting gradual disinflation in 2022. This will be accompanied by the Bank of Zambia, which already raised its key interest rate from 8.5% to 9% in November 2021. If weather conditions remain favourable, the launch of a new agricultural support programme for the 2022/23 season could also boost household incomes (nearly 50% of the workforce is employed in the sector). In addition, consumption will benefit from the reopening of the economy as COVID-19 vaccinations progress. However, the threat of restrictions will continue to loom, as only 4% of the population was fully vaccinated by the end of November 2021. While COVID-19 will continue to dampen the recovery of tourism (7% of GDP in 2019), associated revenues are expected to grow more strongly in 2022. Copper production and prices (70% of exports) will also support increased export earnings. However, the rise in imports associated with the pickup in domestic demand is expected to result in a negative net contribution from foreign trade. The recovery will be further supported by private investment. While high copper prices and the reintroduction of measures allowing mining royalties to be deducted from corporate income tax will support investment in the mining sector, the development of the manufacturing sector could benefit from further tax breaks for export-oriented investments and the reduction of the corporate tax rate from 35% to 30%. However, fiscal consolidation efforts following the November 2020 sovereign default will put pressure on public consumption and investment.

 

The new administration faces fiscal challenges

Thanks to higher mining revenues and a record dividend payment from the central bank, the government deficit narrowed in 2021. However, it remained substantial, due to increased government spending, including on fuel, agricultural input subsidies, and election-related spending. In 2022, the new government is expected to implement fiscal consolidation efforts to put the public debt back on a sustainable path, following the default on the external debt (nearly 65% of the public debt) in November 2020. Pending agreements with the IMF and debt restructuring with private creditors and China, which the authorities hope to achieve this year, the 2022 budget projects that debt service will account for nearly half of expenditures and more than 75% of revenues. While the authorities will try to preserve social spending, especially on health and agricultural support, investment spending is expected to decline. Revenue growth, thanks to brisker activity, will be curbed by the tax breaks and cuts aimed at attracting private investment. To limit the accumulation of debt, the authorities intend not to take out new non-concessional loans (nearly 70% of external debt), except for refinancing operations.

 
The current account surplus, which remained substantial in 2021, is expected to narrow in 2022. Rising imports are set to erode the large trade surplus, while further growth in copper exports and the rebound in tourism revenues will be modest. Significant interest payments on external debt are also expected to result in a large primary income deficit. The modest surplus in the transfer account is expected to remain relatively unchanged. The SDR allocation from the IMF boosted foreign exchange reserves (from 2.6 months of import coverage in June 2021 to 4.9 in September), giving the Bank of Zambia more room for manoeuvre.

 

Political and social tensions ease following transition

The August 2021 presidential elections resulted in a heavy defeat for incumbent president Edgar Lungu and the Patriotic Front (PF) in the first round of voting, as opposition candidate Hakainde Hichilema and the United Party for National Development (UPND) took over 59% of the vote to end the PF's ten-year rule. Despite some pre-election fears, the transfer of power went relatively smoothly. With a majority in the assembly (91 of 165 seats), the new president announced steps to fight corruption, restore debt sustainability and promote investment. Negotiations with the IMF and external creditors, which were launched in 2021, are one of the first steps in achieving the latter two goals. Getting the health situation under control and enabling access to vaccines will also be a priority. The social climate was strained in the run-up to the elections but appears to be easing. However, frustration with the weak economic situation, widespread poverty, tensions over China's role and COVID-19 could quickly resurface. 

 

Last updated: February 2022

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