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Zambia Economic Outlook
Macroeconomic performance and outlook
Real GDP growth slowed to an estimated 2% in 2019, down from 4.0% in 2018. Zambia’s economy was hit by drought in the south and west that lowered 2018/19 agricultural production and hydropower electricity generation considerably. Severe electricity rationing followed, and long periods of electricity load shedding dampened activity in almost all economic sectors. Zambia also faces slower mining, with reduced output and lower copper prices. Economic activity is expected to remain weak, with growth rebounding moderately to 2.4% in 2020 and 2.9% in 2021.
Public investment has severely strained public finances. Overreliance on nonconcessional external borrowing since 2012—to finance large-scale infrastructure projects—has resulted in large fiscal deficits since 2014 (going from 6.5% of GDP in 2013 to 12.1% in 2015, 10.5% in 2018, and 7.7% in 2019). Large domestic payment arrears have also accumulated (9.7% in 2019). The rapidly increasing public debt (80% of GDP at the end of 2019, up from 35% at the end of 2014) places Zambia at a high risk of debt distress.
Inflation rose from 7.5% in 2018 to 9.2% in 2019 and is expected to remain at 9% in 2020–21, pushed by large exchange rate depreciations and food price increases. This prompted monetary policy tightening, with the Bank of Zambia raising the policy rate by 50 basis points to 10.25% in May 2019. The current account deficit is expected to widen to 2.8% of GDP in 2020–21 due to increased public investments and mining sector imports, and higher debt-service payments reduced foreign reserves to 1.6 month of imports at the end of 2019.
Tailwinds and headwinds
Growth is expected to get a boost from the government’s medium-term strategy for inclusive growth, set out in the Seventh National Development Plan (7NDP) for 2017–22. The 7NDP identifies tourism, mining, energy, and agriculture as sectors that drive growth and create jobs and sites for economic diversification. It identifies infrastructure, access to markets, and information and communication technology as growth enablers.
In agriculture, the 7NDP plans an integrated information system to support agribusinesses, farmer expansion, and extension services. It supports climate-smart agriculture to build resilience. It will improve delivery of the Farmer Input Support Program to raise farmer productivity and promote livestock and fishery development to diversify agriculture.
In mining, the 7NDP focuses on mining gemstones and industrial minerals to diversify beyond copper. In energy, it plans to boost capacity and diversify sources —with projects already developed, including solar energy. Infrastructure for transport is planned, with roads already being built. In tourism, the aim is to diversify and make it a job creator by rehabilitating infrastructure to and within tourist sites.
Risks from the drought call for public programs that enhance agricultural resilience and diversify the sources of energy production. Measures outlined in the 2020 budget to build agricultural resilience can mitigate this to some extent, but requires sustained implementation.
To reduce risks associated with debt requires a major and sustained fiscal adjustment—ranking public investment projects, postponing new nonconcessional debt, ceasing to accumulate domestic arrears, strategizing to reduce them, and mobilizing more revenue. The 2020 budget reflects these requirements.
External risks arise from weakening global demand and tightening global financial conditions. Escalated US–China trade tensions would lead to a drop in demand for copper and greater volatility in copper prices. These risks reflect longstanding reliance on a narrow economic and export base driven by copper mining. Reducing these risks requires Zambia to fasttrack diversification and speedily transition the economy to a broader model led by the private sector.