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Zambia Economic Outlook

Macroeconomic performance

Real GDP growth has continued, at an estimated 4.0% in 2018, compared with 4.1% in 2017. Agriculture output contracted by more than 35% due to a rain shortage in early 2018. Copper production continued to increase by an estimated 4%–4.5% in 2018. Construction also contributed to growth, thanks to public infrastructure projects and investment in commercial buildings and residential housing, towing cement production, which increased at an estimated 10% in 2018.

High capital investment, high debt servicing cost, and a large wage bill have contributed to fiscal deficits, which peaked at 9.3% of GDP in 2015 before declining to 7.8% in 2017 and an estimated 7.1% in 2018, thanks to a fiscal consolidation program. However, the 2018 deficit still missed its target, 6.1% of GDP, due mainly to high capital spending, rising debt servicing, and growing arrears.

The debt-to-GDP ratio increased from 25% of GDP to 61% between 2012 and 2016, raising concern. In 2018, domestic debt was an estimated 20% of GDP while external debt, including government guarantees, fell to an estimated 39.2% of GDP. High public and publicly guaranteed debt led to Zambia being classified as being at high risk of debt distress in 2017.

Inflation increased to an estimated 7.6% in 2018 from 6.6% in 2017. The relative price stability led the central bank to reduce the policy rate from 15.5% to 9.75% in February 2018. Average lending rates fell from 29.5% in 2016 to 23.7% in September 2018. Gross international reserves continued to fall from $2.4 billion in 2016 to $2.1 billion in 2017 and were an estimated $1.7 billion by the end of 2018, corresponding to 2.5 months of imports.

Tailwinds and headwinds

The medium-term outlook remains positive, with growth projected at 4.2% in 2019 and 4.3% in 2020. Agricultural production declined in 2018 due to poor rain distribution but is expected to rebound in 2019. Mining output is expected to increase by 4%–5% in 2019, benefiting from improvements in electricity generation associated with the replenishment of the Kariba Dam due to good weather conditions. However, lower demand from China associated with escalating trade tensions is expected to further dampen the copper price, which fell by more than 18% in 2018. To raise tax revenue, the government is planning to change the mining tax regime, raising royalties by 1.5 percentage points and removing mineral royalty tax deductions from corporate taxes. On the downside, tax reforms might reduce Zambia’s competitiveness in attracting mining companies and could discourage mineral exploration. Another key downside risk to the outlook arises from the slow pace of fiscal consolidation, though a debt default is unlikely in the short term, given the probability of China extending tenure on Zambian debt.

Improving debt sustainability should remain a key priority over the medium term. In addition to strengthening the government’s fiscal position, an active debt management strategy would help strengthen confidence in the economy and rebuild some much needed fiscal space. To improve investor confidence in Zambia, the government announced measures aimed at improving debt sustainability and returning to a rating of moderate risk of debt distress. The measures include an indefinite postponement of new infrastructure projects and the cancellation of some contracted loans that are yet to disburse.