Zambia Economic Outlook

Economic performance and outlook

Zambia weathered two years of below-average rainfall in the agriculture seasons of 2015 and 2016. The two dry periods affected the regeneration of key hydropower reservoirs, which lost about 50% of their generation capacity, leading to significant load shedding of up to 12 hours. Combined with low copper prices, economic activity declined to its lowest in more than a decade, reaching 2.9% GDP growth in 2015; it rebounded to 3.4% in 2016. Good rains in 2017 increased agricultural production and ended load shedding. Growth is projected to exceed 4% in the medium term, aided by rising global demand for copper that boosted prices by more than 16% this year.

Macroeconomic evolution

Indicators show improvement throughout 2016 and 2017, despite slow growth. Following a spike in inflation that reached 18.2% in 2016 and excessive exchange rate volatility in 2016, the Central Bank effectively con- trolled prices by tightening monetary policy. The monetary policy rate was raised to 15.5% and the statutory reserve ratio to 18%, reducing market liquidity. Following a return to single-digit inflation in November 2016 and stable exchange rates, the Central Bank gradually rolled back the policy rate to 11%. The government’s aggressive spending program increased public borrowing in 2014 and 2015 and widened the budget deficit. In 2016, the deficit reached 6%; it is expected to decline in the medium term as the government implements its Economic Stabilization and Growth Program. Accrued public debt reached 61% of GDP in 2016, up from 21% in 2011. Higher debt and depreciation of the Zambian kwacha increased debt servicing. Despite high debt levels, international investors are regaining confidence in the government’s ability to manage the economy.

Tailwinds

Demand for copper in China is projected to continue to 2018; combined with the forecasted copper supply deficit, prices are expected to remain at their current levels or rise slightly into 2018. From 2016, the stability of the mining tax regime increased, which is expected to support copper investment and production in 2018. Ongoing energy reforms, driven by higher electricity tariffs, will continue into 2018; revisions to the Electricity Act and the Energy Regulation Act will increase guidance on grid access and encourage private- sector involvement. Reduced subsidies to the electricity and oil subsectors will help offset some fiscal pressures caused by higher interest payments and continued infrastructure investment drive. In 2016, international portfolio investors returned to Zambian securities, maintaining international reserves at $2.3 billion and raising domestic borrowing to more than 4% of GDP in 2017. The high domestic borrowing is expected to dampen growth of credit to the private sector.

Headwinds

Fiscal consolidation will be the key driving force for spending in 2018 as the government strives to meet its tar- gets. The International Monetary Fund’s (IMF) October 2017 reclassification of the country as being at high risk of debt distress in October 2017 will pose challenges for the government in the coming years. The reclassification is expected to add upward pressure on lending rates, although the more positive growth outlook is likely to push interest rates downward. Agreeing to a fiscal stabilization program with the IMF in 2018 would help offset some of the effect. The government needs to prioritize lending in the coming years as it tries to regain market confidence, leading up to the rolling over of the 2022 Eurobond. Contractor-financed projects, with no clear tendering pro- cess, increased the cost of projects, leading Zambians to question whether their taxes are achieving value for money.

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