Focus: Zambia’s economy on track

Focus: Zambia’s economy on track

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The Konkola Copper Mine. The country is currently ranked as the world's 7th largest copper producer

Zambia’s growth potential remains high, but the medium-term outlook is clouded by external risks. Nawa Mutumweno reports from Lusaka

Finance minister Alexander Chikwanda
Finance minister Alexander Chikwanda

Zambia’s economic growth over the past decade has been robust, averaging around 6 percent. This growth has been boosted by a combination of improved macroeconomic management, economic liberalisation and privatisation and the resource boom, specifically in copper mining. The strong performance is expected to continue in the medium term premised on increased mining output, rising construction activity and sustained strong growth in services and agriculture.
Non-mining growth has remained close to 7 percent, but technical outages at some mines led to a decline in copper production that is projected to reduce overall real GDP growth to about 5.5 percent in 2014. The exchange rate depreciated sharply in the first half of the year. A marked tightening of monetary policy and a boost to international reserves from Eurobond proceeds helped to partially reverse the depreciation and stabilise the exchange rate. Nevertheless, the annual rate of inflation edged up to 8.1 percent in November.
‘Zambia’s growth potential remains high, but the medium-term outlook is clouded by domestic and external risks,’ the IMF noted at the end of an appraisal mission to the country mid-December. ‘The outlook is buoyed by several mining and electricity supply projects that are about to come on stream. However, political and social pressures for loosening fiscal policy in the run-up to the 2016 general elections are potential sources of downside risks. Moreover, lower world copper prices and the announced shift to a royalty-only mining tax regime with high rates are likely to adversely affect the mining sector. The authorities indicated that they are looking to assuage the concerns of mines and prevent closures,’ the Fund added.
It said greater policy stability and consistency would help anchor confidence in Zambia as an attractive investment destination. In this regard, the mission urged the authorities to seek a speedy resolution to the impasse over VAT refunds to exporters. More generally, it will be important to enhance dialogue between stakeholders, particularly between government and the mining sector where there is a need to build mutual trust.
Effectively addressing the country’s fiscal imbalances is critical for maintaining macroeconomic stability and ensuring a strong foundation for sustained economic development. Despite some progress in 2014, keeping public finances in line with approved government budgets has proved challenging, and deficit financing has put upward pressure on interest rates. In the mission’s view—based on the current international and domestic environment—the 2015 financing requirement is likely to be larger than planned. The mission welcomed the authorities’ intention to take measures to keep the deficit within the budgeted level. Such consolidation would, with time, allow for a normalization of monetary policy and a reduction in interest rates.
Sector analysis
Mining

The Konkola Copper Mine. The country is currently ranked as the world's 7th largest copper producer
The Konkola Copper Mine. The country is currently ranked as the world’s 7th largest copper producer

After faltering in 2012 due to labour strikes and policy uncertainty following elections in 2011, growth in mining has rebounded with copper output accelerating and set to hit 1.5 million tonnes by 2015. However, prospects in the mining industry are conditional on the restoration of investors’ confidence, which should see renewed investment flows into new mines, and an expansion of capacity at existing plants.
The mining sector remains one of the key drivers of the Zambian economy, generating about 80 percent of foreign earnings. Nonetheless, the revenue effect of Zambia’s mineral resource boom has been weak, exacerbated by the lopsided mineral fiscal regime, which until 2008 favoured foreign investors.
Agriculture
The agriculture sector, which has shown resilience in recent years, is expected to benefit from Government’s increase of resource allocation to the sector and ongoing investments in agriculture infrastructure and crop diversification.
Productivity in Zambia’s agriculture sector is low due to a number of constraints and challenges. Capacity utilisation is low, while farming has been concentrated in staple food crops with minimal export value. The cost of production is high, brought about by limited access to long-term finance. Access to credit remains one of the main challenges facing Zambian small businesses. The agriculture sector also suffers from a shortage of skills, particularly for veterinary and extension services.
The Government has embarked on measures aimed at addressing the binding constraints to productive agriculture. To boost crop production, reforms are underway to encourage crop diversification with the Farmer Input Support Programme (FISP) expanded to cover other crops such as soya, cotton, sunflower and rice.

The agricultural sector is expected to benefit from increased resource allocation
The agricultural sector is expected to benefit from increased resource allocation

To alleviate delays in input distribution, Government has introduced an electronic voucher (e-voucher) system which is expected to strengthen the role of the private sector in supplying agricultural inputs. Livestock restocking, and streamlining of policy and scaling up of extension services, irrigation and research are additional policy measures being undertaken to increase agricultural productivity.
Zambian agriculture is predominantly rain-fed, adverse weather conditions – poor rainfall or floods – could jeopardise the sector’s growth prospects.
Manufacturing
In June 2012, the Government announced the establishment of industrial clusters countrywide, to be supported by appropriate industrial infrastructure for small and medium-sized enterprises (SMEs). This is meant to add value to agricultural products, making them competitive in export markets. In order to ease credit constraints, the Government recapitalised the Development Bank of Zambia, a Government-owned institution providing long-term finance.
Improving the recovery of loans by the Citizens Economic Empowerment Commission (CEEC) is also expected to avail resources to new applicants, especially the micro, small and medium entrepreneurs, which are hugely credit constrained. The banking sector is also expected to continue playing its intermediation role, with products designed for agriculture-related SMEs.
Tourism
The Government continues to put emphasis on the development of the tourism sector, viewed as a new growth frontier sector. Current challenges in the sector include uncompetitive tourism products characterised by the high cost of rooms and consumables and poor access to tourism sites. Thus, opening up pristine tourism spots outside the traditional tourism hub of Livingstone remains top priority on the Government’s policy agenda. Accordingly, the Government has upgraded major roads and related infrastructure leading to attractive yet unexploited tourism facilities. Te Northern Circuit, which cuts across Muchinga, Northern and Luapula provinces is a case in point as it teems with spectacular waterfalls and lakes.
In 2013, Zambia and Zimbabwe jointly successfully hosted the United Nations World Tourism Organisation conference. The Government is leveraging on spill-over effects of this event to portray Zambia to the world as a preferred tourism destination. The event was a grand opportunity to highlight the country’s investment potential in the tourism industry.
Construction
Growth in the construction industry is expected to gain from increased public infrastructure investments, including the launch of the Link Zambia 8000, Pave Zambia and Lusaka 400 road network project as well as energy projects on the backdrop of economic growth which has raised the demand for power. The ambitious road projects are set to transform Zambia from a landlocked to a land-linked country.
Telecommunications

The telecom industry is primed for further growth
The telecom industry is primed for further growth

Investors’ concerns about the fate of Zamtel have now eased. Zamtel was privatised and sold off to the Libyan-owned LapGreen but later repossessed following a public inquiry commissioned by the Patriotic Front (PF) government which revealed glaring irregularities in the sale process.
The telecommunications industry is primed for further growth, performing well on account of increased mobile phone and internet usage. However, poor connectivity, particularly of the internet, and high costs of mobile phone calls remain the vexing challenges facing the ICT and telecommunications sector.
Transport
The transport sector grew considerably in 2013 on account of positive performance in road and air transport sub-sectors.
Energy
The energy sector continued on its upward trend due to increased electricity generation and reliability with the supply of petroleum products. However, load shedding in most parts of the country continued much to the disillusionment of many citizens who called on Government to ensure that the projects underway were finalised to reduce the incidence of black-outs.
External  developments
Current account and trade balance remain positive with strong foreign direct investment (FDI) flows. But declines in trade balance in the recent past reflect the need to promote greater non traditional exports (NTEs) by diversifying the export base. Agriculture, energy and manufacturing sectors are going to be important sources of diversification over the medium to long term.
Zambia’s economic prospects are, however, subject to a number of risks. The country’s dependence on the mining sector continues to expose the economy to external vulnerabilities, such as demand and price shocks. With the global economy still plagued by uncertainty, demand for copper could remain depressed, even with China showing signs of recovery.
This could adversely put a cap on a rally in copper prices, and consequently delay recovery of the mining industry, thus harming economic growth.
Another risk is that investors’ concerns which had somewhat eased are back due to the demise of President Sata and the impending by-elections. There are lingering doubts that could raise expectations of possible policy reversals, causing investors to hold back on planned investments. In the worst-case scenario, investors could completely downsize their investments.
Economic benchmarks
The country endeavours to achieve the following in the medium –term:
• Real economic growth of between 7 – 8 percent targeted over the medium-term (2014 – 16)
• Budget deficits are expected to be consolidated towards a lower figure of 3 percent of GDP in the medium-term. Revenues are projected to rise to 23 percent of GDP by 2016
• Inflation targeted to decline to no more than 5 percent by 2016
• External debt will remain sustainable and well below the threshold of 40 percent of GDP
• Improving access to financial services as well as achieving better health and education outcomes outcomes critical in making meaningful progress in reduction of poverty and inequality
Zambia needs to achieve higher levels of economic growth to make meaningful headway in creating decent jobs and reducing poverty and inequality. Government remains committed to maintaining macroeconomic stability characterised by low inflation, stable exchange rate, rising international reserves and expansion in access to credit, particularly for SMEs.
Way forward
‘In 2015, the Government proposes to spend K46.7 billion ($1=K1,100) or 24.6 percent of GDP. This will be financed from domestic revenues of K35.1 billion which is 75.2 percent of the total Budget and 18.5 percent of GDP. Grants from cooperating partners of K1.2 billion or 2.6 percent of the total Budget will complement domestic revenue. Domestic borrowing is projected to be 2.0 percent of GDP, translating to K3.8 billion while K4.2 billion is a combination of foreign programmes and project financing. The balance of K2.4 billion is earmarked proceeds from the 2014 Eurobond,’ Alexander Chikwanda said in his recent budget statement.

Preliminary projections are that real GDP growth will be higher than the projected 6.5 percent for this year. This will be mainly driven by a good harvest in the 2013/14 farming season, increased electricity generation, investment in private and public infrastructure and growth in manufacturing as well as in transport and communications.

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