Economic Analysis
Zambia

Zambia

Population 18.3 million
GDP per capita 1,318 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 4.0 1.4 -3.0 0.8
Inflation (yearly average, %) 7.5 9.1 15.7 21.0
Budget balance (% GDP) -7.6 -9.1 -14.4 -10.0
Current account balance (% GDP) -1.3 0.6 11.6 6.5
Public debt (% GDP) 77.2 91.9 100.9 110.0

(e): Estimate (f): Forecast

STRENGTHS

  • Mining wealth (copper, cobalt, uranium, gold, diamonds, manganese)
  • Agricultural wealth (corn, tobacco)
  • Major hydroelectric potential

WEAKNESSES

  • Dependence on China: main importer of minerals and main bilateral creditor
  • Landlocked and dependent on communication routes from neighbouring countries
  • Insufficient electricity production based almost exclusively on hydro-electricity, poor transport networks
  • High inequality, health, education and administrative deficiencies
  • Sovereign default in 2020 and unsustainable external debt

RISK ASSESSMENT

Rising commodity prices are insufficient to pull the country out of the crisis

In 2020, growth recorded its first year of recession since 1998 due to the impact of the COVID-19 pandemic, which aggravated an already fragile situation. In 2021, the recovery has been sluggish, constrained by the debt crisis and high inflation, over 20% since the beginning of the year. However, inflationary pressures are expected to ease in the second half of the year due to improved food supply. The kwacha, which depreciated by 30% vs. USD in 2020, appreciated in July 2021 thanks to the allocation of IMF Special Drawing Rights (SDRs), improving foreign currency flows from the mining sector and investor optimism about negotiations with the IMF on a ECF programme.  After defaulting on its debt in November 2020, the country has been cut off from a large part of its external financing. In their absence, fiscal consolidation policies are expected to affect the contribution of public sector investment and consumption. The drying up of external credit is an obstacle to important imports of electricity and petrol. Thus, despite favourable copper prices (about 70% of goods exports) in 2021, growth will remain weak. Furthermore, the third wave of COVID-19 affecting the country and Africa more broadly, combined with limited access to vaccines, is delaying the recovery of the economy. A reputation tarnished by the sovereign default and amendments to the operating environment, particularly in the mining sector, are obstacles to the contribution of private investment. Moreover, investor and consumer confidence has also been eroded by a volatile social climate in an election year marked by violence and repression.

 

After the default, fiscal and external challenges are accumulating

While the country was already on a path of debt distress, the pandemic-related crisis made default inevitable, which became official on 13 November 2020, 30 days after the country missed a coupon payment of USD 42.5 million on one of its three Eurobonds. In end-January, the country missed a further USD 56.1 million due on another bond. The defaults follow chronic budget deficits, financed by non-concessional external debt (over 75% of external debt), which also includes loans from China and syndicated loans. The debt burden, 65% of which is denominated in foreign currency, has also been increased by the depreciation of the kwacha for almost a decade. The country faces difficulties in obtaining external financing, forcing the government to cut spending, particularly on capital investment. Consequently, the budget deficit is expected to narrow in 2021, but will remain high, driven by debt costs. Indeed, although benefiting from the G20 Debt Service Suspension Initiative, debt servicing will absorb over 40% of the budget in 2021. In this context, the government, which has committed itself to no new external commercial borrowing, is expected to increase domestic borrowing to finance the deficit.

The current account, which was in strong surplus in 2020, will remain so in 2021 but at a more moderate level. Indeed, after two consecutive years of strong decline, imports are expected to rebound, but copper exports, supported by strong global demand, should continue to sustain the goods balance surplus. The recovery in tourism will be marginal in 2021, fuelling the services deficit. Debt service payments will continue to weigh on the income deficit. Current international cooperation, following the default, is expected to decline, limiting the positive contribution of the transfer account. Low capital flows are also expected to lead to a deficit in the financial and capital accounts, maintaining the fragility of the country's external position. Foreign exchange reserves cover only about 2 months of imports.

 

A power shift in a tense social and political context

The presidential elections, held on 12 August 2021, resulted in the heavy defeat of incumbent President Edgar Lungu (Patriotic Front, PF) in the first round against opposition candidate Hakainde Hichilema (United Party for National Development, UPND), who obtained over 59% of the votes, thus taking the office in his sixth attempt. Unsurprisingly, Mr Lungu contested the result, arguing that the voting process was characterised by violence in three opposition-held regions. However, the scale of the defeat would render any legal proceedings by the PF almost futile in the eyes of the courts. Mr Hichilema, who benefited from the public’s hostility towards Edgar Lungu and the PF, will have his work cut out for him once he takes office. Indeed, social frustration in the country is at an all-time high: three years of declining per capita income, the debt crisis, the prevalence of poverty, tensions surrounding China's role, recurrent political violence and the COVID-19 crisis have been fuelling it. One of the priorities of the new president will be to conclude an agreement with the IMF quickly, so that progress can be made in negotiations with creditors and the burden of debt on the Zambian economy can be reduced. Another urgent issue will be to get the health situation under control and improve access to immunisation. Zambia is one of the countries most affected by the 3rd wave of COVID-19 that hit the continent in the summer of 2021, suffering from its poor capacity to fight the virus.

 

Last updated: August 2021

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