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Country Report Zambia

Country Report


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Declining copper prices have led to a deterioration of Zambia’s external position, while the persistence of current political tensions and incoherent policies could make matters worse.

Strenghts (+) and weaknesses (-)

(+) Generous natural endowment

Royal mineral resources, vast arable land and high potential for developing tourism and hydropower make Zambia a resource rich country - a strong base for economic development and for attracting investments.

(-)  Narrow export base

Metals account for 80% of Zambia’s exports, rendering foreign income very vulnerable to volatile commodity prices. 

(-) Low level of development

Zambia has a huge infrastructural deficit, especially in transportation and energy, which constrains the economic growth below potential. 

(-) Extreme poverty and inequality

The extremely high level of poverty and income inequality in Zambia, which have worsened in recent years, youth predominance (66% is younger than 24) and elevated unemployment (13% in 2010) make up for an environment that is prone to social unrest. 

Key developments

1. Drop in copper prices pushes the current account balance into the red

In 2012, lower metal prices (especially copper) adversely affected export revenue and, since import demand was resilient, the trade surplus almost halved to 7.2% of GDP (from 11.4% of GDP in 2011). Consequently, the current account balance registered a deficit of 0.9% of GDP for the first time since 2008, rendering Zambia reliant on external financing. In 2012 the current account deficit was comfortably financed by FDI inflows, which amounted to 4.4% of GDP. The current account deficit is expected to widen to 5.3% of GDP in 2013, as lower metal prices and high import demand due to investments in mining and infrastructure persevere. At the same time, stable FDI inflows are expected to continue to provide sufficient cover.

Copper prices dropped by 17% in the first half of 2013. Against a backdrop of higher costs, due to measures implemented by the Zambian government in the past 2 years (e.g. higher royalties, a lower capital expenditure deduction rate), the lower prices forced some Zambian companies to consider job cuts. However, the decline has not yet affected planned investments that should almost double copper production to 1.5m tons by 2016. If that happened, it could undermine currently stable FDI inflows and render Zambia reliant on portfolio or debt inflows to finance the forecasted current account deficits, which would make it vulnerable to international market sentiment and global developments. Such developments could have quite an impact, as indicated by the fact that Fed tapering fears in June pushed the Zambian Eurobond yield up by 24% to 7.2% between 22 May and 25 June. It is therefore positive that copper prices are expected to strengthen in 2014 and only fall slightly afterwards, as this is set to reduce Zambia’s vulnerability to market sentiment. However, global oversupply of copper and slowing economic growth in China pose serious downside risks.

 2. Fiscal imbalances worsened and the debt profile changed

Zambia’s budget deficit increased to 5% of GDP in 2012 and is expected to reach 6.2% of GDP in 2013, pushing public debt to 35% of GDP in 2013, 5 ppts higher than in 2011. However, according to the IMF, the shortfall might be even larger, as the deficit had already reached 5% of GDP in the first half of 2013 and was expected to reach 8.5% of GDP in FY 2013. On top of that, the Eurobond issued in 2012 not only increased external public debt by 61%, it also changed its structure, as the share of commercially financed external public debt increased (49% of external public debt was financed commercially in 2012, compared to 23% in 2011). Higher budget deficits, increasingly financed by external commercial sources, have increased Zambia’s reliance on external financing and have made it more vulnerable to global developments such as the Fed tapering mentioned earlier.

Figure 1: Fiscal imbalances worsen
Fiscal imblances worsenSource: EIU
Figure 2: Fed tapering impact on bond yields
Fed tapering impact on bond yieldsSource: Bloomberg

3. Mixed signals on policy creates uncertainty for investors

Most of the policies adopted by the Patriotic Front (PF) cabinet since it took office in 2011 were inclined towards an interventionist approach. Despite some market- oriented measures, such as the adjusted tax regime to support the troubled mining sector, most policies unnerved investors (e.g. the compulsory temporary repatriation of export receipts, the fund for boosting domestic participation in the mining sector and the prohibition of auctioning Zambian gemstones abroad). The government seems to be carrying out a tough balancing act between supporting local development and maintaining an investment-friendly business environment to sustain job creation and public revenues. The resulting incoherent policies, however, create uncertainty for investors.

4. Opposition harassment increases political tensions

Ever since the 2011 election, the PF has exhibited increasingly authoritarian tendencies in dealing with the opposition and critics. The harassment of the opposition included suspicious temporary arrests of opposition leaders, an attempt to dissolve the Movement for Multiparty Democracy (MMD), attempts to block opposition rallies and sustained efforts to gain parliamentary majority by inducing by-elections. The judiciary has managed to keep such transgressions in check so far and is expected to continue to do so. These developments do not threaten general stability, but have increased political tensions and discontent amongst the population, and could distract the government from policy making. 

Factsheet of Zambia
Factsheet of ZambiaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.


  1. On 1 January 2013 the old Kwacha (ZMK) was replaced by the new Kwacha (ZMW); ZMW = ZMK/1,000;
  2. In previous reports Switzerland was the second largest export market; however, the majority of the merchandise flows comprised transit goods which Switzerland does not record as imports, leading to large discrepancies with the Zambia trade data. This seems to have been corrected in 2012. 

Background information

Zambia is a landlocked country in the south of Africa. Industry, particularly mining, is the country’s main foreign exchange earner. Zambia is the world’s third-largest emeralds producer and seventh-largest copper producer (and the largest in Africa). However, output is mainly accounted for by services and employment by agriculture (more than 70%). Agricultural output is susceptible to weather conditions, as it is dominated by subsistence farming. China, the largest consumer of copper worldwide, is Zambia’s largest export market and an important source of FDI and funding for infrastructure. Based on GDP per capita, Zambia has been classified as a low middle income country since 2011. However, poverty remains widespread (5th largest share of population living on less than USD 1.25 a day amongst the 120 countries for which such data is available) and inequality is high and worsening (the Gini Index worsened from 42.1 in 2003 to 57.5 in 2010).

Zambia gained independence in 1964 and has managed to avoid widespread violent conflict so far, which is remarkable for Sub-Sahara Africa. The country became a multiparty democracy in 1990. The 2011 elections led to a peaceful change of power to the PF, ending 20 years of MMD dominance. The Zambian system concentrates power in the function of the president. Elections are held every 5 years and the next ones are scheduled in 2016. The constitution has been under revision since 2003 and recent drafts indicate the revision will strengthen institutions. Despite the large number of neighboring countries (8), Zambia maintains amiable relationships with all of them. However, the country is vulnerable to unrest in neighboring DR Congo, which has so far led to a large inflow of refugees.

Economic indicators of Zambia
Economic indicators of ZambiaSource: EIU
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2326 6856

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