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Zambia: headwinds due to low copper prices

Country Report


Low copper prices and lower copper production have pulled the trade balance in negative territory and increased the budget deficit. This, combined with a sharp depreciation of the kwacha and a high share of  public debt being denominated in foreign currency, has increased public debt.  

Strengths (+) and weaknesses (-)

(+)      Large natural resource endowments

Ample mineral resources, a vast amount of arable land and high potential in tourism and hydropower make Zambia a resource rich country.

(-)       Narrow export base

Metals account for 75% of Zambia’s exports, which makes the current account very vulnerable to falling commodity prices. 

(-)       Low level of development

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

(-)       High levels of poverty and inequality

An extremely high (and, in recent years, increasing) level of poverty and income inequality in Zambia, youth predominance (66% of the population is under 24) and elevated unemployment (13% in 2013) make up for an environment that is prone to social unrest. 

Key developments

1. Economic growth is slowing

Economic growth has been relatively strong in recent years (averaging above 7% in the last five years), but is expected to decline to around 4% in 2015, compared with 6% in 2014. Various developments will have a negative impact on growth. First, the production of copper, the country’s main export product, is expected to decline for a second consecutive year in 2015. This is partly

due to low copper prices. In addition, hikes of the mineral royalty taxes implemented in January 2015 also had a dampening effect on copper production. Taxes for open-cast mines were raised to 20% from 6% and taxes for underground mines to 8% from 6%. The government subsequently cut the tax for all mines to 9%, after it became clear that these measures could significantly damage copper production. However, uncertainty created by those abrupt tax changes might still lead to a further decrease of copper production, and might negatively affect foreign investments in copper mines. Going forward, the production of copper is expected to decline further as Swiss mining giant Glencore announced the indefinite suspension of two copper mines due to high production costs and low copper prices in September 2015. This will result in 3,800 jobs to be cut. Second, continued power shortages as hydro power generation was affected by poor rainfall last year also weigh on economic activity, probably until at least the second half of 2016. Third, the weak rainfall is expected to harm the agricultural sector. On the bright side, lower inflation due to low commodity prices has supported household spending. The sharp kwacha depreciation, however, could lead to inflationary pressures as imports will become more expensive.

2. Public finances on a downward trajectory

Zambia’s public debt as a percentage of GDP is expected to strongly increase in 2015. Fiscal policy and the combined impact of debt structure and depreciation have driven this debt build-up. Zambia’s fiscal position has become increasingly strained, with government expenditures increasing by around four percentage points between 2012 and 2014 to 26% of GDP, while revenues remained stable at 20% during this period. The budget deficit is expected to widen in 2015 and to remain elevated during 2016, as the government’s revenues are likely to get hit by lower economic growth due to reduced copper production, lower copper prices and power shortages. Furthermore, the reduction of taxes for the mining sector implemented in January 2015 will weigh on revenues. In addition, in the run-up to the September 2016 elections an increase in government spending is likely, especially as economic growth is slowing, which might lead to unrest and increased support for opposition parties. With regard to the public expenditure side, interest costs on debt have increased as tighter liquidity in the domestic banking sector has diminished the demand for government paper. Furthermore, a 1.25bn USD Eurobond issued in July 2015 to finance the 2015 budget deficit will increase debt service costs, as the coupon rate is relatively high (8.97%). Moreover, clearance of arrears, maize purchases from farmers and an increase in goods and services expenditures will keep public expenditures high. Because of Zambia’s public debt structure (public debt denominated in foreign currency is expected to climb to around 26% of GDP in 2015), the sharp depreciation of the kwacha has driven up the debt-to-GDP rate. The recent Eurobond issuance adds to Zambia’s stock of moderate but growing external liabilities.

Figure 1: Deteriorating trade balance
Figure 1: Deteriorating trade balanceSource: EIU
Figure 2: External debt is increasing
Figure 2: External debt is increasingSource: EIU

3. Widening current account as a result of lower exports

Due to a large decrease in exports and a smaller decrease in imports, the current account has deteriorated strongly in 2015. Low copper prices and lower copper production have pushed the trade balance in negative territory,  even as Zambia posted a big trade surplus only a year ago. This, combined with a deteriorating external position increases external vulnerability. The external position is deteriorating due increasing external public debt and a slowdown of foreign asset accumulation, the latter reflecting reduced profits of copper producers. Although Zambia currently has a non-negligible import cover (4 months in 2015), interventions to minimise kwacha volatility, high costs for emergency power or a prolonged decline in copper production (copper accounted for 75% of exports in 2014) could pose risks to foreign exchange reserve availability. Furthermore,  the 2015 increase in import cover is due to one-off Eurobond issuance. The recent softening stance of Finance minister Chikwanda towards IMF support, however, is positive. An IMF program is unlikely to be concluded before the 2016 elections though.

4. Peaceful presidential by-election in January 2015  

Following the death of former President Michael Sata in October 2014, a peaceful presidential by-election took place in January 2015. The governing PF retained the presidency and former justice and defence minister Edgar Lungu will serve the remainder of late President Sata’s term until September 2016, when general elections will be held. The negative economic climate might increase support for the opposition ahead of these general elections. Given the PF’s tendency for populist policy, an opposition win by the UPND could significantly improve the policy environment.

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

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 second largest copper producer in Africa). The agricultural sector accounts for more than 70% of total employment, however. Agricultural output is susceptible to weather conditions, as it is dominated by subsistence farming. China, the largest consumer of copper worldwide, is Zambia’s main export market and an important source of FDI and funding for infrastructure investment. The presence of a high number of Chinese immigrants that do business in Zambia has led to tensions with the local population. Based on GDP per capita, Zambia has been classified as a low middle-income country since 2011. However,  the share of population living in poverty is one of the highest in the world and inequality is high and has been 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 a country in Sub-Sahara Africa. The country became a multiparty democracy in 1990. The 2011 elections led to a peaceful change of power to the Patriotic Front, ending 20 years of dominance by the Movement for Multiparty Democracy. 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. While the number of neighbouring countries is high (8), Zambia maintains amiable relationships with all of them. However, the country is vulnerable to unrest in neighbouring DR Congo, which has already led to a large inflow of refugees. 

Economic indicators of Zambia
Economic indicators of ZambiaSource: EIU
Carlijn Prins
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
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