Zambia: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
Growth driven by copper sales and infrastructure construction
GDP growth is expected to slacken in 2011 but nonetheless remain strong: Earnings from the sale of copper will not grow as strongly with prices for the metal slackening. But the slight decline in mining investment will be offset by the acceleration in road construction and the launch of hydroelectric projects with recourse, where appropriate, to public/private partnerships. Chinese loans will thus finance the construction of the new Lower Kafue Gorge hydroelectric station and the extension of the existing Kiriba North Bank station before Chinese interests and the Zesco national electricity company jointly take over their operation. Tourism will continue to recover, and farm production will likely develop further thanks to increased use of inputs.
Accommodating economic policy in the run-up to elections
Any tightening of economic policy will doubtless be put on hold with legislative and presidential elections scheduled in October 2011. Public spending on social services, roads, agriculture, and the electric power network will, on the contrary, intensify. Tax incentives intended to foster industrial investment in the Multi Facility Economic Areas will be maintained. Fiscal revenues will struggle to grow at a steady pace as a result of deficient tax collection and the modest level of taxes on mining income (legacy of the privatisation process), especially with foreign grants likely to continue to decline. Although the public deficit and debt will grow in absolute terms, they will decline in relation to GDP as a result of economic growth.
Inflation is not expected to decline any further but rather to stabilize at around 8% notwithstanding the steadiness of food prices, which represent over 50% of the price index. And while the money market rate will be unlikely to vary much, the average rate for bank credit is still expected to reach 18%.
Current account deficit covered by foreign investment and borrowing abroad
Foreign trade will remain largely in surplus: the strong growth of copper sales - albeit greater in volume than in value terms - will counterbalance the rise of imports associated with the ongoing infrastructure works and foreign mining investments. Conversely, the deficit in the invisibles balance is expected to grow wider. The growth of dividends repatriated by mining companies and the increased recourse to foreign service providers in connection with imports, construction projects, and mine operation will wipe out the surplus derived from tourism earnings and emigrant worker transfers home. But as in the past, the current account deficit will ultimately be covered by foreign investment and international and bilateral loans (largely concessional).
With elections approaching, the game is on
The next general elections will take place in October 2011. Re-election of President Rupiah Banda and the Movement for Multiparty Democracy is not a sure thing. The opposition - the Patriotic Front and the United Party for National Development - has some chance: The Patriotic Front leader, Michael Sata, is very popular. The two opposition parties will make the most of their chances if they agree to put forward a single candidate and if the constitutional reform providing for a presidential election in two rounds of voting is adopted by then. Among the campaign themes, the more prominent ones will include combating corruption and administrative inefficiency, China's place in the economy, and development of agriculture and manufacturing.
Strengths
- World leading cobalt producer and leading African copper producer
- Vast hydroelectric potential
- Diversification of farm production and development of tourism with great potential
- Multi-party democratic political system
Weaknesses
- Dependence on copper and its market
- Manufacturing and farm sectors lacking competitiveness
- Zambia’s landlocked position hampering international trade and engendering high costs
- Frequent energy shortages and deficient transport networks
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Deep inequalities compounded by health, education, and administrative deficiencies