Zambia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Mineral wealth (copper, cobalt, uranium, gold, diamonds, manganese)
- Agricultural wealth (maize, tobacco)
- Significant hydroelectric potential
- Dependence on copper, which is further accentuated by dependence on China, the main importer of ore
- Landlocked and dependent on the transport routes of neighboring countries
- Electricity generation is insufficient and based almost exclusively on hydropower; unreliable transport networks
- High levels of inequality; healthcare, educational and administrative deficiencies
- Sovereign default in 2020 and unsustainable external debt
Debt crisis succeeds pandemic crisis
In 2020, the economy recorded its first full year of recession since 1998, with the impact of the COVID-19 pandemic exacerbating an already unfavorable situation. In 2021, recovery will be sluggish, constrained by the debt crisis. It will be mainly driven by household consumption, which should benefit from the easing of restrictions associated with the pandemic. However, high inflation, which will be sustained by the depreciation of the kwacha and a probable rise in electricity prices, will contain the rebound. After defaulting on its debt in November 2020, Zambia will be cut off from much of its external financing. In the absence of this financing, fiscal consolidation policies are likely to impact the contribution of public investment and consumption. In particular, the lack of external credits will be an obstacle to electricity imports. Low water levels at the Kariba hydroelectric dam, which generates power for the mineral-rich Copperbelt province, have already prompted the Minister of Energy to warn of electricity rationing until March 2021. This is expected to affect activity in the mining sector. Thus, while copper prices (about 70% of goods exports) are expected to be more favorable in 2021, export volumes could be hurt by these power supply issues, like in 2019. Furthermore, with tourism making a timid recovery, the contribution of foreign trade will probably be limited. Reputational damage caused by the sovereign default, coupled with changes to the operating environment, especially in the mining sector, will hamper the contribution from private investment. Investor and consumer confidence could also be undermined by an unstable social climate in an election year.
Post-default budgetary and external challenges start to build
While the country was already on a worrying debt trajectory, the post-pandemic crisis made default inevitable. It became official on 13 November 2020, 30 days after Zambia missed the deadline for a USD 42.5 million coupon payment on one of its three Eurobonds. This followed chronic budget deficits financed by non-concessional external debt (more than 75% of the external debt), which also comprised loans from China and syndicated loans. The kwacha’s almost decade-long depreciation has further increased the debt burden, 65% of which is denominated in foreign currency. As a result, the country is expected to face 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, fuelled by the cost of debt as, despite benefiting from the G20 debt service suspension initiative, debt servicing will be only marginally eased and will absorb over 40% of the budget, according to the 2021 budget. While the government hopes to conclude restructuring agreements, these may take time. Progress in these talks will also depend on whether an agreement is reached with the IMF. In this context, the government, which has pledged not to take out new external commercial loans, is expected to increase domestic borrowing to finance the deficit.
In 2021, after two consecutive years of surplus, the current account is expected to return to deficit, following a reduction in the trade surplus, with imports set to rebound after declining for two consecutive years, despite a jump in copper exports. A recovery in tourism should help to reduce the services deficit, but debt service payments will fuel the income deficit. Current international cooperation, following the default, is expected to decline, limiting the positive contribution from the transfer account. Weak capital flows are also expected to lead to a deficit in the financial and capital accounts, maintaining the country’s fragile external position. Therefore, severe pressure will continue to be exerted on foreign exchange reserves (about two months of imports covered) and the kwacha, which depreciated by more than 30% in 2020.
Controversial elections ahead in 2021?
Edgar Lungu, a member of the Patriotic Front (PF), who was elected in 2016, will undoubtedly stand for re-election in August 2021, despite the controversy surrounding his candidacy. Zambia’s Constitutional Court ruled in 2018 that the 18-month interim period (2015-2016) served by the president following the death of Michael Sata did not constitute a first term and that he could therefore run without exceeding the limit of two terms. After two years of declining per capita income, probably followed by a third in 2021, the debt crisis, widespread poverty, the perception of an authoritarian shift and tension over China's role in the country will fuel social frustration and could undermine support for the PF and Edgar Lungu. While he avoided a second round in 2016 by squeaking past the 50% threshold, the president may have to face one this time around. He could come up against the candidate of the United Party for National Development (UPND), which, like in 2016, is expected to be the main opposition. A victory for President Lungu and the PF in the legislative elections would probably be challenged. The aborted October 2020 attempt at a constitutional reform, criticized as an attempt to consolidate the power of the PF and the president, is an indicator that the electoral process is likely to feature controversy. Threats to withdraw Glencore's mining licence in April 2020 were another signal to participants of a deteriorating business climate. In 2021, the precarious health of public finances may push the government to increase mining taxes, in a further blow to sector participants.