Zambia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Mineral wealth (copper: leading producer in Africa, cobalt, uranium, gold, diamonds, manganese)
- Agricultural wealth (maize, tobacco)
- Significant hydroelectric potential
- International financial support
- Dependence on copper; poorly diversified economy
- High degree of dependency on China, largest client for copper
- Landlocked and dependent on communication routes of neighboring countries
- Inadequate electricity generation, reliant almost exclusively on hydroelectricity; unreliable transport networks
- High levels of inequality; healthcare, education and administrative failings
A Recovery Supported by Copper Prices
In 2018, growth will accelerate, spurred by higher copper prices, in turn leading to greater investment in the mining sector. A number of mines (Konkola Copper Mines - Vendata Resources, Chambishi mine - NFCA) are expected to expand, thus boosting production and encouraging new investment. The agricultural sector is also expected to contribute the recovery, with more favorable weather conditions enabling higher maize output (second largest non-traditional export item, after tobacco). Growth in these two sectors should spread to the whole economy, thus reducing unemployment. This, combined with inflation within the central bank’s target range of 6-8% and a softer monetary policy, should boost household purchasing power and provide impetus to internal demand. Demand-elastic sectors, such as retail, are expected to benefit. Economic activity is also likely to benefit from improved hydropower energy, thanks to better weather conditions. If a loan agreement with the IMF were to be signed in 2018, this would reassure investors as to the direction of economic policy, which should encourage greater FDI flows. However, the attempt to diversify the economy by taxing gross output in order to stimulate the processing industry could dissuade some investors. Finally these growth prospects remain limited by a banking and financial sector under pressure: the number of non-performing loans has doubled (12.1% in late 2016 compared with 6.1% in 2014) because of the fall in growth in 2015 and rocketing interest rates (interest on bank loans at 29% in late 2016), and local banks are heavily called on to finance the fiscal deficit.
Laborious Fiscal Consolidation, But an Improved Current Account Balance
With a view to obtaining an IMF loan, the Zambian government has set about reducing its deficit, specifically by launching the Zambia Plus programme (Economic Stabilization and Growth Program, 2017-2019). The 2018 budget appears overly ambitious, with an overestimation of copper-related income in the context of ever-growing expenditure. Effectively, the cuts in subsidies on energy prices are unlikely to offset the increased civil service wage bill following the recent round of recruitment. Public debt has risen sharply (60% in 2016, compared with 35% of GDP in 2014), driven by the growth in external debt (60% of public debt at end 2016) and the sharp depreciation of the Zambian kwacha in 2015. Nevertheless, higher copper prices will help reduce the risks relating to the sustainability of the public debt in the short term, although it will still be subject to fluctuations in the kwacha.
Regarding the current account, the balance of goods is expected to remain positive in 2018, thanks to increased exports of copper (volume and price effects) and maize (lifting of the export ban on exports following favourable yields in 2017) and a drop in imports (lower government demand resulting from the fiscal consolidation). In contrast, the balance of services will remain negative. The deficit will be offset by grants (0.8% of GDP in 2017), private remittances (1% of GDP) and FDIs (6.3% of GDP).
Worsening Political Situation Over the Long Term
Since the contested elections of 2016, won by Edgar Lungu (Patriotic Front), the political situation in the country has deteriorated. The arrest in April 2017 of the opposition leader Hakainde Hichilema (United Party for National Development) (UPND) on grounds of treason, following his repeated accusations of fraud during the 2016 elections, has culminated in tensions between the government and his supporters. The unilateral decision by Mr. Lungu to drop these charges in August 2017 has calmed the situation. However, uncertainties remain regarding Mr. Lungu’s insistence on standing in the 2021 elections, with debate raging over the legality of his standing again (the Constitution limits the number of terms to two and Mr. Lungu was interim president following the death of former President Sata). The decision is likely to be referred to the Supreme Court in a climate marked by a concentration of powers in the hands of Mr. Lungu.
With regard to the business climate, relations with China are becoming increasingly tense due to popular anti-Chinese sentiment running high. These tensions are linked to conflicts between Chinese employers and local workers, especially regarding labor conditions, which were recently denounced in a report by Human Rights Watch. Finally, the country’s performance in terms of the government’s effectiveness and the fight against corruption is still poor.