Despite fiscal pressures and a volatile global environment, the recovery continues

High copper prices, the commissioning of the Kafue Gorge Lower hydroelectric plant, a return to average rainfall, and improved market confidence since the election of Hakainde Hichilema in 2021 have and will continue to support economic growth. In 2023, while still facing challenges, activity is expected to strengthen on the back of private consumption, supported by increased social spending to reduce poverty and inequality. The government will launch a new agricultural support program for the 2023/24 season, helping the income of many households (nearly 50% of the labor force employed in the sector). Household incomes should also benefit from easing inflationary pressures due to the continued appreciation of the kwacha - with the prospect of monetary tightening by the Bank of Zambia, whose policy rate has been held at 9% since late 2021. Renewed investor confidence following the change in government - which formalized an Extended Credit Facility (ECF) agreement with the IMF along with debt restructuring with its external creditors - and favorable copper prices should continue to support the currency, bringing gradual disinflation in 2023. High copper production and prices (accounting for over 70% of exports in recent years) and the opening of Africa’s largest nickel mine in July 2022 will generate higher export revenues. However, the global fallout from the Ukrainian conflict and the continued zero-COVID policy in China (one of its main trading partners) could reduce export prospects, particularly for copper and tourism. While the price of copper and the reintroduction of the deductibility of mining royalties from the corporate tax will favor the mining sector, the development of the manufacturing industry could benefit from further tax exemptions for export-oriented investments and the lowering of corporate tax (from 35 to 30%). However, the fiscal consolidation induced by the IMF agreement will weigh on public consumption and investment. 

The new administration faces fiscal challenges

Thanks to the further increase in mining revenues, the payment of a record dividend by the central bank, and the reform of regressive subsidies (notably through the abolition of fuel subsidies in September 2022 and the reform of agricultural subsidies from 2023), the public deficit should again be reduced in 2023. The government will continue to implement fiscal consolidation to put the public debt back on a sustainable path following the default on its external debt (69.5% of public debt in 2022) in November 2020. Securing an ECF of about USD 1.3 billion from the IMF in August 2022 and debt restructuring by bilateral and private creditors - led by China will support the domestic economic reform plan. While the authorities will try to preserve social spending, especially on health, education, and agricultural support, investment spending is expected to decline. Thanks to more dynamic activity, revenue growth should be limited by tax exemptions and cuts aimed at attracting private investment. To determine debt accumulation, the authorities intend not to contract new non-concessional loans (nearly 70% of the external debt) except for refinancing operations. The fiscal adjustment plan should lead to a surplus in the primary balance in 2023 vs. a deficit of 6% of GDP in 2021. The current account surplus is expected to continue to narrow in 2023. Rising imports are expected to erode the considerable trade surplus, while growth in copper and tourism revenues will be modest, especially with copper prices falling from their peak. The SDR allocation from the IMF in the second half of 2021 has boosted foreign exchange reserves, which should continue to grow in 2023 to 3.9 months of import coverage, providing more room for maneuvering for the Bank of Zambia. 

Political and social tensions ease

The August 2021 elections resulted in a heavy defeat for incumbent President Edgar Lungu and the Patriotic Front (PF) in the first round of voting vs. the opposition candidate Hakainde Hichilema (United Party for National Development, UPND). With over 59% of the vote, the UPND and Mr. Hichilema ended the PF’s 10-year rule. With a majority in the Assembly (92 out of 165 seats), the new president announced steps to fight corruption, restore debt sustainability and promote investment. Negotiations with the IMF, with which an agreement on a financing program was reached at the end of August 2022, and the debt restructuring agreement with external creditors, are essential steps towards achieving the two latter objectives. With barely 21% of its population fully vaccinated by June 2022, the rollout of the COVID-19 vaccine will remain a priority task. The social climate, tense in the run-up to the previous elections, is now easing thanks to the leadership of the new president. However, frustration with the weak economic situation, the prevalence of poverty, resentment of China’s influence in Zambian policy-making, and the implementation of future austerity measures could quickly escalate.