Zambia makes the best of a difficult situation: low copper prices and power shortages will make it difficult for Zambia to reach its economic goals.

Author:Ford, Neil

Zambia's President, Edgar Lungu, is only one year into his first term of office but he already faces a battle to turn around Zambia's economic fortunes before the next presidential election on 11th August 2020. The President has given himself little breathing space in this respect after his government sanctioned the introduction of fixed polling dates in the country's new constitution ratified in January.

Slower economic growth in China has hit demand for the country's main export, copper, although the government did provide some regulatory certainty for investors as African Business went to press by agreeing to introduce a sliding-scale royalty regime based on the price of copper. At the same time, El Nino-inspired drought is affecting both the mining sector and efforts to expand agricultural production.

Despite a rally towards the end of 2015, Zambia's currency, the kwacha, suffered the biggest fall of any African currency last year, losing 42% of its value against the dollar. As World Bank senior economist Gregory Smith said in a report published in December: "Tough action is required in 2016 to curb runaway expenditure, double-digit inflation and growing twin deficits."

Nevertheless, the World Bank forecasts economic growth of 3 to 4% this year, rising to 5 to 6% in 2017 and there are other upbeat assessments of Zambia's economic position. During a visit to Lusaka in mid-February, the president of the African Development Bank (AfDB), Akinwumi Adesina, said that he was "satisfied that the economy of Zambia was on solid ground." He said that all the government could do to help the economy was to reduce its dependence on copper mining by promoting the agriculture sector but added that his organisation would help fund energy projects in the country.

The government is continuing to take on debt to help maintain spending but this cannot be a long-term solution. Its $1.25bn bond issue last year was twice oversubscribed with an initial yield of 9.38% but this was a far cry from its first issue, in 2012, which was 16 times oversubscribed with a yield of 5.63%.

The rise is partly due to global economic issues, but the lion's share of the increase is down to Zambia's own deteriorating fiscal position.

Copper-plated challenges

Perhaps the government's biggest failing last year was on changes to its mining royalty regime. It had intended to increase its take from copper mining by increasing royalties on production from underground mines from 6% to...

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