Economics

5 March 2009

Zambia: Annual economic outlook

Copper price bust Yvonne Mhango

Projections for 2009: Construction, the country’

s second-largest sector, has picked up in
recent years on account of an increase in public investment in
• Real GDP growth is expected to slow to 3.8% infrastructure and foreign investment in the mining industry. The sector
• Average annual inflation to edge up to 12.9% is estimated to have grown at 11.0% in 2008, up from 10.4% in 2007.
• Kwacha to depreciate to an annual average rate of This strong growth explains the more than twofold increase in the
ZMK4 915.8/USD construction industry’
s share of GDP, in the 10 years to 2008, to 11%
• Trade balance is projected to moderate to 0.5% of GDP of GDP, from 4.8% in 1998.
• Fiscal deficit is expected to increase to 3.1% of GDP
Figure 2: Real growth of largest sectors
Recent trends
%
Production 24
20
The economy is estimated to have grown by 5.8% in 2008, up from 16
6.3% in 2007, with economic activity largely stemming from three 12
8
sectors: transport, storage and communications; construction; and the
4
community, social and personal services’ sectors. The transport, 0
storage and communications sector, which generates about 10% of -4
national output, is estimated to have grown at a rate of 15.3% in 2008, Wholesale & Agriculture, Construction Transport, Mining &
retail trade forestry & storage & quarrying
which is a softening from 20.6% in 2007. The expansion of this sector fishing comm.

was largely due to communications and road transport. The increased 2006 2007 2008*
uptake of telecommunications’ products explains the growth in
Source: Central Statistical Office, Zambia
communications, and the up-scaling of public investment in road
rehabilitation in recent years is partly the reason for the increase in The growth in community, social and personal services largely reflects
road transport’s contribution to gross domestic product (GDP). the expansion of the education share of GDP. One of the agreements
with creditors following the forgiveness of debt in 2005 was that the
Figure 1: Gross domestic product by activity (2008 estimates)
government would use its freed resources to increase expenditure on
Community, Agriculture, the so-called priority sectors, including education. The 14.3% growth in
Financial Social & Forestry &
Real Estate community, social and personal services in 2008, up from 12.9% in
Institutions Personal Fishing
& Business
& Insurance Services 13%
7%
services 2007, is indicative of the scaling up of investment in education in recent
9% 9% Mining &
Quarrying years.
9%
Transport, Mining and quarrying also performed strongly in 2008, especially when
Manufacturi
Storage &
ng compared to the sector’
s performance in 2007. The extractive industry
Communicat
10%
ions
10% expanded by 10.5% in 2008, after contracting by 1.5% in 2007, on
Electricity, account of record-high copper prices in the first seven months of 2008,
Restaurants,
Wholesale & Gas &
Bars & Construction Water
Hotels Retail trade and a 14.1% expansion in copper production in the January to
17% 11% 2%
3% November 2008 period, compared to the corresponding period of 2007.
Source: Central Statistical Office, Zambia However, power blackouts are proving to be a severe constraint on the
mining industry. The Luanshya copper mine alone is estimated to have
lost US$5 million in early 2008 on account of significant power
disruptions.
The sectors that underperformed relative to their historical average
growth rates were agriculture, commerce and manufacturing.
Agricultural production shrank by 1.5% in 2008 on the back of
inadequate rainfall during the year. As such, the maize harvest during
the 2007/08 season is estimated to have fallen to 1.2 million metric
tonnes, from more than 1.4 million in the 2006/07 season.
Activity in the manufacturing sector slowed in 2008, when the sector
grew by 2.4%, compared to 4.9% in the previous year. The slowdown
in manufacturing growth is attributed to poor growth in textile and
leather products, as well as non-metallic mineral products, especially
cement sales. It is likely that Zambia’
s electricity shortage impacted
operations in the manufacturing industry, hence the softening in the
sector’
s activity in 2008.
The electricity, gas and water sector reported anaemic growth of 0.1%
in 2008, down from 1% in 2007 and 10.5% in 2006. Zambia has been
afflicted by interruptions in the supply of electricity. The national power
supply is in deficit, hence the shortages, and the mining operations’
supply is supplemented by 100-150 megawatts of power from the
Democratic Republic of Congo. Slowing utilities’growth implies that a
brake is being placed on economic activity and thus sub-par economic
growth.
Domestic expenditure
Spending within the Zambian economy is estimated to have slowed in
2008 to 3.0%, from 4.9% in 2007, owing to a softening in household
consumption growth and the likelihood that fixed investment did not
increase in 2008. Household consumption was supported by a large
increase in the recruitment of public workers, including health workers,
teachers and police, and a lower non-taxable threshold and value
added tax rate in 2008, but higher inflation and layoffs in the mining
industry in the second half of 2008 are expected to have slowed its
growth to 3.9%, from 4.6% in the previous year.
Figure 3: Structure of GDP by expenditure (% of GDP)
100%
Gross fixed investment has grown significantly in recent years, thus
increasing its contribution to GDP from 13% in 1997 to an estimate of
26% in 2007 (see Figure 3). In 2007 alone, gross fixed investment is
estimated to have grown by 29.3%. A surge in foreign direct
investment (FDI) in 2007, to US$1.4 billion, partly explains the jump in
gross fixed capital formation in that year. A sizeable share of this
investment was in the mining industry. At the end of 2007, FDI was
expected to increase significantly in 2008 largely due to interest in the
mining sector from Chinese and Australian investors and also in the
non-mining sector. Investments in manufacturing; construction of
commercial property; banking; an economic tax-free zone; agriculture;
and tourism from China, India, South Africa and Nigeria were projected
for 2008, at the end of 2007; however, the global financial crisis is
expected to have dampened FDI in 2008. As such, gross fixed
investment is estimated to have grown by 6.4% in 2008.
Government consumption expenditure is estimated to have increased
by 1.4% in 2008, from 0.8% in 2007, as income growth related to the
rise in mining tax revenue created greater fiscal space. One-third of the
2008 budget was allocated to general public services, including debt
repayment, health and education.
As spending in Zambia exceeds production in the country, this implies
that the country’
s imports exceed its exports, despite copper being a
significant export, which, at times, fetches a high price. Zambia’
s
import dependence exposes the country’
s low manufacturing base,
and the mining companies need to import capital equipment. The
recent commodity boom and subsequent attraction of FDI boosted
capital-equipment imports and thus partly explain the expansion of the
net exports’deficit to 11% of GDP in 2007, from 5% in 1997 (see
Figure 3).
Monetary policy
The Bank of Zambia aims to keep inflation stable and below 10% by
controlling the growth of monetary aggregates. The monetary
authorities’challenge is to strengthen liquidity management so as to
rein in inflation. Broad money growth slowed to 22.3% y/y in December
2008, from 26.6% y/y 12 months earlier on account of softening in
activity in the external sector and slower buildup of international
reserves.

80% Figure 4: Food’s contribution to consumer price inflation in 2008

60%
Clothing and footwear
40%

20% Rent, fueland

Clothing and lighting
footwear
Rent, fueland household goods
0% Furniture
Furniture
Food and and lighting
-20% beverages, and
37% Transport
Medical care
62% household
1997 2007* and care
Medical
Recreation
goods
Net exports Stockbuilding communicati
Transport
andgoods and communication
Other
Gross fixed investment Government consumption on
education
and services
Private consumption Recreation and education

Other goods and services

Source: EIU

Source: Central Statistics Office

2
The authorities’inflation target for end-2007 was 7%. But, from the
time inflation escaped the single-digits’range at the beginning of the
second quarter of the year, it accelerated to 16.6% y/y in December
2008, up from 8.9% y/y 12 months earlier. Inflation’
s climb was largely
due to rising food prices owing to a weather-induced supply constraint,
particularly in southern Zambia that had pushed prices above average.
Food inflation soared to 20.5% y/y in December 2008, from 5.9% y/y a
year earlier on the back of floods during the 2007/08 season, which
were followed by dry spells at the tail end of the season. Thus, every
three out of five percentage points of inflation were due to food and
beverages, which is equivalent to their weight in the consumer price
index, implying that inflation was broad based in 2008. Inflationary
pressures were exacerbated by the depreciation of the kwacha.
Although non-food inflation slowed to an average of 11.2% in 2008,
from 16.4% in 2007, it remained elevated on account of strong energy
price pressures. Fuel prices were the primary source of non-food
inflation in 2008. Transport and communication price inflation ended
2007 at 15.9% y/y, this after starting the year at 7.7% y/y. The demand
for fuel, diesel in particular, rose to a record high in the third quarter of
2008, as a large number of mining operations and other users turned
to fuel-fired generators to supply electricity to compensate for the
growing domestic power shortages. Notably, the copper mines
consumed about half of the imported diesel in 2008. Non-food inflation
received a breather in the tail end of 2008, when the international oil
price collapsed. This prompted the state-owned Energy Regulation
Board to cut the country’
s average fuel price by 25%.
The policy interest rate, the Bank of Zambia rate, increased to 15.9% in
December 2008, from 13.5% 12 months earlier. This incline was in
tangent with that of the 91-day Treasury bill rate that has a two
percentage points’margin with the policy rate. The upward trend in
short-term interest rates reflects the tightening of monetary policy,
particularly in the second half of 2008, as monetary expansion
accelerated on the back of the unwinding of short-term investors that
were demanding foreign currency. Broad money and reserve money’
s demonstrated the drop in demand for bulk carriers, which indicates
growth rates accelerated to 35.6% y/y and 27.5% y/y respectively in
October, when capital flight was acute, from 17.3% y/y and 4.3% y/y in
September (see Figure 5).
Figure 5: Money supply growth (% y/y)
50
40
30
20
10
0 released by a myriad of governments seeking to haul their economies
-10
2004 2005 2006 2007 2008
. Broad money (M3) Reserve money
Source: Bank of Zambia, Standard Bank Group est
3
As the global financial crisis deteriorated in the last quarter of 2008 and
risk aversion heightened, foreign holders of Zambian Treasury bills got
out of their investments. This decline in appetite for Zambian
government paper depressed Treasury bills’ prices and pushed up
yields.
In line with short-term interest rates, the average rate at which
commercial banks lend to their customers edged up to 26.9% in
December 2008, from 24.4% a year earlier.
International trade
The impact of the global economic downturn on international trade
has been marked for Zambia because of its significant dependence
on one primary export commodity. The deep recession in the world’
s
advanced economies has shredded their demand for exports from
one of its biggest markets, East Asia. To be sure, China’
s real
exports’earnings declined by 22% y/y in January 2009. As East Asia
is a large market for Africa’
s raw materials, which are employed to
produce manufactured goods for its export market, the plummeting
demand for its exports implies a corresponding drop in appetite for
raw materials.
Zambia’
s main export, copper, is the world’
s third most widely used
metal, after iron and aluminium, and is mainly employed in highly
cyclical industries, including construction and industrial machinery
manufacturing. The global economic slowdown has slowed and halted
the construction of infrastructure and property development, and
reduced the demand for consumer goods, including electronics. The
global credit crunch has placed a dampener on trade finance, and, as
such, the movement of freight has slowed, as demonstrated by the
collapse of the Baltic Dry Index, which indicates the price of moving
major raw materials by sea and thus measures the demand for
shipping capacity versus the supply of dry bulk carriers. It is thus an
efficient lead economic indicator of future economic growth and
production. The sharp fall in the index in the latter half of 2008
falling demand for raw materials and thus a decline in economic
activity.
Depressed demand for copper explains the more than 60% drop in its
price, from US$8 162 per tonne at the end of July 2008, to US$3 042
at the end of December 2008. The fall in prices was across all
commodities, including energy and food commodities.
In response to the halting of global economic activity, the world’
s
major central banks have relaxed monetary policy through aggressive
interest rate cuts and cash injections in a bid to unfreeze the credit
markets. Various fiscal policy stimulus packages have also been
out of recession.
External sector
The Zambian kwacha was one of the region’
s worst performing
currencies in 2008. In the 12 months to December 2008, the kwacha
depreciated by 27.2% against the US dollar to ZMK5 015.68/USD,
and by 18.3% against the euro to ZMK6 605.75/EUR. However, the
Zambian currency appreciated against the currency of its biggest
trade partner, the South African rand, which was one of the few that
fared worse than the kwacha. The kwacha strengthened by 12.3%
against the rand in the year to December 2008 to ZMK490.81/ZAR.
The fall in the value of the kwacha was due to a combination of
factors, including the 60% collapse in the copper price in the second
half of 2008, acute risk aversion on the back of the global financial
crisis that spurred the withdrawal of short-term investments, and, to a
lesser extent, the death of President Mwanawasa, which brought
about uncertainty about policy continuity.
The merchandise trade account balance reverted to a deficit in the
third quarter of 2008, following 10 quarters of uninterrupted surpluses.
The trade surplus was decimated in 2008 to US$73.8 million, from
US$855.9 million in 2007, on the back of a large increase in imports.
The import bill increased by 15.5% in 2008 to US$4 760.2 million,
compared to 1.1% growth in export earnings to US$4 927.21 million.
The swell of the import bill was largely due to the sharp increase in
the international oil price in the first half of 2008, which inflated the oil
import bill. The faster growth in imports relative to exports explains the
drop in the trade balance to an estimated 0.8% of GDP in 2008, from
6.5% in 2007.
The capital and financial account has had to contend with a slowdown
in short-term capital inflows. Prior to 2005, Zambia was not a recipient
of portfolio investment inflows. However, massive debt forgiveness
and a rising copper price significantly improved the country’
s
sovereign risk profile. That, coupled with attractive yields, attracted
portfolio investors. Foreign portfolio investment inflows, particularly
headed Treasury securities, increased from near zero in 2005 to
US$151 million. However, over a few weeks in October and
November 2008 alone, foreign portfolio investors withdrew about
US$60 million from Zambia, a significant jump from an average of
US$5 million earlier in the year. The slowdown of inflows into the
current and capital account thus led to the decline in international
reserves.
Figure 6: Gross foreign exchange reserves
1500 4.0
1200 3.5
900 3.0
600 2.5
300 2.0
0 1.5
2004 2005 2006 2007 2008
Forex reserves (US$ millions)
Months of import cover (RHS)
Source: Bloomberg, Central Statistics Office, Standard Bank est.
Gross international reserves climbed to a record high of US$1.4 billion
in July 2008, from US$983 million a year earlier, in the same month
that the copper price peaked (see Figure 6). The climb of the copper
4
price, coupled with increasing production, as well as capital inflows,
allowed for the incline to continue. In March 2008, international
reserves had thus increased to US$1 216.3 billion and by June they
had edged up to US$1 338.4 billion, which was equivalent to
5.6 months of import cover. However, in the latter half of 2008 as the
price of copper slid and capital inflows halted, international reserves
receded to just under three months of import cover at the end of 2008.
Public and external solvency indicators
The revision of the mining tax regime in 2008 was undertaken to
capitalise on the windfall profits that the mining companies were
enjoying in their cyclical industry. The adaptations to the regime
included an increase in the corporate tax rate from 25% to 30%, and
the mineral royalty tax rate from 0.5% to 3%; the introduction of a
windfall tax that is triggered at various price levels; and a variable
profits tax. The removal of tax concessions from April 1, 2008 is
estimated to have raised the effective tax rate on mining companies to
47%, from 31.7% previously. When the 2008 budget was presented, it
was estimated that these new tax measures would generate an
additional US$400 million for the fiscal coffers. In July 2008 when the
copper price peaked at a record high, the new mining taxes earned
the local revenue authority US$75 million, with the windfall tax
showing the largest contribution.
However, the deterioration of the global financial crisis in the latter half
of 2008 created great uncertainty and a severe credit squeeze that
compelled Zambia’
s revenue authorities to review the national budget.
Previous fiscal budgets have been dogged by inefficient capital
spending and large supplementary expenditure overruns. In 2008, the
government was forced to deal with unforeseen events, including a
larger-than-budgeted-for civil service wage award, snap presidential
elections, the top-up of funds for the Fertiliser Support Programme
because of soaring fertiliser prices, and the urgent need to finance the
local power utility, ZESCO’
s, power rehabilitation project.
Nevertheless, the budget deficit came in below target at
ZMK1 394.3 billion (US$371.96 million) or 2.7% of GDP. This was
made possible by ministries spending within their budget limits and
the freezing of non-essential projections. Capital expenditure projects,
particularly road construction, were prioritised and revenue squeezing
policies such as the cut in the fuel tax rate were reconsidered.
Figure 7: Budget balance, including grants (% of GDP)
20
16
12
8
4
0
-4
2004 2005 2006 2007 2008e
Source: IMF
The authorities had expected to generate an additional
ZMK917.3 billion (US$244.71 million) from the new mining tax regime;
however, only 35% of this was realised owing to administrative
challenges in implementing the regime.
According to the finance ministry, the public external debt stock at the
end of 2008 was US$1 093.5 million, a 3.7% increase from the debt
stock at the end of 2007. In 2008, the government contracted
US$132 million in new loans, which will be disbursed in 2009. While
the government’
s buildup of reserves has been prudent, there are
concerns that the infrastructure deficit may compel government to
incur additional debt.
At the end of 2007, the total debt stock was US$2 billion, of which
52.7% was government debt holdings. This number is expected to
have climbed significantly as the government has contracted
additional external debt, including a US$1.2 billion loan facility from
international banks to import 1.5 million tonnes of crude oil in 2009
and 2010. The concern in the last quarter of 2008 as economic
conditions in the global economy deteriorated was that the high
payments’ risk for Zambia’
s medium-term credit had become
pronounced as the economic downturn had exposed the country’
s Financial Management system, which has already realised a
narrow and vulnerable foreign exchange base, weak fiscal profile and
high dependence on foreign aid.
National policy assumptions and the international
environment
The Zambian authorities’long-term plan, as articulated in its Vision
2030 document, is to transform Zambia into a middle-income country
by 2030. This vision will be operationalised through five-year planning
instruments that will contain specific policies, programmes and
projects that will address wealth creation and poverty reduction
through sustainable growth. The first of these instruments is the Fifth
National Development Plan (FNDP), whose period of implementation
is 2006 to 2010.
The FNDP has four main objectives: implementing growth-stimulating
measures that will create wealth and reduce poverty; reducing
inequality by creating opportunities, particularly in agriculture,
education and health; empowering the poor to make a decent living
through productive ventures; and constructing and rehabilitating major
transport arteries to ensure that the agricultural producing areas are
connected to the market, so that poor peoples’ income-yielding
commodities can be transported to market. Ultimately, the Zambian
authorities seek to ensure that they put in place sustainable growth-
enhancing policies that are all-inclusive.
While the election of President Banda assured policy continuity, his
removal of Ng’
andu Mangande from his finance minister role did get
foreign investors to pause, especially as Mangande had presided over
the country’
s strong recovery that had been supported by a
commodity boom. However, it was not an entirely unexpected move
given that Magande had run against Banda for the ruling Movement
for Multiparty Democracy party’
s presidential nomination for the
October 30, 2008 snap elections. Any concerns about this change in
5
guard have been dulled by the view that the instatement of Dr
Situmbeko Musokotwane does not imply a change in policy.
Some of the shortcomings of the budgetary process include the partial
execution of the budget, particularly the capital expenditure budget,
owing to delayed procurement, capacity constraints and the structure
of the budget cycle. The authorities have addressed the first point by
permitting ministries to submit the necessary documents to the
National Tender Board as soon as the budget is submitted to
parliament and to submit their tenders soon after the budget is
approved. The last point was addressed by putting forward the budget
release date to late January, rather than early February, to lengthen
the budget execution period.
To further improve efficiency, effectiveness and accountability in the
management of public finances, in 2008 the government together with
13 cooperating partners (CP) signed a memorandum of
understanding for a revised Public Expenditure Management and
Financial Accountability programme. The CP includes Zambian main
multilateral and bilateral partners. The government is in the process of
implementing a computerised commitment control system, the Public
substantial reduction in expenditure arrears. We are thus less likely to
see under-spending in Zambia’
s budgets going forward.
In the 2009 budget, the government announced the removal of the
windfall tax that was introduced on 1 April 2008, in line with a
suggestion from the International Monetary Fund that a more
appropriate way to capture a large share of the rents when prices are
extraordinarily high is through the progressive profit-based variable
tax that takes into account the varied cost structures across mines.
Thus, the variable profit tax was retained.
The monetary authorities’challenge is liquidity management. In 2009,
their foreign exchange sale will be constrained by the end-2009
depletion of foreign exchange inflows due to the decline in export
revenue and unwinding of short-term capital investments. Thus, the
authorities may shift to sterilisation through open market operations,
which has the risk of putting upward pressure on domestic interest
rates.
International environment
The global economic outlook has deteriorated rapidly since
September 2008. The crisis, which originated in the US sub-prime
mortgage market, destabilised the US financial system and
manifested into a global financial crisis, has stalled global economic
activity. As such, the global economy is only expected to grow at 0.5%
in 2009, down from 3.4% in 2008. This sluggish growth will stem from
3.3% growth in the emerging and developing world, while the
advanced economies contract by -2.0%. Recessions in the advanced
world imply a significant drop in global demand for exports. This has
severe implications for major export-driven economies, like East Asia,
and thus for Africa’
s primary commodities.
Sluggish economic activity and depressed commodity prices will
soften inflation in 2009, from 2008’
s highs. Inflation of 0.3% is
projected for the advanced economies, of which some are at risk of
deflation given the severity of the economic slowdown in those
economies. The inflation projection for the emerging and developing
economy in 2009 has also been downwardly revised to 5.8%, from
9.2% in 2008, despite the structural bottlenecks that exist, thus
underscoring the sharp decline in commodity prices and demand
destruction.
Table 1: Global economic outlook
From 2010 the Zambian economy is expected to stage a recovery of
4.9%, as the copper price picks ups and global demand begins to show
some tepid signs of a revival. Thereafter, growth of around 5% is
projected for the medium term.
Retrenchments in the mining industry spurred by the collapse in
commodity prices that led to a squeeze in profit margins are expected to
affect household consumption over the medium term. As a consequence,
household consumption expenditure is not expected to show a burst in
spending in 2009. We thus expect households’consumption expenditure
growth to move sideways and grow at 3.9% in 2009.

Although fixed investment in the mining industry is likely to soften in

Real GDP growth (year-on-year)
2009, the infrastructure backlog suggests that public investment
2006 2007 2008F 2009F
supported by Zambia’
s development partners will continue. To this end,
World 5.1 5.2 3.4 0.5
the World Bank has pledged a US$75.5 million facility to increase
Advanced economies 3.0 2.7 1.0 -2.0
United States 2.8 2.0 1.1 -1.6 Zambia’
s electricity generation that would add an additional 18 000 to the

Euro-zone 2.8 2.6 1.0 -2.0 grid. However, private investment inflows are expected to soften in 2009
United Kingdom 2.8 3.0 0.7 -2.8 owing to the global credit crunch implying that some mining expansion
Japan 2.4 2.4 -0.3 -2.6 projects will thus be halted until conditions change. As such, gross fixed
Emerging and developing capital formation is expected to grow at 2.8% in 2009, down from 6.4% in
economies 7.9 8.0 6.3 3.3
2008.
China 11.6 13.0 9.0 6.7
India 9.8 9.3 7.3 5.1 Sectors that support the mining industry are expected to experience a
Brazil 3.8 5.4 5.0 2.0 decline in demand for their goods and services. On the supply side,
Russia 7.4 8.1 6.2 -0.7 industry will be supported by the coming on stream of additional
Africa 6.1 6.2 5.2 3.4 electricity supply. ZESCO is expected to increase electricity generation
Sub-Saharan 6.6 6.9 5.4 3.5
by 660 MW in early 2009 from a rehabilitation project. The sectors that
Developing Asia 9.9 10.6 7.8 5.5
are expected to remain above water during these turbulent times are
telecommunications and construction. There remains significant scope
Forecast summary for growth in telecommunications. The 2009 budget suggested that
construction of roads and energy infrastructure will continue, probably
Domestic expenditure
with a greater urgency as the copper price bust has demonstrated the
The deterioration in the external environment in 2008 has adversely importance of facilitating diversification.
affected Zambia’
s economic outlook. The drop in the copper price has
Monetary policy
tightened Zambia’
s resource constraint and thus highlighted the
The Bank of Zambia will continue to pursue stable single-digit inflation
significance of structural reforms and economic diversification. The
through the control of monetary aggregates. Although inflation
softening of activity in the mining sector coupled with its direct and
decelerated in the first two months of 2009, grain shortages, a weaker
indirect impact on the rest of the economy largely explains the projection
kwacha, electricity shortages and interruptions in fuel supply are
of a slowdown in economic growth to 3.8% in 2009, from 5.8% in 2008.
expected to keep prices downwardly sticky. Headline inflation is thus
Figure 8: Real GDP growth (%) expected to edge up to 12.9% in 2009, up from 12.4% in 2008.

7 Figure 9: Consumer price inflation (%, annual average)

6 %
16
5
4 12

3 6.2 6.3 5.8

5.1 5.2 5.2 8
4.9
2 3.8
4
1
0 0
2006 2007 2008e 2009f 2010f 2011f 2012f 2013f 2006 2007 2008 2009f 2010f 2011f 2012f 2013f
Overall Non-food
Source: Central Statistical Office
Source: Central Statistics Office, Standard Bank est.

6
The risk to this outlook is a severe drought-induced food shortage, for Figure 11: Trade balance (% of GDP)
food constitutes almost 60% of the consumer price index and thus its
9
price has a marked effect on inflation.
6
Growth of currency in circulation ended 2008 at a high rate due to the
central bank’
s net claims on the government increasing significantly 3
and thus necessitating significant net sales of foreign exchange by the
central bank to drain the excess liquidity. The weakening appetite for 0
government securities has pushed yields up. In 2009, the rate of
-3
monetary expansion is expected to be slower owing to a softening in
foreign exchange inflows. Yields are thus projected to remain elevated -6
in 2009 owing to soft demand related to heightened risk aversion. That 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
coupled with a projected higher inflation environment is expected to
raise the average lending interest rate to 19.4% in 2009, from 18.8% in Source: IMF, Standard Bank est.
2008.
A trade deficit in an economy where the services and income account
Figure 10: Interest rates (%, annual average) are often in deficit implies that the current account deficit will deteriorate
and that foreign exchange reserves will come under pressure in the short
%
24 term. Current transfers are expected to be squeezed because of the
21 recessions in most donor countries. Over the medium term, import cover
18 is expected to return to 4-5 months as export earnings improve and net
15 capital flows and grants are restored owing to a recovering global
12
economy.
9
6 The kwacha has taken a significant knock from the receding of foreign
3 exchange inflows. The adjustment in Zambia’
s terms of trade brought on
0 by the fall in commodity prices necessitated a depreciation of the
2006 2007 2008 2009f 2010f 2011f 2012f 2013f kwacha. The kwacha thus weakened against the currencies of its major
trade partners thus demonstrating that it is a market determined
Source: Bank of Zambia, Standard Bank est.
exchange rate which reflects fundamentals. As the copper price is
External sector expected to remain depressed and capital inflows are unlikely to be
forthcoming in 2009, the kwacha is expected to average
Zambia’
s significant dependence on copper for foreign exchange inflows,
ZMK4 915.75/USD in 2009, which is 31% weaker against the US dollar
the plummeting of its price and the contraction in global demand owing to
than it was in 2008. The shallowness of the exchange rate market
the world’
s financial crisis have reduced export earnings and had a
implies that the volatility of the kwacha will persist as long as uncertainty
pronounced effect on the external sector. Aside from the metal fetching a
continues to cloud the global economy.
lower price, production in some smaller or high cost mines has already
halted. However, the coming on stream of copper from Equinox’
s Figure 12: Exchange rate, ZMK/USD (annual average)
Lumwana mine is expected to boost production by about 30%. The
7000
increase in output should counter, to some extent, the depressed price.
6500
Furthermore, a weak kwacha is expected to boost the competitiveness of
6000
non-mineral exports.
5500
The import bill will receive a breather in the form of a lower oil price in 5000
4500
2009. However, the infrastructure investment projects are expected to
4000
continue attracting capital equipment imports. We thus expect the trade
3500
surplus to shrink to 0.5% of GDP in 2009, from 0.8% in 2008. In the
3000
medium term, a trade deficit is projected, for, although the copper price is
2006 2007 2008 2009f 2010f 2011f 2012f 2013f
expected to recover as global demand is revived by the world’
s varied
stimulus packages, so will the international oil price. Given Zambia’
s
Source: Bloomberg, Standard Bank est.
landlocked status and the domestic electricity supply constraint, fuel will
be an inordinately significant part of the trade account in the medium
term.

7
Although a modest recovery in the kwacha is expected in the latter half of
2009, this is not likely to return the value of the kwacha to its pre-
September 2008 level.
Public and external solvency
The slide of the copper price and the sharp drop in global demand have
adversely impacted economic activity, and by implication fiscal revenue,
particularly from the mining industry, is projected to weaken in 2009. In
recent years, the fiscal authority’
s budget execution has been weak,
specifically actual spending not mirroring planned expenditure, especially
capital expenditure. The near-term slump in the mining industry has
emphasised the urgency for Zambia to diversify.
Fiscal policy will continue to pursue infrastructure development, which
has become a more urgent agenda as the importance of economic
diversification is highlighted by the decline in the industry that produces
Zambia’
s primary export. Spending on transport networks and electricity
generation and transmission is at the core of the capital expenditure
policy framework. In recent years, poor budget execution and the
deviation of spending from the planned budget have delayed
infrastructure projects. In 2009, the emerging constraint will be accessing
credit to finance the projects.
Softer growth implies revenue collections will moderate in 2009.
According to the Zambia Revenue Authority, tax collections from a profit
variable tax will not show any contribution to the government’
s revenue
flow in 2009, and as the windfall tax has been removed that will also not
generate any revenue. However, a history of under spending, particularly
on the capital expenditure side, suggests that the fiscal deficit is unlikely
to balloon in the short- to medium term. As such, we expect the fiscal
deficit to widen to 3.1% of GDP, from an estimated 2.7%. The risk of a
fiscal revenue squeeze is that the government will divert funds towards
recurrent expenditures and reduce spending on infrastructure.
Figure 13: Fiscal balance (% of GDP)
20
15
10
5 from 12.4% in 2008.
-5
2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
Source: IMF, Standard Bank est.
Zambia’
s huge infrastructure backlog raises the risk of the government
overextending itself by heavily contracting in external debt, particularly
non-concessional debt. The ongoing global financial crisis in a way will
prevent Zambia from getting its fingers burnt, as credit in the short term
is hard to come by and expensive. Thus domestic borrowing is projected
to increase in 2009 as the authorities seek to address Zambia’
s
8
infrastructure needs. As such, public debt is projected to increase to
55.6% of GDP in 2009, from 48.5% in 2008. In the short- to medium term
this is projected to rise as public fixed investment is galvanised with
greater urgency because of the current drawbacks of depending on one
industry. Thereafter, we expect public debt to moderate as real GDP
growth picks up. Zambia is thus expected to remain focused on
concessional financing and donor aid to execute government
programmes, and to monitor the borrowing of state enterprises to ensure
it is held at manageable and sustainable levels. While the credit crunch
reduces the risk of putting Zambia’
s debt planning in jeopardy, it is also
likely to delay the government’
s infrastructure drive.
Outlook
Zambia’
s copper endowment implies that its economic pulse is directly
linked to the world’
s economic fortune; thus, when global economic
activity was buoyant and commodity prices strong, Zambia’
s economy
soared. As the cycle turned and the global economy began to sink to
the trough of the business cycle, it dragged Zambia’
s economy with it.
Fixed investment and the exports’industry are projected to soften in
2009 owing to the global credit crunch and the fallen copper price,
which has slowed capital inflows and squeezed export earnings. The
adverse effect of the drop in the price of Zambia’
s primary export is the
worsening of the country’
s terms of trade, however this has been
mitigated by the concomitant sharp decline in the international oil price.
As such, the trade surplus is not projected to revert to a deficit in 2009,
instead moderate to 0.5% of GDP from an estimated 0.8% in 2008.
On the consumption side, layoffs in the mining industry and its
associated industries are projected to dampen domestic demand.
Similarly government consumption will decline in 2009 as a decline in
economic activity squeezes fiscal revenue. As such, Zambia’
s
economic growth is expected to slow to 3.8% in 2009, from an
estimated 5.8% in 2008.
Zambia’
s inflation is not expected to fully benefit from the fall in
commodity prices as domestic price pressures due to food supply
shortages and structural constraints, including a shortage in the supply
of electricity and poor transport infrastructure, keep prices from easing.
Thus, inflation is projected to climb to an average of 12.9% in 2009,
Zambia
Standard Bank forecasts of selected indicators

2006 2007 2008 2009 2010 2011 2012 2013

National Accounts
Gross Domestic Product (constant LCU billions) 17 777.3 18 897.3 19 993.3 20 746.3 21 757.4 22 857.0 24 052.1 25 308.8
% change 6.2 6.3 5.8 3.8 4.9 5.1 5.2 5.2

Final consumption expenditure of:

Households (constant LCU billions) 14 345.2 15 006.9 15 596.2 16 204.8 16 828.3 17 485.4 18172.0 18 871.2
% change 5.7 4.6 3.9 3.9 3.8 3.9 3.9 3.8

Final consumption expenditure of:

Government (constant LCU billions) 1 016.2 1 024.2 1 038.0 1 054.2 1 070.2 1 084.8 1098.1 1 110.5
% change -0.1 0.8 1.4 1.6 1.5 1.4 1.2 1.1

Gross Fixed Capital Formation (LCU) 3 226.3 4 171.4 4 439.3 4 562.1 4 946.1 5 641.9 6 549.4 7 395.0
% change 12.8 29.3 6.4 2.8 8.4 14.1 16.1 12.9

Gross domestic expenditure (LCU) 20 558.2 21 562.9 22 209.2 22 798.2 23 389.4 24 057.7 24 803.2 25 592.1
% change 7.7 4.9 3.0 2.7 2.6 2.9 3.1 3.2

Agricultural production (constant LCU billions) 2 497.3 2 576.0 2 674.9 2 785.4 2 871.5 2 954.6 3 028.1 3 105.2
% of GDP 14.0 13.6 13.5 13.3 13.1 12.8 12.5 12.2

Prices
Inflation (annual average, %) 9.1 10.7 12.4 12.9 10.1 9.9 9.0 8.6

Monetary sector
Lending interest rate (annual average, %) 23.2 18.9 18.8 19.4 18.3 17.2 16.1 15.0
Exchange rate, annual average (LCU/USD) 3 595.3 3 996.8 3 748.5 4 915.8 5 111.1 5 464.4 6 372.7 6 861.8

External sector
Exports: goods and services (billions of LCU) 14 843.9 19 218.6 18 599.6 21 796.5 27 618.9 34 860.3 46 266.9 60 520.6
% change 34.0 29.5 -3.5 17.5 26.7 26.2 32.7 30.8

Imports: goods and services (billions of LCU) 11 605.3 16 280.8 18 086.0 21 318.9 33 349.6 44 178.3 60 744.1 84 899.8
% change -1.2 40.3 11.0 18.9 56.4 32.5 37.5 39.8

Trade balance (billions of LCU) 3 238.6 2 937.8 513.6 477.6 -5730.6 9318.0 -14 477.2 -24 379.2
% of GDP 8.3 6.5 0.8 0.5 -3.9 -4.4 -4.6 -5.3

Public and external solvency indicators

Fiscal balance, including grants (% of GDP) 18.6 -0.8 -2.7 -3.1 -2.7 -2.5 -2.4 -2.3
Public sector debt (% of GDP) 31.6 41.4 48.5 55.6 60.4 65.2 52.4 42.6

Bank of Zambia, Central Statistics Office, Bloomberg, IMF, World Development Indicators and Standard Bank estimates

9
Group Economics
Goolam Ballim – Group Economist
+27-11-636-2910 goolam.ballim@standardbank.co.za
South Africa

Johan Botha Shireen Darmalingam Jeremy Stevens Danelee van Dyk

+27-11-636-2463 +27-11-636-2905 +27-11-631-7855 +27-11-636-6242
Johan.botha@standardbank.co.za Shireen.darmalingam@standardbank.co.za Jeremy.Stevens@standardbank.co.za Danelee.vanDyk@standardbank.co.za

Rest of Africa

Jan Duvenage Anita Last Yvonne Mhango Victor Munyama

+27-11-636-4557 +27-11-631-5990 +27-11-631-2190 +27 11-631-1279
Jan.duvenage@standardbank.co.za Anita.last@standardbank.co.za Yvonne.Mhango@standardbank.co.za Victor.Munyama@standardbank.co.za
Botswana Angola Kenya DRC
Lesotho Ghana Mozambique Nigeria
Namibia Malawi Uganda Tanzania
Swaziland Mauritius Zambia Zimbabwe

All current research is available on the Standard Bank Group Economics home page. In order to receive Group Economics’research via email, all
clients (new and existing) are required to register and select publications on the website. Click on
http://ws9.standardbank.co.za/sbrp/LatestResearch.do, select Register and enter your email address. A username and password will then be emailed
to you.

Analyst certification
The authors certify that: 1) all recommendations and views detailed in this document reflect his/her personal opinion of the financial instrument or market class discussed;
and 2) no part of his/her compensation was, is, nor will be, directly (nor indirectly) related to opinion(s) or recommendation(s) expressed in this document
Disclaimer
This document does not constitute an offer, or the solicitation of an offer for the sale or purchase of any investment or security. This is a commercial communication. If you
are in any doubt about the contents of this document or the investment to which this document relates you should consult a person who specialises in advising on the
acquisition of such securities. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and no
responsibility or liability is accepted by the Standard Bank Group Limited, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of the
information contained herein. All opinions and estimates contained in this report may be changed after publication at any time without notice. Members of the Standard Bank
Group Limited, their directors, officers and employees may have a long or short position in currencies or securities mentioned in this report or related investments, and may
add to, dispose of or effect transactions in such currencies, securities or investments for their own account and may perform or seek to perform advisory or banking services
in relation thereto. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. This document is not intended for the use of
private customers. This document must not be acted on or relied on by persons who are private customers. Any investment or investment activity to which this document
relates is only available to persons other than private customers and will be engaged in only with such persons. In European Union countries this document has been issued
to persons who are investment professionals (or equivalent) in their home jurisdictions. Neither this document nor any copy of it nor any statement herein may be taken or
transmitted into the United States or distributed, directly or indirectly, in the United States or to any U.S. person except where those U.S. persons are, or are believed to be,
qualified institutions acting in their capacity as holders of fiduciary accounts for the benefit or account of non U.S. persons; The distribution of this document and the offering,
sale and delivery of securities in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by the Standard Bank
Group Limited to inform themselves about and to observe any such restrictions. You are to rely on your own independent appraisal of and investigations into (a) the
condition, creditworthiness, affairs, status and nature of any issuer or obligor referred to and (b) all other matters and things contemplated by this document. This document
has been sent to you for your information and may not be reproduced or redistributed to any other person. By accepting this document, you agree to be bound by the
foregoing limitations. Unauthorised use or disclosure of this document is strictly prohibited. Copyright 2004 Standard Bank Group. All rights reserved.

10