Zambia - iuj.ac.jp · Country Report Zambia March 2005 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom Zambia at a glance: 2005-06 OVERVIEW Zambia’s

Country Report

Zambia

March 2005

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Zambia at a glance: 2005-06

OVERVIEWZambia’s next presidential and legislative elections are scheduled for late 2006.The bid for re-election by the president, Levy Mwanawasa, and the rulingMovement for Multiparty Democracy (MMD) will be helped by their positionas incumbents, the strong support of rural voters, and the disunity of theopposition. The main threat to the re-election of Mr Mwanawasa and theMMD is the possibility that Mr Mwanawasa's predecessor, Frederick Chiluba,will campaign against him. However, the government is devoting a lot ofresources to containing this threat. On balance, the Economist Intelligence Unitexpects both Mr Mwanawasa and the MMD to remain in power, but theresults could be close. The main thrust of economic policy will be to reducethe fiscal deficit, but success is likely to be limited. In general, we expect thegovernment to remain on track with agreed reforms, although it could slip inthe run-up to the 2006 polls, which would strain, but not break, relations withthe IMF and other donors. Inflation is forecast to remain in double digits overthe forecast period, averaging 17.2% in 2005 and 21% in 2006, owing to lax fiscalpolicy, especially in 2006, and the ongoing depreciation of the kwacha.

Key changes from last month

Political outlook• There has been no change to our political outlook.

Economic policy outlook• There has been no change to our economic policy outlook.

Economic forecast• In light of new official data, we have increased our forecast for copper

production over the outlook period. We now estimate 2005 production at480,000 tonnes (up from our previous estimate of 430,000 tonnes) and 2006production at 575,000 tonnes (previously 500,000 tonnes). The increasedproduction will have a positive effect on the current-account deficit, which isforecast at 5.2% of GDP in 2005 (down from 6% of GDP previously) and 5.8%of GDP in 2006 (6.8% of GDP previously). Increased mining production,along with better performance in agriculture and tourism, has resulted in anupward revision of our forecast for real GDP growth. Economic growth isnow forecast at 6.2% in 2005 (previously 4.7%) and 6.6% in 2006 (previously5.9%).

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Zambia 1

Country Report March 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Zambia

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2005-067 Political outlook8 Economic policy outlook10 Economic forecast

13 The political scene

20 Economic policy

24 The domestic economy24 Economic trends25 Agriculture26 Mining27 Financial markets

29 Foreign trade and payments

List of tables10 International assumptions summary13 Forecast summary22 2005 budget: expenditure23 2005 budget: revenue and financing24 Real GDP growth by economic activity28 Performance of the Lusaka Stock Exchange

List of figures

13 Gross domestic product13 Consumer price inflation

Zambia 3


ZambiaMarch 2005

Summary

Zambia’s political activity will focus on the presidential and legislativeelections, which are due in late 2006. The Economist Intelligence Unit expectsboth the president, Levy Mwanawasa, and the ruling Movement for MultipartyDemocracy (MMD) to be re-elected. The main thrust of economic policy will beto reduce the fiscal deficit. We expect the government to remain broadly ontrack with agreed donor reforms, although it could slip in the run-up to the2006 polls, which would strain, but not break, relations with the IMF and otherdonors. Owing to rising copper production, and reasonable growth inagriculture and services, coupled with rising government spending in 2006, weforecast real GDP growth of 6.2% in 2005 and 6.6% in 2006. However, owing tolax fiscal policy around the elections, inflation will remain in double digits inthe forecast period.

Mr Mwanawasa has consolidated his hold on power, following the SupremeCourt’s rejection of the opposition’s claims of electoral fraud in the presidentialelection of 2001. The opposition’s attempts to bring forward theimplementation of a new constitution appear to be petering out. MMD insidershave been working hard to restrict the influence of former president, FrederickChiluba, at the forthcoming MMD conference. The cabinet has rejected anumber of electoral reforms put forward by the electoral reform technicalcommittee that would have allowed the opposition to mount a greaterchallenge in the 2006 elections.

A joint IMF-World Bank mission has announced that Zambia has met all thetriggers for debt cancellation under the heavily indebted poor countries (HIPC)initiative. The 2005 budget, announced on January 28th, containedunsurprising pre-election year expenditure increases, as well as tax cuts thatwill increase the country’s reliance on donor funds.

The official estimate of real GDP growth for 2004 has once again been revisedupwards, this time to 5%, compared to the previous estimate of 4.6%. Inflationhas risen again in recent months, owing mainly to higher food and oil prices.The Bank of Zambia (the central bank) expects the exchange rate to remainstable during 2005, supported by strong exports and inflows of donor funds.

The trade deficit is reported to have narrowed in January 2005, with bothexports and imports falling. The UK and Japan have both agreed to substantialdebt write-offs.

Editors: Philip Walker (editor); Pratibha Thaker (consulting editor)Editorial closing date: March 4th 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2005-06

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Zambia


Political structure

Republic of Zambia

Unitary republic

Based on the 1996 constitution

National Assembly; 150 members elected by universal suffrage, serving a five-year term.The president can appoint eight further members

Presidential and legislative elections due in late 2006 (last presidential and legislativeelections December 2001)

President, elected by universal suffrage for a term of five years

The president and his appointed cabinet. The last major reshuffle was in May 2003

The Movement for Multiparty Democracy (MMD) is the ruling party and holds a slimparliamentary majority. The United Party for National Development (UPND), formed inlate 1998, is the largest opposition party in parliament, followed by the former sole party,the United National Independence Party (UNIP) and the recently formed Forum forDemocracy and Development (FDD). Other parties represented in parliament are theHeritage Party, the Zambia Republican Party (ZRP) and the Patriotic Front

President & minister of defence Levy MwanawasaVice-president Lupando Mwape

Agriculture & co-operatives Mundia SikatanaCommerce, trade & industry Dipak PatelCommunications & transport Abel ChambeshiEducation Andrew MulengaEnergy & water development George MpomboFinance & national planning Ng'andu MagandeForeign affairs Ronnie ShikapwashaHealth Brian ChituwoHome affairs Kalombo MwansaInformation & broadcasting Mutale NalumangoLabour & social security VacantLands Judith Kangoma-KapijimpangaLegal affairs George KundaLocal government & housing Sylvia MaseboMines & minerals development Kaunda LembalembaScience, technology & vocational training Bates NamuyambaTourism, environment & natural resources Patrick KalifungwaWorks & energy development Ludwig Sondashi

Caleb Fundanga

Official name

Form of state

Legal system

National legislature

Main political parties

Key ministers

National elections

Central bank governor

Head of state

National government

Zambia 5


Economic structure

Annual indicators2000 a 2001 a 2002a 2003 b 2004 b

GDP at market prices (ZK bn) 12.2 13.5 17.6 22.9 28.8GDP (US$ bn) 3.9 3.7 4.1 4.8 6.0

Real GDP growth (%) 3.6 4.9 3.3 5.1 c 5.0 c

Consumer price inflation (av; %) 26.0 21.4 22.2 21.4 a 18.0 a

Population (m) 10.4 10.6 10.7 10.8 a 10.9

Exports of goods fob (US$ m) 757.0 912.0 945.0 1,146.0 a 1,600.5Imports of goods fob (US$ m) 978.0 1,253.0 1,204.0 1,388.0 a 1,844.7

Current-account balance (US$ m) -264.0 -414.0 -298.0b -356.0 -385.8Foreign-exchange reserves excl gold (US$ m) 244.8 183.4 535.1 247.7 a 337.1 a

Total external debt (US$ bn) 5.7 5.7 6.0 5.2 5.5

Debt-service ratio, paid (%) 20.9 27.5 42.0b 36.3 26.9Exchange rate (av) ZK:US$ 3,110.8 3,610.9 4,307.0 4,733.3 a 4,778.9 a

a Actual. b Economist Intelligence Unit estimates. c Official estimate.

Origins of gross domestic product 2003a % of total Components of gross domestic product 2002 % of totalAgriculture 15.2 Private consumption 52.2Industry 28.3 Government consumption 11.1

Manufacturing 10.9 Gross fixed capital formation 41.4 Construction 6.9 Change in stocks 1.3

Mining 7.7 Exports of goods & services 35.3Services 56.5 Imports of goods & services -41.3

Principal exports 2003a US$ m Principal imports 2003b US$ mCopper 610 Metals 292

Cobalt 67 Others 1,092

Main destinations of exports 2003c % of total Main origins of imports 2003c % of totalSouth Africa 28.3 South Africa 71.4Malawi 8.7 China 2.8

Japan 6.8 UK 2.8Egypt 5. 4 Tanzania 1.7

a Official estimates. b This is the only breakdown that the Bank of Zambia provides. c Based on partners’ trade returns; subject to a wide marginof error.

6 Zambia


Quarterly indicators2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (1994=100) 828.3 843.5 858.3 911.7 971.5 994.8 1,018.8 1,075.3Consumer prices (% change, year on year) 23.2 23.2 20.5 19.1 17.3 17.9 18.7 17.9Copper, LME (US$/tonne) 1,662.7 1,641.4 1,753.1 2,060.3 2,724.5 2,781.5 2,854.7 3,093.2

Financial indicatorsExchange rate ZK:US$ (av) 4,652 4,846 4,741 4,694 4,751 4,774 4,809 4,782Exchange rate ZK:US$ (end-period) 4,874 4,828 4,807 4,645 4,722 4,789 4,906 4,771Deposit rate (av; %) 22.50 22.43 21.50 21.37 14.80 10.44 10.10 10.77Weighted lending base rate (av; %) 43.47 41.42 39.10 38.30 33.27 30.0 29.90 29.77Treasury bill, 91-day rate (av; %) 31.97 31.32 30.97 25.64 13.63 7.15 12.48 17.42M1 (end-period; ZK bn) 1,036.6 1,238.3 1,308.2 1,513.9 1,499.3 1,767.9 1,849.1 n/aM1 (% change, year on year) 11.6 17.2 15.5 13.0 44.6 42.8 41.3 n/aM2 (end-period; ZK bn) 3,463.8 3,723.3 3,937.4 4,268.5 4,459.0 5,039.9 5,235.2 n/aM2 (% change, year on year) 28.1 19.0 22.0 17.9 28.7 35.4 33.0 n/aSectoral trendsCopper in concentrates, production (‘000 tonnes 74.3 87.4 91.9 96.2 96.8 101.4 101.0 99.0Copper in concentrates, exports (‘000 tonnes) 79.3 90.1 97.0 87.0 90.8 99.4 99.2 94.9Cobalt production (tonnes) 742 859 953 649 703 541 631 606Cobalt exports (tonnes) 756 858 822 938 637 533 638 520Foreign trade (US$ m)a

Exports fob 328.5 212.3 198.8 208.0 284.1 266.3 264.8 n/aImports fob -372.6 -394.1 -388.0 -396.4 -381.5 -397.5 -406.5 n/aTrade balance -44.2 -181.7 -189.2 -188.4 -97.4 -131.2 -141.7 n/aForeign reserves (US$ m)Reserves excl gold (end-period) 509.6 415.6 403.7 247.7 228.4 260.3 304.1 337.1

a DOTS estimates.

Sources: Bank of Zambia, Statistics Fortnightly; IMF, International Financial Statistics; Direction of Trade Statistics.

Zambia 7


Outlook for 2005-06

Political outlook

Political activity in Zambia will gradually focus on the presidential andlegislative elections, which are due in late 2006. The Economist IntelligenceUnit expects both the president, Levy Mwanawasa, and the ruling Movementfor Multiparty Democracy (MMD), to be re-elected. Although support forMr Mwanawasa in urban areas has been undermined by the implementationof tough economic austerity policies—such as a public-sector pay freeze during2004, in order to secure a new deal with the IMF—his standing is likely to beboosted by a number of events prior to the polls. In particular, substantialexternal debt relief will be awarded by mid-2005, the opening of new coppermines will boost real GDP growth and export revenue, and the 2005 budgethas awarded public-sector pay increases as well as tax cuts. Crucially,Mr Mwanawasa should also be able to count on the support of rural voters:government programmes to supply subsidised pesticide and seed havecontributed to increases in the maize harvest in the last two years. Theexploitation of the powers of incumbency will also help the president's bid forre-election.

Despite Mr Mwanawasa's likely victory, the MMD will remain a divided party.Some of the president's actions—specifically the prosecution of his predecessor,Frederick Chiluba, on corruption charges—have split the party. Senior MMDfigures who are unhappy with Mr Mwanawasa's rule are rumoured to bebehind the formation of a new party, the Party for Unity, Democracy andDevelopment (PUDD), formed in the second half of 2004. The PUDD issecuring support from those close to Mr Chiluba, which may forceMr Mwanawasa to mount a purge of MMD members suspected of beingaligned with the PUDD.

The MMD will continue to benefit from the ongoing disunity within theopposition. At least five opposition presidential candidates will be capable ofsecuring a reasonable level of support in the polls thanks to the backing ofvarious ethnic groups. However, owing to personal ambition and rivalry, mostof them will not be prepared to step down to clear the way for a singleopposition candidate, even though such a candidate would be in a strongerposition to pose a real challenge for Mr Mwanawasa. The opposition’s besthope of achieving victory in the presidential election has been dashed by thegovernment’s refusal to change the voting system to one where the victor hasto secure 51% of the ballots cast. This would have allowed the opposition tounify around one potential candidate in a second round run-off.

Aside from the unlikely prospect of opposition unity, the greatest potential riskto Mr Mwanawasa's re-election would be the collapse of the trial ofMr Chiluba and other officials in his government. The trial forms thecentrepiece of the president's much-vaunted campaign against corruption. Theabsence of a clear paper trail and the disappearance of two key witnesses havealready caused the trial to be scaled back dramatically. This appears to have

Domestic politics

Election watch

8 Zambia


convinced much of the public that the anti-corruption crusade is simply apolitical "witch-hunt", a feeling bolstered by the fact that little has been done tocombat the petty corruption that junior government officials engage in on adaily basis. An early collapse of the trial would damage Mr Mwanawasa'sstanding with the public and donors. Mr Chiluba still commands considerablesupport and resources, and is a good orator. Should he choose to back apresidential rival to his former protégé, this could somewhat undermineMr Mwanawasa's support.

Mr Mwanawasa has also faced a court challenge himself, as the oppositioncontested his victory in the 2001 presidential election. In February 2005 theSupreme Court ruled that, although there were numerous irregularities in theconduct of the poll, these were not sufficient to warrant the election resultbeing overturned. The verdict, which was described as a sham by theopposition leaders, strengthens Mr Mwanawasa’s position as he will be able tostep up his election campaigning with a more focused mind now that theuncertainty surrounding the judgement has been removed.

Zambia is not expected to face any external threats over the forecast period,although there will be tension with the neighbouring Democratic Republic ofCongo, caused by the occasional inflow of refugees from that country. Thegovernment will remain focused on building relations with key donors. TheIMF and bilateral donors suspended much of the budgetary support scheduledfor 2003 in protest at the government's fiscal laxity. Although adherence todonor requirements has since improved, and some external funding hasresumed, donors will remain vigilant over governance issues. However,Mr Mwanawasa’s image has been boosted by the Supreme Court’s ruling thathe was duly elected as president in 2001 and that he knew nothing about anycorruption that took place. Bilateral donors may well have halted funding ifMr Mwanawasa had been implicated in the manipulation of the presidentialpoll.

Economic policy outlook

Fiscal consolidation is the main goal of Zambia's three-year poverty reductionand growth facility (PRGF), which was approved by the IMF in June 2004. Thefirst review was completed in December 2004 and US$126m was disbursed. Inparticular, the government has agreed to focus on reducing non-priorityspending and preventing any growth in the civil-service wage bill (above itscurrent level of 8% of GDP). Expenditure will be redirected towards poverty-reduction programmes in areas such as education and healthcare (includingcombating HIV/AIDS). A reduced fiscal deficit will also limit the need for thegovernment to borrow domestically, curbing inflationary pressure and leadingto a reduction in interest rates, which will stimulate private-sector borrowing.

However, this process will face obstacles. First, civil servants are likely todemand pay hikes in 2005 to compensate for a wage freeze the governmentimposed in 2004. These demands are likely to exceed the benchmarks for debtrelief set by the Fund, but the government may give in to them as the elections

Policy trends

International relations

Zambia 9


approach. Second, even if the government is able to reduce its domestic debtstock (currently estimated at around 20% of GDP), commercial banks are riskaverse and may prove unwilling to increase lending to the private sector. We donot expect the government to adhere fully to the Fund's spending criteria,although it is likely to demonstrate sufficient commitment to prevent the PRGFfrom going drastically off track during 2005. However, unbudgeted election-related spending is expected during 2006, and we anticipate that this will causethe IMF to withhold at least one PRGF disbursement.

Other priorities under the PRGF are improving governance, enhancing theefficiency of the private sector and completing the privatisation programme.Privatisation remains a potential source of conflict between the governmentand the IMF—both Mr Mwanawasa and the minister of finance and nationalplanning, Ng'andu Magande, oppose it. Further progress in the drawn-out saleof the Zambia National Commercial Bank is expected, although thegovernment has reopened negotiations with both interested consortia, whichcould signal its intention to start a bidding war. The commercialisation of theZambia Electricity Supply Company is also expected, but the governmentappears to have temporarily convinced the Fund that proceeding too rapidlywould risk social unrest. Capacity constraints and weak political commitment(particularly as the elections approach) will limit the progress that will be madetowards achieving the PRGF goals. However, enough progress will be made toensure that Zambia reaches completion point under the IMF-World Bank'sheavily indebted poor countries (HIPC) debt-relief initiative in the first half of2005. The IMF and World Bank boards are due to endorse Zambia’s reaching ofcompletion point after a joint IMF-World Bank mission announced in Januarythat the country had fulfilled the conditions for debt cancellation.

We estimate that improved fiscal discipline in 2004 allowed a reduction in thebudget deficit to 2% of GDP. In 2005 ongoing reforms of public financemanagement and accountability will create further savings by improving thequality and coherence of spending plans. However, the government will stillstruggle to control spending, particularly as it seeks to reorientate expendituretowards pro-poor activities such as education and healthcare. Also, the 2005budget has been developed with the 2006 elections firmly in mind, andincludes large expenditure increases and tax cuts. Nonetheless, due to the boostgiven to fiscal revenue by a full year of donor support and continued strongreal GDP growth, we forecast that the expansion of the fiscal deficit will berestricted, to 3% of GDP, compared to the Fund’s target of 2.4% of GDP.

Government spending in 2006 is likely to increase fairly rapidly as the electionsapproach. This could cause problems with the IMF as the government willstruggle to meet PRGF commitments such as keeping the public-sector wage billbelow 8% of GDP. However, even if some donor disbursements are delayed, westill expect strong growth in domestic revenue in 2006. To some extent, this willact to offset the expenditure increases, but the fiscal deficit is still expected toincrease to 3.7% of GDP. The lower deficit in 2005 should limit the need to issuenew domestic debt, but this will be the main source of financing in 2006.Domestic debt is forecast to rise slightly from 19.1% of GDP in 2004 to 20.9% of

Fiscal policy

10 Zambia


GDP in 2005, and the extra borrowing in 2006 is expected to cause it toincrease to 22.4% of GDP.

Monetary policy is focused on reducing inflation to 10% by the end of 2006 byslowing growth in reserve money through the use of open-market operations.A significant tightening of fiscal policy and lower domestic debt issuance isrequired for inflation to hit this level, and given that this is unlikely in 2006, wedo not expect that this target will be achieved during the forecast period. Inaddition to trying to contain inflation, the main focus of the Bank of Zambia(BoZ, the central bank) will be to try to increase commercial bank lending to theprivate sector. The BoZ reduced the statutory reserve requirement from 17.5% to14% in October 2003, in order to free up funds for commercial banks to lend,and also in the hope of reducing the spread between lending and deposit rates(currently around 19 percentage points). Despite this move, lending rates haveremained high and deposit rates negligible as a result of the low level offinancial intermediation. Because of this, commercial banks have invested thefunds released by the reduction in the reserve requirement in Treasury bills.More fundamental structural reforms, such as revisions to bankruptcy laws,may be necessary to give a real boost to lending. Moreover, even if the spreadbetween lending and deposit rates is lowered substantially, there are manyother bank charges that borrowers face, which will keep the cost of borrowingfrom banks high.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2003 2004 2005 2006Real GDP growthWorld 3.9 5.0 4.2 3.9OECD 2.0 3.3 2.4 2.4EU25 1.1 2.4 2.0 2.2Exchange rates¥:US$ 115.9 108.1 97.0 93.3US$:€ 1.132 1.244 1.365 1.400SDR:US$ 0.714 0.675 0.638 0.627

Financial indicators€ 3-month interbank rate 2.33 2.13 2.10 2.25US$ 3-month Libor 1.21 1.62 3.44 4.52Commodity pricesOil (Brent; US$/b) 28.8 38.5 37.5 33.6Gold (US$/troy oz) 363.3 410.8 433.8 396.3Copper (US cents/lb) 80.3 128.5 127.0 113.8Industrial raw materials (% change in US$ terms) 13.0 21.0 -1.3 -5.9

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

World GDP growth (on a purchasing power parity basis) is estimated at 5% in2004, and is forecast to fall to a still robust 4.2% in 2005 and 3.9% in 2006 inresponse to policy-tightening in leading economies. In South Africa, Zambia’smain trading partner, real GDP growth is forecast to rise to around 4% in 2005-06. The slowdown in global growth will reduce demand for copper, Zambia's

International assumptions

Monetary policy

Zambia 11


main export, causing prices to fall from an average of 128.5 US cents/lb in 2004to 127 US cents/lb in 2005 and 113.8 US cents/lb in 2006. However, these pricesare high by recent historical standards, and this should encourage furtherinvestment in existing Zambian copper mines. The tightness of the oil market isexpected to ease over the forecast period, and we expect the price of Brentcrude to slip back to an average of US$37.5/barrel in 2005 and US$33.6/b in2006. The cost of Zambia’s oil imports should fall, but will remain high byhistorical standards.

Strong growth in copper mining is expected to boost real GDP growth from anestimated 5% in 2004 to 6.2% in 2005 and 6.6% in 2006. Two large new minesare set to open during the forecast period. In early 2005 production will beginat the Kansanshi mine, operated by Canada's First Quantum Minerals, which iseventually aiming for output of 130,000 tonnes/year. The Lumwana mine,operated by an Australian firm, Equinox Minerals, will open in early 2006 andis targeting output of 140,000 t/y. Konkola Copper Mines (KCM) and MopaniCopper Mines (MCM)—Zambia’s two largest producers—undertook massiverehabilitation in 2004 to increase their copper output, the results of which willstart to come on line during 2005. KCM aims to lift its production to 250,000 t/yin 2005, while Mopani plans to produce 190,000 tonnes. Additional outputmay be possible from the Ramcoz mine, which is being rehabilitated by its newowners, J&W Investments of Switzerland. The government said that output for2004 came to 409,000 t/y (although central bank data put output at 398,000tonnes) and that production will reach 550,000 tonnes in 2005. We think thatthe 2005 figure may prove to be slightly optimistic, and forecast production of480,000 tonnes. In 2006 production is forecast to reach 575,000 tonnes.

Assuming normal weather conditions, we expect a modest pick-up inagricultural growth over the forecast period, owing to the boost to thecommercial sector provided by the government's free distribution of unusedland. Output of non-food crops, such as tobacco, is set to expand as a steadyflow of farmers continue to relocate from Zimbabwe to Zambia. Manufacturinggrowth is heavily influenced by food processing, and the sector is expected toremain moribund over the forecast period. Donor-funded work on therehabilitation of major roads and the construction of private housing willensure continued strong growth in construction. There will be reasonableservices growth, in line with increasing economic activity and greater demandfrom the mining sector as copper production increases. Strong tourism growthwill also support the services sector. Zambia will continue to benefit from theturmoil in Zimbabwe as tourists choose to stay on the Zambian side of theVictoria Falls, a very popular tourist destination.

Average annual inflation eased to 18% in 2004, the first time in decades thatannual inflation has been below 20%. The decline in inflation was mainly theresult of a good harvest and tighter fiscal policy. This is a significantachievement, but much remains to be done to bring inflation down further.Trends in food prices will remain the main determinant of inflation over theforecast period, but as we assume that there will be normal harvests in bothyears, which will be sufficient to meet the national consumption requirement,

Inflation

Economic growth

12 Zambia


we do not anticipate significant price pressures from this source. Continueddonor support and relatively tight fiscal policy will reduce the need forinflationary deficit financing in 2005, so we expect inflation to fall slightly toan average of 17.2%. However, election-related expenditure and the possiblesuspension or delay of donor disbursements, leading to higher levels ofgovernment borrowing, should cause inflation to accelerate in the second halfof 2006, and to average 21% for the year.

Although the kwacha remained relatively stable in 2004, because of theresumption of donor support, high copper prices boosting export earnings andthe weak US dollar, we forecast that it will lose value in 2005-06, owing to highinflation, a lack of confidence in the currency and structurally higher demandthan supply for foreign exchange (owing to the economy's import dependency).We expect it to weaken from an average of ZK4,779:US$1 in 2004 toZK5,067:US$1 in 2005 and ZK5,560:US$1 in 2006. Historically, the kwacha hasbeen vulnerable to sharp bouts of depreciation, and these could recur over theforecast period. Predicting the timing of these is difficult, but possible triggerscould be if relations go off track with the IMF or if copper prices collapse.Although central bank intervention can smooth out short-term fluctuations, thiswill postpone, rather than avert, a sharp depreciation.

Exports are forecast to increase over the forecast period, owing to the expectedincrease in copper production, which will more than offset the effect of lowerprices in 2006. By 2006 copper exports will be at their highest level since 1979.Non-metal exports, such as tobacco and horticultural products, are also forecastto perform strongly. As most of the investment goods required for the mineswill be imported, import growth will be strong in 2005, before slowing in 2006,when the bulk of the mining development work will be complete, althoughelection-related expenditure will prevent the value of imports from falling. Anincrease in trade-related costs associated with the rise in imports and election-related expenditure in 2006 will more than offset increased tourism revenue,causing the services deficit to widen. Additionally, increased profit remittancesby mining companies will cause the income deficit to widen. A full year ofdonor funding in 2005 will lift inflows of current transfers, but transfers creditsare expected to fall in 2006 as relations with donors deteriorate owing to pre-election spending. Overall, the current-account deficit is forecast to narrow from6.4% of GDP in 2004 to 5.2% of GDP in 2005 as copper exports increase anddonor funding increases. The current-account deficit is expected to widenslightly, to 5.8% of GDP, in 2006, owing to election-related expenditure, risingprofit remittances and deteriorating relations with donors.

Exchange rates

External sector

Zambia 13


Forecast summary(% unless otherwise indicated)

2003a 2004 b 2005c 2006c

Real GDP growth 5.1b 5.0 6.2 6.6Gross industrial growth 8.7 8.8 10.9 7.9

Gross agricultural production growth 5.1 4.3 4.5 4.8Consumer price inflation (av) 21.4 18.0 a 17.2 21.0

Consumer price inflation (year-end) 17.2 17.5 14.9 29.3Short-term interbank rate 40.6 30.7 32.0 36.0Government balance (% of GDP) -5.1b -2.0 -3.0 -3.7

Exports of goods fob (US$ m) 1,146.0 1,600.5 1,820.9 1,926.9Imports of goods fob (US$ m) 1,388.0 1,844.7 2,010.7 2,091.1

Current-account balance (US$ m) -356.0b -385.8 -367.4 -463.6Current-account balance (% of GDP) -7.4b -6.4 -5.2 -5.8

External debt (year-end; US$ bn) 5.2b 5.5 4.8 5.0Exchange rate ZK:US$ (av) 4,733.3 4,778.9 a 5,067.0 5,560.2Exchange rate ZK:¥100 (av) 4,083.9 4,419.8 a 5,223.7 5,962.6

Exchange rate ZK:€ (av) 5,359.2 5,943.7 a 6,916.5 7,784.2Exchange rate ZK:SDR (av) 6,630.9 7,078.3 a 7,944.3 8,871.9

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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The political scene

After three years of uncertainty surrounding the legitimacy of his presidency,Levy Mwanawasa consolidated his hold on power when on February 16th theSupreme Court endorsed him as the lawfully elected president of Zambia. Thecourt’s decision came after the leader of the United Party for NationalDevelopment (UPND), Anderson Mazoka, petitioned the court to nullify thecontroversial 2001 electoral victory of Mr Mwanawasa, claiming that the pollswere rigged (February 2002, The political scene). Mr Mazoka was joined in thepetition by the leader of the Forum for Democracy and Development (FDD),Christon Tembo, and the president of the Heritage Party (HP), GodfreyMiyanda. The judgement in the presidential petition was an anti-climax for

Levy Mwanawasaconsolidates hold on power

14 Zambia


opposition leaders and a triumph for Mr Mwanawasa, after a tug of war thathad lasted for over three years.

During the 11-hour long judgement, chief justice Ernest Sakala, said that onlysix of the 36 allegations of fraud and vote-rigging were partially proved againstMr Mwanawasa. The court agreed that the state power utility, Zesco, had paidZK123m (US$34,000) to a local printing firm to produce Mr Mwanawasa’scampaign posters, contrary to electoral rules, and also conceded that theMovement for Multiparty Democracy (MMD) had been selling cheap mealiemeal (ground maize meal) prior to the polls to induce voters to supportMr Mwanawasa and the MMD. The court also said there was proof that theMMD used 48 vehicles bought using tax-payers' money to campaign forMr Mwanawasa and that a district commissioner (junior government officer)was found using a government vehicle to campaign for Mr Mwanawasa,despite being barred by electoral regulations. However, despite these findings,the court dismissed the petition, saying that the evidence was insufficient tonullify the vote as Mr Mwanawasa had been elected on a wider nationalconstituency.

The court's judgement should help to foster stability in the government as MrMwanawasa will rule with a more focused mind now that the uncertainty overthe judgement has been removed. The court’s decision will also help to cementrelations between Mr Mwanawasa and some senior MMD members, who mayhave attempted to leave the party if the election results had been nullified.

The court’s verdict infuriated opposition leaders, who accused the court ofendorsing graft. Mr Mazoka questioned the motive behind salary increasesordered by Mr Mwanawasa for judges before and during the hearing of thepetition, saying that this had compromised the judges. Although judges areentitled to salary increases, Mr Mazoka saw the timing of these as a method ofswinging the petition judgement in Mr Mwanawasa’s favour. Further stokingpolitical tensions, Mr Mazoka went on to say that he would not stop hismembers from engaging in acts of violence in the future, because the courtswere not reliable in their delivery of justice. Mr Mazoka claimed that he hadstopped his supporters from taking part in street demonstrations in January2002—which had the potential to turn violent—when it became apparent thatthe election had been stolen from him. Mr Mazoka said that it would be follyfor him to stop UPND supporters from engaging in acts of violence in futurebecause the courts had been compromised or tamed by Mr Mwanawasa.

The threats of violence will deepen the animosity between Mr Mazoka andMr Mwanawasa, and between the MMD and the UPND. In the days followingthe court’s verdict, Mr Mwanawasa said that he would no longer condoneopposition comments that border on treason. He urged the opposition leaderseither to work with his government or wait for the next presidential andlegislative elections in 2006, during which time they should try to convince thepeople that they can offer a better alternative. These comments suggested thatMr Mwanawasa may begin to clamp down on dissenting views, now that thecourt has given him a mandate to rule as the lawfully elected president. Itseems likely that the state machinery will be tracking Mr Mazoka’s movements

Aggrieved opposition leaderthreatens violence

Zambia 15


and it is possible that he will end up in jail on charges of treason, if hecontinues with his threats. This would then weaken the UPND and give furtheradvantage to the MMD in the 2006 elections.

As well as the tensions over the court ruling, the government and oppositionremain a long way apart over the issue of constitutional reform.Mr Mwanawasa has consistently maintained his position that a newconstitution can only be ready in 2008, whereas the opposition parties want anew constitution before the 2006 elections. Mr Mwanawasa’s reluctance toagree to early constitutional reforms can be partly explained by the fact that hedoes not want to lose track of his fiscal austerity measures by changing theconstitution now: any amendments to the supreme law would require theholding of a costly national referendum. Mr Mwanawasa, MMD insiders say,has pointed out that the Treasury cannot finance two major political events—areferendum in 2005 and then elections in 2006—which require huge sums ofmoney. In January Mr Mwanawasa had a private meeting with donors wherehe asked them if they could provide additional financing for a referendum. Theresponse was not thought to be favourable, indicating the difficulties thegovernment would face in raising additional financing.

There also seems to be another, ulterior, reason behind Mr Mwanawasa’sresistance to earlier changes to the constitution. A key demand from theopposition is for a clause to be included in the constitution that would ensurethat the next president was elected by a 50% plus one majority. Should a newsystem of voting be implemented before the elections in 2006, Mr Mwanawasawould struggle to get the necessary 50% of the vote, especially if the oppositionparties managed to unite around a single candidate in any second round ofvoting. The votes cast in favour of the ten opposition leaders in the 2001presidential election far outnumbered the votes received by Mr Mwanawasa;he only received 28% of the total votes cast.

Opposition parties, civil society groups and religious groups stageddemonstrations in January to demand that the government enact the newconstitution before the 2006 elections. About 2,000 people gathered in Lusakaon January 6th to begin what was promised would be a sustained series ofcountrywide demonstrations, with follow-up protests planned for several othertowns in Zambia. The protests were being organised under the umbrella bodyknown as the Constitution Coalition 2005, which groups political parties andcivil society groups. The Coalition's chairman, Gilbert Themba, said that thegroup was ready to increase pressure on Mr Mwanawasa to back down on hisstand that a new constitution would only be possible in 2008. However, thedemonstrations were undermined by a series of low turnouts, and theopposition and civic groups soon abandoned them.

After seeing the low turnout at the protests, Mr Mwanawasa—who was initiallyuncomfortable about the demonstrations—allowed the police to continue givingpermission to opposition parties to protest, saying that this would expose theunpopularity of the opposition parties. However, this is not the most likelycause of the low turnout. More likely reasons include the fact that most peopleare uninterested in marching on the streets as they have to spend much of their

Deadlock over constitutionalreform remains unresolved

The planned protests over thenew constitution peter out

16 Zambia


time fetching food for their families or looking for jobs. The timing of theprotests, called for by the organisers on week-days, was also an error as manyof those potential protesters with jobs could not afford to take time off. Thefailure of the demonstrations to garner significant numbers is likely to createthe false understanding in the government that the people want the newconstitution in 2008 and not before the 2006 elections. An angry oppositionand a government out of touch with the people will only act to increase thelikelihood of the elections in 2006 being marred by violence.

The MMD will hold its pre-election convention from May 4th to May 8th, whenit will amend its constitution and elect new leaders to the National ExecutiveCommittee (NEC). Mr Mwanawasa is set to be challenged as the party’spresidential candidate for the 2006 election by a relative unknown, NasonMsoni, who will find it difficult to marshal the support required to win thevote. Corruption is likely to be another big issue at the convention;Mr Mwanawasa has admitted that there is widespread graft in the MMD,adding that he had received reports of senior party members spending millionsof kwacha to buy votes from other convention delegates. Mr Mwanawasalamented that the fight against corruption would fail if corrupt leaders wereelected to senior MMD positions.

There are concerns that Mr Mwanawasa’s drive against corruption in the MMDmay be being used as a way of silencing his opponents. Credence is given tothis theory by the fact that, since announcing his intention to challengeMr Mwanawasa, Mr Msoni has come under investigation by the DrugEnforcement Commission (DEC) and the Zambia Revenue Authority (ZRA). TheDEC is investigating him over suspected money-laundering, while the ZRA isinvestigating Mr Msoni over allegations of non-tax compliance. Mr Msoniclaims that he is being investigated in an attempt to silence him and deny himhis rights to contest a position of his choice in the ruling party. However,despite Mr Mwanawasa’s best efforts, there are still strong suggestions thatanother candidate or candidates will emerge from the floor to challengeMr Mwanawasa at the convention. MMD insiders say that some top partyofficials are reluctant to declare their intentions until May, owing to theperception that anyone who challenges Mr Mwanawasa will be subjected tounnecessary probes to tarnish his reputation. Unless a strong challenger toMr Mwanawasa emerges at the convention, Mr Mwanawasa will be elected asthe MMD’s candidate for the presidential and legislative elections in 2006.

Divisions in the MMD increased in January when the party chairman, BonifaceKawimbe, announced that the former president, Frederick Chiluba, would notbe allowed to vote at the convention. Mr Kawimbe said that Mr Chiluba, thefounder of the MMD party, would be allowed to attend the convention andcontest any position other than the presidency, but would not be allowed tovote, because he is currently facing charges of corruption (December 2004, Thepolitical scene). The barring of Mr Chiluba from casting his vote is widely seenas a way of trying to reduce his popularity and influence within the MMD.Despite the accusations of graft being made against him, Mr Chiluba stillcommands respect and support from within the MMD. The barring of

Political intrigue grows as theMMD convention approaches

Attempts are made to reducethe influence of Mr Chiluba

Zambia 17


Mr Chiluba means that he will struggle to hold consultations with partymembers at the convention, as such members would be viewed as traitors andface repercussions from Mr Mwanawasa and his supporters. KeepingMr Chiluba sidelined should prevent him from being able to announce apreferred candidate for the presidential nomination, a candidate that would belikely to provide a stiff challenge to Mr Mwanawasa.

The move is also seen as a scheme to ensure that Mr Chiluba does not contestany of the party positions, as if he were to be successful, he would use hisinfluence in the MMD's National Executive Committee to manipulate theoutcome of some key issues. Mr Chiluba has been allowed to stand for aposition of his choice in the party, but the MMD leaders know that he isextremely unlikely to contest a junior position after spending so long as partypresident.

The vice-presidency of the Movement for Multiparty Democracy willbe hotly contested

The position of vice-president of the Movement for Multiparty Democracy (MMD)will be hotly contested. The candidates that have already declared their intention tostand are as follows.• Lupando Mwape: The current vice-president, Mr Mwape is popular with the

grassroots of the party and is the current favourite for the position.• Nevers Mumba: The previous vice-president, who was sacked in 2004 for

sparking a diplomatic row with the Democratic Republic of Congo (December2004, The political scene). Mr Mumba appears not to have created a politicalbase since 2003, when he disbanded his National Citizens Coalition (NCC) partyto join the MMD, paving the way for his appointment as Zambia’s vice-president.

• Austin Chewe: An influential businessman and the only other real contender.Over the years Mr Chewe has used his business connections to marshal supportwithin the party.

• Bwalya Chiti: Another businessman and a close ally of Mr Mwanawasa, aposition that could give Mr Chiti a chance in the polls.

Mr Mwanawasa has not yet singled out anyone as his preferred candidate, but it isprobable that he will do so at the convention. Mr Mwanawasa’s chosen candidatewill have his prospects boosted, although delegates have previously gone against thepresident’s wish. At the 2001 MMD convention, Enoch Kavindele was the preferredcandidate of the former president, Frederick Chiluba, but he lost the election, untilthere was a recount which surprisingly swung the vote in Mr Kavindele’s favour.

The witch-hunting that has characterised the MMD in recent months(December 2004, The political scene) may well come to a head during theMMD convention and its immediate aftermath, causing further divisions in aparty struggling to maintain unity. Accusations of dual membership by someMMD leaders were substantiated by claims made by the Party for Unity,Democracy and Development (PUDD) in January that some cabinet ministershad secretly joined it. PUDD's spokesman, Dan Pule, a close ally of Mr Chiluba,said that the MMD's national secretary, Vernon Mwaanga, had authored thePUDD constitution at the time he fell out of Mr Mwanawasa’s favour.

PUDD claims some cabinetministers are its members

18 Zambia


Mr Mwaanga denied the allegations, claiming that they were aimed at dividingthe MMD ahead of the elections. However, the suspension of some juniorofficials in Lusaka, the Copperbelt, and the north-western provinces were anindication that the MMD believed the claims of dual membership. It is likelythat any senior MMD members that challenge candidates preferred by thepresident or the party's top officials at the MMD convention will be accused ofbeing sponsored by the PUDD to cause divisions in the MMD.

The Forum for Democracy and Development (FDD) has cancelled its nationalconvention, which was scheduled to be held on March 4th in Lusaka, becauseof a lack of funds. The convention was aimed at electing new leaders, includinga president. Ernest Mwansa, the FDD's national co-ordinator, said that newdates for the convention would be announced later. The FDD has facednumerous financial constraints since 2001, when it incurred a huge debt afterparticipating in the elections using borrowed money. Financial problems in theFDD are similar to the ones faced by other opposition parties: it has becomeincreasingly difficult for political parties to mobilise external resources owing tostringent anti-money-laundering regulations imposed by the government.Under the Anti-Money-laundering Act, Zambians are forbidden from obtainingfunds from abroad without a proper explanation of the source and reasons forsuch a donation. The Drug Enforcement Commission (DEC) previously seizedthousands of dollars from some Zambians on suspicion that they were beingfinanced by drug dealers or groups involved in terrorist activities abroad. TheFDD created lots of goodwill amongst South African businessmen in 2001, butmost of the financial pledges made to the party could not be fulfilled owing toproblems associated with receiving cash donations from outside the countryunder the Anti-Money-laundering Act. The result is the failure by oppositionpolitical parties to generate enough money locally to finance their activities.Zambian private companies and individual businessmen prefer giving moneyto the ruling party, in return for favours such as government contracts to supplygoods and services. This situation is raising concerns that the government isusing overly stringent regulations to restrict opposition party activity.

Voting took place on March 4th in three constituencies where members ofparliament (MPs) have died in the last five months. Zambians will be voting in:

• Kasempa in the north-west of the country, where the late labour minister,Patrick Kafumukache, was the MP;

• Mufulira in the Copperbelt province, where an MMD legislator, FidelisChisala, died; and in

• Sinjembela in western Zambia, a seat previously held by the UPNDlegislator, Mubita Pumulo.

Of the three by-elections, the MMD has an upper hand in Kasempa andSinjembela, both of which are rural constituencies, but the Patriotic Front, ledby Michael Sata, appears to be popular in Mufulira town. Opposition partiesusually experience difficulties mobilising support during by-elections, as theytend to face problems with transport and financing. This gives the ruling partya chance to win back seats lost during a national election, which seems to be

FDD party cancels convention

The results of three by-elections are imminent

Zambia 19


what will happen in Sinjembela. The MMD has placed supporters in districtadministrations throughout Zambia, where they are well placed to helporganise campaigning for the ruling party. The government also tends toexpedite the implementation of development projects in areas where there isdue to be a by-election.

Mr Mwanawasa and his ministers have rejected wide-ranging electoral reformssubmitted to the cabinet by the Electoral Reform Technical Committee (ERTC).Mr Mwanawasa appointed the ERTC in 2004 to collect submissions fromZambians with a view to reforming the electoral system and ending thecontroversies that have characterised elections in Zambia. On February 24th2005, the information and broadcasting minister, Mutale Nalumango, said thatthe cabinet had rejected proposals to delay the swearing-in of a newly electedpresident until electoral disputes were resolved and to allow the speaker of theNational Assembly to act as president while such disputes were being resolved.Mrs Nalumango said that other proposals rejected included the filing of apresidential petition within seven days of the release of election results. Thelaw currently allows 30 days within which the aggrieved political parties canfile a presidential petition to nullify an election victory of a president-elect. Thegovernment argued that the 30 days that are currently allowed to file apresidential petition was a reasonable time period for both petitioners andrespondents to mobilise witnesses. The cabinet also rejected a proposal to havepresidential petitions heard by a tribunal headed by the chief justice and sixeminent persons with legal background. The cabinet did, however, accept aproposal to remove the chief justice as the returning officer for presidentialelections, since it is he that presides over presidential petition cases.

The opposition had wanted the swearing-in of a president-elect to be delayeduntil electoral disputes were resolved, arguing that it becomes difficult toremove a president once he has been sworn-in as he then assumes full powersand takes total control of the instruments of the state. The rationale for theargument that the speaker of the National Assembly should be allowed to actas president during a petition was that the speaker would be impartial. Theopposition also wanted election petitions to be speeded up to enable quickresolution in order to avoid a repeat of the recently concluded petition that tookover three years to resolve. The opposition felt that having a tribunal headed bythe chief justice, and containing six eminent persons, to hear presidentialpetitions would also help to expedite presidential petition cases.

Owing to the government’s rejection of electoral reforms, electoral disputes arelikely to continue. The government's stand also reinforced analysts’observations that Mr Mwanawasa will do very little to carry out reforms thatwould prevent future electoral disputes once the Supreme Court has declaredhim the duly elected president of Zambia. The move also shatters theopposition’s hopes of a free and fair election in 2006 as the government will beable more easily to devote resources to campaigning, rather than to complyingwith new electoral rules—resources of a magnitude that the opposition cannothope to match.

The cabinet rejects electoralreforms

20 Zambia


Economic policy

On February 9th a joint IMF-World Bank mission announced that Zambia hadmet all the targets required for debt cancellation under the heavily indebtedpoor countries (HIPC) initiative. The IMF and World Bank boards are due tomeet in March to formalise Zambia’s graduation to HIPC completion point,through which US$3.8bn of Zambia’s debt owed to the IMF, World Bank andsome Western donors will be cancelled. The debt cancellation will also bringadditional relief as Zambia will not be required to pay interest on some loansfalling due in 2006 and beyond. This will enable the Treasury to channel fundsinto development and poverty reduction. The Fund said that Zambia had mettriggers such as keeping the wage bill within 8.1% of GDP and limiting thebudget deficit to 2.0% of GDP. Zambia also managed to channel 40% of fundsfrom the national budget to poverty programmes and was on course with thecommercialisation of the state power company, Zesco, and the selling of a 49%stake in state bank, Zanaco, some of the key conditions set by the Fund forZambia to reach HIPC completion point.

The reaching of HIPC completion point is not all good news for thegovernment, however. The funds released through HIPC debt forgiveness willonly begin to become available to the government from 2006, as Zambia willonly start to negotiate for debt relief with various Western lenders from mid-2005. Some donor countries, such as the UK and Japan, have already pledgedto cancel part of Zambia’s debts, but many will take more time to consult andmake decisions. The limited early availability of funds may set the governmenton a collision path with trade unions and civil society groups, who werepreviously led to believe by the government that at HIPC completion pointZambia would immediately have enough funds to provide more services to itspeople. The government has now started a public relations campaign aimed atexplaining exactly how the HIPC initiative works, but this has merely ledpeople to think that the government is now shifting its position on HIPC.

On January 28th the minister of finance and national planning, Ng’anduMagande, gave his budget address. Under the theme of Steadfastness forAccelerated and Broad-based Growth, the 2005 budget aims to achieve thefollowing.

• Build upon the fiscal prudence that characterised the 2004 budget (March2004, Economic policy) and continue with viable economic policies that willpromote economic growth. Fiscal austerity was necessary in 2004 for the IMF toagree to a new poverty reduction and growth facility (PRGF). With the PRGFnow in place and elections only a year away, there is less motivation for thegovernment to be so prudent in its fiscal policy. However, the need to reachHIPC completion point and negotiate debt relief with donors should besufficient incentives to maintain the government’s commitment to sensible fiscalpolicy, albeit slightly more expansionary in 2005 than in 2004.

• Reduce the budget deficit from 2% of GDP in 2004 to 1.6% of GDP in 2005.In the budget presentation the deficit is defined as the level of domesticfinancing. This therefore assumes that foreign financing will be at budgeted

IMF mission approvesdebt-relief plan

The 2005 budget aims topromote broad-based growth

Zambia 21


level, which is highly unlikely given the uncertainty and delay associated withdonor inflows. Such a position is normal for African countries and is no greatcause for concern, as most of the donor money is for project financing; if it doesnot arrive then the projects are not implemented and so there is only a limitedeffect on the deficit.

• Enable the Zambian economy to grow by 6% during the year, boostedmainly by growth in agriculture, manufacturing, tourism and mining. Thegovernment also plans to reduce inflation to 15% in 2005. Mr Magande said thatinflation stood at 17.5% at the end of 2004, below the 20% target agreed withthe IMF.

Mr Magande said the government would spend ZK9.78trn (US$2bn) in 2005, a17% nominal increase on expenditure planned in the 2004 budget. Of the totalbudget expenditure in 2005, 42.8% is to be directed to poverty reducingprogrammes such as providing clean water, dealing with HIV/AIDS, buildingschools and clinics, and recruiting teachers and nurses. The government plans tospend ZK114.25bn to recruit 5,000 teachers and medical personnel and also toraise their salaries. ZKk64.9bn will be used to pay housing allowance arrears tocivil servants and another ZK65.7bn to clear outstanding arrears for retrenchedcivil servants. Mr Magande said the government would spend ZK343.7bn onwage awards for civil servants and public workers, in effect lifting a wage freezeon salaries the government had imposed in 2004 in a bid to meet IMF debt-reliefbenchmarks. Only ZK142bn was provided for the constitutional review, electoralreforms and elections in 2005. This is a further indication that Mr Mwanawasa’sadministration will not bow to demands by the church, civic groups andopposition parties to amend the constitution before the 2006 elections.

Providing more funds for poverty-reducing programmes will raiseMr Mwanawasa’s profile ahead of elections in 2006. Employing up to 5,000more teachers, and paying retirement packages to teachers who retired severalyears ago, will also work in favour of Mr Mwanawasa and the MMD, as theyattempt to mend relations with different groups of Zambians. The governmenthas separated payments of salary arrears to civil servants and funds for therecruitment of new teachers from the normal wage bill in the budget. This is away around the targets agreed with the IMF for limiting the public-sector wagebill to 8% of GDP (December 2004, Economic policy), and it remains to be seenwhat the Fund makes of the move.

Civil servants and public workers, particularly in rural areas, are soon swayedby benefits relating to wages conferred on them by the government and easilyforget their previous sufferings. They are thus likely to support the governmentthis year, hoping that it can deliver more salary hikes in the coming year.

Budget includes pre-electionyear expenditure increases

22 Zambia


2005 budget: expenditure(ZK bn)

Personal emoluments 2,186.51 Housing allowance 86.40 Net recruitment of teachers/medical personnel 114.25

Other personal-related expenses 130.57 Housing allowance arrears 64.87 PSRP retrenchments 65.70Recurrent programmes 2,808.69 Donor-funded recurrent programmes 637.08 Constitutional review/electoral reforms/elections 142.00 By-elections 4.00 Voters' registration exercise 11.65 Food security packs 20.00 Fertiliser support programme (FSP) 140.00 Arrears to suppliers of goods & services 76.00 Pensions fund 159.00 Awards & compensations 54.00 Public-expenditure management and accountability reforms (PEMFAR) 131.96 Food strategic reserve 59.13Capital programmes 2,854.20 Donor-funded capital programmes 2,236.54 Financial restructuring/ contingent liabilities 100.00 Road fund 90.00 Rural electrification 11.30 Road infrastructure projects 100.00Constitutional & statutory 1,799.05 Domestic debt service 850.00 Foreign debt service 192.70 Amortisation 383.80 Contingency 15.85 Wage award 343.70 Constitutional posts 13.00Total expenditure 9,779.02

Source: Ministry of Finance and National Planning, Budget address.

Almost certainly with half an eye on the elections due in 2006, Mr Magandeannounced plans to reduce the top rate of personal income tax to 37.5%, from40%, and raise the tax-exempt threshold by ZK20,000 to ZK280,000 (US$58.70).The government also reduced excise duty on imported mobile phones, from15% to 5%, the cost of which are currently beyond the reach of many civilservants and public workers. Other populist measures included:

• an increase of the tax-exempt proportion of retirement benefits;

• a reduction of excise duty on children’s books and items used in theZambian music industry;

• higher tariffs on some agricultural products to protect domestic producers;

• a reduction of VAT on certain goods destined for export, to boostinternational competitiveness; and

• a reduction of VAT on drugs and other medical products.

Tax cuts are announced

Zambia 23


Overall, the government expects to receive ZK5.72trn (US$1.2bn) in domesticrevenue, and another ZK3.56trn in project and budget support from donors.This will leave a fiscal deficit of ZK500bn or 1.6% of GDP. The figure for foreignfinancing appears optimistic, as the average of the last four years is aboutZK1trn. Some increase is expected as Zambia benefits from the first full year ofdonor funding under the PRGF and as HIPC completion makes donors moregenerous. However, as in most previous years, donor funding is likely to fallshort of government expectations. As mentioned before, owing to the fact thatmost of the donor shortfall will be in project financing, the fiscal deficit willnot be overly affected—the Economist Intelligence Unit predicts a fiscal deficitof 3% for 2005, still low in a historical context. However, political expediencymay force the government to delay or suspend some sensitive projects.

2005 budget: revenue and financing(ZK bn)

Total tax revenue 5,505.56 Direct taxes 2,419.31 Company income tax 444.87 Pay as you earn 1,726.81 Withholding & other income taxes 243.49 Mineral royalty tax 4.14 Excise taxes 728.94 Fuel levy 90.00 Other excises 638.94 Domestic VAT 608.98 Trade taxes 1,748.33 Import tariffs 744.73 Import VAT 979.00 Export duties 24.60Non-tax revenue 135.85 User fees and charges 111.00 Dividends, interest & other levies 24.85Exceptional revenue 80.84

Domestic financinga 500.00Total domestic revenue & financing 6,222.25Foreign financing 3,556.77 Project financing 2,873.62 General budget support 683.15Total revenue & financing 9,779.02

a In effect, the budget deficit.

Source: Ministry of Finance and National Planning, Budget address.

The Bank of Zambia (BoZ; the central bank) has announced the withdrawal ofthe ZK500 and ZK1,000 (10 US cents and 20 US cents) polymer notes, whichwere printed by the Canadian Bank Note Company Limited. The notes causedcontroversy in 2003 when it was noted that they started fading shortly afterbeing issued owing to the poor quality of ink used on them (December 2003,Economic policy). The BoZ governor, Caleb Fundanga, said on February 9ththat the notes—worth in excess of ZK27bn (US$5.6m) and numbering some42m—would be systematically withdrawn from circulation, but did not specifya timeframe for this process. Mr Fundanga said that the Canadian Bank NoteCompany had printed fresh notes for the country, which were durable and had

Fading plastic notes arewithdrawn

Tax cuts will increase relianceon donor funds

24 Zambia


been printed for free to compensate for the poor quality of the notes nowbeing siphoned from circulation.

It seems likely that people in rural areas will have problems in exchanging theold notes for the new notes because of the lack of banking facilities available tothem. Eventually traders are likely to start refusing to accept the faded notesand this will create difficulties for villagers in buying goods and obtainingservices. It is unclear if the government or central bank will do anything tocounter this potential problem.

The domestic economy

Economic trends

Recent data provided by the Central Statistical Office (CSO) in late Februaryindicated that real GDP growth for 2004 was 5%. This was the third revision forthe year so far, and represented an upward revision from the previous estimateof 4.6%. The CSO director, Buleti Nsemukila, attributed the revision to thecollection of additional economic data (December 2004, The domesticeconomy). Mr Nsemukila said that the initial growth estimate of 4.6% wasbased on data collected for the first six months of 2004. The 5% estimate wasbased on data collected up to the third quarter of 2004, but Mr Nsemukila gaveno indication as to whether the figure would be revised again once data for thelast quarter of 2004 were collected. The growth in real GDP was driven mainlyby expansion in mining and quarrying, agriculture, construction, trade,transport and communications. The CSO estimated that agriculture grew by4.3% in 2004, while mining and quarrying rose by 12.6% compared with growthof 3.4% in 2003. Growth in the manufacturing industry was estimated at 5.2%and in the construction industry at 14.6%.

Real GDP growth by economic activity(% change, year on year)

2001 2002 2003 2004a

Agriculture, forestry & fishing -2.6 -1.7 5.0 4.3Mining & quarrying 14.0 16.4 3.4 12.6Manufacturing 4.2 5.7 7.6 5.2Electricity, gas & water 12.6 -5.2 0.6 -1.8Construction 11.5 17.4 21.6 14.6Wholesale & retail trade 5.4 5.0 6.1 5.4Restaurants, bars & hotels 24.4 4.9 6.9 5.5Transport storage & communications 2.8 1.8 4.8 6.5Financial institutions & insurance 0.1 3.5 3.5 3.5Real estate & business services 3.5 4.4 4.0 4.0Community social & personal services 5.8 1.6 1.6 0.6

Less FISIMb 2.5 2.5 2.5 2.5Total gross value added 4.6 4.6 6.0 5.8Taxes on products 7.0 -6.8 -2.8 2.7Real GDP growth 4.9 3.3 5.1 5.0

a Revised estimates. b Financial intermediation services indirectly measured.

Source: Central Statistical Office, The Monthly, February 2005.

GDP growth in 2004 isrevised upwards

Zambia 25


e

Economic growth in Zambia has been quite impressive recently; since 2000 realGDP growth has averaged 4.4%. This level will need to rise if any meaningfulreductions in poverty are to be achieved, but the Zambian economy is wellplaced to start achieving this growth. The Economist Intelligence Unit forecaststhat GDP growth will exceed 6% in 2005, owing to increased activity in coppermining and the mining of precious stones such as emeralds and amethysts. TheZambian copper sector recorded 409,000 tonnes of finished copper exports in2004 and the government has forecast 550,000 tonnes of copper output in2005. Growth in agriculture should also pick up as the government continueswith its attempts to help Zambia realise its great agricultural potential. Policiessuch as allowing displaced white Zimbabwean farmers to set up commercialfarms and the seed-pack programme, through which heavily subsidisedpesticides and seed are distributed to peasant farmers, should aid progress inthe sector.

Annual inflation for February 2005 was recorded at 18.7%, compared with 16.8%in the same month in 2004 and 18.2% in January 2005. The CSO attributed thehigher level of inflation mainly to upward adjustments in food prices. Annualfood inflation was recorded at 18.3% in February, up from the January rate of17.9%. Price increases for beverages, house rent and building repair items alsocontributed to the rise in the overall inflation rate. Annual non-food inflationrose to 19.7% in February, up from 18.7% in January. The governor of the Bank ofZambia (BoZ, the central bank), Caleb Fundanga, said on January 20th thatinflationary pressures were expected to continue, owing to high world oilprices as a result of greater consumption in the Northern hemisphere duringthe winter period and continued instability in the Gulf region, particularly Iraq.Other pressures would come from rising Asian demand, particularly fromChina and India. These pressures will make the government’s 2005 inflationtarget of 15% more difficult to achieve.

On January 19th the central bank reported that the exchange rate of the kwachaagainst the US dollar was expected to remain stable during 2005, owing to afavourable performance by the external sector and expected inflows fromdonors during the year. Mr Fundanga said that the EU disbursed €16m(US$21m) to Zambia in January, further boosting foreign-exchange reserves. Thecentral bank expected the government to continue with measures aimed atimproving fiscal discipline, which it said would support a strong kwacha andhelp to lower commercial banks' lending rates.

Agriculture

The 2005 budget contained a number of elements aimed at improving thecountry’s agricultural sector. The minister of finance and national planning,Ng’andu Magande planned to spend ZK59.13bn (US$11.8m) on purchasingmaize grain and cassava from peasants farmers, up from ZK47bn in 2004. Thegovernment allocated a further ZK140bn for purchasing pesticides and seed tosupport small-scale farmers in the 2005/06 season. This will enable the

Exchange rate is to stabilise

Agriculture receives muchattention in the 2005 budget

Inflation rises in early 2005

Strong growth is forecastfor 2005

26 Zambia


government to provide pesticides and seed at half the market price. Anadditional ZK20bn was provided for vulnerable but viable farmers.

The government’s intention is to help to create wealth among rural peasantsthrough agriculture, and enable them to have food security. However, going bylast year’s final allocations, which were inadequate, the money provided forbuying maize from small-scale farmers is likely to fall short of expectations andit is likely that the government will seek extra funds later in the year. The FoodReserve Agency said in January that it was unable to purchase all the maizeneeded for strategic reserves from farmers as the money provided wasinadequate and the roads were impassable in some rural outposts.

Having previously predicted a doubling of maize production in the 2004/05season (December 2004, The domestic economy: Agriculture), it looks asthought the government will be shown to have been overly optimistic. Afterscarce rains in some parts of the country, the Zambia National Farmers' Union(ZNFU) said in January that it might be difficult to raise the maize harvestabove the 1.3m tonnes produced in the 2003/04 season. However, Zambia isnot expected to experience serious food shortages as the deficits experienced insome areas are likely to be compensated for by surpluses in other areas. Thedrastic scaling back of output predictions highlights the fact that no matter howmuch resources the government devotes to improving agricultural output inZambia, the country will remain heavily dependent on the prevailing weatherconditions.

Mining

The BoZ said in January that total copper output for 2004 came in at 409,000tonnes, up from 349,814 tonnes the previous year. The government expects thatZambia will produce 550,000 tonnes of copper in 2005. Additional copperproduction will come in from the Kansanshi Copper Mine, which is operatedby Canada’s First Quantum Minerals and aims to produce 105,000 tonnes ofcopper in its first year of production in 2005. Copper production at Kansanshi isexpected to peak at 130,000 tonnes in 2011. In addition, Konkola Copper Mines(KCM) and Mopani Copper Mines (MCM) undertook massive rehabilitation in2004 to increase their copper output, the results of which will start to come online in 2005. KCM aims to lift its production to 250,000 tonnes in 2005, whileMopani plans to produce 190,000 tonnes.

The mines minister, Kaunda Lembalemba, said on January 10th that copperproduction will keep rising until 2007, when it is forecast to peak at 750,000tonnes. The source of this mining expansion will be both existing mines andnew ones. Recent announcements include the following.

• Australia’s Equinox Minerals reported that it had found new copperdeposits at its Lumwana copper mine in north-western Zambia. The Lumwanamine is now expected to start producing 140,000 tonnes of copper in 2006. GDRMinproc has been engaged to start building the mine and an agreement hasbeen signed with the Zambian power utility, Zesco, to build a powertransmission line to the mine.

Copper production willcontinue to increase

Forecasts of maize output arescaled back

Zambia 27


• New copper deposits have been discovered in Chongwe, in centralZambia, and in Petauke, east of the capital, Lusaka, by Australian firms that hadbeen conducting mineral explorations.

The government granted 12 licences for foreign firms to explore for copper andother minerals in various parts of the country in 2004 and the overall resultsare due to be released later in 2005.

The European Commission (EC) has announced that it will finance the buildingof a training institute for geologists, and also help with the financing of aGemstone Exchange Centre, in a bid to help Zambia diversify its miningactivities away from copper and cobalt mining. The EC had previously givenZambia a grant of €30m (US$41.5m) in 2002 to help the country train peopleinvolved in gemstone mining. About 50% of the funds were intended for use asloans to the miners so that they could purchase equipment. However, there hasbeen little success on the loans side, owing to the stringent conditions attachedto their disbursement. The EC councillor at the mission in Lusaka, Jenny Nunes,said on February 28th that the conditions for obtaining loans would beloosened to give more miners access to the money before the expiry of theproject in 2006. The gemstone industry is seen by both the government andWestern lenders as an area with the potential to create wealth and jobs forZambians, thus reducing poverty.

Financial markets

The Lusaka Stock Exchange (LuSE) has stepped up its attempts to link up withthe Johannesburg Stock Exchange (JSE) and establish a dual listing system.Closer ties with the JSE would make the LuSE more visible to foreign investors,and so help to raise its profile. A dual listing system would hopefully bringmore liquidity to the Zambian market, and also speed up the introduction ofan automated system of trading—trading on the LuSE is currently conductedmanually. The chief executive officer of the LuSE, Joseph Chikolwa, said thatthe LuSE and the JSE should be linked by the first quarter of 2006. For theremainder of 2005 both the JSE and LuSE will be working to design a system tofacilitate the linking of brokers and to allow enough time for testing theequipment for dual listing.

As well as announcing closer ties with the JSE, Mr Chikolwa also said that theLuSE planned to encourage firms to issue corporate bonds in order to bringmore liquidity to the market. The state power utility, Zesco, is already in theprocess of issuing corporate bonds to finance its expansion projects in powergeneration and distribution, while the Copperbelt Forestry Company is due toissue corporate bonds worth US$1m in the first week of March. The five-starPamodzi Hotel also intends to issue corporate bonds and some municipalcouncils are in the process of finalising the issuing of municipal bonds.Mr Chikolwa said that emphasis would be placed on corporate bonds as thetrade in government bonds was declining. In 2004 trading in governmentbonds declined drastically to 93 trades, from 434 trades the previous year. This

Plans to link Zambian andSouth African stock exchanges

Gemstone mining gets a boostfrom the EU

Further attempts are made toboost liquidity on the LuSE

28 Zambia


was mainly because of the fiscal austerity measures undertaken by thegovernment in order to meet IMF benchmarks.

At the end of 2004 the LuSE published a review of the exchange’s performanceover the year. There was a significant increase in market capitalisation, whichmore than doubled to US$1.65bn. Because of this, the market capitalisation ofthe LuSE is now more than that of the exchanges of Malawi (US$153m),Tanzania (US$715m) and Uganda (US$1.12bn). As a percentage of GDP, marketcapitalisation increased from 16.9% to 38.1%. The number of listed companieswas still low, at 12, an increase of 1 compared to 2003. The number of tradesdeclined from 2,102 in 2003 to 1,993 in 2004, and turnover declined fromUS$11m to US$7m over the same period. These declines highlight the illiquidnature of the exchange, as most stock is owned by institutional investors whotend to buy and hold.

The LuSE all share index closed December 2004 at 766, up 334 points from theclosing value of 432 in 2003 and representing price increases in most stocks.Indeed, the share index out performed both inflation and developments in thedollar/kwacha exchange rate. There was an increase in trade volumes fromforeign investors, but a net outflow of foreign capital, which indicates thedifficulty the LuSE is experiencing in attracting and keeping foreign investment.

Performance of the Lusaka Stock Exchange2003 2004

Market capitalisation (US$ m) 768 1,650

Market capitalisation (ZK m) 3,438,189 7,754,893Number of trades 2,102 1,993

Turnover (US$) 11,048,896 6,956,949Turnover (ZK) 49,443,808,065 33,526,796,864Turnover/market capitalisation (%) 1.46 0.43

Market capitalisation/GDP (%) 16.87 38.06Number of listed companies 11 12

Number of quoted companies 9 10Total number of companies 20 22

LuSE all-share index 431.97 765.83

Source: Lusaka Stock Exchange.

The LuSE has undoubtedly benefited from the more stable macroeconomicenvironment of 2004. This has given investors a chance to better structure theirinvestment portfolios and enabled companies to improve their earnings andpay dividends. The LuSE plans to embark upon an awareness programme in2005. Currently only around 30,000 Zambians hold shares, compared to apopulation of around 11m. Lack of awareness is a factor in this, although so isthe amount of poverty in the country, something outside the LuSE’s control.The LuSE also intends to increase the number of listed companies.Mr Chikolwa said that the state bank, Zanaco, would be listed on the bourse,together with the beef producing firm, Zambeef. Farmers House Plc, which isalready listed on the LuSE, also intends to issue additional shares. The totalnumber of listed firms is expected to reach 14 by December 2005.

Report shows that the LuSE isstill small, but growing

Zambia 29


Foreign trade and payments

Data from the Central Statistical Office (CSO) indicate that total exports (fob)declined by 16% to ZK573bn (US$120m) in January, from ZK679bn in December2004. Total expenditure on imports (cif) declined by 15% to ZK752bn fromZK883bn over the same period. The net effect of this was a 13% decline in thetrade deficit, from ZK204bn in December 2004 to ZK179bn in January 2005. Thedecline in total export value in January over December 2004 was attributed toa decline in export earnings from crude materials, manufactured goods,beverages and tobacco. The decline in import value was mainly attributed tomachinery and equipment, chemicals, and food and live animals.

As a reward for Zambia’s fiscal discipline and progress towards achievingcompletion point under the heavily indebted poor countries (HIPC) initiativeduring 2004, the UK and Japan have both agreed to debt write-offs. The UKsecretary of state for international development, Hilary Benn, announced onFebruary 9th that his government would cancel the entire £128m (US$230m)debt Zambia owed to the UK, because of the country’s good economicmanagement and also to enable it to provide funds for development andpoverty reduction. Mr Benn said that the UK would also pay 10.14% of the debtservice owed by Zambia on outstanding World Bank and African DevelopmentBank loans until 2015. Japan announced on January 19th that it had written offZK3.4trn (US$710m, or 88%) of the debt that Zambia owed it. The debtcancellation came after the Zambian president, Levy Mwanawasa, and theJapanese premier, Junichiro Koizumi, held bilateral talks in Tokyo. These debtcancellations should benefit the country, provided that the money freed up isput to good use rather than, for example, election campaigning. Thecancellations will also give Mr Mwanawasa and his Movement for MultipartyDemocracy government a pre-election boost of popularity with the generalpublic. Assuming that the Zambian government remains on track with itsreform programme, it will continue to benefit from debt write-offs and donorsupport.

The external trade deficitnarrows

The UK and Japan cancelZambia's debts

Documents

Zambia - iuj.ac.jp · Country Report Zambia March 2005 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom Zambia at a glance: 2005-06 OVERVIEW Zambia’s