Zambia – According to the IMF, Zambia’s growth outlook has potential, but lingering vulnerabilities pose risks to its outlook. The recent amendment to its mining royalties is a step in the right direction however.
Low copper prices and policy uncertainty
In the last two years, the Zambian economy has been weighed down by large fiscal imbalances, lower copper prices and policy uncertainties. It is estimated that real GDP growth slowed from 6.7% in 2013 to 5.6% in 2014, driven by a contraction in copper production.
The Zambian kwacha has fluctuated widely since the beginning of 2014. After depreciating by about 20% in the first half of the year, it recovered in the second half of the year reflecting tightened monetary policy and the issuance of Zambia’s second Eurobond in the amount of US$1 billion.
Downward pressures on the Kwacha re-emerged in the first quarter of 2015 reflecting external developments (U.S. dollar strength, and lower copper prices) as well as domestic factors (growing fiscal deficit, depleting government deposits and a change in the fiscal regime that adversely affected the outlook for the mining sector). Monetary policy has carried the burden of containing inflation and countering the depreciation pressures on the Kwacha.
Growth is projected to average 5.5 – 7% a year over the medium term, reflecting the impact of investments in mining and electricity in recent years. Inflation is projected to stay in single digits and decline gradually to 5%.
Key risks to the outlook…
…are delayed fiscal adjustment in the lead-up to general elections in 2016, persistent low copper prices, and policy uncertainties that could undermine investment in the economy.
Mining royalties amended
Steps taken by the government to resolve mining taxation problems by easing documentation for VAT refund claims by exporters and the decision to rescind the new fiscal regime for mining introduced in January 2015 could lead to higher copper production and growth.