The Zambian economy has experienced tough times in 2015 and 2016 after a period of fast expansion. The economic woes swiftly combined for the slowdown, suggesting they can dissipate quickly.
Here are six points that argue for a little more optimism in 2017.
1.Copper prices regained some losses. At US$5,720 per metric ton on 19 January 2017, the price of the metal has recovered to May 2015 levels. After five years of annual decline this is good news although it remains far below the 2011 recent peak. Where it goes now, nobody can say with clarity. The more bullish fear supply shortages (with the possibility of strikes in Chile and exports bans in Indonesia), they think the new US government will invest more in infrastructure and take heart from better manufacturing data from China. The more bearish think the recent rally might be overdone as supply appears to them as ample to meet global needs.
Despite the recent power outages, lower prices and mine closures; Zambia’s copper production has kept growing as new mines have ramped up their production (production in Q3 2016 was the fourth highest quarterly output since 2000). Annual production in 2017 is being forecast to be slightly higher again. More copper exported at a higher price is good for the economy. The recent EITI report highlights Zambian mining industry contributed ZMW 9 billion in 2015, equivalent to 26% of total government revenue.
2.Above average rainfall. What is good for farmers and electricity generation (Zambia is 95% dependent on hydro) is good for the economy. The 2016 harvest was 10% up on 2015 and in 2017 cereal production is expected to exceed the recent average (2011-15) of 3.22 million tons. Army worms have caused some havoc, but their maneuvering will not be enough to stop a very good harvest according to the FAO who report an ‘enhanced chance for above-average rainfall conditions’ and that the ‘2017 agricultural outlook is favorable’.
Despite the good news there are still people in the southern area facing food insecurity, as they –unlike much of the country- got hit by a second round of El Niño dryness, but the Government asserts humanitarian support is being provided. Tight supplies and higher demand over borders mean that the mealie meal price is still rising putting pressure on people’s pockets in urban areas. Either less food is bought for families or other consumption plans get the chop. Not everyone benefits from economic growth, particularly when the prices of essentials keep rising.
The rain is also helping replenish hydro-electric reservoirs. Frequent data on Lake Kariba is posted on the Zambezi River Authority website, and it appears that, despite levels remaining historically low, the annual recovery (more water flowing in, than is being used) has started 7 weeks earlier than in 2016 (when rains came late). This and the recent addition of Maamba Collieries to the grid will help the sector, although power outages (loadshedding) will persist in some form or other until reforms are progressed with, financial sustainability of the sector improves and big new projects come online.
3.A period of exchange rate stability. For 9 months the Kwacha has not deviated more than 10% from the rate of 10 Kwacha per US$. The currency plummet of 2015 (mostly August to November of that year), when chaos replaced the fundamentals, had undermined confidence in the economy. And although the rate remains far weaker than the ZMW 6.4 per US$ at the start of 2015 the recent stability has helped businesses and investors make clearer decisions.
4.Inflation back in single digits. Zambia imports many goods (including some of its food) so when the exchange rate weakens prices increase. The depreciation in 2015, coupled with a weaker harvest, sent annual inflation above 20%. However, since then really tight monetary policy and careful exchange rate management has pushed inflation back into single figures (7.4% in December 2016). NB the Zambian statistics website produces monthly trade data and inflation reports.
5.Returning market confidence. The November 2016 Kwacha bond auction was three times over-subscribed. Having stayed away after the currency went into its 2015 free-fall, international investors dipped their toes in August 2016, but in November they came back with confidence and the prospect of high real returns (interest rates remained high as inflation has declined). This and an unexpected ‘fifth’ quarterly bond auction (they’re now to be held every two months) provided the government with some much needed cash to clear some of the spending arrears at the end of a tough 2016, where borrowing opportunities and revenue collection fell short and expenditure pressures mounted on account of emergency power imports and unbudgeted petrol and diesel subsidies.
6.Liquidity is a little less tight. To tame inflation and the exchange rate plunge, in a context of loose fiscal policy, the central bank had to make liquidity really tight. This has squeezed banks and the private sector just as the economy slowed down making things really tough. However, there are now grounds to argue good news might be on the horizon. The annual growth of commercial banks’ liquidity turned positive in December 2016 after 12 months of decline. This came after the central bank eased monetary policy slightly (although they did not alter the policy rate) at their November 2016 monetary policy meeting.
Easing liquidity constraints should permit some much needed credit growth that has stuttered for some time and made it harder for firms to expand. Faster growth and less extreme fiscal imbalances are still required before the central bank can ease monetary policy much further. This would help get the cost of borrowing down closer to something reasonable (they’re currently close 35%-40%) and ease a huge impediment to the private sector.
Remember that the 2015 and 2016 slowdown was attributed to global headwinds (mainly via plummeting copper prices) and domestic pressures (weaker harvest, power outages, deteriorating confidence, and political uncertainty). The above numbers suggest some change on each of these fronts. Despite all the global uncertainty in 2017 and much needed reform on the domestic front: are these arguments enough for renewed economic optimism in 2017?
Well, none of these trends?especially the copper price bounce? is guaranteed to continue, but they should be enough for growth to pick-up to 4%. To get back to the magic number (7% growth that doubles the size of the economy in 10 years) better economic policies and structural reforms are needed. With the political space from no election until 2021 this should be possible, but it will take bold action.
The Author is a Senior Economist at World Bank Group