Reflections On Zambia’s Economic Performance For The Year 2021

By Mr Boyd Muleya Head of Research – CTPD

The year 2021 has been an eventful one with several notable developments in the global and domestic economy. The Centre for Trade Policy and Development (CTPD) gives an account of some of the highlights of the year that informed performance and yet to influence growth in 2022.

Global Economic Developments

The price of Copper remained above the $9,000 per metric ton mark. One of the main reasons for the high copper prices is that the world is currently experiencing a copper shortage. And thus far, only 12% of the world’s copper reserves have been mined throughout human history. Furthermore, increased electronic consumption, the proliferation of electric vehicles, the increased use of renewable energy sources, and energy efficiency have all contributed to high copper prices.

Oil prices rose above $80 per barrel in October and November 2021, as dwindling natural gas supplies in Europe threatened an energy crisis and low OPEC production prospects resulted in crude oil prices reaching highs not seen since 2014. However, by the end of November, a surge in coronavirus infections had dampened market traders’ expectations.

A global fertilizer shortage has been driving up food prices and putting poorer countries in jeopardy. Prices for synthetic fertilizer, which uses natural gas and coal as raw materials, have risen due to a lack of energy and export restrictions imposed by Russia and China. A nitrogen fertilizer shortage caused by rising natural gas prices threatens to reduce global crop yields in 2022.

The global inflation shock has gotten worse in recent months, with annual inflation rates in many of the world’s largest economies reaching their highest levels in years, if not decades. Consumer prices have risen over the last year due to a variety of factors, including supply chain breakdowns, labor shortages, and a sudden surge in spending following widespread lockdowns during the COVID-19 pandemic. Inflation will be a problem until the pandemic is over.

The magnitude and duration of the global inflation shock have taken the world by surprise, hastening the start of global monetary policy normalization. Over the last year, a strong recovery in global aggregate demand in nominal terms has not been matched by an equal recovery in output. Due to supply constraints, real GDP expanded at a slower pace than expected, particularly in the third quarter.

Domestic Macroeconomic Performance

The August 12 General election spurred renewed investor confidence demonstrated through its effect on the performance of the Kwacha, renewed interest by various cooperating partners, and budget support either received or pledged from the international community.

For 2021, annual Inflation averaged 22 %, with the basic needs and nutritional basket averaging K8,456.65 for a five (5) member family. By end of 2021, inflation moved towards the upper bound of the 6 – 8% band as targeted in the 2021 National budget. The country mainly suffered from the supply side inflationary pressures, with food inflation mainly leading the conversation than non-food throughout the year.

The first half of 2021 saw a poor performance of the Kwacha with the worst coming in the second week of July 2021, whereas the best performance was in the last week of August 2021. The Kwacha’s movements during 2021 is attributed to a cocktail of factors such as offloading of dollars by the Bank of Zambia in the run up to the elections, market sentiments from investor confidence courtesy of the new dawn administration, debt service levels, inflationary pressures, favorable copper prices and monetary policy rate interventions.

The monetary policy rate (MPR) was adjusted upwards in the first quarter from 8 percent to 8.5 percent to contain inflationary pressures and remained unchanged in the second quarter until the fourth quarter of 2021, as inflationary pressures were expected to ease in view of the improved supply of food, particularly maize and wheat following a good crop harvest. In the third quarter, MPR was maintained as Inflation was projected to decelerate faster and edge closer to the target range than was earlier predicted, mostly on account of the favorable outlook for the exchange rate and improved prospects for fiscal consolidation. The upward adjustment in the fourth quarter of 2021 was required to keep inflation in single digits in 2022 and within the 6-8 percent target range by mid-2023. The increase in fuel pump prices and potential hike in electricity tariffs, as well as the fourth wave of COVID-19, leading to disruptions in supply chains and causing price increases, are all upside risks to the inflation outlook (Bank of Zambia MPC Statements -2021).

Debt levels remain very high in the country as Zambia will be committing to a very high debt service burden in 2022. The 2022 National Budget commits to spend K27.4 billion in domestic debt service, K51.3 billion in external debt service and K3.1 billion in domestic arrears, all amounting to K81.8 billion. Fiscal sustainability remain a huge challenge and a downside risk to economic recovery. The fiscal deficit was expected to narrow to 10.4 percent of gross domestic product (GDP) in 2021 from an outturn of 14.2 percent in 2020.

Zambia reached a Staff Level Agreement with the IMF after many years of attempting to obtain goodwill from the Bretton Wood Institution for an Extended Credit Facility. With the debt restructuring potential that comes with it, this will unlock cashflows to reallocation to the productive and other sectors of the economy.

In the 2021 National budget, the Government set to attain a real GDP growth rate of 1.8 %, however, by November 2021, the estimated GDP growth rate was attained. The Zambian economy grew by 3.5 % in the Third Quarter of 2021. This represents a 6.5 percentage points increase from minus 3 percent recorded in the corresponding quarter of 2020. The main drivers to this have been information and communications and construction, with support from the Financial & insurance, Public administration, Transportation & storage, and Manufacturing sectors.

The 2022 National Budget was not expected to be as large as K172.9 billion compared to the K119.6 billion in 2021, due to the country’s large debt burden, narrow tax base and high fiscal deficits. However, Government embarked on an expansionary budget obviously to quicken the pace of economic recovery. Notable in the 2022 National Budget is the Constituency Development Fund allocation of K25.7 million for each of the 156 constituencies, being a huge boost towards actualizing the aspirations within the Decentralization Policy in Zambia (Ministry of Finance 2021).

The reintroduction of the deductibility of mineral royalties for corporate income tax computation has been contentious, as seen from mixed feelings among citizens. The decision will see a government revenue loss of $182 million (K3.2 billion). The decision has been made to align mineral royalties with international practice and is envisaged to attract investment and increase copper production beyond 800,000 metric tonnes annually.

The year 2021 saw a renewed commitment to the return of the rule of law, media freedoms, the removal of politically exposed elements in trading places and bus stations, widening the civic space, and strengthened efforts in staging the fight against corruption.

The removal of fuel and electricity subsidies have been a contentious issue among citizens as fears of worsening the cost of living and that of doing business looms on in the Country. Prices of petroleum products have been increased in the quest to make them cost reflective and to contain debt accumulation arising from subsidies, with electricity tariffs increase to follow in 2022.

The launch of the National Airline, the Zambia Airways has potential to boost tourism, trade, and investment. However, CTPD maintains that while the idea to launch the national Airline was well intended, it remains risky due to Zambia’s financial and macroeconomic situation coupled with the downside effect of the COVID-19 pandemic on the airline and tourism sectors.

The trail of the previous regime’s massive focus on infrastructure projects is evident from some of the key developmental projects that Government has put up. In 2021, the Simon Mwansa Kapwepwe International Airport, Kenneth Kaunda International Airport, as well as a Kazungula Bridge linking Botswana and Zambia were inaugurated. Trade and investment flows are expected to be strengthened as import and export increase between the two countries.

The Economic Recovery Plan (ERP) developed by the previous regime remains packed as the new Government never refer to it. Furthermore, during the year, it was expected that the 8^th National Development Plan would have been concluded, as of 31^st December 2021, it remains work in progress.

Implications for year 2022

1. With the shortage in global fertilizer prices, local fertilizer prices are expected to rise and pose a food security risk in the country.

2. Copper prices will remain buoyant in 2022, giving a greater opportunity to grow Zambia’s revenues from the mining sector, if only structural realignments such as a stable and efficient mine tax regime can be instituted.

3. The reintroduction of deductibility of mineral royalty tax on copper is expected to bring a minimum investment of $2 billion in 2022.

4. Both the cost of living and that of doing business are expected to rise further due to inflationary pressures coming from the global markets, possibility of poor farming season due to erratic rains, increase in fuel prices and electricity tariffs, increased demand from increased income due to the 41,500 jobs to be created, and payment to pensioners and many other government interventions to spur liquidity in the economy.

5. CTPD expect tighter monetary policy rate in the first quarter of 2022 to contain inflationary pressures as highlighted.

6. Cost reflective fuel prices imply that with global oil prices surging, coupled with a volatile Kwacha will heavily weigh down on the local pump prices in 2022. Hence the need to support the Kwacha by all means.

7. The IMF programme will help restore macroeconomic stability, through debt and fiscal sustainability.

8. The failure to endorse the Economic Recovery Plan (ERP) raises the issue of transparency as citizens are not be privy to the policy document informing the economic recovery and delay in completing and availing the 8^th National Development Plan will affect planning by stakeholders.