the US$ in 2015. Weakness and volatility in ZAMBIA the Kwacha was more severe compared to Recent developments other emerging market currencies The depreciation, together with an in- The Zambian economy has come under crease in food prices and a loose fiscal strain since mid-2015. Real GDP growth position lifted annual inflation to a peak of Table 1 2015 slowed to 2.8 percent in 2015, well below 22.9 percent in February 2016. To mitigate Population, million 16.2 its historical average. Weaker growth has this, the Bank of Zambia reduced liquidity GDP, current US$ billion 21.6 been tied to both global headwinds and severely through a variety of measures. GDP per capita, current US$ 1330 domestic pressures which have intensi- The central bank also intervened in the Poverty rate ($1.9/day 2011PPP terms) a 57.5 fied. Zambia is sensitive to slower region- foreign exchange market, impacting the Poverty rate ($3.1/day 2011PPP terms) a 73.2 al and global growth and a sharp fall in level of reserves. These interventions a the price of copper, given that copper typ- helped to tame annual inflation to 19.6 Gini Coefficient 57.1 b ically contributes about 75 percent to ex- percent by August 2016 and to bring sta- School enrollment, primary (% gross) 109.2 ports. Domestically, a power crisis has bility to the Kwacha-US$ exchange rate. b Life Expectancy at birth, years 58.4 affected all sectors of the economy as well However, this achievement has not been Sources: World Bank WDI and M acro Poverty Outlook. as low and poorly-timed rains that dented without cost and has led to a reduction in Notes: the agricultural incomes of 61.3 percent of private sector investment and growth. (a) M ost recent value (2015) (b) M ost recent WDI value (2014) the population living in poverty. Accord- Recent fiscal expansion has been financed ingly, poverty rates in rural areas likely by external borrowing, including large went up in 2015 relative to past years. Eurobond issues beginning in 2012 which Lower, El Nino-influenced rainfall led to nearly tripled the size of external debt 2015 agriculture output falling, while low- relative to GDP. Both domestic and exter- The economy has come under recent strain er copper prices suppressed the mining nal financing has been more challenging as external headwinds and domestic pres- and quarrying sector, which grew by only to source during 2016, and revenue has 0.3 percent. Over the course of 2015 cop- fallen short of budget projections for the sures have intensified. GDP growth slowed per exports fell, leading to a current ac- first half of the year. At the same time to 2.8 percent in 2015 from 5.0 percent in count deficit of 3.4 percent in 2015. The expenditure has not been curtailed, lead- 2014. External headwinds have included industrial sector (which includes mining) ing to a build-up in arrears, and forcing slower regional and global growth, lower was supported by strong growth in con- the Government to borrow from the Cen- struction (18.9 percent), driven by public tral Bank. Current pressures on expendi- copper prices and the strengthening of the infrastructure investment. Services gained ture include the import of emergency U.S. dollar against the kwacha. Domestic at a slower 2.3 percent pace in 2015. power, a fuel subsidy, debt service costs pressures include a power crisis affecting Lower copper prices are typically followed and spending in the build-up to the Au- all sectors of the economy and repeat fiscal by a depreciation of the Kwacha. This pres- gust 2016 elections. The 2016 fiscal deficit deficits that have weighed on investor con- sure on the currency was worsened by ebb- (cash basis) is likely to register almost ing investor confidence related to the power twice its target of 3.6 percent of GDP. fidence. Growth in 2016 is expected to re- crisis, repeat fiscal deficits, a widening trade The benefits of GDP growth have accrued main sluggish at 2.9 percent, leading to deficit and large external borrowing. The mainly to the richer segments of the popu- only a marginal decline in poverty. Kwacha lost 41 percent of its value against lation in urban areas. Despite gradual FIGURE 1 Zambia / Sector growth rates (2013-2016) FIGURE 2 Zambia / Fiscal trends (2013-2018) Percent Percent of GDP 8 30 25 4 20 15 0 10 5 -4 0 -5 -8 -10 2013 2014 2015e 2016f 2013 2014 2015e 2016f 2017f 2018f Agriculture Industry Services Government revenues Government expenditure Fiscal deficit Sources: Central Statistics Office, Zambia and World Bank forecasts. Sources: Ministry of Finance, Zambia and World Bank forecasts. MPO 284 Oct 16 poverty reduction over the past decade, pressures ease. Per capita GDP growth of challenges over the medium term. Fur- poverty in Zambia remains high with 54.4 0.5 percent in the current year is expected thermore, there is a need to ensure that percent of households at incomes below to keep the proportion of people living growth is more inclusive across income the national poverty line in 2015. Poverty under the $1.90/day poverty line in 2016 at groups, economic sectors and geograph- is estimated at 57.5 percent in 2015 when 57.5 percent, which is the same as in 2015. ical areas also remains a major challenge. measured by a $1.90/day (2011 PPP). However, at the existing population Economically depressed rural areas need Overall, the level of inequality is also very growth rates the actual number of poor is to be linked to the most dynamic sectors high in Zambia. In 2015, the Gini coeffi- expected to increase from 9.32 million of the economy. cient was 0.559, an indication that ex- people in 2015 to 9.61 million in 2016. Continued large fiscal deficits remain penditure has continued to be unevenly Tough action is required in the second half costly to finance, and they send adverse distributed among the population. Many of 2016 and 2017 to curb runaway fiscal ex- signals to investors that undermine con- of the gainful economic activities in the penditures, with inflation close to 20 percent fidence in the kwacha. With financing country are concentrated along the eco- and persisting twin deficits. The outlook is constraints emerging, fiscal consolida- nomic corridor that runs from the highly also subject to down-side risks, both domes- tion is inevitable. Nevertheless consoli- urbanized Copperbelt region to Lusaka. tic and external. A further slowing in Chi- dation needs to take place in a gradual na’s economy could weigh on demand for and orderly fashion so that medium and Zambia’s exports by further reducing cop- long term growth is preserved. Moreo- Outlook per prices. While main domestic risks are two-fold: first that the power crisis will con- ver consolidation must not erode the nascent system of social safety nets if the tinue to worsen (this could occur via contin- country is to boost the livelihoods of the The medium-term outlook has been re- ued reduced capacity at the main hydro- poorest citizens. vised downward from the previous MPO, power plants); and second, that a falloff in Improving the economic benefits from mainly following slower regional and confidence in the economy re-occurs, follow- Zambia’s mineral wealth in an environ- global growth and lower copper prices. ing recent improvement tied to expectations ment of depressed world prices is a fur- On the upside however, is the likely reali- that there will be a post-election IMF pro- ther challenge. Finally, income inequality zation of stronger agricultural sector gram and World Bank support. poses a major challenges for poverty re- growth following late but not reduced duction in Zambia as it erodes the gains rains as earlier feared in the second of the associated with income or economic El Nino influenced agricultural seasons. GDP growth for 2016 is projected at 2.9 Risks and challenges growth, and likely reflects inequalities in the access to assets, services and opportu- percent, before improving in 2017 (4.0 nities across the population, especially in percent) and 2018 (4.2 percent), assuming Lower copper prices, power outages rural areas. that copper prices stabilize and domestic and fiscal imbalances present the major TABLE 2 Zambia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 5.1 5.0 2.8 2.9 4.0 4.2 Private Consumption 0.8 1.6 1.0 2.8 5.6 6.1 Government Consumption 25.2 5.8 7.1 6.0 -6.3 -12.5 Gross Fixed Capital Investment 9.1 3.4 3.7 3.6 4.1 6.5 Exports, Goods and Services 12.6 0.6 -5.5 -5.1 9.6 12.9 Imports, Goods and Services 13.3 0.7 -4.0 -5.6 6.5 9.7 Real GDP growth, at constant factor prices 5.1 5.0 2.8 2.9 4.0 4.2 Agriculture -4.1 8.0 -7.7 2.0 3.6 3.8 Industry 3.5 3.3 6.7 3.8 3.5 3.7 Services 7.9 5.5 2.3 2.5 4.4 4.6 Inflation (Consumer Price Index) 7.0 7.8 10.1 19.0 9.8 8.3 Current Account Balance (% of GDP) -0.6 2.1 -3.4 -3.6 -2.6 -0.9 Fiscal Balance (% of GDP) -6.7 -5.5 -9.4 -6.8 -6.0 -4.7 Debt (% of GDP) 29.1 35.2 52.9 55.4 58.6 59.2 Primary Balance (% of GDP) -5.2 -3.3 -6.6 -4.2 -3.3 -2.1 Poverty rate ($1.9/day PPP terms) a,b,c .. .. 57.5 57.3 57.0 56.2 Poverty rate ($3.1/day PPP terms) a,b,c .. .. 73.2 73.1 72.8 72.4 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n 201 5-LCM S. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. (c) A ctual data: 201 5. P ro jectio ns are fro m 2016 to 2018. MPO 285 Oct 16