Zambia

Encouraging outlook for copper

In 2023, economic growth was slightly affected by the weak performance of the agricultural and mining sectors, due to unfavorable weather conditions, power cuts and the State's reduced capacity to manage the mines it had nationalised, stifling production and investment. The outlook for 2024 is brighter, with copper production set to rebound in the second half of the year. It will be underpinned by high prices, linked to robust global demand driven by the energy transition, as well as the privatisation of two mines announced in 2023. India's Vedanta Resources regained control of the country's largest copper mine, KCM, ending the legal wrangle with the government that erupted in 2019 over asset ownership. The company jointly announced a USD 1 billion five-year plan to bridge the investment gap, particularly in the development of underground mining. On the other hand, UAE-based International Resources Holdings (IRH), selected in December 2023 to partner the national company ZZCM-IH, will own 51% of the Mopani copper mine and invest USD 1.1 billion. Spurred on by the improved business climate, other investors are expected to invest in the country, such as the Canadian company Barrick Gold, which announced in October 2023 that it would inject $2 billion into the expansion of its Lumwana copper mine. Indeed, the encouraging progress made towards the signature of a comprehensive debt restructuring agreement, combined with improved governance and IMF support, is reassuring. The construction and service sectors will also benefit from the enthusiasm of foreign private investors. On the demand side, however, there will continue to be major impediments to growth, such as sluggish economic growth in China, the second-largest importer of Zambian products behind Switzerland, and the fiscal consolidation plan, which will curb public and private consumption. Household demand will continue to be hampered by inflation, which is likely to increase slightly, fuelled by the depreciation of the kwacha. As a result, the Bank of Zambia will continue its monetary tightening; by November 2023, it has raised its rate for the fourth consecutive time this year to 11%. It has also increased the ratio of deposits held by commercial banks from 11.5% to 14.5%, in order to alleviate pressure on the foreign exchange market.

Towards a global agreement on debt restructuring

As Africa's first state to default at the end of 2020 during the Covid-19 pandemic, Zambia has since been seeking to restructure its $13 billion non-multilateral foreign currency public debt, equivalent to around 46% of GDP in 2023. Negotiations have accelerated, since in mid-October the country signed an agreement with bilateral creditors (including China and Paris Club members), mirroring the protocol established in June 2023 on official debt amounting to $6.3 billion. This breakthrough paved the way for negotiations with private bondholders, whose claims amount to $3 billion. The latter signed an agreement with Zambia at the end of October, identifying them as priorities for payment, while providing cash flow relief of $2.5 billion. The nominal discount of 18% includes $821 million in arrears. However, official creditors, mainly China, denounced the more favorable treatment accorded to private creditors, breaching the principle of comparability of treatment defined by the Official Creditors Committee (OCC), and therefore opposed this latest agreement. As a result of this major setback, no global agreement has yet been reached, and the country continues to revise its Eurobond restructuring proposals. It will also have to reach agreement with commercial creditors, including Chinese state-owned banks, whose total claim also amounts to $3 billion. However, this failure did not prevent the IMF from approving the immediate disbursement of a second tranche of $187 million under its Extended Credit Facility (ECF) in December 2023, in view of the progress made in negotiations and Zambia's efforts to restore its public finances and debt sustainability. This is part of the program attached to the ECF concluded in August 2022, for a duration of 38 months and a total amount of $1.3 billion. In 2024, the government is expected to pursue fiscal consolidation, which was slowed down in 2023 by weak mining revenues. In order to broaden the tax base, the country plans to improve revenue collection through the introduction of a new electronic invoicing system, and timid tax reforms such as the introduction of a tax on mobile money transactions and increased excise duties on sweetened beverages and tobacco. The gradual increase in mining revenues will support the government's efforts and allow the public deficit to shrink slightly. The Farmer Input Support Program (FISP), whose cost soared in 2023 due to the subsidies on imported fertilizers, should see its cost fall. At the end of the year, it should be gradually replaced, to include new support services and aim for greater productivity. However, inflation will weigh on public spending, with increases planned in education, health and road infrastructure. So, although the country hopes to mobilise more domestic resources through taxation and borrowing, it will still have to rely on external concessional loans to finance its deficit.

In 2023, falling copper exports reduced the trade surplus and reversed the current account balance, which turned into a deficit. In 2024, the rise in merchandise imports, particularly capital goods, will continue due to large-scale private investment. However, the gradual recovery in mining exports, combined with rising copper prices, which accounted for 65% of the country's export earnings in 2023, and 70% in 2022, will eliminate the current account deficit. The primary income deficit will be maintained with the transfer of dividends to foreign mining companies and the payment of interests on private external debt and local currency debt still held by non-residents. Remittances will ensure a very slight surplus in the secondary income balance. In 2023, foreign exchange reserves covered only 3.4 months of imports, partly drained by support for the kwacha. An agreement on debt should trigger their replenishment, supported by the recovery of mining revenues.

The sovereign default, a burden for public policies

President Hakainde Hichilema, who came to power in 2021, one year after the sovereign default, will pursue the reform plan, guided by the IMF. With a weak tax base, his actions will be limited, and the implementation of the fiscal consolidation program risks upsetting public opinion, already struggling with the high cost of living and the double epidemic of cholera and anthrax. The country is marked by corruption and inequality, with over 80% of the rural population living in poverty. On the international stage, the President will pursue his rapprochement with Western countries, while maintaining close relations with China. In September 2023, Hakainde Hichilema and Xi Jiping announced their intention to strengthen trade cooperation in 2024. The two presidents met in the context of negotiations on Zambian debt, while China alone holds more than 4 billion in bilateral claims (i.e. around 20% of foreign public debt and two-thirds of its bilateral share), not counting the share of its commercial banks. Foreign policy will therefore focus on pursuing negotiations aimed at reaching a comprehensive debt restructuring agreement, in order to ease the country's financial situation and reassure foreign investors.

Last updated: January 2024