The government is likely to strike a balance between meeting the expectations of its supporters—less inequality, better industrial regulation and lower unemployment—and sustaining investment and growth.
However, there is some risk that it will introduce policies that are poorly designed or counterproductive,
which would undermine growth. In line with the central scenario, it is expected to stick to a market-orientated agenda and maintain macroeconomic stability.
Recent public-sector pay increases have been well in excess of inflation, but this state of affairs is not expected to continue over the rest of the forecast period. Drastic changes in mining policy are not expected, but some measures will be taken to boost revenue from the sector (partly by ensuring better compliance with existing tax rates) and improve working
The 2012 budget has raised mineral royalty rates from 3% to 6% for base metals and to 5% for precious minerals. Further modest increases in mining taxes could be made in 2013-16 if copper prices stay high, as the Economist Intelligence Unit forecasts.
The government has also said that it will negotiate increases in its stakes in the mines to 35% (from 10-20.6% at present)
and may introduce restrictions on the repatriation of export earnings.
The reaction of mining companies to these policies has been muted, and we believe that the changes are likely to be accepted, although if handled badly (if, for example, the government were to renege on its commitment to increase its stakes in the mines via negotiation rather than coercion), investment in the sector could fall.
Infrastructure will improve gradually as investments are made in power supply and roads. Power generation is expected to grow by 50% in 2012-16, reducing the frequency of power cuts but not eliminating them.
The fiscal incentives on investments in the “priority sectors” have been retained but could be lowered, as the threshold of US$500,000 for eligibility means that these tend mostly to favour foreign companies.
Despite high levels of public spending on education, progress in improving its quality and relevance is likely
to be slow.
Agriculture will remain high on the government’s agenda. Fertiliser subsidies will be retained but their share of the agriculture budget is set to fall slightly. Although the subsidy scheme has allowed maize production to rise sharply, it is flawed: targeting is poor; a blanket support scheme for maize is inappropriate given that Zambia has three agro-ecological zones, each suited to different crops; and the impact on productivity has been weak.
The government has acknowledged some of these issues and agricultural policy could become more effective over the forecast period.
Fiscal policy will be expansionary in 2012-13. The government projects the deficit at 5.6% in 2012 as expenditure grows by 30% while domestic revenue and grants grow by 25% and 19% respectively.
Although the ZK1trn (US$195.8m) loss resulting from the doubling of the income tax threshold to ZK2m per month (and associated revisions to the other tax bands) will be offset by higher taxes on mining, the domestic revenue projection seems
unviable given historical trends.
Furthermore, expenditure overruns are likely following the recent hefty wage increases for civil servants and public-sector
health workers, although we expect that this will be partly offset by lower than budgeted capital spending. Overall, we forecast a deficit of 6.2% of GDP (previously 5.9%) in 2012.
Thereafter, growth in public spending is expected to moderate, picking up slightly in the run-up to the election in 2016. Revenue growth will be robust, in line with economic trends.
Grants are expected to grow steadily but to finance a smaller share of the budget (6.4% by 2016). The fiscal deficit is forecast to moderate to 2.6% of GDP by 2015, before picking up to 3.4% in 2016.
Public debt is forecast to rise from 27.3% of GDP in 2011 to 35.4% by 2016. Some of this will be non-concessional external borrowing: the US$700m sovereign bond issue scheduled for 2012 may be deferred because of global economic uncertainty but will take place by 2014. Public debt-servicing capacity is expected to stay intact over the medium term, although a failure to invest borrowed funds wisely could undermine longer-term debt sustainability.
The Bank of Zambia (BoZ, the central bank) will focus on keeping inflation within single digits. It will be helped by fairly stable global commodity prices, which will allow it to cut its benchmark interest rate slightly over the forecast period.
The benchmark rate, currently set at 9%, was introduced in late March, to boost the transparency of the BoZ’s efforts to anchor inflation expectations.
However, financial markets are thin and supply-side factors and monetary aggregates will remain important determinants of prices.
The rebasing of the Zambian kwacha—1,000 units of the present currency would be equal to one unit of the new currency—is scheduled for 2012. The replacement of current banknotes with the new currency is to take place over a two-year transition
Real GDP growth is forecast to moderate to 5.9% (previously 6.3%) in 2012 as erratic rainfall damages the maize harvest. A sharper slowdown is not expected because of investments in power and mining and rapid growth in public spending.
Growth is expected to increase to an average of 6.9% in 2013-16. The main drivers will be agriculture, construction and mining.
Agricultural growth will be underpinned by a public-spending push, the recent reduction in the corporate tax rate in the sector from 15% to 10% and the potential offered by Zambia’s vast tracts of uncultivated arable land and abundant fresh water.
Growth in mining will soar in 2014-15 as investments at the Kansanshi, Lumwana and Konkola mines, as well as First Quantum’s new Trident mine, approach completion.
Our forecast allows for delays in these projects, and growth would be higher if they were completed on time.
Construction growth is expected to average 12.5% in 2012-14, driven primarily by planned investments in mining and power, and to edge down after that to 7% in 2016 as mining investment subsides after a period of strong growth.
Services and manufacturing (which consists mainly of agro-processing) are expected to grow at an average of 5.9% per year. The former will be driven by telecommunications, financial services, retail and the public sector, and the latter by copper output, investments in the multi-facility economic zones (MFEZs) and financial incentives for investment in the priority sectors.
Growth would be lower in the event of a drought, if the incidence of strikes were to escalate, if the euro zone were to collapse or if the incidence of politicised decision-making were to increase, deterring investors.
Inflation averaged 8.7% in 2011 as production of the staple food, maize, vastly exceeded domestic demand, keeping food prices in check, but fuel and electricity prices soared. Domestic maize production will continue to exceed demand, keeping food prices fairly stable. However, expansionary fiscal policy and further rises in electricity tariffs will stoke inflation in 2012.
In 2013-15 inflation is expected to ease as growth in electricity prices slows (following large increases in previous years as tariffs were raised towards cost-recovery levels) and fiscal policy is tightened. It is expected to pick up in 2016 as public spending growth increases in the run-up to the election.
In March we revised our inflation forecasts following the adoption of a rebased consumer price index (CPI). The new CPI is based on consumption patterns in 2002/03, compared with 1994 previously.
As expected, food’s share of consumption has declined, from 57% to 53%, as income levels have
Food inflation is lower than non-food inflation—a trend that is set to continue—so the new weights will tend to boost inflation estimates.
This effect will, however, be offset by the “formula effect” of using geometric means to calculate item indices instead of arithmetic means—the former incorporates the impact of price changes on consumption patterns.
The net effect will be to lower inflation estimates. In line with this, we forecast inflation at 7.1% in 2012 and at an average of 7% in 2013-16.
Further modest revisions are likely as the impact of the new formula—which varies in line with the dispersion of price changes—becomes clearer.
The kwacha’s value will be supported by strong growth in copper production (particularly in 2014-16), large foreign investment inflows and high public external borrowing.
This will be offset by robust import demand, a stronger US dollar and slower growth in copper prices. Overall, the kwacha is forecast to depreciate by 10% to ZK5,345:US$1 in 2012 as uncertainty about global economic prospects and domestic policy undermine confidence in the currency, and more gradually, to ZK6,274:US$1 by 2016, as copper exports rise sharply following the completion of major mining projects.
The dominance of copper in the export basket will continue to expose the currency to external
The planned rebasing of the kwacha will alter the value of our forecasts—for example, from ZK5,642:US$1 to ZK5.64:US$1 for 2013—although their substance would remain unchanged.
The current account is forecast to return to deficit, of 3% of GDP in 2012 and 2.8% of GDP in 2013, as growth in the production of copper (which accounts for more than 80% of exports) slows while imports continue to grow robustly, supported by high domestic demand and investment.
Thereafter, the deficit is forecast to decline, with the current account going into modest surplus in 2015-16 as exports
increase by over 50%. This will be driven mainly by a sharp rise in copper production as major mining projects are completed, but also by modest growth in copper prices and slightly higher non-traditional exports.
The services deficit is forecast to widen as growth in tourism is outweighed by a rise in services debits (in line with goods imports). The income deficit is expected to grow steadily as profits at the mines rise, boosting income debits.
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