Outlook for 2018-22
Zambia will face substantial threats to political stability in 2018-22. Much of this stems from what is for Zambia an unusual degree of tension under the presidency of Edgar Lungu. Treason charges against Hakainde Hichilema, the leader of Zambia’s main opposition party, the United Party for National Development (UPND), have been dropped, but only under a nolle prosequi, which means that the prosecution will proceed no further but that he can be re arraigned at any time.
Mr Hichilema has also reiterated his commitment to overturning the results of the 2016 general election (which the UPND claims was fraudulent), even though these claims are the most likely reason why he was charged with treason in the first place.
The Commonwealth, a multilateral organisation, has brokered talks between Mr Hichilema and Mr Lungu, but in the absence of any common ground over the 2016 election, these are unlikely to succeed. Emergency security powers have been dropped, which will allow for calm over the short term despite low-level anti-government protests over corruption, which will be a frequent phenomenon. Over the longer run there are several potential flashpoints that stand to stir more serious unrest and provide justification for the reimposition or extension of emergency powers. Such unrest is likely to be triggered, for example, if the judiciary were to deem Mr Lungu eligible to stand for another term in office in 2021—something the opposition roundly rejects.
The 2021 election season will be another volatile period, during which the government will look to narrow the political space aggressively. Extra security powers should help to bolster overall stability, but they will nonetheless reinforce widespread perceptions that Zambia is staggering into autocracy, keeping tensions very high throughout the forecast period and resulting in frequent low-level clashes and violence.
Besides relations with the opposition, intra-governmental divisions will keep policy unpredictable, with a vocal conservative faction of the ruling Patriotic Front (PF) having long been sceptical of the president and his choice of cabinet.
To cement his position, Mr Lungu is likely to enact a purge against this caucus, which will prove a distraction to the functioning of government while it lasts, but later on it should work to avoid internal instability—for example, in the runup to the 2020 PF presidential nomination.
The next presidential and legislative elections are due in August 2021. The most recent presidential and legislative polls, held in August 2016, were marred by violence—primarily between security forces and opposition supporters—as well as intimidation of media outlets and voices critical of the government. The violence and intimidation have injured Zambia’s image as one of Africa’s stronger democracies. Assuming that Mr Lungu is deemed eligible to stand again in 2021, and with the odds stacked against the opposition in a repressive environment, The Economist Intelligence Unit expects him to win a second full term as president.
Solid Sino-Zambian relations will be underlined by a string of infrastructure and manufacturing investment deals agreed with Chinese firms over the past few years, although not all of these will materialise, given our expectation that an economic slowdown in China will accelerate from 2018. Relations with Western donors will be strained by concerns over widespread official corruption, but Zambia will largely remain on good terms with its regional neighbours. There may be some regional efforts to push Zambia back onto a more democratic path later in the forecast period, but with major diplomatic players such as South Africa facing political controversy themselves, there will be no punitive action.
Policy will be guided over the medium term by an economic recovery programme, Zambia Plus, which is intended to channel the public finances into productive public assets, and the country’s seventh national development plan spanning 2017 21. At the heart of the latter will be an attempt to stimulate value added industrialisation and economic diversification in the private sector, with the state uncharacteristically taking a back seat. For this to work, policy stability—something the government has struggled with in the past—is being stressed as vital, but we remain sceptical. The plan envisages real GDP growth averaging 4.9% a year, underpinned by industrialisation, which over optimistically suggests immediate dividends from greater economic liberalisation. But with politics prone to instability, attracting the necessary levels of private investment will probably be harder than envisaged by the authorities.
As the programme falls behind target, the government will probably try to speed industrialisation along artificially. Likely interventions include export taxes on unprocessed goods and local-content requirements that will undermine development in the longer run. Still, upward adjustments to electricity tariffs should see a wave of private investment into the energy sector, helping generation to expand slowly throughout 2018-22 and supporting some industrialisation. Regarding finance for economic policy, there will be recourse to IMF funding under an assistance package that, despite some delays, is likely to be agreed in 2018. Some difficult reforms and fiscal austerity measures will be required to secure and maintain IMF backing, but without the boost to consumer confidence that comes with a programme Zambia will struggle to refinance its large stock of external debt and face repayment difficulties. Accordingly, reforms such as the lifting of consumer subsidies will be enacted and IMF support will allow Zambia to return to international capital markets in 2019.
Although fiscal policy will notionally tilt towards consolidation, official projections have spending as a share of GDP increasing in 2018 over the estimated 2017 outturn. Most of the increase is centred on core recurrent spending (which is politically tough to reverse) and debt servicing. There is also a stock of arrears to the private sector, which stood at US$1.4bn at end-June 2017, that need to be cleared. All of which leaves the budget with limited adjustability should revenue fall behind target. Seeing as stringency is essentially being dodged in 2018, our assumption is that outlays will edge down as a proportion of GDP in 2019-20. An expected loan agreement with the IMF will also introduce external oversight and help to limit policy slippages over these years.
An election season in 2021 will then see a partial abandonment of the consolidation agenda, with spending set to increase sharply as a share of GDP that year, before decreasing again in 2022 once election pressures subside. On the revenue side, the government expects a 22% nominal rise in revenue in 2018, but this ambition is not matched by enough tax or collection measures to make the increase feasible. Revenue will still gently increase, but—as with ex penditure— consolidation will have to kick in harder in 2019-20. By then the IMF will also have more direct oversight in budget planning, and as such we expect wider tax reforms to cause the revenue/GDP ratio to increase slightly faster during those years. Income will then dip in 2021, on the back of an expected election-related tax cut that year, and recover in 2022 as compensatory revenue measures are brought in again to try to rebalance the government account.
Overall, with revenue likely to fall behind target and spending relatively inflexible, the deficit will remain wide at 6.9% of GDP in 2018. As consolidation kicks in harder the shortfall will then steadily narrow to 3.4% of GDP in 2020. An election-related uptick in spending will then cause the shortfall to widen to 5.2% of GDP in 2021, but corrective measures will narrow it again, to 2.6% of GDP, in 2022.
The deficits will predominantly be financed domestically in the short term, but as this policy crowds out private sector activity there will be a renewed emphasis on external borrowing later in the forecast period.
The Bank of Zambia (BoZ, the central bank) lowered its key policy rate by 150 basis points, to 11%, at a monetary policy committee meeting in August. Weak asset quality will limit the effects of this on credit extension, with banks preferring government paper instead. But the BoZ has repeatedly opted to use the base rate to push down average lending costs, and in 2018 there will be some further monetary easing as inflation remains relatively subdued and the government continues to crowd out private-sector borrowers. With a reduced fiscal deficit diverting less liquidity into Treasury securities in 2019, the rate will bottom-out and be kept flat until rising inflation in 2020 prompts a tighter stance that year. In 2021-22, as inflation remains at the upper end of the BoZ’s 6 8% target range, a cautious stance will be continued.