inflation has prompted the central bank to ZAMBIA loosen monetary policy. This supported a Recent developments decline in lending rates during the first half of 2017 and private sector credit re- Following slower growth in 2015 and bounded during the second quarter of 2016, three factors have supported faster 2017 after a year of continuous decline. Table 1 2016 growth in 2017. First, was a longer and Over the first half of 2017, government P o pulatio n, millio n 16.7 heavier 2016-17 rainy season that has led revenue was below target by 10 percent, GDP , current US$ billio n 21.1 to improved crop production and in- while public expenditure plans remained GDP per capita, current US$ 1262 creased hydro-electricity production. Sec- on track. The 2017 fiscal deficit target of 7 a ond, is improved copper production and percent of GDP is unlikely to be met. Re- Internatio nal po verty rate ($ 1.9) 57.5 Lo wer middle-inco me po verty rate ($ 3.2) a 74.3 copper prices (up 23 percent in H1 2017). peated large fiscal deficits have occurred Upper middle-inco me po verty rate ($ 5.5) a 87.2 Third, is improved macroeconomic stabil- since 2013, reaching 9.4 percent of GDP in a 69.0 ity that has strengthened confidence and 2015 (cash basis). In 2016, following reve- Gini co efficient b permitted the reduction of the policy rate nue shortfalls and a lack of affordable Life expectancy at birth, years 60.0 and reserve requirement ratio three times financing, the fiscal deficit reached 5.7 Source: WDI, M acro Poverty Outlook, and official data. between February and August 2017. percent of GDP (cash basis) and 8.5 per- Notes: (a) M ost recent value (2015), 2011 PPPs. After two tough El-Nino influenced agri- cent on a commitment basis. The stock of (b) M ost recent WDI value (2014). cultural seasons, agriculture output ex- public expenditure arrears reached US$ panded strongly during the first half of 1.7 billion at the end of 2016 (up from $827 2017, driven by a 19 percent increase in million in 2015) contributing to an in- crop production. The growth of industry crease in non-performing loans to 11 per- rebounded after a slow first quarter, when cent of outstanding loans. Economic activity has improved in 2017, heavy rains subdued the construction and Fiscal deficits have been financed by in- mining sectors. The services sector im- creased inflows of commercial and foreign following a bumper harvest and improved proved as looser monetary policy stimu- -currency denominated debt (including hydro-electricity generation, increased lated wholesale and retail trade, and the US$3 billion worth of Eurobonds since copper production, higher copper prices financial sector. 2012). The stock of public debt (two-thirds and more accommodating monetary poli- Following a large depreciation and ex- of which is external) reached 60.5 percent cy. Growth is projected to register 4.2 change-rate volatility in 2015, the Kwa- of GDP in 2016, up from 35.3 percent in cha has since been more stable. It appre- 2014, elevating the risk of debt distress. percent in 2017 (up from 3.6 percent in ciated by 10 percent against the US$ be- The improved macroeconomic indicators 2016) and improve over the medium term. tween January and August 2017. After and growth prospects have encouraged Despite this, huge fiscal and debt chal- reaching a peak of 22.9 percent in Febru- the purchase of government securities by lenges remain. Economic and fiscal re- ary 2016, inflation has remained below non-residents. In consequence, domestic 10 percent since November 2016. In- public debt increased sharply in H1 2017. forms remain key for a shift to sustained creased tariffs of fuel and electricity did Over the first half of 2017, exports grew and more inclusive growth that can accel- not significantly impact on inflation as faster than imports due to higher copper erate poverty reduction. they were offset by a stronger Kwacha, prices. The merchandise trade deficit re- reducing the cost of imported fuel. Low duced to US$ 171 million in H1 2017, the FIGURE 1 Zambia / Public sector debt FIGURE 2 Zambia / Actual and projected poverty rates and GDP per capita Percent of GDP Poverty rate (%) GDP per capita (constant LCU) 70 100 10000 60 80 8000 50 60 6000 40 30 40 4000 20 20 2000 10 0 0 0 2004 2006 2008 2010 2012 2014 2016 2018 2014 2015 2016e 2017f 2018f 2019f International poverty rate Lower middle-income pov. rate Domestic debt Foreign debt Upper middle-income pov. rate GDP pc Sources: Ministry of Finance, Zambia and World Bank forecasts. Source: World Bank. Notes: see table 2. MPO 290 Oct 17 lowest since the first half of 2015, reducing improve further. Unless a new path of production declines if disputes with pressure on the balance of payments. fiscal consolidation is embarked upon, some mines over new electricity tariffs With population growth near 3 percent, fiscal deficits are projected to moderate do not get resolved. per capita incomes grew at only 0.6 per- only slightly to 6 percent of GDP by 2019. The Government’s ‘Economic Growth and cent in 2016, moderating progress in re- The debt stock will continue to grow at a Stabilization Plan’, launched in late-2016, ducing poverty. The 2015 Living Condi- brisk pace, unless efforts are made to offers a solid framework to meet the chal- tions Monitoring Survey suggests that 54.4 slow down the signing of new non- lenges. It includes measures to support a percent of the population lives below the concessional loans. return to a sustainable fiscal stance and national poverty line. Poverty is higher in Per capita GDP growth is projected at 1.1 structural reforms to promote more inclu- rural areas (76.6 percent) than in urban percent in 2017 up from 0.2 percent in sive growth. Efforts to tackle fuel and elec- areas (23.4 percent). Inequality is also very 2016. This is expected to reduce poverty tricity subsidies have already been imple- high in Zambia, with a Gini coefficient of only slightly. The proportion of people mented, but there remains a long list of 0.56 in 2015. living under the $1.90/day poverty line is much needed reform. It remains critical projected to fall by just 0.6 percent to 56.7 for Government to: (i) limit the growth of percent in 2017. However, at existing pop- public debt, (ii) improve debt manage- Outlook ulation growth rates, the actual number of poor people would increase from 9.6 mil- ment, (iii) adopt a strategy for preventing the accumulation of public expenditure lion in 2016 to 9.8 million in 2017. arrears, (iv) build systems to better man- Growth is projected to improve in 2017 (to age public investment; and (v) improve 4.2 percent) and over the medium-term. In the efficiency State Owned Enterprises. 2017, higher growth will be driven by agriculture and industry (especially con- Risks and challenges Overall, there remains a need to ensure that growth is more inclusive. Economi- struction and electricity production). Over cally depressed rural areas need to be the medium-term, the services sector is The outlook is subject to downside risks better integrated to the most dynamic sec- expected to be the key driver (led by fi- and the possibility of positive develop- tors of the economy. Coverage of pro- nance, wholesale and retail trade, and ments. The upside is that copper prices grams targeted to help the poor and vul- information and communication). Recent might continue to rally. The downside nerable remains small relative to the need, disputes over new electricity tariffs for the includes possibilities that: (i) progress as well as compared to regional and inter- mining sector may negatively weigh on with fiscal consolidation and structural national standards. H2 2017. However, if the dispute is reforms are slower than expected; (ii) settled, and copper prices maintain their investor confidence fades if talk of an current levels, copper production might IMF program dissipates; and (iii) copper TABLE 2 Zambia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 4.7 2.9 3.6 4.2 4.5 5.0 Private Consumption 5.2 4.9 1.9 4.9 5.5 5.8 Government Consumption 4.5 3.7 4.4 2.4 1.9 1.1 Gross Fixed Capital Investment 1.5 5.0 -3.2 3.5 4.3 6.1 Exports, Goods and Services -5.4 -11.0 -10.0 8.8 9.0 9.2 Imports, Goods and Services -6.5 -7.0 -10.6 8.5 8.8 9.0 Real GDP growth, at constant factor prices 4.7 2.9 3.6 4.2 4.5 5.0 Agriculture 1.1 -7.7 3.6 7.0 5.2 5.1 Industry 3.9 6.8 5.3 5.6 5.8 5.9 Services 5.7 2.4 2.7 3.0 3.7 4.5 Inflation (Consumer Price Index) 7.8 10.1 18.2 7.2 7.0 6.8 Current Account Balance (% of GDP) 2.1 -3.9 -4.5 -3.3 -2.7 -1.5 Fiscal Balance (% of GDP) -5.5 -9.4 -5.7 -7.6 -7.0 -6.0 Debt (% of GDP) 35.3 61.4 60.5 57.4 59.9 61.9 Primary Balance (% of GDP) -3.3 -6.7 -2.3 -3.9 -3.2 -2.3 International poverty rate ($1.9 in 2011 PPP) a,b .. 57.5 57.2 56.7 55.9 55.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b .. 74.3 74.0 73.6 73.0 72.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b .. 87.2 87.1 86.8 86.5 86.0 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty and Equity Glo bal P ractice. No tes: f = fo recast. (a) Calculatio ns based o n 201 0-LCM S-VI and 201 5-LCM S. A ctual data: 2015. No wcast: 2016 - 2016. Fo recast are fro m 2017 to 2019. (b) P ro jectio n using annualized elasticity (2010-2015) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 291 Oct 17