Zambia: An economy in stress revival plans - CNBC Africa

Zambia: An economy in stress revival plans

Special Report

by Irmgard Erasmus, Fixed Income Analyst, NKC African Economics 0

Photo: Wikipedia

Zambia’s President Edgar Lungu delivered the state of the nation address on Friday, September 18. The president stressed the need for economic diversification and to alleviate power capacity constraints via focused government infrastructural spending and “strong partnership” between the public and private sectors. The head of state expressed his concern that economic diversification “has not been satisfactory”, alluding to the extractive sector (copper accounts for more than three-quarters of export receipts), which renders the domestic economy highly vulnerable to commodity price cycles. To address this vulnerability, the president urged that “successful diversification” be prioritised, with specific focus on promoting tourism, downstream activities (such as the value-addition to mineral and agricultural produce) and development of the agricultural and manufacturing sectors. In this regard, the government has set the target that at least 50% of export earnings stem from non-traditional exports by 2030, which will be achieved “through transforming the country from being one of the largest exporters of copper in Africa to being one of the largest exporters of value-added products.” One avenue through which the government aims to achieve this goal is to “industrialise rapidly”, which will “entail rationalising and strengthening the regulatory, legislative and institutional framework to make Zambia a premier destination for foreign direct investment [FDI].” The president called on “entrepreneurs and innovators” as well as the private sector to establish venture capital funds to “promote business incubation” and to mobilise resources in order to unlock growth potential.


The president emphasised his concern with regard to infrastructural challenges, obtaining funding to alleviate bottlenecks, and recognised that “financing remains a key challenge.” With reference to the latter, Lungu stated that the government is “exploring innovative means of financing capital projects” including public private partnerships (PPP), and vowed that the government will review institutional arrangements to respond in a flexible manner to current and future infrastructural needs.

The president outlined a “transport master plan” encompassing the integration of airports, harbours, dry ports and trade centres to alleviate transport bottlenecks. The government aims to establish Zambia as a regional hub due to its geographical location. Driven by this ambition, the government seeks to accelerate the implementation of road projects under the umbrella programme ‘Link Zambia 8,000’. The government aims to achieve this goal by utilising PPPs to fund selected roads. With regard to the aviation sector, the president announced that government has “made significant progress in establishing a national airline”, which is scheduled to commence with operations in 2016.

In response to the rampant power crisis experienced by the country due to low water levels and over-reliance on hydro power sources, the president outlined both short-term responses and long-term solutions. Short-term measures include the importation of power from neighbouring countries, the use of energy saver bulbs and the use of “alternative sources of energy” for cooking and heating. Electricity tariffs have accordingly been adjusted higher by a substantial margin, save for the lowest income bracket. The government envisages that the more competitive pricing will lure private sector electricity providers to Zambia, which will help to alleviate the high power shortfall.

With regard to the longer-term response to the power deficit, the government has partnered with Zimbabwean authorities to “explore the possibility” of the development of a 1,800 megawatt (MW) power station at Batoka Gorge by 2019. The cost of the project is estimated at $4bn. If undertaken, this project will be in addition to the 750 MW Kafue Lower Hydro power plant, which is scheduled for completion by 2018. Further energy projects include increasing the capacity of the Lusiwasi Hydro power project, as well as at Chishimba and Musinda Falls, and the commissioning of the coal-fired power station at Maanba Collieries and the Itezhi-Tezhi hydro power station. The government estimates that projects at Maamba Collieries and Itezhi-Tezhi will contribute an additional 420 MW to the national grid by January 2016. This is in addition to the rehabilitation of old power stations and the implementation of a solar-based renewable energy programme. The government is furthermore “actively” pursuing the development and implementation of alternative energy resources, including natural gas, thermal, wind and bio-mass. The exploration of natural gas by the private sector is seen as “an emergency that should be treated with the necessary urgency”. The president voiced his frustration at the slow pace of progress, and subsequently, the ministry of energy has been directed to “bring to cabinet all necessary cabinet memoranda to ensure that these procurement processes are completed no later than three weeks from now.” With regard to petroleum, the president stated that construction of a refined petroleum multi-product pipeline linking the Angolan Lobito Bay refinery to Lusaka will commence by 2017. The cost of the project is estimated at $2.5bn. Upon completion, the project is estimated to deliver refined petroleum and gas for power generation of an estimated 500 MW - 1,000 MW.

Zambia is currently in the throes of a grappling power crisis on account of adverse weather conditions, which exacerbates the pain inflicted on the domestic economy by foreign factors in recent months. The daily power deficit is estimated at between 600 MW and 700 MW, with forced power rationing weighing on the business sector and necessitating power imports, with adverse consequences for both the fiscal position and economic growth. Our forecasts therefore suggest that Zambia will undershoot the government’s revised target of 5 per cent economic growth this year, while pressure on the twin deficits will increase.

Zambia was structurally ill-prepared for exogenous shocks to the real economy, such as adverse weather conditions and an environment of low international commodity prices. However, provided that these stressors impart the needed impetus to reinvigorate reform efforts and bring about structural adjustments, Zambia will be better-equipped to weather shocks in the long term. The president’s state of the nation address provides an inkling of hope that the government is ready to meet challenges head-on, and seeks to involve the private sector in addressing structural challenges. This however rests on the strict assumption that the necessary funding will be secured. Short-term challenges aside, and provided that broad policy opacity and negative government intervention in the private sector cease, the medium-term outlook for the Zambia economy remains robust.

 *Irmgard Erasmus, Fixed Income Analyst, NKC African Economics