Economy growing at 4 percent in 2018

Debt Fuelled Growth No Surprise

November 08, 2018 

Zambian Finance Minister Margaret Mwanakatwe expects the country's fiscal deficit to be around 7 percent of gross domestic product in 2018, she said on Thursday.

Mwanakatwe also told a news briefing that Zambia's external debt at the close of third quarter was $9.51 billion from $9.37 billion at end of second quarter of 2018.

For months, the International Monetary Fund (IMF) has raised concerns over high borrowing.

Mwanakatwe said Zambia was committed to implementation of austerity measures to limit debt risk distress (though there have not been too many projects cancelled - blog).

"The government acknowledges the rising vulnerabilities from its debt profile," Mwanakatwe said.

The government planned to send a delegation to China by the end of this year to discuss Zambia's debt with that country and debt restructuring, Mwanakatwe said.

Mwanakatwe said Zambia's copper production in the first three quarters of 2018 grew 8.8 percent to 632,267 tonnes from 581,334 tonnes over the same period last year.

Zambia's economy would likely grow near the earlier projected 4 percent in 2018 and inflation was expected to remain within single digits by the end of 2018, she said. The economic expansion has come at the cost of growing fiscal deficits.

Meanwhile 2Q18 supportive

Zambia’s 2Q18 economic growth printed at 3.9% y/y compared to 3.4% in the comparable period in 2017. The biggest contributor to growth was the financial and insurance sector, which expanded by 35%, and the information and communication sector pushing up by 23%. Combined with 1Q18 figures, the economy grew by 3.3% in 1H18 relative to 3.1% in 1H17. Important to note is that the full year 2017 growth figure has been revised down to 3.4% from the previous preliminary figure of 4.1%.

While the growth numbers show a modest improvement, there are notable headwinds on the horizon. The mining and quarrying sector, which had the highest contribution to growth in 1H18 of 1.0pp, will come under strain in the wake of copper price that have declined by 14.5% so far this year. The red metal has come under pressure on account of ongoing protectionist policies between China and the US. A slowdown in the Chinese economy could dampen its demand for copper.

Based on the 2019 budget, the authorities will be embarking on fiscal consolidation measures next year, which will have a bearing on infrastructure development, particularly the construction sector. The government has already decided to stop funding infrastructure projects that are below 80% complete; this will weigh down on Gross Fixed Capital Formation (GFCF).

The demand side of the economy poses a risk as well. The latest inflation reading shows that annual inflation accelerated to 8.3% y/y in October from 7.9% a month earlier. Growing inflationary pressures will certainly dampen households’ real income going forward. We estimate that inflationary pressures will increase in the months ahead based on a currency that is weakening as it has already lost 15% of its value against the dollar since the beginning of September 2018. The pressure on the currency may force the Bank of Zambia to start increasing its benchmark rate, adding upside pressure to already-elevated commercial lending rates and thereby dampening private-sector credit extension.