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Zambia 2014 | ECONOMY | REVIEW: ECONOMY

Despite arguably being built on copper, the Zambian economy has much potential to diversify should opportunity across a number of sectors be unlocked.

The copper industry continues to be a driver of growth and a major draw for investment into Zambia, encouraging development in a number of other sectors, including construction, transport, and energy. Agriculture also remains a crucial area of the economy, with poor output in 2013 having had an acutely negative impact on growth. That said, Zambia needs to move up the value chain across the board, while also developing its nascent tourism industry, if it is to emerge as a well-rounded example of the rise of Africa.

GDP grew by 6.5% in 2013, down slightly on 2012 following a poor harvest. The outlook for 2014 is more positive, however, with the African Development Bank Group projecting growth of 7.1% in 2014 and 7.4% in 2015, with inflation, which finished 2013 at 7.1%, expected to fall. But while a weakening currency in 1Q2014 made the target of 6.5% for end-year appear difficult, a tightening of monetary policy by the Bank of Zambia (BoZ), which had also faced a liquidity overhang in 1H2014, brought the situation under control. Currently, the exchange rate stands at USD1:ZMW6.28 (October 2014). Unemployment stands at 7.8%, with the government aiming to create 200,000 jobs a year, especially for younger Zambians.

Zambia also runs an effective trade surplus, posted at $1.4 billion in 2013, or 6% of GDP, while the current account also posted a surplus of $216 million, or 1% of GDP. And while copper accounts for 70% of export revenue, non-traditional export earnings continue to grow, up to $3.4 billion in 2013 from $392 million in 2003. Investors were also keen to unlock Zambia's potential over 2013, pumping nearly $2 billion in FDI into the economy, up from $1.6 billion in 2012.

IN THE NUMBERS

Having grown 7.3% in 2012, GDP came in a tad lower, at 6.5%, in 2013, due to a drop in the output of key agricultural products, namely maize and cotton. According to the Zambia Development Agency (ZDA), agriculture was the second largest contributor to GDP in 2012, at 12.2%, just behind construction on 13% and ahead of manufacturing (11.2%) and mining (8%). That said, copper mining growth is behind much activity in the construction sector, with the government keen to promote other sectors, namely agriculture, gemstone mining, tourism, and hydropower generation, in order to promote diversification. And should Zambia wish to make that a reality, it will need to up the competitiveness of its exports by climbing the value chain. Manufacturing currently represents around one-tenth of GDP, held back by the high costs of transport—sometimes up to 40% of the cost of the final product—associated with being a landlocked country. That reality, too, holds back downstream copper activities, with main markets often too distant. Upstream, however, there is plenty of room for development.

MONETARY POLICY

Zambia finished 2013 with an inflation rate of 7.1%, but, in 1H2014, the BoZ was faced with a liquidity overhang and exchange rate volatility, coupled with inflationary pressures. Quick to act, the BoZ tightened monetary policy by raising the statutory reserve ratio from 8% to 14% in March, followed closely by an increase in the policy rate to 12% in April. Efforts in these areas then continued into May, resulting in “tighter liquidity conditions and an increase in interest rates, particularly interbank interest rates," said Dr. Michael Gondwe, Governor of the BoZ, adding that these measures helped to “achieve relative stability in the foreign exchange market and moderated inflationary pressures." With balance restored, the BoZ then set about easing liquidity conditions to make interbank rates consistent with the policy rate.

In January 2014 the inflation figure had come in at 7.3%, with 3.1 percentage points accounted for by food and non-alcoholic beverages, and the remaining 4.2 percentage points by non-food items. Before the BoZ took action, the institution was targeting an end-year figure of 6.5%, a task that was then complicated by a weakening kwacha, which pushed up import costs.

Elsewhere, the BoZ is also keen on boosting access to financial services, despite the overall banking sector having benefitted from new capital requirements and a sharp increase in assets, up to ZMW45.98 billion at end-June 2014 from just ZMW4.67 billion in 2002. According to Governor Gondwe, financial inclusion currently stands at 42% in urban areas and 34.4% in rural areas. And thus, the BoZ aims to boost the overall figure by 15 percentage points, to 50%, by end-2015. Spearheading the drive are new regulations to encourage financial institutions to develop agent banking or branchless services via additional touch points in rural areas, as well as mobile banking. Other efforts include the development of a Unified Collateral Registry to encourage lenders to accept movable property as collateral, a new guideline to allow those without formal identification to enter the banking system, and a national strategy to strengthen financial education.

TRADE

Zambia posted a trade surplus in 2013 of $1.4 billion, or 6% of GDP. The trend continued into 2014, and in January the major export category was intermediate goods, mainly comprising copper, accounting for 82.8%. Other exports were in the raw materials, consumer goods, and capital goods categories, which accounted for 17.2% overall. Switzerland represents Zambia's largest export destination, accounting for over 40% of all exports in January. China came in second on 20%, followed by South Africa on 10.9%. The DRC came in fourth, on 8.6%, and distinguished itself as the only country in the top four whose main import item from Zambia isn't copper related, itself importing sulfuric acid and oleum. The UAE wraps up the top five, which altogether accounted for 85.8% of total exports over the month.

In import terms over the same month, capital goods represented the largest category on 33.2%, followed by consumer goods (29.8%), raw materials (20%), and intermediate goods (16.9%). In terms of sources, South Africa was the biggest, accounting for 27.3%. The second largest source was the DRC, at 18%, followed by Kenya (12.1%), and China and India (12.6%).

The government has recently been keen to pursue diversification, seeing agriculture, manufacturing, and tourism as key areas to boost the export mix. This drive can be seen in the non-traditional export trend, which has seen earnings in non-metal earnings rise from $392.2 million in 2003 to $3.4 billion in 2013. Governor Gondwe also weighed in on the subject, stressing the importance of continuing the drive; “we need to maintain this growth momentum so that non-traditional export earnings have a bigger share of exports, now at just over one-third, than metal export earnings."

FDI

FDI came in a touch below $2 billion in 2013, up from $1.6 billion in 2012, according to the Finance Ministry. That makes Zambia the highest receiver of FDI flows compared to the other 16 landlocked countries in the region. The increase is a result of growing interest in the agriculture, manufacturing, tourism, construction, and energy sectors. That said, mining continues to be the biggest draw, accounting for over 85% of FDI. The government is also working hard to promote Zambia as a safe place to invest. The ZDA, which is tasked with promoting trade and investment, outlines a number of investment incentives, including tax benefits for those investing more than $500,000 in multi-facility economic zones, industrial parks, priority sectors, or rural enterprises. Non-fiscal incentives, granted to those who invest over $250,000, include guarantees against nationalization and free facilitation for the application of immigration permits, secondary licenses, land acquisition, and utilities. The BoZ is also in the mix, working to implement measures to curb money laundering via a clearing system. All FDI will thus be channeled through an account at the BoZ, a measure that will not only reduce the presence of hot money, but also encourage all investment pledges to become a reality, a problem that currently causes consternation as the government uses FDI pledges as a benchmark for revenue projections, thus leading to public budget shortfalls when investments fail to come through.

As the economy continues to grow on the back of copper exports, the need to grow other areas of the economy becomes vital. A poor harvest in 2013, resulting in slowed growth, coupled with inflationary pressures due to a weakening currency in 1H2014, can only drive home the need for an even wider, and higher value, export basket. A stable fiscal environment, however, could go a long way to boosting growth and financial inclusion, opening up the countryside to development.