IN SAFE HANDS

Zambia 2014 | DIPLOMACY | YEAR IN REVIEW

The Bank of Zambia did battle with inflation in 1H2014, while GDP growth looks set to speed up again over the full year following a poor harvest in 2013.

The Zambian economy fended off multiple challenges over the course of the year, finding itself vulnerable to currency fluctuation as talk of US Federal Reserve tapering caused ripples in developing economies. A weakened currency led to inflationary pressure as imported food prices rose, with the Bank of Zambia (BoZ) tightening up monetary policy to keep the beast at bay. Inflation stood at 8% in August 2014, well above the BoZ's target of 6.5% for the year, but remained relatively stable thanks to the institution's timely intervention. The African Development Bank Group expects GDP growth of 7.1% in 2014, up from 6.5% in 2013 following a poor harvest, especially of the primary maize and cotton crops, over the year. The economy's reliance on agriculture, which represents 12.2% of GDP, while striking, pales in comparison to the significance of its booming copper industry—while mining represents just 8% of GDP, behind agriculture, construction (13%), and manufacturing (11.2%), it accounts for a staggering 80% of exports and attracts 85% of FDI. And considering Zambia's haul in 2013 was $2 billion, up from $1.6 billion in 2012, analysts are not exaggerating when they say the economy is built on copper, with almost 1 million tons of the metal produced per year, putting it in the world's top 10.

Copper certainly allows the country to maintain a trade surplus, which came in at $1.4 billion in 2013, or 6% of GDP. On the current account side, Zambia posted a surplus of $216 million over the same year. Not willing to be a one-trick pony, however, government measures have encouraged the diversification of the export basket in recent years, with non-traditional exports growing from just $392 million in 2003 to $3.4 billion in 2013. Much of the country's non-traditional exports come from agriculture, with primary crops including maize, tobacco, wheat, cotton, rubber, and coffee representing 35%. The crops, in turn, account for 10% of total export revenue. Approximately 85% of the country's workforce is engaged in agricultural activities, with overall unemployment standing at 7.8%. And it is rural areas that are the focus of intense government attention, with the view to lowering poverty—rural poverty hovers just below 80%—and boosting financial inclusion. Currently, while financial inclusion sits at 42% in urban areas, in rural areas it is just 34.4%, with the BoZ seeking to encourage the development of branchless and mobile banking and allow those without formal identification to enter the financial system. And with 72% of small farms cultivating less than 2 hectares of land, according to the Ministry of Agriculture, improving access to credit could be crucial should Zambia want to meet its target of qualifying for the World Bank's Middle Income classification by 2030.

Other areas also receiving attention include the languishing electricity generation sector. Peak demand (up to 1,900 MW) now edges over total capacity. And with just 25% of the population connected to the grid, and a growing mining sector accounting for 54.5% of demand, the prospect of increased demand—currently growing at up to 200 MW per year, coincidently the same rate as the current peak-time deficit—only adds urgency to the need for more generation capacity. To counter the problem, a number of projects are underway, including three new hydropower plants, the largest of which has a capacity of 750 MW. Considering the country's long-term requirements, however, a solid level of investment will have to be maintained should blackouts not become too common an occurrence, a reality the country can't afford if it is to continue feeding its industry.

Manufacturing, which represents 6.6% of electricity demand, is another area on which the government is lavishing attention. Growth areas include agro-processing, textiles, and leather goods, while the secondary processing of metals also contributes to output. The government is especially keen to develop the chemicals sector, which, together with rubber, represents 9% of total manufacturing output, in order to reduce the imports of fertilizer, on which $200 million is spent every year and heavily subsidized by the government.

Finally, Zambia boasts impressive tourism sector growth potential, with the World Travel and Tourism Council (WTTC) predicting expansion in the sector of 8.1% annually over the next decade. Home to the Victoria Falls, being landlocked is far from a handicap for the Southern African nation, while the tourism sector currently represents 5.2% of GDP as of end-2013. Approximately 1.1 million foreign visitors arrived in 2013, with a target of 1.8 million set for 2024. The sector employs 3.5% of the workforce, employing 70,000 people.

All in all, Zambia is on a solid path despite worries in 1H2014 that inflation could get out of hand. In order to reduce risk moving forward, the country needs to expand its export basket, moving up the value chain in order to offset the high costs of exporting associated with being landlocked. And with the basics in place, there is nothing stopping Zambia from playing a key role in the rise of Africa.