WHAT A YEAR

Zambia 2015 | DIPLOMACY | YEAR IN REVIEW

Zambia is winning praise as a good place to do business, although low commodity prices affecting copper exports have convinced the government to take measures to narrow the budget deficit.

The Zambian economy grew 5.6% in 2014, down from 6.7% in 2013, according to the World Bank. The economy is driven by the mining, agriculture, construction, retail, and transport sectors, with mining eating up the lion's share of FDI. But with copper finding itself in a long-term depression price wise, and Zambia over exposed to China, Lusaka is looking to shed dead weight and trim the budget deficit to under 5%, down from around 6.9% in 2015, as a way of hunkering down.

Discovering new ways of making ends meet, however, is in Zambia's DNA. One key example of this is the rapid urbanization that has transformed how Zambians live over the last 20 years. According to the Minister of Housing, the majority of Zambians will live in cities by 2030, and the contribution of agriculture to GDP has fallen from a tick over 60% in 1995 to just over 12% today. In this climate, the government has made strides to develop new areas of the economy, including tourism, where schemes include a new visa regime, the creation of a low-cost carrier, tax incentives, and a pricey advertising campaign. And it seems to be paying off; tourist numbers are expected to grow by half a million in 2015. And according to the latest government statistics from the Ministry of Commerce, Mining, and Industry, the manufacturing and industrial sector contributes approximately 11% to the country's GDP, making it a viable long-term driver for economic growth. Indeed, rising household income is spurring growth in manufacturing, with the main sub-sectors the agro business, which mainly consists of food processing and drinks manufacturing, textiles, and leather, with metals and metal refining also playing a significant role.

Elsewhere, and the Bank of Zambia (BOZ) did battle with inflation and depreciation pressures over 2014, raising the policy rate, increasing statutory reserve ratios, and intervening in foreign exchange markets. Inflation came in at 7.8% over the year, in a victory for the BOZ and also as a result of lowering food prices. Depreciation pressures have returned, however, following a 7% loss in the value of the kwacha between May and August 2014, as a result of the rising strength of the US dollar. This is particularly worrisome due to Zambia's fiscal imbalance, which runs in the area of 8%. This means projects funded in dollars or euros are becoming pricier, although, on the flip side, commodity exports are bringing in a bit more than usual. The falling price of oil is also a boon for Zambia, which is a net energy importer.

Overall, however, the authorities are refusing to accept the status quos; the country's foreign currency reserves stand at below $2 billion, meaning budget cuts are the only path in the medium term. That said, the government has been experimenting with sovereign bonds in recent years, and in 2012 its international debut raised $750 million and was oversubscribed 23 times. And in late July 2105, Zambia issued its third and largest euro bond to date, bringing in $1.25 billion at a coupon rate of 8.97% with an average lifespan of 11 years. The high rates, however—in the last issuance, the securities were sold at 97.257% of face value, climbing to 9.67% just days later—have encouraged some commentators to voice concern that the money will take too long to pay back without guarantee that the revenues earned can be effectively invested.

Elsewhere, and a wrap up of recent months wouldn't be complete without mention of Edgar Lungu, Zambia's president as of January 2015. Former president Michael Sata passed away in mid October 2014, leaving the country without an elected leader for its 50th anniversary of independence. So far, however, and Lungu has already made a solid impression; in May 2015 Sweden announced it was unlocking $47.3 million in donor funds that it had frozen back in 2010 after allegations of misappropriation. The move is a victory for Lungu's anti-corruption platform, and another string on his progressive bow—he has also been lauded for the selection of the first female Vice-President, Inonge Wina. Lungu came to power having gained 48.33% of the vote, compared to rival Hakainde Hichilema's total of 46%.

Zambia has also promulgated a strong role in the region, and is somewhat dependent on neighboring South Africa, which represents half of its overall trade balance. Zambia is also home to 20,000 Angolan refugess left over from the Angolan Civil War, as well as 10,000 Congolese refugees, and many from Rwanda and Burundu. Strained relations with Zimbabwe have also thawed of late, with the country accepting Zambian plans to build a brudge between Botswana and Zambia over a disputed water border on the Zambezi River. Zambia is one of seven landlocked African countries in the Commonwealth, and is also a member of the SADC, COMESA, and the Non-Aliened Movement. It also has strong ties with the US, mainly tied to the US' support for its anti-AIDS/HIV and malria campaigns. The EU has also provided Zambia with over $500 million since 2008 for poverty reduction schemes.

Moving forward, observers will be keeping a close eye on global copper prices. In the meantime, however, the government is keen to tighten its belt lest spending turn into a lead weight in the form of mounting debt.