The economy of Zambia fell into a deep recession due the adverse impact of the COVID–19 pandemic. Real GDP contracted by an estimated 4.9% in 2020, after growing by 4.0% in 2018 and 1.9% in 2019. The output contraction is the result of an unprecedented deterioration in all the key sectors of the economy.
Manufacturing output fell sharply as supply chains were disrupted, while the service and tourism sectors were hurt as private consumption and investment weakened due to measures taken to contain the spread of COVID–19. Mining output, which declined initially due to falling global demand for copper, is recovering amidst production disruptions in South America.
Sustained commodity price increases beyond the current forecast could lead to lower economic contraction. Even before the pandemic, the economy was experiencing serious macroeconomic challenges, such as high inflation, widening fiscal deficits, unsustainable debt levels, low international reserves, and tight liquidity conditions.
Price levels and the financial sector have not stabilized, despite government efforts to deploy monetary easing in 2019 and 2020. Inflation has been rising, mainly driven by the pass-through effects of the depreciation of the kwacha and elevated food and transport prices. Following the outbreak of COVID–19, inflation rose to 17.4% in 2020 and is projected to remain above the target range of 6%–8% in 2021.
The external position also worsened in 2020, with dwindling reserves (averaging 1.6 months import cover), and will remain depressed in 2021 due to copper price and output fluctuations, rising public debt payments, and elevated non oil imports.
The government’s pursuit of expansionary fiscal policy for public investments, despite falling revenues, has resulted in widening fiscal deficits (8.3% of GDP in 2019 and 11% of GDP in 2020). The expansionary fiscal policy, mainly financed by external and local borrowing, caused Zambia’s public and publicly guaranteed debt to hit 91.6% of GDP in 2019 and 104% in 2020. It will remain elevated in the medium term.
Outlook and risks
The economy is projected to grow by 1.0% in 2021 and 2.0% in 2022, underpinned by recovery in the mining, tourism, and manufacturing sectors. The recovery in international demand and copper prices are positive developments, while a reduction in COVID–19 cases will boost activity both in manufacturing and tourism. However, the economy faces substantial risks that a second wave of the pandemic will impede global economic recovery and stifle demand for copper. A second wave could also undermine the revival of such critical sectors as tourism and manufacturing.
Failure to effectively implement the Economic Recovery Programme, which is intended to resolve most of the critical economic constraints—such as debt sustainability and stabilization of the macroeconomic environment—could also pose a high risk to Zambia’s economy.
In the banking sector, the ratio of non-performing loans is expected to increase and contribute to a drying up of bank liquidity, dampening private sector activity. Against this backdrop, poverty is expected to increase due to significant job losses in the service sector (on average, 30.6%), manufacturing (39%), personal services (39%), and tourism (70%).
Financing issues and options
Zambia’s stock of public debt increased to an unsustainable 104% of GDP on 30 September 2020 and is expected to rise slightly in 2021 before decreasing in the medium term because of improved coordination between fiscal and monetary policy, as espoused in the Economic Recovery Programme.
To attain debt sustainability, Zambia must stop accumulating new external debt, increase domestic revenues, curb runaway public spending, and create a stronger institutional public financial management framework. To avoid a severe liquidity crunch, the government has initiated a creditor engagement strategy aimed at securing immediate debt service relief with its external creditors.
African Economic Outlook 2021