EIU predicts strong economic growth for Zambia between 2022-2026
By Ernest Chanda
THE Economist Intelligence Unit (EIU) has predicted strong economic growth for Zambia between 2022 and 2026.
In its latest report on Zambia published July 28, the EIU also predicts continued political stability in the country during the same period.
Prior to the 2021 general eslection, the EIU consistently predicted victory for the Patriotic Front and its presidential candidate Edgar Lungu.
However, several local and international intellectuals doubted the prediction and their doubts were justified by the outcome of the June 12, 2021 elections.
The EIU further expects a gross domestic product (GDP) growth of 5.8 per cent within the same period.
“Economic growth will be relatively strong throughout the forecast period, relative to recent
performances. We expect a small easing in GDP growth, from 3.6 per cent in 2021 to three per cent in 2022, as higher interest rates and high inflation take their toll on consumer spending,” the report indicates. “Higher investment spending and exports of copper and other minerals will then support a steady improvement in Zambia’s economic performance, with GDP growth rising to 5.8 per cent in real terms in 2026.”
On the mining sector, the EIU expects it to expand rapidly due to favourable government policies which are likely to spur more investments from mining companies.
“The mining sector will expand rapidly both before and after the debt-restructuring deal is reached. The government has reinstated the deductibility of mineral royalties for corporate income tax assessment purposes, in effect removing a source of double taxation. In addition, the period for which disallowed interest can be carried forward has been increased from five to ten years,” the EIU states. “This will greatly benefit early-stage capital-intensive projects that have heavy financing costs. A general policy shift away from nationalisation under Mr Lungu and efforts to restore confidence in the business environment will remove a barrier to production and private investment in the mining sector and beyond. The tax policy shift is in line with government’s broad business-friendly policy agenda, which also includes a reduction in the corporate tax rate, from 40 per cent to 35 per cent, which was enacted in February 2022.”
The EIU also predicts strengthened GDP growth next year due to continued increase in copper prices.
The Unit also expects improved global food prices within this four-year period.
“GDP growth will strengthen in 2023, to 3.9 per cent, as copper prices continue to rise and export volumes increase owing to the growing importance to the global electric vehicle industry of the metal (and of cobalt, a copper by-product that is also produced at the Mopani and Konkola state-run copper mines). Copper and cobalt output will remain historically high in 2024-26 as global prices pull back,” the EIU states. “Zambia’s agriculture minister, Mtolo Phiri, stated in May that maize output had fallen to 2.7 metric tonnes in the 2021/22 crop year, from 3.6 metric tonnes in the previous year. This reflects the impact of drought and a lower planted area.
Over 2022-26 we expect strong global food prices to encourage more agricultural investment, with Zambia continuing to play the role of a regional exporter of maize.”
On inflation, the EIU expects it to fall within the Bank of Zambia’s target of 6.8 per cent by 2023 and drop to 6.2 per cent by 2026.
“The global increase in prices for fuel, food and fertiliser following the Russian invasion of Ukraine in February has not so far pushed up Zambian consumer price inflation, given the strength of the kwacha. In 2021 consumer prices rose by 22 per cent over the year as a whole; in contrast, year-on-year inflation in 2022 has eased from 15.4 per cent in January to 10.2 per cent in May,” it states. “With further monetary tightening by the BoZ likely later in 2022, and with rising commodity prices expected to narrow the
government’s fiscal deficit, we forecast that inflation will ease to 11 per cent in 2022, in annual average terms. Inflation will fall back within the BoZ’s target range of six-eight per cent by end-2023 as further local interest-rate increases and a large decline in global commodity prices in 2023 help to rein in consumer price growth in Zambia. Inflation will ease to 8.2 per cent in 2023, dropping to 6.2 per cent in annual average terms by 2026.”
The EIU also predicts a stable exchange rate with increased foreign exchange inflows arising from a favourable economic environment.
“We expect the kwacha to appreciate from an estimated ZK16.67 per US $1 at end-2021 to ZK16.44 per US $1 at end2022. The election in 2021 of a more business friendly government – which has provisionally secured an ECF arrangement with the IMF, although this still has to be confirmed by the Fund’s executive board, and seems likely to reach a debt restructuring deal later in 2022 – and a resulting surge in investor confidence support the currency,” EIU states. “Zambia is Africa’s second-biggest copper producer, and rising copper prices will lead to an increase in foreign exchange flows from the mining sector through tax receipts remitted directly to the BoZ in US dollars… With global copper prices rising, we expect the kwacha to appreciate steadily, ending 2023 at ZK15.48 per US $1.”
And the EIU anticipates improved political stability during the period in question.
The EIU also notes that Lungu’s loss has instilled political stability in the country.
“EIU expects political stability to continue to improve following Hakainde Hichilema’s victory in the August 2021 presidential election. Mr Hichilema’s leadership has induced a sense of optimism among citizens and businesses alike. Efforts to end corruption, restore Zambia’s relations with the international community and improve governance support, Mr Hichilema’s popularity and political stability, even if the near-term outlook is overshadowed by high inflation and the legacy of a debt crisis from the last administration,” notes the EIU. “The departure of Mr Hichilema’s predecessor, Edgar Lungu, and his Patriotic Front (PF) from power underlines the enduring strength of Zambia’s democracy and rule of law, despite institutional erosion under the previous administration. As part of an immediate anti-corruption drive, the President has formally directed relevant institutions to investigate widespread allegations of graft against members of Mr Lungu’s administration. Mr Hichilema also struck a reformist tone on May 25th, when he announced that his administration would submit a bill to the legislature to abolish the death penalty in Zambia.”