The UK-based Economist Intelligence Unit (EIU) says the resource nationalism displayed by the Patriotic Front will deter investment in the run-up to the 2021 elections.
EIU further says it expects the budget deficit to widen, from an estimated 7.5 percent of GDP in 2018 to 7.9 percent in 2019.
In its Country Report for Zambia dated July 11, 2019, EIU stated that Zambia’s economic growth in 2019 to 2023 would be considerably below its long-run potential.
It added that higher royalty rates, scrapping of VAT rebates and the forced liquidation of Konkola Copper Mines (KCM) would hold back investment in the mining sector, while some older and more costly mines would be forced to downsize.
“Economic growth in 2019-23 will be considerably below Zambia’s long-run potential. Most significantly, higher royalty rates, a scrapping of VAT rebates and the forced liquidation of KCM will hold back investment in the mining sector, while some older and more costly mines will be forced to downsize while copper prices remain fairly low, as is the outlook for 2019. The fallout from higher operating costs and problems facing KCM have reached a scale whereby a contraction in the mining sector seems likely for the year,” EIU stated.
It further stated that though the PF government had denied claims that it would soon seize assets of other international miners, the resource nationalism displayed would deter investment in the run-up to the 2021 elections.
“The government’s dire need for funds has already resulted in a new tax regime for the mining sector in 2019—one that has led to scaleddown operations and suspended projects nationwide. The Mopani copper mine currently plans to decommission two shafts (at the cost of 2,000 jobs), while KCM placed operations on care and maintenance. However, the PF has responded by placing KCM into provisional liquidation; the company’s majority shareholder, India’s Vedanta Resources, has now begun a court battle to challenge the winding-up of its Zambian assets. The government has denied claims it will soon seize the assets of other international miners, but the resource nationalism displayed by the PF will deter investment in the run-up to the country’s 2021 elections,” EIU stated.
It noted that sudden regulatory changes would also hamper progress on Zambia’s Seventh National Development Plan (7NDP), which covers the 2017-21 period.
EIU stated that national development would instead be driven mostly by debt-financed public infrastructure projects, adding that even then, high procurement costs and government’s use of foreign contractors would act as major limitations on the fulfillment of the 7NDP.
“Such policy erraticism and the risk of sudden regulatory changes will also hamper progress on the country’s seventh national development plan (7NDP), which covers the 2017-21 period. At the heart of 7NDP is an attempt to stimulate value-added industrialisation and promote economic diversification by leveraging private investment and foreign direct investment (FDI). National development will instead be driven mostly by debt-financed public infrastructure projects. Even then, high procurement costs, delays in execution and the government’s use of foreign contractors will act as major limitations on the fulfillment of NDP7,” it stated.
“Without an IMF programme, it is uncertain how Zambia will repay US$3bn in outstanding Eurobond debt. A first US$750m bullet repayment is due in 2022, and there is no obvious way of meeting the commitment (underscoring the unproductive use of the funds). A bilateral loan from China sufficient to cover the repayment may be forthcoming, or the government may try offloading strategic assets; consequently, we have not included a default in the current forecast. However, the risk of default will persist, weighing heavily on investor confidence.”
And the EIU stated that the 2019 to 2021 expenditure would remain driven by foreign-debt-financed capital outlays and debt servicing.
It also stated that it expected the budget deficit to widen, from an estimated 7.5 percent of GDP in 2018 to 7.9 percent in 2019.
“In 2019-21 expenditure will remain driven by foreign-debt-financed capital outlays and debt servicing. Despite pledges to halt some projects, most Chinese-financed capital investments are expected to go ahead; renegotiating them would require an overhaul of China-Zambia relations (and the entire medium-term fiscal agenda). This is highly possible, but a poor track-record of compliance with austerity plans under the PF warrants scepticism. Only in 2022, with foreign liquidity pressures mounting will capital spending be cut back, while high debt-servicing costs will continue to crowd out wage spending and subsidies,” stated EIU.
“We expect the budget deficit to widen, from an estimated 7.5 percent of GDP in 2018 to 7.9 percent of GDP in 2019. Infrastructure spending will keep the deficit wide, at 7 percent of GDP in 2020 and 2021. Steep capital spending cuts should then bring the shortfall down, to just below 3 percent of GDP, in 2023. The deficits will be financed mainly by external loans from China and also domestic borrowing for the recurrent budget.”
