17 August 2016

Zambia's Political Unity Put to the Test By Need for Fiscal Discipline


Zambia's close-run presidential election means President Edgar Lungu must now balance uniting the nation with the spending cuts needed to stay competitive.

A closely contested and unpredictable election saw Zambia's incumbent President Edgar Lungu of the Patriotic Front (PF) emerge victorious - but with just 50.35 per cent of the vote, protesters clashing with the police in the streets, and support mostly concentrated in the north and east of the country, much needs to be done to unite a politically divided nation.

Lungu is now charged with creating that unity while also steering Zambia from its current economic downturn; this will require political will and careful control of government spending.

China's economic downturn and the subsequent fall in copper prices greatly impacted Zambia, where copper accounts for over three-quarters of export earnings and 16 per cent of GDP. Its copper-belt region has seen thousands of miners made redundant and mining companies reduce output with investors unsettled by falling commodity prices and the political uncertainty.

Economic woes broader than copper alone

The decline in copper prices coincided with an energy crisis as reduced rainfall, antiquated machinery and a surge in consumer demand led to more frequent power shortages. The Kariba and Kafue hydroelectric plants cannot fully service demand, forcing government to source emergency power regionally (at an annual cost of US$660m) and its attempt to recoup costs through a 70 per cent increase in power tariffs led to public protests which forced the government to back down.

Zambia's once buoyant growth has slowed - from 10 per cent at the start of the decade to around three per cent now - but despite this financial squeeze, the PF government has been heavily investing in infrastructure, especially social infrastructure, with 650 clinics, 32 district hospitals, 68 primary schools and more than 100 secondary schools built in the last five years. Hundreds of miles of tarred roads are now in place, with more promised, and the Social Protection Safety Net social welfare scheme has assisted thousands of households.

But this high expenditure has put additional stress on the finances with Zambia's budget deficit now almost 10 per cent of GDP, spurred by heavy government borrowing. There have been liquidity shortages in Zambia's banking sector - partly caused by government borrowing crowding out the private sector - servicing international debt is getting more expensive as confidence wobbles, and the currency is in decline. Discussions between Zambia and the IMF on an extended credit facility are ongoing, but a substantive deal will probably have to wait until 2017.

And this spending has not had an immediately transformative effect with almost 60 per cent of Zambia's population classified as poor, and 42 per cent in absolute poverty. Urban unemployment and underemployment remain prevalent despite a large informal sector, and the PF has been criticised for politicising infrastructure development and being lax on corruption.

Reasons for optimism in the medium-term

Despite these problems, and even though copper remains king, there has been economic diversification. Zambia remains a net maize exporter to a drought- blighted region, is a major tourism hub, and is helping drive the regional economic integration process.

It is also ironic that a country which was famous for exporting labour to its southern neighbours is now a destination of choice for professionals in the region. The small but growing middle class in Zambia supports a consumer economy attractive to international investors, and the government must now develop a policy environment that allows domestic businesses to flourish.

In addition, companies that made efficiency savings during the copper 'crash' are now well-placed to capitalise if the global price of copper strengthens, and a broad consensus between government and mining multinationals regarding royalties - a toxic issue just a few years ago - will bolster this rebound. Zambia's strong legal framework and investment guarantee system are competitive advantages and its partnership with the IOM (international Organization for Migration)means Zambia is actively engaging with its global diaspora to help its own development.

Zambia still faces major challenges, most immediately in reducing profligate spending. Popular policies of subsidised fuel and government-underwritten maize pricing will now come under scrutiny, and increased power tariffs may be back on the cards. But changes could generate protest, particularly if the government is perceived to be favouring its supporters.

Opposition leaders, notably the defeated United Party for National Development (UPND) leader Haikande Hichilema, will have a key role to play in uniting the nation and overcoming the political cleavages exposed in both this election, and the snap presidential election of 2015 following the death of former President Michael Sata (which also resulted in a narrow victory for Lunga).

A higher turnout (56 per cent of registered voters, compared with just 32 per cent in 2015) does give Lungu a stronger mandate than he had previously, but he will be expected to deliver on electoral promises of completing infrastructure projects, pursuing agricultural diversification, and job creation - all within a tough economic environment. But, as economic headwinds abate, Zambia should be well placed to retain its status as a regional hotspot for international investment.

Dr Knox Chitiyo

Associate Fellow, Africa Programme


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