By Moin Siddiqi, Economist
The Republic of Zambia is a vibrant developing nation bursting with solid potentials; chiefly abundant resources, strong demographic and macro-economic fundamentals, as well as a rising well-educated middle class and democratic credentials (Zambia has held six successful and peaceful multi-party elections since gaining independence from the United Kingdom in 1964).
The country, well-endowed with primarily arable land, a favorable climate and ample water, forestry and minerals, remains one of the most attractive investment destinations in Southern Africa. Its natural assets offer huge possibilities for diverse economic activities such as mining, agriculture, forestry, eco-tourism and hydroelectricity, as well as manufacturing and agro-processing facilities. Government policy is largely geared towards foreign participation, with low levels of trade protection, low tax rates, less bureaucracy and equal rights for foreign and domestic investors. Foreign direct investment (FDI) has played a critical role in Zambia’s economy, rehabilitating the copper industry and boosting production and exports of non-traditional products and services. “Zambia is attracting interest from investors that are looking to support the country’s economic diversification plan. There is an increasing awareness of the opportunities outside of the mining sector and this is something that could be the catalyst for the transformation of our economy from its reliance on mining to a diversified sector that not only attracts FDI inflows but creates employment opportunities,” says Ceaser Siwale, Chief Executive of Pangaea Securities Zambia, member of the Lusaka Stock Exchange (LSE).
The surge in FDI inflows reflects investor confidence and bullish investment profitabil-ity prospects. In July 2014, the African Union observed that “in recent years Zambia witnessed a substantial 93% rise in investments compared to 2011, a feature attributa-ble to a well-managed economy and a peaceful transfer of power.”Since 2007, FDI pro-jects in Zambia have grown at a compound annual growth rate (CAGR) in excess of 30%, according to Ernst & Young’s Africa 2014 report. Reforms by successive Zambian governments have led to significant improvements in the investment climate.
Maintaining Growth Momentum
The quality of infrastructures is being upgraded with ongoing investments into road/railway networks and the construction of new electric power stations. The gov-ernment is aggressively promoting Public Private Partnership (PPP) projects in the en-ergy, transport, agriculture and housing and health sectors. Zambia has the appetite for long-term funding, but official aid flows are declining. Thus, the government is seeking private non-concessional financing; investor confidence is reportedly high as evidenced in the successful issue of two Eurobonds – US$750mn in 2012 and US$1bn in 2014, respectively. Zambia plans to issue a new US$2bn 10-year Eurobond, one of frontier Africa's biggest international bonds, to fund public investment projects.
Economic policy has significantly improved over the last decade in Zambia, with key macroeconomic indicators such as inflation, real GDP growth and the current account balance strengthening substantially since the mid-2000s. Global credit agencies have expressed confidence in Zambia’s prospects. Moody’s Investors Service notes that the country’s key credit support (B1 stable) includes; a track record of growth above the B1 median, lower growth volatility, better conditions relating to the rule of law and control of corruption, and one of Africa's most stable political environments. "Zambia's econ-omy continues to register robust growth rates, averaging 7.8% per annum in real terms since 2005. We expect that economic growth will remain at around the same level in the coming years, supported by the development of infrastructure projects. The gov-ernment's fiscal position is also strong, though deficits have increased and high de-pendence on a single export commodity, copper, leaves Zambia exposed to adverse price movements," commented Moody’s.
In 2014, Standard & Poor’s (S&P) acknowledged: “Zambia’s fiscal challenges have in-creased and the external environment has deteriorated, partially due to a fall in copper prices. Despite these intensifying and increasingly interrelated challenges, “we have affirmed our ratings on Zambia (B+) because we continue to believe that a relatively stable political environment and continued strong growth prospects act as a counter-balance.” However, in July 2015, Zambia’s rating was reduced to B because of rising budget deficit and currency risks. “The government may struggle to keep spending under control before elections in 2016,” S&P said. Meanwhile, Finance Minister, Alex-ander Chikwanda reiterated that Zambia will stick to its plan of cutting ZMK5bn (US$665mn) of non-essential spending from its budget in order to maintain debt sus-tainability. “When you have scarce resources versus your vast needs, you have to learn fiscal prudence. We’ll make sure we have fiscal prudence. We will cut our suit to the available cloth,” he added.
The recent rebasing of the national accounts has given a new perspective to the struc-ture of the economy. Preliminary estimates put the economy at 25% larger than in the previous accounts. Mining, construction and trade gained more prominence as agricul-ture declined. A sustained period of buoyant growth enabled Zambia to attain lower middle-income country (MIC) status in 2012.
Excerpt taken from The Zambia Investment Report 2015 published by DMA and available here and will be presented at the UK-Zambia Trade & Investment Forum, London, on 4th November 2015.