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Spotlight on Zambia..

Spotlight on Zambia..

Zambia

By Archimedes Muzenda

Ahead of its Presidential and National Assembly elections on the 11th of AuguZambia flagst, we take a close look at Zambia, one of sub-Saharan Africa’s most urbanized yet commodity-reliant countries. This is Zambia’s first election since new constitutional ratifications early this year and is destined to be its most competitive yet…

The elections are taking place in what has proven to be a turbulent year. Zambia’s copper-dependent economy has been hit by falling commodity prices, erratic hydro electricity supplies, a sharp devaluation of its local currency, and a huge budget deficit awaiting an IMF bailout. GDP, which grew at an average of 7% per annum between 2010 & 2014, has dampened down significantly with growth having slowed to 3% for last year and (predicted) 2016.

This slowdown has led to considerable political uncertainty and rising conflict that recently culminated in campaigning being suspended for 10 days in certain areas, after violent skirmishes led police to open fire on a gathering of opposition UPND supporters, killing one.

Current Political Climate

A landlocked country in the Southern African Development Community region (SADC), Zambia is a unitary republic with a multi-party democratic system in place since 1991. Out of 150 seats in its National Assembly, political parties rarely win by majority in the National Assembly.

Zambia adopted its two 5-year term limit in a 2006 Constitutional Reform. Today, five out of the 46 registered political parties will be contesting the upcoming elections as the remaining parties were controversially disqualified for failing to pay the presidential nomination fees in time. The frontrunners in the election are incumbent President Edgar Lungu (Patriotic Front, PF) and Hakainde Hichilema (United Party for National Development, UPND), whose more liberal, free market approach is seen by many commentators as an attractive alternative to the status quo.

Incumbent President Lungu, the third President in two years, came to power via a narrow election victory following the death of President Sata (Patriotic Front) in 2014, and has since failed to arrest the decline in Zambia’s growth. This year’s election is likely to be his last chance to secure any semblance of a commanding mandate, but high profile defections (including those of Sata’s influential nephew Miles Sampa and former VP & interim President Guy Scott) from his party have led some to predict a victory for opposition leader Hakainde Hichilema.

Weak Economy & IMF Bailout

Although Zambia’s currency has had a strong performance this year, the fall of copper prices in 2015, mainly caused by the slowdown of China’s commodity market, has increased the Government’s debt-to-GDP ratio. Public debt was 42.5% of GDP in 2015 and is estimated to rise to 56% in 2016 and to 60% by 2018, leading to IMF bailout negotiations, which have now been delayed until after the election.

Zambia has effectively therefore been caught in something of a downward spiral, trapped between spending cut requests from the IMF and World Bank whilst maintaining subsidies to garner electoral support. Measures discussed during an IMF visit in May included the progressive removal of subsidies and drawing up plans to significantly reduce subsidies for electricity, fuel and fertiliser.

Whoever wins the elections, therefore, will have some tough decisions to make. Both sides have made populist promises incompatible with their economic policies.

With tensions running so high, the priority so far has been to placate the people and maintain order – with mixed results. Lungu has assumed that IMF negotiations will continue either way, and has therefore not dealt immediately with the budget shortfall ahead of the election.

Political Unrest

The Government also has to address the creeping violence on both sides of the political divide. Recently, the police and army have been deployed to maintain peace and stability during the election period. Attacks on foreign businesses and Rwandan refugees have been witnessed as the electorate seeks scapegoats for their frustration. Additionally, in the run-up to the election, some media outlets have been the subject of tax investigations that in some cases have led to licence suspension. The opposition claims that these are unjustified attacks on free speech and inhibiting a fair election. All this has led to concerns about how free and fair the election will be - the deployment of an EU Election Observation Mission was recently announced.

Pre-election Policy Changes & Reforms

In previous years, Zambian political parties used to argue that mining companies were not contributing their share towards the economy. There have been disputed adjustments to its mining taxation system, which strained the relationship between the Government and the mining sector especially in election years. However, on June 1 the Government introduced a new sliding tax-scale Mineral Royalty Tax (MRT) system, which imposes levies on operators according to the prevailing copper price. So far, feedback from the sector has been positive, but given the importance of the sector to the economy, this is a crucial area to watch post-election.

Post-election Possibilities

  • With neither leading candidate seemingly enjoying the backing of a majority of voters (and a 50% + 1 vote mandate required), the outcome of the election may bring more confusion and unrest, whoever wins. A coalition reliant on smaller parties is a distinct possibility, with further tension likely in this scenario;
  • That said, the impact of the slowdown on employment figures and living standards, coupled with internal PDF disharmony, could see the UPND to victory;
  • Whoever wins, investor confidence will be hard to secure until a consistent set of economic and social policies is defined. Capital spending remains well below the amount necessary to improve the country’s underdeveloped energy and infrastructure sectors. This will be detrimental given high pre-election public spending and post-election adjustments from the IMF and World Bank, but the conditions of the IMF bail-out may offer opportunities for investors in these areas;
  • Zambia’s economic growth will remain subdued through 2017 owing to pressure on net exports from low copper revenues, a regional drought as well as a substantial power shortage;
  • Real GDP growth of 3.4% this year will be underpinned by a modest increase in private consumption and fixed capital formation;
  • In the medium term, Glencore’s announcement to invest USD1.1bn into Zambia’s mining sector will bode well for overall investment into the country if the MRT system is not revoked – either way, an upswing in the commodity sector is essential to Zambia’s recovery;
  • A sharper than expected Chinese slowdown will keep the copper price low, leading to a further currency weakness and job losses as more mining companies close operations in the challenging operating environment;
  • The Bank of Zambia may continue its aggressive monetary policy approach over the rest of 2016 owing to persistently high inflation levels. Thus, credit growth may remain subdued as consumers opt to save in the post-election period, negatively impacting private consumption levels.
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