IN DEPTH MACRO-ECONOMIC STUDY OF THE KEY METRICS AND DRIVERS OF THE ZAMBIAN ECONOMY: THE WAY FORWARD TO THE KWACHA FREEFALL
BY MWAMBA PENI
Zambia is an exciting promising economy in Africa and has attracted significant regional and international investment over the last decade. However, the past decade has also shown to various times how vulnerable the Zambian economy is to the global economic growth trends and has found itself amidst a global decline in commodity prices, emerging market interest and exchange rate price volatility and ever increasing electricity utility shortages due to slow infrastructure investment, thus not being able to keep up with demand from a growing economy.
In the face of turbulences in the global economy compounded by the continuous volatility of the Zambian kwacha, this paper proposes an in depth macro-economic study of the key metrics and drivers of the local economy so that whatever remedial measures we come up with not only takes a holistic approach but also resonates with what is obtaining on the ground.
Zambia has been an investment destination choice for international and regional corporations over the past decade that are seeking African US dollar return exposure due to the following factors:
• A proven and largely successful democracy for close to two decades now;
• Pro business political landscape;
• Strong international multinational corporation presence;
• English is used as transactional language and the English common law and customary law system making operational management and legal transactions very business friendly;
• Zambia is largely a US Dollarized economy with limited local trade in Kwacha reducing domestic currency risk on investment and return distributions;
• Strong commodity export industry boosting gross domestic product and in return disposable household income;
• Strong retail growth from the informal to the formal sector; and
• Investors and corporates are seeking yields which are found in developing economies and increasing they are more at ease with the risk that are historically been associated with emerging markets.
Consequently, the Zambian GDP has outperformed its Sub-Saharan counterparts for the past 10 years buoyed by a strong commodity cycle. However, this growth is likely to be affected due to changes in mining tax laws, a widening trade deficit and low copper price. Further, global growth slowdown is putting pressure on the economy with the US looking to tightening monetary policy and stagnation in China’s economic growth. Despite all this, Zambia’s projected GDP for 2015 is reported to be around 5 per cent, which is significantly higher than its Southern Africa counterparts excluding Mozambique.
Besides, Zambia’s currency, the Kwacha, remains vulnerable to further depreciation against the dollar as a free-floating currency in a small commodity-dependent economy. Following a significant declare in trade surplus from last year to date, the foreign exchange reserve has continued to decline and that may plunge the current account balance into deficit for the next few years until the situation gets back to normal. Suffice to say, as the major export commodity, Copper has a large influence on the valuation of the Zambian currency. Therefore, a risk to Copper output is the on-going electricity delivery disruptions.
THE PROPOSED WAYFORWARD
The current situation should be a matter of great concern for every citizen of goodwill regardless of political affiliation. To propose remedial measures without undertaking a holistic in depth macro economic analysis of the key metrics and drivers of the economy will not help us address the root causes but mere symptoms. Therefore, my proposal is that a study is undertaken to address the following so as to come up with sustainable solutions that are based on sound research and not assumptions as the case may be:
• Global macro economic environment and its relevance to Zambia;
• The impact of the global macro environment on the commodity markets;
• The monetary and fiscal reality of Zambia from the perspective of international markets;
• The Zambian vulnerability to external global macro economic factors; and
• The translation of economic metrics and market sentiment on the financial markets of Zambia.