Economic Growth expected on Back of Copper Prices and slowing Inflation

Zambia’s struggling economy is forecast to pick up next year as copper prices recover and inflation slows sharply, giving the central bank room to cut interest rates, according to a Reuters poll of economists taken over the past week. Growth in Zambia, Africa’s second-largest copper producer, is expected to slow to 3.2% this year compared with 3.6% last year. But the median forecast from a survey of 12 analysts has a pickup to 4.5% next year. Inflation, forecast to average 18.5% this year, is expected to slow to 12.9% next year. While that is not in the single digits that the government aims for, it may provide some room for the Bank of Zambia to cut interest rates. The policy rate is forecast to drop to 13.5% next year from 15.5% currently.

But analysts note there are an exceptional number of hurdles for policymakers to overcome. Ingrid Erasmus at NKC African Economics points to the government’s lack of fiscal room, which is a result of overspending during the last upturn. “Zambia’s economic quagmire is rooted in fiscal overstretch, structural imbalances and spendthrift eroded buffers, leaving the country ill-prepared to adapt to the terms of trade shock dealt by the copper price slump and the acute power deficit,” she wrote. Zambia is currently in talks with the International Monetary Fund over a possible financing deal, after conceding its budget deficit, which has averaged 4.8 percent of gross domestic product in the last two years, was unsustainable.

President Edgar Lungu, who was re-elected last week, said on Thursday Zambia would control spending and act to boost economic growth. However, he could face some challenges as the main opposition leader filed a court petition on Friday challenging the vote result.

h3. China & Drought

Like many other exporters, Zambia has been hit by China’s diminished appetite for raw materials. That has hurt growth as mines closed down, pushing up unemployment. It also has been hard hit over the past year by a drought that has wilted crops and driven food prices higher. Low levels of the Kariba dam have also meant power shortages have been frequent. Power is produced through hydroelectric generation at the dam, supplying electricity to parts of the copperbelt where mining companies are situated. “It is the authorities’ efforts at diversifying Zambia’s sources of power that should eventually provide relief for an already strained economy,” said Rafiq Raji, managing director at Macroafricaintel Investment in Lagos.

However, Raji doesn’t see any economic recovery until next year at the earliest. A separate Reuters poll taken in July suggests copper prices will improve slightly to $4 927 per ton next year. It is currently trading $4 785 per ton. The kwacha currency, which tumbled about 70% last year, and is responsible for raising imported inflation, has recovered about a seventh of its losses. “The fiscal drag will be partly offset by the fading impact of the currency slump,” said Liam Carson at Capital Economics.

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