World Report

The government is hitting its targets and has won back the confidence of international donors with austerity programme

olstered by strong international demand for copper and rising production in all sectors, the Zambian economy has continued to perform well, and the country is enjoying its strongest period of growth and lowest rate of inflation for two decades. Gross domestic product increased by 5 percent in 2003, marking the fourth consecutive year of economic expansion.

The national currency is stable and the rate of inflation has fallen

Total exports rose by 23 percent in 2003, compared to a 13 percent increase in total imports and, in addition to increased copper sales, there was a notable rise in export of non-traditional products. “This is our longest period of sustained economic growth since independence in 1964,” says Ng’andu P. Magande, Minister of Finance and National Planning.

This year, the economy is forecast to grow by 3.5 percent, although the government believes a strong performance in the agricultural and mining sectors could lift it above its target of 5 percent. Copper exports are projected to increase by an average of 15.8 percent a year between 2004 and 2007 due to production rises in the Copperbelt and the coming on stream of new mines at Kansanshi and Lumwana in the Northwestern Province.

Ng’andu P. Magande
Minister of Finance and National Planning

‘This is our longest period of sustained growth since independence’

Meanwhile, the national currency, the kwacha, has remained stable, while the rate of inflation, not long ago at 45 percent, fell to 17 percent last year. This year’s target is 15 percent, and the government aims to reduce it to around 10 percent by 2006 and then to a single-digit figure.

In addition to increasing growth and checking inflation, the government wants to build up gross international reserves and limit domestic borrowing to 2 percent of GDP. Interest rates have remained encouragingly low following a reduction in the government’s domestic borrowing last year. Together with the Bank of Zambia’s decision to lower cash legal reserve requirements, this has freed excess liquidity in the banking system onto the money market.

Mr Magande is pleased with the progress that has been made. “We have come out of a very difficult situation,” he says. “The economy has been growing, the new investors are settling down and that has led to an increase in production. Interest rates have come down and the government is doing its best to provide an enabling environment to encourage activity in the private sector.” And he concludes, “We believe things are changing.”

In order to achieve its targets, the administration is committed to reforms encouraging private sector development, improving state spending and developing the financial system. Dipak Patel, Minister of Commerce, Trade and Industry says the government’s job is to govern while the private sector runs business. “Our entire focus is private sector led,” he says.

Mr Magande reinforces the point. “We are ready to embrace private sector companies either in public-private initiatives or just on their own,” he says.

Zambia is heavily dependent on international financial support but has recently been subjected to a year-long squeeze by donors after overspending its budget in 2002. Since then, the government has made a huge effort to comply with fiscal discipline measures laid down by the IMF and the World Bank, introducing a painful austerity drive and risking unpopularity with a public sector wage freeze and tax rises.

The belt-tightening has won a vital vote of confidence from the International Monetary Fund (IMF), which in June responded by approving a $320 million (£177 million) Poverty Reduction Growth Facility loan to support Zambia’s budget until 2007. Crucially, this signals that Zambia is back on course this year to reach the Highly Indebted Poor Countries (HIPC) completion point – the key to reducing its unsustainable level of external debt.

Zambia’s foreign debt, largely inherited from the socialist era, stands at $6.6 billion (£3.6 billion) – around twice the size of the country’s GDP. Paying it off swallows a large portion of the government’s financial resources; in 2003, Zambia spent £62.5 million on debt servicing.

Attaining the HIPC completion point will relieve Zambia of around half the debt, which in turn will allow more resources to be allocated to cash- and staff-strapped services such as education and health, Poverty Reduction Programmes and the fight against HIV/AIDS.

The IMF’s example has been followed by the World Bank and the European Union, which have respectively agreed to provide $100 million (£55 million) and 110 million euros (£61 million) in support.

Donor funding to Zambia has been conditional on the privatisation of loss-making state-run enterprises, and the majority have already been sold off. With the remainder, the government has been taking a cautious approach as privatisation is a controversial issue in Zambia. Recently, however, President Mwanawasa announced that plans to privatise the telecommunication company ZAMTEL, the electricity utility ZESCO and the Zambia National Commercial Bank would go ahead, with the state retaining 51 percent shares to safeguard the interests of the nation.