ZAMBIA: ECONOMIC WOES IN 2009

C O N F I D E N T I A L SECTION 01 OF 03 LUSAKA 001173

SIPDIS

E.O. 12958: DECL: 12/16/2018
TAGS: ECON EAGR EFIN EINV EMIN ZA
SUBJECT: ZAMBIA: ECONOMIC WOES IN 2009

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Classified By: Ambassador Donald Booth for Reasons 1.4(b) and (d).


1. (C) Summary. Zambia's Gross Domestic Product (GDP) grew
by just under six percent in 2008, according to the Ministry
of Finance. Although the Zambian Government (GRZ) forecasts
five percent growth in 2009, its economic prospects are
likely to be challenged by external shocks and unhelpful
populist GRZ policies. Inflation, currently at over 15
percent, is apt to remain high. The Zambian economy is
beginning to feel the consequences of the global economic
crisis in the form of lower copper prices, reduced access to
credit, currency depreciation, and decreased foreign direct
investment. End Summary.


2. (U) On December 10, Minister of Commerce, Trade, and
Industry Felix Mutati announced that Zambia will achieve
seven percent growth in 2008. He attributed the health of
Zambia's economy to increased investment, particularly in the
Northwestern Province, where Lumwana Copper Mine -- Africa's
largest copper mine -- will open in early 2009. The Ministry
of Finance, however, puts 2008 GDP at 5.8 percent, citing
food and fuel price shocks, as well as reverberations from
the global economic crisis, as impairments to meeting the
GRZ's 2008 macroeconomic targets.


3. (C) A visiting International Monetary Fund (IMF)
delegation met with GRZ officials in early December to
evaluate Zambia's economic performance and the government's
fiscal plans. Overall, the IMF representatives were
satisfied with Zambia's macroeconomic performance and
expressed confidence in the GRZ's 2009-2011 expenditure
framework and 2009 budget. They noted overall
lower-than-expected revenues that were compensated for by GRZ
under-spending, primarily in the area of capital
expenditures. Although they concurred that 2008 GDP growth
would be 5.8 percent, one IMF team member separately
expressed some skepticism to emboff about GRZ data quality.


4. (U) The GRZ has adjusted its economic forecasts in light
of global economic instability, projecting five percent GDP
growth in 2009 and ten percent inflation (annual average).
These figures, however, are based on a "normal agricultural
season," according to IMF, of 1.5 percent growth in
agricultural production and an adequate maize harvest. The
outlook is also contingent on more efficient GRZ capital
expenditures to stimulate the economy and encourage economic
diversification.


5. (SBU) Despite adjusting its growth expectations downward,
the GRZ's forecasts may still be overly optimistic. The
Government's efforts to mitigate food and fuel prices -- by
reducing fuel tax and increasing spending on fertilizer
subsidies -- are unlikely to reduce inflation. Petrol prices
at the pump in November remained high, at Kwacha 7,699/liter
(approximately 6.85/gallon at the November closing exchange
rate),compared to K7,207/liter on year earlier. Fuel prices
in Zambia (among the highest in Africa) are likely to remain
high due to intermittent procurement-related fuel shortages,
high transportation costs, currency depreciation, and the
operational inefficiency of Zambia's sole oil refinery.


6. (U) Donors agree that the GRZ's Fertilizer Support
Program causes more harm than good to agricultural
production. According to the Jesuit Center for Theological
Reflection, a well-reputed local think tank, the cost of
basic food items in Zambia over the past 12 months has
actually increased by over 50 percent. Early indications
suggest that the maize crop in 2009 will be insufficient to
meet domestic needs. Large-scale commercial farmers have
experienced difficulties securing production credit and are
shifting from the staple maize to other crops. The high
price of fertilizer will diminish smallholder usage, and the
GRZ's subsidized fertilizer support has once again arrived
too late to have its intended effect.


7. (U) The global economic crisis is having a direct impact
on Zambia. Both the price of and demand for copper are
falling (copper prices are down 60 percent from early 2008).
Foreign direct investments and access to capital are also
declining. The Lusaka Stock Exchange (LuSe) all-share index
fell by 24 percent between January and November 2008,
suggesting less investor confidence and declining levels of
portfolio investment. According to Denny Kalyalya, the
Deputy Governor of Zambia's central bank, the Bank of Zambia
(BoZ),year-to-date foreign portfolio investment declined by
USD 134 million (an estimated three percent of the LuSe
market capitalization).


8. (SBU) The appreciation of the Dollar versus the Kwacha is
an area where the financial and economic externalities are

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felt acutely. The Kwacha has dropped from about 3,500 to
5,000 against the Dollar since late September, a very
expensive turn of events for an import-dependent country,
even as it creates opportunities for exporters, particularly
commercial farmers if they can increase productivity. The
depreciation has led to dollarization among some vendors.
Kalyalya said the BoZ targets foreign reserves to guide its
monetary policy. BoZ Governor Caleb Fundanga told Ambassador
that the central bank intervenes to even out exchange rate
fluctuations but realizing that it cannot influence either
the exchange rate trend or the rate of inflation.


9. (U) Lower copper prices and higher copper taxes (some,
i.e. the new windfall tax, do not apply at current price
levels) have reduced profitability in the mining sector.
Long-term capital investments have been trimmed, delayed, and
cancelled, and access to financing has been reduced within
this capital-intensive sector. A World Bank representative
predicted that job losses could rise to 7,000 (approximately
one-third of the mining labor pool). The Democratic Republic
of Congo's export ban on copper ore and concentrate has a
negative impact on companies that had been processing DRC
copper at smelters in Zambia. In early December, Chambishi
Metals shut down its copper smelter following further drops
in world metal prices. Luanshya Copper Mine relieved 800
workers and put its mine on "care and maintenance,"
essentially closing its operations.


10. (SBU) Delays in the rehabilitation of Zambia's three
main power plants mean that electricity shortages will
persist. Inadequate power supply will continue to deter
investment and constrain ongoing commercial enterprises.
Slower growth also may harm the construction, tourism,
manufacturing, and transportation sectors, and result in
significant job losses. The privately owned Zambian Airways
already is facing liquidity problems due to its high fuel
costs and its difficulty in accessing lines of credit.


11. (SBU) In short, the GRZ may be underestimating the
external shocks that its economy will face in 2009 and
overestimating its ability to address them. In the face of
rising inflation, the GRZ will be under considerable pressure
to offer short-term, populist solutions, like fuel or
fertilizer subsidies. IMF staff expressed concern about new
legislation that will increase civil servants' wages and
other benefits. They described the GRZ's implementation
plans for the wage bill (and its actual cost) as "the most
difficult aspect" of their visit. Nevertheless, the GRZ
acknowledged forthcoming economic difficulties on December 12
when it withdrew its offer to host the 2011 All Africa Games,
citing the need to direct resources to investments that
contribute to food security "in the wake of the global
economic crisis."


12. (SBU) At present the GRZ's 2009 strategy involves
maintaining stability by keeping GRZ spending constant in
proportion to GDP, while increasing capital expenditures.
Although this will result in a larger deficit (about two
percent of GDP) and an increased domestic financing
requirement, the GRZ is confident that it can achieve this.
Given the GRZ's procurement inefficiencies and its past
record of under-spending on capital investments, it will be
hard-pressed to carry out the strategy for underpinning
projected growth.


13. (SBU) It also appears that the GRZ's budget proposals do
not reflect its stated priorities of infrastructure
development and economic diversification. The GRZ's
2009-2011 Medium-Term Expenditure Framework ("Green Paper")
shows that it will spend over three times as much on
"recreation, culture, and religion" as it will on rural
electrification, despite the fact that only one quarter of
Zambians have access to electricity. Although the transport
sector "will continue to be key in the nation's development
agenda," road building allocations in 2009 are only
marginally larger than the fertilizer support program and
less than what the GRZ anticipates spending to defend itself
in lawsuits against the government between 2009 and 2011.
GRZ spending increases on health and education as a
percentage of GDP are negligible.


14. (C) In the event that the global economic crisis affects
Zambia's banking sector, Kalyalya told emboffs that the BoZ
lacks the resources to serve as a lender-of-last-resort. He
added, however, that Zambia's banking system was on sound
footing because "ingenious" financial products have not yet
"snuck in." Separately, Fundanga told Ambassador that the
GRZ does not have the capacity to administer a government
financial stimulus package, like those being debated in the
United States. Either way, the GRZ's fiscal planning and

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budget execution do not inspire confidence in its ability to
weather the storm, let alone grow the economy. High
inflation, low copper prices, reduced access to capital,
currency depreciation, and declining investment are all
likely to dampen Zambia's prospects for economic growth.

BOOTH