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Country Commercial Guides for FY 2000: Zambia Report prepared by U.S. Embassy Lusaka, released July 1999   Note*

CHAPTER II: Economic Trends and Outlook

Major Trends And Outlook: Zambia's remarkable economic reform program stumbled badly in 1998, caused largely by the delay in privatizing the loss-making parastatal Zambia Consolidated Copper Mines (ZCCM). Due to ZCCM's large size and dominance of foreign exchange earnings, this delay threatens Zambia's hard-won macroeconomic stability. The inflation rate rose from 19% in 1997 to 30.6 in 1998,foreign exchange reserves dropped by more than 50%, to a month's import cover, and the local currency (kwacha) lost more than a quarter of its value against the dollar. This trend spilled over into the first half of 1999. Critical balance of payments support from the international community was suspended in 1998 pending ZCCM's sale, but partially reinstated in May 1999. A massive buildup of inter-company debts threatens the domestic financial system. Most observers judge that ZCCM will sink the economy unless it is sold or closed.

Some economic sectors are recording growth, but broad-based growth benefiting all Zambians remains elusive. Zambia has reduced its vulnerability to the external shocks of periodic drought and falling copper prices through crop diversification, growth in non-agricultural sectors, and privatization. Zambia's growth potential remains somewhat hostage to the world economy, however, since the fastest growing segments of the economy are non-mineral exports and tourism. Privatization of the economy in general will allow quicker and more flexible responses to unforeseen economic developments. Governmental corruption and bureaucratic inefficiency are continuing problems that affect the business environment.

The social sector currently suffers from government's fiscal constraints and structural changes. Private sector incomes have not kept pace with inflation and the imposition of user fees for health and education services. The result is that people often do without. The HIV/AIDS pandemic will continue to hamper development as Zambian workers, parents and officials are cut down in their prime.

Principal Growth Sectors: Copper and cobalt dominate the Zambian economy, accounting for 75% of export earnings, but production will continue to decline unless privatization succeeds in bringing in substantial new investment. Assuming the copper sector does not drag down the entire economy, there is considerable potential for growth in other areas. The non-copper mining sector holds considerable potential; Zambia is rich in precious and semi-precious gems, producing about 20% of the world's emeralds.

Zambia has large tracts of uncultivated arable land with good soil, a favorable climate and generally adequate water supply. Nontraditional exports, particularly horticultural and floriculture products, have enjoyed strong growth over the past several years. The country has numerous natural attractions, including Victoria Falls, and relatively abundant wildlife which, if marketed properly, could attract more tourists. Zambia's central location and relatively abundant rivers position Zambia well as a generator, exporter and conduit of hydroelectric power for the southern African region.

Government Role In The Economy: In 1998 the government recorded a decline of 2% of GDP in 1998, after growth of 3.5% in 1997, while Zambia's proposed budget for 1999 entails maintaining the overall fiscal deficit below 3% of GDP and achieving a surplus of 2% of GDP. Wages are not controlled. Prices have been decontrolled and subsidies eliminated. The foreign exchange rate and interest rates are market determined, and quantitative restrictions on imports have been eliminated. On the other hand, the government finds it difficult to refrain from interfering in the politically sensitive agricultural grain sector, and other areas. (see section VII).

Approximately 85% of Zambia's parastatal companies were privatized by June 1999, including some components of the dominant and symbolically important copper mining complex ZCCM. The telephone utility is slated for partial privatization; the electric utility, some sections of the rail network, and petroleum pipeline parastatals are currently slated for commercialization. State-owned financial institutions are being privatized or liquidated. The central bank (Bank of Zambia) remains subject to influence from the government in its conduct of monetary policy and commercial banking supervision. The energy sector has been opened up to private investment.

Balance Of Payments Situation: Zambia's balance of payments (BOP) situation is fragile, with foreign currency reserves in December 1998 capable of covering one month's worth of imports. In part this reflects the suspension since 1996 of bilateral BOP support by donors in the wake of governance concerns. Some BOP support resumed mid 1999, following agreement on a second ESAF with the IMF, and Consultative Group (CG) meeting in May 1999. Zambia's Paris Club debt was rescheduled on Naples terms in December 1995. Total debt service payments in 1997 equaled $277 million, about 21% of export earnings. Zambia had a current account deficit of $275 million in 1998.

Infrastructure: Transport and communications infrastructures are fair by regional standards. A roads maintenance board has been created, funded by a gasoline tax, to deal with Zambia's deteriorated roads. Health facilities are mostly of poor quality; educational facilities vary greatly in quality.