Previous Quarterly Editions
Expropriation Risk: 54 57 57 58 ▲Political Violence Risk:39 39 39 39 ►Terrorism Risk:20 18 16 14 ▼Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ►Sovereign Default Risk:92 83 92 83 ►
TREND ►
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Low LowAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: HighFood/fuel policy protests: Medium
*Note: Protest intensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
For many years, the Zambian government was one of the better-performing administrations in the region when it came to inflation, with the government setting a target of 6%-8%. Although the country experienced double-digit inflation between 2007 and 2009, and again between 2015 and 2016, this fell to 6.6% in 2017 before rising to 7.6% in 2018.
The situation has deteriorated significantly in recent years, however, with inflation rising to 9.15% in 2019, 14.5% in 2020, and 16.4% at the end of 2021. One reason global food and fuel inflation hit Zambia particularly hard is as an oil importing and landlocked country, fuel increases raise the cost of most imports.
Interest rate increases, from 8% at the start of 2021 to 9% by the end of 2021, initially had little effect, prompting the government to implement a further increase to 9.25% in February 2023. This was partly inspired by new inflation data, showing while inflation fell below 10% at the end of 2022, it is likely to remain above the above the government’s target range, and will continue to be a source of public frustration.
The economic hardship generated by rising prices was one of the main reasons President Edgar Lungu performed so poorly in the 2021 general elections. Similar issues now present a major challenge to President Hakainde Hichilema. He faces the challenge of restructuring the country’s vast debt burden (over USD17 billion in external obligations, which represents over 120% of GDP) in the context of low economic growth – 3.1% in 2022, below the government’s goal of 4%.
Although Hichilema drew plaudits for finalizing a USD1.3 billion economic rescue package that had been consistently delayed under Lungu, some of the clauses appear to require the government to implement austerity economics. This includes reducing government expenditure and significantly reducing the assistance the government provides to citizens in terms of policies – including subsidies – designed to reduce the cost of food and fuel, all of which will be highly unpopular measures.
Even in the absence of the IMF, some of these policies may be required given the government continues to run a deficit – 9% in 2022 – with domestic borrowing rising from ZMW17,709 million in 2021 to ZMW24,459,000 in 2022, an increase of from 4.8% of GDP to 5.2% of GDP. The government will need to make considerable debt repayments whatever agreement is made regarding the timetable for doing so.
There is a significant risk implementing these policies could rapidly erode the government’s popularity and legitimacy, and even drive protests, especially in urban areas. Although Hichilema won a landslide victory in 2021, some Zambians were voting against Lungu and economic hardship as much as they were voting for Hichilema. It is also worth noting Zambia has a long history of mass protests against unpopular economic policies imposed by organizations such as the IMF, stretching back to the 1980s.
While many of the civil society groups that organized these protests are now much weaker, opposition politicians may seek to manipulate popular anger at government cuts to mobilise
support against Hichilema. In turn, this could lead to confrontations between the police and protestors, increasing the risk of political stability.
TREND ▲
Given his commitment to repaying the country’s creditors and adopting liberal economic policies, it is highly unlikely that Hichilema’s government will pose an expropriation risk, even though it is likely to come under continued pressure to increase the contribution foreign investors make to the country.
Indeed, the government actually moved to restructure the way that copper royalties are collected in the 2022 budget, introducing a sliding scale system that effectively reduced taxes, leading to a loss of USD178 million in government revenue. However, given weak economic growth and IMF pressure to raise revenues and cut spending, this may be difficult for the government to sustain.
The initial positivity surrounding Hichilema’s honeymoon phase, when inflation fell and the Zambian currency was the best performing in the world, has largely evaporated. Delays in finalizing debt restructuring and a lack of new economic opportunities for most citizens, has led to growing criticism there has been more economic continuity than change.
The government did receive some credit for announcing it would hire 30,000 more teachers and 11,000 more nurses, but outside of these professions there has been little good news. The risk of political unrest is therefore growing, although Zambia generally does not experience high levels of political violence and this is likely to continue.
TREND ▼
There are no terrorist organizations known to be operating in Zambia. The country has not experienced a major terrorist incident. However, any serious deterioration in the country’s stability would reduce the ability of the security services to monitor external threats.
Interest rates were increased from 8% at the start of 2021 to 9% by the end of 2021, and then to 9.25% in February 2023.
Having initially gained against the U.S. dollar following the election of Hichilema, the kwacha has performed poorly in recent months. Having hit a recent high of 15.93 to the dollar in August 2021, the kwacha is currently trading at 21.20 to the dollar.
The price of copper, which is critical to the Zambian economy, remains high, but has fallen slightly from an average of USD4.25 per pound in 2021 to USD4.15 per pound in 2022 and USD4.08 in 2023. This figure is likely to generate considerable challenges for the government, as it is lower than the estimated price of copper included in the 2022 budget, which is likely to result in a shortfall in government revenue.
Having initially appeared to make good progress towards persuading all relevant parties to accept a similar debt restructuring process, Hichilema has become increasingly frustrated progress appears to have stalled.
It is a particularly challenging set of negotiations due to the need simultaneously to talk to and persuade a wide range of players including the IMF, World Bank, and African Development Bank, and regional players such as the Southern Africa Development Community and donors such as the European Union and U.K.. Key creditors, including commercial and state-owned lenders in China, as well as multilateral institutions and those who subscribed to the country’s Eurobonds, also need to be encouraged to pull in the same direction.
In turn, long delays have led to a damaging public spat between China and the United States, with the U.S. government accusing China of unnecessarily dragging its feet, and China retorting the U.S. should focus on its own debt crisis before telling other countries what to do. This very public disagreement highlights how difficult a task Hichilema faces in concluding debt negotiations on terms that do not stymie Zambia’s potential economic recovery.
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