Previous Quarterly Editions
Expropriation Risk: 67 64 67 66 Political Violence Risk: 67 68 68 68 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 67 64 65 65 Sovereign Default Risk: 82 82 82 84
TREND ▲ OUTLOOK ▲
Political tensions continue to simmer in Zambia as the government begins preparations for President Edgar Lungu’s re-election campaign in 2021. This has been made possible by the decision from the Constitutional Court in December that he is eligible to stand. The court was responding to the argument made by four opposition parties that the president has already reached his constitutional limit of two terms in office because, as vice president, he stepped into the role to complete the term of President Michael Sata, who died in office, before going on to win his own term. Although the Court was unanimous that completing Sata’s term did not count towards Lungu’s total, it is now composed entirely of judges appointed by Lungu. The sensitivity of Lungu’s governing Patriotic Front party on this point has resulted in ever greater intolerance of dissent. Even groups that have so far evaded state censure have been warned not to criticise government policy; a meeting of clergymen in Ndola to discuss the government’s proposed budget for 2019 was disrupted by the police, who detained some of the organisers. However, widespread expectations that this trend would culminate in opposition leader Hakainde Hichilema being arrested for a second time after senior PF leaders accused him of triggering a riot in Kitwe, the city in the heart of the country’s copper mining belt, have not been borne out. Instead, in December it was revealed that the two leaders have been participating in secret talks designed to break the political impasse. Lungu’s aim appears to have been to smooth the political environment before the announcement about his eligibility to stand in 2021, but the fact that the talks took place under the auspices of Christian leaders has raised hopes that they might actually produce an end to the recent cycle of opposition protests and government repression. However, economic pressures will continue to exacerbate political tensions in the absence of an IMF rescue package, and at the start of 2019 this seems as far away as ever. In 2018, poor rains saw agricultural output contract by 35%, and GDP growth fell slightly to 4.0%. A minimal increase to 4.2% is now expected in 2019. Although the current account deficit has fallen from a high of 9.3% in 2015 to 7.1% in 2018, this was still some way short of the official target of 6.1%, compounding fears that the country’s debt burden is already unsustainable.
Rumours that the country had fallen so far behind on debt repayments that it was poised to sell off key assets to China led to growing anti-Chinese sentiment towards the end of 2018. In particular, reports that the state-owned timber company Zambia Forestry and Forest Industries Corporation (Zaffico) was due to be sold to China were the main trigger for the riots in Kitwe in November that the government subsequently blamed on its main opponent, Hakainde Hichilema. Having stoked anti-Chinese sentiment with its populist positions while in opposition, the PF now finds itself attempting to moderate growing enthusiasm among the electorate for the idea of nationalisation and expropriation. However, as economic difficulties erode popular support for Lungu’s government, the president may feel the need to adopt a more aggressive stance with regards to foreign investors. With the price of copper expected to remain weak due to lower Chinese demand, the Zambia Revenue Authority (ZRA) is likely to renew its pursuit of mining companies for alleged underpayment of taxes. The African Development Bank recently reported that the government is planning to raise royalties by 1.5% while ending the corporate tax deductions for mineral royalties.
TREND ► OUTLOOK ▲
The talks between President Lungu and Hakainde Hichilema are likely to prevent a further escalation of political tensions in the short term. However, as the next election draws closer the governing PF appears to be readying a number of strategies designed to undermine the position of opposition leaders, including forcing their parties to hold leadership elections that the PF hopes will prove divisive. This is likely to mean a return to the fractious political environment seen in 2017 and the first half of 2018. In this context, continuing economic difficulties that cut into government spending and push urban Zambians further into poverty may well trigger protests and unrest.
There are no terrorist organisations known to be operating in Zambia, and the country has not experienced a major terrorist incident. However, any serious deterioration in the country’s stability would detract from the ability of the security services to monitor external threats.
Although inflation remains in single digits, it crept up from 6.6% in 2017 to 7.6% in 2018. Having lost value in September 2018, the kwacha has remained relatively steady into 2019. However, further instability remains likely as political and economic uncertainty continues and the country remains extremely dependent on copper exports for foreign exchange. Expected gains from recent production increases of around 4% a year are being eroded by the return to lower global prices after the upturn seen in the first half of 2018. Donor relations remain strained after the UK and Finland suspended aid in September 2018 following allegations of misuse and embezzlement.
Zambia continues to contract external and domestic debt at an unsustainable rate, and there is general consensus that the government’s own figures do not reflect the severity of the situation. Central bank reserves fell from 2.4 billion dollars in 2016 to 1.7 billion dollars in 2018, and there are serious concerns that a further decline is likely in 2019. Avoiding debt default in the medium term will therefore require either far greater fiscal discipline than the government has demonstrated up to now, or the rescheduling of debt and an international rescue package. An IMF staff visit to Lusaka in November did little to bring the two sides closer to a deal, however, with the IMF still waiting for the government to put forward a credible strategy for reducing public expenditure and bringing debt under control.
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