Zambia Democratic Republic of Congo at a Glance: 2001-02

COUNTRY REPORT

Zambia Democratic Republic of Congo At a glance: 2001-02

OVERVIEW Despite mounting opposition, the president, Frederick Chiluba, may contest the presidency again now that he has been adopted as the candidate of the ruling party, the Movement for Multiparty Democracy (MMD). The constitution will need to be amended to enable him to serve another term but, with or without Mr Chiluba, the MMD will probably win the presidential and legislative elections as they are the only party with a strong national following. The government’s economic policy priority for 2001-02 is to produce a poverty reduction strategy paper. Fiscal policy will be expansionary over the forecast period; we expect donor assistance to cover all of the financing gap in 2001-02. Monetary policy, recently loosened, may be tightened again to help support the kwacha. We expect an average rate of inflation of 28.4% in 2001 and 23.6% in 2002, largely because the kwacha is expected to weaken further, to an average of ZK3,395:US$1 in 2001 and ZK3,892:US$1 in 2002. Key changes from last month Political outlook • The MMD’s nomination of Mr Chiluba as its presidential candidate is likely to deepen the rift between the factions supporting and opposing a third term. Economic policy outlook • The government remains publicly committed to delivering on its privatisation programme but, as the elections draw nearer, delays can be expected. Economic forecast • Real GDP is forecast to grow by 6.2% in 2001 and by 5.3% in 2002. Higher export receipts will narrow the current-account deficit from 2.6% of GDP in 2001 to 0.2% of GDP in 2002. May 2001

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ISSN 1369-4839

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Contents

3 Summary

Zambia

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 10 Economic forecast 14 The political scene 17 Economic policy 20 The domestic economy 20 Economic trends 21 Mining and energy 23 Infrastructure 24 Agriculture 24 Foreign trade and payments

Democratic Republic of Congo

27 Political structure 28 Economic structure 28 Annual indicators 29 Quarterly indicators 30 Outlook for 2001-02 32 The political scene 41 Economic policy and the economy

List of tables

10 Zambia: international assumptions summary 12 Zambia: forecast summary 18 Zambia: government finances 22 Zambia: copper and cobalt production and prices 43 Congo: diamond production 44 Congo: budget, 2000

List of figures

13 Zambia: gross domestic product 13 Zambia: kwacha real exchange rates 20 Zambia: inflation rate 21 Zambia: exchange rate 21 Zambia: money supply growth, 2000 21 Zambia: copper and cobalt production 24 Zambia: foreign-exchange reserves, 2000 29 Democratic Republic of Congo: copper price 29 Democratic Republic of Congo: foreign trade 32 Democratic Republic of Congo: gross domestic product 42 Democratic Republic of Congo: diamond production

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 3

Summary

May 2001

Zambia

Outlook for 2001-02 The MMD has voted to nominate President Chiluba as its candidate for the presidential election in October. The constitution will need to be amended for him to serve another term but, with or without Mr Chiluba, the ruling party will probably win both the presidential and legislative elections. The civil war in Angola will continue to test relations between the two governments. The government’s economic policy priority for 2001-02 is to produce a poverty reduction strategy paper and, on paper, the government remains committed to its privatisation programme. Fiscal policy will be expansionary; we expect donor assistance to cover all of the financing gap in 2001-02. Monetary policy, recently loosened, may be tightened again to support the kwacha. We expect an average rate of inflation of 28.4% in 2001 and 23.6% in 2002, largely because the kwacha is expected to weaken further, to an average ZK3,395:US$1 in 2001 and ZK3,892:US$1 in 2002. Real GDP is forecast to grow by 6.2% in 2001 and by 5.3% in 2002 supported by increased activity in the mining sector. The current-account deficit is expected to improve from 2.6% of GDP in 2001 to 0.2% of GDP in 2002, thanks to higher export receipts.

The political scene With official MMD support, Mr Chiluba appears intent on running for a third presidential term. However, opposition from some MMD politicians and civil society groups is expected to increase. Importantly, Western governments have said they would like him to stand down. The Republican Party and the Zambia Alliance for Progress, have merged, forming the Zambia Republican Party.

Economic policy The budget, announced in January, is intended to stimulate the tourism and agricultural sectors. The budget deficit is forecast to fall to 0.8% of GDP in 2001. However, although the finance minister, Katele Kalumba, has stated the privatisation programme will remain on track, privatisation commitments have been threatened by Mr Chiluba. The banking sector continues to cause concern, but the IMF has approved the release of US$126m under its poverty reduction and growth facility (PRGF).

The domestic economy The government has forecast real GDP growth of 5% in 2001, supported by increased activity in the mining sector. The inflation rate has continued to remain high, but tight monetary policy has strengthened the kwacha. Konkola has reported losses of US$9.2m. Heavy rainfall has damaged the maize crop.

Foreign trade and payments The IMF’s PRGF support has strengthened economic performance in early- 2001, and foreign-exchange reserves have increased significantly.

Late note Mr Chiluba has dismissed members of the cabinet who oppose his third term, and a motion for his impeachment has come before parliament.

Democratic Republic of Congo

Outlook for 2001-02 The new president, Joseph Kabila, has exceeded expectations and appears to be consolidating his control over the government. His allies Angola and, particularly, Zimbabwe will continue to exert strong influence in government and Mr Kabila will need to pay careful attention to their concerns. Positive engagement with the peace process by the government has put the onus on the main rebel movements supported by Rwanda and Uganda to also show compliance. Deployment of UN forces is expected to continue amid halting progress with the peace process. The convening of the inter-Congolese dialogue will present risks as the government must give ground if the process is to be recognised as legitimate. The new government has shown some skill in diplomacy and in convincing the international community that it is committed to the peace process. The economic outlook is now positive for the first time in years. The government has made encouraging moves on economic reforms and new appointments. If appropriate policies are followed and international assistance consolidated, economic growth may resume for the first time since 1996.

The political scene President Joseph Kabila was quickly inaugurated in late January following the assassination of his father, the late president, Laurent Kabila. A new government was installed in early April which swept away nearly all of the discredited cronies of the late president, replacing them with a relatively competent and clean cabinet. A commission of inquiry has been set up to investigate the assassination of Kabila senior. The late president’s aide-de-camp, Edy Kapend who is closely associated with Angola, has been arrested amid much speculation that he was linked to the assassination. A UN report on resource exploitation in Congo has strongly criticised Rwanda and Uganda and called for sanctions against them—to the satisfaction of the Congolese government. A disengagement plan has been successful: troops from both sides have pulled back from the front lines. Mr Kabila has travelled to Europe and the US, where he was well received. The UN has taken the initiative and begun deploying troops in government- and rebel-held territory.

Economic policy and the The World Bank and IMF have sent missions to Congo and negotiations are economy under way over a stabilisation programme, amid positive signs that the government is serious about economic reform. The new economic team includes impressive members. The government has partly liberalised some foreign-exchange transactions but has not yet agreed to a much needed currency devaluation. The government has moved to abrogate the disastrous IDI diamond monopoly—a move that is expected to increase foreign-exchange earnings for the economy.

Editors: Angus Downie; Douglas Mason (DRC); Pratibha Thaker (consulting editor) Editorial closing date: April 30th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Zambia 5

Zambia

Political structure

Official name Republic of Zambia

Form of state Unitary republic

Legal system Based on the 1996 constitution

National legislature National Assembly; 150 members elected by universal suffrage; all serve a five-year term

National elections November 1996 (presidential and legislative); next elections due in October 2001

Head of state President elected by universal suffrage for a term of five years

National government The president and his appointed cabinet

Main political parties The Movement for Multiparty Democracy (MMD) is the ruling party, with a large parliamentary majority. The National Party (NP) and Agenda for Zambia (AZ) also have seats in parliament. The former sole party, the United National Independence Party (UNIP) boycotted the 1996 elections (as did several other opposition groups ), but has since gained one seat in a by-election. The United Party for National Development (UPND) was formed in late 1998 but its support appears mixed. The Zambia Alliance for Progress (ZAP) is a coalition of eight political groups formed in early 1999; it merged with the Republican Party (RP) in January 2001 forming the Zambia Republican Party (ZRP). There are over 30 parties in total.

President Frederick Chiluba Vice-president Christon Temboa

Key ministers Agriculture & fisheries Suresh Desaia Commerce, trade & industry vacant Communications & transport Nkandu Luo Community & social development, lands Abel Chambeshia Defence Chitalu Sampa Education Godfrey Miyandaa Energy & water development David Saviye Finance & economic development Katele Kalumba Foreign affairs & co-operation Keli Walubita Health Enoch Kavindele Home affairs Peter Machungwa Information & broadcasting Newstead Zimba Labour & social services Edith Nawakwia Legal affairs Vincent Malamboa Mines Syamukayumbu Syamujayea Office of the president Eric Silwamba Science & technology Valentine Kayope Tourism David Mpambaa Works & supply Golden Mandandi

Central bank governor Jacob Mwanza

a Dismissed by President Chiluba on May 2nd.

Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (ZK bn) 4.0 5.2 6.4 8.6 11.1 GDP (US$ bn) 3.3 3.9 3.5 3.6 3.6 Real GDP growth (%) 6.5 3.4 –2.0 2.2 3.1 Consumer price inflation (av; %) 46.3 24.8 24.5 26.9 26.0b Population (m) 9.5 9.8 10.1 10.4 10.7 Exports of goods fob (US$ m) 994 1,110 816 759 800 Imports of goods fob (US$ m) 1,056 1,055 971 870 1,008 Current-account balance (US$ m) –122 –249 –322 –193 –265 Foreign-exchange reserves excl gold (US$ m) 222.7 239.1 69.4 45.4 244.8b Total external debt (US$ bn) 7.1 6.7 6.9 5.9 5.9 Debt-service ratio, paid (%) 22.1 18.9 21.0 50.8 37.2 Exchange rate (av) ZK:US$ 1,207.9 1,314.5 1,862.1 2,388.0 3,110.8b

April 30th 2001 ZK3,140:US$1

Origins of gross domestic product 2000c % of total Components of gross domestic product 1999 % of total Agriculture 17 Private consumption 77 Industry 26 Government consumption 10 Mining 6 Gross fixed capital formation 17 Construction 5 Change in stocks 1 Manufacturing 12 Exports of goods & services 31 Government & other services 58 Imports of goods & services –37 GDP at market prices 100 GDP at market prices 100

Principal exports 1999 US$ m Principal imports 1999 US$ m Copper 377 Capital goods 547 Cobalt 104 Manufactures 220

Main destinations of exports 1999d % of total Main origins of imports 1999d % of total Saudi Arabia 12.5 South Africa 55.5 Japan 10.2 Zimbabwe 8.8 UK 7.7 UK 5.9 Thailand 6.7 Japan 2.7 a EIU estimates. b Actual. c Official estimates. d Based on partners’ trade returns; subject to a wide margin of error.

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Zambia 7

Quarterly indicators

1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Consumer prices (1994=100) 356.7 370.6 387.4 401.3 436.7 462.7 490.9 517.6 % change, year on year 30.2 26.9 26.9 28.0 30.2 26.9 27.1 23.6 Copper, LME (US cents/lb) 63.9 66.5 76.1 78.9 81.5 78.9 85.0 83.8 Financial indicators Exchange rate ZK:US$ (av) 2,288.1 2,377.9 2,403.6 2,482.5 2,714.4 2,866.4 3,177.6 3,685.1 ZK:US$ (end-period) 2,288.5 2,439.5 2,413.7 2,632.2 2,758.2 3,022.0 3,232.2 4,157.8 Interest rates (av; %) Deposit 18.60 20.47 21.00 21.00 20.93 20.00 20.03 n/a Weighted lending base 38.37 40.37 41.23 42.10 40.67 38.93 37.97 n/a Treasury bill, 91 day 35.26 36.66 36.70 36.15 34.41 31.59 29.14 n/a M1 (end-period; ZK bn) 379.7 398.2 432.3 513.0 474.5 582.3 639.8 715.4 % change, year on year 6.4 10.8 14.9 23.6 25.0 46.2 48.0 39.5 M2 (end-period; ZK bn) 1,065.4 1,154.8 1,241.0 1,397.9 1,422.6 1,724.7 1,977.6 2,335.5 % change, year on year 23.4 24.9 24.9 27.7 33.5 49.4 59.4 67.1 Sectoral trends Copper in concentrates, production (‘000 tonnes) 77.7 71.4 65.7 56.2 53.2 51.0 83.1 82.8 Foreign tradea (US$ m) Exports fob 215.4 196.0 197.6 183.0 201.6 182.9 200.8 n/a Imports fob –188.1 –182.1 –207.8 –236.9 –198.1 –205.3 –231.7 n/a Trade balance 27.3 13.9 –10.2 –53.9 3.5 –22.4 –30.9 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 73.3 55.5 72.6 45.4 8.9 29.8 89.4 244.8

a DOTS estimates.

Sources: Zambian Central Statistical Office; World Bureau of Metal Statistics, World Metal Statistics; IMF, International Financial Statistics; Direction of Trade Statistics.

Outlook for 2001-02

Political outlook

Domestic politics Zambia is constitutionally required to hold presidential and legislative elections by end-October 2001. The constitution also prevents the president, Frederick Chiluba, from contesting the presidency again but, despite considerable and growing opposition both within and outside the ruling party, the Movement for Multiparty Democracy (MMD), the MMD voted on April 30th to nominate him for a third term. There is a good chance that the constitution will now be amended to enable him to serve another term. Whether or not Mr Chiluba stands (he has yet to state publicly whether he will run), the MMD will probably win the presidential and legislative elections because—although some opposition parties have a strong regional presence—it is the only party with a convincingly national following.

Election watch The official decision of the MMD, which is becoming increasingly and violently divided on the issue, to support Mr Chiluba for a third term was determined at an extraordinary party convention on April 30th. Despite strong internal opposition, particularly from some cabinet ministers and non-Bemba people, the MMD convention endorsed the call for constitutional change. If Mr Chiluba chooses not to stand again, despite having been selected, the most likely MMD presidential candidates are Katele Kalumba, the minister of finance, and Michael Sata, the party chairman. Supporters of a third term for Mr Chiluba are seeking another constitutional amendment to allow Zambia’s vice-president to rule for the remainder of a presidential term, should the president resign or be removed from office, rather than the current requirement that an election should be held within three months. This raises the possibility that Mr Chiluba may decide to stand for election, win, then step down shortly afterwards and deliver the presidency to a handpicked successor, who will be sufficiently beholden to Mr Chiluba to ensure that he retains considerable behind-the-scenes influence. (But see Late note below.)

The Zambia Republican Party (ZRP), founded on February 25th as the result of a merger between the Zambia Alliance for Progress and the Republican Party (founded by the ex-MMD minister, Ben Mwila), has created an opposition party that enhances the electoral chances of both constituents, but does not yet stand a serious chance of beating the MMD. However, the ZRP is likely to outperform the other main opposition party, the United Party for National Development (UPND), led by Anderson Mazoka, in the predominantly Bemba, Central, Copperbelt and Luapula provinces. The UPND is strongest in the mainly Tonga Southern and Western provinces. Nevertheless, neither party shows any sign of diverging significantly from the MMD’s economic reformist policies, including privatisation. The United National Independence Party (UNIP), which ruled Zambia for 27 years, acquired its third leader in two years in April—Tilyenji Kaunda (the son of the former president, Kenneth Kaunda). However, Tilyenji Kaunda is not expected to reverse UNIP’s dismal fortunes, and the party is expected to perform poorly in the 2001 elections.

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Zambia 9

International relations The Angolan civil war continues in areas bordering Zambia, and, as long as the Zambian government retains its neutral position in the conflict, relations between the two governments will remain strained. However, diplomatic initiatives, and a new tripartite security mechanism which includes Namibia, are easing the tension, and relations are expected to improve further. Meanwhile, armed Angolan groups from both sides of the conflict will continue to make incursions into Zambian territory in 2001-02, and thousands more Angolan refugees are expected to flee across the border in search of safety.

The Zambian government will continue to mediate in the conflict in the Democratic Republic of Congo (DRC), but its efforts are likely to be of marginal significance, since the belligerents increasingly lack confidence in Mr Chiluba’s ability or commitment to add value to the peace process. The Zambian government will sustain its increased military presence in border areas with DRC, and will work with the UN High Commission for Refugees to keep refugees away from the border.

Economic policy outlook

Policy trends The government’s economic policy priority for 2001-02 is to produce a poverty reduction strategy paper (PRSP)—expected by this September and based on the July 2000 interim-PRSP—and then to begin its implementation. The PRSP will help Zambia reach the completion point under the IMF and World Bank’s heavily indebted poor countries (HIPC) initiative, when the bulk of HIPC debt relief is received. It is expected to focus mainly on promoting macroeconomic stability, increasing social spending, targeting poverty alleviation, widening the tax base, improving fiscal control and completing the privatisation programme.

As stated in Mr Kalumba’s letter of intent to the IMF (of March 29th), the government remains committed to offering for sale in 2001 of its shares in the troubled Zambia National Commercial Bank, the Indeni oil refinery and the Tanzania-Zambia pipeline, and has re-committed itself to the privatisation of the Zambia Electricity Supply Company. Its plans for Zambia Railways and Zambia Telecommunications remain uncertain. However, despite this latest pronouncement on privatisation, significant progress on the fiscal front by the government prior to the elections will be difficult to achieve, partly because of the negative impact the expected redundancies would have, but also because of the low institutional capability of the government.

Fiscal policy Real public expenditure is forecast to rise over the forecast period. The government is committed to settling overdue public-sector wage increases and to increased funding for the health and educational sectors (under the HIPC initiative); and there will be expenditure on the Organisation of African Unity summit in Lusaka in July (which will include US$5m on 62 Mercedes Benz cars) and increased allocations to the president’s discretionary fund as the elections approach. However, efforts will be made to redirect public expenditure towards social service provision, as projected in the interim-PRSP. Revenue will be maximised through vigorous tax collection (officially forecast to be 42% more than in 2000), increased economic activity in the Copperbelt

and higher donor assistance (forecast to rise by a nominal 159% to ZK2.6trn (US$766m), from ZK1trn in 2000). However, donor support will depend greatly on the government’s ability to meet its targets, particularly with regard to good governance and privatisation (both of which are raising concerns). Mr Kalumba has given his assurance that economic policy will not be unduly influenced by the MMD’s electoral needs, and has predicted a fiscal deficit of 0.8% of GDP in 2001. However, the EIU forecasts a deficit of 4.6% of GDP, mainly owing to high government spending in the run-up to the elections and the OAU conference. We believe expenditure will exceed revenue throughout 2002, yet the fiscal deficit is expected to fall to 3.3% of GDP, as an upturn in business activity—owing to the buoyant mining sector—increases revenue. We expect donor assistance to cover all of the financing gap in 2001- 02, as it has in recent years.

Monetary policy Monetary policy was loosened on April 24th because of the government’s concern that its tight monetary policy in the first quarter of 2001 had resulted in an overappreciation of the kwacha. By removing the requirement on foreign firms to exchange their profits into kwacha before transfering them overseas, which had greatly led to the appreciation, the government hopes this to stem any further significant depreciation. However, since the Bank of Zambia (the central bank), reduced the statutory reserve ratio requirement to 10%, from 15% in early April, real interest rates have fallen and the kwacha has lost value. In addition to the fluctuating interest rate, the budget target of 20.5% growth in narrow money supply (M1) during 2001 appears unrealistic, as does the IMF- advised broad money (M2) supply target of 17.5% for 2001. The target of 17.5% for annual inflation is also optimistic, because the kwacha is expected to weaken further in the forecast period—creating cost-push inflationary pressure—and the 2000/01 maize harvest will be lower than in 1999/2000, because of heavy rainfall earlier this year, which will lead to food price increases.

Economic forecast

International assumptions Prospects for the global economy remain mixed, following recent fears for the growth prospects of the US economy. We expect world GDP (on a purchasing power parity basis) to expand at a rate of 2.9% in 2001 and 3.8% in 2002, against a background of low levels of inflation. The outlook for copper— Zambia’s main export—in the forecast period is also mixed. Copper prices are expected to rise by 0.6% in 2001, to 81.8 US cents/lb (from 81.3 US cents/lb in 2000). They will rise by 4.3% in 2002 to 85.3 US cents/lb.

Zambia: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.9 3.8 OECD 3.1 4.0 1.7 2.5 EU 2.5 3.3 2.5 2.6

continued

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1999 2000 2001 2002 Exchange rates (av) ¥:US$ 113.9 107.8 124.3 123.0 US$:¤ 1.07 0.92 0.97 1.08 US$:SDR 1.37 1.30 1.32 1.36 Financial indicators ¤ 3-month interbank rate 2.97 4.48 4.43 4.39 US$ 3-month Libor 5.42 6.53 4.62 5.42 Commodity prices Oil (Brent; US$/b) 17.9 28.4 24.1 24.0 Gold (US$/troy oz) 278.8 279.3 258.8 255.0 Copper (US cents/lb) 71.1 81.3 81.8 85.3 Industrial raw materials (% change in US$ terms) –4.6 13.4 2.6 5.1

Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Economic growth Zambia’s growth prospects for 2001-02 are good: real GDP is forecast to grow by 6.2% in 2001 (from an estimated 3.1% in 2000) and by 5.3% in 2002, supported strongly by higher mining activity. Following privatisation, fresh investment, new technology and improved management for the copper mines will allow production to increase significantly in 2001. Combined with relatively stable world copper prices, this should help the mining sector to grow by 15% in 2001. Copper output is expected to rise further in 2002, leading to mining sector growth of 12%. However, agricultural growth will be less marked, at 1.2% in 2001 and 3%, in 2002.

The 2000/01 maize harvest will not match the large crop seen in 1999/2000, because of heavy rain in some areas and drought in others, and the reduction in planting acreage caused by low commodity prices and farmers’ debt. In the Copperbelt, manufacturing has received a boost from new capital investment, and during 2001 this will increasingly impact on manufacturers elsewhere in the country. Depending on the extent of mining firms’ local levels of procurement, we expect the sector to grow by 12% in 2001 and by 8% in 2002 (from 13.5% in 2000). Government consumption is expected to grow, in line with expanding economic growth, by 3.5% in 2001 and 2% in 2002.

Inflation The government’s inflation forecast, contained in the budget statement, is for an average rate of 17.5% in 2001. However, we expect inflation to increase by 28.4% in 2001 and 23.6% in 2002, despite falling world oil prices, because non-maize food costs are rising (many foodstuffs are imported) and the kwacha is expected to continue to weaken. The possibility of increased spending in the run-up to the elections—particularly if the MMD sees a serious challenge from the ZRP or UPND—will threaten our forecasts.

Exchange rates Despite significant appreciation in the value of the kwacha this year (by over 39% since January), following the introduction of exchange controls early in the year (which have since been dropped), the currency is forecast to resume its depreciation, from an average of ZK3,111:US$1 in 2000 to ZK3,395:US$1 in 2001 and ZK3,892:US$1 in 2002.

The Zambian government did little to defend the kwacha in 2000, but this year, owing to the forthcoming elections, it is expected to intervene again, following the removal of the exchange controls on April 24th. However, it will be constrained by the limited foreign-exchange reserves (US$240m in 2001 and US$255m in 2002) at its disposal.

Zambia: forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 2.2b 3.1 6.2 5.3 Gross industrial growth –5.1 4.6 11.0 8.4 Gross agricultural growth 6.9 1.8 1.2 3.0 Consumer price inflation Average 26.9 26.0a 28.4 23.6 Year-end 20.7 30.0 a 27.9 21.3 Short-term interbank rate 40.5 38.9 48.8 44.0 Government balance (% of GDP) –3.2b –5.7 –4.6 –3.3 Exports of goods fob (US$ m) 7590 800 1,039 1,180 Imports of goods fob (US$ m) 870 1,008 1,099 1,154 Current-account balance (US$ m) –193 –265 –112 –8 % of GDP –5.4b –7.4 –2.6 –0.2 External debt (year-end; US$ bn) 5.9 5.9 6.0 6.0 Exchange rates ZK:US$ (av) 2,388.0 3,110.8a 3,395.2 3,891.7 ZK:¥100 (av) 2,096.5 2,886.8 a 2,889.7 3,407.0 ZK:¤ (av) 2,544.2 2,873.9a 3,465.5 4,536.3 ZK:SDR (av) 3,265.5 4,103.3a 4,681.4 5,698.9

a Actual. b EIU estimates. c EIU forecasts.

External sector The current-account deficit is expected to improve from 7.4% of GDP (US$265m) in 2000 to 2.6% of GDP (US$112m) in 2001 and 0.2% of GDP (US$8m) in 2002. The improving trend is due mainly to higher export revenue from the mining sector, supplemented by increased tourist receipts.

On the external front, despite fluctuating copper prices, rising copper production in 2001 and 2002 will increase total export earnings from US$800m in 2000 to US$1.04bn in 2001 and US$1.18bn in 2002. Import costs will also rise in the forecast period, from US$1.01bn in 2000 to US$1.1bn in 2001 and US$1.15bn in 2002, mostly because of new capital inputs for the mining industry. The rising value of exports will also narrow the trade deficit from US$208m in 2000 to US$60m in 2001; a surplus of US$27m in 2002 is forecast.

Tourist numbers are expected to pick up sharply this year, in part because of the solar eclipse in June, but also because of Zimbabwe’s political and economic woes, which are causing many tourists to look elsewhere in the region. Zambia is well placed to benefit, because of the new Sun International hotel complex in Livingstone near Victoria Falls and its refurbished airport. This will help the deficit on the services account, which is forecast to improve from US$222m in 2001 to US$214m in 2002 (high transport costs remain a

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Zambia 13

barrier to the deficit falling further). The surplus on the current transfers account is also forecast to improve, from US$330m in 2001 to US$355m in 2002, on the strength of donor inflows. The deficit on the income account should grow to US$175m in 2002—from US$160m in 2001—as mining firms repatriate profits.

Late note Speaking on May 2nd at the close of the MMD’s national convention, Mr Chiluba said that though the MMD was certain of victory at the forthcoming elections, he would wait before deciding whether to stand again or not, in order to gauge the opinion of the electorate over his third-term bid. Mr Chiluba also told the party faithful that the MMD had decided to expel from the party the vice-president, Christon Tembo, and eight other cabinet dissenters (along with several MPs), for opposing the campaign to allow him to stand for a third term. This would allow the MMD to fill the seats at by- elections with Chiluba loyalists (strengthening their position in parliament). The expulsions came a day after the Lusaka High Court granted a temporary injunction against any such action. However, the interim injunction is expected to be heard fully on May 4th, when it may be overturned.

Another important development is the decision taken by the MMD dissenters to impeach Mr Chiluba. The former local government minister, Ackson Sejani (sacked by Mr Chiluba in early March), and his fellow MMD MP, Mike Mulongoti, gave the parliamentary speaker, Amusaa Mwanamwanbwa, a notice of motion on May 3rd, signed by more than one-third of MPs, to impeach Mr Chiluba for alleged misconduct. The speaker has 21 days to decide whether the allegations warrant a special tribunal. Parliament has been recalled to debate the issue and, if 101 MPs vote to dissolve parliament, a new legislative election must be called within 90 days. The impeachment motion is unprecedented in independent Zambia, and will prove a major test of the strength of parliament and the judiciary over the executive arm of government. Describing this as a crisis may be premature, but all the ingredients are falling into place.

The political scene

The MMD chooses The ruling party, the Movement for Multiparty Democracy (MMD), voted on Mr Chiluba as its candidate April 30th at its special national convention to amend its constitution and nominate the president, Frederick Chiluba, as its candidate in the presidential election in October. The vote in favour, of around 80%, surpassed the two- thirds majority that any MMD constitutional amendment requires. However, the more difficult task of persuading over two-thirds of MPs to support an amendment to the national constitution, which limits a president to two terms, lies ahead.

He appears to want a third Mr Chiluba has still not said publicly whether he intends to seek a third term presidential term in office. His actions, however, strongly suggest that he would like a third term. In late February and early March, Mr Chiluba twice reshuffled his cabinet after sacking several cabinet ministers known to oppose a third term, including the commerce minister, William Harrington, the local government minister, Ackson Sejani, the deputy defence minister, Mike Mulongoti, and the deputy home affairs minister, Edwin Hatembo. He promoted those known to support it, such as the former deputy foreign affairs minister, Valentine Kayope, who became minister for science and technology. Zambia’s district administrators (DAs), who were controversially appointed by Mr Chiluba last year (May 2000, page 13), and report directly to him, are believed to be busy mobilising support for a constitutional amendment, particularly within the MMD. The DAs have also been courting traditional leaders in their areas, encouraging them, with varying degrees of success, to state publicly their support for a third term. Meanwhile, militia calling themselves MMD Youth have jostled or beaten up various prominent anti-third term MMD members, including the legal affairs minister, Vincent Malambo, the mines minister, Syamukayumbu Syamujaye (who suffered a broken arm at the convention) and the agriculture minister, Suresh Desai. While Mr Chiluba has made various appeals for calm debate about the third term, few MMD youths have been arrested or disciplined.

Civil society mobilises to The campaign from within the MMD to amend the constitution to allow oppose a third term Mr Chiluba to stand again has galvanised Zambia’s lethargic civil society organisations into action. A coalition of influential civic organisations, including the Law Association of Zambia, the Zambia Episcopal Conference and the Non-Governmental Organisation Co-ordinating Committee, formed early this year, and after a week-long, well-attended public debate in Lusaka, adopted the “Oasis Declaration” on February 24th; and a rally in Lusaka on April 22nd, organised by opposition and civil society groups, drew around 15,000 people. Such crowds have not been seen at a civic gathering in Zambia since 1991, when civil society organisations, and particularly the churches, played an important role in enabling Mr Chiluba to come to power, by ensuring that the outgoing president, Kenneth Kaunda, and the then ruling party, the United National Independence Party (UNIP), caved in and allowed political liberalisation and a (mostly) free and fair election. The Oasis declaration emphatically opposes the third term, arguing that since the 1970s there have been repeated calls from the Zambian public, made to three

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constitutional review commissions, to limit the presidential tenure, and therefore, a third term would be a violation of the people’s will. The declaration is also supported by the Zambia Congress of Trade Unions and, it appears, by many ordinary Zambians, who have enthusiastically taken up the suggestion of the Oasis coalition that they make their support public by wearing green ribbons, and sounding their vehicle horns on Friday afternoons.

Some MMD MPs oppose a Provincial branches of the MMD discussed the third term bid at a series of third term provincial conventions in January and February; seven decided in favour and two—Lusaka and Southern province—were opposed. The MMD’s national executive committee discussed the issue in late March and resolved to refer it to the special convention of the party scheduled for April 28th-29th. The results of the provincial conventions, and the harassment to which the party leadership in Southern and Lusaka provinces have since been subjected, led most observers to conclude that the pro-third term lobby would win the vote at the special national convention, which is what happened. However, in the run-up to the convention, opponents of a third term filed an unsuccessful court challenge to the convention, arguing that the MMD needed to give 90 days’ notice rather than 30 days. Their fear was that MMD members who might vote against Mr Chiluba’s adoption were likely to be excluded from the regional delegations attending the conference. In the event, 11 cabinet dissenters and over 300 of the 1,400 delegates to the convention were intimidated into staying away.

Constitutional amendments in Zambia require a two-thirds majority in parliament; and the MMD holds 131 of the parliament’s 150 seats, well over two-thirds. Yet it is by no means certain that an amendment to allow Mr Chiluba to run again will be passed. In mid-April, emboldened by the Oasis Declaration, 50 MMD MPs, including 8 ministers and 13 deputy ministers, joined opposition MPs in signing a petition stating their opposition to a third term. Numbering around 80, there are enough opponents of the third term in parliament to block a constitutional amendment. The ministers who have signed the petition include heavyweights against whom Mr Chiluba has so far hesitated to take action, including Mr Malambo, the defence minister, Godfrey Miyanda, the vice-president, Christon Tembo, and the labour and social services minister, Edith Nawakwi. (See Late note at end of Outlook 2001-02.)

Donors say they support Campaigners against a third term have sought to elicit from donors explicit the third term debate statements about their preference for the constitution to remain unchanged. Though donor organisations have remained generally quiet on this, statements that have been made have argued that the debate about the third term is a sign of the deepening of Zambian democracy, prompting speculation that the donors would prefer Mr Chiluba to retain the presidency than to see the MMD become factionalised in its search for a new leader (which is in fact now happening). However, in a joint statement, the foreign missions in Lusaka of Denmark, Finland, Ireland, Netherlands, Norway, Sweden, the United Kingdom and the US expressed their support for Mr Chiluba’s earlier intention of stepping down at the expiry of his term of office this year. This is the strongest statement to date against him standing again, and may point to these

governments giving clear notice that their continued financial support should not be taken for granted.

The Zambia Republican Two opposition parties, the Zambia Alliance for Progress (ZAP) and the Party is formed Republican Party (RP), merged on February 26th, forming the Zambia Republican Party (ZRP). The interim president of the ZRP is the RP’s founder, and a former MMD minister, Ben Mwila (also Mr Chiluba’s uncle), who was expelled from the government and the MMD last year for making public his presidential ambitions. Ben Kapita, the ZAP president, is the ZRP’s national chairman. The merger is to the advantage of both parties, since it gives the ZAP a public profile it has hitherto lacked while it makes the RP appear more than just a group of disgruntled MMD members (October 2000, page 12). The ZRP now challenges the United Party for National Development (UPND), lead by Anderson Mazoka, to be Zambia’s main opposition party. Although at least 40 MMD MPs are thought to support Mr Mwila, under the Zambian system they cannot cross the floor in parliament to join the ZRP, but must instead vacate their seats and recontest them in by-elections in the name of their new party. This has yet to take place and the ZRP currently has no seats in parliament.

The UPND distances itself As expected (January 2001, page 14), Kenneth Kaunda’s son, Tilyenji Kaunda, from opposition alliances was appointed president of the United National Independence Party on April 5th by the party’s central committee, replacing Francis Nkhoma, who had held the position since March 2000. The new leader’s primary asset appears to be his family name, but party officials insist that Mr Kaunda has the talent required to revive UNIP. During the 1990s, UNIP was rarely prepared to work with other opposition parties, but in a sign that this is changing, Mr Kaunda shared the podium with Mr Mwila at a rally in Kafue in mid-March. Tellingly, the UOPND leader, Mr Mazoka, did not speak at the rally, prompting accusations from UNIP and the ZRP that he was not interested in joining forces to defeat the MMD. On April 19th Mr Mazoka told the UPND that if it failed to win power this year it would probably never gain a significant number of seats, raising doubts about his long-term commitment to politics.

A new inter-governmental Mr Chiluba travelled to Windhoek, on February 10th for a meeting with the forum Namibian president, Sam Nujoma, and the Angolan president, Eduardo dos Santos. The three agreed to establish a tripartite mechanism to address security issues on their common borders. The meeting, which all three presidents reported as successful, showed that long running diplomatic efforts by the Zambian and Angolan governments to improve relations, which have been severely tested by the heavy fighting between the Angolan armed forces and UNITA rebels on and around the Zambian border, are finally beginning to pay off. The first ministerial meeting of the tripartite mechanism was held in Luanda in early March, attended by the Zambian foreign minister, Keli Walubita. He went on to host a second meeting in Lusaka, on April 22nd-23rd. Meanwhile, hundreds of Angolan refugees have crossed into Zambia, fleeing a new government offensive against the UNITA rebels on the Angolan side of the border; dozens of Angolan soldiers, apparently tired of the conflict, were among them. The refugees’ arrival has intensified the pressure on Zambia’s already swollen refugee camps, where the World Food Programme has

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repeatedly warned that it lacks adequate supplies to feed everyone properly. On April 3rd Mr Walubita met the Angolan foreign minister, João Miranda, in Luanda to discuss the implications of the new offensive, and called for an urgent meeting of the tripartite mechanism to discuss the matter further, while at the same time giving a public assurance that relations between Zambia and Angola remained healthy.

Low turnout at DRC peace Mr Chiluba’s decision in January to allow around 4,000 soldiers from the summit in Lusaka armed forces of Democratic Republic of Congo (DRC), including suspected members of the Rwandan Interahamwe militia, to return to DRC, after they had fled to Zambia following their defeat by the Rwandan army in Pweto (January 2001, pages 14-15), infuriated the Rwandan government, which claimed that Mr Chiluba was taking sides in the conflict. The Rwandan government boycotted a summit held in late February in Lusaka to discuss the war in DRC, which had been called by Mr Chiluba in his capacity as official mediator of the peace process. Also absent were the Ugandan president, Yoweri Museveni, Mr dos Santos, and the leadership of the two main DRC rebel movements, though the DRC president, Joseph Kabila, President Mugabe of Zimbabwe and Mr Nujoma were present. With so many key players absent, the summit achieved very little, but did at least confirm Mr Chiluba’s position as mediator, despite earlier speculation in the South African press that he had been usurped by the South African defence minister, Mosiuoa Lekota. Mr Chiluba and the Rwandan president, Paul Kagame, have subsequently met to discuss their differences, and the official position of both governments is that past misunderstandings are now behind them. However, in private, the distrust between the two governments remains.

Economic policy

Tourism and agriculture The 2001 budget was presented by the finance minister, Katele Kalumba, on are highlighted in budget January 26th. With the mining sector in private hands, and donor agreement for extensive debt relief conditionally secured, Mr Kalumba turned his attention to agriculture and tourism, announcing new measures to assist them. Tourism operators will benefit from a range of tax concessions, particularly in Livingstone, while grants have been allocated to small-scale farmers for input packages and “empowerment”, and ZK10bn (US$2.7m) to the Ministry of Agriculture to purchase domestic agricultural produce.

VAT de fe r me nt is One tax measure welcomed by the business community has been the reintroduced reintroduction of the VAT deferment scheme on capital goods and selected raw materials (the standard rate of VAT remained unchanged in the budget speech, at 17.5%). Previously importers have had to pay import VAT at the point of entry and then try to secure a refund, which caused many firms major cash- flow problems and lengthy administrative delays.

The budget deficit is External debt relief provided under the IMF and World Bank’s heavily indebted forecast to fall poor countries (HIPC) initiative will reduce Zambia’s debt servicing

commitments by US$260m in 2001-05 (US$52m per year), as a result of which Mr Kalumba projected a budget deficit of only 0.8% of GDP this year, compared with an estimated 2.3% of GDP in 2000. (An IMF press release on April 17th stated that the fiscal deficit was 7.3% of GDP in 2000, and forecast a deficit of 5% of GDP in 2001.) At the same time, the debt relief has enabled significant increases in budgeted social sector expenditure, and in other poverty reduction measures, particularly in capital expenditure, where a large overall increase has been budgeted for this year. The budget projected total expenditure of ZK5.02trn (US$1.48bn), of which 52% is to be externally financed, and total revenue of ZK2.31trn. Even allowing for a forecast inflation rate this year of 28%, this implies a real annual increase in expenditure in 2001 of over 30%. The proportion of this to be financed externally is also much higher than in 2000, when it was around 35%, which increases donor influence over economic policy. Domestic revenue is also set to increase, to ZK4.92trn, reflecting increased commercial activity due to new investment in the Copperbelt and higher growth in tourism.

Zambia: government finances (ZK bn) 2000 2001 Budget Outturn Budget Total revenue 2,833 n/a 4,917 Tax revenue 1,600 1,931 2,276 Non-tax revenue 37 22 37 Tax arrears 191 n/a 0 Foreign financing 1,005 n/a 2,604 Total expenditure 2,957 n/a 5,016 Personal emoluments 500 n/a 620 Recurrent department charges 452 n/a 671 Grants & other payments 250 n/a 478 Pension gratuities 26 n/a 36 Capital expenditure 878 n/a 1,894 Constitutional and statutory 851 n/a 1,317 Source: Ministry of Finance.

Specific budget commitments

• An increase in domestically financed capital expenditure to ZK277bn (US$81m), compared with ZK228bn in 2000, to be targeted at infrastructure for reducing poverty, in line with the goals of the interim poverty reduction strategy paper (PRSP)

• The rehabilitation of Zambia Railways’ assets

• The restructuring and recapitalisation of the Development Bank of Zambia

• An increase in international reserves by US$150m

• The allocation of ZK20bn for redundancy payments under the public-sector reform programme

• The allocation of ZK207bn for Zambia Consolidated Copper Mines’ debts (compared with ZK423bn in 2000), and of ZK40bn for the government’s debts to suppliers

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Privatisation commitments In contrast to previous years, there was little in the 2001 budget about are under threat privatisation, prompting fears among donors that the government’s commitment to the process is waning. The fears intensified when on February 21st Mr Chiluba told a meeting in Ndola that the government would contest the sale of almost all the remaining large parastatals—Zambia Electricity Supply Corporation (Zesco), Zambia National Commercial Bank (ZNCB), Indeni oil refinery, Zambia National Oil Company (ZNOC), Tanzania-Zambia Railways Authority and Zambia Telecommunications Company (Zamtel)—because the firms were vital to the security of the country.

The IMF and World Bank were concerned enough to ask the Zambian government to state its commitment to the privatisation process, which Mr Kalumba did in a letter of intent to the IMF on March 29th, in which he restated the government’s prime economic policy commitment of achieving macroeconomic stability and poverty reducing growth through the interim PRSP. In his letter, Mr Kalumba referred to most of the utilities (January 2001, page 18) mentioned by Mr Chiluba.

The troubled banking Starting with the troubled ZNCB, Mr Kalumba said that the plans of the sector Zambia Privatisation Agency (ZPA) for the sale of ZNCB were to be approved in the near future, and that the ZPA would be instructed to proceed by the end of 2001. In the meantime Mr Kalumba said, the Bank of Zambia (the central bank) would improve its supervision of the bank (it is already under daily monitoring), which is being kept liquid by having VAT receipts channelled through it. Mr Kalumba also commented on the troubled Union Bank, which he said had been taken over by the central bank and its operations suspended, pending a possible recapitalisation and takeover by another bank. In addition, Commerce Bank is currently in liquidation. The Bank of Zambia is also considering recommendations to improve bank supervision, regulatory enforcement and action to bring Zambia into compliance with the Basel core principles.

The energy sector is to be Mr Kalumba’s letter of intent also recommitted the Zambian government to liberalised this year liberalising the energy sector, saying that the private sector was free to import crude oil as well as petroleum, and pledging that ZNOC would soon cease to import fuel, except for strategic reserves. Mr Kalumba said that the government intended ZNOC’s main function in future to be to maintain these reserves. Mr Kalumba stated that by the end of October 2001 the state would offer for sale shares in the Indeni oil refinery, to reduce its stake to under 50%, and offer the Tazama pipeline for sale or concession. Regarding Zesco, Mr Kalumba reported to the IMF that the ZPA had submitted a proposal for its divestiture to cabinet, and that a directive for it to proceed would be issued shortly.

Uncertainty over Zambia Neither Zambia Railways nor Zamtel were mentioned in Mr Kalumba’s letter. Railways and Zamtel Bid documents for Zambia Railways concessions were supposed to have been ready on February 12th, but have so far not been issued. Meanwhile, the rehabilitation of Zambia Railways’ assets, which is supposed to run in tandem with the concessioning process, is under way. In late February the World Bank released an initial US$2.5m of a total of US$30m it has committed for rehabilitation, and the government says the process is moving roughly

according to schedule. The Bank’s decision appears to support the process, but it is thought that the Bank wants the timetable to be more closely followed.

IMF approves the release of Despite these omissions, on April 17th the IMF announced that it had US$126m under the PRGF completed the second review of Zambia’s programme under the poverty reduction and growth facility (PRGF) and approved the release of the third annual arrangement of US$126m to support the government’s economic programme for 2001. Approximately US$32m was released immediately (see Foreign trade and payments).

The domestic economy

Economic trends

Government forecasts real In his budget speech on January 26th, Mr Kalumba said that real GDP had GDP growth of 5% for 2001 grown by 3.5% in 2000, and predicted that growth would increase to 5% this year owing to strong growth in the mining sector. The main contributor to overall growth in 2000 was the manufacturing sector, which grew by an estimated 13.4% in the year, partly on the strength of increased demand for basic and fabricated metal products on the Copperbelt following privatisation. However, the food, beverages and tobacco sub-sector is still the largest single component within manufacturing, and accounted for 66% of the sector’s total value in 2000. Tourism grew by 7.2% in 2000, but from a low base. 443,000 foreign tourists entered Zambia in 2000, 40,000 more than in 1999, but this is significantly below the millions enjoyed by Kenya, South Africa and—until recently—Zimbabwe. Agriculture grew by only 1.8% in 2000, reflecting a fall in local agricultural commodity prices which masked an impressive increase of 11.2% in maize production and an increase of 8% in wheat production. By far the economy’s worst performer was mining, whose output contracted by 5.1%, despite increased international prices for copper and cobalt, owing to lower production of both metals during the transition period between state and private ownership.

Inflation rate remains The 2001 budget projected a fall in the rate of inflation this year to 17.5%. The above forecast end-2000 inflation rate was 30%, (above the 14% forecast in the 2000 budget). In its Economic Report 2000, published in January, the Ministry of Finance and Economic Development blames the high inflation rate in 2000 primarily on external factors, such as the strengthening of the US dollar, but also concedes that growth in the money supply was much higher than forecast. According to the report, broad money supply (M2) grew by 53.5% in 2000, compared with a target of 25.2%, reflecting the expansion of domestic credit, which rose by 69.5% in the year, to ZK2.55trn (US$819m). Another major inflationary factor was the depreciation of the kwacha, which nominally fell by 58.3% in 2000, compared with a nominal 13.8% depreciation in 1999.

Tight monetary policy This year the monetary authorities are taking interventionist measures to strengthens the kwacha defend the kwacha. To reduce liquidity in the economy, the authorities have

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several times raised the core liquid asset and statutory reserve ratios required of commercial banks: the ratios currently stand at 25% and 10% respectively. Open market operations, using Treasury-bill and bond auctions, have also been used to engineer an increase in base rates and thus demand for kwacha. The yield on the 28-day T-bill is currently 43.99%, up from 10.07% in early January. Nominal base rates have inevitably risen too, peaking at 58% during a period when the statutory reserve ratio was increased to 35% (in mid-March). They subsequently fell to 49% by early April.

In addition, the government required all major foreign-exchange holders to allow the Bank of Zambia to auction the currency through its dealing window, to smooth market flows and prevent the selling tactics of major foreign- exchange suppliers from depressing the value of the kwacha. The net impact of these initiatives on the kwacha’s value has been dramatic. From a low of around ZK4,400:US$1 in mid-January, the kwacha has since appreciated by over 30%, peaking at ZK3,030:US$1 in late March. The currency’s strong recovery prompted concern that the monetary authorities had gone too far, and that the kwacha’s new strength was harming business interests. Most Southern African currencies have depreciated substantially this year, and it was feared that if the kwacha grew any stronger, it would excessively assist regional exporters to Zambia, as well as harm Zambia’s exports. In addition, it was recognised that real interest rates were too high and would damage growth. Monetary policy was therefore eased in late March, and the kwacha began to depreciate: it is currently trading at around ZK3,140:US$1. Of concern to the monetary authorities, though, is the speed with which the kwacha has fallen since monetary policy has been eased.

Mining and energy

Konkola loses US$9.2m in The subsidiary of Anglo American Corporation (AAC), Konkola Copper Mines its first operating year (KCM), which owns Konkola Deep and Nchanga released its operational results to December 31st 2000 at the end of March. KCM reported that in its first nine months, finished copper production was 125,385 tonnes, 16% lower than the 149,334 tonnes it had initially forecast. Cobalt production in the same period however was 1,659 tonnes, compared with the 1,432 tonnes forecast. KCM blamed the shortfall in copper production on delays in receiving spares and equipment, and the fact that the assets were in a worse state than had been expected. KCM spent US$70m refurbishing its assets in 2000, and incurred an after-tax loss for the year of US$9.2m. KCM has forecast copper production of 240,000 tonnes this year, and has nearly completed its feasibility study for the development of Konkola Deep, which is expected to require investment of US$800m. The study is due to go before the board of AAC in July. Operations were partly shut down following a landslide on April 8th in which ten miners were killed.

Zambia: copper and cobalt production and prices

1999 2000 Copper Output (tonnes ‘000) 265,880 256,179 Average price (US cents/lb) 70 80 Cobalt Output (tonnes ‘000) 3,761 3,333 Average price (US$/lb) 11.7 11.8 Source: Bank of Zambia.

In mid-March the Canadian firm, First Quantum Minerals (FQM), which is the majority owner of Mopani Copper Mines (MCM), announced revenue of US$91m for the year 2000, and profits of US$7m, largely on the back of its Zambian operations. Demonstrating that one reason it invested in Zambia was to position itself for the far richer mineral deposits in DRC’s Katanga province. MCM announced in February that it planned to go into partnership with the DRC mining parastatal, Gécamines, to jointly exploit copper and cobalt deposits that traverse Zambia’s Congolese border at Luansobe near Mufulira. FQM already owns the nearby Katangese Dikulushi mine, which should facilitate the planned project.

Luanshya floods as The Luanshya mine has always had water problems, but with maintenance RAMCOZ and ZNCB wrangle almost at a standstill after its owner, RAMCOZ, was placed under receivership by its main creditor, Zambia National Commercial Bank, in November 2000 (January 2001, page 21), it began flooding badly early this year. There was then a delay getting pumps from South Africa, and pumping only began in March, by which time there had been extensive damage, not only in the mine, but in

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Luanshya town, where some residential areas were cut off, and others submerged completely. Local residents and mine workers are reported to be angry, and have called on the government to repossess the mine. However, the management of RAMCOZ filed a claim in the Lusaka High Court on March 26th demanding US$619m in damages from ZNCB and the receiver, Grant Thornton, and preventing them from advertising the sale of its Luanshya assets. RAMCOZ argues that it paid ZNCB for insurance against flooding and that it therefore owes RAMCOZ for all the damage that has since been caused. RAMCOZ further claims that this is more than the sum it owes to ZNCB, and that the receivership should therefore be rescinded. ZNCB and Grant Thornton have since filed a counter claim and the case is expected to take a several months to resolve.

ZCCM is alleged to have lost The London newspaper Financial Times reported in February on a deal between US$150m ZCCM and a Bahamas-based commodity trading firm, Metal Resources Group (MRG), which apparently involved ZCCM selling MRG cobalt well below the market price prior to privatisation, resulting in losses which may have totalled US$150m. The background to the report is that in June 2000 the IMF asked the Zambian government to engage auditors to investigate irregular cobalt sales, and linked the investigation to Zambia’s ability to reach the HIPC decision point. The Zambian government obliged, and an interim audit revealed that 40% of cobalt sales occurred in what the auditors termed an “imprudent and irregular” manner. According to the audit, ZCCM sold MRG the cobalt for just US$6/lb in January 1999, when the international price was around US$12/lb. MRG has strongly denied that it ever bought cobalt from ZCCM below market price. The Financial Times questioned the reasons why Zambia was granted the HIPC debt relief when the interim audit was so unfavourable.

Final audit on cobalt sales The Zambian government’s initial reaction was to denounce the leak of the available in June interim audit as “distasteful”, and insisted that the audit’s findings were incomplete. However, Mr Kalumba told the Zambian parliament on March 1st that the government had instituted legal proceedings against MRG. This statement was later thrown into doubt when Mr Kalumba told the IMF on March 29th that the final audit would be completed in June and only then would a decision be taken on legal action. This alleged fraud appears to suggest that corruption within ZCCM may be likely. However, more ominous is the fact that substantial revenue from cobalt in 1999-2000 would have affected Zambia’s external debt/export ratio, and thus its eligibility for HIPC debt relief.

Infrastructure

Indeni oil refinery is The refusal of oil importing companies to make use of the government-owned non-functional Indeni oil refinery since it resumed operations in December 2000 (January 2001, pages 21-22) was said by the government in March to be losing it US$10m per month in tax. The deputy energy minister, Celestino Chibamba, said that Indeni was essentially non-functional because of its failure to acquire feed stock, and most workers were being employed on a part-time basis only.

According to Mr Kalumba’s letter of intent to the IMF, the government will sell its controlling stake in Indeni this year (see Economic policy).

Agriculture

Heavy rainfall damages the Heavy rainfall over most of Zambia during February and March, and the maize crop subsequent flooding of the Zambezi and Luangwa rivers, has affected parts of most provinces, according to the UN’s Food and Agriculture Organisation (FAO) in its latest update. However, the FAO reports that recent prolonged dry weather in areas of Southern and Western provinces will result in poor harvests there. Floods and drought are estimated to have affected at least 1.5m people. The flooding once again placed the Kariba dam under huge strain, prompting calls for its floodgates to be opened. Fearful of the consequences downstream, particularly at the Cahora Bassa dam in Mozambique, the Mozambican government appealed to the Zambian government not to open the floodgates. Much to the relief of the Mozambican authorities, Zambian officials opened only two of Kariba’s four floodgates. The FAO predicts that this season’s national maize crop will be smaller than the bumper harvest in 1999/2000 because of the heavy rainfall and a decline in the area planted (due to low prices, large carry-over stocks and farmers’ debt caused by low market prices). This is likely to make maize imports necessary later in the year. Zimbabwe, meanwhile, is reported to be planning to import up to 1m tonnes of maize from Zambia and South Africa to compensate for its poor crop (also badly affected by excessive rains), which may exacerbate the problem of low maize stocks in Zambia.

Foreign trade and payments

IMF approves PRGF In the press release that accompanied the IMF’s announcement that it had payment approved the third annual arrangement under the poverty reduction and growth facility, the Fund expressed its hope for a strong political commitment to expenditure control, measures to improve expenditure management, and appropriate follow-up action when an audit investigation into an apparently large fraud involving cobalt sales is finalised (see Mining and energy). The IMF also noted Zambia’s progress in developing its poverty reduction strategy paper, and said it looked forward to further consultations with stakeholders, particularly at provincial level, and a high-level political steering group to ensure that deeds followed words in implementing the strategy. However, though generally supportive of the government’s efforts to date, the Fund has disbursed only US$38m of the US$322m approved back in March 1999. This indicates the generally poor level of target attainment. Nevertheless, the immediate release of US$32m of funds has provided strong financial support to the economy, particularly to the kwacha exchange rate and the current- account position.

Further fund releases can be expected under this third annual arrangement; however, as the scheduled elections draw near, the government’s commitment

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to the privatisation programme may come under pressure (see Economic policy). This might postpone the full release of funds, which would not be unexpected.

Foreign-exchange reserves According to the IMF, the foreign-exchange reserves jumped spectacularly in increase December 2000, to US$222.5m from US$50.3m in November and a low of US$8.7m in the first quarter of the year. The EIU attributes this large increase to the raised level of export receipts, stemming from the buoyant mining sector and, less so, to donor inflows.

Zambia ratifies the The Zambian government ratified the Southern African Development SADC-SACU trade protocol Community-South African Customs Union (SADC-SACU) trade protocol on January 30th. The protocol envisages free trade within the region by 2012. According to David Mpamba, the tourism minister, the preferential access to the South African market stemming from the protocol will enable Zambia to increase its exports by over US$100m a year, though this assumes high levels of both supply and demand for Zambian exports. One of the major benefits of the protocol to Zambia is that it is now permitted to export 13,500 tonnes of sugar a year to SACU members (the EU is still considering Zambia’s application to increase its sugar exports to it from 10,000 tonnes to 50,000 tonnes per year). The SADC-SACU protocol came into force on January 25th 2000, after it was ratified by the required two-thirds of member states (October 2000, pages 23-24), but after considerable legal wrangles, was only implemented in March this year.

Non-traditional exports fall The Zambia Export Growers Association (ZEGA) warned in mid-February that the horticultural and floricultural industries, which contribute an important part of Zambia’s non traditional exports (NTEs) were in danger of collapse. Earnings from NTEs fell by 3% in 2000 to US$279m for a variety of reasons, including the continued conflict around the Great Lakes region (which has dampened demand for Zambian cement and left Zambian goods marooned at Mpulungu harbour). Another major factor for ZEGA and other export associations are Zambia’s high production costs and the lack of affordable credit, which ZEGA says has prohibited the sector’s growth and forced five rose farms into receivership. ZEGA is also complaining about erratic energy supplies and the fact that the VAT deferment scheme (see Economic policy) applies to only one of its major inputs.

Aid and debt news • On April 4th the European Investment Bank approved a credit of ¤20m to the Bank of Zambia, to provide long-term credit for small and medium-sized businesses. The loan will be administered by the Africa Banking Corporation, Barclays Bank, Indo-Zambia Bank and the Industrial Credit Company.

• In early February France cancelled US$122m of Zambia’s bilateral debt, following its reaching HIPC decision point. At the same time, Canada granted a partial debt write-off worth C$88.7m.

• In early March Canada pledged US$3.7m to finance environmental management in mining areas of the Copperbelt, and to help pay for the

national census. The World Bank in April also promised further assistance for the Copperbelt, primarily to complete ongoing projects.

• On April 5th the US government announced that it was providing Zambia with US$6m to help tackle HIV/AIDS. The money will fund a variety of programmes including assistance to orphans, counselling, lorry-driver and sex worker programmes. HIV prevalence in Zambia is estimated at around 20%.

• In early February the Swedish government released US$15m, primarily to assist the privatisation of Zambia Railways, but also for projects in agriculture, health, urban development, the media and the judiciary.

EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Democratic Republic of Congo 27

Democratic Republic of Congo

Political structure

Official name République démocratique du Congo

Form of state Unitary republic

Legal system All executive, legislative and military powers are vested in the president. The judiciary remains independent, but the president has the power to appoint and dismiss judges. Following a coup in May 1997, the previous transitional constitution was abolished. A new draft constitution was approved by the Constitutional Commission in March 1998

National legislature A new parliament, the Assemblée constituante et législative-Parlement de transition, was created by President Laurent Kabila in August 2000, packed with his own appointees

National elections July 1984 (presidential) and September 1987 (legislative). Presidential and legislative elections were due in April 1999 but have been postponed indefinitely. Government plans to hold new elections have been made and withdrawn at short notice

Head of state The president, Joseph Kabila

National government The president is head of government. There is no prime minister. The government was last reshuffled in April 2001

Main political parties The ruling Alliance des forces démocratiques pour la libération du Congo-Zaïre (AFDL) was officially dissolved in April 1999 after Laurent Kabila established new grass-roots structures, the comités du pouvoir populaire (CPPs). Rebels opposed to the government have formed the Rassemblement congolais pour la démocratie (RCD), which in effect split in May 1999, as well as the Mouvement de libération du Congo (MLC). The Union pour la démocratie et le progrès social (UDPS) remains a strong opposition voice

President & head of the executive Joseph Kabila

Agriculture André Philippe Futa Civil service Benjamin Mukulungu Internal affairs Mira Ndjoku Mines & petroleum Simon Bawanganyo Tumawako Defence Irung Awan Education Kutimisa Kiota Energy Georges Buse Falay Environment Faloman Banamuhere Foreign affairs & international co-operation Léonard She Okitundu Finance economy & budget Matungulu Nguyamu Health Mashako Mamba Human rights Ntumba Luaba National security & public order Mwenze Kongolo Press & communication Kikaya Bin karubi Post & telecommunications Philipe Kuwutama Mawokos Public works Nkodi Mbaki Plan & reconstruction Denis Kalume Numbi Transport Dakarudino Wakale Minada

Central Bank governor Jean-Claude Masangu

Economic structure

Annual indicators

1996 1997 1998a 1999a 2000b GDP at market prices (NZ bn)c 306,637 792,154 18.9 70.0 380.0 Real GDP growth (%) 0.9d –6.4 –3.5e –14.5 –15.0 Consumer price inflation (av; %) 659 176 147e 333e 540 Population (m) 45.2d 46.6d 48.2 49.4a 50.6 Exports fobe (US$ m) 1,469 1,290 1,189 1,167 960 Imports cife (US$ m) 1,356 994 975 771 660 Current-account balance (US$ m) –521a –658a –583 n/a n/a Reserves excl gold (US$ m) 83 n/a n/a n/a n/a Total external debt (US$ m) 12,826 12,330 12,929e n/a n/a External debt-service ratio, paid (%) 2.7 0.9 1.2e n/a n/a Copper production (‘000 tonnes) 40.2 37.7 38.2e 31.2 33 Cobalt production (‘000 tonnes) 6.0 3.0 3.9e 2.3 3.1 Diamond production (m carats) 22.2 22.0 26.0e 20.1 18.0 Exchange rate (av official; FC:US$)c 52,400 145,988a 1.6e 4.0e 16.5e

April 26th 2001 FC50:US$1 (fixed official rate); FC255.5:US$1 (parallel rate)

Origins of gross domestic product 1997 % of total Components of gross domestic product 1995 % of total Agriculture 57.9 Private consumption 81.0 Industry 16.9 Public consumption 4.9 Services 25.2 Gross investment 9.4 GDP at factor cost 100.0 Exports of goods & services 28.2 Imports of goods & services –23.5 GDP at market prices 100.0

Principal exports 1999 fobf US$ m Principal imports 1999 fobf US$ m Diamonds 520 Consumer goods 263 Copper & cobalt (Gécamines) 60 Capital goods 110 Petroleum 99 Raw materials 115 Coffee 91

Main destinations of exports 1999 fobf % of total Main origins of imports 1999 fobg % of total Belgium 62.0 South Africa 28.4 US 18.5 Belgium 13.5 Finland 4.2 Nigeria 8.9 Italy 4.0 Kenya 6.6 a Official estimates. b EIU estimates. c From 1998 in FC m; the franc congolais (FC) replaced the nouveau zaïre (NZ) on June 30th 1998 at the rate of NZ100,000:FC1. d Official estimate. e Actual. f IMF, Direction of Trade Statistics; based on partners’ trade returns, may include exports from rebel-held areas; differs from local trade figures. g Banque Centrale du Congo.

Quarterly indicators

1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Wholesale prices Coffee, US (US cents/lb) 7.4 67.7 62.2 63.3 50.1 44.7 40.1 33.7 Copper, LME, (US cents/lb) 63.9 66.5 76.1 78.9 81.5 78.9 85.0 83.8 Official exchange rate FC:US$ (end-period) 2.95 4.50 4.50 4.50 9.00 23.50 23.50 50.00 Sectoral trends Mining production (annual totals) Copper in concentrates ( ‘ 0 0 0 t o n n e s ) ( 3 1 . 2 ) ( 3 3 . 0 a ) Zinc (‘000 tonnes) ( 1.2 ) ( 1.2a ) D i a m o n d s ( m c a r a t s ) ( 2 0 . 1 ) ( 1 8 . 0 a ) Coffee production (annual totals; ‘000 tonnes) ( 45.6 ) ( 36.0a ) Foreign tradeb (US$ m) Exports fob 252.5 266.9 309.4 307.3 285.2 297.4 358.0 n/a Imports cif –169.9 –153.9 –181.8 –160.0 –184.0 –178.1 –198.4 n/a Trade balance 82.6 113.0 127.6 147.3 101.2 119.3 159.6 n/a a Estimate. b DOTS estimates.

Sources: World Bureau of Metal Statistics, World Metal Statistics; Food and Agriculture Organisation; IMF, International Financial Statistics; Direction of Trade Statistics.

Outlook for 2001-02

Domestic politics Now that the president of the Democratic Republic of Congo (DRC), Joseph Kabila, has formed his own government all eyes will be on him and his new team to see whether they are committed to and capable of making a real break with the past and leading the country to peace and national reconstruction. Although Mr Kabila seems to have consolidated his power to some extent and now appears to be more in control, powerful forces such as the economic and political interests of his allies, Angola and Zimbabwe, will continue to influence government policy. Mr Kabila has won over some sceptics by sacking controversial figures from his late father’s government. However, the presence in the government of such heavyweights as Mwenze Kongolo, the minister of state for national security and public order, indicate that he will have to strike a balance between the old and the new in order to maintain stability. A further risk is that there are powerful elements who see their interests threatened by Mr Kabila and who do not want him to succeed. It cannot be ruled out that previously competing groups, such as the Mobutists and Laurent Kabila’s disgruntled cronies, could form opportunistic alliances in an attempt to destabilise his regime. Mr Kabila will also have to pay attention to the role of his allies, in particular Angola, whose formidable military and security forces could tilt the balance against him if they do not see their interests respected, a point heightened by the fact it has clearly been the loser in a contest for influence with Zimbabwe.

Now that he has made it clear that he wants to engage in the peace process and has the support of the international community, Mr Kabila appears to be willing to push ahead with preparations for the inter-Congolese dialogue at which the political future of the Congo is to be mapped out. Being seen to cooperate with the dialogue certainly has domestic benefits for him in that, to some extent, this deflects criticism of his own legitimacy and how he ascended to power. However, the dialogue is also a risk to his own position and that of his government, as it is intended to map out a democratic transition and inevitably some power will have to be conceded to the opposition—both armed and unarmed—if the process is to be recognised as legitimate. Balancing the need to retain power and acquire popular assent and legitimacy, therefore, will be difficult and it is still not clear what Mr Kabila’s strategy is in this regard or, in fact, if the two can be reconciled at all. Mr Kabila has indicated that his position as head of the transition must be recognised. He has also made contradictory statements regarding when the dialogue can be held and has yet to lift the ban on political activity which is necessary to its success.

Positive engagement with the peace process and the death of Laurent Kabila has turned the tables on the two rebel groups, Rassemblement congolais pour la démocratie (RCD) and Front pour la libération du Congo (FLC). The open obstruction of the peace process by Laurent Kabila had rendered their co- operation a moot point. Now faced with the imminent convening of the inter- Congolese dialogue, both groups will have to work quickly to give their movements the popular legitimacy which they lack, but which is necessary if they want to play a role in a political transition. Both groups have criticised

Mr Kabila and said that he is blocking progress on the dialogue. Until they can consolidate their own political base they are likely to throw up obstacles to the peace process, although there will be considerable manoeuvring between them and the government—which has also still to deliver on commitments under the peace process—over who should take the blame for this. Much will therefore depend on the adherence of both sides to the military disengagement process.

International relations The new government has shown some skill in diplomacy by engaging with the international community and seeking to convince it that co-operation with the peace process will be respected. This has resulted in a positive response from the international community, which hopes to encourage peace in Congo and compliance from all parties. It has also put the onus on Congo’s adversaries to show similar commitment. Strong support for the government is emerging from France, which is seeking to rebuild its influence in the region and has taken an increasingly critical line toward the government’s adversaries, Rwanda and Uganda, encouraging sanctions against them. The US government is also attempting to take a more even-handed approach to the conflict, including relations with Rwanda which had tended to be close under the administration of the former president, Bill Clinton. Further progress on the peace process by Mr Kabila’s government can expect to be rewarded by the international community.

The UN military observer mission in Congo (MONUC) will have its work cut out for it in its de facto role as arbiter in the peace process. UN military observers have begun verifying disengagement and so far all sides, with the exception of the FLC, have claimed to have complied. Verification of these claims will be a crucial component in consolidating trust between the various sides and maintaining the momentum of the peace. Accusations by the RCD over ceasefire violations by the government are an indication of the distrust which all sides harbour towards one another; further allegations and recrimination can be expected. UN commitment to the peace process, now that it has fully deployed in the Congo, is likely to remain firm unless the ceasefire once again collapses and war resumes.

Economic policy outlook For the first time since the start of the war in the Congo in 1998, the economic policy outlook is positive. The new government of President Kabila has made pledges to economic liberalisation and stabilisation and to revamp the mining and investment codes. The recent record of the government in delivering on its commitments indicates that some progress can be expected. The diamond sector has been liberalised, restrictions have been lifted on the use and circulation of foreign exchange, and work is continuing on new mining and investment codes. A long-overdue devaluation of the currency the Congolese franc is expected by the Banque centrale du Congo—it is currently trading at an official rate of FC50:US$1, compared with a parallel market rate of FC255:US$1. However, it is not yet clear whether the government will agree to a flotation of the currency or a partial devaluation.

The government has placed respected technocrats in the main economic posts in cabinet and opened dialogue with the IMF and World Bank, who sent a joint mission to the country in February. Both are now working to formulate a macroeconomic adjustment programme for the government which could be in place by July. This and other donor programmes are crucial to restoring economic growth and investor confidence in Congo. If policies of liberalisation and macroeconomic stabilisation are followed through this, combined with donor support, could drastically improve the economic situation.

Economic forecast The economic outlook for Congo has improved. The de facto abrogation of the diamond export monopoly by the Israeli company, IDI Diamonds, and the reopening of independent diamond buying operations, will have an immediate effect on the economy, increasing much needed foreign-exchange earnings. This may also slow the rapid depreciation of the Congolese franc on the parallel market and the still high rate of inflation. The return of diamond sales to official channels—previously they had been driven underground by the IDI monopoly—will contribute to healthier economic conditions as finance for imports improves. If appropriate policies are implemented, as advised by the IMF and World Bank, and this is accompanied by inflows of foreign assistance, it is possible that that positive real GDP growth may resume for the first time since 1996. The opening of river traffic between rebel and government-held zones, when and if this is agreed, would also have a positive impact on economic activity in the interior of the country.

The political scene

The late president is buried The late president, Laurent Kabila, who was assassinated on January 17th (January 2001, page 30) was buried in an elaborate state ceremony in Kinshasa in late January. The body, after being returned from Harare, Zimbabwe, lay in state for two days at the Palais du Peuple for public viewing. After the relative calm which reigned following the assassination, including the three days before it was admitted that he was dead, the return of the president’s body triggered popular emotion and misdirected anger by Congolese towards foreigners and suspected foreign interference. Such sentiment proved to be temporary, however; three months after his death, Laurent Kabila is little more than a negative memory for most Congolese and there is little nostalgia for him or his regime.

A public funeral attended by members of the Congolese government and 12 heads of state and representatives of various foreign governments, including the late president’s closest allies, presidents José Eduardo dos Santos of Angola and Robert Mugabe of Zimbabwe, was held on January 23rd. After several days of hesitation, Louis Michel, the minister of foreign affairs of Belgium, Congo’s former colonial power, also travelled to Kinshasa to attend the funeral and to meet the new president, Joseph Kabila, Laurent Kabila’s son. Mr Michel’s message to Mr Kabila was that he could count on Belgium’s support if he followed the peace process and allowed the previously stalled inter-Congolese dialogue to move forward.

Angola and Zimbabwe take In the chaotic days following the assassination of Laurent Kabila, there was a over state security large influx of Angolan and Zimbabwean troops who took over security matters in the capital, Kinshasa. Congolese troops were temporarily disarmed in the wake of Mr Kabila’s assassination and it was these foreign troops who provided security during his funeral. Although their presence has become less visible since then, the number of foreign troops in the capital remains considerable and they are arguably in control of the security apparatus, including presidential security for Mr Kabila himself. Although allies in the war in Congo, Angola and Zimbabwe have been engaged in a struggle to establish influence over the government—a contest in which Zimbabwe seems to be gaining the upper hand (see below).

Joseph Kabila is formally On January 24th the transitional parliament rubber-stamped the appointment installed as president of the 29-year old Joseph Kabila as president—he had been hastily nominated by his late father’s cabinet in the days after the assassination—and on January 26th he was formally sworn in as president of Congo. That evening he made his first public address in a recorded statement on state television. Taking a vastly different tone to his father, President Kabila stated that he would favour dialogue with Congo’s neighbours and do everything to bring the peace process back on track. He also promised to review the law regulating political activity, to liberalise the economy, and to review Congo’s mining and investment codes. The tone of the speech was interpreted positively by domestic and international observers who see the accession as a long-awaited window of opportunity to turn around the peace process and return to a constructive dialogue with the Congolese government.

A struggle with the late The situation of the new president initially looked precarious as his father’s old president’s cronies cronies battled for influence. For many weeks, it looked as though he was little more than a weak figurehead whose lack of experience in political matters and relative isolation would not allow him to manage the hawks in the old government, the majority of whom hail from Laurent Kabila’s home province of Katanga, As hardliners such as Mwenze Kongolo, the minister of justice, Gaëtan Kakudji, the minister of the interior and nephew of the late president, and Edy Kapend, Laurent Kabila’s powerful aide-de-camp, struggled to hang on to power, it remained unclear whether Mr Kabila would be able to sideline such key figures all of whom were obstacles to the change needed to usher in a new era. Public speculation also grew over the origins of the new head of state—the government maintains that Mr Kabila’s mother is from the Mubangubangu tribe in Maniema province, although it is rumoured that she is a Tutsi from Rwanda. Many Congolese have also questioned the legitimacy of his claim to the presidency and criticised the fact that the presidency has been handed from father to son in a monarchical fashion.

Tensions peaked following the arrest in February of Edy Kapend and his close associate, General Nawej Yav, the commander of Kinshasa military region, who had been at odds with Mr Kabila while he was head of the army. Both Mr Kapend and General Yav were initially arrested in connection with the arrest and disappearance of 11 Lebanese nationals the day after Mr Kabila was assassinated. They were later detained by the commission of enquiry into

Mr Kabila’s death (see below) on suspicion of being involved in the plot to kill him. The arrest of Mr Kapend, in particular, caused a stir among Katangese factions in the army, and there were rumours that elements from Mr Kapend’s ethnic group—the Lunda from south-western Katanga, bordering on Angola— were planning to avenge their leader. Mr Kapend’s arrest also seems to have upset the Angolans whose interests he represented in both the old and the new governments, tilting the balance toward Zimbabwe whose point man, Mr Kongolo, remained firmly entrenched in the government. Tensions subsided in the following weeks, although both General Yav and Mr Kapend remain in detention in Kinshasa’s central prison pending the outcome of the commission of enquiry.

Speculation over who was A number of theories have emerged over who was responsible for the late responsible for assassination president’s assassination—often of remarkable complexity—ranging from the lone act of a disgruntled soldier to a plot backed by regional states. The official version is that Mr Kabila was shot by a young bodyguard known as Rashidi. However, no one has ever seen his body and few believe that he acted entirely on his own. It is now alleged that Mr Kapend shot and killed Rashidi as he was fleeing the assassination, leading many to believe that Mr Kapend wanted to eliminate both him and the information he knew. Although the results of the commission of enquiry have yet to be made public, it is now widely believed that Mr Kapend played a major role in the assassination although it is unclear who was backing him. Whether he will be publicly accused or whether the need to balance both regional and domestic interests will require that he be exonerated remains to be seen. There has been some suggestion that the Angolan government has asked that Mr Kapend be allowed to slip quietly into exile instead of facing justice in the Congo.

A commission of inquiry On February 6th President Kabila set up a commission of enquiry, composed of investigates the assassination Congolese security and military figures as well as representatives of the Zimbabwean and Angolan military, to investigate the circumstances of his father’s assassination. Since its formation, the commission has worked in secrecy, making no public statements on its progress. Originally to report within one month, the investigation was extended by a month in early March, officially for it to complete its work. In the meantime, nearly all the directors of various national security and intelligence agencies have been arrested in connection with the enquiry and remain in detention in Kinshasa’s central prison, under Zimbabwean military guard. Access to the detainees is prohibited, even for family members, and many are believed to be in worsening health. In late April the newly appointed minister of national security and public order, Mwenze Kongolo, indicated that the commission had completed its report and that it would be presented to the president as soon as his schedule allowed. This would be followed, he indicated, by the release of detainees found not to be connected with the assassination. According to Mr Mwenze, the president will decide whether and how the report will be made public.

Coup plots abound There are still many unexplained circumstances surrounding the assassination. The day after Mr Kabila was killed, General Yav and several truckloads of

Congolese soldiers arrested 11 Lebanese nationals, including three young men under 18, at a building in downtown Kinshasa. For the following two months their whereabouts remained unknown in spite of family and community efforts to locate them in Kinshasa’s many clandestine prisons. By mid-February rumours that they had been executed shortly after their arrest spread throughout the capital, while the Lebanese community clamoured for an official explanation of their disappearance. In early March negotiations between representatives of the Lebanese community and the government led to an official acknowledgement that they had been executed. Although it officially apologised to the families and the Lebanese government, and said that those responsible would be brought to justice, the Congolese government declined to elaborate on the circumstances of the arrests nor disclose who had ordered the operation. Security sources in the capital indicate that the arrests were ordered by Mr Kapend and carried out by General Yav, who may have acted independently in ordering their execution. The arrests were apparently triggered by the discovery of the name of one of the 11 men in an address book belonging to Mr Kabila’s assassin who, it is speculated, may have been involved in a possible plot by members of the Lebanese community with which Mr Kapend was also associated. The individual concerned was arrested along with, apparently, 10 bystanders and curious neighbours who were arbitrarily swept up in the operation. The severely mutilated bodies of ten Lebanese men were found in a mass grave in March and taken back to Lebanon.

In another development in late April, security agents discovered an arms cache in the home of an officer in the Division spéciale présidentielle (DSP), the feared presidential guard of the late Congolese president, Mobutu Sese Seko. At the same time, the port for river traffic between Brazzaville and Kinshasa was closed for three days for undisclosed security reasons. Since then there have been widespread but unconfirmed rumours of a planned coup orchestrated by exiled Mobutists and DSP troops reportedly based across the Congo River in Brazzaville. This incident has created further tension with Angola, whom government members regard as controlling security in Brazzaville, and underlines official suspicion regarding its intentions.

Mr Kabila reshuffles the With most directors of the national security agencies in detention, and under military and security forces mounting pressure to address the domestic situation, Mr Kabila appointed new heads of the military and security agencies in late February. The reshuffle brought few surprises; nearly all of the appointees were already senior officials in the military or old members of the government. Brigadier-General François Olenga, previously the army chief of staff and head of logistics was appointed head of land forces, the position previously held by President Kabila. General Faustin Munene, previously head of the air force was shifted to head the national service—a largely defunct public service project initiated by the late president. General Sylvestre Luecha, a Mai Mai from South Kivu province and who is largely a figurehead, retained his post as chief of the army. The remaining military appointees had already served in the Congolese army under the late president and the reshuffle was seen as largely cosmetic. One surprise was the return of the controversial Dieudonné Kazadi Nyembwe to head the

Agence nationale de renseignement (ANR; the national intelligence agency). Mr Kazadi had headed the ANR under Laurent Kabila from 1998 to 1999. He is widely considered to be a rogue element and his return as head of the ANR has been met with some misgiving. Meanwhile, Jean Mbuyu, the well-respected legal council to the late president, was appointed security adviser to the new president. Mr Kabila also appointed a presidential cabinet with Théophile Mbemba Fundu, the former governor of Kinshasa, as cabinet director.

The old cabinet is dismissed After weeks of speculation about when he would form a new government, Mr Kabila dissolved his father’s cabinet in early April. Cabinet members were ordered to carry on with day to day activities but to refrain from engaging in any new projects. The move was widely seen as a measure to buy time amid growing domestic impatience that Mr Kabila had not yet appointed his own government. Accompanied by an announcement that independent audits of all provinces and state-owned companies would be conducted, it may also have been intended as a warning to those who felt they could benefit from the relative confusion surrounding the government in the wake of the Kabila assassination. The audits have yet to be conducted.

A new government is On April 14th Mr Kabila publicly announced his new government which appointed represents a radical break with the past; only five ministers retained their posts and almost all of the old regime’s strongmen were ejected from the government. Léonard She Okitundu, the widely respected minister of foreign affairs, whose influence had been growing since Joseph Kabila took over, retained his post, as did the ministers of health, reconstruction and social affairs. Mwenze Kongolo, a close ally of the late president and the former minister of justice, consolidated his position with his appointment to the newly created post of minister of national security and public order, and he is now widely seen as the new government’s most influential minister. His retention in the government has also been interpreted as a nod to Zimbabwe, whose business interests in the Congo he represents. Although Angola would appear to have lost its strongman with the arrest of Mr Kapend, the appointment of Irung Awan, a Lunda and previously deputy minister of foreign affairs, to the post of minister of defence seems intended to reassure Angola that its interests and influence will continue to be represented. Meanwhile, several of the late president’s most controversial cronies, such as Gaëtan Kakudji, Yerodia Abdoulaye Ndombasi, the minister of national education, and Pierre Victor Mpoyo, minister of state without portfolio were sacked. Their removal from the cabinet was perceived to be inevitable if Mr Kabila was to demonstrate his independence and commitment to bringing real change to the country, and has been almost universally welcomed in Kinshasa. It is possible that some of the sacked ministers may be appointed as provincial governors or ambassadors.

Mr Kabila calls for competence The rest of the cabinet is composed largely of relative unknowns, many of and openness in new cabinet whom have been recruited from outside of the country, in particular South Africa where there is a large Congolese diaspora. For the most part the new ministers have experience in their fields and seem to have been chosen for their technical capabilities rather than their political weight or ethnic

background. Still no one ethnic group or province dominates the cabinet. It is believed that the vast majority were recruited by Mr Mwenze and Augustin Katumba Mwanke, the former governor of Katanga who was appointed to the newly-created position of minister to the presidency. Both Mr Mwenze and Mr Katumba are from Katanga province and their weight in the cabinet would indicate that the era of Katangan influence has not yet ended.

In his first address to the cabinet when it was sworn in on April 23rd, Mr Kabila emphasised the need for transparency and good governance and said that it was the ministers’ responsibility to serve the Congolese people and to put an end to the era of nepotism. He also stated that mechanisms of control such as an auditing board and financial inspection would regularly investigate the ministries and that any reports would be made public. A seminar on the principles of governance is to be held in the near future.

Restrictions on political In spite of the promises made in his inaugural speech, Mr Kabila has not yet activity are still not lifted freed political activity which remains regulated by a 1999 law requiring all political parties to register with the government under onerous conditions (1st quarter 1999, page 32). After convening a meeting with Congolese opposition and civil society groups, which was boycotted by the main opposition parties, Mr Kabila called for a commission to examine the law on political activity. In early April, the commission recommended that political parties be allowed to function freely. The director of the presidential cabinet, Théophile Mbemba Fundu stated that Mr Kabila would consider the recommendation but added that a judicial framework would have to regulate political activity. Since then, there has been no mention of the commission, and it remains unclear whether Mr Kabila intends to act upon its recommendation. Opposition politicians have criticised Mr Kabila for maintaining the law and have rejected his overtures, arguing that any political dialogue must take place within the framework of the inter-Congolese dialogue.

On April 23rd Etienne Tshisekedi, the leader of the Union pour la démocratie et le progrès sociale (UDPS), the country’s main opposition party, returned to Congo after a 16-month absence during which he had campaigned for political liberalisation and the end of the war. His return to Kinshasa was met with great enthusiasm by his supporters. In his first public statement after his arrival, Mr Tshisekedi adopted a surprisingly conciliatory tone towards the government, and stated that he had returned to help prepare the inter- Congolese dialogue.

The UN reports on illegal In mid-April the UN released a report on the illegal exploitation of resources in exploitation of resources Congo. The report is heavily critical of resource exploitation by Rwanda and Uganda and the rebel movements they support. However, the late President Kabila is also mentioned as being involved in illegally granting mining concessions and in business deals for personal enrichment. The report accuses the Rwandan-supported Rassemblement congolais pour la démocratie (RCD) and the Ugandan-supported Front pour la libération du Congo (FLC; the FLC is a merger of the Mouvement de libération du Congo and a Ugandan-backed faction of the RCD) of systematically looting gold, diamonds, coffee, wood, colombo-tantalite and other resources in areas under their control. Rwanda

and Uganda have not denied their support to these rebel groups but claim that these are legitimate administrations and are recognised as such under the Lusaka peace accord. The report has also been criticised for ignoring the role played by Congo’s allies and the rebel movements they support. Although the report calls for sanctions against Uganda and Rwanda, this is not expected to happen, as some members of the Security Council, most probably the UK and US, would oppose it, considering the report to be insufficiently rigorous.

The new president exceeds Since coming to power President Kabila has enjoyed surprising success in expectations international diplomacy. Eagerness to engage the young head of state in positive dialogue characterised his first foreign visits, to France, the US and Belgium in early February. In France President Jacques Chirac promised to support his efforts to reinvigorate the peace process. In the US, Mr Kabila held talks with the secretary of state, Colin Powell, and with the Rwandan president, Paul Kagame. He also met the directors of the World Bank and IMF with whom relations had been extremely strained under his father’s reign. In meetings in New York with the UN secretary-general, Kofi Annan, Mr Kabila, in a reversal of his father’s position, expressed his desire to see the UN mission in Congo (MONUC) deploy its troops as soon as possible. He also promised to meet crucial guarantees of freedom of movement and security for all UN personnel. These are prerequisites for a deployment but had been consistently obstructed by Laurent Kabila. In Brussels, Mr Kabila again met the minister of foreign affairs, Mr Michel, as well as the Belgian King.

The UN seizes the day Mr Kabila’s first foray into the international scene was regarded as a success; many judged that the door to co-operation with the international community and the UN had been opened and that he was committed to breaking with his father’s past. The UN Security Council seized the new momentum in the peace process and in February approved the deployment of up to 3,000 support troops and 500 military observers in Congo, the most significant development in the peace process since the Lusaka Accord was signed in 1999. In the meantime, Mr Kabila continued his travels abroad, meeting various foreign heads of state—including the British prime minister, Tony Blair—in the subsequent weeks to discuss support for the Congolese peace process and reconstruction of the country.

The first stage of On February 15th all parties involved in the war in Congo agreed to pull back disengagement is successful 15 km from the front lines. This was the third disengagement plan—previous agreements signed in April 2000 and December 2000 had never been respected. The plan required all parties to move 15 km from the positions they occupied in April 2000, leaving the vacated areas under the administrative control of whatever party had previously occupied it. The two-week disengagement phase began on March 15th and since then all parties except the FLC have complied. The RCD started the process by moving out of the town of Pweto which it had captured in December 2000 (January 2001, page 35) and its troops were the first to complete the disengagement process. The government’s Forces armées congolaises (FAC) started their disengagement with some delay, although MONUC reported that they were continuing the process satisfactorily through April. At the last minute, the FLC refused to disengage from its positions in

Equateur province, prompting the ambassadors of France, the US, the UK and Russia to travel to the rebel-held city of Beni to meet its leader Jean-Pierre Bemba, in early April. Mr Bemba told the ambassadors that the refusal to disengage was due to concerns for the welfare of the people in areas to be vacated by FLC forces who, he argues, would be vulnerable to attacks or mistreatment by Congolese government forces. MONUC agreed to meet Mr Bemba’s concerns, and a UN military observer team is to take up positions in Basankusu in late-April even though a UN deployment to FLC areas had not been due to take place at this stage.

The UN moves in UN troops sent to protect UN military observers began arriving in Congo in March. The first contingent of 200 Uruguayan troops arrived in the rebel-held city of Kalemie in late March. Several days later 200 Senegalese troops arrived in the government-controlled town of Kananga. As agreed, UN troops are to be deployed in a four cities—in two government- and two rebel-controlled areas— which will serve as regional headquarters for teams of military observers. The deployment of Moroccan troops in Kisangani on April 15th had to be delayed, however, when the RCD abruptly refused to allow them to land in the city. The

RCD—which had agreed to the deployment days before—insisted that MONUC first investigate alleged ceasefire violations in Kasaï Orientale province by government forces which it accused of human rights abuses in villages vacated by the RCD under the disengagement plan. MONUC immediately sent a team of military observers accompanied by officers of the FAC and the RCD to investigate the allegations, although the RCD then demanded that MONUC publicly condemn the violations before the Moroccans be allowed to deploy. Ultimately the ambassadors of the countries with permanent seats on the Security Council flew to Goma to hold talks with the RCD. The RCD said at this meeting that it did not want to be an obstacle to peace, and allowed the deployment of the 253 Moroccan troops to proceed on April 20th. The planned arrival of Senegalese troops in government-controlled Mbandaka on April 27th will complete the initial phase of the deployment. A report on the alleged atrocities in Kasaï Orientale province will be sent to the RCD and the Congolese government as well as the joint military commission.

In an indication of the instability which still prevails in much of the interior, six workers of the International Committee of the Red Cross (ICRC) were killed in Ituri province on April 27th. Bodies of the ICRC workers were discovered by Ugandan army troops north of Bunia. No group has claimed responsibility for the attack, although there are numerous armed groups operating in the area which has been the scene of ethnically motivated fighting during the past year (1st quarter 2000, page 34-35).

The UN human rights The UN rapporteur on human rights in the Congo, Roberto Garreton, rapporteur returns conducted a fact-finding mission to the country in March, travelling throughout both government- and rebel-held areas and meeting President Kabila twice. Mr Garreton deplored the general human rights situation in the country and was also the first person to officially confirm that Colonel Anselme Masasu Nindaga, a leader of one of the four rebel factions that brought Laurent Kabila to power, had been executed in mid-November. Colonel Masasu had been arrested in late October and his whereabouts were unknown (January 2001, page 37-38). Mr Garreton disclosed that Mr Masasu had been executed along with a number of civilians and soldiers from South Kivu province after a lightning trial on charges of treason. The execution has exacerbated popular resentment among people from South Kivu who have been subject to arbitrary arrests and harassment in the aftermath of Mr Kabila’s assassination, reportedly because the alleged assassin is said to be from there.

The mediator returns to Sir Quettumile Masire, the former president of Botswana and the facilitator in the scene the inter-Congolese dialogue travelled to Kinshasa in early March upon Mr Kabila’s invitation. This was the first visit since the late president rejected him as the facilitator in the dialogue in June 2000 (July 2000, page 37). Following the meeting Mr Masire declared that there would be no co-facilitator as had been suggested by the government. Mr Masire visited other countries in the region and returned to Kinshasa in early April to meet members of civil society and the internal opposition. However, little progress has been made on when or where the inter-Congolese dialogue is to take place. Mr Kabila has also

made contradictory statements on the matter, saying recently that the dialogue cannot take place until all foreign troops have left Congolese territory.

Relations with South In early February the South African president, Thabo Mbeki, met President Africa improve Kabila in Kinshasa at the request of the Congolese government. Relations between the government of Laurent Kabila and South Africa had been tense because of Mr Kabila’s resentment of South Africa’s refusal to participate in the Angolan, Namibian and Zimbabwean, military intervention in Congo. The new Kabila government seems to see in South Africa a worthwhile political and economic ally who could be instrumental in reviving the mining industry. Several weeks later, a delegation from the South African Ministry of Defence met Mr Kabila in Kinshasa; there are few details of the subject of their discussions.

Economic policy and the economy

The IMF and World Bank In February the government took a step towards renewing engagement with prepare assistance the IMF and World Bank over policy reform, when delegations from the two institutions travelled to Kinshasa. The teams undertook a preliminary assessment of the macroeconomic situation in order to prepare a stabilisation programme. Another mission from the IMF is to arrive in Kinshasa on May 2nd and one from the World Bank shortly after. Discussions had been held with the government of the late president, Laurent Kabila, although these led nowhere because of to the government’s failure to implement any of the policy requirements for macroeconomic stabilisation.

The IMF is working to develop a staff-monitored programme (SMP) which will include policy targets that the government will be required to meet during an initial period of three to six months before financial assistance can begin. Although the programme is not yet formulated, key elements are expected to include a devaluation of the exchange rate and measures to achieve fiscal stabilisation, including an end to financing state expenditure through monetary growth. The SMP is to be presented to the board of the IMF in July. The World Bank is also working to prepare a transitional support strategy (TSS) to promote economic recovery and social stabilisation in the country, which would be supported by an emergency recovery credit (ERC). A problem for both institutions is that for assistance to resume, Congo must begin to clear its arrears to them—an amount currently totalling US$300m. A portion of funds under the ERC of US$30m-40m may be put toward this as well as funds from the World Bank’s soft loan arm, the International Development Association. Otherwise the World Bank’s TSS is to include sector components with the broadest impact on poverty reduction, possibly including the social and transport sectors.

Respected figures now The success of the economic reforms still very much depends on political occupy key economic posts backing from the highest level. However, recent developments appear to indicate that the government is now taking economic reform seriously. The new economic team includes as minister of finance, Matungulu Nguyamu,

previously the IMF’s resident representative in Cameroon. The cabinet positions of finance and economy have now been combined into Mr Ngyama’s new post of finance, economy and budget. The governor of the Banque centrale du Congo, Jean-Claude Masangu, a respected technocrat, has been maintained in his post—one that he had occupied under the late President Kabila’s rule during which he was a lone voice of reason. The new government is also attempting to balance spending, something that the outgoing minister of finance, Jean Amisi Kalondaya, claimed to have done during January and February. It was not possible to confirm this, however, and continued exchange-rate weakness during this period would appear to suggest that monetary growth was not yet under control (see below). Regular payment of civil service salaries is also a key objective although even this is a limited success; civil service salaries currently range from FC85 to FC90 per month— that is between US$0.35 and US$3.5 at the parallel market rate.

Foreign-exchange In early-February the government took steps to liberalise the use of foreign transactions are liberalised exchange in economic transactions, as President Joseph Kabila had promised in his inaugural speech in January. The new regulations allow the use of foreign currency in export transactions, as well as completely liberalising foreign- exchange transfers in the banking system. Previously these had been required to be in the unstable local currency and at the official (overvalued) exchange rate. Economic operators in Kinshasa have welcomed the new regulations, which lift significant restraints from exporters and importers. The measures will also boost the diamond market as diamond sales are again allowed in foreign exchange rather than the Congolese franc. A sharp rise in foreign- exchange earnings is expected as a result.

An end to the disastrous The export monopoly granted to the Israeli-owned company, IDI Diamonds, IDI diamond monopoly (October 2000, page 39) continued to drive diamond sales underground over the past quarter, with most diamond sellers preferring to sell their wares on the parallel market or in Brazzaville, the capital of the neighbouring Republic of Congo. The effect of the IDI monopoly had been disastrous for Congo; most buyers refused to sell to IDI with the result that diamond production and foreign-exchange earnings plummeted.

Faced with falling income from the diamond sector, which has been the country’s biggest source of foreign exchange since the collapse of copper and cobalt production in the early 1990s, the government opened negotiations with IDI in an attempt to abrogate the 18-month contract. These do not appear to have been successful; however, in late April the government announced that all licensed diamond traders would again be allowed to export diamonds. This is in effect a de facto abrogation of the monopoly. It appears that the Congolese government is attempting to cancel IDI’s contract for not having met monthly targets set out in the original agreement. However, an official agreement between IDI and the Congolese government on the matter had not yet been finalised by late-April and negotiations have continued.

Congo: diamond production

(‘000 carats) Mibaa Artisanal Total 2000 Jan 267 1,754 2,021 Feb 257 1,154 1,411 Mar 411 924 1,335 Apr 422 1,145 1,567 May 452 677 1,129 Jun 306 1,033 1,339 Jul 541 1,418 1,959 Aug 436 1,208 1,644 Sep 448 389 837 Oct 402 530 932 Nov 373 486 859 Dec 325 648 973 2001 Jan 407 636 1,043 Feb 250 740 990

a Minière de Bakwanga, the state-owned diamond company.

Source: Banque centrale du Congo.

The currency is still The exchange rate of the Congolese franc has been falling steadily on the in free fall parallel market in the wake of uncertainty caused by Mr Kabila’s assassination in mid-January. In January the average monthly black market rate fell to FC167.5:US$1, from a monthly average of FC141:US$1 in December. The liberalisation of exchange transactions in February has not had much effect on the black market since the Central Bank continued to print money in order to finance the budget deficit (see below). By March the average monthly exchange rate had depreciated to FC195.5:US$1 and had reached FC225.5:US$1 by the last week of April.

The budget deficit was According to the most recent data from the Central Bank, the budget deficit in financed by printing money 2000 reached FC10.45bn (US$633m at the yearly average for the official exchange rate), which it covered by printing money. The bulk of the shortfall is due to lower than projected revenue from the mining sector; revenue from Générale des carrières et des mines (Gécamines), the country’s defunct copper and cobalt mining giant realised only 2.3% of its anticipated levels, while

Minière de Bakwanga (Miba), the state-owned diamond company realised only 50.5% of its targeted revenue. Meanwhile total expenditure was slightly below the budgeted amount, most cuts took place in the payment of salaries, while spending on day-to-day government activities, reached FC7.15bn, more than double the budgeted amount.

Congo: budget, 2000 (FC ‘000) Budget Outturn Total revenue 18,475,294 11,092,723 of which: taxes 2,872,798 3,458,404 customs 3,975,282 4,004,177 Gécamines 704,152 16,245 Miba 622,857 314,617 petroleum producers 1,175,000 1,004,112 petroleum distributors 1,620,000 n/a DGRAD 1,594,113 823,457 reimbursements, loans & advances 2,879,444 1,471,127 Total expenditure 24,936,060 23,078,358 Salaries 11,524,070 6,963,636 Public debt 3,080,428 70,221 External 135,000 0 Internal 2,495,428 13,056 Financial fees 450,000 57,165 Subsidies & transfers 1,804,587 715,855 Day-to-day expenditure 3,330,334 7,146,289 Capital expenditure 5,196,641 730,663 Others 0 1,504,066 Adjustable expenditure 0 5,947,628 Sources: Banque centrale du Congo; Ministry of Finance.