Country Report Zambia January 2019

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Country Report

Zambia

Generated on February 6th 2019

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Zambia 1

Zambia

Summary 2 Briefing sheet

Outlook for 2019-23 4 Political stability 4 Election watch 5 International relations 5 Policy trends 6 Fiscal policy 6 Monetary policy 6 International assumptions 7 Economic growth 7 Inflation 8 Exchange rates 8 External sector 8 Forecast summary

Data and charts 9 Annual data and forecast 10 Quarterly data 11 Monthly data 12 Annual trends charts 13 Monthly trends charts 14 Comparative economic indicators

Summary 14 Basic data 16 Political structure

Recent analysis Politics 18 Forecast updates 18 Analysis Economy 21 Forecast updates 23 Analysis

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 2

Briefing sheet Editor: Benedict Craven Forecast Closing Date: January 9, 2019 Political and economic outlook The Economist Intelligence Unit expects the ruling Patriotic Front, led by the president, Edgar Lungu, to remain in power. However, the government will become increasingly unpopular as a result of economic mismanagement and deep recurrent spending cuts. Heavy public borrowing plans mean that an IMF loan deal is not expected to materialise in the medium term, at least. Economic policy will be erratic, with sudden changes to the regulatory environment as the government attempts to cover spending needs. Fiscal policy will be lax up to 2021 as the government pursues a debt-financed infrastructure programme. Revenue will rise as a result of tax increases, but the fiscal deficit will remain large. From 2022 we expect deep spending cuts to begin. Monetary policy will be tighter in 2019 to control rising price pressures linked to currency depreciation. With the kwacha and inflation both more stable from 2020, the central bank will begin to reduce the policy rate in a bid to bring down high commercial lending rates. Real GDP growth will average 3.5% a year in 2019-23. Detrimental changes to the tax regime will keep mining growth far below potential, especially in the early part of the forecast period, but the effects will be masked partially by government capital spending. The current account will remain in deficit in 2019-21 as a result of high government capital spending and debt-servicing. As global copper prices continue to climb and the government embarks on austerity, the account will then move into surplus in 2022. Key indicators 2018a 2019b 2020b 2021b 2022b 2023b Real GDP growth (%) 4.2 3.3 3.6 3.4 3.5 3.7 Consumer price inflation (av; %) 7.5 8.3 6.0 7.6 6.8 6.7 Government balance (% of GDP) -7.9 -8.7 -7.4 -7.1 -3.3 -2.5 Current-account balance (% of GDP) -5.1 -3.9 -3.3 -2.1 0.7 1.8 Money market rate (av; %) 16.3 19.2 20.5 21.1 19.6 15.9 Exchange rate ZK:US$ (av) 10.46 12.29 12.35 12.54 12.40 12.27 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 3

Key changes since November 30th Real GDP growth in the third quarter of 2018 came in at 5% year on year, which was above expectations. With growth momentum unlikely to fall away dramatically in the last quarter, we have revised our annual growth estimate for the year up from 3% to 4.2%. Softer inflation dynamics in late 2018 have caused a small downward revision to our 2019 annual average inflation forecast, from 8.6% to 8.3%. However, we have left our forecast for monetary tightening in that year unchanged. The month ahead February 21st—Monetary policy committee meeting: The Bank of Zambia (the central bank) may decide to hike its policy rate as early as February to counter inflationary pressures, stem depreciation of the kwacha and safeguard diminishing reserves. Whatever happens in February, we expect a rate hike at some point in 2019. Major risks to our forecast Scenarios, Q4 2018 Probability Impact Intensity A bail-out package with the IMF does not materialise High High 16 A shortage of skilled labour affects business operations High Moderate 12 Power shortages disrupt operations High Moderate 12 Government policy towards the mining sector again becomes punitive Moderate High 12 enough to force mines to scale back operations The government is forced to impose convertibility restrictions on foreign- Moderate High 12 exchange transactions Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 4 Outlook for 2019-23 Political stability Although the ruling Patriotic Front (PF), led by the president, Edgar Lungu, is expected to retain power, Zambia will face substantial threats to underlying political stability in 2019-23. Popular public frustration could develop into violence at any time given the widespread perception of worsening corruption, combined with the prospect of poor employment opportunities, fragile public-sector finances and fears of creeping authoritarianism. The run-up to the 2021 election will be an especially unstable period, during which the government will narrow the political space aggressively; crackdowns will escalate any time that Mr Lungu feels that his position is vulnerable. Another layer of risk emanates from the growing influence of China in state affairs. For instance, there were riots in the city of Kitwe in November over the suspected sale of a state timber firm to Chinese buyers. As public distrust of the government grows, open dissatisfaction and the administration's intolerance of criticism will represent a volatile mix. Protests could turn violent and, if disorder becomes widespread, extra security powers could come into force, as they did in 2017. On the one hand, this would act as a mechanism for bolstering overall stability; on the other, it would reinforce perceptions that Zambia is staggering towards autocracy and exacerbate underlying social tensions. In the run-up to the election in 2021, internal power struggles will take place within the PF. As Mr Lungu's overarching ambition appears to be securing the presidency in 2021, potential rivals will be purged from the cabinet and possibly the party before PF nominations in 2020. In a public address after a ruling by the Constitutional Court declaring that he was eligible to stand for another term (his critics claim that he has already served the maximum of two), Mr Lungu hinted that some senior members in the party had been manoeuvring to seek the candidacy if he had been barred from standing.

Election watch The next presidential and legislative elections are due in August 2021, and Mr Lungu's support from most of the Central Committee will help him to secure the PF nomination. By the time of the election in 2021, public fears of Zambia being caught in a debt trap—characterised by a loss of economic sovereignty to creditors—will be a legitimate concern among voters and one that the PF will have to answer for. Because of high debt-servicing costs, fiscal space will have also been tightened, causing salaries to be frozen and subsidies cut. All of this will make Mr Lungu's re- election a daunting task. By implication, incumbency advantages are likely to be used to maximum effect (as they were during the 2016 general election), and a growing culture of violence and intimidation by PF supporters, as demonstrated during by-elections, means that the electoral process could easily fall short of being free and fair. The main opposition party, the United Party for National Development (UPND), together with a new generation of opposition parties springing up, will have to surmount these challenges. A revitalised Movement for Multiparty Democracy (a former ruling party) could also emerge as a notable political force after a leader of one of its factions, Felix Mutati, who also served in the current government—as minister of finance, and later of works and supply—was ousted from the cabinet. The UPND is the most viable contender for the presidency but has become directionless since the 2016 election. The opposition vote is also vulnerable to fragmentation unless alliances are formed. Our baseline forecast is that Mr Lungu will win in 2021, but without any commanding margin and amid deep popular dissatisfaction. Nonetheless, this forecast could easily change if opposition parties agree to form a broad-based coalition.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 5 International relations Zambia's relations with Western donors and multilateral financial institutions will deteriorate. The IMF is not expected to agree to a deal with Zambia within the forecast period, and traditional donors (including the UK, EU and US) will also stay away amid concerns about corruption and uncontrolled borrowing. Spurned by the West, Zambia will continue to deepen its dependency on its main bilateral creditor, China. In exchange, Chinese state-owned lenders will probably agree to a debt restructure, thereby preventing a sovereign default. However, the restructuring will be on the proviso that the government borrows more (albeit at a lower cost) for a string of Chinese- contracted infrastructure projects, and potentially allows creditors to take ownership of strategic state-owned enterprises. Hence the government's dependency on China will be a double-edged sword, providing some financial relief in the short term, but compromising relations with Western donors and investors (many of whom regard an IMF package as indispensable), as well as long- term debt sustainability.

Policy trends The government's borrowing plans—as outlined in a recent mediumterm expenditure framework —suggest that a loan deal with the IMF is no longer a priority in the near to medium term. Without external support, policy will be erratic. The government's dire need for funds has already prompted a suite of tax hikes for the mining sector beginning in 2019—a move that threatens to depress foreign direct investment (FDI). Progress on the country's seventh national development plan (NDP7), spanning 2017-21, will be constrained in turn; at the heart of NDP7 is an attempt to stimulate value-added industrialisation and promote economic diversification by leveraging private investment and FDI. The idea of opening up state-dominated areas of the economy such as energy and transport will also be explored, but in practice the necessary investment will be blocked by policy uncertainty among investors. National development will instead be driven mostly by debt-financed public infrastructure projects. Even then, high procurement costs, delays in execution and the government's use of foreign contractors will act as major limitations on the fulfilment of NDP7. Without an IMF programme it is unclear how Zambia will manage its US$3bn in Eurobond debt. A first US$750m bullet repayment is due in 2022, but there is no obvious way of meeting the commitment (underscoring the unproductive use of the funds). A sinking fund being established seems to be an implausible solution alongside a high budget deficit, and the same goes for refinancing, given recent downgrades of Zambia's sovereign debt by credit rating agencies. A bilateral loan from China sufficient to cover the repayment may be forthcoming; consequently we have not included a default in the forecast for now. However, the risk of one will weigh heavily on investor confidence.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 6 Fiscal policy The finance minister, Margaret Mwanakatwe, has repeatedly promised fiscal prudence, but little in the fiscal agenda backs this up. Spending will be high in 2019-21, exhausting all buffers. There will eventually be a correction, which we expect to occur from 2022, after the election. For 2019-21 high expenditure will be driven by foreign-debt-financed capital outlays, as well as debt-servicing. As the government will have difficulty raising finance locally (Treasury securities are routinely undersubscribed), recurrent spending will actually decline, including in the public wage bill. Overall, however, spending as a share of GDP will be unusually high during these years. By 2022, with economic growth running behind official expectations and foreign liquidity pressures mounting, the investment programme will have to be replaced by a period of adjustment. Capital spending will be cut back and high debt-servicing costs will continue to crowd out wage spending and subsidies. Over the outlook period, revenue is forecast to increase, albeit not decisively. In 2019 there will be a dividend from an increase in all mineral royalty rates (plus a new top rate) and a scrapping of value-added tax (VAT) rebates for mining companies with the introduction of a non-refundable sales tax, as set out in the budget. Although these tax measures will be damaging for mineral production in the longer term, high copper prices throughout the forecast period should compensate. Output gaps will, however, make revenue fall behind official targets. As the capital spending side of the budget appears inflexible, and because mineral royalty reforms will keep economic growth below the government's target of 4% of GDP, we expect the budget deficit to be 8.7% of GDP in 2019, compared with a revised official projection of 7%. Infrastructure spending will keep the deficit high at 7.4% and 7.1% of GDP in 2020 and 2021 respectively. Heavy spending cuts should then bring the shortfall down, to 2.5% of GDP in 2023. The deficits will mainly be financed by external loans from China.

Monetary policy After a period of easing, the Bank of Zambia (BoZ, the central bank) has held its policy rate steady at 9.75% since February 2018 to protect against budding inflationary pressures. With the kwacha under pressure and prices likely to rise relatively quickly as a result, we expect the BoZ to adopt a tighter stance at its next monetary policy committee meeting in February 2019. Given the prospect of continued currency volatility and high inflation, this policy is unlikely to be relaxed until 2020, as inflation edges down into the 6-8% target range and the currency stabilises. A looser policy will continue over the remainder of the forecast period, but average lending rates will be kept high until fiscal policy tightens in 2022; before this point, considerable arrears to the government's local suppliers will keep asset quality weak.

International assumptions 2018 2019 2020 2021 2022 2023 Economic growth (%) US GDP 2.9 2.3 1.3 1.7 2.0 1.9 OECD GDP 2.3 2.0 1.5 1.8 1.9 1.9 World GDP 2.9 2.7 2.4 2.7 2.8 2.6 World trade 4.0 3.3 2.7 3.9 3.7 3.9 Inflation indicators (% unless otherwise indicated) US CPI 2.6 2.4 1.6 1.8 1.7 1.8 OECD CPI 2.5 2.6 2.1 2.0 2.0 2.1 Manufactures (measured in US$) 6.2 3.8 2.8 2.4 3.7 2.9 Oil (Brent; US$/b) 71.7 70.0 67.5 74.3 76.6 75.4 Non-oil commodities (measured in US$) 2.0 -0.1 3.6 1.5 1.5 0.6 Financial variables US$ 3-month commercial paper rate (av; %) 2.1 2.9 2.3 2.3 2.8 3.2 US$:€ (av) 1.18 1.19 1.22 1.21 1.24 1.24 ¥:US$ 110.16 111.54 108.57 104.88 100.46 96.08

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 7 Economic growth Economic growth in 2019-23 will be well below potential. Most significantly, higher royalty rates, a scrapping of VAT rebates and the reduction of other fiscal benefits will hold back investment in the mining sector, and some older and more costly mines will be forced to downsize. This will not mean contraction, with technologically advanced and lower-cost newer mines able to scale up production as prices for copper return to levels not seen since the 2011-14 commodity super- cycle. However, sectoral expansion will not be sufficient to raise real GDP growth to the level of 4% targeted by the government over the medium term. After real GDP growth of 4.2% in 2018, higher mineral taxes, as well as expected monetary tightening, will cause growth to fall to 3.3% in 2019. As credit conditions ease in 2020, and with copper prices on a continued upswing, growth is forecast to rise to 3.6%. Election-related uncertainty will push the rate down to 3.4% in 2021. In all these years headline growth will be supported by public infrastructure investment, although high procurement costs and the use of foreign contractors will dampen the effects. Over the remainder of the forecast period, the composition of growth will be altered. By 2022 we expect the government to be compelled to implement budget cuts. Austerity will have negative implications for construction and services, although high copper prices—and thus mining growth—over these years will blunt some of the headline consequences. Overall, we expect growth to average 3.6% a year in 2022-23. Economic growth % 2018a 2019b 2020b 2021b 2022b 2023b GDP 4.2 3.3 3.6 3.4 3.5 3.7 Private consumption 3.1 1.5 2.6 2.4 2.3 3.0 Government consumption 2.2 2.8 2.8 2.2 -2.9 -5.3 Gross fixed investment 5.0 5.9 4.2 4.0 1.2 1.0 Exports of goods & services 6.4 5.3 5.8 6.1 7.3 8.1 Imports of goods & services 4.9 4.8 5.0 5.2 2.7 3.3 Domestic demand 3.4 3.0 3.1 2.8 1.0 0.8 Agriculture -16.5 7.3 2.7 3.1 3.5 3.9 Industry 8.8 4.0 4.4 4.6 4.6 5.0 Services 4.5 2.5 3.2 2.8 2.9 2.9 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Inflation Depreciation in the kwacha in late 2018 and 2019 will push average annual inflation beyond the BoZ's 6-8% target range in the early part of the forecast period. A poor harvest in 2018 will add to the upward pressure on consumer prices in early 2019 (via higher food costs), and currency depreciation will prompt higher import prices as well. As a result, we expect inflation in 2019 to rise to an average of 8.3%. Global oil prices are expected to fall slightly in 2020, and, in tandem with improved kwacha stability, inflation will fall to 6% in that year. As global crude prices broadly recover in 2021-23, inflation will be higher, but some (slight) currency appreciation, based on rising copper prices, will keep the headline rate within the BoZ's target range at an average of 7% a year. An upside risk to the forecast stems from possible monetisation of the budget deficit, which could rise in the event of insufficient appetite for government debt.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 8 Exchange rates The kwacha has lost considerable value against the US dollar in recent months, partly because foreign investors—concerned by lax fiscal policy—have been unwinding their positions in the local debt market. Without an IMF programme to provide reassurance, and with foreign reserves too low for sustained intervention by the BoZ, a rebound is not expected in 2019, when we forecast the rate to average ZK12.29:US$1, down from an average of ZK10.46:US$1 in 2018. Because the kwacha is mainly supported by copper, with portfolio inflows being only a small component in Zambia's balance of payments, strengthening global prices for the metal will lead to a broad stabilisation of the currency in 2020-21. Helped by a continued upward trajectory in exports, the kwacha will register further gains against the US dollar in 2022-23, ending the forecast period at an average of ZK12.27:US$1 in 2023.

External sector Current-account prospects will continue to be determined largely by the copper-dominated mining industry. Higher copper prices will support growth in earnings over the whole forecast period. In 2019-21 the import bill will also rise, driven mainly by public capital expenditure. A contraction will follow in 2022-23 as austerity kicks in. The trade surplus will widen over the entire forecast period as a result of these dynamics. The services deficit as a share of GDP will be elevated in 2019-21, reflecting the government's use of foreign contractors in upcoming capital projects, following which it will narrow as infrastructural activity slows. As a share of GDP, the primary income deficit will remain large in 2019-23, with foreign debt repayments set to rise and high copper prices boosting profit repatriation from foreign-owned mines. The secondary income account will remain in surplus, although it will decline as donor aid inflows fall, in line with concerns about Zambia's public financial management. Overall, the current account will shift from a deficit estimated at 5.1% of GDP in 2018 to a surplus of 1.8% of GDP in 2023 as government capital spending winds down and exports keep growing. The shortfalls in 2019-23 will be covered by a combination of external borrowing and FDI, allowing international reserves to recover gradually from their current (hazardously low) levels.

Forecast summary Forecast summary (% unless otherwise indicated) 2018a 2019b 2020b 2021b 2022b 2023b Real GDP growth 4.2 3.3 3.6 3.4 3.5 3.7 Gross industrial growth 8.8 4.0 4.4 4.6 4.6 5.0 Gross agricultural production growth -16.5 7.3 2.7 3.1 3.5 3.9 Consumer price inflation (av) 7.5 8.3 6.0 7.6 6.8 6.7 Consumer price inflation (end-period) 7.9 6.2 6.3 6.9 6.5 6.3 Lending rate (av; %) 9.8 10.5 9.8 9.8 9.8 9.5 Government balance (% of GDP) -7.9 -8.7 -7.4 -7.1 -3.3 -2.5 Exports of goods fob (US$ m) 9,910 10,624 11,281 12,090 12,609 13,014 Imports of goods fob (US$ m) -9,434 -9,642 -9,979 -10,209 -9,770 -9,672 Current-account balance (US$ m) -1308 -979 -902 -647 237 675 Current-account balance (% of GDP) -5.1 -3.9 -3.3 -2.1 0.7 1.8 External debt (year-end; US$ bn) 17.5 18.7 20.4 22.5 22.3 22.5 Exchange rate ZK:US$ (av) 10.46 12.29 12.35 12.54 12.40 12.27 Exchange rate ZK:¥100 (av) 9.49 11.02 11.37 11.96 12.34 12.78 Exchange rate ZK:€ (av) 12.38 14.65 15.06 15.21 15.34 15.19 Exchange rate ZK:SDR (av) 14.82 17.29 17.60 17.90 17.89 17.81 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 9 Data and charts Annual data and forecast

2014a 2015a 2016a 2017a 2018b 2019c 2020c GDP Nominal GDP (US$ m) 27,145 21,245 20,957 25,814 25,744 25,050 27,633 Nominal GDP (ZK m) 167,053 183,381 216,098 245,686 269,249 307,831 341,185 Real GDP growth (%) 4.7 2.9 3.8 4.1 4.2 3.3 3.6 Expenditure on GDP (% real change) Private consumption 3.8b 3.4b 2.0b 2.3b 3.1 1.5 2.6 Government consumption 7.6b 5.5b 4.7b 1.3b 2.2 2.8 2.8 Gross fixed investment 5.3b 2.1b -0.9b 6.7b 5.0 5.9 4.2 Exports of goods & services 2.8b 0.2b 3.0b 6.3b 6.4 5.3 5.8 Imports of goods & services 3.0b 1.8b -1.6b 4.8b 4.9 4.8 5.0 Origin of GDP (% real change) Agriculture 1.1 -7.7 3.7 9.8 -16.5 7.3 2.7 Industry 4.0 6.6 6.7 4.7 8.8 4.0 4.4 Services -1.3 2.2 2.0b 3.0b 4.5 2.5 3.2 Population and income Population (m) 15.7 16.2 16.6 17.1b 17.6 18.2 18.7 GDP per head (US$ at PPP) 3,802 3,836 3,931 4,044b 4,135 4,222 4,352 Fiscal indicators (% of GDP) Public-sector revenue 18.9 18.8 18.2b 17.3b 17.6 17.6 17.7 Public-sector expenditure 24.3 27.6 23.9b 24.6b 25.5 26.3 25.0 Public-sector balance -5.4 -8.9 -5.7b -7.3b -7.9 -8.7 -7.4 Net public debt 38.0 63.2 60.7b 63.1b 73.1 74.0 73.9 Prices and financial indicators Exchange rate ZK:US$ (end-period) 6.39 10.98 9.92 9.92 11.91 12.40 12.51 Exchange rate ZK:€ (endperiod) 7.76 11.95 10.46 11.90 13.76 15.13 15.20 Consumer prices (end-period; %) 7.8 21.1 7.5 6.1 7.9 6.2 6.3 Stock of money M1 (% change) 3.7 4.5 10.9 10.5b 7.7 7.9 8.9 Stock of money M2 (% change) 9.8 24.9 0.1 10.7b 10.0 12.0 9.9 Lending rate (av; %) 11.6 13.3 15.5 12.5 9.8 10.5 9.8 Deposit rate (av; %) 7.9 9.0 10.8 8.8 8.7 7.5 8.8 Current account (US$ m) Trade balance 1,625 -74 -4 364 476 982 1,301 Goods: exports fob 10,220 7,362 6,535 8,216 9,910 10,624 11,281 Goods: imports fob -8,595 -7,436 -6,539 -7,852 -9,434 -9,642 -9,979 Services balance -794 -571 -508 -660 -849 -833 -880 Primary income balance -1,517 -349 -654 -1,070 -1,321 -1,488 -1,671 Secondary income balance 283 227 212 359 386 359 347 Current-account balance -401 -768 -954 -1,007 -1,308 -979 -902 External debt (US$ m) Debt stock 9,339 11,754 15,587 16,376 17,515 18,726 20,447 Debt service paid 399 545 742 1,652 1,454 1,375 1,333 Debt service due 898 1,048 1,249 2,226 1,972 1,882 1,821 International reserves (US$ m) Total international reserves 3,078 2,968 2,353 2,082 1,573 1,666 1,736 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: IMF, International Financial Statistics.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 10 Quarterly data 2017 2018 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Consumer prices (2009=100) 193 195 196 199 205 210 211 215 Consumer prices (% change, year on 6.8 6.7 6.5 6.3 6.5 7.6 7.9 8.0 year) Copper, LME (US$/tonne) 5,840 5,668 6,349 6,823 6,957 6,881 6,118 n/a Financial indicators Exchange rate ZK:US$ (av) 9.76 9.32 9.12 9.87 9.75 9.88 10.30 n/a Exchange rate ZK:US$ (end-period) 9.68 9.13 9.66 9.92 9.47 9.95 12.30 n/a Deposit rate (av; %) 10.69 9.71 8.13 6.85 6.75 6.57 6.65 n/a Central bank policy rate (end-period; %) 14.50 13.00 12.00 10.50 9.92 9.75 9.75 n/a Treasury-bill rate (av; %) 19.30 14.70 11.42 12.27 11.76 13.27 16.17 n/a M1 (end-period; ZK m) 15,016 15,691 16,822 19,082 16,747 18,811 n/a n/a M1 (% change, year on year) 17.8 16.9 18.5 21.6 11.5 19.9 n/a n/a M2 (end-period; ZK m) 43,126 44,171 46,035 49,618 47,459 49,627 n/a n/a M2 (% change, year on year) 7.0 8.7 13.8 20.7 10.0 12.4 n/a n/a Foreign trade (US$ m) Exports fob 1,886.9 1,881.3 2,044.2 2,433.2 2,614.5 2,101.4 1,936.2 n/a - - - Imports cif -2,457.6-2,542.0-2,591.8-2,431.2 n/a 1,888.5 2,077.1 2,271.6 Trade balance -1.5 -195.8 -227.4 -24.4 72.5 -490.3 -495.0 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 2,292 2,369 2,151 2,082 1,787 1,816 1,629 n/a Sources: Bank of Zambia, Statistics Fortnightly; IMF, International Financial Statistics; Direction of Trade Statistics; Haver Analytics.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 11 Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate ZK:US$ (av) 2016 11.13 11.33 11.34 9.74 10.05 10.70 9.90 10.01 9.98 9.89 9.82 9.85 2017 9.93 9.76 9.60 9.44 9.26 9.25 8.94 9.02 9.39 9.73 10.04 9.85 2018 9.86 9.79 9.59 9.52 10.02 10.11 9.89 10.10 10.95 11.91 11.85 11.91 Deposit rate (end-period; %) 2016 9.8 9.9 10.9 11.9 11.4 10.9 11.0 10.6 10.6 10.9 10.8 10.8 2017 10.9 10.7 10.6 10.4 10.1 8.7 8.6 8.0 7.8 6.9 6.7 6.9 2018 6.7 6.9 6.7 6.6 6.6 6.5 6.6 6.6 6.7 n/a n/a n/a Central bank policy rate (end-period; %) 2016 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 2017 15.5 14.0 14.0 14.0 12.5 12.5 12.5 11.0 11.0 11.0 10.3 10.3 2018 10.3 9.8 9.8 9.8 9.8 9.8 9.8 9.8 9.8 n/a n/a n/a M1 (% change, year on year) 2016 0.5 -4.5 -5.9 0.3 6.4 6.4 9.3 15.1 5.7 1.7 12.3 4.9 2017 0.7 8.1 16.6 16.3 21.2 18.2 n/a n/a n/a n/a n/a n/a 2018 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a M2 (% change, year on year) 2016 24.9 22.1 19.3 14.4 17.3 19.6 21.0 16.1 16.2 3.4 0.7 -9.8 2017 -6.4 1.3 8.5 5.7 7.4 14.0 n/a n/a n/a n/a n/a n/a 2018 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Stockmarket index 2016 5,554 5,575 5,534 5,011 4,964 4,753 4,698 4,384 4,321 4,307 4,265 4,196 2017 4,052 4,229 4,414 4,570 4,718 4,760 4,749 4,901 4,974 5,127 5,347 5,328 2018 5,327 5,587 5,548 5,582 5,549 5,456 5,452 5,231 5,468 n/a n/a n/a Consumer prices (av; % change, year on year) 2016 21.8 22.9 22.2 21.8 21.3 21.0 20.2 19.6 18.9 12.5 8.8 7.5 2017 7.0 6.8 6.7 6.7 6.5 6.8 6.6 6.3 6.6 6.4 6.3 6.1 2018 6.2 6.1 7.1 7.4 7.8 7.4 7.8 8.1 7.9 8.3 7.8 7.9 Total exports fob (US$ m) 2016 559.9 465.9 528.9 541.3 543.6 525.3 563.1 501.9 488.8 610.1 581.9 596.7 2017 588.1 646.2 652.7 616.6 626.3 638.3 747.6 709.8 586.9 714.0 882.4 836.8 2018 835.3 869.5 909.7 719.1 685.0 697.4 615.4 n/a n/a n/a n/a n/a Total imports cif (US$ m) 2016 597.8 547.4 618.6 625.3 572.6 580.8 614.2 592.0 614.6 786.9 732.4 673.8 2017 499.1 682.0 707.3 740.2 662.3 674.6 701.5 763.6 806.5 811.8 847.9 797.9 2018 910.9 793.2 838.0 905.1 779.6 907.1 794.1 n/a n/a n/a n/a n/a Trade balance fob-cif (US$ m) 2016 -37.9 -81.5 -89.6 -84.1 -28.9 -55.5 -51.1 -90.1 -125.8 -176.8 -150.5 -77.1 2017 88.9 -35.9 -54.6 -123.6 -36.0 -36.3 46.1 -53.9 -219.6 -97.8 34.5 38.9 2018 -75.6 76.4 71.7 -186.0 -94.6 -209.7 -178.6 n/a n/a n/a n/a n/a Foreign-exchange reserves excl gold (US$ m) 2016 2,893 2,763 2,592 2,650 2,456 2,404 2,228 2,246 2,262 2,202 2,300 2,353 2017 2,302 2,257 2,292 2,397 2,372 2,369 2,396 2,262 2,151 1,997 1,946 2,082 2018 1,916 1,867 1,787 1,779 1,752 1,816 1,771 1,725 1,629 n/a n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 12 Annual trends charts

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 13 Monthly trends charts

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 14 Comparative economic indicators

Basic data Land area 752,612 sq km Population 17.1m (IMF actual, 2017)

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 15 Main towns Population in '000 (World Gazetteer estimates, 2012) Lusaka (capital): 1,526 Kitwe: 562 Ndola: 518 Kabwe: 221 Chingola: 183 Mufulira: 144 Livingstone: 141 Luanshya: 134 Climate Tropical, cool on high plateaux Weather in Lusaka (altitude 1,277 metres) Hottest month, October, 1831°C; coldest month, July, 923°C (average daily minimum and maximum); driest month, August, 0 mm average rainfall; wettest month, December, 231 mm average rainfall Languages English (official), Nyanja, Bemba, Tonga, Lozi and other local languages Measures Metric system Currency Kwacha (ZK)=100 ngwee; ZK10.46:US$1 in 2018 Time 2 hours ahead of GMT Public holidays New Year's Day (January 1st); Good Friday; Easter Monday; Labour Day (May 1st); Africa Day (May 25th); Heroes' Day (first Monday in July); Unity Day (first Tuesday in July); Independence Day (October 24th); Christmas (December 25th-26th)

Political structure Official name Republic of Zambia Form of state Unitary republic Legal system Based on the 1996 constitution (last amended in 2015) National legislature National Assembly; 156 members elected by universal suffrage, serving a five-year term; the president can appoint eight further members National elections The most recent presidential and legislative elections were held on August 11th 2016; the next national elections are scheduled for August 2021 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

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 17 The Patriotic Front (PF) is currently the ruling party; the main opposition party is the United Party for National Development (UPND); other parties include the Movement for Multiparty Democracy (MMD), the Forum for Democracy and Development (FDD) and the Alliance for Democracy and Development (ADD); independents form the third-largest bloc in parliament Key ministers President: Edgar Lungu Vice-president: Inonge Wina Agriculture: Micheal Katambo Chiefs & traditional affairs: Lawrence Sichalwe Commerce, trade & industry: Christopher Yalumba Community development & social services: Emerine Kabanshi Defence: Chama Davies Development planning: Alexander Chiteme Energy & water development: Matthew Nkhuwa Finance: Margaret Mwanakatwe Fisheries & livestock: Kampamba Chilumba Foreign affairs: Joseph Malanji Gender: Victoria Kalima General education: David Mabumba Health: Chitalu Chilufya Higher education: Nkandu Luo Home affairs: Stephen Kampyongo Housing & infrastructure development: Ronald Chitotela Information & broadcasting services: Dora Siliya Justice: Given Lubinda Labour & social security: Joyce Nonde Simukoko Lands, natural resources & environmental protection: Jean Kapata Mines & mineral development: Richard Musukwa National guidance & religious affairs: Godfridah Sumaili Tourism & arts: Charles Banda Transport & communications: Brian Mushimba Works & supply: Felix Mutati Youth, sports & child development: Moses Mawere Central bank governor Denny Kalyalya

Generated on February 6th 2019 The following articles have been written in response to events occurring since our most recent forecast was released, and indicate how we expect these events to affect our next forecast. Politics Forecast updates Patriotic Front fails to appear at national dialogue launch January 23, 2019: Political stability Event The president, Edgar Lungu, and the ruling Patriotic Front (PF) boycotted the launch of a national dialogue forum on January 18th, after the president said that he had not been officially invited to the talks. Analysis Party politics have obstructed a genuine opportunity to defuse unusually deep tensions between the PF and Zambia's main opposition party, the United Party for National Development (UPND), which developed after a disputed election in 2016. The leader of the UPND, Hakainde Hichilema, still does not recognise Mr Lungu as Zambia's legitimate president. He maintains that the legitimate democratic process was disrupted by violence and intimidation during the poll, and that the vote was fundamentally rigged. To avoid a repeat, the national dialogue—which has had numerous falsestarts—is intended to lead to a proposal for electoral reform before the next general election in 2021, and seek a consensus on reforming the Public Order Act, which the UPND considers as a draconian law that gives the police excessive powers to curb free speech. A potentially groundbreaking launch for the national dialogue has been undermined by administrative mismanagement. Mr Lungu cancelled an earlier date for talks, scheduled for January 7th, and now claims that he was not formally invited to the forum on the second proposed date. Other PF representatives who were invited chose to boycott the event, claiming that the Catholic church—which Mr Hichilema wants to lead the talks—had hijacked the process from the Zambian Centre for Inter-party Dialogue, a body set up to establish a consensus on reforms. The PF appears unenthusiastic about prospects, perhaps unsurprisingly, as the party benefits from the current electoral and judicial arrangements. In an unexpected turn, Mr Hichilema in effect described the forum on January 18th as a success, making no mention of the PF's conspicuous absence. He defended the prominent role being played by the church and said that he was optimistic that the national dialogue will yield results. Without the ruling party in attendance, this seems unrealistic. For a genuine debate to take place for tensions to be defused, pressure on the PF to participate will have to be increased; but instead, the party has been all but absolved of responsibility for refusing to engage in the process. Impact on the forecast The national dialogue is unlikely to succeed, and we retain our forecast for deep tensions to persist between the ruling party and the opposition, which could translate into violence at the 2021 election.

Analysis African leaders learning to embrace social media

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 19 January 21, 2019: Democracy index Aiming to boost their electability, and following the lead of their counterparts elsewhere, Sub- Saharan African leaders have gradually established a presence on social media platforms such as Twitter and Facebook in recent years. Many African politicians (both in office and in opposition) have become aware of the power of the medium to communicate directly with voters cheaply, without the inconvenience of touring remote parts of their countries that often have poor transport systems and lack the vital infrastructure for a political campaign. Despite having left power in controversial circumstances in February 2018, the former South African president, Jacob Zuma, may soon have more social media followers (on Twitter at least) than his successor and incumbent, Cyril Ramaphosa. In power, Mr Zuma had seemed more comfortable addressing rallies of supporters in rural South Africa. But since his debut on the platform in December 2018, the former president has used Twitter to air his views on controversial issues such as South Africa's land reform question and to keep himself in the public eye as he fights corruption charges related to his time in office. A popular pastime Some politicians wait until they are in office before taking to social media to communicate their intentions to the electorate. Zimbabwe's president, Emmerson Mnangagwa, joined Twitter in 2011, but became a prolific user only after taking power in November 2017. Once he became a frequent user, he followed in the footsteps of other incumbents, including Kenya's president, Uhuru Kenyatta, Nigeria's leader, Muhammadu Buhari, and Rwanda's head of state, Paul Kagame. Mr Kenyatta is Sub-Saharan Africa's most followed president, with almost 3.5m followers on Twitter, and Mr Buhari and Mr Kagame both boast followings of over 1m supporters. Suppression and co-option African leaders have only relatively recently discovered the power of social media in modern political discourse, spurred by the spread of cheap mobile communications technology across the continent in even the toughest markets. The early adoption of social media (and the broader use of the internet) by many opposition groups has led many leaders to view the technology with suspicion. Instead of adopting social media to compete with opposition politicians, many established government leaders have tried to use it for their own benefit, while suppressing opposition use of these channels—a reaction seen most recently in the Democratic Republic of Congo, where during a disputed election the government switched off internet and SMS access across the vast country for more than a week. Mauritius is the only full democracy in Sub-Saharan Africa, according to The Economist Intelligence Unit's Democracy Index 2018 (there are also seven flawed democracies, 14 hybrid regimes and 22 authoritarian states). The emergence of this new channel for discourse has tended to take place in countries where uncontrolled political activism normally generates a swift and hostile response from the state. The Democracy Index 2018 has recorded a rise in political engagement in Sub-Saharan Africa (and globally), which suggests that incumbents will potentially face waves of social media-generated protests, irrespective of the political system within which they operate. A more sophisticated approach is emerging, where leaders use social media to communicate their version of events to their online followers. In the past, regimes (including democratic ones) may have counted on voter apathy to avoid tackling problems that they must now confront head- on, given that their citizens are engaged and voicing their discontent online. This has led some leaders to increase their social media presence, perhaps in an attempt to demonstrate their public influence by displaying a large social media following—a useful badge of popularity in any country where a regime's democratic credentials are in doubt. Several African governments (such as in Zimbabwe) are discussing new laws to control the role of social media, accusing diaspora dissidents of using the medium to stir up social tensions. Although there is some truth to such claims, few would expect such laws to be enforced evenly between pro-government and pro-opposition accounts in countries with authoritarian or hybrid regimes. The Democracy Index 2018 found that an overall improvement in the democratic situation took place in Sub-Saharan Africa in 2018, mostly reflecting higher scores for political participation). However, the region's score remained below recent historical democratic peaks.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 20 The past vs the present The increased control of social media by African governments could turn platforms such as Twitter or Instagram into further examples of political arenas dominated by established politicians, much like the continent's state-owned television or radio stations (which are frequently ignored by voters, especially the minority who can turn to major foreign news channels). Social media offer a more subtle approach to getting an "official" government version of events out, or, potentially, an opportunity to create conflict and confusion by releasing misleading information about political events or rivals. Authoritarian leaders across the globe have certainly put more effort into monitoring popular online platforms for signs of dissent in recent years, and African leaders are no exception. The use of social media may have been pioneered by political activists whom few people had heard of before, but its biggest legacy may be the opening-up of internal debates within ruling parties, particularly between former leaders and their successors. In many semi-democratic African countries today it is much harder to silence or ignore a former president or prominent opposition politician than it is an ordinary citizen or an exiled dissident, especially on social media. This suggests that social media could increase transparency within African parties and institutions more rapidly than between politicians and their voters.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 21 Economy Forecast updates Production at Nchanga mine suspended over tax hikes January 14, 2019: Economic growth Event Konkola Copper Mines (KCM), the local subsidiary of UK-based Vedanta Resources, has suspended operations at its Nchanga underground mine. Analysis The suspension follows a 5% import duty placed on concentrate that came into force with the 2019 budget. In response KCM had to downsize production at its 311,000-tonne/year smelter, which sources concentrate from abroad, and now the Nchanga underground mine that also supplies it has been taken off line. KCM's profitability was already under pressure from a hike in electricity tariffs for mining companies, and in September 2018 the company temporarily had its power supply cut over US$40m in unpaid bills. Now all producers in Zambia have been hit by a suite of tax changes, which aside from new import duties include a rise in mineral royalties and a scrapping of value-added-tax (VAT) rebates. High cost, older mines such as Nchanga (which has been in operation since the 1950s) were always going to be the worst affected. In 2015 the whole asset was placed under care and maintenance when copper prices slumped. Although world prices for the metal have recovered from lows seen back then, and we expect them to broadly rise in 2019-23, Nchanga has long been loss-making, and higher operating costs may prompt a lengthy suspension. As Nchanga was a predictable first casualty of the tax changes, the suspension by itself is unlikely to force a backtrack in tax policy. More alarming would be if newer, efficient mines began to radically downsize. As a short-run cost saving measure, Canada's First Quantum Minerals has already threatened to cut 1,000 workers in a licence area that includes its brand new Sentinel mine, which utilises world-class technology. This is a far more ominous warning sign. So far there have been no lay-offs, meaning the company could be in "wait and see" mode with regards to trends in world copper prices. The same may be true for Vedanta's other operations. The company had unveiled plans for a US$1bn investment in KCM to set up a new refinery and smelter, as well as upgrade its comparatively new Konkola Deep Mine. If prices rise by enough, there could be justification for keeping some or all of these projects alive. Impact on the forecast Our forecast is for high-cost, older mines to downsize production as a result of tax increases, so the closure of Nchanga reinforces this prognosis.

Fall armyworms are back in key maize-growing regions January 17, 2019: Economic growth Event Fall armyworms—a pest that destroys the leaves of budding maize—have invaded 34,000 ha of farmland in 18 districts, threatening to cause damage to food production in the 2019 season. Analysis At least 44,322 farmers face the prospect of losing their crop to the armyworm infestation, which could have devastating effects on food security if it spreads. Although armyworms can survive on at least 27 plant families, they feed primarily on maize. Infestations have centred on crops in the Eastern, Lusaka and Copperbelt provinces—all key maizeproducing regions. Smallscale farmers, who produce over 80% of the staple crop, have been worst affected, as they often have only limited resources with which to control crop pests. Armyworms are native to tropical and subtropical regions of the Americas and the Caribbean and are present in some southern states of the USA, but have spread rapidly across Sub-Saharan Africa and arrived in substantial numbers in Zambia in 2016. The government's measures to control the pest have included the distribution of pesticides and farmer education, funded by ZK18.6m (US$1.6m) from the national budget. The African Development Bank has provided US$3m for pesticide procurement. Assessments of the damage caused to the crop are currently under way, and most farmers will suffer losses, as the period for replanting rain-fed early maturing varieties of maize has long passed. The Zambia National Farmers Union, which has established a rapid response system to the infestation by sending text message updates to farmers, has appealed to the government to include pesticides in the Farmer Input Support Programme (FISP), a voucher subsidy system under which the government provides seed and fertilisers to more than 1.5m farmers each year. After a very poor harvest in 2018, which was partly caused by glitches to the FISP, causing consumer food prices to soar, the authorities will be keen to avoid another drop in food supply. It is likely that there will be a concerted intervention, but the prospects for a rebound in agricultural output will be considerably reduced if the response is not rapid. Impact on the forecast If the infestation spreads, we will revise down our forecast of a recovery in the agricultural sector of just over 7% in 2019, and revise up our forecast of average annual inflation of 8.3%.

Foreign reserves fall to new low January 29, 2019: External sector Event Zambia's stock of foreign reserves fell to a new decade-low in December 2018, according to the latest data. Analysis At less than US$1.6bn, foreign reserves equate to around 2.2 months of import cover—well below the three months internationally recommended as a safe minimum. In absolute terms, the stock was down by 2.4% month on month and 24.6% in annual terms. Bank of Zambia (BoZ; central bank) data have a considerable time lag, but between January 2018 and the latest data in October the prevailing reason for the drain was government debt servicing. In a bid to restock, the BoZ has been buying up foreign exchange on the interbank market, but the kwacha has been coming under pressure—for a variety of reasons—and so there has not been enough manoeuvrability to stem net outflows. Prospects for foreign reserves are not any brighter in 2019. Mining producers, who are critical for generating foreign exchange (copper alone accounts for 71% of export earnings), are considering their options after a series of tax changes affecting the sector. Smelters are now operating below capacity and older operations are being downsized. This will deter foreign direct investment and keep mineral output, and so exports, well below capacity, in turn holding back hard-currency availability. Another dimension to foreign-reserve pressures will be continued outflows to service external public debt. In 2019 the government expects another US$1.3bn, or 5.3% of GDP, to be added to the stock. We forecast a rise in world copper prices, which should prevent the external liquidity position from becoming untenable—even with output gaps. However, hazardously low foreign reserves will be a major macroeconomic burden for the government, and dent both portfolio and direct investor sentiment. Impact on the forecast We continue to expect foreign reserves to remain under considerable pressure, ending 2019 at an equivalent of 1.8 months of import cover.

Analysis Mining producers issue barrage of threats over taxes January 28, 2019 Zambia's government has rejected assertions from mining companies that a range of new taxes affecting the minerals sector will materially dent their profitability. Producers are arguing that they will have to scale down activity. One copper operation has already been mothballed, and another producer is considering an exit. A protracted argument would be extremely harmful and probably not be risked by the government, but it will not cave in easily either. Ultimately we expect the situation to be resolved by high world copper prices rather than negotiation, but this is clearly not a permanent solution, and damaged investor sentiment will be hard to repair. Depending on circumstances, different producers are taking exception to different parts of the new tax regime, which is coming into force as part of the 2019 budget. These include: Increasing the royalty rate for copper by 1.5 percentage points on a price-determined sliding scale and the introduction of a new 10% tax when the price of copper exceeds US$7,500/ tonne. Introduction of a 5% import tax on copper and cobalt concentrates. An increase in the cobalt royalty rate from 5% to 8%. Introduction of a 15% export duty for precious metals and gemstones. The scrapping of value added tax (VAT) rebates on mine-related imports, with the introduction of a non-refundable sales tax.

Country Report January 2019 www.eiu.com © Economist Intelligence Unit Limited 2019 Zambia 24 Despite the best hopes of mining companies, parliament has approved the new taxes, despite stern warnings from the Chamber of Mines, an industry body, that investment would be halted and 25,000 miners could potentially lose their jobs. But the decision by the government to set itself on a collision course with the country's main industry is borne from a desperate fiscal situation. New tax to raise money for debt-servicing The main motivation for the tax hikes is debt-servicing. Zambia has issued three Eurobonds, the first of which matures in 2022 when a bullet repayment of US$750m needs to be made. Heavy borrowing from China is also ongoing, with plans for a large scaling-up of debt-financed infrastructure investment planned during 2019-21. This all needs a revenue hike to be manageable. It is a risky strategy; higher taxes mean less investment by parent companies, and foreign reserves are already below two months of import cover as a result of heavy debt-servicing, with the debt- service (due) ratio already at about 20%. In essence, Zambia is at impending risk of an external liquidity crisis. How much investment is cut will depend on copper prices, which we expect to be strong during the 201923 forecast period—at an average of US$3.4/pound, with demand propped up by expansion in the electric vehicle market. This should shield the some of the industry from the doomsday scenario being posited by the Chamber of Mines, but other parts of the sector are not safe. Older and less efficient mines are likely to be downsized or their activity will be suspended. One such example is the Nchanga mine, owned by the UK's Vedanta Resources, which has already been mothballed. There has also been a production slowdown at all three of Zambia's smelters: Nchanga, Mufulira and Chambishi. The tax policy is going to keep both exports and foreign direct investment inflows well beneath potential and limit hard-currency availability (foreign reserves are already below two months of import cover) and sovereign repayment capacity. We expect high copper prices to compensate to some extent, but there is a very real risk that even efficient producers decide to downsize. Canada's First Quantum Minerals (FQM) has warned that it could lay off up to 2,500 workers, including from a licensing area that hosts a state-of-the-art mine. In the starkest warning yet, Canada's Barrick is pondering whether to sell its 116,000-tonne-a-year Lumwana copper mine. Global copper prices are currently on a downtrend and have been since mid-2018, making the tax change appear extra burdensome. However, The Economist Intelligence Unit expects a sustained recovery in the medium term as demand for electric car components intensifies. Assuming that this is the case, decisions to scale down activity or leave Zambia entirely would probably be reversed. In an early sign of this, FQM is reported to be delaying its retrenchment plan for now, while it negotiates with the government. Previously the company had suggested that mass lay- offs were inevitable. However, if there do end up being significant job losses, output gaps would start to widen considerably and exports would fall, forcing the government to backtrack. Political fallout, no matter what happens Besides putting its own finances and the state of Zambia's economy at risk, the government is faced with a political fallout from a mining sector crash. The Copperbelt has been a steadfast support base for the ruling Patriotic Front (PF) since the party was created in 2001. A change in mood among the region's electorate caused by job losses, or the fear of them, would be a disaster for the party. Again, high copper prices should in reality prevent widespread retrenchments, but if not, then the government's gamble would have failed, and political factors would again cause a rethink of the tax policy. Even if that were to be the case, some degree of reputational damage would be unavoidable. Many Zambians without connections to the mines have long perceived that foreign producers contribute too little to development, and every attempt by the PF to squeeze them has been abandoned. Doing so again would be seen by some as a lack of political strategy. Other voters may wonder why the government chooses to upset the business environment with ill-conceived policies that never end up working. A fear of looking weak—besides the dire need to boost revenue—will stop Mr Lungu's administration from giving up on the tax hike unless absolutely necessary. From the government's point of view, relations with producers will be damaged, whatever the outcome. Repeated uncertainty over the issue of tax makes investment decisions all the more difficult, even if they are reversed.