Zambia Zambia at a Glance: 2007-08

Country Report

Zambia Zambia at a glance: 2007-08

OVERVIEW The president, Levy Mwanawasa, and the ruling Movement for Multiparty Democracy (MMD) face a major challenge in mollifying a divided electorate. A large majority of urban voters in the economically vital areas of the capital, Lusaka, and the Copperbelt are opposed to their rule. The priority of Mr Mwanawasa and his government will be to highlight the extent to which the current copper boom and the potential benefits of recent external debt relief are making a difference to the lives of ordinary Zambians. This will be made difficult by the likely resumption of in-fighting within the MMD over who should succeed Mr Mwanawasa after his second and final term in office ending in 2011 and by the fact that the government has only a narrow parliamentary majority. In this environment, progress with the economic reforms agreed under the poverty reduction and growth facility (PRGF)! focusing mainly on fiscal policy!may slip, although the government is expected to remain sufficiently on track with its reform programme to avoid a total breakdown in relations with donors. Increasing copper output should drive robust real GDP growth of a forecast 6.4% in 2007 and 6.2% in 2008. Higher food prices after floods in early 2007 mean that average inflation for the year is expected to increase, to 10.3%, before slightly weaker fuel prices and increasing agricultural output help average inflation to fall to 7.8% in 2008.

Key changes from last month Political outlook • Political tensions should begin to decrease, as the government and the main opposition party have in recent weeks released conciliatory statements about working together more. Economic policy outlook • There have been no major changes to the economic policy outlook. Economic forecast • Preliminary current-account data from the Bank of Zambia have shown that a surplus of 3% of GDP was recorded in 2006. The main difference with the previous Economist Intelligence Unit estimate of a small deficit was that service debits were not as high as expected. The new data have had a knock- on effect on the forecast, with surpluses of 3.2% and 1.8% of GDP now expected in 2007 and 2008 respectively, following trends in the dominant copper sector. June 2007

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Zambia 1

Contents

Zambia

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

19 Economic policy

21 The domestic economy 21 Economic trends 22 Agriculture 23 Mining 24 Financial and other services 25 Construction

25 Foreign trade and payments

List of tables 10 International assumptions summary 12 Forecast summary 22 Annual inflation rates 25 Current account 26 External debt, World Bank series

List of figures

13 Gross domestic product 13 Consumer price inflation

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Zambia 3

Zambia June 2007 Summary

Outlook for 2007-08 Tensions in the political scene are expected to decline only gradually during the forecast period, following the fractious election period in the second half of 2006. Although the president, Levy Mwanawasa, and the Movement for Multiparty Democracy (MMD) were re-elected, they had to rely on their strong rural support. Winning back urban voters will be a priority for the government, although it will face criticism over its efforts from the prominent opposition leader, Michael Sata. In addition, the government will need to balance its efforts to win back urban support against the policy of fiscal prudence agreed under its IMF-sponsored poverty reduction and growth facility (PRGF). Although any policy slippage would provoke tensions with the IMF and other donors, it is unlikely to be severe enough to cause a significant restriction in donor assistance. Real GDP is forecast to rise by 6.4% in 2007 and 6.2% in 2008, reflecting strong copper production. Robust agricultural production should ensure that inflation remains well below the country"s historical averages, averaging around 9% in 2007-08.

The political scene The former president, Frederick Chiluba, has been found guilty of misappropriating US$46m during his time in office. This was a major success for Mr Mwanawasa"s anti-corruption drive. Further corruption has been unveiled at the Ministry of Lands, and three parliamentary seats have been declared vacant over corrupt practices during the 2006 elections. Legislators from the largest opposition party have offered the MMD conditional support for its development programme in the Copperbelt.

Economic policy The IMF has published another broadly positive analysis of economic developments in Zambia. A new electronic tax payment system has been initiated in an attempt to boost domestic revenue collection. An ambitious information and communication technology policy has been launched.

The domestic economy Inflation has edged up in early 2007 after heavy rains affected food crops. However, overall prospects for the 2007 maize harvest are good. Problems have affected production at a number of copper mines and smelters.

Foreign trade and payments The stock of external debt fell substantially in 2006 owing to debt relief under the IMF-World Bank"s heavily indebted poor countries (HIPC) initiative. Both China and the Africa Development Fund have provided new loans in recent months. Recent official estimates indicate that the overall current account recorded a small surplus in 2006 owing to surging copper exports.

Editors: Philip Walker (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 29th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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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, serving a five-year term; the president can appoint eight further members

National elections Last presidential and legislative elections on September 28th 2006; next elections due in 2011

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 and holds a parliamentary majority; the three largest opposition parties, the United Party for National Development (UPND), the United National Independence Party (UNIP) and the Forum for Democracy and Development (FDD) formed a coalition for the 2006 elections called the United Democratic Alliance (UDA) prior to the elections; other parties represented in parliament are the Heritage Party (HP), the Zambia Republican Party (ZRP) and the Patriotic Front (PF)

President & minister of defence Levy Mwanawasa Vice-president Rupiah Banda

Key ministers Agriculture & co-operatives Ben Kapita Commerce, trade & industry Felix Mutati Defence George Mpombo Education Geoffrey Lungwanga Energy & water development Kenneth Konga Environment, natural resources & tourism Kabinga Pande Finance & national planning Ng"andu Magande Foreign affairs Mundia Sikatana Health Brian Chituwo Home affairs Ronnie Shikapwasha Information & broadcasting Mike Mlongoti Lands Bradford Machila Local government & housing Sylvia Masebo Mines & minerals development Kalombo Mwansa Science, technology & vocational training Peter Daka Transport & communications Sarah Sayifwanda Works & supply Kapembwa Simbao

Central bank governor Caleb Fundanga

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Economic structure

Annual indicators 2002a 2003a 2004 a 2005 a 2006b GDP at market prices (ZK bn) 16.3 20.5 25.8 32.1 b 36.2 GDP (US$ bn) 3.8 4.3 5.4 7.2 b 10.0 Real GDP growth (%) 3.3 5.1 4.6 5.2 b 5.8 Consumer price inflation (av; %) 22.2 21.4 18.0 18.3 9.0a Population (m) 11.1 11.3 11.5 11.7 b 11.8 Exports of goods fob (US$ m) 945.0 1,081.0 1,836.4 2,195.3 3,803.5c Imports of goods fob (US$ m) 1,204.0 1,393.0 1,726.9 2,160.7 2,625.1c Current-account balance (US$ m) -343.0 -405.0 -389.0 -417.0 318.0c Foreign-exchange reserves excl gold (US$ m) 535.1 247.7 337.1 559.8 719.7a Total external debt (US$ bn) 6.5 6.9 7.3 5.7 2.5 Debt-service ratio, paid (%) 33.6 55.7 20.0 16.3 4.2 Exchange rate (av) ZK:US$ 4,307.0 4,733.3 4,778.9 4,463.5 3,603.1a a Actual. b Economist Intelligence Unit estimates. c Official estimates.

Origins of gross domestic product 2004 % of total Components of gross domestic product 2004 % of total Agriculture 22.6 Private consumption 64.9 Industry 28.3 Government consumption 14.5 Manufacturing 3.2 Gross fixed capital formation 26.1 Construction 9.4 Change in stocks 1.3 Mining 12.0 Exports of goods & services 21.6 Services 49.1 Imports of goods & services -28.3

Principal exports 2006 US$ m Principal imports 2006 US$ m Metals 3,084 Metals 633 Non-metals 701 Others 1,992

Main destinations of exports 2005a % of total Main origins of imports 2005a % of total South Africa 24.2 South Africa 53.1 Switzerland 13.7 UAE 8.6 China 12.4 Zimbabwe 6.9 Tanzania 6.6 UK 4.1 a Based on partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2005 2006 2007 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices (1994=100) 1,183.7 1,214.1 1,259.4 1,274.0 1,288.4 1,314.6 1,360.6 1,423.2 Consumer prices (% change, year on year) 19.0 19.2 17.1 11.0 8.8 8.3 8.0 11.7 Copper, LME (US$/tonne) 3,387.2 3,750.4 4,303.8 4,947.5 7,228.8 7,679.9 7,069.2 5,957.6 Financial indicators Exchange rate ZK:US$ (av) 4,684 4,489 3,930 3,316 3,286 3,826 3,985 4,245 Exchange rate ZK:US$ (end-period) 4,676 4,503 3,509 3,295 3,569 4,182 4,407 4,248 Deposit rate (av; %) 11.10 11.50 11.19 10.40 10.30 10.30 10.30 n/a Weighted lending base rate (av; %) 28.70 28.12 27.99 26.15 23.18 21.67 21.61 n/a Treasury bill, 91-day rate (av; %) 15.29 15.57 16.35 14.24 8.08 9.25 9.90 n/a M1 (end-period; ZK bn) 2,127.3 2,171.1 2,099.7 2,088.7 2,343.9 2,973.4 3,340.1 n/a M1 (% change, year on year) 21.8 18.7 14.1 15.3 10.2 37.0 59.1 n/a M2 (end-period; ZK bn) 5,784.0 5,901.9 5,689.3 5,671.0 6,219.2 7,549.1 8,301.9 n/a M2 (% change, year on year) 15.8 13.7 1.9 7.2 7.5 27.9 45.9 n/a Sectoral trends Copper in concentrates, production ('000 tonnes 110.9 114.2 129.3 125.9 138.4 118.5 114.4 112.8 Copper in concentrates, exports ('000 tonnes) 105.4 114.0 120.7 119.7 129.8 119.5 107.2 109.8 Cobalt production (tonnes) 1,362 1,389 1,270 1,184 1,209 1,246 1,020 740 Cobalt exports (tonnes) 1,358 1,419 1,251 1,203 1,144 1,279 1,037 760 Foreign trade (US$ m)a Exports fob 500.8 478.0 432.5 494.9 646.2 597.8 638.6 n/a Imports fob -621.3 -658.7 -763.0 -577.8 -624.4 -694.0 -625.9 n/a Trade balance -120.5 -180.7 -330.6 -82.9 21.8 -96.2 12.6 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 469.9 496.5 559.8 452.7 523.9 677.3 719.7 766.6 a DOTS estimates. Sources: Bank of Zambia, Statistics Fortnightly; IMF, International Financial Statistics; Direction of Trade Statistics.

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Outlook for 2007-08

Political outlook

Domestic politics The Zambian president, Levy Mwanawasa, and his party, the Movement for Multiparty Democracy (MMD), face numerous challenges during the forecast period. Although they were comfortably returned to power in the legislative and presidential elections held in September 2006 they are unpopular with many Zambians. In particular, the economically vital areas of the capital, Lusaka, and the Copperbelt!where the country"s vast copper reserves are found!voted strongly in favour of the opposition, primarily Michael Sata and his Patriotic Front (PF). A key challenge for the president will be to ensure that the improved economic performance of the past few years is better felt by ordinary Zambians!an issue on which Mr Sata campaigned hard. Initial tensions between the government and Mr Sata following the elections were high!Mr Sata was bitter in defeat and the president and government angry at the continued attacks on their performance by the opposition!but this situation is now appearing to calm down and is expected to continue to do so in the forecast period. Mr Mwanawasa has adapted a more conciliatory approach, and the opposition parties appear to have realised that they risk being alienated if they are seen to be standing in the way of Zambia"s development. Therefore, although the opposition, in particular Mr Sata, will keep a critical eye on the government"s progress, they are likely to be more willing to participate in the development process. This should see tensions gradually recede, although periodic flare-ups can be expected. Mr Mwanawasa also faces the challenge of pushing ahead with the implementation of a new constitution. The current constitution, which gives a high degree of power to the president and to a voting system that favours the incumbent, is deeply unpopular with much of the urban middle class. Mr Mwanawasa will be more willing to implement reforms now that he has no more elections to contest!he has shown no desire to stay beyond the constitutional limit of two terms in office!although he will drag the process out so as not to erode his powers prior to standing down in 2011. However, his ability to make progress in all areas will be constrained by in-fighting within the MMD. He had to work hard before the elections to combat dissent within the party from those opposed to his style of leadership, and tensions will be exacerbated in the coming years by growing speculation about his potential successor.

International relations Zambia is not expected to face any external threats during the forecast period. The government will remain focused on building relations with key donors. Although adherence to donor requirements has been good in the past two years, donors will remain vigilant over governance issues. However, now that the elections have been concluded successfully, donor support is expected to remain broadly on track.

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Growing focus is being brought to bear on Zambia"s ties with China, which has become a major investor in the copper sector. Mr Mwanawasa and his government have good relations with their counterparts in Beijing, but there is increasing resentment in Zambia at the perceived exploitation of the country"s mineral resources and labour force by Chinese investors. Small-scale anti-Chinese protests can be expected over the forecast period, although these are unlikely to translate into a wider backlash against foreign investment in Zambia.

Economic policy outlook

Policy trends The main goal of Zambia"s three-year poverty reduction and growth facility (PRGF) with the IMF, which is due to run until June 2007, is to improve fiscal discipline and management. A reduced fiscal deficit should limit the need for the government to borrow domestically, curbing inflationary pressure and ultimately allowing reductions in interest rates, with the aim of boosting private-sector borrowing. Other priorities under the PRGF are to improve governance, develop the business environment for the private sector and complete the privatisation programme. So far, the government has remained on track: another broadly positive statement was released by the IMF after discussions on the fifth and sixth reviews in Zambia during March 2007. Following the conclusion of this PRGF, the government may well decide that it is in a sufficiently strong position not to require continued financial assistance from the IMF. Nevertheless, it will still need IMF approval to secure cheaper funding from other donors and may therefore push for an IMF-led policy support instrument (PSI). There will, however, be obstacles to continued progress under the PRGF or any future policy agreement. The IMF will argue that high copper prices and substantial debt relief have given the government an excellent opportunity to push through the structural reforms needed to develop the economy. The government seems committed to this, as shown in its recently published Fifth National Development Plan (FNDP), which runs from 2006 to 2010 and in which it sets out in greater detail its plans for reform. However, there is a risk that the extra room for manoeuvre provided by the current high copper prices and debt relief!not to mention the growing ties with China, which are yielding alternative sources of funding!will erode the IMF"s influence. Nonetheless, the government appears to be well aware of the potentially disastrous effects of a downturn in copper prices and will therefore be unwilling to jeopardise its relations with the IMF, considering that it may need greater assistance in the future. Although there could be temporary spikes in tension over tax policy and spending priorities, the government is unlikely to cast aside the IMF"s recommendations to the point where it would risk a significant suspension of donor support.

Fiscal policy According to the 2007 budget, which was presented to parliament in early February, the government expects a fiscal deficit equivalent to 3.7% of GDP. However, rather than explicitly targeting the overall fiscal deficit, the government bases its budgets on reaching a target for domestic borrowing. To this end, it has set an ambitious domestic borrowing target of 1.2% of GDP for

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2007, despite having heeded complaints made by voters during the 2006 elections and made a number of tax cuts for workers. In addition, lower copper prices will affect the tax take from the mining sector, but this should be offset by the introduction of higher mineral royalties!although these may themselves be resisted by the mining companies. Nevertheless, robust economic growth is expected to generate higher tax revenue overall. On the expenditure side, the government is attempting to devote more money to poverty-reduction programmes. This will please donors, but electricity demand is growing rapidly, which may force the government to divert expenditure to expanding generating capacity. Since domestic revenue is likely to fall below expectations, the government will have to decide whether to increase borrowing or cut back on expenditure. The government"s projections for foreign borrowing are already high. It is unlikely to be able to obtain that amount at concessional interest rates, especially as the IMF is likely to disapprove of such a large increase in borrowing!foreign financing in 2007 is projected to be more than 20% higher than budgeted in 2006. Therefore, foreign borrowing is likely to be lower than budgeted rather than higher. Although the government will probably sanction slightly higher domestic borrowing, it will not want to overshoot its target of 1.2% of GDP by too much for fear of undermining wider macroeconomic stability. As a result, expenditure is likely to fall below budgeted levels. The overall fiscal deficit in 2007 is likely to be lower than expected by the government, at 2.8% of GDP, but this still represents a small increase on the 2006 figure of 2.6% of GDP. Greater fiscal discipline may be possible in 2008 as the pressure for lower personal taxes recedes and the collection of the higher mining taxes improves. Spending pressures will remain, but the fiscal deficit is expected to fall back, to 2.4% of GDP. Domestic debt is forecast to rise modestly, from 21.4% of GDP at end-2006 to 22% of GDP at end-2008.

Monetary policy One of the main priorities for the Bank of Zambia (BoZ, the central bank) is to bring inflation down. In 2006 the BoZ was greatly aided in its attempts to do so by falli ng foo d pri ces and the strength o f the cu rrency. However, fu rther reductions in the inflation rate will require a greater tightening of fiscal policy and lower domestic debt issuance, which is likely to happen only towards the end of the forecast period. The BoZ is also expected to pay greater attention to the level of international reserves. These have historically been low, but the improved outlook for the balance of payments should allow them to be built up. The central bank will try to increase lending to the private sector by commercial banks. It had been hoped that greater take-up of government securities by non- bank investors would leave the banks with more scope to expand credit to the private sector. However, against a background of structural constraints on lending, banks are likely to compete more for government securities. More fundamental structural reforms, such as revisions to land tenure and bankruptcy laws, may be needed to give a real boost to lending. Moreover, even if the spread between lending and deposit rates were to be reduced substantially, there are many other bank charges that will keep the cost of borrowing high.

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Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2005 2006 2007 2008 Real GDP growth World 4.8 5.3 4.8 4.7 OECD 2.6 3.2 2.5 2.6 EU27 1.8 3.0 2.7 2.3 Exchange rates ¥:US$ 110.1 116.2 115.9 104.5 US$:€ 1.246 1.256 1.360 1.383 SDR:US$ 0.677 0.680 0.651 0.640 Financial indicators € 3-month interbank rate 2.18 3.08 4.10 4.30 US$ 3-month Libor 3.56 5.19 5.24 5.12 Commodity prices Oil (Brent; US$/b) 54.7 65.3 65.0 60.3 Gold (US$/troy oz) 445.0 604.5 652.5 642.5 Copper (US cents/lb) 166.8 305.6 296.8 250.0 Industrial raw materials (% change in US$ terms) 10.2 49.9 6.3 -14.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Although growth in the global economy is forecast to fall back from an estimated 5.3% in 2006, it will remain robust, at 4.8% in 2007 and 4.7% in 2008. Tight supply and strong global demand, combined with threats of industrial action and speculative pressure, kept international prices for copper high throughout 2006!copper is Zambia"s most important export. Although supply is starting to pick up as new capacity comes on stream, stocks will take some time to recover. This will yield a correction in prices, which will be gradual rather than abrupt. Copper prices are forecast at an average of 297 US cents/lb in 2007 and 250 US cents/lb in 2008, which is still high by historical standards. Continued industrial growth in India and China will keep oil demand high during the forecast period. On the supply side, there are continuing concerns over a lack of spare capacity among OPEC producers. As a consequence, the Economist Intelligence Unit expects the price of benchmark dated Brent Blend to remain high in 2007, averaging US$65/barrel, before falling slightly, to US$60/b, in 2008 as stocks and spare capacity increase.

Economic growth Continued strong expansion of copper production!reflecting high levels of investment in the sector during the past five years!will continue to provide a boost to real GDP growth during the forecast period. Real GDP growth, which was officially estimated at 5.8% in 2006, is expected to accelerate in 2007, to 6.4%. Growth will also be aided by the better performance of other sectors, such as agriculture and tourism, which the government sees as critical in its diversification efforts. However, progress is not expected to be sufficient to meet the government"s growth target of 7%. A slight reduction in economic growth to 6.2% is forecast for 2008, as copper-related investment is expected to slow in the face of declining prices. Furthermore, growth in the vital mining sector will remain vulnerable to production disruptions throughout the forecast period:

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safety concerns, flooding and strikes have led to temporary closures at some mines and smelters in early 2007. Indeed, the recent high world copper prices and increasing profits for the mining companies are likely to give rise to further calls for pay increases from the workers, which could lead to continuing industrial unrest. The services sector is expected to grow strongly throughout the forecast period, in line with rising economic activity, greater demand from the mining sector and growth in tourism. The manufacturing sector is expected to perform well, reflecting strong growth in copper refining, food processing, and tobacco, beverages and chemicals production, but it will be constrained to some extent by growing electricity shortages. The construction of new hydroelectric power stations, combined with donor-funded work on infrastructure improvements, will ensure continued strong growth in construction.

Inflation Trends in fiscal policy and in food and oil prices will continue to be important determinants of inflation during the forecast period. The 2006 harvest of maize, Zambia"s staple food crop, was a bumper one, and another is now expected in 2007 following favourable weather conditions and increased public investment in the sector. However, flooding in early 2007 has led to a temporary increase in food prices, which will increase average inflation for the year as a whole. Fuel prices should ease during the forecast period, as repairs at the country"s only oil refinery progress. However, it will continue to operate below capacity, and the need for fuel imports is therefore set to continue. Overall, although inflation is unlikely to surge during the forecast period, the government and the central bank will struggle to maintain the downward trend of recent years. Inflation is expected to average 10.3% in 2007, before receding to an average of 7.8% in 2008 as fuel prices subside and development of the agricultural sector increases.

Exchange rates A combination of strong copper exports, a weak US dollar, donor support and growing investor confidence following debt relief led to an appreciation of the kwacha by almost 20% in 2006, to an average of ZK3,603:US$1. This was despite periods of depreciation during the second half of the year, reflecting election- related uncertainty and a wider global emerging-market sell-off (which was largely a corrective reaction and reflected US monetary tightening). Although the uncertainty surrounding the elections is now over and copper production is expected to remain strong, the appreciation last year, combined with falling copper prices, will result in a depreciation of the currency in 2007, to an average of ZK4,221:US$1 for the year. Continued reductions in copper prices will be the main determinant of the exchange rate in 2008, as the consequent stagnation in exports will affect the amount of foreign exchange entering Zambia. As such, we expect the kwacha to depreciate to an average of ZK4,513:US$1 for the year. Historically, the kwacha has been vulnerable to sharper bouts of depreciation, and these could recur during the forecast period. Predicting the timing of these is difficult, but possible triggers could include a worsening of relations with the IMF, a collapse in copper prices or a sudden escalation of political tensions. Although intervention by the central bank might smooth out short-term fluctuations, this would postpone rather than avert a sharp depreciation,

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especially as foreign-exchange reserves are expected to remain below three months of import cover.

External sector According to preliminary data from the central bank, a current-account surplus of US$318m was recorded in 2006 on the back of surging international copper prices and growing domestic production!total exports increased in value by 73%. Although copper output is expected to expand throughout the forecast period, prices are likely to fall back from the peak reached during 2006. However, average prices in 2007 are expected to be only slightly below those seen in 2006. This, in conjunction with further strong production increases, will cause exports to rise to a forecast US$4.2bn in 2007, compared with US$3.8bn in 2006. A steeper fall in copper prices is expected in 2008, and this will almost completely offset the production increases so that total exports are forecast to increase only slightly, to US$4.3bn. Meanwhile, non-metal exports, such as tobacco and horticultural products, will continue to expand but will still be dwarfed by copper exports. Imports are forecast to rise from US$2.6bn in 2006 to US$3.1bn in 2007, driven by high oil prices and capital spending in the copper and power sectors. Import growth in 2008 will be slightly slower, reaching US$3.4bn as oil prices decline and import growth in the copper sector decelerates. Trade-related expenses associated with the transport of increased copper exports will largely offset higher tourism revenue, causing the services account to remain in deficit. Increased profit remittances by mining firms will ensure that the income deficit remains high, although it will narrow a little in line with the fall in copper prices. Current transfers remain significant but are not expected to increase in 2007-08, as donors are unlikely to scale up assistance substantially until clearer signs of progress with economic reform have emerged. Overall, the current-account surplus is forecast to remain broadly unchanged in 2007, at 3.2% of GDP, before falling to 1.8% of GDP in 2008, reflecting trends in the dominant copper sector.

Forecast summary (% unless otherwise indicated) 2005 a 2006 a 2007b 2008b Real GDP growth 5.2 5.8 6.4 6.2 Consumer price inflation (av) 18.3 c 9.0 c 10.3 7.8 Consumer price inflation (year-end) 15.9 c 8.2 c 6.5 10.8 Lending rate (av) 28.2 c 23.2 c 22.0 18.0 Government balance (% of GDP) -2.6 -2.6 -2.8 -2.4 Exports of goods fob (US$ m) 2,195.3 3,803.5 d 4,222.5 4,278.2 Imports of goods fob (US$ m) 2,160.7 2,625.1 d 3,097.6 3,438.4 Current-account balance (US$ m) -417.0 318.0 d 315.9 182.8 Current-account balance (% of GDP) -5.8 3.2 3.2 1.8 External debt (year-end; US$ bn) 5.7 c 2.5 2.8 2.9 Exchange rate ZK:US$ (av) 4,463.5 c 3,603.1 c 4,220.5 4,512.7 Exchange rate ZK:¥100 (av) 4,055.0 c 3,100.2 c 3,643.1 4,318.3 Exchange rate ZK:€ (av) 5,560.4 c 4,524.2 c 5,740.6 6,238.8 Exchange rate ZK:SDR (av) 6,595.9 c 5,301.6 c 6,479.4 7,051.6 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. d Official estimates.

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Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Zambia Sub-Saharan Africa Zambia Sub-Saharan Africa 7.0 25.0

6.0 20.0 5.0

4.0 15.0 3.0

2.0 10.0 1.0

0.0 5.0 08 03 04 05 06 07 03 04 05 06 07 08 2002 2002

The political scene

An ex-president is found guilty Six years after the Zambian president, Levy Mwanawasa, came to power and

of corruption launched the country"s most wide-ranging ever anti-corruption crusade, a landmark judgment was delivered in a London court in May, which could lead to the former president, Frederick Chiluba, facing bankruptcy. One of Mr Mwanawasa"s earliest decisions in the anti-corruption drive was to target his predecessor, but progress has been slow in the Zambian courts, with the ever- present suspicion that the corruption allegations were merely a tool being used to restrict a powerful political rival. However, during 2006 the attorney- general"s office in Zambia switched tactics and attempted to punish Mr Chiluba via a civil procedure in the British justice system while the Zambian criminal case remained stalled. This was an option for the Zambians, as much of the money allegedly stolen by the former president and his close allies was believed to have been laundered via London. The British judge presiding over the case, Peter Smith, ruled on May 4th that he had found sufficient evidence linking Mr Chiluba and his allies to a conspiracy to defraud Zambia out of US$46m through a siphoning account at the London branch of the Zambia National Commercial Bank (Zanaco), known as the Zambia Trans-overseas Operational Account (Zamtrop).

Mr Chiluba pleads his Mr Chiluba, who denies the accusations of graft, branded the judgment a

innocence conspiracy between the British prime minister, Tony Blair, and Mr Mwanawasa in order to "crucify" him. The former president said that the judgment was not legally tenable and that he would ignore it. In his defence, Mr Chiluba said, on May 11th, that around US$9m of the funds that he was accused of stealing were received in the form of "gifts and donations" from his friends abroad, and that part of it was used on undisclosed security operations by the Zambian intelligence services. However, it is impossible to substantiate this claim, as the former president refused to appear before Mr Justice Smith, saying that he had no jurisdiction to preside over Zambian internal legal affairs, and accused Mr Mwanawasa of compromising the country"s sovereignty. Mr Chiluba also argued that the government had launched a political vendetta against him by

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bringing up a civil case when he was separately on trial in Zambia for criminal charges involving theft of US$488,000. Mr Chiluba also said that the case was pre-determined because the UK had paid all legal fees for the lawyers representing Zambia.

There is significant evidence Despite his protestations, the findings of the British court are damming. The against Mr Chiluba judgment records that Mr Chiluba and his co-accused made complicated transfers of funds from the Zambian Treasury to the Zamtrop account before the money was laundered to various personal accounts and two firms of English solicitors or round-tripped back to the Access Financial Services firm, in which some of the accused had shares. The judge also said that funds were disbursed in Belgium, Switzerland and the US. Mr Justice Smith said that, in one conspiracy, Mr Chiluba, the former permanent secretary at the Ministry of Finance, Stella Chibanda, and others of the co-accused, misappropriated US$21m in a dubious deal to purchase military aircraft, arms and ammunition for Zambia. Although the funds were paid for by Zambia, no weapons or aircraft were delivered. Another US$25m was siphoned from the Treasury through payments for various other services and goods that were never delivered. Mr Justice Smith's conclusions

• The Zambia Trans-overseas Operational Account (Zamtrop) was created to be used as an engine of fraud at the expense of Zambia. • Frederick Chiluba, as president at the time, was in a position to prevent corruption but instead of doing so he participated in it. • Mr Chiluba ought to have explained himself to the Zambian people in the light of the serious allegations raised against him without fear of compromising national security, but he instead declined to appear before the court. • Mr Chiluba, popularly referred to as FJT in Zambia, spent US$557,803 of the siphoned funds to purchase 349 shirts bearing the FJT monogram, 206 jackets and suits and 72 pairs of unique high-heeled shoes, which have been confiscated by the Zambian state. • Mr Chiluba"s personal emoluments and income did not match the signature wardrobe he maintained in a country where 68% of the people live on less than a dollar a day. • Mr Chiluba and his allies used two London-based law firms, Meer Care and Desai and Cave Malik and Co, to defraud the government of Zambia out of US$13m. • There was a paper trail proving that in excess of US$1.2m had been spent on buying clothes from Boutique Basile in Switzerland as well as properties, in addition to huge cash payments, the payment of substantial credit-card expenditure, jewellery, the payment of school fees and payment for cars for his children, accommodation and other "lifestyle" goods.

The judgment is a major The decision against Mr Chiluba can be seen as a milestone in stamping out victory for Mr Mwanawasa official corruption, something that has always been a major drag on the development of African countries like Zambia. Mr Mwanawasa said on May 10th that the government would continue with its fight against corruption, which included Mr Chiluba, because he wanted to leave a legacy of reduced graft in Zambia. Mr Mwanawasa also said that the judgment was an indictment

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against the ruling Movement for Multiparty Democracy (MMD) over graft and that he would rid the party of corrupt officials. This will require stronger action from the domestic anti-corruption agencies as well as a speeding-up of court processes!Mr Mwanawasa will be unable to rely on the British justice system for future corruption cases. The information and broadcasting minister, Mike Mlongoti, reported on May 16th that the government would file the UK court"s judgment in the Lusaka High Court in order to domesticate and therefore enforce it. If Mr Chiluba and his co-conspirators fail to pay back the 85% of the funds that the British judge ordered them to repay, or to appeal against the judgment within 14 days of it being served on them in Zambia, the government intends to file fresh legal documents to seize the assets that were frozen in 2006 at the start of the proceedings in the UK. The Law Association of Zambia revealed in May that the government would have an option to declare Mr Chiluba and his allies bankrupt if it failed to recover enough money from the sale of properties that they allegedly own in Europe. Bankruptcy would entail a withdrawal from public life for Mr Chiluba in terms of borrowing funds from commercial banks or individuals, or conducting any form of business. This would represent a significant additional bonus for Mr Mwanawasa, who would see a powerful political enemy effectively silenced. Suspicions remain that it was this potential prize that played a large role in Mr Mwanawasa"s determination to bring his predecessor to justice in the first place.

Donors praise Zambia Despite any lingering doubts over ulterior motives for Mr Mwanawasa"s anti- corruption drive, Zambia"s Western donors were quick to praise the president"s actions in bringing Mr Chiluba to justice. Six European governments! Denmark, Ireland, the Netherlands, Norway, Sweden and the UK!and the US released a statement describing Mr Mwanawasa as courageous. They felt that Zambia"s actions would set a good precedent for tackling corruption in Africa and globally. Zambia had become increasingly in favour with its Western donors over the past two years. Macroeconomic stability after close adherence to an IMF-led economic policy and now strong evidence that high-level corruption will not be tolerated should help to maintain close relations and ensure continued high levels of financial assistance.

Major corruption is uncovered In a further show of "zero tolerance" on corruption, Mr Mwanawasa dismissed at the lands ministry the lands minister, Gladys Nyirongo, and her deputy, Moses Muteteka!a relation of the president!on March 18th over their involvement in corruption at the Ministry of Lands. Mrs Nyirongo was sacked and placed under investigation after information emerged that she had given numerous plots of land to her husband and two children and also approved the allocation of 25,000 ha of land to a foreigner in northern Zambia, contrary to public policy. Under Zambian law, a minister of lands can only give up to 1,000 ha of land to foreigners, and any amount above 1,000 ha has to be approved by the president. Other suspensions and sackings were carried out throughout the ministry following strong evidence that officials had been allocating pieces of land to themselves, which they later sold to developers at exorbitant prices!the high prices themselves owing to a lack of distribution of state-owned land by

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the ministry. Opposition politicians provided much of the evidence, an encouraging sign that the opposition in Zambia is playing a greater role in holding the government to account. Following the sackings and suspensions, 111 properties suspected to have been purchased using funds obtained through corruption by officials from the ministry were placed under restrictions, the first step towards seizure. The Anti- Corruption Commission (ACC) public relations officer, Timothy Moono, said on May 17th that the properties included farms and commercial and residential plots that officials in the ministry had awarded themselves. Several officials were also found to be in possession of cars and properties that they had acquired without obtaining any loans from commercial banks and not commensurate with their earnings. Mrs Nyirongo was replaced in the ministry by Bradford Machila.

The MMD loses three seats Corruption at the 2006 legislative elections has also recently been uncovered

over corruption and punished. The opposition successfully petitioned for the results of three seats to be overturned after the High Court in Lusaka found the MMD winning candidates to have abrogated the electoral code of conduct by engaging in graft and intimidation of voters. Nicholas Banda lost his Kapoche parliamentary seat after Charles Banda of the Forum for Democracy and Development (FDD) petitioned the outcome of the elections, claiming that the winning candidate had spread falsehoods against him during the polls. The High Court agreed with the petitioner"s arguments that he had been portrayed as a dishonest and sickly person during a public meeting that the winning candidate had addressed. The opposition also won a petition against the member of parliament (MP) for Nalolo, Mwangala Mubita, who was found to have intimidated voters and also personally distributed money to bribe voters. The court declared Mr Mubita"s election null and void after it was proved that he personally gave a civic leader Zk70,000 (US$19) as inducement to vote for him. Mr Mubita allegedly also threatened voters by claiming that devices were going to be placed in polling booths to identify voters who cast ballots for the opposition. The courts also nullified the election victory of the MMD MP for Mbala Central, Gaston Sichilima, after concluding that he won the seat through corruption and intimidation of voters. The losing candidate of the Patriotic Front (PF), Evans Musenda, had petitioned Mr Sichilima"s election victory, saying that his agents bribed a voter while he also issued inflammatory and false statements against his rival, thereby placing him in bad light with the electorate. The Electoral Commission of Zambia (ECZ) has now set July 5th as the date for by-elections in the three constituencies.

The court decisions are The nullifications of the three seats are an indictment on the MMD over the encouraging manner in which some of its candidates have conducted themselves in elections. Paradoxically, the government and the president also deserve praise for putting in place legislation aimed at speeding up the process of petitioning election results. Previous accusations of bribery of voters had almost always been ignored, but after Mr Mwanawasa signed a new law prior to the 2006 elections providing guidelines on their conduct, things appear to be changing for the better. The law stipulates that an election petition should be disposed of

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within 180 days. Previously, election disputes used to last as long as five years, and sometimes court cases lapsed when the next election was due. This often made losing candidates avoid petitioning election results, even when there were glaring anomalies or blatant corruption, which the courts were often accused of indirectly endorsing.

A senior minister could lose The High Court is yet to deliver judgment in a case in which Captain Cosmas

his seat Moono of the United Party for National Development (UPND) wants the election victory of the finance minister, Ng"andu Magande, in the Chilanga constituency, to be nullified, claiming that Mr Magande"s agents bribed voters and also that votes were stashed in ballot boxes in order to raise Mr Magande"s numbers. The Chilanga petition has received wide attention within Zambia owing to Mr Magande"s senior cabinet position. If Mr Magande loses his seat, it will be a major blow to Mr Mwanawasa, as he will lose one of his best- performing ministers. Mr Magande has largely been applauded within and outside Zambia for being a major player in the country"s economic recovery. The finance minister has spent several months in the High Court defending himself at the expense of delivering services to his electorate and performing government functions. During his absence the justice minister, George Kunda, has had to perform Treasury functions. In previous administrations it was practically unheard of for senior politicians who were close to the president to face corruption charges. The fact that Mr Magande faces the very real prospect of losing his seat reflects well on the growing independence of the courts. However, if he were to leave government, his influence in economic development would be sorely missed. This case will also be a test of Mr Mwanawasa!if he is truly in favour of rooting out corruption he will have to resist interfering in the court process in order to help a key ally.

Zambia police are cited as Despite the recent successes against high-level corruption, the low-level

most corrupt corruption that affects ordinary Zambians on a day-to-day basis continues unabated. In a recent report, Transparency International (Zambia) (TIZ) has listed the Zambian police force as the most corrupt category of government officers. The TIZ report released in April showed an increase in the incidence of bribery in 2006 compared with the previous year. About 44% of respondents said that they had paid bribes because public officers demanded them, while 16.5% had volunteered to pay bribes. TIZ found that people paid bribes in order to avoid the law, to reduce the costs of obtaining services, to obtain government contracts and to obtain employment, among other things. The survey covered Lusaka, Copperbelt and Southern provinces, the most densely populated and economically active regions, and covered 964 adults aged 18-57.

PF legislators offer MMD In a major shift from its initial post-election intentions to frustrate the ruling conditional support party"s efforts to govern, the largest opposition party, the PF, offered the MMD conditional support for its development goals in April. Yamfwa Mukanga, a close ally of the PF leader, Michael Sata, and MP for the Kantanshi constituency in Kitwe led a number of Copperbelt legislators to the provincial offices of the government, where they pledged to support efforts to lift development in the region, but on condition that MMD supporters stop chanting anti-Sata slogans at public meetings that Mr Mwanawasa addresses. The PF has also reversed a

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ban on its mayors attending government functions to perform their civic duties, but added that mayors would have to leave any function where Mr Mwanawasa would be officiating if his supporters started to sing songs denouncing Mr Sata. An MMD spokesman, Ben Tetamashimba, welcomed the move as a gesture of goodwill from the PF, which will help to patch post-election tension and enhance development. The fact that the PF legislators are ready and willing to work with the MMD to implement government policy shows that tensions are subsiding after the acrimonious 2006 elections, although major differences remain on such matters as how the constitution should be adopted. The PF action also provides relief to Mr Mwanawasa, as the opposition party"s dominance in the key economic areas of Lusaka and the Copperbelt presented a real problem in terms of implementing government policy. It is also a shrewd move by the PF, which seems to recognise that it risks becoming alienated if it is seen to be standing in the way of the country"s development. The move should also head off a previous threat by Mr Mwanawasa that he would allow into the MMD any legislators and mayors who were expelled by the opposition party for associating or working with the government.

Information minister is fired The information and broadcasting minister, Vernon Mwaanga, was sacked in

fo r a seco nd time April. The sacking came after a public-relations mishap with the Democratic Republic of Congo (DRC). Mr Mwaanga was sent to the DRC by Mr Mwanawasa in late March after the Katanga province governor, Moise Katumbi, had closed the DRC-Zambia border to trucks carrying copper ore, claiming that the DRC was being ripped off by the Zambian-based foreign mining firms that processed the DRC copper. Although the border was successfully reopened, after he returned from the DRC it emerged that Mr Mwaanga had told journalists there that Mr Katumbi was owed US$7m by the Zambian government over a maize deal that he had agreed with the authorities prior to the 1996 presidential elections. This statement came despite, in earlier March, a Zambian taskforce on corruption stating that it wanted Mr Katumbi to be extradited to Zambia to enable him to answer charges of corruption and embezzlement of Treasury funds through the very same maize deal. Mr Katumbi, a close ally of Mr Chiluba, was accused of aiding the MMD to victory in the controversial 1996 elections by supplying cheap ground maize meal to some areas of the country, a move that the opposition claimed was inducement to voters. Once Mr Mwaanga"s contrary statement came to light! which was an embarrassment for the government!pressure mounted on Mr Mwanawasa from the opposition, religious groups and civil society to dismiss the information minister. After hesitating for a while the president eventually sacked Mr Mwaanga, branding him "extremely irresponsible" on April 11th. This was the second time that Mr Mwaanga had been sacked by the president. In 2002 he was removed from office after numerous differences of opinion with Mr Mwanawasa, only to be reinstated as a "repentant" man in mid-2005, before he played a key role in campaigning for Mr Mwanawasa in the 2006 elections (September 2005, The political scene).

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A new civic alliance emerges A controversial group calling itself the Constitutional Awareness Network

to back the government (CAN) emerged on May 19th and promptly endorsed the government"s roadmap on enacting a new constitution. This was a boon for the government, since a better-known and well respected civil society group, the Oasis Forum, along with much of the opposition, had previously rejected the government"s plans. The CAN comprises the Zambia Congress of Trade Unions, the Press Association of Zambia, the Foundation for Democratic Process (Fodep) and a number of little-known associations that often seem to emerge when there is an election or contentious national debate and usually take the side of the government. Although the Oasis Forum, which has in its ranks the Law Association of Zambia, has said that a new constitution can be enacted without necessarily amending the current constitution, the CAN has agreed with the government"s position that the current constitution should first be amended, after conducting a national referendum, a legal technicality that threatens to slow down the enactment substantially. The CAN has also stated that it is ready to engage the government directly and support whatever initiatives that it takes in the process. This turn of events will strengthen Mr Mwanawasa"s position on the constitutional debate and weaken civil society, which has been pushing for a new constitution by 2008. The CAN, despite lacking credibility because of questions over the partisan nature of some of the groups in its ranks, will certainly cause major divisions in opinion. It is likely to receive major press coverage from the state media, something that the Oasis Forum fails to enjoy. Mr Mwanawasa and his government appear to be reluctant to speed up the process, because the recommendations contained in a previous draft of the new constitution include clauses that will limit the powers of the president. Mr Mwanawasa will almost certainly be wary of enacting a law that will take away most of the sweeping powers that he enjoys long before his second five- year term is over. However, more encouragingly, the president does seem determined to leave behind a good constitution for the country when his second and final term in office ends in 2011. Furthermore, there has been no indication that Mr Mwanawasa has any desire to attempt to alter the constitution to permit further terms in office, as has previously been the case in Zambia and throughout Africa.

Economic policy

Another broadly positive Following a mission to Zambia in March, the IMF reported on April 2nd that it statement comes from the IMF planned to conclude the fifth and sixth reviews under the country"s poverty reduction and growth facility (PRGF) in early June. This would bring to an end Zambia"s current PRGF, but owing to the currently close ties between the Fund and the government either another PRGF or a policy support instrument (PSI; basically an unfunded PRGF) is likely to be agreed promptly. In its statement the IMF, once again, acknowledged the strong performance of the Zambian economy, supported by strengthened macroeconomic policies, prudent fiscal policy and a favourable external environment. Looking ahead, the Fund felt that economic prospects would remain favourable, with real GDP expected to

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grow by around 6% a year over the medium term!possibly more if the Fifth National Development Plan was effectively implemented (September 2006, Economic policy). However, the Fund cautioned that sustaining such robust growth would need continued macroeconomic stability, infrastructure improvements and development of the financial and private sectors.

There is some concern over Commenting on the government"s fiscal policy, the IMF said that tax revenue in

the special economic zones 2007 was projected to rise by 1 percentage point of GDP, mainly because mining firms had started to declare taxable profit and also because of improved value-added tax (VAT) collections. The Fund said that the planned measures by the Treasury to avoid granting further tax breaks to mining firms and also to raise the mineral royalty and corporate tax would further boost the government"s revenue base. However, in reference to the government"s intention to create special economic zones (March 2007, Economic policy), the Fund stated that, although targeted tax incentives for investment could be appropriate under special circumstances, inefficient use of tax incentives, in particular tax holidays, entailed significant costs. Therefore, the Fund felt that great care should be taken to ensure that such incentives associated with the economic zones did not erode the tax base over time. This comment from the IMF makes sense, but it is also an interesting warning in the light of the fact that it is Chinese firms that are most likely to benefit from such zones in Zambia. It hints at some concern from Western donors over increasing Chinese influence in the country.

Something that should please the IMF, given its comments on the need to widen the fiscal revenue base, the Zambia Inter-bank Payment and Settlement System/Real-time Gross Settlement System (ZIPSS/RTGS) has been established. Seeking to enhance the efficiency of tax payment, the new system allows taxpayers to make payments electronically, and was launched on April 1st. The move is aimed at reducing congestion at the Zambia Revenue Authority (ZRA) as well as reducing the fraud often associated with cheque and cash payments.

An ICT policy is launched In March the government launched an Information and Communication Technology (ICT) policy, which is aimed at fostering public-private partnerships (PPPs) in order to bridge the digital divide in Zambia. The government has lofty plans to transform Zambia into an information- and knowledge-based society supported by consistent development of, and pervasive access to, ICT for all citizens by 2030. The policy aims to guide and bring into the mainstream the use of ICT in all sectors of the economy, and has hence been dubbed the ICT for Development (ICT4D) policy, designed to fit the social economic development agenda of the country rather than be a standalone technology framework. The thrust of the policy will be premised on the PPPs as a basis for the implementation of projects, and the government intends to play a major role in ensuring the promotion of ICT. ICT is seen as a major tool for improving economic growth through new projects in telecommunications, information systems and broadcasting. The government said on March 28th that it would harmonise the operations of the ministries of information and broadcasting and transport and communications in order to establish a proper regulatory framework in ICT.

Although the government is correct in seeking to diversify the economy away from its dependence on mining, it has an exceedingly difficult task ahead in creating a successful ICT sector. Treasury data indicate that only nine people out of 1,000 have access to fixed telephone services, leaving Zambia with the lowest teledensity in Southern Africa. Only 90,000 installed fixed lines are in use despite rising demand. There are only 12,000 Internet subscribers in Zambia, with an additional 30,000 users who patronise Internet cafés, owing to poor accessibility to telephony and high access costs. The country is in dire need of more effective regulation, as the lack of an Internet governance system has led to the restriction of cost-effective technologies such as Voice over Internet Protocol (VoIP). However, there has been some success in other areas! mobile telephony continues to expand and a small fibre-optic network has been established. The Copperbelt Energy Company (CEC) has installed a 520-km fibre-optic backbone in the Copperbelt, and the state power utility, Zesco, has installed a 45-km fibre-optic line between the capital, Lusaka, and the small town of Kafue to the south. Zesco plans a major rollout of the network on its 3,500-km power-lines system to cover the whole country. A fibre-optic network is seen as the backbone for Zambia to provide comprehensive and reliable digital radio, television, Internet and other multimedia services to the people. Plans are also afoot to connect to the undersea cable running along the west and east coasts of Africa to interconnect with Asia, Europe and the US.

The domestic economy

Economic trends

Inflation edges up in According to Treasury forecasts, annual inflation is expected to drop to 5% by

early 2007 end-2007, down from 8.2% at end-2006. However, this now looks unlikely given inflation trends in early 2007, which saw year-on-year inflation reach 12.4% by April. Both non-food and food inflation levels have increased in recent months on the back of increases in fuel and maize prices respectively. Indeed, petrol prices rose by 24%, to Zk6,820/litre (US$1.62/litre) between January and May, while prices of diesel rose by 12%, to Zk5,440/litre over the same period. The governor of the Bank of Zambia (BoZ, the central bank), Caleb Fundanga, said on April 19th that it was difficult to predict whether inflation would decline to the projected levels. However, the high maize prices in the first quarter of 2007!which were due to heavy rains ruining some crops and preventing others from being transported to market!are expected to drop after the new marketing season commences in June, and this should help to rein in inflationary pressures. The Economist Intelligence Unit expects inflation to begin to edge down in the coming months, but not at a fast enough rate to meet the government"s target. Instead, year-end inflation is forecast at 6.5%, with an annual average of 10.3% for 2007.

Annual inflation rates (% change, year on year) 2006 2007 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Food 8.3 5.6 5.4 4.3 0.4 1.5 1.0 0.8 -0.2 1.0 4.2 4.9 5.5 Non-food 10.6 12.0 11.8 13.6 16.4 15.7 15.4 16.2 18.1 20.0 22.1 21.5 20.1 Total 9.4 8.6 8.5 8.7 8.0 8.2 7.9 8.1 8.2 9.8 12.6 12.7 12.4

Source: Central Statistical Office, Consumer Price Index.

The kwacha strengthens The kwacha has appreciated marginally during the first five months of 2007, reaching Zk3,920:US$1 on May 21st, compared with ZK4,240:US4 in early January. There was a gradual depreciation between January and March, before a stronger appreciation over April and May. The strength of the copper sector has, once again, been a major factor, but increasingly favourable interest-rate yields have also played a part in the kwacha"s strength in 2007. We still expect a modest overall depreciation in 2007, with copper prices trending downwards and the continued expansion of Zambia"s mining sector attracting higher levels of capital imports, which, in turn, are contributing to an expected expansion in the current-account deficit.

Domestic credit growth Total domestic credit, including foreign currency loans, declined by 4.1%, to

declines Zk6,099.9bn (US$1.4bn) during the first quarter of 2007. This was mainly as a result of a reduction in banking system lending to both the government and the private sector. This indicates that, although the government is succeeding in reducing its domestic borrowing requirements, the monies freed up in the banking system are not, as desired, going towards the development of the private sector. A sectoral analysis showed that the agricultural sector continued to account for the largest share of domestic credit, at 26.4%, reflecting expanded activities during the 2006/07 farming season. Behind the agricultural sector were wholesale, retail trade, personal loans and manufacturing industry. The share of personal loans has continued to rise, indicating an increase in the participation of households in economic activity through consumer expenditure and home-ownership schemes.

Agriculture

Prospects are good for the The outlook for the 2007 maize harvest is favourable, with the government

2007 maize harvest projecting that output could be even higher than last year"s bumper 1.4m-tonne harvest (June 2006, The domestic economy: Agriculture). The agriculture and co-operatives minister, Ben Kapita, said on April 17th that the floods experienced in the first quarter of the year had not dampened prospects for a high yield in the staple food crop. The government is already planning ahead insofar as national food security is concerned, with 400,000 tonnes of maize expected to be kept in strategic food reserves. The chairman of the Food Reserve Agency (FRA), Costain Chilala, said on April 26th that the government had released US$49m to the FRA to purchase 270,000 tonnes maize, while the agency would source funds from commercial banks to purchase the remainder from small-scale farmers. The 400,000 tonnes is to be in addition to the 299,000 tonnes of maize that the FRA had kept in reserve from the 2006

harvest. Overall in 2006 the FRA bought 600,000 tonnes of maize domestically, out of which it exported 233,000 tonnes!mainly to Zimbabwe and the Demo- cratic Republic of Congo (DRC)!selling a further 68,000 tonnes to local millers. However, private-sector buyers were not allowed to export maize, leading to complaints that the government was interfering too much in the sector.

Ambitious plans to treble If the recent favourable harvests continue, Zambia could gradually become a

maize output are outlined major regional maize producer and key exporter. Mr Kapita said that the government had completed a plan to treble annual white maize output to 4.2m tonnes in the next five years. The agriculture recovery programme includes reducing rain-reliant farming under a US$9m irrigation revolving fund, which is due to be launched before the end June. The government wants to provide financing to farmers to enable them to use various forms of irrigation! furrows, sprinklers, drip and centre pivot!in measures aimed at utilising the country"s vast rivers, lakes, streams and underground water. Under the irrigation scheme the growing of other cash crops!such as wheat, cotton, coffee and soybeans!will also be promoted. The government also plans to boost enrolment in colleges providing agricultural courses.

Mining

Copper production is likely to The Zambia Chamber of Mines (ZCM) has predicted that copper output will

fall below projections rise to 670,000 tonnes in 2007, compared with 497,000 tonnes in 2006. However, the sector has received a number of setbacks in the early months of 2007 and the ZCM"s projection is looking increasingly unrealistic. There were production problems at the Mopani Copper Mines" (MCM) Mufulira unit, a partial shutdown of the Konkola Copper Mines" Nkana Smelter and strikes at Luanshya Copper Mines (LCM). The Nkana Smelter, was shut down in April for 20 days, leading to the loss of 4,000 tonnes of finished copper, and the Mufulira mine suspended production at a shaft owing to flooding for most of May, but it was not immediately clear how much would be lost in production. LCM sacked 1,000 workers on March 6th but reinstated them 24 hours later after they ended a six-day strike over a dispute arising from demands for higher pay. Similarly, MCM awarded its workers a 20% pay rise during the same period after a one-day strike paralysed mining operations. As a result of production constraints, preliminary data released by the BoZ in April showed that copper output declined marginally, to 114,239 tonnes, during the first quarter of the year, compared with 114,403 tonnes in the last quarter of 2006. On an annual basis, production of copper was 9.3% lower than the 125,880-tonne output for the first quarter of 2006. Production is expected to pick up as the year progresses, although temporary disruptions are likely from time to time. We expect copper production in 2007 to reach 535,000 tonnes!much lower than the ZCM optimistically projects, but still an 8% improvement on 2006. The relatively favourable picture for copper production, despite intermittent setbacks, was reinforced by the president, Levy Mwanawasa, who said on March 3rd that the annual production of copper was expected to peak at 1m tonnes by 2011 owing to huge investments in the mining sector, which had reached an estimated US$4bn in the five years to 2006. The president said that

the sector was expected to continue to be the largest contributor to economic growth, wealth and job creation. Mr Mwanawasa also said that the government was lobbying mining firms to list on the Lusaka Stock Exchange (LuSE) so that Zambians could participate in ownership of the mines.

There are fresh investment and A number of new developments in the mining sector have occurred over the production plans previous months. • Equinox Minerals announced in May that work was nearing competition on its mine in Lumwana, from where 169,000 tonnes of copper is expected to be produced in the first six years of the mine"s life. Commissioning of the Lumwana mine, which could become Africa"s largest open-pit mine, is expected during the second quarter of 2008. • First Quantum Minerals said in May that it had scaled down its 2007 copper cathode forecasts for the Bwana Mkubwa processing plant to 35,000 tonnes, from 45,000, owing to floods at its Lonshi pit inside the DRC and a border closure by the DRC authorities that prevented the movement of copper ore to Zambia for processing (see The political scene). • LCM said in March that it would spend US$200m to develop the Muliashi copper mine, which is a new project, and also to upgrade the Baluba mine that it currently operates. • Australia"s Albidon Ltd said in April that it had sourced US$60m from the European Investment Bank and Barclays Capital to develop Zambia"s first nickel mine at Munali. Albidon plans to produce 8,600 tonnes of nickel per year, 1,400 tonnes of copper, 400 tonnes of cobalt and 15,000 oz of platinum group metals when it commences commercial production in 2008.

Financial and other services

The LuSE expects six listings The management of the LuSE is optimistic that it can raise the number of

in 2007 company listings significantly during 2007. Six new firms are expected to list during the year, bringing the total number to 21. The firms that have indicated that they want to list include Australia"s Equinox Minerals Ltd, which owns the Lumwana copper mine; a mobile-phone operator, Celtel Zambia Ltd, which applied to the Securities Exchange Commission to list 21% of its shares; and a power distributor, the Copperbelt Energy Company (CEC). A LuSE spokesman, Brian Tembo, said on April 20th that Nanga Farms, Investrust Bank and the Zambia National Commercial Bank had indicated that they had plans to offload some of their shares on the bourse. In addition, the Development Bank of Zambia (DBZ) went to the market in February and issued a Zk150bn (US$35m) bond, with the first tranche of Zk40bn being oversubscribed to the sum of Zk68bn. The DBZ has not indicated when it will issue the second tranche, but has raised enough funds to increase its lending portfolio to development projects in Zambia. Bonds are also expected from four major municipal councils in 2007, with groundwork already done, and only the government"s approval remaining. The government will need to be careful, however, that the funds raised by the DBZ and municipal councils are used

productively, otherwise it could be forced to bail them out when the bond repayments become due.

Construction

A new cement plant is built Production of cement is due to start in Ndola at some point between August and September 2007, after Zambezi Portland Cement (ZPC) revealed in March that it was spending US$40m on setting up a manufacturing plant. The ZPC managing director, Antonio Ventriglia, said on March 26th that the firm would produce 330,000 tonnes of cement per year and that 80% of the works had already been completed at the site. The new plant will help to ease shortages of cement created in the Copperbelt by high demand from the copper mines. The Lumwana copper mine project alone has consumed 10,000 tonnes of cement per month during its construction.

Foreign trade and payments

A current-account surplus is Preliminary data from the Bank of Zambia (BoZ, the central bank) have

estimated for 2006 indicated that a surplus was recorded on the current account in 2006!the first time that this has occurred in over a decade. As expected, surging copper exports played a major role, almost doubling from the 2005 figure to reach US$2.9bn. With non-metal exports increasing by over 30%, a 20% increase in imports was comfortably outweighed and a healthy trade surplus recorded. Meanwhile, also as expected, the income deficit increased substantially on the back of increased profit remittances by the mining companies. However, what did come as some surprise was that the deficit on the services account actually fell. Owing to the increase in trade-related expenses, it had been thought that the services deficit would expand. Instead, a 24% increase in service incomes! largely reflecting increased tourism!outweighed the 7% increase in service debits. Overall, the current account, including grants, was estimated to have recorded a surplus of US$318m, equivalent to 3% of GDP, compared with the 2005 deficit of US$417m, equivalent to 5.7% of GDP.

Current account (US$ m unless otherwise indicated) 2004 2005 2006a Trade balance 110 35 1,178 Exports (fob) 1,817 2,178 3,786 Metals 1,359 1,644 3,084 Copper 1,075 1,486 2,938 Cobalt 284 158 146 Non-metal 458 534 701 Imports (fob) -1,727 -2,161 -2,625 Metals sector -431 -386 -633 Other -1,296 -1,775 -1,992 Goods procured by airlines 20 17 18

Current account (US$ m unless otherwise indicated) 2004 2005 2006a Income balance -410 -609 -1,005 Interest payments -203 -177 -83 Services balance -215 -237 -209 Receipts 232 271 335 Payments -447 -508 -544 Current transfers (net) -25 -24 -5 Grants 151 419 358 Current account (incl grants) -389 -417 318 % of GDP -7.2 -5.7 3.0 a Preliminary. Source: Bank of Zambia.

External debt falls Total external debt fell by 22%, to US$5.7bn, in 2005 according to the World

substantially in 2005 Bank"s Global Development Finance 2007. The main factor behind this large drop was Zambia"s attainment of completion point under the heavily indebted poor countries (HIPC) initiative in April of that year. An immediate debt write-off followed, primarily from the Paris Club of bilateral creditors, which wrote off around US$1.4bn. Smaller amounts were written off by other bilateral and multilateral creditors. Total debt to GDP fell to 79% in 2005, from 135% in 2004, whilst the debt-service ratio fell to 16% from 20%. However, these large falls in the debt stock masked substantial increases in both private debt and short-term debt. Much of the increase in private external debt will be connected to the heavy investment in the copper sector, while the increase in short-term debt is closely linked to the increase in trade experienced during the year on the back of surging copper output and increased demand for imports. An even greater drop in Zambia"s external debt stock is estimated for 2006. Zambia"s qualification for debt relief under the multilateral debt relief initiative (MDRI) resulted in large write-offs from the World Bank and the IMF, among other multilateral creditors. The Economist Intelligence Unit estimates that total external debt declined to US$2.5bn in 2006 as a result of this, with the debt to GDP ratio falling to 25%.

External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end) 2001 2002 2003 2004 2005 Public medium- & long-term 4,826.6 5,264.5 5,582.3 5,871.7 4,084.9 Private medium- & long-term 119.2 108.4 395.5 385.6 802.0 Total medium- & long-term debt 4,945.8 5,372.9 5,977.8 6,257.3 4,886.9 Official creditors 4,342.3 4,745.8 5,156.8 5,435.1 3,699.1 Bilateral 1,960.9 2,007.0 2,079.9 2,079.6 563.8 Multilateral 2,381.4 2,738.8 3,076.9 3,355.5 3,135.3 Private creditors 603.5 627.1 821.0 822.2 1,187.8 Short-term debt 141.0 72.7 90.1 131.6 190.2 Interest arrears 0.5 4.4 20.1 42.6 36.2

External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end) 2001 2002 2003 2004 2005 Use of IMF credit 982.2 1,015.0 858.7 890.3 591.1 Total external debt 6,069.0 6,460.6 6,926.6 7,279.2 5,668.2 Principal repayments 298.3 322.0 524.3 345.8 362.9 Interest payments 57.2 60.0 204.6 80.6 49.5 Short-term debt 3.3 1.9 2.1 2.2 3.0 Total debt service 355.5 382.0 728.9 426.4 412.4 Ratios (%) Total external debt/GDP 166.9 171.1 159.8 134.8 78.9 Debt-service ratio, paida 32.1 33.6 55.7 20.2 16.3 Note. Long-term debt is defined as having original maturity of more than one year. a Debt service as a percentage of earnings from exports of goods and services. Source: World Bank.

The debt stock is likely to Owing to the recent write-offs, Zambia"s external debt stock is well within the

return to an upward path realms of sustainability, with no payment problems expected in the medium term. However, a lingering concern is that Zambia!along with the other countries that have also experienced debt relief in recent months!will begin to contract onerous amounts of new debt. The high aid levels promised by the G8 group of industrialised nations to accompany the MDRI have failed to materialise, and countries like Zambia find themselves with ambitious development plans and numerous institutions now prepared to lend to them. The Zambian government has repeatedly stated that it does not intend to return to the days of debt unsustainably, and is developing a comprehensive debt strategy (September 2006, Foreign trade and payments), but it does seem likely that the debt stock will return to an upward path during the forecast period. Indeed, two large loans have been recently agreed.

China provides a loan for In April Zambia secured a US$39m soft loan from China to reconstruct reconstruction infrastructure that was damaged during the 2006/07 rainy season. The president, Levy Mwanawasa, said on April 26th that China had agreed to award Zambia the funds to reconstruct roads, bridges and other infrastructure damaged by the rains. This new loan came as Zambia and Tanzania, which are joint shareholders in the Tazara railway, which links the two countries, agreed to offload some shares to Chinese investors in a move that will see fresh capital being pumped into the railway. Tazara management separately said in April that it required US$150m to rehabilitate the rail track and other infrastructure and that China would be the likely source for the funds.

The ADF provides a loan for The Treasury announced on May 21st that it had received US$55.6m from the

poverty reduction African Development Bank (AfDB) through its lending wing, the Africa Development Fund (ADF), in loans and a grant for poverty reduction budget support (PRBS), which will facilitate the implementation of priority areas in the Fifth National Development Plan (FNDP). A Treasury spokesman, Chileshe Kandeta, said that a total of US$30.5m under this component would contribute towards sound macroeconomic management, wealth creation, social equity and public-service reforms in order to enhance medium-term economic

development. In addition, there is a US$22.9m loan for improving rural water supply and sanitation, which is expected to increase access to safe water for rural communities!a Millennium Development Goal target. A component of US$2.2m was given to Zambia as a grant to conduct feasibility studies on the construction of a bridge at Kazungula, on the border with Zimbabwe. The project had previously been stalled after facing opposition from Zimbabwe, which has claimed that the Zambian authorities planned to cut into its territory without involving it in initial discussions for the construction of the bridge. If built, the Kazungula Bridge will be a major gateway for trucks travelling from South Africa to Zambia. The construction of the bridge would remove congestion at the border at Kazungula, where trucks are usually stuck for several days each time the unreliable pontoon currently operated there breaks down.