At Fitch Solutions, we forecast that Zambia’s real GDP will rebound from a 2.8% contraction in 2020 to 3.1% growth in 2021. Growth came in at a robust 8.1% y-o-y in Q221 (latest available data), reflecting both the easing of lockdown restrictions and favourable base effects coming off of a 5.1% contraction in Q220. While y-o-y growth will ease over H221 as base effects fade, we expect the economic recovery to continue. Zambia’s Purchasing Managers’ Index came in above the neutral threshold of 50.0 in September and October – for the first time since April 2021 – partly reflecting strengthening business confidence following the victory of business-friendly candidate Hakainde Hichilema in the August 2021 presidential election. We believe that business sentiment will continue to improve over Q421, while a bumper May-June 2021 cereal harvest will boost farmers’ incomes and purchasing power. Despite the lingering negative impact of the Covid-19 pandemic, we expect private consumption to be the main driver of the 2021 recovery, adding 1.6 percentage points (pp) to headline growth.

Low-Base Effects Boost Q221 Growth

Zambia - Real GDP Growth, % y-o-y

📷

Source: Zambia Statistics Agency, Fitch Solutions

Growth To Strengthen Further In 2022

We forecast that real GDP growth will accelerate to 3.3% in 2022, with private consumption remaining the main driver. We expect that average annual inflation will moderate from a two-decade high of 22.8% in 2021 to 13.0% in 2022, as a stable kwacha tempers import costs, easing pressures on disposable incomes. Moreover, continued government assistance under the Farmer Input Support Programme will facilitate further expansion of cultivated agricultural land. Assuming that weather conditions remain favourable next year, this will benefit agricultural production and thus household purchasing power (49.6% of the workforce is employed in the agricultural sector). A further opening of the economy is also likely, which will support labour market conditions and household incomes, though some social distancing restrictions are likely to remain in place due to the slow vaccine roll-out (only 1.6% of the population has received at least one vaccine dose at the time of writing). Against this backdrop, we forecast private consumption growth of 4.3%, contributing 2.0pp to headline growth.

Private Consumption To Strengthen

Zambia - Contribution To Real GDP Growth, pp

📷

e/f = Fitch Solutions estimate/forecast. Source: UN, Fitch Solutions

Tailwinds to private investment will further support growth. The improving consumer outlook will contribute to rising investment in consumer-facing sectors. Following temporary power cuts in October and November 2021, electricity supplies are likely to remain stable in 2022 as a result of higher water levels at the Kariba hydropower dam (which produces more than half of Zambia’s electricity), and we expect this to result in stronger industrial output, and encourage investment in manufacturing sectors. Moreover, in its 2022 budget statement, the government announced the re-introduction of deductibility of mineral royalties from corporate tax (a key demand from the mining industry), which is likely to increase the attractiveness of the sector to new investment over the coming quarters. Corporate income tax will be cut from 35.0% to 30.0% from January 2022, while new tax holidays will be offered for export-oriented investments in Zambia’s Multi-Facility Economic Zones.

Business Conditions Will Continue To Improve

Zambia - Purchasing Managers' Index

📷

Note: Readings above 50 signal improving conditions: IHS Markit, Stanbic Bank, Bloomberg, Fitch Solutions

However, fiscal consolidation efforts will result in weak public consumption and investment. The government targets a sharp reduction of the fiscal deficit from an official estimate of 10.4% of GDP in 2021 to 6.7% in 2022. Almost half of planned spending will go towards interest and principal payments on debt, reducing room for other spending areas. As a result, we forecast muted government consumption growth of 0.3% in 2022. While a breakdown of the budget into recurrent and capital expenditure is not available yet, spending on infrastructure is likely to fall further, following cuts in 2021. This will partly offset rising private investment, capping fixed investment growth at 5.2% in 2022 (below the 2015-19 average of 6.6%).

Weak Copper Output Growth To Weigh On Exports

Zambia - Copper Output And Total Exports

📷

e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions

Net exports will continue to weigh on short-term growth. Progress on vaccine roll-outs around the world will support a stronger recovery in tourism arrivals in 2022 (tourism receipts accounted for 9.9% of total exports in 2019). That said, our Mining team forecasts that output of copper (over 70.0% of exports) will expand by a muted 2.0% in 2022, which will weigh on total exports. Meanwhile, import demand will rise further as economic activity strengthens, causing net exports to subtract 1.4pp from headline growth.