Zambia Economic Analysis

2015:Q1

QUKA CONSULTING

US Shale oil and OPEC supply policy will keep oil prices low in medium term

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Oil US$/barrel

Oil US$/barrel

Source: Bank of Zambia,

LME

• Global economic recovery remains

fragile and uneven, with important

implications for the domestic

economy through developments in

commodity price trends and global

trade and financial flows.

• Growth in U.S, lower unemployment

at around 5.5% will bolster the global

economy

• The US Federal reserve has

reiterated its ability to be patient or

lack thereof in raising interest rates.

Current expectation anticipate a rate

hike in June or September

• US shale Oil production has changed

the fundamental structure of the Oil

market shifting supply control away

from Saudi Arabia to US.

• Oil is projected to stay low in the

medium term due to increased supply

and OPEC policy.

• The potential of a possible deal with

Iran will increase oil supply and keep

oil prices lower in the medium term

Lower Copper Prices due to lower global demand & a strong dollar

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Copper US cents/Lb

Copper US cents/Lb

Source: Bank of Zambia, LME

• Copper has continued to decline on the global market due to lower global demand and a strong dollar

• China’s economy which accounts for most of global copper demand has waned in recent years cooling off with

policy makers focusing more on boosting domestic demand

•

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Jan-15 Feb-15 Mar-15In

flat

ion

%

Inflation Q1 2015

Total Inflation

Food Inflation

Non Food Inflation

• The Inflation rate has dropped consecutively

in the last three months from 7.7 to 7.2%

• Non food inflation has been a key driver of

lower inflation in Q1 through lower oil prices

on the international market

Source: Central Statistics Office

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Infl

atio

n %

Inflation Year to Date

Total Inflation

Food Inflation

Non Food Inflation

• The Inflation rate averaged 7.8% over the year

2014

• In the second half of the year Non food inflation

drove overall inflation higher due to a depreciating

Kwacha which increased oil import costs.

Inflation drops for 3 consecutive months driven by lower oil prices

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USD/Kwacha Rate

USD/Kwacha Rate

Source: Bank of Zambia

• The Kwacha has depreciated against its major convertibles with a very noticeable depreciation against the US

Dollar.

• The depreciation is largely due to a stronger dollar, low copper price and some domestic issues that undermined the

supply of foreign exchange on the local market

Kwacha depreciated in Q1 due to Strong dollar, low copper prices and domestic issues

Province Target(MT) Purchases(MT) % beyond target Crop value(ZMW)

Central 50,600 149,488 195 209,283,760

Copperbelt I5,000 36,945 147 51,778,510

Eastern 89,100 251,123 182 351,852,340

Luapula 60,450 76,402 27 107,523,220

Lusaka 13,600 35,035 15 49,048,370

Muchinga 65,900 110,397 69 154,555,710

Northern 99,550 154,010 55 215,614,560

North Western 35,000 58,240 66 41,536,070

Southern 63,850 140,132 120 196,185,010

Western 6,950 18,891 172 26,447,050

National Total 500,000 1,031,303 106 1,443,324,620

The Food reserve agency continues to buy maize above the budgeted target

• FRA purchasing of maize above target combined with the introduction of maize subsidies will stretch the budget

deficit

• Due to poor rains, Zambia is not projected to record a bumper harvest with some regions expected to record food

deficits.

Source: Ministry of Agriculture

Loan advances to agriculture dropped, manufacturing and whole sale rose

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ZMW

Commercial Bank Loan and Advances Other sectors

Agriculture,forestry,Fishingand hunting

Mining andquarying

Manufacturing

Wholesale andretail trade

• Commercial loans to Agriculture sector declined in first quarter mainly attributed to seasonal trends for rainfall.

• Loans to Manufacturing and wholesale sectors showed strength in the first quarter

Source: Bank of Zambia

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2010 2011 2012 2013 2014

Gross Domestic Product

Growth rate(%)

• Preliminary figures regarding overall GDP

growth suggest that non-mining output grew

strongly at close to 7.0%. However, output

in the mining and quarrying sector

contracted by around 1.4%, pulling down

the overall GDP growth to 6.0% in 2014

compared with 6.7% in 2013.

• Growth in non-mining output was largely

driven by the following sectors: transport,

storage and communications; construction;

financial institutions and insurance;

agriculture, forestry and fishing; wholesale

and retail trade; and community, social and

personal services.

• Preliminary estimates of Zambia’s GDP

growth in the first quarter 2015 are around

1.25%

• This lower than a seasonal 1.5% pulled

down by a 0.25% contraction in mining

We estimate the Zambian economy grew by 1.25% in Q1 2015

Source: Bank of Zambia

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2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014

Mining tax (%Revenues)

Mining tax (%Revenues)

Source: Central Statistics Office

Mining Tax regime is to be reverted back to a two tier system

• Mining tax a s a percentage of revenues have been low but increased since 2010

• In the 2015 Budget announce last year, Minister of Finance Alexander Chikwanda proposed a one tier tax system

based on increased mineral royalties.

• Some mining houses threated to cut jobs and stall investment in reaction to this development.

• President Edgar Lungu recently decreed to revert back to the two tier tax system which should come to effect on 8

April 2015.

One in four youths in Zambia are unemployed

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Unemployment in Zambia

Unemployment, total (%)

Unemployment, youth total (%)

Source: World Bank

• Wage growth remained weak while labour force participation increased due to recent University graduates

• The natural rate of unemployment in Zambia still remains unofficially targeted

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Trade balance

Trade balance

Source: Central Statistics Office

• Zambia faced a narrowing trade surplus broadly over 2014 even recording a trade deficit in December 2014

• In the first quarter 2015 Zambia has broadly recorded a trade deficit, widening over January to February

• *March results come out in May 2015

Zambia recorded trade deficits for 3 months consecutively

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2009 2010 2011 2012 2013 2014

Export Earnings (US$ millions)

Export Earnings

Non-Traditional Export Earnings

Source: Central Statistics Office

• External sector performance continued to deteriorate during the quarter under review with preliminary data

indicating that the overall balance of payments deficit widening to US $152.9 million from US $125.0 million

recorded during the third quarter of 2014.This situation continued in the first quarter 2015.

• The widening in the deficit was mainly driven by unfavorable performance in both the current and financial accounts.

External sector performance deteriorated in Q1 2015

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2009 2010 2011 2012 2013 2014

Current Account(US Millions)

Current Account

Source: Bank of Zambia

• The current account deficit widened on account of a trade deficit in Q1 as well as a widening of

the services and primary income deficits

• According to preliminary data expenses incurred with regard to fuel import purchases have

stretched the budget deficit and have put the Government under serious strain.

• The fiscal issues are further compounded with subsidies on maize, pension and road

construction as highlighted by the IMF in their recent consultation report.

Budget deficit estimated to have widened in Q1 2015

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2015 2016 2017

Personal Emoluments Amount

Source: Ministry of Finance

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2015 2017

Personal Emoluments % GDP

Source: Ministry of Finance

• Government’s objective on personal emoluments is to contain the public service wage bill within sustainable levels

in order to create more fiscal space for developmental and service delivery expenditures

Wage Freeze on Public service projected to be upheld until Q3 2015

Conclusion

• Global economic recovery remains fragile and uneven, with important implications for the domestic economy

through developments in commodity price trends and global trade and financial flows.

• In the fourth quarter of 2014, commodity prices continued to decline sharply underpinned by lower growth rates in

emerging markets, especially China

• In addition to the decline in commodity prices, there has been an overall strengthening in the US dollar, reflecting a

flight to safety by investors as well as the brighter prospects for economic growth in the United States of America.

• Inflation dropped for 3 consecutive months driven by lower oil prices in non-food inflation

• The Zambian Kwacha depreciated in Q1 due to Strong dollar, low copper prices and domestic issues

• The Food reserve agency continues to buy maize above the budgeted target which combined with subsides will

stretch the budget

• Zambia recorded trade deficits for 3 months consecutively

• External sector performance deteriorated in Q1 2015

• Budget deficit estimated to have widened in Q1 2015

• Wage Freeze on Public service projected to be upheld until Q3 2015

• Mining Tax regime is to be reverted back to a two tier system

• Quka Consulting estimates Zambia’s GDP grew in the first quarter 2015 at 1.25%, lower than a seasonal 1.5%

pulled down by a 0.25% contraction in mining

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• Quka Consulting is a data analytics research firm founded to provide timely data and accurate analysis that

provides an innovative insight which informs good decisions for our clients. We provide market analysis that

leverages absolute and comparative advantages for our clients in the business sector, putting global and local

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Disclaimer

• While every effort has been made to verify the information contained in this document, Quka Consulting cannot

accept any responsibility for any errors that it may contain.

• This document has been prepared by Quka Consulting for information purposes only. This document contains

summaries of selected reports and macroeconomic data.

• Quka Consulting does not guarantee the accuracy or completeness of information which is contained in this

document. All such information has been obtained from or is based upon publicly available trade and statistical

services or other third party sources. All information, opinions and estimates are given as of the date hereof and are

subject to change.

Contact Us

For more information on the initiative “Zambia Economic

Analysis 2015: Q1", please contact:

Kampamba Shula

Economist – World Economic Forum Global Shaper

PO Box 50722, Ridgeway

Tel: +260973833383

Email: kampambashula@gmail.com