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Country Report September 2003

Zambia

September 2003

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Zambia at a glance: 2003-04

OVERVIEWThe priority for the government of Levy Mwanawasa, the president, for theremainder of 2003 will be to persuade striking public-sector workers to acceptthe rescinding of their recent pay rise owing to donor pressure. As the strikingworkers are not being paid, they will be compelled to accept the government�soffer. Despite this pressure, skilful countermeasures should ensure that thepresident and the ruling Movement for Multiparty Democracy (MMD) remainin power throughout the forecast period. Higher copper production will lift realGDP growth to 3.1% in 2003 and 3.4% in 2004. Improved maize harvests shouldallow inflation to fall to an average of 21.7% in 2003 and 19.9% in 2004. Highinflation differentials with Zambia�s main trading partners will cause thekwacha to depreciate to an average of ZK4,833:US$1 in 2003 and ZK5,541:US$1in 2004. Higher copper prices and export volumes will cause the current-account deficit to narrow to 3.8% of GDP in 2003 and 1.7% of GDP in 2004.

Key changes from last month

Political outlook• The trial of the former president, Frederick Chiluba, for multiple counts of

public theft began in late August. There is a reasonable possibility that hewill be found guilty on at least some of the charges, but a conclusive verdictseems unlikely given the number of counts and the possibility that high-profile members of the current government could be implicated.

Economic policy outlook• The economic policy outlook remains unchanged.

Economic forecast• Year-on-year inflation rose from 20.2% in July to 20.3% in August owing to

higher food prices. This may signal that the impact of the much improvedfood supply situation (caused by the near doubling of the maize harvest thisyear) on inflation is weakening. Although this is earlier than the EconomistIntelligence Unit had anticipated, we had thought that the inflation rate hadnearly bottomed out as a result of the rise in inflation pressures stemmingfrom the strength of the South African rand against the kwacha. Wetherefore maintain our forecast for average inflation for 2003 of 21.7%.

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Zambia 1

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2003-047 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

16 Economic policy

20 The domestic economy20 Economic trends21 Mining and energy22 Agriculture23 Tourism

24 Foreign trade and payments

List of tables9 International assumptions summary12 Forecast summary25 Visible trade, 200326 Foreign-exchange transactions

List of figures12 Gross domestic product12 Consumer price inflation20 Exchange rate, 200321 Inflation

Zambia 3


Summary September 2003

The priority for the government of the president, Levy Mwanawasa, for theremainder of 2003 will be to persuade striking public-sector workers to acceptthe rescinding of their recent pay rise owing to donor pressure. As the strikingworkers are not being paid, they will be compelled to accept the government�soffer. Despite this pressure, skilful countermeasures should ensure that thepresident and the ruling Movement for Multiparty Democracy (MMD) remainin power throughout the forecast period. Higher copper production will lift realGDP growth to 3.1% in 2003 and 3.4% in 2004. Improved maize harvests shouldallow inflation to fall to an average of 21.7% in 2003 and 19.9% in 2004. Highinflation differentials with Zambia�s main trading partners will cause thekwacha to depreciate to an average of ZK4,833:US$1 in 2003 and ZK5,541:US$1in 2004. Higher copper prices and export volumes will cause the current-account deficit to narrow to 3.8% of GDP in 2003 and 1.7% of GDP in 2004.

Mr Mwanawasa has comfortably survived an impeachment motion in parlia-ment over alleged �gross misconduct�. Two leading members of the MMD whosupported the impeachment have been dismissed. Two high-profile membershave left the main opposition party, the United Party for NationalDevelopment, to join the MMD. The Constitutional Review Commission hasbegun public hearings. The trial of the former president, Frederick Chiluba, onmultiple charges of theft has begun. There have been armed military incursionsby militia groups from the Democratic Republic of Congo.

Donors have withheld budgetary support owing to government over-expenditure, particularly on a recent public-sector pay package. Public-sectorworkers have staged a number of strikes over the government�s attempts torescind the pay package. Ng�andu Magande has been appointed the newfinance minister. Bids have closed for the privatisation of the ZambiaCommercial Bank. The Bank of Zambia (BoZ, the central bank) has taken afurther step towards liberalising the foreign-exchange market by introducing abroad-based dealing window.

Inflation has remained on a steady downward trend because of easing foodprice inflation. Copper mining has resumed at the Chambishi mine after thecompletion of a five-year rehabilitation programme. The Zambia ElectricitySupply Corporation (Zesco) has been selected to build the power line to theKansanshi mine. Trans Sahara Trading has taken the government to court overthe termination of its exclusive oil supply contract. Bumper harvests have beenrecorded for most food crops.

The trade deficit has narrowed in the second quarter of 2003, compared withthe first quarter, owing to higher copper exports. The focus of illegal cross-border trade has switched from Zimbabwe to Botswana and Namibia. Foreign-exchange reserves have fallen owing to the withholding of donor support.

Editors: Paul Gamble (editor); Angus Downie (consulting editor)Editorial closing date: September 11th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Outlook for 2003-04

4 Zambia


Political structure

Republic of Zambia

Unitary republic

Based on the 1996 constitution

National Assembly; 150 members elected by universal suffrage, serving a five-year term.The president can appoint eight further members

Presidential and legislative elections due in late 2006 (last presidential and legislativeelections December 2001)

President, elected by universal suffrage for a term of five years

The president and his appointed cabinet. The last major reshuffle was in May 2003

The Movement for Multiparty Democracy (MMD) is the ruling party and holds a slimparliamentary majority. The United Party for National Development (UPND), formed inlate 1998, is the largest opposition party in parliament, followed by the former sole party,the United National Independence Party (UNIP) and the recently formed Forum forDemocracy and Development (FDD). Other parties represented in parliament are theHeritage Party, the Zambia Republican Party and the Patriotic Front

President & minister of defence Levy MwanawasaVice-president Nevers Mumba

Agriculture & co-operatives Mundia SikatanaCommerce, trade & industry Dipak PatelCommunications & transport Augustine MwapeDefence Michael MabengaEducation Andrew MulengaEnergy & water development Kaunda LembalembaFinance & national planning Ng!andu MagandeForeign affairs Kalombo MwansaHealth Brian ChituwoHome affairs Ronnie ShikapwashaInformation & broadcasting Mutale NalumangoLands Judith KapijimpangaLabour & social security Mutale NalumangoLegal affairs George KundaLocal government & housing Sylvia MaseboMines & minerals development Davison MulelaScience, technology & vocational training Abel ChambeshiTourism, environment & natural resources Patrick KalifungwaWorks & energy development Ludwig Sondashi

Caleb Fundanga

Official name

Form of state

Legal system

National legislature

Main political parties

Key ministers

National elections

Central bank governor

Head of state

National government

Zambia 5


Economic structure

Annual indicators1998 a 1999 a 2000a 2001 a 2002 b

GDP at market prices (ZK bn) 6.3 8.4 12.2 14.3 17.8GDP (US$ bn) 3.4 3.5 3.9 4.0 4.1

Real GDP growth (%) -1.9 2.2 3.6 4.9 2.3Consumer price inflation (av; %) 24.5 26.8 26.0 21.4 22.2 a

Population (m) 10.0 10.2 10.4 10.6 10.7 a

Exports of goods fob (US$ m) 816.0 756.0 746.0 887.0 920.0Imports of goods fob (US$ m) 863.0 922.0 978.0 1,253.0 1,157.0

Current-account balance (US$ m) -265.0 -181.0 -275.0 -439.0 -265.0Foreign-exchange reserves excl gold (US$ m) 69.4 45.4 244.8 183.4 535.1 a

Total external debt (US$ bn) 6.9 5.9 5.7 5.7 5.9

Debt-service ratio, paid (%) 21.0 16.9 21.2 28.5 42.9Exchange rate (av) ZK:US$ 1,862.1 2,388.0 3,110.8 3,610.9 4,307.0 a

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2001 % of totalAgriculture 14.9 Private consumption 49.9Industry 27.6 Government consumption 12.4

Manufacturing 10.4 Gross fixed capital formation 44.6 Construction, electricity, gas & water 9.7 Change in stocks 1.3

Mining 7.0 Exports of goods & services 31.8Services 57.6 Imports of goods & services -40.0

Principal exports 2002a US$ m Principal imports 2002a US$ mCopper 594 Metalsb 194

Cobalt 54 Othersb 963

Main destinations of exports 2002c % of total Main origins of imports 2002c % of totalMalawi 10.2 South Africa 64.1Thailand 9.2 US 3.7

Japan 9.0 China 3.6South Africa 7.8 Tanzania 3.5

a Official estimates. b This is the only breakdown the Bank of Zambia provides. c Based on partners� trade returns; subject to a wide margin oferror.

6 Zambia


Quarterly indicators2001 2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

PricesConsumer prices (1994=100) 575.9 611.2 672.3 684.9 712.2 765.7 828.3 843.5Consumer prices (% change, year on year) 17.1 17.9 19.0 20.7 23.7 25.3 23.2 23.2Copper, LME (US$/tonne) 1,472.9 1,428.2 1,559.0 1,612.1 1,516.7 1,553.4 1,662.7 1,641.4

Financial indicatorsExchange rate ZK:US$ (av) 3,653 3,788 3,895 4,130 4,504 4,699 4,652 4,846Exchange rate ZK:US$ (end-period) 3,720 3,830 3,936 4,481 4,557 4,334 4,874 4,828Deposit rate (av; %) 24.27 24.30 24.30 23.80 22.43 22.77 22.50 22.43Weighted lending base rate (av; %) 46.67 46.57 48.57 45.97 43.67 42.59 43.47 41.42Treasury bill, 91-day rate (av; %) 46.00 46.52 45.00 33.72 29.15 30.28 31.97 31.32M1 (end-period; ZK bn) 1,012.9 1,041.4 928.7 1,056.7 1,132.5 1,339.3 1,254.1 n/aM1 (% change, year on year) 58.3 34.2 17.5 20.9 11.8 28.6 35.0 n/aM2 (end-period; ZK bn) 2,653.0 2,759.7 2,704.4 3,129.6 3,227.9 3,619.2 3,673.5 n/aM2 (% change, year on year) 34.2 13.6 30.6 34.5 21.7 31.1 35.8 n/aSectoral trendsCopper in concentrates, production (�000 tonnes 74.7 82.5 77.8 81.1 86.1 91.7 74.3 86.9Copper in concentrates, exports (�000 tonnes) 75.8 77.6 79.0 83.7 81.1 85.1 78.9 89.6Cobalt production (tonnes) 1,169 1,005 1,097 1,016 1,015 854 751 859Cobalt exports (tonnes) 1,400 926 1,131 1,079 1,018 788 756 859Foreign trade (US$ m)a

Exports fob 157.1 151.1 167.1 164.3 177.4 160.6 218.3 n/aImports fob -256.8 -229.4 -242.7 -275.8 -282.5 -252.3 -278.6 n/aTrade balance -99.8 -78.4 -75.6 -111.5 -105.1 -91.7 -60.2 n/aForeign reserves (US$ m)Reserves excl gold (end-period) 196.2 183.4 170.6 364.7 379.5 535.1 509.6 415.6

a DOTS estimates.

Sources: Bank of Zambia, Statistics Fortnightly; IMF, International Financial Statistics; Direction of Trade Statistics.

Zambia 7


Outlook for 2003-04

Political outlook

The main challenge facing the government for the rest of 2003 is to find a wayto accommodate the conflicting demands of donors and public-sectoremployees. Donors are withholding vital budgetary support in protest atgovernment overspending so far this year, in part the result of a higher thanprojected public-sector pay award. The government is now trying to rescindthis, a move being resisted by civil servants, who are on strike over the issue.The IMF has also indicated that it will not compromise. With the governmentunprepared to cut other spending commitments"it links them to its politicalsurvival"it will probably refuse to pay the striking civil servants, eventuallycompelling them to return to work, no doubt with the promise of a pay rise in2004. Despite the damage that this will cause to the government�s standing, theskilful use of patronage should ensure that the president, Levy Mwanawasa,and the ruling Movement for Multiparty Democracy (MMD) remain in powerthroughout the forecast period.

Mr Mwanawasa has employed skilful countermeasures to strengthen hisposition and weaken the opposition. A number of opposition figures"includingsome of his sternest critics"have been appointed to government, in most caseswithout their party�s consent. Mr Mwanawasa has also managed to fatallyweaken an anti-government alliance formed in December 2002. Key membersof the alliance have defected, including the United National IndependenceParty (UNIP), the third largest party in parliament, which entered into an ill-defined alliance with the MMD in early May. This support gives thegovernment a comfortable majority in the National Assembly. Finally,Mr Mwanawasa has launched a constitutional review process, which began inAugust (the constitution that Mr Chiluba rammed through in 1996 in the face ofwidespread opposition has been widely criticised for being flawed andpartisan). Civil society bodies have been divided over whether or not toparticipate in the review process which could make it harder for them tooppose the government.

Many donors were unhappy at the manner of Mr Mwanawasa�s electoralvictory and have become increasingly critical of government performance,particularly regarding economic policy. The IMF and bilateral donors havealready suspended much of the budgetary support scheduled for 2003, inprotest at the government�s fiscal laxity. Mr Mwanawasa�s anti-corruption drivehas, however, impressed donors, despite a growing suspicion that its prime aimis the consolidation of the president�s power base. If Mr Mwanawasa isimplicated in the corruption trials, donors may have no choice but to stopfunding the government.

International relations

Domestic politics

8 Zambia


Economic policy outlook

The immediate policy priority is to restore IMF budgetary support, which wassuspended in June owing to government overexpenditure (largely caused by ahigher than budgeted pay rise for public-sector workers). Donors wereprojected to fund 43% of the 2003 budget but, with others following the IMF�slead, the government urgently needs to make the necessary spending cutbacksto get donors back on board. The Economist Intelligence Unit anticipates thatthe government will face down the civil servants currently striking over thereversal of their pay award. Nonetheless, the IMF has indicated that it willmonitor the government�s performance for the rest of the year and is thereforeunlikely to disburse any funds. Without donor support the government will beunable to fund adequately the programmes in the poverty reduction strategypaper (PRSP), which is supposed to form the basis of government policy. Inorder to achieve the PRSP�s main goals of diversifying from mining, developingagriculture and reducing poverty, it proposes increasing the rate of economicgrowth and infrastructural development, and privatising parastatals.

The setback to relations with the IMF has pushed back the announcement of anew lending programme under the poverty reduction and growth facility(PRGF) until at least early 2004"the previous one lapsed in March. It will alsodelay Zambia reaching completion point under the heavily indebted poorcountries (HIPC) initiative, which triggers a substantial debt write-off, althoughwe still expect this to be achieved in 2004. This assumes that the IMF issatisfied with the government�s performance over the remainder of the year. Atpresent we expect this to be broadly the case, but a potential stumbling block isprivatisation, a policy that Mr Mwanawasa, and the new finance minister,Ng�andu Magande, both oppose.

Lax fiscal management, because of unbudgeted spending on public-sector pay,patronage and consolidating the government�s position, will ensure that thefiscal targets"of a deficit of 1.6% of GDP in 2003 and a balanced budget in2004"are breached. Instead, we forecast that a suspension of donor supportwill cause the deficit to widen to 4.3% of GDP in 2003, before it improves to3.4% of GDP in 2004, as donor support is partially resumed.

The suspension of donor support will cause a significant shortfall in budgetedrevenue in 2003. As much of this money was targeted for capital projects, thesewill not be undertaken and therefore total expenditure will also fall. Evenassuming that the government is able to reverse the public-sector pay rise, theoverexpenditure so far this year will cause strong growth in recurrentexpenditure. Although the much improved maize harvest, estimated at1.2m tonnes (nearly double last year�s harvest), will allow a saving on thebudgeted cost of food imports, the constitutional review process and theanticipated continued stream of by-elections will be expensive. Relativelybuoyant real GDP growth prospects this year mean that we expect thegovernment to meet its target for domestic revenue collection. A number of taxrises have been announced and the efficiency of the Zambia RevenueAuthority should ensure strong compliance.

Policy trends

Fiscal policy

Zambia 9


Higher real GDP growth will boost revenue in 2004, but pressure to increasespending will continue. Public-sector workers will be aggrieved at the expectedreversal of their pay deals and the government may well offer them an above-inflation pay rise next year. The scheduled full introduction of the much-delayed medium-term expenditure framework (MTEF) will create savings byimproving the quality of spending plans, provided that the governmentremains genuinely committed to the process. However, there is little sign ofenthusiasm for the MTEF from either Mr Mwanawasa or Mr Magande. If theMTEF is credibly implemented, this will help ensure that donor support will bemore forthcoming during 2004 than during 2003. The shortfall in donorfunding in 2003 will force the government to finance its deficit domestically,adding to domestic debt"the value of outstanding Treasury bills was ZK1.11trnon August 1st, up by 36% on the end-2002 level"and increasing its debt-servicebill. Greater external financing in 2004 should ease the pressure on thegovernment to issue new T-bills.

Monetary policy is focused on achieving an year-end inflation target of 8%.Although we expect this to be missed by some distance, the Bank of Zambia(BoZ, the central bank) will continue to aim to reduce inflation throughout theforecast period by slowing growth in reserve money through the use of openmarket operations. The BoZ may also make further alterations to thecommercial bank reserve requirement in order to control money supply. It is theBoZ�s objective to reduce the reserve requirement in order to free up funds forbanks to lend. This should allow an increase in bank profitability and thereforea reduction in the spread between lending and deposit rates (currently around20%). However, this would be inflationary over the short term, so we do notexpect much progress over the forecast period. Real lending rates are expectedto remain high, owing to the government�s loose fiscal policy and the need toattract investment into government securities in order to sustain high levels ofdomestic borrowing. Real deposit rates will remain negligible due to the lowlevel of financial intermediation. We expect only a slight decline in nominalrates, in line with our forecast fall in inflation.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.2 2.9 3.2 3.9OECD 0.9 1.8 1.7 2.4EU 1.5 1.0 0.7 1.9Exchange rates¥:US$ 121.5 125.3 118.1 116.8US$:� 0.896 0.945 1.123 1.183SDR:US$ 0.785 0.772 0.718 0.702Financial indicators� 3-month interbank rate 4.26 3.33 2.27 2.25US$ 3-month Libor 3.78 1.80 1.11 1.42

International assumptions

Monetary policy

10 Zambia


International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Commodity pricesOil (Brent; US$/b) 24.5 25.0 26.8 18.9Gold (US$/troy oz) 271.1 310.3 343.3 317.5Copper (US cents/lb) 71.5 70.4 74.5 83.0Industrial raw materials (% change in US$ terms) -9.7 2.2 9.1 3.9

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

Global economic performance has improved recently and we now expectglobal GDP growth to rise to 3.2% in 2003. Growth will accelerate to 3.9% in2004, fuelled by fiscal and monetary easing in the US. Nevertheless, there arestill serious problems in some of the world�s largest economies and it will takeuntil late 2004 for the global economy to reach a trend pace of growth. Copperprices are forecast to rise by 6% in 2003 to 74.5 US cents/lb and by a further 11%in 2004 to 83 US cents/lb, in line with higher global demand.

The main copper producers are confident of increasing their output in 2003"output is up by 1.5% in the first half of the year compared with the same periodof the previous year. Output growth is accelerating"in the second quarteroutput was 7% higher than in the second quarter of 2002"and we forecast thatfor 2003 as a whole output will rise by 8%, to around 365,000 tonnes. Thepositive impact that this will have on GDP growth will be supported byimproved agricultural production"the 2003 maize harvest is projected to benearly double last year�s. We expect growth in the services sector to be lower,as investment in the mining sector will fall after the withdrawal of AngloAmerican in 2002. In addition, some tourists will continue to be deterred bythe economic and political crisis in neighbouring Zimbabwe and flight arrivalsduring the first half of 2003 are lower than in the same period of 2002. Thepublic-sector strike will hit the operating environment for all firms, though weare not expecting the impact of this to last more than a few months. Therefore,because of the improved prospects for the maize harvest and higher copperproduction, we forecast real GDP growth of 3.1% in 2003.

In 2004 real GDP growth is forecast to increase to 3.4%, in line with risingcopper prices and production and a recovery in services. Smaller coppermining firms will help contribute to a further, though more modest, increase incopper output, to around 380,000 tonnes. Assuming that weather conditionsare normal in 2004, the agricultural sector is expected to grow by around 4%"in an encouraging sign for next season the government has increased the size ofthe input subsidy programme for smallholder farmers by around 25%.Manufacturing growth will remain modest in 2004, as regional competitorsgain a further share of the domestic market. Services will recover in line withincreasing economic activity and greater demand in the mining sector,stimulated by higher copper prices.

Year-on-year inflation rose slightly to 20.3% in August from 20.2% in July, owingto a slight increase in food prices. The much-improved food supply this yearhad put the inflation rate on a downward trend in the seven months to July,but this factor now appears to be dissipating. The strengthening of the South

Economic growth

Inflation

Zambia 11


African rand is having an adverse effect on non-food inflation and, because ofinflationary financing of the fiscal deficit, we feel that the inflation rate isunlikely to fall much further this year. Therefore, we forecast that inflation willaverage 21.7% in 2003. Assuming normal weather conditions in late 2003 andearly 2004, we expect inflation to fall back to an average of 19.9% in 2004"thehigh rate being due to poor fiscal management.

Trade in the kwacha was further liberalised on July 23rd, through theintroduction of a broad-based dealing window. Since this date a regularmonthly pattern has emerged where the kwacha depreciates for most of themonth, as demand for foreign currency exceeds supply, before a relatively sharpappreciation as month-end approaches, when companies require local currencyto pay their salaried employees and local suppliers. The end-monthappreciation has not been enough to prevent a gradual depreciation in recentmonths. The withholding of donor support will provide momentum to thisdepreciation. Thanks, however, to higher export revenue, owing to increasedcopper production and prices, the rate of depreciation should not be asdramatic as in previous years. However, high inflation and a lack of confidencein the currency will ensure that the currency continues to lose value. Wetherefore forecast that the kwacha will average ZK4,833:US$1 in 2003 andZK5,541:US$1 in 2004.

The current-account deficit is forecast to narrow to US$178m (3.8% of GDP) in2003 and US$84m (1.7% of GDP) in 2004, owing to an improvement in the tradebalance. Export earnings are forecast to increase in 2003 and 2004 because ofhigher copper prices and export volumes. Imports will fall in 2003, as mine-related imports fall back following the completion of substantial rehabilitationwork in 2002. The bumper harvest means that after importing a substantialamount of maize in 2002 and early 2003 the government is now looking toexport 40,000 tonnes, which will have a positive impact on the trade balance.A reduction in trade-related costs associated with the fall in imports will causethe services deficit to narrow. Once Konkola Copper Mines (the country�slargest producer) is sold to a foreign investor"a deal with Sterlite Industries ofIndia is expected to be concluded later this year"the income deficit will widenbecause of increased profit remittances; this effect will be more pronounced in2004. Net current transfers will fall in 2003, owing to donors� withholding ofsupport due to government overspending and weak support for the economicreform programme. Donors will respond to improved fiscal discipline in 2004,causing the surplus on the current transfers account to rise.

Exchange rates

External sector

12 Zambia


Forecast summary(% unless otherwise indicated)

2001a 2002 b 2003c 2004c

Real GDP growth 4.9 2.3 3.1 3.4Gross industrial growth 9.2 9.9 4.0 4.1

Gross agricultural production growth -2.6 -4.1 10.0 4.0Consumer price inflation (av) 21.4 22.2 a 21.7 19.9

Consumer price inflation (year-end) 18.7 26.7 a 21.2 18.8Short-term interbank rate 46.2 45.2 a 40.8 39.5

Government balance (% of GDP) -4.3b -3.0 -4.3 -3.4Exports of goods fob (US$ m) 887.0 920.0 987.6 1,041.4Imports of goods fob (US$ m) 1,253.0 1,157.0 1,029.3 1,019.0

Current-account balance (US$ m) -439.0 -265.0 -177.6 -84.1Current-account balance (% of GDP) -11.1 -6.4 -3.8 -1.7

External debt (year-end; US$ bn) 5.7 5.9 5.3 5.0Exchange rate ZK:US$ (av) 3,610.9 4,307.0 a 4,833.0 5,541.3Exchange rate ZK:¥100 (av) 2,971.2 3,436.0 a 4,092.3 4,746.3

Exchange rate ZK:� (av) 3,234.1 4,069.7 a 5,426.3 6,552.6Exchange rate ZK:SDR (av) 4,597.2 5,579.0 a 6,727.1 7,896.2

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

The president, Levy Mwanawasa, comfortably survived an attempt in theNational Assembly on August 14th to impeach him, with the oppositionmotion defeated by 92 votes to 57. However, during the accompanyingparliamentary debate, the president!s reputation as a crusader againstcorruption was tarnished by accusations from the former vice-president, EnockKavindele, whom the president dismissed in May (June 2003, page 13). Theimpeachment vote was brought on the grounds of alleged presidential "grossmisconduct and corruption". The charge of corruption largely rested onMr Kavindele!s allegations. Mr Kavindele presented correspondence to theAssembly indicating that Mr Mwanawasa had been fully aware of anagreement Mr Kavindele had earlier signed with a South African oil trading

Parliament rejects thepresident's impeachment

Zambia 13


company, Trans Sahara Trading. Mr Mwanawasa later alleged that the deal wascorrupt and made without his knowledge"he cited this as one of the reasonswhy he was dismissing Mr Kavindele. More damagingly, Mr Kavindele alsoalleged that Mr Mwanawasa had influenced the awarding of a US$10m maizeimportation contract to a local firm headed by Mr Mwanawasa!s nephew, inwhich tender procedure was not followed. The firm is later said to havedonated ZK100m (US$21,000) to the ruling Movement for MultipartyDemocracy (MMD). Most MMD members of parliament were unmoved byMr Kavindele!s allegations, and their support, together with that of all but twolegislators of the opposition United National Independence Party (UNIP)"UNIPformed an ill-defined alliance with the MMD in May (June 2003, page 14)"ensured that the impeachment motion was defeated.

Originally the opposition had introduced the impeachment motion because ofthe controversial appointment of Mr Kavindele�s replacement, the current vice-president, Nevers Mumba. Mr Mumba was not a member of parliament at thetime of his appointment, though according to the constitution he should havebeen. Mr Mwanawasa has the right to appoint eight sworn-in members ofparliament at any one time, but he made Mr Mumba vice-president whileparliament was in recess and therefore not in a position to swear Mr Mumba inas a member. This point was withdrawn from the impeachment motion as theconstitutionality of Mr Mumba�s appointment is being examined in the courts.

Several MMD heavyweights did vote in support of impeachment, including theparty treasurer, Peter Machungwa, and the national chairman, Chitalu Sampa.Mr Mwanawasa was swift in exacting revenge; the MMD national executivecommittee (NEC) voted them both out of the party on August 8th. As a resultthey will lose their parliamentary seats, which will necessitate further costly by-elections that the public appears to have little appetite for. Mr Kavindele isrefusing to go quietly and has said that he will contest the legality of hisexpulsion on the grounds that only the party congress has the power to expelhim. Similar attempts during the tenure of the former president, FrederickChiluba, usually ended in failure; Mr Kavindele!s bid is likely to go the sameway. More damagingly for Mr Mwanawasa, Mr Kavindele has made front pagenews repeatedly since his expulsion from the MMD with damagingobservations about the president!s way of doing business. Mr Mwanawasa hasresponded in kind, calling Mr Kavindele a fool, although this has hardlyreassured the public about Mr Mwanawasa!s judgement, since it was thepresident who initially picked him.

The former foreign affairs minister and one-time fugitive, Katele Kalumba,publicly begged forgiveness from the president on August 10th and later votedwith the government in the impeachment debate, having earlier put his nameto the impeachment petition. Mr Kalumba was immediately rewarded for hischange of heart by being reinstated into the MMD at the same meeting thatexpelled Mr Kavindele. After a period on the run, Mr Kalumba had spent eightmonths in prison on suspicion of the theft of public funds and vehicle theft(February 2003, page 16). The theft of public funds charge is still pending, but inlate July Mr Kalumba was acquitted of vehicle theft, along with the former

Leading dissenters areexpelled from the MMD

Mr Kalumba receivespresidential forgiveness

14 Zambia


director of intelligence services, Xavier Chungu. Vehicle theft is a non-bailableoffence, ensuring that the two remained in jail until they were cleared.Mr Kalumba�s other charge relates to the alleged diversion of funds intendedfor roads in the North-western province to finance an extraordinary congress ofthe MMD in 2001, designed to secure the go-ahead for Mr Chiluba�sunconstitutional third-term bid. The case has not yet been brought to court anddespite the anti-corruption campaign there is increasing scepticism that it everwill be.

Another startling comeback has been that of David Diangamo, the formersecretary to the Treasury, who was sacked in January 2003 after being arrestedand charged with theft by the Anti-Corruption Commission task-force(February 2003, page 16). The state entered a nolle prosequi regardingMr Diangamo!s case on June 17th, which does not, as the state media hasmaintained, mean that he has been cleared of the charges (which insidersregarded as distinctly credible) but merely that the state has decided not toprosecute. On August 21st Mr Diangamo was promoted to the post of deputysecretary to the cabinet in charge of finance, and Mr Mwanawasa called on himand the public at large to put all the allegations of the past behind them.Domestic commentators have said that the developments regardingMr Kalumba and Mr Diangamo are making a mockery of Mr Mwanawasa!santi-corruption campaign. The two cases certainly reveal more clearly thanpreviously that a key aspect of the campaign is the president�s need to remouldthe power and patronage networks left behind by his predecessor and securedonor assistance and public endorsement while doing so. The strategy hasworked to a degree since the 2001 election, but the general public and donorsare becoming notably more cynical and unwilling to play along.

Past attempts by Mr Mwanawasa to recruit high-profile members of the mainopposition party, the United Party for National Development (UPND), havefailed but, by using the Constitutional Review Commission (CRC) that heappointed in April (June 2003, page 15), the president has managed to prise twoaway. The UPND secretary-general, Ben Tetamashimba, and the deputychairman, Austin Liato, were expelled from the party in early July for agreeingto be commissioners on the CRC; this compelled them to give up theirparliamentary seats. On August 11th the MMD adopted Mr Tetamashimba andMr Liato as its parliamentary candidates for the by-elections for their old seats,which are scheduled for September. Kenny Shepande, who had previouslydefected from the UPND, was re-elected to his old seat for the MMD onJuly 17th. After the poll the UPND party president, Anderson Mazoka, wasthreatened with arrest for apparently threatening violence after alleging that theresult was rigged. If Mr Tetamashimba and Mr Liato win their seats back too"considerable resources (despite the current fiscal squeeze) will be deployed tofacilitate this"other UPND members of parliament will be encouraged todefect. This will do nothing to help improve the condition of Mr Mazoka, whois apparently recovering slowly after treatment for cerebral malaria inJohannesburg.

Former Treasury secretarymakes a comeback

Mr Mwanawasa prisesdefectors from the UPND

Zambia 15


The CRC began its public hearings in mid-August in Lusaka. Attendance hasbeen sparse and many of those who have participated have condemned theprocess and called instead for a constitution to be adopted through aconstituent assembly. Key sections of organised civil society, most of whom aremembers of the Oasis Forum, which played a key role in blocking Mr Chiluba!sthird-term bid, have also demanded a constituent assembly and reject the CRCin its current form. Their argument is based on precedent, since Mr Chilubalaunched a similar CRC in 1995, only for the government to reject 70% of itssubmissions and instead authorise a text custom-made in key respects for thepresident. Now some of the more outspoken commissioners, including JoyceNonde of the Federation of Free Trade Unions of Zambia, say that they toowant a constituent assembly. This has led to a public argument between themand other commissioners over the issue, complete with calls for each other toresign. Mr Mwanawasa originally opposed a constituent assembly, but has sincesaid that he could support the proposal, if it is made by the CRC. CRCmembers are paid an allowance for each commission sitting and the CRC wasallocated ZK700m (US$145,000) in the 2003 budget, ZK200m more than thecost of the civil servants! 2003 pay award which the government is currentlyseeking to renege on (see Economic policy).

Mr Chiluba was arrested and accused of multiple charges of theft on July 30th.These were added to those the former president had already been charged within February (June 2003, page 16). A few days later the Supreme Court ruled thatMr Chiluba!s case could proceed in a magistrate!s court, rejecting the argumentof his lawyers that the court could be biased against him. Mr Chiluba!s casebegan on August 14th and he and his co-accused, Mr Chungu, pleaded notguilty to 65 counts of theft totalling ZK19bn. The sheer number of the chargeshas raised questions about the real intentions of the state!s prosecution. Eachcount will have to be examined separately, with witnesses for the defence andthe prosecution, and the whole process is set to take years. Mr Chiluba!s formeragriculture minister, Guy Scott, has persuasively argued that the state pro-secution team has adopted this strategy either because it is not confident of itscase and simply hopes that at least some of the charges will stick or because itis not interested in a conviction. It may indeed be that the government will becontent merely to have Mr Chiluba!s past misdemeanours paraded in publicduring a long trial, even if no final verdict is reached, in order to divertattention from its own shortcomings. As it is, the trial was adjourned during thelast week of August owing to a strike by judicial workers (see Economic policy).

The UN Refugee Agency (UNHCR) began its formal repatriation programme ofAngolan refugees on July 11th. By late August around 6,000 had returnedhome, mostly from the Maheba camp in the North-western province. TheUNHCR hopes to assist the return of 20,000 refugees to Angola this year and40,000 in 2004; uncounted thousands have already returned by their ownmeans. There are an estimated 200,000 Angolan refugees in the country, manyof whom have lived there since the 1970s. Residents of the Western and North-western provinces seem relieved that the refugees are going home, blamingthem for all manner of current ills, including environmental degradation and

CRC commissioners dividedabout constituent assembly

Mr Chiluba's theft trial begins

The UNHCR beginsrepatriating Angolan refugees

16 Zambia


the proliferation of small arms. With the Angolan civil war over, there appearto be no more fresh supplies of weapons from that country, though there is stilla significant stockpile to be accounted for. For many years the Western provincetowns of Mongu, Sesheke and Kaoma have been notorious clearing houses forsmall arms, particularly AK47s which can reportedly be acquired from formerAngolan rebel fighters for the price of a 25-kg bag of maize meal. The weaponsappear mostly to have found their way to Lusaka, where they have contributedto an increasingly violent crime wave, and also to the Kafue National Park,where they have been used to devastating effect by poachers. On July 17th thepolice burned hundreds of firearms surrendered under a new amnesty processin which small sums of money are handed out and no questions asked ifweapons are brought in. Around 2,500 weapons have been handed in,according to the police, who admit that it is a tiny fraction of the number ofillegally held small arms within the country.

There have been continued problems on the long border with the DemocraticRepublic of Congo (DRC) during the past quarter, with often heavily armedCongolese militia raiding and looting Zambian villages. Additional troops weredeployed by the government to Luapula province in August to combat theproblem. This seems to have had an impact, as reports of further incursionshave diminished, but trouble is expected to continue in regions bordering theDRC for a number of years. The militia incursions are also bringing furtherillicit small arms into the country, at a time when the main Angolan supplieshave dried up.

The government says that it has resources to provide free anti-retroviral drugsfor 10,000 of the country!s estimated 200,000 AIDS sufferers, leading to con-siderable acrimony about how the decision on which of them will receive thedrugs will be taken. On August 20th the health minister, Brian Chituwo, saidthat the drugs would be distributed on a �first come, first served� basis, withpotential recipients first tested and counselled to determine the level of theirimmunity. The Global Fund to Fight AIDS, Tuberculosis and Malaria, created byBill Gates, the Microsoft billionaire, has pledged US$192m to help Zambia buyAIDS drugs. Mr Mwanawasa has complained at procedural delays that areholding up the funds! disbursal, although government bureaucracy is alsohampering HIV/AIDS programmes. The World Bank has pledged US$42m tothe same end (November 2002, page 28).

Economic policy

On June 20th the IMF announced that it was withholding US$100m inbudgetary support under the poverty reduction and growth facility (PRGF)because the government was exceeding its spending targets. In a joint statementissued on July 31st the government and the IMF agreed that the main problemwas the award in March of salary and housing allowance increases to civilservants (June 2003, page 19), which the government said was ZK500bn(US$102m) above the amount budgeted for. Honouring the pay agreement,which the government planned to do through the issuance of domestic debt,

Militia incursions from theDRC continue

ARV access will be on �firstcome, first served� basis

Donors withhold balance-of-payments support

Zambia 17


would impact on inflation, interest rates and the kwacha, ultimatelyendangering economic growth and leaving the government unable toimplement its poverty reduction strategy paper (PRSP). A subsequent 30% cut inministerial salaries was not enough to keep the fiscal deficit within thescheduled 1.55% of GDP in 2003"the Fund predicted that total spending wouldexceed the budgeted amount by ZK611bn (US$124m), around 3% of GDP. Afterthe IMF�s announcement that it had suspended PRGF support, the then actingminister of finance and national planning, George Kunda, dispatched a team toWashington in a bid to negotiate a compromise. The initiative failed. Inaddition to the withheld IMF funds, US$38m of scheduled budget support fromthe EU and the Netherlands was withheld in the second quarter of the year,while the World Bank has suspended a lending facility worth US$342m.

The government promised to renegotiate the pay award with public-sectorunions, while the IMF agreed to a macroeconomic framework that would"partially accommodate" an increase in civil service pay. The unions did notaccept this. Judicial workers staged a one-week strike in early July, prior to thetalks between the IMF and the government, demanding that the Marchagreement be honoured. The strike paralysed the judicial system, while ateachers� strike also greatly disrupted schools. Following the IMF-governmenttalks, the unions embarked on a generally well-observed three-day nationalstrike in mid-August in pursuit of their demands, particularly targeting servicesgenerating revenue for the state, such as traffic fine collection. The unionsclaimed later that their industrial action had cost the government US$2m a dayin lost revenue. Talks began between the government and civil service unionson August 21st, focusing particularly on the issue of housing allowances, whichin many cases have not been paid for 14 months. There are signs emerging of apossible compromise, with the government examining the possibility of payinghousing allowances via provincial budgets, cunningly justifying to donors theincreased provincial budgets as being part of its decentralisation strategy, whichis advocated by the PRSP. This ultimately depends on donor leniency and wasnot enough to avert another strike. Industrial action, termed by union leadersas "indefinite", began the following week and is ongoing. An IMF team willcome to Zambia in October to review progress and, should this be sufficient,begin talks on the resumption of the PRGF.

The unions! position is that they recognise the government!s problem andaccept the need for donor funds, but that they believe the government shouldfirst explore other ways to cut spending before reneging on its agreement withthem. Possible items mooted for expenditure cutbacks are:

• the 42-member Constitutional Review Commission, which is rejected bykey elements of organised civil society (see The political scene);

• district administrators, whose responsibilities largely duplicate previouslyexisting local councils;

• the luxury vehicles purchased for each of the 66-member cabinet in lateJune;

Unions propose alternativespending cuts

Attempts to renegotiate wagesprompt civil service strikes

18 Zambia


• the succession of expensive by-elections caused by the appointment intogovernment by the president, Levy Mwanawasa, of members of other partieswithout the consent of their party leadership and by expulsions from the MMD(see The political scene); and

• although not so far formally mentioned by the trade unions, there remainconcerns that the government is continuing to waste large sums of moneythrough corruption, particularly in tendering processes, despite its public anti-corruption crusade.

With Mr Kunda only a caretaker minister following the dismissal of theprevious incumbent, Emmanuel Kasonde, in May (June 2003, pages 12-13),pressure increased on the president to choose a successor. After the twocandidates turned the offer down, the president appointed Ng!andu Magandeas finance and national planning minister on July 3rd. In making theappointment Mr Mwanawasa once again bypassed parliament"as was the casewith the vice-president, Nevers Mumba (see The political scene)"ignoring therecently appointed commerce minister, Dipak Patel, who had seemed thestrongest candidate. Mr Magande is a technocrat who had previously beensecretary-general of the African, Caribbean and Pacific (ACP) group ofdeveloping countries. Prior to this he was a favoured economist of the formerpresident, Kenneth Kaunda, serving as director of several parastatals, includingthe Industrial Development Corporation of Zambia, which was Mr Kaunda!sflagship of state economic intervention, and was also a permanent secretary inthe civil service.

Mr Magande was unknown to most Zambians on his appointment and hasspoken to the media at length since to introduce himself. His comments willnot have pleased donors. Mr Magande talked about the negative consequencesof foreign direct investment in terms of loss of economic sovereignty and urgedself-reliance instead. Not surprisingly, therefore, he came out forcefully againstthe privatisation of remaining major state assets and has ruled out the sale ofZambia Telecommunications (Zamtel) and the Zambia State InsuranceCompany (ZSIC). Despite this bluster, the privatisations of the ZambiaCommercial Bank (Zanaco) and smaller companies are proceeding.

The Zambia Privatisation Agency (ZPA) announced on August 21st that bidswould finally close for Zanaco on September 19th (June 2003, page 18). It is stillnot yet clear whether the successful bidder for the 49% stake in the bank onoffer will be able subsequently to increase the shareholding above 50%. Thetwo bidders thus far"Amalgamated Banks of South Africa (ABSA) and AfricaInternational Financial Holdings (Zambia), a consortium of HSBC, theInternational Finance Corporation, the European Investment Bank, theNetherlands Development Finance Organisation and the National Bank ofMalawi"have made it clear that this is the basis on which they want Zanaco.Mr Magande was Zanaco!s managing director for a time during the 1980s andhis doctrine of self-reliance suggests a preference for retaining Zambian control.However, donors have already indicated that they will continue to withholdfunds if Zanaco is not sold, giving the bidders leverage over the government intheir negotiations.

Mr Magande is appointedfinance and planning minister

Bids will close soon for Zanaco

Bids will close soon for Zanaco

Zambia 19


As expected, the cabinet approved plans to �commercialise� rather thanconcession or sell the Zambia Electricity Supply Company (Zesco) in mid-July,after Mr Patel had earlier secured agreement for this change of strategy fromdonors (June 2003, page 18). Mr Patel has promised that a new board ofdirectors will be appointed in which representatives of government do nothave the final say. The board will monitor management, which is claimed willbe enough to ensure improved service delivery and higher spending oninfrastructure. Performance under the new arrangement is to be reviewed in 18months� time to see if it is working. Some analysts believe that the conditionsunder which Zesco is to be commercialised are more onerous than would havebeen the case with concessioning, particularly regarding Zesco!s payments to itsmany creditors and its debt collection from customers in arrears. The customerwith the highest arrears with Zesco is, of course, the state, and it remains to beseen whether commercialisation will have any significant impact on itspayment record.

The expected handover of the concession to run Zambia Railways to aconsortium of two South African companies, New Limpopo Bridge ProjectsInvestments and Spoornet, scheduled for July 1st (June 2003, page 19), ran intodifficulties and was delayed. One of the main concerns of the concessionaireswas the loss-making passenger component of the business, which they felt theycould not make profitable. Following discussions between the government andthe concessionaires, the latter agreed to continue passenger services betweenKabwe and Livingstone on condition that these were subsidised by the govern-ment for at least seven years, after which the situation would be reviewed. Themanagement of Zambia Railways now expects completion of the handover tothe consortium, to be known as Railway Systems of Zambia, in September. TheWorld Bank is to provide credit to fund the redundancy packages for thoseworkers who lose their jobs.

On July 23rd the Bank of Zambia (BoZ, the central bank) took a further step inliberalising the exchange rate by introducing a broad-based dealing windowthat allows corporates to sell their foreign currency directly to commercialbanks. Previously the BoZ operated a dealing window through which allcommercial banks would bid for up to US$1m of foreign exchange per day at aminimum exchange rate set by the central bank. The banks would receive themoney from the central bank as and when it was available. Corporates wereunder no pressure as to when they had to sell their foreign exchange to thecentral bank, which sometimes led to artificial shortages of hard currency.Under the new system the central bank aims to keep its intervention to aminimum, although it would still intervene should the kwacha start to fallsharply or if it thought one commercial bank was monopolising foreign-exchange purchases. Some concerns have been raised about the risk of a cartelforming, as the market would be dominated by the four major commercialbanks"Barclays Bank, CitiBank, Standard Chartered Bank and Stanbic Bank.Alternatively, corporates could deliberately withhold their dollars if the ratesare not favourable. However, it is likely that the new system will encourage the

Mr Patel promises that Zesco'scommercialisation can deliver

Government keeps subsidy onrail passenger services

KTZ and Maamba Collieriesup for sale

Liberalisation of the foreign-exchange market takes place

20 Zambia


kwacha to follow a smoother, albeit still downward, trajectory against themajor trading currencies.

The kwacha has been relatively stable since the introduction of the broad-basedtrading system and a regular pattern in its movement already appears to bedeveloping. This involves moderate depreciation for most of the month, asdemand for foreign currency exceeds supply, followed by a relatively sharpappreciation as month-end approaches, when companies require local currencyto pay their salaried employees.

The domestic economy

Economic trends

Year-on-year inflation has maintained a broadly downward trend over the lastquarter, although it rose from 20.2% in July to 20.3% in August. The decline sofar this year"year-on-year inflation was 26.7% in December"is mainly the resultof lower food price inflation. Food prices account for 57% of the basket used tocalculate the consumer price index, and growth in these has eased so far thisyear owing initially to the influx of donor food aid and more recently to thebumper harvest. Non-food inflation has remained under control, althoughpressures are emerging as a result of the strengthening of the South Africanrand against the kwacha (South Africa is the source of nearly two-thirds ofZambia�s imports).

Inflation remains on a slowdownward trend

Zambia 21


Mining and energy

Negotiations between the government and J&W Investments Group ofSwitzerland over the company!s proposed purchase of the liquidated RoanAntelope Mining Corporation of Zambia (Ramcoz) at Luanshya have run intoproblems. The government!s initial concern was that J&W, which wasunexpectedly declared the preferred bidder ahead of South Africa!s Avmin(June 2003, page 22), was offering too little for the asset. J&W is reported tohave raised its offer higher than its initial US$7m bid, but has not disclosed byhow much. Now J&W says it does not want the flagship Ramcoz asset, theLuanshya mine, and is only interested in the smaller and more profitableBaluba and Milyashi units. Avmin had intended to acquire and operate allthree assets. Negotiations are continuing and it seems likely that J&W will holdout, at the least, for a guarantee from a donor (possibly the World Bank) that itwill provide money for redundancy packages"only 500 of the 4,300 minerswho worked for Ramcoz have been paid their termination benefits. In late Junethe World Bank approved a US$10m credit to pay for redundancy packages forminers at Konkola Copper Mines (KCM), the country�s largest producer. Again,there has been little progress in negotiations between the government and thepreferred bidder for KCM, Sterlite Industries of India (June 2003, page 21).

Following a protracted rehabilitation process lasting around five years,Chambishi mine, owned by the China Non-ferrous Metal Industry!s ForeignEngineering and Construction Company (CNFC), went back into production onJuly 28th. CNFC says Chambishi will produce 50,000 tonnes of copper peryear, and hopes to double this figure with further investment of aroundUS$100m within five years. China is a major copper consumer and relies onimports to meet two-thirds of its needs. Chambishi is China�s major overseascopper mine and CNFC says it is interested in acquiring further assets in theneighbouring Democratic Republic of Congo. CNFC has said that transportcosts are currently too high to export much of its copper concentrate to Chinaand it is hoping for tax breaks from the Chinese government for domestic

Mining output rises in thesecond quarter

Ramcoz and KCM salenegotiations are continuing

Chambishi resumes operations

22 Zambia


copper consumers, to encourage them to source supply from overseas minessuch as Chambishi.

The plans by First Quantum Minerals (FQM) of Canada to commission theKansanshi copper and gold mine in the North-western province in the fourthquarter of 2004 had been jeopardised by delays in sourcing sufficient power.This had caused some of its previously arranged financing to fall through, butthe situation now appears to be resolved. In June, FQM had negotiated withthe Copperbelt Energy Consortium to supply the required power line toKansanshi, but this agreement was subsequently vetoed by the EnergyRegulation Board (ERB) which has ruled that the contract must go to Zesco. TheERB says the decision was taken for technical reasons and because awardingthe contract to Zesco would mean that power would continue to be supplied tothe area even if FQM pulled out. However, there is a strong suspicion that thereal reason was to bolster Zesco!s financial position in order to vindicate thegovernment!s new policy of �commercialisation�. Aware of FQM!s timeconstraints, the government called on Zesco to expedite the Kansanshi trans-mission project, which involves constructing a power line from Chingola on theCopperbelt. In response, Zesco pledged to start work in October and befinished one year later. Production at Kansanshi is forecast at 81,000 tonnes ofcopper in 2005, rising to a peak of 130,000 tonnes during the mine�s estimated16-year life span, according to FQM.

South African-based Trans Sahara Trading (TST), a subsidiary of Canada!sDiamondWorks, went to the High Court in June to prevent the Indeni refineryfrom sourcing crude oil from other suppliers. This follows the government�ssudden termination of TST�s exclusive contract to supply crude owing toserious errors in the type of fuel imported (June 2003, page 23). The court ruledagainst TST, arguing that if its injunction was granted economic chaos wouldresult. The issue has become the subject of claim and counterclaim betweenthe president, Levy Mwanawasa, and his estranged former vice-president,Enock Kavindele, whom the president claims negotiated the deal with TSTwithout proper regard for tendering procedures in order to receive an allegedkick-back. Mr Kavindele denies the allegation. TST admits it made a donation tothe MMD, but it denies bribery or any other impropriety. TST, which maintainsits contract is still valid, is now contemplating taking its case to an arbitrationcourt in London, where it says it is confident of victory.

Agriculture

In late June the Central Statistical Office confirmed earlier forecasts that the2002/03 harvest had been a strong one (June 2003, page 23). Production of thestaple crop, maize, was put at 1.16m tonnes, nearly double the 2001/02 harvest.This increase was mainly the result of improved weather conditions andgovernment efforts to distribute inputs on time across the country. Sorghumproduction in 2003 is also expected to more than double compared with 2002and substantial increases are anticipated in other crops, including rice, fingermillet, soya beans, groundnuts, mixed beans and cassava. The problem for

Zesco picked for proposedKansanshi power line

TST takes government to courtover oil supply contract

Most food crops have bumperharvests

Zambia 23


farmers is that there is often no ready market for crops apart from maize, whichcan easily be traded.

In late July Mr Mwanawasa instructed the Food Reserve Agency (FRA) to buy�all stocks� of maize not purchased commercially. The FRA set a target for thepurchase of 205,700 tonnes, but the austerity measures imposed by thegovernment following its large overspend on the public-sector pay award meanit can only currently afford a fraction of this. In order to raise more money forpurchases, the FRA plans to sell 40,000 tonnes of maize that was con-troversially imported earlier this year despite indications of a domestic bumperharvest (June 2003, page 24), before it goes off. This was initially planned to bereleased onto the domestic market, but was blocked by the Zambia NationalFarmers Union (ZNFU). The ZNFU was concerned that the sale woulddestabilise the domestic maize market by further lowering prices, so it obtaineda court injunction in August preventing the FRA from selling the maize. Thetwo parties agreed on August 12th that the surplus maize should be exportedinstead, where it is unlikely to raise as much money as it cost to import. Duringthe parliamentary debate on the president�s impeachment (see The politicalscene) Mr Kavindele linked Mr Mwanawasa to the original maize purchase,claiming that he intervened to award the contract in order to benefit hisnephew, whose company was involved in the deal. Mr Mwanawasa denies thecharge. In addition to the exports from the FRA, the good harvest means thatthe government is discussing the export of up to 120,000 tonnes of maize,probably to neighbouring Zimbabwe, provided that country can afford it.

Despite the surplus, the UN World Food Programme (WFP) says it intends tofeed up to 500,000 vulnerable people who have difficulties in securing foodsupplies, including the aged and AIDS orphans, with 48,000 tonnes of maizefrom September 2003 to June 2004. The WFP says that it bought most of themaize in Zambia, since it was cheaper than elsewhere in the region.

Tourism

The Zambia Wildlife Authority (ZAWA) officially launched a five-year strategicplan on July 30th. Speaking at the launch, the tourism minister, PatrickKalifungwa, said that wildlife resources were the �backbone� of the tourismindustry in the country and that they needed cost-effective and efficientmanagement. ZAWA was prevented from doing this by a lack of resources,according to its director-general, Hapenga Mabeta. The strategic plan calls for animproved investment environment for tourism operators, more public-privatepartnerships within the industry and greater involvement of local communitiesin game management areas, which surround most of the national parks. Localcommunities are heavily involved in poaching, which is a serious problem inthe vast Kafue National Park in the centre of the country owing to the long-standing flow of weapons from Angola during that country�s civil war. Wildlifenumbers have recovered in other parks, such as South Luangwa. Members ofthe police and defence forces are rumoured to be complicit in poaching andthere have been few prosecutions to date. According to its new strategic plan,ZAWA is to become self-financing, which many tourism operators say they fear

A wildlife development plan islaunched

24 Zambia


will mean further increases in ZAWA licence tariffs without correspondingimprovements in service delivery.

Tourism has continued to pick up in Livingstone, which is close to the country!spremier natural asset, Victoria Falls. The two Sun International hotels situatedby the Falls, that opened in 2001, finally became profitable in July. Occupancyrates are up and Nationwide Airlines, which flies direct from Johannesburg toLivingstone, has increased its flights from three times a week, when SunInternational opened, to two or three every day. Livingstone has benefited fromthe political and economic crisis in Zimbabwe that has scared tourists awayfrom the south side of the Zambezi river. Nonetheless, there remain a numberof problems for tourism operators in Livingstone and along the Zambeziwaterfront. Incidents of mugging near the Falls have gone up and excessive redtape and official obstruction has already induced several extreme sportoperators from New Zealand and Australia to quit the country. Another issue isthe lamentable state of services provided by Livingstone town council, which isbankrupt and cannot pay its staff. The council says that in 2004 it is scheduledto receive an aid package from the World Bank that will enable it to repair andimprove infrastructure and services and finance the redundancies of more thanhalf the council!s 400 staff.

Speaking on July 27th after attending the Umutomboko traditional ceremony ofthe Lunda people, Mr Mwanawasa stressed the importance of promotingcultural tourism and criticised the Zambia National Tourist Board (ZNTB) forfailing to attend. The ZNTB is notoriously underfunded"its chief executive,Charity Lumpa, explained that her officials had not attended because their onevehicle had broken down.

Foreign trade and payments

Higher copper and cobalt production and exports of non-traditional goodscaused export revenue to rise from US$207.5m in the first quarter of 2003 toUS$237.3m in the second quarter, according to data from the Bank of Zambia(BoZ, the central bank). Increased output by Konkola Copper Mines andMopani Copper Mines lifted total copper production to 86,900 tonnes in thesecond quarter, compared with 74,310 tonnes in the first quarter. Cobaltproduction in the second quarter also rose, to 859 tonnes, from 751 tonnes inthe first quarter. The higher non-traditional exports were mainly the result ofincreased sales of primary agricultural products owing to the surplus harvest,with horticultural goods and precious stones also making a strong showing.Imports fell by 8.9% in the second quarter compared with the first quarter,primarily because of reduced oil imports following the Trans Sahara Trading(TST) scandal (see The domestic economy: Mining and energy). Higher importsand lower exports resulted in the trade deficit narrowing from US$190.2m inthe first quarter to US$125m in the second quarter.

Tourism in Livingstone islooking up

The president wants morecultural tourism

The trade deficit narrows

Zambia 25


Visible trade, 2003(US$ m)

Exports Imports BalanceJan 61.4 -125.6 -64.3Feb 74.6 -142.2 -67.6

Mar 71.5 -129.8 -58.3Apr 64.4 -124.2 -59.8

May 85.3 -122.8 -37.5Jun 87.6 -115.4 -27.8

Source: Central Statistical Office.

The focus of illegal crossborder trade has shifted from Zimbabwe to Botswanaand Namibia. This is partly the result of the upgrading of the road betweenLivingstone and Sesheke, along which are the Kazangula border crossing toBotswana and the Katima Mulilo crossing to Namibia. The government saysthat it intends to promote the area, which it is calling the �Zambezi corridor�,and is seeking funds from donors to construct a bridge across the ZambeziRiver at Kazangula (currently crossing is made by a pontoon). As well as legaltrade, smuggling is flourishing at Kazangula and Katima Mulilo, as traders seekto take advantage of lower prices for fuel, cooking oil, alcohol and cigarettes inBotswana and, to a lesser extent, Namibia. The Zambia Revenue Authority isfinding it impossible to stop this trade, particularly as it has not had a boat topatrol the Zambezi for the last three years, enabling traders to cross the river indug-out canoes with impunity. The police deploy roadblocks along theLivingstone-Sesheke road, supposedly in a bid to stop smuggling, althoughmany officers seem more content to extract bribes from motorists for minortraffic offences. Crossborder trade has, however, noticeably declined betweenZambia and Zimbabwe across the Livingstone border. This trade was untilrecently substantial and was the cause of a protracted dispute between the twocountries (August 2002, page 29). It appears that the official devaluation of theZimbabwean dollar, rising commodity prices within Zimbabwe and a ban onbulk purchasing of basic goods have all discouraged crossborder trade.

A report by the heavily indebted poor countries (HIPC) initiative expendituretracking and monitoring unit, covering 2002, was released in August. Its mainfinding was that during the year only ZK113bn (US$26m) out of ZK450bn offunds saved in debt servicing by the HIPC were released for poverty reductionprogrammes. This was a lower proportion of budgeted HIPC expenditure thanwas released during 2001 and was despite several attempts by the Ministry ofFinance and National Planning to sensitise other ministries and provincialadministrations about HIPC expenditure allocation and tracking. The reportfound that in Central Province, for example, there was no procedure in place tomonitor HIPC expenditure and that HIPC resources were being used to financesuch things as spare parts and fuel for vehicles instead of poverty reduction.The government has promised donors that it will improve performance during2003, but preliminary indications are that there will once again be a severeunderspend. Owing to the withholding of poverty reduction and growthfacility (PRGF) assistance by the IMF, Zambia will not reach HIPC completionpoint, at which reductions in debt stock are awarded, in 2003, as the

The focus of illegal cross-border trade switches

HIPC resources on povertyreduction are underspent

26 Zambia


government (though not The Economist Intelligence Unit) had anticipated. Weagree with the government that this is now likely in 2004.

The latest data from the IMF�s International Financial Statistics show thatforeign-exchange reserves plunged from a 30-year high of US$557.6m in May toUS$415.6m in June. This was the result of two payments to the IMF"ofSDR18.2m (US$25.7m) and SDR65.2m"in respect of previous loans. These areregular payments that are usually offset by the disbursement of funds underthe PRGF, but with IMF funding suspended they had to be met by drawingdown reserves. Further repayments of the Fund�s two loans are due inDecember and with IMF funding unlikely to be resumed until the new yearthere will be a further pronounced fall in reserves at the end of 2003. (The tableis from the Bank of Zambia, so the reserve figures differ from those of the IMF.It also only runs until May, but it shows the trend in debt servicing and donordisbursements.)

Foreign-exchange transactions(US$ m)

Inflows OutflowsDonors Others Debt servicing Others Reserves

2002Jan 4.5 17.2 0.1 13.5 149.6Feb 0.4 13.5 3.8 21.9 137.8Mar 1.5 14.0 4.2 19.8 129.2Apr 1.0 28.0 15.9 13.5 128.8May 0.7 15.9 2.6 22.7 120.2Jun 274.1 18.3 113.5 14.1 285.0Jul 0.6 28.2 7.2 28.3 278.2Aug 0.6 20.6 5.3 21.7 272.3Sep 18.9 19.6 1.3 9.2 300.3Oct 0.5 15.9 0.7 32.7 283.3Nov 11.6 19.5 10.5 25.7 278.1Dec 337.3 15.8 113.7 -30.4 489.82003Jan 1.3 13.9 10.6 -9.8 477.6Feb 2.5 17.5 2.3 -8.8 472.9Mar 0.0 11.6 6.1 -7.0 463.5Apr 6.2 25.6 4.5 2.9 485.9May 3.9 58.1 19.3 13.8 526.8

Source: Bank of Zambia.

Withheld donor money hitsforeign-exchange reserves

zambia - iuj.ac.jp · zambia 1 country report september 2003 ' the economist intelligence unit...

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