- The past quarter has seen a notable deterioration in Zambia’s growth prospects. The announcement of budgetary aid suspension in the context of the ongoing stalemate regarding IMF support resulted in a confidence crisis, which was then followed by an unconvincing fiscal budget statement. We have now revised growth for 2018 markedly lower from 4.1% to 2.5% on account of a larger shortfall on the external position, negative revisions to the growth- supportive fiscal position and foreign direct investment, a higher inflation projection and a weaker kwacha exchange rate.
- Zambia’s merchandise trade position weakened markedly during 2018 H1, with a rise in exports being more than offset by a higher import bill. Together with a wider services account deficit, the weaker merchandise trade position is expected to result in a wider current account deficit this year. Zambia’s current account deficit is projected to widen from 3.9% of GDP in 2017 to 5.5% of GDP this year, before widening further to 6.6% of GDP in 2019.
- September saw a lending freeze trigger a sharp sell-off of the kwacha, while a sense of urgency to address investors’ loss of confidence was severely lacking in the recent budget statement. Zambia remains hopeful that discussions with the IMF will bear fruit, but we attach a low probability to an agreement this quarter as the pace of consolidation – albeit more realistic than in previous budgets – signalled a discounted view of external risks to fragile economic recovery.
- Consumer price inflation is projected to average 8.1% this year before averaging 8.9% in 2019. In turn, the policy rate is expected to be maintained at 9.75% for the remainder of 2018 and deep into 2019, bar a further deterioration in risk perceptions – most likely stemming from fiscal concerns.