Zambian economy needs tough measures

With plunging copper prices, weak currency, ballooning budget deficit and skyrocketing inflation, Zambia is grappling with an unprecedented economic challenge. And the newly re-elected President Edgar Lungu has an extremely tough job at hand — to remedy the various ills ailing the country’s economy.
There was a time when the southern African nation had seen the GDP growing at 10.3 percent in 2010. However, it has come down to 3.2 percent in 2015 — its lowest since 1998 — largely because of the slump in the prices of copper that accounts for 70% of Zambia’s export earnings. The metal has been trading at seven-year lows, thereby putting the economy under intense pressure. Those employed in the mining industry have also lost their jobs.
Zambia’s currency has plummeted by 25 percent against the dollar in the past year. The budget deficit, which zoomed to 10 percent of GDP in 2015, will touch 9.3 percent this year. The mounting prices of essential materials have led to high cost of living in a country where 60 percent of the population still lives below the poverty line.
Zambians have voted Lungu to power with the hope that he will turn things around. The good thing is that Lungu has been elected for a whole term of five years and so he can go ahead with implementing difficult decisions. Some of these can be painful too. After a recent meeting with businessmen in Lusaka, the President underlined, “I will take measures to grow the economy and control expenditure.”
As a first step, Lungu must arrest the inflation rate that has been pushed above 20 percent. He has to ensure that the food prices come under check. This will help inspire confidence in the system.
Next, his government should secure the $1.2 billion International Monetary Fund (IMF) bailout package. Even though the IMF-backed programme will come with the rider of subsidy cuts that will result in higher electricity and fuel prices, Zambians have to realize that the loan will bring about economic stability through foreign reserves and investments as well as capital inflows. The subsidy cut will also go a long way in tackling the problem of crippling power outages that takes a toll on production.
Foreign investors are resting their hope on the IMF loan that’s on the cards. Demand for Zambia’s $1 billion of securities due in April 2024 has reportedly driven yields from 10.88 percent on August 3 to 9.46 percent last Thursday, as investors anticipate the bailout.
Lungu has hinted at new tariffs on the power and fuel sectors. While levying the tariffs, it has to be kept in mind that these yield optimum result and are imposed in a way that they don’t affect the poor.
When the economy is set on the path of revival through some hard decisions, more jobs would be generated and spending will get controlled. The government has to move away from its dependence on copper mining and focus on economic diversification. Zambia has a vast agricultural wealth and it is time this is fully tapped. Fiscal consolidation will only come when Zambia devises a policy that aims at long-term benefits. A myopic approach will be damaging.