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Country Report June 2003

Zambia

June 2003

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

Zambia at a glance: 2003-04

OVERVIEWTwo legal cases!one challenging the legitimacy of Levy Mwanawasa�s victoryin the 2001 presidential election, the other accusing the former president,Frederick Chiluba, of corruption!will weaken the government during 2003-04.However, skilful countermeasures by the president should ensure thatMr Mwanawasa and the ruling Movement for Multiparty Democracy (MMD)remain in power throughout the forecast period. Higher copper production willlift real GDP growth to 2.9% in 2003 and 3.1% in 2004. Improved maize harvestsshould allow inflation to fall to an average of 21.5% in 2003 and 19.1% in 2004.High inflation differentials with Zambia�s main trading partners will cause thekwacha to depreciate to an average of ZK5,054:US$1 in 2003 and ZK6,123:US$1in 2004. Firmer copper prices and export volumes will help to narrow thecurrent-account deficit to 5.3% of GDP in 2003 and 2.4% of GDP in 2004.

Key changes from last month

Political outlook• The vice-president and finance minister were dismissed, ostensibly on

grounds of corruption, in a cabinet reshuffle on May 28th. The new vice-president, Nevers Mumba, is a popular evangelical preacher who was co-opted from the opposition. This appointment is a further example ofMr Mwanawasa�s attempts to silence his critics through patronage and createdivisions within the opposition.

Economic policy outlook• The new public-sector pay award has exceeded the budgeted target. We had

assumed this would happen and have maintained our forecast for a fiscaldeficit of 2.6% of GDP in 2003.

Economic forecast• Copper production in the first quarter of 2003 was down by 4.5% year on

year, owing to uncertainty over the sale of Konkola Copper Mines, thelargest producer. The Economist Intelligence Unit has, therefore, reduced itsforecast for copper production in 2003 from 370,000 tonnes to 361,000tonnes. However, an improved outlook for the maize harvest, our forecastfor which has been revised up from 800,000 tonnes to 1m tonnes, has offsetthe impact of this on real GDP growth.

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Zambia 1

Country Report June 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 outlook10 Economic forecast

12 The political scene

17 Economic policy

20 The domestic economy21 Mining and energy23 Agriculture25 Tourism

26 Foreign trade and payments

List of tables10 International assumptions summary12 Forecast summary20 Inflation25 Tourism

List of figures

12 Gross domestic product12 Consumer price inflation21 Treasury-bill yields23 Monthly copper production26 Gross international reserves

Zambia 3


Summary June 2003

Two legal cases!one challenging the legitimacy of Levy Mwanawasa�s victoryin the 2001 presidential election, the other accusing the former president,Frederick Chiluba, of corruption!will weaken the government during 2003-04.However, skilful counter measures by the president should ensure thatMr Mwanawasa and the ruling Movement for Multiparty Democracy (MMD)remain in power throughout the forecast period. Higher copper production willlift real GDP growth to 2.9% in 2003 and 3.1% in 2004. Improved maize harvestsshould allow inflation to fall to an average of 21.5% in 2003 and 19.1% in 2004.High inflation differentials with Zambia�s main trading partners will cause thekwacha to depreciate to an average of ZK5,054:US$1 in 2003 and ZK6,123:US$1in 2004. Higher copper prices and export volumes will cause the current-account deficit to narrow to 5.3% of GDP in 2003 and 2.4% of GDP in 2004.

The vice-president and the finance minister have been sacked in a cabinetreshuffle. Several members of the opposition have been bought into thecabinet, including one as the new vice-president. An opposition party, theUnited National Independence Party, has formed an alliance with the MMD. Acommission has been appointed to review the constitution. Legal wranglinghas continued to delay the trial of Mr Chiluba, who was formally charged with59 counts of theft in February.

The government has launched the National Economic DiversificationImplementation Plan, which aims to reduce the economy�s dependence onmining. A 49% stake in the Zambia National Commercial Bank has been put onsale. The government has said that it will commercialise the Zambia ElectricitySupply Company, rather than offer a management concession. Recentlyawarded increases in public-sector pay have exceeded the budgetary target.

Higher fuel prices lifted year-on-year inflation to 23.9% in April, reversing therecent decline caused by lower food price inflation. Sterlite Industries of Indiahas been selected as the preferred bidder for a 51% stake in Konkola CopperMines (KCM). A Swiss company, J&W Investment Group, has confirmed that itis buying Roan Antelope Mining Corporation. Copper production has fallen by4.5% in the first quarter of 2003 compared with the same period of 2002,because of the uncertainty surrounding KCM. The projection for the maize crophas been revised up to 1m tonnes. Improved food supply has reduced the needfor food aid distribution.

Mining exports rose to US$61m in the first quarter of 2003, compared withUS$56m in the first quarter of 2002. Foreign-exchange reserves have increasedowing to large donor inflows. Total external debt fell slightly in 2001, owing toa number of bilateral debt-reduction deals.

Editors: Paul Gamble (editor); Prathiba Thaker (consulting editor)Editorial closing date: June 5th 2003

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

Outlook for 2003-04

The political scene

Economic policy

The domestic economy

Foreign trade and payments

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 up to ten further members, but eight appears to be the norm

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 & fisheries Mundia SikatanaCommerce, trade & industry Dipak PatelCommunications & transport Augustine MwapeEducation Andrew MulengaEnergy & water development Kaunda LembalembaFinance & national planning George Kunda (acting)Foreign affairs & co-operation Kalombo MwansaHealth Brian ChituwoHome affairs Ronnie ShikapwashaInformation & broadcasting Mutale NalumangoLands Judith KapijimpangaLabour & social services Patrick KafumukacheLocal government & housing Sylvia MaseboMines & mineral development Davison MulelaPresidential & legal affairs George KundaScience, technology & vocational training Abel ChambeshiTourism, environment & natural resources Patrick KalifungwaWorks & supply 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) 6.4 8.3 10.8 13.0 b 16.3GDP (US$ bn) 3.4 3.5 3.5 3.6 b 3.8

Real GDP growth (%) -1.9 2.0 3.5 4.7 b 2.8Consumer price inflation (av; %) 24.5 26.8 26.0 21.4 22.2 a

Population (m) 10.1 10.4 10.7 11.0 b 11.2

Exports of goods fob (US$ m) 816 756 746 887 920Imports of goods fob (US$ m) 863 922 978 1,253 1,157

Current-account balance (US$ m) -265 -181 -275 -439 -265Foreign-exchange reserves excl gold (US$ m) 69.4 45.4 244.8 183.4 451.4Total 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 43.9Exchange rate (av) ZK:US$ 1,862.1 2,388.0 3,110.8 3,610.9 4,306.9 a

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2000 % of totalAgriculture 14.9 Private consumption 57.7Industry 27.6 Government consumption 13.1

Manufacturing 10.4 Gross fixed capital formation 40.9 Construction, electricity, gas & water 9.7 Change in stocks 1.4

Mining 7.0 Exports of goods & services 33.1 Services 57.6 Imports of goods & services -46.2

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

Cobalt 54 Others 963

Main destinations of exports 2001b % of total Main origins of imports 2001b % of totalSouth Africa 25.5 South Africa 65.1Switzerland 9.2 Zimbabwe 6.5

Malawi 7.8 UK 3.2Thailand 7.7 Tanzania 2.9

a Official estimates. b Based on partners� trade returns; subject to a wide margin of error.

6 Zambia


Quarterly indicators

2001 20021 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (1994=100) 565.1 567.3 575.9 611.2 672.3 684.9 712.2 765.7Consumer prices (% change, year on year) 29.3 22.4 17.1 17.9 19.0 20.7 23.7 25.3Copper, LME (US$/tonne) 1,766.2 1,653.8 1,472.9 1,428.2 1,559.0 1,612.1 1,516.7 1,553.4

Financial indicatorsExchange rate ZK:US$ (av) 3,658.30 3,344.00 3,652.60 3,788.20 3,894.54 4,130.43 4,870.39 4,699.02Exchange rate ZK:US$ (end-period) 3,039.10 3,704.40 3,719.50 3,830.40 3,936.16 4,480.56 4,557.17 4,334.40Deposit rate (av; %) 21.90 23.17 24.27 24.30 24.30 23.80 22.43 22.77Weighted lending base rate (av; %) 45.33 46.37 46.67 46.57 48.57 45.97 43.67 42.59Treasury bill, 91-day rate (av; %) 40.87 43.74 46.00 46.52 45.00 33.72 29.15 30.28M1 (end-period; ZK bn) 790.1 874.1 1,012.9 1,041.4 928.7 1,056.7 1,132.5 n/aM1 (% change, year on year) 66.5 50.1 58.3 34.2 17.5 20.9 11.8 n/aM2 (end-period; ZK bn) 2,070.4 2,326.5 2,653.0 2,759.7 2,704.4 3,129.6 3,227.9 n/aM2 (% change, year on year) 45.5 34.9 34.2 13.6 30.6 34.5 21.7 n/aSectoral trendsCopper in concentrates, production (�000 tonnes 66.8 72.4 74.7 82.5 77.8 81.1 86.7 91.7Copper in concentrates, exports (�000 tonnes) 70.9 72.1 75.8 77.6 79.0 84.2 81.7 85.1Cobalt production (tonnes) 821 1,188 1,169 1,005 1,097 1,024 1,015 854Cobalt exports (tonnes) 811 1,243 1,400 926 1,131 1,088 1,018 788Foreign trade (US$ m)a

Exports fob 184.6 170.4 161.8 151.9 164.2 163.7 164.9 155.6Imports fob -225.8 -263.1 -254.1 -231.2 -246.4 -276.5 -283.4 -262.0Trade balance -41.2 -92.7 -92.3 -79.3 -82.2 -112.8 -118.5 -106.4Foreign reserves (US$ m)Reserves excl gold (end-period) 249.9 195.6 196.2 183.4 170.6 364.7 379.5 451.4

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

Two legal cases!one challenging the legitimacy of Levy Mwanawasa�s victoryin the presidential election in 2001, the other accusing the former president,Frederick Chiluba, of corruption!will weaken the government during 2003-04.Skilful countermeasures by the president aimed at strengthening his positionand weakening the opposition may well mitigate much of the impact of thecourt cases. As a result, Mr Mwanawasa and the ruling Movement forMultiparty Democracy (MMD) are expected to remain in power throughout theforecast period. Opposition parties formed an anti-government alliance inDecember 2002 to capitalise on the government�s difficulties, but the defectionof key members, including the United National Independence Party (UNIP), thethird largest party in parliament, has weakened the alliance. The UNIP enteredinto an alliance with the MMD in early May and its support will give thegovernment a comfortable majority in the National Assembly. Although theUNIP�s move appears designed to increase the party�s influence, historicalprecedent suggests that once senior officials have got a taste of power they willbe more concerned with maintaining their positions rather than that of theparty, which could eventually be dissolved into the MMD. Another ofMr Mwanawasa�s successful countermeasures has been the appointment ofopposition figures!including some of his sternest critics!to governmentwithout their parties� consent. This has silenced these particular critics, andcaused division within their parties, which will further diminish their capacityto oppose the government. Finally, Mr Mwanawasa has launched aconstitutional review process, which has divided civil society bodies overwhether or not to participate. This will make it harder for organised civilsociety to oppose the government. It is not clear how independent the reviewwill be, or whether Mr Mwanawasa will implement all of itsrecommendations, although some constitutional provisions, such as therequirement that both parents of a presidential candidate must be Zambian,will be amended.

Nonetheless, the challenge to Mr Mwanawasa�s electoral victory taking placein the Supreme Court remains a major concern to the government. Allegationsof electoral malpractice have been made in court and the Supreme Court cannullify the election result if it finds that state funds were used inMr Mwanawasa�s campaign. A fresh election is looking more likely;Mr Mwanawasa can call a snap election should he feel the need to. However,the president has yet to begin his defence and the case is unlikely to beconcluded before late-2004. The second legal case concerns Mr Chiluba, whowas charged with 59 counts of corruption on February 24th. There is a strongpossibility that he will be found guilty on at least some of the charges.Revelations during the trial are likely to prove highly damaging to prominentmembers of the MMD who are attempting to mobilise againstMr Mwanawasa. The result could be a formal split in the party. However,

Domestic politics

8 Zambia


Mr Chiluba�s trial will be a long one!because of procedural arguments it hasyet to start!and it may not end during the forecast period.

Bilateral donors and the EU, although unhappy at the manner ofMr Mwanawasa�s electoral victory and increasingly wary of his populism ineconomic policy, are comforted by his anti-corruption stance and are reluctantto withdraw their support for fear of destabilising the country. However, thepresident�s populist economic policy will continue to have an impact on theIMF�s discussions with the government over a new poverty reduction andgrowth facility (PRGF)!the previous one expired in March 2003. Furthermore, ifMr Mwanawasa is implicated in the corruption trials, donors may have nochoice but to stop funding the government. Publicly, Zambia will carry onsupporting the Zimbabwean president, Robert Mugabe, and his land reformpolicy, but the government will continue to welcome commercial farmers fromZimbabwe who want to start up in Zambia.

Economic policy outlook

Zambia faces three main challenges in the medium-term: diversifying theeconomy to reduce its dependence on mining; developing agriculture toincrease food production; and tackling the HIV/AIDS pandemic. The donor-supported poverty reduction strategy paper (PRSP), released in May 2002,proposes several strategies for meeting these challenges and reducing povertyin 2002-04, such as increasing the rate of economic growth, infrastructuredevelopment and privatising parastatals. However, capacity and resourceconstraints will hamper the implementation of many of the PRSP�s initiatives.

Three factors threaten to derail the PRSP. First, the government has launchedtwo subsequent economic plans that are not entirely consistent with the PRSP.A 2002-05 Transitional National Development Plan was unveiled in October2002 and a National Economic Diversification Implementation Plan!aimed atreducing the economy�s dependence on copper mining!was launched in May2003. These new plans, although relatively consistent, have created someuncertainty about the government�s economic policy intentions. Second,Mr Mwanawasa has declared his opposition to the sale of the two large loss-making parastatals, Zambia National Commercial Bank (Zanaco) and theZambia Electricity Supply Corporation (Zesco). These sales are a key donordemand and the IMF has said that it will not agree to a new PRGF if they areabandoned. Under a compromise deal agreed with the IMF, the governmentwill dispose of a 49% stake in Zanaco, together with management rights, to astrategic partner, and a 25.8% stake will be sold on the Lusaka Stock Exchange.A South African bank, ABSA, and Africa International Holdings (Zambia), aconsortium including HSBC and the International Finance Corporation, havesubmitted bids for Zanaco. The third factor that poses a threat to the PRSP iswhether the new finance minister, whenever he or she is appointed, will showthe same commitment to reform as the outgoing minister, Emmanuel Kasonde.Mr Kasonde was sacked in May after clashing with Mr Mwanawasa over thepresident�s scepticism towards economic liberalism, particularly regarding theprivatisation programme.

International relations

Policy trends

Zambia 9


The Economist Intelligence Unit forecasts that the fiscal deficit will narrow from3.3% of GDP in 2002 to 2.6% of GDP in 2003 and 2.2% of GDP in 2004. In bothyears spending will be reined in, although budget targets are still likely to beexceeded, and there will be a small increase in revenue!the Zambia RevenueAuthority slightly exceeded its collection target in 2002. The deficits in 2003-04will exceed official projections of a deficit of 1.6% of GDP in 2003 and abalanced budget in 2004, as announced in the 2003 budget, partly because ofcontinued lax fiscal management, compounded by delays in fully introducing amedium-term expenditure framework (MTEF). Our projections assumecontinued donor support.

The 2003 budget proposes total spending of ZK6.93trn (US$1.57bn), but this islikely to be exceeded. The government has succumbed to trade union pressureand awarded a higher than budgeted increase in public-sector pay. In addition,the constitutional review process promises to be expensive and has apparentlynot been budgeted for. However, it appears that Konkola Copper Mines (KCM;the country�s largest copper producer, which was recently restructured when aleading investor withdrew) will be sold this year!India�s Sterlite Industries isthe preferred bidder!and we do not expect that significant governmentspending will be necessary to keep it operational. Furthermore, because of theimproved harvest, the government will not need to spend so much onimporting maize. We think that the government will meet its 2003 revenuetarget of ZK6.63trn. A number of tax rises have been announced and theefficiency of the Zambia Revenue Authority should ensure strong compliance.The low rate of real GDP growth will restrain revenue growth in 2004 andpressure to increase spending will continue. Nonetheless, the introduction of anMTEF in 2004 will create savings by making spending plans more realistic,provided that the government remains genuinely committed to the process. In2003-04 the government will finance the fiscal deficit through a combination ofexternal funding and domestic borrowing. Donors are concerned about therising level of domestic debt and the government will remain under pressure tocurtail its spending during the forecast period.

Real lending rates are likely to remain at around 25% in 2003-04, owing to thegovernment�s loose fiscal policy and the need to attract investment intogovernment securities. Because the budget is expected to remain in deficitthroughout the forecast period, and as there are likely to be delays in therelease of donor support, the government will continue borrowing fromdomestic banks and the money market. The Bank of Zambia (the central bank)may make further alterations to the reserve requirement of commercial banksin order to control money supply. The forecast weakening of the kwachaagainst the currencies of leading trading partners will increase the pressure onthe central bank to increase interest rates, although at present we expect adecline in nominal rates in line with the forecast fall in inflation.

Fiscal policy

Monetary policy

10 Zambia


Economic forecast

International assumptions summary(% unless otherwise indicated)

2001 2002 2003 2004Real GDP growthWorld 2.2 2.9 3.1 3.8OECD 0.9 1.8 1.7 2.4EU 1.5 1.0 0.9 1.8Exchange rates¥:US$ 121.5 125.3 116.2 115.5US$:� 0.896 0.946 1.148 1.183SDR:US$ 0.785 0.772 0.711 0.703Financial indicators� 3-month interbank rate 4.26 3.33 2.30 2.25US$ 3-month Libor 3.78 1.80 1.33 2.53Commodity pricesOil (Brent; US$/b) 24.5 25.0 24.5 18.2Gold (US$/troy oz) 271.1 310.3 335.0 315.0Copper (US cents/lb) 71.5 70.4 77.0 83.0Industrial raw materials (% change in US$ terms) -9.7 2.2 10.2 3.5

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

The global economy is experiencing its second serious slowdown in two yearsand will remain extremely sluggish until late 2003. Recovery will only begin totake hold in 2004, as the main economies!led by the US!respond to fiscal andmonetary easing. Zambia�s main trading partners, South Africa and the EU, willexperience average real GDP growth of 3.3% and 1.3% respectively in 2003-04.The outlook for copper, Zambia�s main export, is relatively good; copper pricesare forecast to rise by 9% in 2003 to 77 US cents/lb and by a further 7% in 2004to 83 US cents/lb, in line with higher global demand. After rising to an averageof US$24.5/barrel in 2003, owing to the uncertainty caused by the Iraq war, theprice of Brent crude is expected to fall to an average of US$18.25/b in 2004,causing a reduction in the cost of fuel imports and easing pressure on inflationand the kwacha.

The major copper producers are confident of increasing their output in 2003,and total annual production has been forecast at around 370,000 tonnes, 10%higher than in 2002. However, production in the first quarter of 2003 was lowerthan in the corresponding period of 2002, apparently because of uncertaintiesat KCM, so we now expect only a 7% increase. The positive impact that this willhave on GDP growth will be supported by improved agricultural production.The 2003 maize harvest is currently projected at around 1m tonnes, up bynearly one-third on last season�s harvest. We expect growth in the servicessector to be lower in 2003 than in 2002, as KCM�s new owners are initiallyunlikely to match the investment of its former owners. In addition, despiterecent investment in hotels in Lusaka and around Livingstone, tourists willcontinue to be deterred by the economic and political crisis in neighbouringZimbabwe. Current difficulties in sourcing oil supplies, following thecancellation of the contract with the previous suppliers owing to unspecifiedirregularities, will be a further burden for the manufacturing sector, which is

International assumptions

Economic growth

Zambia 11


suffering from regional competition. Nonetheless, because of the improvedprospects for the maize harvest and higher copper production we areforecasting real GDP growth of 2.9% in 2003.

In 2004 real GDP growth will increase to 3.1%, in line with rising copper pricesand production and a recovery in services. Smaller copper mining firms willhelp contribute to a further, though more modest, increase in copper output, toaround 380,000 tonnes. Assuming that weather conditions are normal in 2004,the agricultural sector is expected to grow by around 4%. Manufacturing growthwill remain modest in 2004, as regional competitors gain a further share of thedomestic market. Services will recover in line with increasing economic activityand greater demand in the mining sector, stimulated by higher copper prices,.

Year-on-year inflation has picked up since reaching a nine-month low of 22.3%in February; it climbed to 23.9% in April owing to higher fuel prices. Withinternational oil prices falling, the recent beginning of the maize harvest shouldallow year-on-year inflation to resume its downward trend. The maize harvestin crop year 2002/03 (October-September) is expected to be much higher thanin 2001/02, although it will still probably be insufficient to meet demand,leading to a slight pick-up in inflation from September, when stocks start to runout. (Food prices account for 57% of the basket used to calculate the consumerprice index.) As the depreciation of the kwacha will add to imported inflation,we believe that the official target of 17.9% for average inflation in 2003 isunlikely to be achieved and forecast average inflation of 21.5%. Assumingnormal weather conditions in late 2003 and early 2004, we expect inflation tofall back to an average of 19.1% in 2004!the high rate being sustained owing topoor fiscal management. The main risk to our forecast remains the movementof the kwacha; if it depreciates faster than our current forecast, cost-pushpressures will cause higher inflation.

High inflation and poor fiscal management have historically made the kwachavulnerable to depreciation and will continue to do so in 2003-04. Although weassume that donor funding will continue, disbursals are likely to be delayed inan attempt to force the government to meet its economic policy commitments,weakening the kwacha. Furthermore, if Treasury-bill rates do not risesufficiently to provide a satisfactory real return, investors will be encouraged tohedge against a weakening kwacha and buy foreign currency, therebyaccelerating its depreciation. Nonetheless, because of higher export revenue,owing to increased copper production and prices, the rate of depreciationshould not be as dramatic as in previous years. We therefore forecast that thekwacha will average ZK5,054:US$1 in 2003 and ZK6,123:US$1 in 2004.

The current-account deficit is forecast to narrow to 5.3% of GDP in 2003 and2.4% of GDP in 2004, owing to an improvement in the trade balance. Exportearnings are forecast to increase in 2003 and 2004, owing to an increase incopper prices and export volumes. Imports will fall in 2003, as mine-relatedimports fall back to more normal levels following the completion of substantialrehabilitation work at the mines in 2002. Imports will edge down further in2004, as normal weather reduces the maize import requirement. Instability in

Inflation

Exchange rates

External sector

12 Zambia


Zimbabwe and poor infrastructure will hamper tourism throughout the forecastperiod. Nonetheless, a reduction in trade-related costs associated with the fallin imports will cause the services deficit to narrow. Once KCM is sold to aforeign investor, which we expect later this year, the income deficit will widenbecause of increased profit remittances; this effect will be more pronounced in2004. Net current transfers will remain robust throughout the outlook period,provided that the government does not abandon its faltering economic reformprogramme.

Forecast summary(% unless otherwise indicated)

2001a 2002 b 2003c 2004c

Real GDP growth 4.7b 2.8 2.9 3.1

Gross industrial growth 9.2 9.9 5.1 3.8Gross agricultural production growth -2.6 -4.1 6.0 4.0

Consumer price inflation (av) 21.4 22.2 a 21.5 19.1Consumer price inflation (year-end) 18.7 26.7 a 20.4 20.1

Short-term interbank rate 46.2 45.2 a 42.0 40.0Government balance (% of GDP) -4.7b -3.3 -2.6 -2.2Exports of goods fob (US$ m) 887.0 920.0 983.9 1,076.4

Imports of goods fob (US$ m) 1,253.0 1,157.0 1,133.4 1,099.4Current-account balance (US$ m) -439.0 -265.0 -213.0 -96.1

Current-account balance (% of GDP) -12.2b -7.0 -5.3 -2.4External debt (year-end; US$ bn) 5.7 5.9 5.5 5.2Exchange rate ZK:US$ (av) 3,610.9 4,307.0 a 5,053.6 6,122.6

Exchange rate ZK:¥100 (av) 2,971.2 3,436.0 a 4,348.2 5,301.0Exchange rate ZK:� (av) 3,234.1 4,074.4 a 5,802.8 7,240.0

Exchange rate ZK:SDR (av) 4,597.2 5,579.0 a 7,108.8 8,709.8

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

The political scene

The president, Levy Mwanawasa, carried out a far-reaching cabinet reshuffle onMay 28th, dropping several high-profile ministers from cabinet and bringing the

The vice-president and thefinance minister are sacked

Zambia 13


former leader of a small opposition party into government. Those dismissedinclude the vice-president, Enoch Kavindele, the minister of finance andnational planning, Emmanuel Kasonde, and the minister for information andbroadcasting, Newstead Zimba. Mr Kavindele was replaced by Nevers Mumba,who had until recently been president of the opposition National CitizensCoalition (NCC) party. Mr Mumba quit the party he formed to join the rulingMovement for Multiparty Democracy (MMD) on May 25th and the NCCdissolved itself into the MMD the following day. Mutale Nalumango, formerlythe minister for labour and social services, has taken Mr Zimba�s job, butMr Kasonde has yet to be replaced. The dismissal of Mr Kavindele andMr Kasonde from the cabinet also means their departure from Parliament, sinceboth had been nominated by Mr Mwanawasa!the president is allowed tonominate up to ten MPs!rather than elected by a constituency.

Officially, the sackings were part of the president�s anti-corruption drive!Mr Kavindele�s was related to the controversial oil contract with Trans SaharaTrading (see Mining and energy) and Mr Kasonde�s was over a maize supplycontract. In fact, the president had other reasons for wanting to dismiss the two.In Mr Kavindele�s case, the issue was his openly expressed interest insucceeding Mr Mwanawasa as president, rather than any obviousincompetence in his job. Comments to this effect by Mr Kavindele had earlierprovoked Mr Mwanawasa to say that he hoped the country�s next presidentwould be a woman (resulting in speculation that the president was groominghis wife, Maureen Mwanawasa, for the post). There have been sharpdifferences between Mr Mwanawasa and Mr Kasonde on economic policysince 2002, particularly with regard to privatisation (February 2003, page 22).Since his appointment in mid-February (see below), the new commerceminister, Dipak Patel, has had far greater influence than Mr Kasonde regardingprivatisation, and Mr Patel appears most likely to succeed Mr Kasonde asfinance minister. Mr Zimba�s departure from government is part ofMr Mwanawasa�s continuing campaign to remove from power MMD membersclosely associated with the former president, Frederick Chiluba. With Mr Zimbagone, there is now not a single member of Mr Chiluba�s final cabinet in thecurrent government.

Mr Mumba, who is an evangelical pastor, was one of the most prominent andeffective critics of Mr Chiluba�s presidency and particularly his attempt tosecure an unconstitutional third term in office (May 2001, page 14). Mr Mumbaalso joined other opposition party leaders in crying foul at the manner ofMr Mwanawasa�s election victory in December 2001, but has not been closelyassociated with the ongoing Supreme Court challenge of its legality (see below).Mr Mumba also declined to join the opposition party alliance formed inDecember 2002 (February 2003, page 15) and had instead begun to speak out insupport of Mr Mwanawasa�s government. The appointment of Mr Mumbashould further boost the president�s anti-corruption stance, as the NCC wasspecifically formed to fight graft and bring about �morality in politics�. Thevice-presidency can be a powerful position, depending on the tasks allocated toit by the president; in Mr Mumba�s case, his role is likely to focus on endearingthe government to civil society and making the constitutional review process

Opposition members arebrought into the government

14 Zambia


work. Mr Mumba�s appointment has led to allegations of opportunism andillegality from opposition parties, since he is not an MP and therefore, accordingto the constitution, has to be nominated; this did not happen as the NationalAssembly was in recess. Several opposition parties have begun moves toimpeach Mr Mwanawasa over the issue. This is not expected to be successful,but a reprimand is possible, as the president should have waited untilparliament came out of recess before appointing Mr Mumba.

Mr Mumba�s appointment as vice-president follows Mr Mwanawasa�s selectionof Mr Patel!a Forum for Democracy and Development (FDD) MP who hadbeen a highly vocal critic of the government!as minister of commerce onFebruary 8th. Also appointed in the February reshuffle was the only MPrepresenting the opposition Zambia Republican Party (ZRP), Sylvia Masebo,who was made minister of local government, and two members of theopposition United National Independence Party (UNIP), who were madedeputy ministers of labour and tourism. Mr Mwanawasa has presented thesereshuffles as exercises in nation building, intended to get all Zambians workingtogether, regardless of political affiliation. However, the February appointmentswere made without the agreement or even consultation of the oppositionparties concerned, and in the case of the FDD resulted in considerableacrimony within the party. It seems that Mr Mwanawasa�s real motivation is tosilence his critics through the astute use of patronage, while at the same timesowing divisions within opposition parties whose unity could threaten his holdon power.

The UNIP, which ruled Zambia from independence for 27 years, has receivedrelatively slim pickings from Mr Mwanawasa thus far, but the party leader,Tilyenji Kaunda, nonetheless agreed to a formal alliance with the MMD, whichwas announced on May 6th. A UNIP statement said that the two parties hadalready agreed to �joint� policies. Dissenters within the UNIP have said that thealliance will kill the party and vowed to defeat the measure at the next partycongress, which has yet to be scheduled. This may not be possible, asMr Mwanawasa has established warm relations with the former UNIP leaderand national president, Kenneth Kaunda, who remains a powerful force withinthe party, and has also cultivated traditional leaders in the UNIP�s heartland inEastern province. Mr Mwanawasa recently toured the province and won praiseby ordering that arrears in payments of chiefly stipends be paid forthwith.Furthermore, under Mr Mwanawasa, the government has revised most of theMMD�s policies that the UNIP strongly objected to under Mr Chiluba, includingprivatisation and a reduced role for the state in agriculture.

The MMD-UNIP alliance and the recent reshuffles have reduced the oppositionalliance formed in December 2002 to just the United Party for NationalDevelopment (UPND) and the FDD. The FDD, which mainly consists of formerMMD cabinet ministers who opposed Mr Chiluba�s bid for a third term,appears to be an increasingly spent force. Mr Mwanawasa has been particularlykeen to try to undermine the parliamentary base of the UPND, which providedthe main electoral challenge in December 2001. The president offered threeministerial posts to UPND members in February, but party discipline held andthe invitees refused to meet him to discuss the offer. Nonetheless,

The UNIP forms an alliancewith the MMD

Zambia 15


Mr Mwanawasa has succeeded in isolating the UPND, which will provevaluable should the Supreme Court ruling on the 2001 election results goagainst him, making fresh elections necessary.

In a further bid to strengthen his position, Mr Mwanawasa has removed moreof those associated with Mr Chiluba from influential positions within theMMD. Nine members of the MMD�s National Executive Committee weresuspended in April, including the chairman, Chitalu Sampa, the nationalTreasurer, Peter Machungwa, the international relations chairman, ValentineKayope, and the former foreign minister, Katele Kalumba. All of the men areclosely associated with Mr Chiluba. The suspended MMD chairman ofNorthern province, Daniel Kapapa, resigned from the party on April 17th,saying that he felt betrayed after �giving� Mr Mwanawasa 20 out of 21 seats inthe province at the 2001 elections.

On April 19th Mr Mwanawasa appointed a 42-member commission to reviewthe constitution. This is the fourth time that the constitution has been reviewedsince independence and the second time in a decade. Mr Mwanawasa�sargument that the constitution needs revision is accepted by many, since theconstitution that Mr Chiluba rammed through in 1996 in the face of widespreadopposition has been widely criticised for being flawed and partisan (2ndQuarter 1996, page 7). A provision in the 1996 constitution prohibiting thosewith parents who are not Zambian from contesting the presidency, which wasaimed at preventing Kenneth Kaunda from contesting the 1996 election,attracted significant international criticism. Domestic human rightsorganisations also protested at clauses granting presidential powers to removeHigh Court judges and clauses that protected National Assembly decisions fromjudicial review.

Nonetheless, civil society organisations are wary of participating in the currentconstitutional review, for fear of finding their recommendations jettisoned at alater stage in favour of amendments introduced by Mr Mwanawasa and theMMD. Key civic bodies, including the Catholic Church, the Law Association ofZambia and the Zambia Independent Media Association!all members of theOasis Forum, an umbrella body formed to oppose Mr Chiluba�s third-term bid!have therefore refused to participate in the constitutional review commission.Instead, they have demanded a constituent assembly, which would be madeup of all MPs and from a shortlist of interested parties and non-governmentalorganisations. Mr Mwanawasa has turned down the request, although in afurther bid to engage his critics, he has said that he will consider proposals for aconstituent assembly if they come from the review commission. The UPND hasbacked calls for a constituent assembly and says that it will block constitutionalreform in parliament if demands for an assembly are not met.

The legal challenge to Mr Mwanawasa�s electoral victory, which has beenbrought to the Supreme Court by Anderson Mazoka of the UPND, GodfreyMiyanda of the Heritage Party and Christon Tembo of the FDD, and whichcould result in a judicial order for fresh elections, is continuing. In late 2002 theSupreme Court heard damning evidence from former cabinet ministers about

Work begins on yet anotherconstitutional review

Further evidence emerges ofillegal use of election funds

Further purges occur in theMMD

16 Zambia


the illegal use of state resources to secure Mr Mwanawasa�s victory andtestimony from the former director of the Zambia Security Intelligence Services(ZSIC), Xavier Chungu, about ZSIC�s role in distributing bribes (February 2003,page 13). The former foreign minister, Katele Kalumba, who is in detentionawaiting trial for corruption, testified in mid-February that Mr Chungu hadgiven him money to distribute in Luapula province. Opposition parties,particularly the ZRP, were considered well placed in Luapula prior to theelection but, according to the official election results, the MMD won 13 of theprovince�s 14 parliamentary seats. In mid-May, Moses Mumba, a former MMDprovincial chairman, testified that he had received ZK713m (US$155,000) and 23vehicles from Mr Chiluba to distribute to MMD officials working to secureMr Mwanawasa�s victory. Mr Mwanawasa has always maintained that if therewas any wrongdoing, he was unaware of it and has promised to testify to thiseffect when the defence case finally gets under way. This is expected to be atleast as long and protracted as the prosecution�s, which means that ajudgement is unlikely to be delivered before late 2004.

On February 19th the Supreme Court struck down Mr Chiluba�s appeal againstthe legality of a decision by the National Assembly to lift his immunity fromprosecution so that he could be charged with corruption. This happened fivedays later, when the former president was arrested and formally charged with59 counts of theft at the Lusaka Magistrates Court and released on bail ofZK1.5bn. Mr Chiluba denied the charges. In March Mr Chiluba�s lawyerspetitioned the High Court for the trial to be conducted there, on the groundsthat he was unlikely to get a fair trial from a lower court. Cited as evidencewere documentaries aired on the state broadcaster about Mr Chiluba�s �stolenbillions�, which his lawyers argued were prejudicing the case. However, theHigh Court rejected this petition, arguing that such documentaries did notconstitute evidence and would have no impact in court, thus clearing the wayfor the trial to begin at the Lusaka magistrates court. Mr Chiluba has appealedagainst this ruling and refused to appear at the court until the matter isresolved. Despite the ingenuity of Mr Chiluba�s lawyers, their client�s trial forcorruption is now imminent and Mr Chiluba faces the prospect of the shadieraspects of his rule becoming headline news for months on end.

Anti-corruption highlights

• Arthur Yoyo, the personal spokesman of the president, Levy Mwanawasa, wassuspended from office on May 2nd, following allegations by the Anti-CorruptionCommission (ACC) that he received money intended for state-owned mediaorganisations when he was a permanent secretary during Frederick Chiluba�spresidency.

• The former tourism minister, Anoshi Chipawa, was sentenced to five years injail on May 2nd, after being found guilty of stealing ZK29.9m (US$6m) from aconstituency development fund.

• The deputy information minister, John Mwaimba, was sacked in late Marchbecause of a civil case in which he stands accused of fraudulently obtainingcredit to buy large quantities of fertiliser. On April 17th he was arrested andcharged with forging the title deeds to his house.

The trial of former presidentFrederick Chiluba is imminent

Zambia 17


• The former boss of Zambia Security Intelligence Services, Xavier Chungu, wasacquitted of vehicle theft charges on March 19th, owing to a lack of evidence.Vehicle theft is a non-bailable offence in Zambia, which many suspect is theonly reason why Mr Chungu was charged with the crime in the first place.

• Chuulu Kalima, the chief executive of the parastatal Nitrogen Chemicals ofZambia and three senior managers were arrested on February 28th and chargedwith embezzlement. The men had been suspended since December 2002 whilethe police investigated the alleged fraud.

• Five Zambia Revenue Authority officials were suspended in March to pave theway for investigations into suspected fraud.

• The ACC said on May 10th that it had seized privately owned aircraft andproperties worth US$4.3m on the suspicion that they had been acquired withstate funds.

• Two Zambian Airforce colonels were charged with stealing ZK1.3bn of statefunds on April 17th.

Economic policy

Not content with a poverty reduction strategy paper (PRSP) and a TransitionalNational Development Plan (the latter was only launched in December 2002;February 2003, page 20), the government launched a National EconomicDiversification Implementation Plan (NEDIP) on May 3rd. As its name suggests,NEDIP is intended to help diversify the economy, reducing its dependence onmining and increasing agricultural production. Although this is a good idea, it ishardly original. The final version of the PRSP, produced in March 2002,expounded amply on its view that �the case for successful diversification fromcopper mining has never been more urgent and commercial agriculture isenvisaged as playing a major role in this�. However, the president, LevyMwanawasa, is an ardent supporter of plans and planning, and has establisheda special planning unit in the Ministry of Finance, which he has renamed theMinistry of Finance and National Planning. Aware of the president�s tastes, theunit seems intent on generating plan after plan, which are then handed toFinance Ministry officials who are not yet seconded to planning, to integratewith earlier plans and implement.

The expulsion of the finance minister, Emmanuel Kasonde, from cabinet onMay 28th was the culmination of a steady deterioration in relations betweenhim and the president caused by sharp differences over economic policy.Mr Kasonde is a believer in the Movement for Multiparty Democracy�seconomic manifesto of continued economic restructuring, including theprivatisation of the remaining major parastatals. Conversely, Mr Mwanawasa isof the view that there have been no instances to date where privatisation hasbeen in the interests of Zambian citizens (February 2003, page 22) and hasordered existing arrangements for the privatisation of remaining parastatals tobe reviewed. The legal affairs minister, George Kunda, was appointed intemporary charge at the Ministry of Finance and National Planning followingMr Kasonde�s removal, but is not expected to oversee major policyimplementation, which will be left to a new appointee. The commerce minister,Dipak Patel, was instrumental in the government�s negotiating of a compromise

Another economic plan islaunched

Policy differences result infinance minister�s dismissal

18 Zambia


with the IMF over the fate of the electricity parastatal, the Zambia ElectricitySupply Company (Zesco; see below), and is a strong candidate for the post offinance minister. Mr Patel is known to covet the post and it is rumoured thatthis is why he agreed to come from the opposition into government ascommerce minister in the first place.

In a significant government retreat in the face of donor pressure, the ZambiaPrivatisation Agency (ZPA) announced on May 16th that it was inviting bids fora 49% stake (together with management rights) in the state-owned ZambiaNational Commercial Bank (Zanaco). The government is to retain a 25% stake,25.8% will be held in trust by the ZPA for sale to Zambians, and existingminority shareholders are to retain a 0.2% stake. Only two companiessubmitted formal bids!Amalgamated Banks of South Africa (ABSA) and AfricaInternational Financial Holdings (Zambia). The latter is a consortium of HSBC,the International Finance Corporation, the European Investment Bank, theNetherlands Development Finance Organisation and the National Bank ofMalawi. The ZPA board reviewed the bids on May 23rd and decided not toselect a preferred bidder, but to continue negotiations with both bidders to gainfurther clarity about their plans. There seems to be no time limit on thesenegotiations, although ZPA sources have indicated that they want to maintainthe momentum.

The donor community has made it clear that it considers the privatisation ofZanaco to be vital. The IMF has made the sale a condition of a new povertyreduction and growth facility (PRGF)!the previous one expired in March 2003!and a World Bank mission visited Zambia to clarify the government�s positionshortly before the latest announcement on Zanaco. In January Mr Mwanawasasaid to the cheers of most members of the National Assembly, the trade unionmovement and organised civil society that he was not in favour of theprivatisation of Zanaco. The bank has assets of US$161m, deposits totallingUS$114m (25% of the Zambian market), but bad debts estimated at aroundUS$50m, in large part because of politically motivated lending during thepresidency of Frederick Chiluba. A 35% stake in the bank was offered for sale in2001, but attracted no interest (August 2001, page 18). The offer wassubsequently increased to 51% of the bank, which attracted several declarationsof interest, but Mr Mwanawasa�s opposition to privatisation stalled furtherprogress.

Mr Mwanawasa told the World Bank mission on May 9th that Zesco would nolonger be concessioned, as had been stated in the November 2002 letter ofintent to the IMF (February 2003, page 24), but would instead be�commercialised�. This apparently means that Zesco�s ownership andmanagement will remain in state hands, but that the company will bemanaged according to �best� commercial practice. It is hoped that this willprotect the public finances, enhance development and leave Zesco safe from�undue� political interference!there is no indication that there will be anychanges to management. The World Bank mission displayed some sympathyfor the government�s position, while seeking guarantees that Zesco will notcontinue to be a drain on the fiscus under the new arrangement, but did not

The government says Zesco isto be �commercialised�

Zanaco is put up for sale

Zambia 19


give a formal response to the proposal. A government mission later travelled toWashington to continue negotiations and a final decision is expected from thecabinet by the end of June. Zesco meanwhile declared a dividend to the stateon April 2nd, for the first time in years, after making a projected profit ofZK40bn (US$9m) in financial year 2002-03 (April-March).

On February 15th the government signed a 20-year concessioning agreement forZambia Railways with a consortium of two South African companies, NewLimpopo Bridge Projects Investments (NLPI) and Spoornet, as agreed in October2002 (November 2002, page 21). Under the terms of the agreement, thegovernment will receive US$253m from the consortium over this time period,as well as 5% of turnover. Spoornet�s main interest in Zambia Railways is in itsrole in regional freight movement and at the signing ceremony, the NLPIdirector, Orville Cachia, described it as a key component of a plannedLubumbashi-Durban transport corridor. The final handover is due to becompleted by July 1st, although it remains possible that technical hitches willdelay this by a few weeks.

Recently agreed public-sector pay awards are higher than budgeted for and willmake it very difficult for the government to hit its fiscal deficit target of 1.55% ofGDP in 2003 (February 2003, page 26). Controversial pay increases awarded tocabinet ministers, district administrators and judges in late 2002 and early 2003,as well as new vehicle allowances for MPS, set the scene for aggressivenegotiations between the government and other public-sector workers thisyear. The opening bid from the Zambia Congress of Trade Unions (ZCTU) inearly March was for a pay increase to at least ZK1.5m (US$310) per month for allpublic-sector workers. Before the current round of negotiations, the monthlypay for teachers, nurses and police officers was in some cases as low as US$60per month after tax. Mr Mwanawasa dismissed the demand and theaccompanying threat of strike action as �blackmail�. Most unionised teacherswent on strike nonetheless, causing the closure of the country�s universities andmany schools. Mr Mwanawasa met public-sector unions in late March and,despite some criticism by their members, the unions eventually settled on a farsmaller, though still substantial, increase that will see the minimum public-sector wage rise to US$123 per month.

In early April magistrates went on strike over pay, causing havoc in the criminaljustice system. After two weeks of industrial action, pay increases of betweenUS$120 and US$220 per month were agreed and the magistrates trickled backto work. In early May it was the turn of doctors, who began a go-slow after thegovernment failed to deliver the 50% pay hike it promised them in February; anincrease of only 25% was agreed in April. In an attempt to offset some of thisincreased expenditure, a freeze on recruitment in local government wasannounced. Commenting on the 2003 pay awards, the IMF said that although itsupported the principle of paying workers properly for their efforts, anywidening of the fiscal deficit should be avoided because of the inevitableinflationary consequences of increased government borrowing.

An agreement is reached overZambia Railways

2003 pay awards are higherthan budgeted

20 Zambia


The domestic economy

An easing of food price inflation over the first quarter, as the distribution of freemaize by donors impacted on the maize price, was reversed in April, whenyear-on-year inflation rose to 23.9%, from 22.6% in March. The principal reasonfor the jump in inflation in April was an increase in fuel prices, the result ofhigher international prices, local supply shortages and the devaluation of thekwacha. Fuel prices have a strong impact on the metropolitan high-incomegroup index, where inflation is at its highest since May 2001. By contrast, for themetropolitan low-income group index inflation is nearly at a 10-month low.With international oil prices now falling and food availability much improvedowing to the recent beginning of the maize harvest, year-on-year inflation isexpected to resume its downward trend.

Inflation(% change, year-on-year)

Metropolitan Non-Low income High income metropolitan Overall

2002May 22.8 18.3 21.6 20.9Jun 26.6 20.1 24.3 23.6Jul 26.9 19.5 24.1 23.4Aug 26.0 20.0 24.9 23.7Sep 27.1 19.9 24.7 23.8Oct 27.7 20.0 24.2 23.8Nov 29.7 21.2 25.6 25.3Dec 31.5 23.2 26.2 26.72003Jan 29.1 21.2 23.6 24.3Feb 26.2 21.3 22.0 22.9Mar 25.7 22.1 21.1 22.6Apr 26.1 23.5 22.8 23.9

Source: Central Statistical Office.

Continued high domestic borrowing by the government is maintaining upwardpressure on short-term interest rates. The average interest rate on thebenchmark 91-day Treasury bill rose from 33.1% in January 2003 to 33.9% inApril, and was 33.8% in early June, despite the fall in inflation over the sameperiod. Total 91-day T-bills outstanding rose from ZK216bn (US$49m) toZK309bn between the beginning of 2003 and the end of April. The value ofoutstanding bonds has been rising too; from ZK665bn at the beginning of theyear to ZK812bn at the end of April. Bond yields have nonetheless dippedslightly, from 44.8% to 42.6% for 12-month bonds, and from 46% to 43.6% for 18-month bonds. As government demand for credit remains high, commercialbanks can make adequate profits from holding government paper and thereforehave little incentive to lend to private borrowers.

Treasury-bill yields remainhigh

Inflation picks up temporarilyin April

Zambia 21


Mining and energy

On May 16th the government announced that it had selected India�s SterliteIndustries as the preferred bidder for a 51% equity stake in Konkola CopperMines (KCM). This follows the extensive restructuring of KCM in September2002 (November 2002, page 23). The state currently holds a 42% stake in KCM,through Zambia Consolidated Copper Mines, but hopes to reduce this to 20% inthe near future. A Swiss commodities trader, Glencore, had been considered astrong contender to acquire the stake in KCM, but the government wasconcerned that this would give Glencore, which already owns most of MopaniCopper Mines, too much of the Zambian mining industry. First QuantumMinerals (FQM), which also holds substantial Zambian assets, had beenexpected to bid, but in the end did not. The other losing bidders were SouthAfrica�s Metorex, which already owns Chibuluma West and Chibuluma South,and a Japanese consortium comprising Mitsui and Mitsubishi.

Within the Zambian mining sector there has been relief that KCM, whichconsists of the Nchanga and Konkola copper mines and the Nampundwe pyritemine, has found a buyer, but some nervousness about Sterlite. This is because itis unknown locally and Zambia had a disastrous experience with anotherIndian mining investor, Binani, which drove the Luanshya copper mine intoliquidation in 2000 (January 2001, page 21). Sterlite has an annual turnover ofUS$1.5bn and has mining assets in India, Australia, Armenia and Canada, withcopper mines the most successful among them, but has never previouslyoperated in Africa. Sterlite�s acquisition of KCM is part of a bid by the companyto become a more significant global copper producer, while reducing itsinvolvement in other industries, particularly fibre optics. Copper currentlycontributes about 90% of Sterlite�s pre-tax profits and the company says that itintends to list soon on the London or New York Stock Exchanges, because ofthe difficulties it has encountered in raising the finance it needs on the MumbaiStock Exchange. Sterlite has promised the Zambian government a �substantial�capital investment programme at KCM and says that it intends to attempt thedevelopment of Konkola Deep. If it does (which is open to some doubt),Sterlite�s need for capital will become even more pressing, since the investment

Sterlite Industries is thepreferred bidder for KCM

22 Zambia


required at Konkola Deep is estimated at up to US$1bn. The high costs ofdeveloping Konkola Deep were the main reason why KCM�s previous majorityshareholder, Anglo American, withdrew.

On April 4th the government confirmed that it would sell the liquidated RoanAntelope Mining Corporation of Zambia (Ramcoz) at Luanshya, previouslyoperated by Binani, to J&W Investments Group of Switzerland for US$7m. J&Whas reportedly pledged to spend US$50m on capital expenditure, as well asUS$23m on a planned concentrator for Ramcoz. It is widely suspected withinthe mining sector that the Zambian negotiating team had wanted to sellLuanshya to Avmin of South Africa, which operates the nearby ChambishiMetals copper and cobalt plant, but was overruled at a late stage by the cabinet.The government denies this. Nonetheless, there is speculation of corruption inthe award of the contract to the little known J&W, which is apparently involvedin mining in the former Soviet Union, with a number of interests inKazakhstan.

Following its experience with Anglo American, which abandoned KCM in2002, the government says that the contract with J&W will contain substantialguarantees for Zambia in the event that the company decides to sell up. It isunclear how many of the 4,300 miners who worked for Ramcoz will be re-employed by J&W. Only 500 Ramcoz workers have so far been paid theirtermination benefits and the government claims that it has not yet found themoney to pay for the rest. Had it won the Ramcoz bid, Avmin had planned toprocess the mine�s concentrate at Chambishi, boosting Chambishi�s output andprofitability. Having lost the bid, Avmin agreed in early April to sell 90% of itsholdings in Chambishi to J&W. A US$134m write-down on Chambishi in 2002left a substantial dent in Avmin�s annual earnings and many in the companyare glad to see it go.

In line with most analysts, the Economist Intelligence Unit expects an increasein copper production in 2003 compared with 2002. However, figures for thefirst quarter of 2003 were disappointing; copper production was 4.5% lower andcobalt production 46% lower than during the same period of 2002. This ismainly because of the uncertainty that surrounded KCM, the biggest producer,while the sale of a majority stake was being negotiated.

One factor behind the expected higher production this year is the expansion ofFQM�s Bwana Mkubwa mine. Production capacity at the mine is supposed tohave increased to 30,000 tonnes/year by May 2003 from 11,878 tonnes ofcopper in 2002 and FQM forecasts annual production of just under 29,000tonnes in 2003. The increase in production stems from the use of high-grade orefrom the massive Lonshi deposit in the Democratic Republic of Congo. Duringthe first quarter of 2003 copper production more than doubled, to 4,359 tonnes,from 2,080 tonnes one year earlier.

J&W is to buy Ramcoz

Copper production falls in thefirst quarter

Zambia 23


Despite terminating the contract with South Africa-based Trans Sahara Trading(TST) for the import of crude oil to the Indeni refinery in early 2003 (February2003, page 26), the government has yet to identify an alternative supplier. Theuncertainty and earlier alleged serious errors in the type of fuel imported byTST have resulted in fuel shortages and escalating prices, particularly for diesel.Diesel stocks began to run out in late April, resulting in panic buying, furtherworsening the shortage and pushing prices still higher. As the crisis worsened,the government authorised oil companies to import already refined diesel toease the crisis. When this did not bring in enough fuel, it ordered Indeni topurchase its own emergency diesel supplies. Supply remained extremely tightduring May, but began to ease towards the end of the month and was expectedto return to normal levels in June, accompanied by price reductions. However,uncertainties seem set to remain until the government finds a way to sourcereliable crude oil supplies for the Indeni refinery.

Agriculture

Latest government and donor crop assessments show that, contrary to earlierfears (February 2003, page 28), the maize crop in the 2002/03 agricultural year(October-September) will be a strong one. The crop is currently estimated ataround 1m tonnes, one-third higher than the 2001/02 crop. Central province hashad a particularly good season and production has also been strong in Northand North-western provinces. Production in pockets of Southern provinceremains problematic; nonetheless, it is expected to be much higher than in theprevious season. The main reason for the improved harvest is the weather.Normal-to-good rains were reported over most of the country, although parts ofSouthern province have endured both drought and heavy flooding. Otherfactors behind the good harvest have been the improved provision of inputs!aresult of both government and donor efforts, although many farmersapparently received inputs late in the season!and a significant increase in thearea planted with maize. The national maize requirement is around 1.2mtonnes, but the shortfall will be made up through commercial imports, so littleor no food aid should be necessary if the crop forecast proves accurate.

Fuel shortages occur as nosupplier is found

The 2002/03 harvest is muchbetter than earlier expected

24 Zambia


Maize prices started falling in April as the new harvest arrived. The better thanexpected crop means that prices during the remainder of the harvesting season,which runs until September, are expected to be substantially lower than duringthe previous two seasons. Donors have recognised that this requires anadjustment to their food distribution plans and the government announced onMay 22nd that it had stopped providing emergency food aid because of theimproved food availability. The World Food Programme had earlier indicatedthat it intended to continue distribution in Southern province until June.

A joint vulnerability assessment committee (VAC) is investigating howvulnerable groups were able to survive between April 2002 and March 2003,given donor estimates of a huge maize deficit during this period, which wassaid to have left 3.4m people at risk of famine (February 2003, page 29).Preliminary results from the VAC show that many intended beneficiaries offood aid were not reached during this period, owing to ineffective targeting ofrelief and inadequate monitoring. A report on food security, prepared for theUS Agency for International Development and released earlier this year,suggests that the government was largely correct in denying the risk of famineduring this period. It argues that donors overestimated the extent and severityof the food deficit because of their use of a seriously flawed methodology. Thereport was particularly critical of the VAC, accusing it of producing �patentlyinaccurate� assessments that overestimated the population at risk of foodshortages by a factor of at least two, and argued that the link between HIV andfood vulnerability had been overstated and misunderstood. The report accuseddonor agencies of inadvertently encouraging many subsistence farmers to selltheir crops early in the season because of their expectation that they wouldreceive food aid later on. The report recommended that assessmentmethodology be improved, greater consideration be given to non-foodassistance to vulnerable households and that the Food Reserve Agency begiven the resources to build stocks as a better alternative to emergency foodimports.

The improved maize harvest this year will reduce the requirement for maizepurchases during 2003 and thus ease pressure on government spending.However, in a blow to the government�s fiscal plans, the authorities apparentlysquandered at least US$20m on unnecessary maize imports during April. Thenational Treasury announced on May 9th that it has asked the police toinvestigate Treasury officials who allegedly authorised the maize imports andto establish what the money was actually spent on.

On May 16th the government set a floor price for maize in the 2003/04 seasonof ZK30,000 per 50-kg sack, equivalent to US$122/tonne. This is the first timesince 1992 that the government has set a floor price and is a further indicationof the determination of President Levy Mwanawasa�s government to play a farmore active role in agricultural marketing than its predecessor. The floor price isexpected to prevent small-scale farmers from being exploited by traders; beforeit was introduced, some were selling their maize for as little as ZK15,000 per 50-kg sack. However, it will prove costly to many commercial farmers, particularlythose who harvested early, since they will now have to store their maize untilthe end of the harvesting season, when prices will start climbing again and it

Improved supply reduces theneed for food aid distribution

The government sets the floorprice for maize

US$20m is allegedly spent onunnecessary food relief

Zambia 25


will be profitable to sell their crop. The lower prices will, however, be beneficialfor urban consumers. The government says that it is hoping for a massive 3mtonne maize harvest in 2003/04, which it claims will be made possible becauseof plans to bring a further 10,000 ha under cultivation under four resettlementschemes, which it hopes will bring new farmers into the market. However, thistarget is highly unrealistic; around 1.7m tonnes is normally considered to be abumper harvest.

TourismThe tourism minister, Patrick Kalifungwa, announced the lifting of a two-yearban on the issuing of safari hunting concessions on April 15th. All huntingconcessions has been revoked because of government concerns aboutwidespread corruption in the hunting business!Mr Kalifungwa has appealedto future hunting concessionaires to have �zero tolerance� for corruption. Theban resulted in the foregoing of an estimated ZK13.6bn (US$3.2m) by theZambia Wildlife Authority during 2002, according to Ministry of Financeestimates. However, it has not caused Zambia to lose much of its share of theregional tourism industry because of the economic and political turmoil inZimbabwe. The government says that it is committed to developing tourism inZambia, but although the country�s potential in this respect is universallyacknowledged, it has never been effectively realised. Despite the government�scommitment, it appears to lack the resources to do much about removing themain constraints; notably the poor access to many attractions owing toinadequate transport infrastructure.

Donor support has, however, been forthcoming in this area. On May 29th theEU announced that it had released "9m (US$10.5m) to rehabilitate LivingstoneInternational Airport. Most of the money will be spent on lengthening therunway to enable larger planes to use the airport. Thanks to the presence ofSun International hotels, which opened in 2001, the number of tourists usingLivingstone airport has increased from 2,000 per month in 1999 to 8,000 permonth currently. According to official statistics, the number of internationalholidaymakers has jumped from 86,266 in 1998 to 150,451 in 2002, which hasbeen attributed to improved marketing by both the private sector andgovernment. Total foreign visitors (including those on business, those visitingfriends and relatives, and other arrivals) increased from 362,025 to 556,043 overthe same period. Just under half of the visitors came from Southern Africa,while the number of visitors from Europe and America increased by 26% in2002, to reach 27% of the total.

TourismEarnings Share of GDP

Holidaymakers (ZK m) (%) Employment1998 86,266 74.7 1.9 8,9911999 90,336 88.0 1.8 10,340

2000 122,762 110.8 1.9 11,8912001 147,350 117.1 2.1 13,444

2002 150,451 145.3 2.5 14,996

Source: Ministry of Tourism, Environment and Natural Resources.

Hunting concessions are to begranted again

26 Zambia


Foreign trade and payments

Copper exports in the first quarter of 2003 were 78,904 tonnes, marginallylower than the 78,993 tonnes exported in the first quarter of 2002. However, theaverage price for copper in the first quarter of 2003 was 75 US cents/lb, up 6.8%on the equivalent period of 2002, and therefore overall earnings were higher. Inkeeping with the 46% fall in cobalt production, cobalt exports in the firstquarter of 2003 were just 756 tonnes, 49% lower than during the correspondingperiod of 2002. Although international cobalt prices picked up during the firstquarter of 2003, this was by an insufficient margin to compensate for the fall inexport volumes. Nonetheless, the increase in copper earnings has resulted in anoverall rise in mining exports, to US$61m, compared with US$56m in the firstquarter of 2002.

Gross international reserves were US$486m at the end of April, according toBank of Zambia (central bank) data; the total differs from the IMF data used bythe Economist Intelligence Unit, but both sources put the recent total at a 30-year high. Donor inflows totalling over US$337m in December 2002 had asignificant impact on reserves, which rose from US$278m to US$489m duringthe month!the rise would have been higher, were it not for the fact thatrepayments of both an enhanced structural adjustment facility (ESAF) and apoverty reduction growth facility (PRGF) were made. The jump in reserves wasbecause of a combination of two payments of SDR41.4m (US$55.5m) from theIMF under Zambia�s current PRGF, a "50m (US$53m) grant from the EU(February 2003, page 31) and support from other donors, much of which wasassociated with the famine. Since December inflows from the mines haveallowed a further slight build-up in reserves, although demand for foreignexchange remains strong and reserves are expected to fall during the remainderof the year.

Data from the 2003 edition of Global Development Finance, the benchmarksource of external debt data published by the World Bank, put Zambia�s totalexternal debt at US$5.67bn in 2001, down from US$5.73bn in 2000. Theprincipal reason for the slight fall was a number of bilateral debt deals!the

Mining export earnings rise,despite falling volumes

Donor inflows cause a jump inreserves

Total external debt falls slightlyin 2001

Zambia 27


largest being a US$122m write-off agreed with France (May 2001, page 25)!anda decline in the use of IMF credit, related to the start of repayments of an ESAF.Debt servicing also declined as Zambia became entitled to relief under the IMF-World Bank�s heavily indebted poor countries (HIPC) initiative. However, thereis a conflict between World Bank figures and IMF data on IMF repurchases; theformer put them at US$42m, whereas the latter has them at SDR168m(US$214m). We are sticking with the IMF number and therefore believe that thetotal debt service increased substantially in 2001, owing to the start ofrepayments of the ESAF. External debt is estimated to have risen in 2002,because of increased government borrowing at concessional rates.

External debt, World Bank series(US$ m unless otherwise indicated; debt stocks at year-end)

1997 1998 1999 2000 2001Total external debt 6,668 6,879 5,868 5,731 5,671 Medium & long-term debt 5,270 5,361 4,584 4,514 4,513 Public 5,257 5,332 4,511 4,449 4,394 Private 12 28 73 65 119 Short-term debt 261 331 113 79 175 Interest arrears 140 137 39 36 35 Use of IMF credit 1,138 1,188 1,171 1,138 982Public & publicly guaranteed long-term debt 5,257 5,332 4,511 4,449 4,394 Official creditors 5,087 5,220 4,478 4,418 4,364 Bilateral 2,921 2,977 2,148 2,009 1,929 Multilateral 2,166 2,242 2,331 2,409 2,435 Private creditors 170 113 33 31 30Total debt service paid 246 202 149 186 129 Principal 164 132 58 98 80 Interest 81 70 90 88 49 Short-term debt 10 9 7 3 7Ratios (%)Total external debt/export of goods & services 513.4 713.4 636.0 624.6 512.9Total external debt/GNI 179.9 227.6 197.2 185.2 162.0Debt-service ratio, paida 18.9 21.0 16.1 20.2 11.7

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

• On May 7th Germany announced that it would cancel 100% of Zambia�sbilateral debt, valued at "187m (US$205m). The German government says that itwants the money freed from debt servicing to be spent on poverty reduction.The Zambian government is now asking the German government to repay allthe money it paid servicing this bilateral debt during the 1990s.

• On April 24th the African Development Bank pledged US$50m (splitbetween a grant and a loan) for a variety of projects, including a public-sectorcapacity building programme.

• The government announced on April 17th that the World Bank is to lendZambia US$50m, primarily to construct bridges under an emergency droughtrecovery programme. Repayments on the loan will begin in 2013.

Debt and loan briefs

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