SlideShare a Scribd company logo
POWERING THE
ZAMBIAN ECONOMY
6th
ZAMBIA ECONOMIC BRIEF
December 2015
@ 2015 The International Bank for Reconstruction and Development/THE WORLD BANK
1818 H Street NW
Washington, DC 20433
USA
All rights reserved
This report was prepared by the staff of the Macroeconomic and Fiscal Management and
Energy and Extractives Global Practices of the World Bank Group. The findings, interpretations, and
conclusions expressed herein are those of the authors and do not necessarily reflect the views of the
World Bank’s Board of Executive Directors or the countries they represent.
This report was designed and edited by Katarina Zeravica, Lusaka.
Cover design: Clement Masiye Daka
Photos: World Bank, Zambia
ICONTENTS
Acronyms									 	 i
Foreword									 	 ii
Acknowledgements 							 iii
Executive Summary	 							 	 1
Section 1: Recent Economic Developments					 	 3
A.	 Regional Economic Developments	 				 	 3
B.	 The State of the Zambian Economy	 				 	 7
C.	 Economic Outlook, Risks and Policy Challenges			 	 13
Section 2: Powering the Zambian Economy					 	 16
D.	 The Electricity Challenge						 	 16
E.	 Zambia’s Power Crisis	 						 	 18
F.	 Managing the Cost of Mitigation					 	 20
G.	 Graduating to Sustainable Supply					 	 24
References									 	 26
Notes										 	 26
Boxes
1	 Huge recent subsidy bills for government				 	 11
2	 Hydro-Electricity in Zambia						 	 18
3	 Scaling solar in Zambia 						 	 21
4	 Diversification and demand-side measures in Ethiopia		 	 	 25
Figures
1	 Commodity prices have continued to fall in 2015			 	 3
2	 Current account and fiscal balances are growing			 	 4
3	 The US$ has strengthened against frontier market currencies	 	 5
4	 Sovereign bond spreads have widened				 	 5
5	 Growth in SSA and developing countries has slowed			 	 6
6	 Global copper prices have been falling since 2011			 	 7
7	 The kwacha has deprecated considerably 2015			 	 8
8	 Inflation increased substantially in Q3 2015	 			 	 9
9	 Growing and repeat fiscal deficits					 	 11
10	 The Trade Balance has become negative in 2015			 	 12
11	 Electricity generation capacity fallen below Demand	 		 	 17
12	 Power deficit trends in 2016	 					 	 22
13	 The cost to government of emergency power depends on the tariff	 	 23
Tables
1	 Fiscal trends								 	 10
2	 A power generation deficit in 2015	 				 	 19
3	 Private power plant contract status					 	 20
4	 A power deficit is expected in 2016	 			 	 21
BoZ	 Bank of Zambia
BSA	 Bulk Supply Agreements
CEC	 Copperbelt Energy Corporation
CFL	 Compact Fluorescent Lamps
CSO	 Central Statistical Office
DAM	 Day Ahead Market
DFID	 Department for International Development
ERB	 Energy Regulation Board
FDI	 Foreign Direct Investment
GDP	 Gross Domestic Product
GWh	 Giga Watt Hours
IDC	 International Development Corporation
IMF	 International Monetary Fund
IPP	 Independent Power Producers
KW	 Kilo Watt
LCMS	 Living Conditions Monitoring Survey
LCPDP	 Least Cost Power Development Plan
LPG 	 Liquefied Petroleum Gas
MW	 Mega Watts
PSA	 Power Supply Agreements
SAPP	 Southern African Power Pool
SSA	 Sub-Saharan Africa
US$	 United States Dollar
USc	 United States Cent
VAT	 Value Added Tax
WBG	 World Bank Group
ZRA	 Zambezi River Authority
ZMW	 Zambian Kwacha
IACRONYMS
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
i
I am pleased to share the sixth Zambia Economic
Brief with a focus section on the power sector. This
Brief is part of a series of short economic updates
produced twice a year by the World Bank. Each Brief
includes two sections: the World Bank’s assessment
of recent economic developments and outlook in
the short- to medium-term, and its analysis of a spe-
cific development topic or theme. Previous Briefs
covered opportunities for mining, human develop-
ment, jobs, trade, and financial inclusion.
Zambia faces its toughest economic challenges in
at least a decade. The economy has come under
strain in 2015 as external headwinds and domestic
pressures have intensified. Insufficient fiscal buffers
were built up in the times of higher copper prices,
limiting the room to maneuver now that prices are
low. Stark trade-offs exist between cushioning peo-
ple from the impact of the power crisis by sourcing
emergency electricity and reducing the fiscal deficit
to restore confidence and fix the underlying prob-
lems in the economy.
In the power sector, global experience shows there
is no substitute for effective planning. Zambia may
again face a similar crisis in the near future if struc-
tural weaknesses in the sector are not adequately
addressed. There remains a need to shift from be-
ing reactive to anticipatory or preemptive in dealing
with reduced generation capacity. Additionally, the
need to increase access to electricity in the country
should not be neglected.
We hope that the findings of this Brief will stimulate
a healthy debate around these questions so that
Zambia can weather the current economic difficul-
ties and power crisis and shift to inclusive growth
underpinned by a reliable power supply.
Ina Ruthenberg
Country Manager for Zambia
The World Bank
IFOREWORD
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
ii
The sixth Zambia Economic Brief has been prepared jointly by the Macroeconomic and Fiscal Management
and Energy and Extractives Global Practices of the World Bank Group. The team was led by Gregory Smith,
and included Zivanemoyo Chinzara, Joseph Kapika and Raihan Elahi. Simon Davies and Annelies Raue (UK’s
DFID) provided peer review and useful comments were also received from Catriona Purfield and Tobias Ras-
mussen (IMF).
Jumbe Ngoma led the dissemination activities with support from Wisdom Mulenga, Hellen Mungaila, Mofya
Mwanalushi, Kelvin Ng’andu and Gebisa Chisanga. Gebisa Chisanga and Hellen Mungaila provided adminis-
trative support. Ina Ruthenberg, the Zambia Country Manager; Mark Thomas, Practice Manager for Macro-
economic and Fiscal Management Global Practice; and Catriona Purfield, Program Leader, provided overall
guidance.
IACKNOWLEDGEMENTS
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
iii
Regional economic developments
As African economies face difficult global conditions
combined with domestic challenges, Sub-Saharan
Africa’s (SSAs) economic growth will continue to
slow in 2015 to 3.7% from 4.6% in 2014, according
to World Bank projections. The end of the commod-
ity price super cycle − with a substantial drop in the
price of oil, copper and iron ore; a slowdown of the
Chinese economy; and tightening global financial
conditions underpin the deceleration in growth.
Worsening current account and fiscal imbalances
have propagated a depreciation in most resource-
dependent currencies. This depreciation has been
compounded by a general increase in the demand
for the United States dollar (US$) in anticipation of
an increase in the US Federal Reserve rate. Domes-
tic factors have also weighed on some currency de-
preciation.
Another recent trend is increased access to interna-
tional debt markets by low income and lower-mid-
dle income countries. But the cost of borrowing has
increased sharply in 2015 for many sovereigns and
the spreads on African countries’ Eurobonds have
widened over uncertainty about government poli-
cies and a slowdown in the economies. The spreads
have increased the most where market confidence
is weakest.
The state of the Zambian economy
Zambia faces its toughest economic challenges in at
least a decade. The economy has come under strain
in 2015 as external headwinds and domestic pres-
sures have intensified. Growth of the economy is
expected to drop beneath 4% in 2015 for the first
time since 1998, resulting in only marginal growth
of per capita incomes. The external headwinds in-
clude slower regional and global growth (crucially in
China who purchase 40% of global copper produc-
tion) and a US$ that has strengthened considerably
against the kwacha. Domestic pressures include a
power crisis impacting on all sectors of the econo-
my, repeat fiscal deficits that have reduced inves-
tor confidence, and low and poorly-timed rains that
have reduced the agricultural incomes of 62% of the
population living in poverty.
Medium-term outlook
The outlook for 2016 has become more sombre fol-
lowing announcements of expected mine closures,
the severity of the power crisis and the rapid depre-
ciation of the kwacha. Given the external and do-
mestic challenges, we expect GDP growth to drop
to 3 to 3.5% this year and next, before returning to
potential (5 to 6%) by 2018 as copper prices stabi-
lize and domestic pressures ease. Tough action is
required in 2016 to curb runaway expenditures,
double digit inflation and growing twin deficits. Fis-
cal policy should be put center stage and efforts
made to shift the country back onto a sustainable
fiscal path.
The outlook is subject to downside risks, both do-
mestic and external. Externally, a further slowdown
in China’s economy would weigh on the demand for
Zambia’s exports by further reducing copper prices,
and would severely affect Zambia’s prospects. Fur-
thermore, strengthening of the US$ in the event of
the Federal Reserve increasing interest rates would
lead to added volatility of the kwacha.
The main domestic risks are threefold. Firstly, that
the power crisis will worsen. This could occur via
delays in new generation coming online or a fur-
ther reduction of generation capacity at the main
hydropower plants. Secondly, a deterioration of
confidence in the economy, leading to further weak-
ening of the currency and increased levels of infla-
tion. This might result in the absence of measures
to curtail runaway expenditure and failure to make
any substantial dent in the fiscal deficit. In this event,
external financing would also become more costly
and put further pressure on the 2016 budget and
for years to come via increased debt service obliga-
tions. Lastly, a bad harvest that serves to increase
food prices and reduce rural and agricultural in-
comes, with the greatest impact falling on the poor-
est households.
EXECUTIVE
SUMMARY
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
1
Policy challenges
Commodity-exporting countries’ policy makers face
increasing challenges across the globe. Zambia is no
exception and must grapple with multiple challeng-
es as the economy slows down. Falling copper prices
and a power crisis could be met with fiscal buffers,
but in Zambia no savings were made, or stabiliza-
tion measures carried out when the economy was
prospering. Furthermore, debt levels have soared
following repeat non-concessional borrowing mak-
ing it more expensive to borrow from international
debt markets.
This leaves the government with little room for
maneuver, limited fiscal space to compensate for
slower growth and recent job losses, and only hard
choices. Trade-offs exist between cushioning peo-
ple from the impact of the depreciation and power
crisis by subsidizing the cost of fuel and electricity,
and reducing the fiscal deficit to restore confidence
to fix underlying problems in the economy. These
trade-offs are particularly stark in 2016 given it is an
election year.
Large fiscal deficits and inefficient government
spending persist as sources of vulnerability for Zam-
bia. Strengthening the fiscal position and restoring
fiscal buffers are necessary to increase confidence
in the economy, reduce the need for costly borrow-
ing and build resilience against further exogenous
shocks. Fiscal adjustment would also put less pres-
sure on monetary policy and potentially make space
for interest rates to be reduced, easing the pressure
on individuals and firms. Keeping inflation expecta-
tions anchored in single digits remains critical to
maintaining macroeconomic and wider develop-
ment objectives.
With market access comes greater scrutiny and pol-
icy responses are judged by real action that affects
the interest rate paid on new borrowing. Eurobond
issuance has also increased international inter-
est in the Zambian economy and events are being
watched much more closely than prior to 2012. To
help maintain confidence in the economy, and Zam-
bia as an investment destination, better dialogue
on the economy should be targeted and confusing
messages avoided.
In addition, the commodity price shock highlights
the need for Zambia to reduce its dependency on
copper, a challenge it has been grappling with for
over 50 years. Talk about diversification and grow-
ing manufacturing needs to be met with a clear and
realistic strategy and structural reforms aimed at re-
moving impediments to private sector activity and
improving the business environment.
Powering the Zambian economy
Economic progress since 2000, driven by mining
production and services, has substantially increased
the demand for electricity in Zambia. A growing
shortfall in supply has been exacerbated in 2015 by
a reduction in hydroelectric generation due to low
water levels at the country’s main reservoirs. This
has increased power outages and impacted on all
aspects of the economy, contributing to slower eco-
nomic growth in 2015 and higher production costs.
Since July 2015, ZESCO has increased the extent of
rolling black-outs (load-shedding) to at least 8 hours
per day on a rotational basis for the majority of its
household, commercial and industrial consumers.
And although they are not subject to rotational load-
shedding, ZESCO has requested the mining industry
to curtail its load by 30%. This is in order to manage
a power deficit of around 591 MW each month (Sep-
tember to December 2015), representing approxi-
mately 34% of demand.
Mitigating the power crisis
Power is essential for the Zambian economy to func-
tion. Despite new generation projects, the modelling
of different hydrology conditions shows that even in
a wet (above average rainfall) scenario, current pow-
er shortages will continue through to at least 2018.
For 2016, the authorities have decided to increase
the import of expensive emergency power options.
This puts huge pressure on the budget at current
tariff rates, in tough economic conditions, and un-
less tariffs are revised upwards, the government’s
subsidy of the sector will rise dramatically. At No-
vember 2015 tariff rates, the government will need
to provide ZESCO with an additional US$ 340 million
in 2016 to meet the cost of emergency power. How-
ever, the financing requirement can be substantially
reduced if the average tariff is increased.
Key to note is that an increase in tariffs to cost-re-
flective levels is necessary but not sufficient to in-
crease private investment in electricity generation in
Zambia. There are many other hurdles to overcome
as well. Management and regulation of the sector
have been improving, but there is still substantial
work to do. Particular efforts are needed to improve
sector planning and the procurement processes for
large power projects.
Graduating to sustainable supply
The new generation capacity and emergency meas-
ures for 2016 will help in mitigating the impact of
the power crisis in the coming year, but global ex-
perience shows there is no substitute for effective
planning. Furthermore, Zambia may again face a
similar crisis in the near future if structural weak-
nesses in the sector are not adequately addressed.
There remains a need to shift from being reactive
to anticipatory or preemptive in dealing with a re-
duced generation capacity. Additionally, the need to
increase access to electricity in the country should
not be neglected.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
2
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
3
SECTION
A. REGIONAL ECONOMIC DEVELOPMENTS
As African economies face difficult global conditions combined with domestic challenges, Sub-Saha-
ran Africa’s economic growth will continue to slow in 2015 to 3.7% from 4.6% in 2014, according to
World Bank projections. The end of the commodity price super cycle − with a substantial drop in the
price of oil, copper and iron ore; a slowdown of the Chinese economy; and tightening global financial
conditions underpin the deceleration in growth.
The World Bank’s Africa Pulse published in October 2015 highlights that continued
dependency on oil and commodity exports has left the Sub-Saharan Africa (SSA) region
vulnerable to periodic shocks from the prices of international commodities. The region
remains a net exporter of oil, minerals, and agricultural commodities. Specifically, ener-
gy (oil and gas) and minerals comprise two-thirds of SSA’s exports.1
International com-
modity prices have steadily softened since early 2014, although they remain above the
levels experienced during the 2008 financial crisis. In August 2015, oil prices reached
their lowest level since the end of the financial crisis (figure 1). Similarly, copper prices
fell to their lowest level since August 2009. The slowdown and economic transition in
China has been a driver of weakening international commodity prices.
China is SSA’s largest trading partner and its slowdown and economic transition has
direct spillover effects, especially to the oil-exporting and mineral-rich SSA countries.
Angola, Democratic Republic of the Congo, Mauritania, Republic of Congo, Sierra Leone,
1
RECENT
ECONOMIC
DEVELOPMENTS
China’s slowdown
and economic
transition has
direct spillover
effects.
30
40
50
60
70
80
90
100
110
120
130
01/01/2014
15/01/2014
29/01/2014
19/02/2014
04/03/2014
17/03/2014
28/03/2014
11/04/2014
25/04/2014
12/05/2014
23/05/2014
09/06/2014
20/06/2014
03/07/2014
17/07/2014
30/07/2014
12/08/2014
25/08/2014
09/09/2014
22/09/2014
10/10/2014
23/10/2014
05/11/2014
18/11/2014
02/12/2014
15/12/2014
29/12/2014
13/01/2015
27/01/2015
09/02/2015
02/03/2015
13/03/2015
26/03/2015
10/04/2015
23/04/2015
07/05/2015
20/05/2015
03/06/2015
16/06/2015
30/06/2015
14/07/2015
27/07/2015
07/08/2015
20/08/2015
02/09/2015
18/09/2015
Oil Copper Iron Ore Agriculture
Figure Commodity prices have continued to fall in 2015
1
Source: World Bank (2015)
Weakening oil and
mineral prices
have propagated
a deterioration of
the terms of trade
of oil-exporting
and mineral-rich
economies.
Worsening current account and fiscal imbalances have propagated a depreciation in
most resource-dependent currencies (figure 3). This depreciation has been compound-
ed by a general increase in the demand for the US dollar in anticipation of an increase
in the US Federal Reserve rate. Domestic factors have also weighed on some currency
depreciation. For example, in Zambia, investors’ concerns about the government’s com-
mitment to reining in the fiscal deficit has caused volatility in the Zambian kwacha. De-
preciating currencies have exposed oil-exporting and mineral-rich countries to inflation
through imported inputs and consumables. Having remained stable over the past few
years, and declined to 5.9% in 2014 from 6.1% in 2013, inflation rates in the SSA are
expected to increase to 6.5% in 2015.
The Gambia, and Zambia have been the most affected given that 40% of their exports
go to China. Central Africa Republic, Eritrea, Mali, South Africa, and Zimbabwe have
also been affected as their exports to China are above 20% of total exports. Conse-
quently, the growth of SSA is expected to slow to 3.7% in 2015 on the back of poor
growth performance in the oil-exporting and mineral-rich economies. Domestic factors
such as poor agricultural yields due to drought (e.g. Zambia), power supply bottlenecks
(e.g. South Africa, Nigeria, Zambia), political instability (Burundi, Burkina Faso, South
Sudan), and insurgency (e.g. Nigeria, Cameroon, Chad, Niger) are expected to further
drag down growth.
Nevertheless, in the majority of oil-importing countries, particularly those that are non-
mineral rich, growth is expected to remain robust. Notable examples include Cote
d’Ivoire, Ethiopia, Mozambique, Rwanda, and Tanzania, where growth will not only be
driven by low oil costs, but also by government investment in infrastructure, and an ex-
panding services sector. However, in some economies, there is a risk that low growth in
the oil-exporting and mineral-rich countries will spill over to some of the non-resource
rich economies through reductions in intra-regional trade and investment.
Weakening oil and mineral prices have propagated a deterioration of the terms of trade
of oil-exporting and mineral-rich economies. This has led to weakened current account
positions for most of these economies (figure 2). For example, in Nigeria, the current
account deficit widened from 0.6% of GDP in Q4 2014 to 3.6% of GDP in Q1 2015. In
Zambia, the current account deficit deteriorated to 3.4% of GDP in 2014 from 0.8% of
GDP in 2013. Furthermore, in countries such as Angola, Nigeria, and Zambia, where oil
and mineral exports contribute to part of the government revenue, the fiscal deficit has
widened (figure 2). However, in other cases, fiscal imbalances have been worsened by
recurring domestic factors, among others, which include rising wage bills, large expend-
iture on infrastructure, and high expenditure on subsides. In countries such as Ghana
and Zambia, these fiscal deficits have been financed by borrowing in the international
debt markets, resulting in substantial increases in the debt to GDP ratios.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
4
-15
-10
-5
0
5
10
15
Angola Nigeria Zambia South Africa Kenya Ghana Tanzania
%ofGDP
Fiscal balance 2008 Fiscal balance 2014 Current Account Balance 2008 Current Account Balance 2014
Figure Current account and fiscal balances are growing
2
Worsening current
account and fiscal
imbalances have
propagated a
depreciation in
most resource-
dependent
currencies.
Depreciating
currencies have
exposed countries
to inflation through
imported inputs
and consumables.
Source: World Bank (2015)
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
5
Domestic factors such as fiscal expansion in the lead-up to elections, and poor agri-
cultural harvests and electricity bottlenecks, are also going to be drivers of inflation in
some countries. At the sub-regional level, the Central African region is set to continue
being the least inflationary. This is mainly because of the common monetary policy
pursued by most countries in this region (being administered by the regional central
bank ― the Bank of Central African States, through pegging of their common currency,
the CFA franc, to the Euro).
A recent trend is increased access to international debt markets by low income and
lower-middle income countries. Since 2007, 17 SSA countries, in addition to South Af-
rica, have tapped over US$24 billion, typically at fixed interest rates, with bullet repay-
ment structures and in US dollars, thereby adding foreign currency risks that these
countries need to manage. The cost of borrowing has increased sharply in 2015 for
many sovereigns, with Ghana issuing US$1 billion (15 year tenor) at 10.75% and Zambia
US$1.25 billion at 9.375% (11 year tenor on average); rates that are much higher than
previous issues. Further, having narrowed in April and May 2015, the spreads on Afri-
can countries’ Eurobonds have widened over uncertainty about government policies
and a slowdown in the economies. The spreads have increased the most where market
confidence is weakest (figure 4).
A recent trend is
increased access to
international debt
markets by low
income and lower
middle income
countries.
Spreads on
African countries’
Eurobonds have
widened over
uncertainty about
government
policies and a
slowdown in the
economies.
-140
-130
-120
-110
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
2014-Jan
2014-Feb
2014-Mar
2014-Apr
2014-May
2014-Jun
2014-Jul
2014-Aug
2014-Sept
2014-Oct
2014-Nov
2014-Dec
2015-Jan
2015-Feb
2015-Mar
2015-Apr
2015-May
2015-Jun
2015-Jul
2015-Aug
2015-Sept
2015-Oct
2015-Nov
CumulativeDepreciation(%)
South Africa Nigeria Kenya Zambia
Figure The US$ has strengthened against frontier market currencies
3
Source: World Bank (2015)
0
200
400
600
800
1000
02/01/2014
02/03/2014
02/05/2014
02/07/2014
02/09/2014
02/11/2014
02/01/2015
02/03/2015
02/05/2015
02/07/2015
02/09/2015
02/11/2015
Basispointsspread
Africa region
Emerging markets
Ghana
Namibia
Nigeria
South Africa
Zambia
Figure Sovereign bond spreads have widened
4
Source: Bloomberg
The medium-term growth outlook of the region is subject to several downside risks.
The global risks include the slow growth and economic transition in China, which is ex-
pected to spill over to the SSA region through depressed prices and volumes of oil and
mineral exports. Furthermore, an anticipated increase in the US Federal Reserve inter-
est rate is expected to tighten global financing conditions and investment flows into the
SSA region, and possibly cause further weakening of regional currencies. Countries with
large external and fiscal imbalances are expected to be the most vulnerable to these
factors. In this regard, fiscal consolidation and structural reforms can potentially help
countries to contain the effects of these shocks. Domestically, the risks include politi-
cal instability in Burundi and South Sudan, and security risks caused by insurgency in
parts of Nigeria, Cameroon, Chad, Niger, and Kenya, while weather-related shocks are
expected to negatively affect medium-term growth prospects.
When the global financial crisis hit the region, some countries were able to use govern-
ment investment in infrastructure and other built-in buffers to finance policy responses
to enable growth. Overall, the analysis shows that before the current bout of global
difficulties, these policy buffers were already showing signs of vulnerability from over-
valued currencies and growing fiscal deficits. Today, these policy buffers are lower than
before the global financial crisis, according to the report, and will make it more difficult
for countries to grow in the current situation.
Outlook for Sub-Saharan Africa
In the medium term, the overall growth for the SSA region is expected to rebound to
4.4% in 2016 and improve to 4.8% in 2017, albeit with mixed recovery across countries
due to domestic factors (figure 5). In some of Africa’s frontier markets, medium-term
growth recovery is expected to be much quicker on the back of rising oil production,
easing external and fiscal imbalances, and continued large investment in infrastructure.
However, factors such as power bottlenecks (in Nigeria, South Africa, and Zambia), fiscal
consolidation and high costs of imported inputs imposed by weaker currencies (Nige-
ria, Zambia), political instability (Burundi and South Sudan), and policy uncertainties will
also drag on growth recovery in the region.
Power bottlenecks,
fiscal consolidation
and high costs of
imported inputs
will drag on growth
recovery in SSA.
Policy buffers are
lower than before
the global financial
crisis, making it
more difficult for
countries to grow.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
6
0%
2%
4%
6%
8%
10%
12%
2008 2009 2010 2011 2012 2013 2014 2015f 2016f 2017f
China Developing countries excluding China Sub-Saharan Africa Zambia
Figure Growth in SSA and developing countries has slowed
5
Source: World Bank (2015) and staff projections
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
7
Despite decreasing copper prices and declining mining output, growth in 2014 was
supported by a good harvest (maize production increased 32% relative to the previous
year), expanding services and construction sectors (both growing just above 7%), gov-
ernment investment in infrastructure, and rapid growth in the transport (12.5%) and
financial and insurance sectors (up 13.2%). Contrastingly, growth in 2015 is expected
B. THE STATE OF THE ZAMBIAN ECONOMY
Zambia faces its toughest economic challenges in at least a decade. The economy has come un-
der strain in 2015 as external headwinds and domestic pressures have intensified. Growth of the
economy is expected to drop beneath 4% in 2015 for the first time since 1998, resulting in only
marginal growth of per capita incomes. The external headwinds include slower regional and global
growth (crucially in China who purchase 40% of global copper production) and a US dollar that has
strengthened considerably against the kwacha. Domestic pressures include a power crisis impacting
on all sectors of the economy, repeat fiscal deficits that have reduced investor confidence, and low
and poorly-timed rains that have reduced the agricultural incomes of 62% of the population living in
poverty.
The Zambian economy grew at an average annual rate of 6.4% between 2010 and
2014, above the overall growth rate of SSA and on the back of high copper prices,
foreign direct investment (FDI) in the manufacturing and mining sectors, government
investment in infrastructure, and expanding private sector investment in construction
and services. Until recently, inflation remained stable due to prudent monetary policy,
the currency remaining relatively stable, and good agricultural harvests recorded. Min-
ing and fiscal pressures have been building since 2012-13, but in 2015 the economy
has slowed considerably as global headwinds and domestic pressures have intensified.
The slowdown in China and fall in international commodity prices is having a ripple ef-
fect globally and particularly so in Zambia. Some relief has been provided in the form
of lower global oil prices, but the dominant effect is negative and comes via low copper
prices, which have been falling since 2011. The Zambian economy remains dependent
on copper mining, including for 77% of its exports, and the decline in global copper
prices, falling 20% in 2015 and ever since its 2011 peak, has put additional pressure on
the sector (figure 6).
Mining companies are looking globally to scale back operations in high-cost environ-
ments and low copper prices have meant that in Zambia, copper mines are being
closed, new investment is being delayed and substantial job losses have started in the
sector (7,700 between January and end-November 2015). In addition to lower prices,
the mining sector is being impacted on by the current power crisis and uncertainty
from frequent changes to the mining tax and royalty regime and the back-log of VAT
refund payments.2
The slowdown
in China and fall
in international
commodity prices
is having a ripple
effect globally and
particularly so in
Zambia.
Growth in 2015 is
expected to fall
to a range of 3 to
3.5% highlighting
the impact of the
lower copper prices
and domestic
pressures. 2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
275,000
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
Domestic Copper Production, MT(LHS) World Copper Price, US$/MT (RHS)
Figure Global copper prices have been falling since 2011
6
Source: Bank of Zambia, Ministry of Finance and World Bank staff calculations
to fall to a range of 3 to 3.5%, highlighting the impact of the lower copper prices and
domestic pressures such as a poor maize harvest and the current power crisis.
Low rainfall has reduced agricultural production, harming rural households’ incomes.
The 2014 -15 agricultural (October-March) season was characterized by extensive rain-
fall deficits resulting in markedly below average end of season vegetation (World Food
Program3
). This has reduced agricultural production for 2015 and increased the prices
of food items. Recent drier weather patterns have been strongly influenced by the El
Niño, an event active since March 2015 and expected to last into Q1 2016. Furthermore,
climate change has increased the frequency of floods and droughts over the past three
decades and will continue to have an impact on climate-sensitive sectors such as rain-
fed agriculture, fishing, and forestry.
The contribution of the agriculture sector to economic growth is expected to be nega-
tive in 2015 (preliminary estimates are for a 7.5% decline in output from agriculture,
forestry and fishing this year). Food prices have been increasing steadily and high prices
for mealie-meal (the main staple in Zambia) and meat have repeatedly hit the headlines.
The November 2015 bulletin from the Central Statistical Office (CSO) shows maize grain
prices have increased by 32% (year-on-year). While a small proportion of farmers have
benefited from the higher prices and sold their maize abroad (especially to the US dol-
lar denominated Zimbabwean economy), the vast majority of rural households’ incomes
have been hit hard by lower production in 2015. Slower growth and reduced agricul-
tural incomes are likely to halt poverty reduction, given the sector is the primary source
of income for close to three-fifths of poor households.
The current power crisis, discussed in Section 2, is impacting on all sectors of the econ-
omy. Like mining, the manufacturing and services sectors have been hit hard as costs
have increased and margins squeezed, leading to 7,700 job losses in 2015 and lower
output.
Sharp kwacha depreciation followed by an inflationary spike
As is typical in this part of Zambia’s copper price cycle, the kwacha has depreciated
considerably (the kwacha tends to depreciate as the copper price falls and appreciate
as it rises). However, on this occasion, global headwinds have combined with domestic
pressures and ebbing confidence in the economy, resulting in huge shifts and market
turbulence. While the strength of the US dollar fused with worsening current account
and fiscal imbalances have propagated a depreciation in most resource dependent cur-
rencies, the kwacha’s decline stands out (figure 2).
There have been three distinct phases to the kwacha to US dollar exchange rate be-
tween January and November 2015 (figure 7). There was the gradual depreciation be-
tween January and mid-August, where the kwacha depreciated by 21% over 30 weeks,
moving from ZMW 6.4 to ZMW 7.9 per US$. Next followed huge volatility and a steep de-
cline in the exchange rate and in the 10 weeks to end-October, the kwacha depreciated
-110%
-100%
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
09-Jan-15
23-Jan-15
06-Feb-15
20-Feb-15
06-Mar-15
20-Mar-15
03-Apr-15
17-Apr-15
01-May-15
15-May-15
29-May-15
12-Jun-15
26-Jun-15
10-Jul-15
24-Jul-15
07-Aug-15
21-Aug-15
04-Sep-15
18-Sep-15
02-Oct-15
16-Oct-15
30-Oct-15
13-Nov-15
US$ GB£ Euro Rand
Figure The kwacha has deprecated considerably in 2015
7
Food prices have
been increasing
steadily and high
prices for mealie-
meal and meat
have repeatedly hit
the headlines.
Global headwinds
have combined
with domestic
pressures and
ebbing confidence
in the economy
resulting in huge
shifts and market
turbulence.
At the end of
November, annual
inflation reached
19.5%.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
8
Source: Bank of Zambia
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
9
by 69% to ZMW 12.5 per US$. By November 11, 2015, the exchange rate reached ZMW
14.2 per US$ but by the end of that month had recovered to ZMW 10.3 per US$, an ap-
preciation of 27% in 19 days. The net effect is that the kwacha depreciated by 61% over
the 11 months to end-November 2015. Put differently, the kwacha lost 38% of its value.
The recovery in November is linked to a belief that the decline of the kwacha had been
over-blown, as well as better targeted and timed intervention by the Bank of Zambia
(BoZ), who look to calm the volatility in the foreign exchange market but not set its rate.
Furthermore, it was recognized in September and October that the rule governing for-
eign exchange trading did not perform well during days of thin markets and large shifts
in the exchange rate.
Between January 2012 and September 2015, inflation remained stable at an average
rate of 7.2%. Low inflation was attributed to low oil prices, a stable currency, and pru-
dent monetary policy by the BoZ. In 2015, inflation fell consecutively during Q1 and Q2.
However, since mid-2015, inflationary pressures began building up due to the depreci-
ating kwacha. However, October inflation (year-on-year) jumped to 14.3% and Novem-
ber inflation to 19.5% (figure 8), a shift driven by food inflation that increased to 16.2%
in October and 23.4% in November, from 8.1% in August 2015. The basket of food
measured includes both domestically produced foods, where price is largely depend-
ent on the quality of the harvest, and imported foods where prices are impacted by the
depreciation of the kwacha. Non-food inflation also rose to 15.5% in November from
just 7.3% in September, on the back of increased transport costs as vehicles and car
parts became more costly to import.
The big jump in inflation is consistent with expectations about the pass-through from
currency deprecation to inflation in Zambia. There is often a lag in pass-through and
the effects can still be felt up to 9 months after an episode of depreciation. Zambia is
viewed as having a relatively high rate of pass-through as even firms producing goods
for the domestic market rely on the import of parts and intermediary goods. Many food
products are also imported. Food inflation has been a big factor and in response to
concerns about the affordability of core staples, the government, via the Food Reserve
Agency, has announced its intention to sell grain below market prices to mills that are
contracted to sell mealie-meal to consumers at lower cost (the target price is ZMW 65
for a 25 kg bag, while actual prices ranged between ZMW 65 to 105 across the country
in November 2015.
In 2014 and 2015, while fiscal policy has been expansionary, monetary policy shoul-
dered the burden of moderating inflation. In Q1 2015, the BoZ increased the statu-
tory reserve ratio to 10% from 14%, but kept the policy rate constant at 12.5% until
November 3, 2015 when it was increased to 15.5% (figure 8). Caps on lending rates
were removed to improve the functioning of the credit market. The rising interest rates
Over the 11 months
to end-November
2015, the kwacha
lost 38% of its
value.
The big jump
in inflation is
consistent with
expectations about
the pass-through
from currency
deprecation to
inflation in Zambia.
Fiscal policy has
been expansionary,
monetary policy
shouldered
the burden of
moderating
inflation.
3%
8%
13%
18%
23%
28%
Jan2014
Feb2014
Mar2014
Apr2014
May2014
Jun2014
Jul2014
Aug2014
Sep2014
Oct2014
Nov2014
Dec2014
Jan2015
Feb2015
Mar2015
Apr2015
May2015
Jun2015
Jul2015
Aug2015
Sep2015
Oct2015
Nov2015
Inflation rate BOZ policy rate Avg. interbank rate Avg. T-Bill rate
Figure Inflation increased substantially in Q3 2015
8
Source: Bank of Zambia and Central Statistical Office
have helped moderate inflation, but at a cost. Higher interest rates increase the cost of
borrowing and make it even harder for firms and individuals to access credit. In a 2013
published Enterprise Survey of 720 Zambian firms, access to finance was highlighted as
the largest business environment constraint.4
Fiscal policy continues to be expansionary
Over the past few years, fiscal policy has been loose, and expenditure has increased
from around 22% of GDP in 2012 to an average of 24.5% of GDP since then (table 1).
To fund these higher levels of expenditure, that have exceeded revenues and grants,
large fiscal deficits of 6.7% and 5.5% of GDP (cash basis) were realized in 2013 and 2014
respectively. The underlying fiscal deficit has been higher still (10.6% in 2014), reflecting
an accumulation of VAT refund claims and expenditure arrears.
External borrowing has plugged this gap between what was spent and what was earned
in tax. External financing was 5.3% of GDP in 2014 and is expected to end 2015 around
6.6% following the issuance of Eurobonds in each of the two years.
The increased expenditure in 2015 has been absorbed in several areas. First is an in-
crease in public investment from 5.6% to 6.0% of GDP, focused on tackling core infra-
structure bottle-necks. Second is the increasing costs of debt servicing, as a result of
the non-concessional borrowing at high interest rates and depreciation of the kwacha
(the external debt is serviced in US dollars). Third is a huge unbudgeted outlay on sub-
sidies, especially fuel, but also for emergency power; up to 4.3% of GDP 2015 from 2%
of GDP in 2014.
Fuel subsidies have cost the government US$300 million in 2015 and some payments
will be carried over into 2015 (box 1). This subsidy is equivalent to ZMW 3,300 million,
ZMW 220 for every Zambian. The cost of emergency power in 2015 has reached ZMW
493 million (US$45 million) (discussed in Section 2).
Revenues have fallen short of expectations at the time of budgeting as growth of the
economy has slowed. Tax revenues will end the year around 13.8% of GDP, slightly
above target, but non-tax revenues (that include royalties) will end 2015 at 3.5% below
the target of 5.3%. Grants also fall short of the target by 0.3% of GDP. The extra expen-
ditures and revenue shortfalls will result in an estimated fiscal deficit of 8% of GDP in
2015, considerably higher than the budgeted 5.7% and the deficits recorded in recent
years (figure 9).
Fiscal policy has
been loose, and
expenditure has
increased from
around 22% of
GDP in 2012 to an
average of 24.5%
since then.
There’s been a
huge unbudgeted
outlay on subsidies,
especially fuel, but
also for emergency
power.
Revenues have
fallen short of
expectations at the
time of budgeting
as growth of the
economy has
slowed.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
10
2012 2013 2014
Actual Actual Actual Budget Proj.
Total Revenue and Grants 19.1 18.4 19.3 19.7 17.8
Tax 15.0 14.7 15.8 13.7 13.8
Non-Tax 2.4 2.2 2.7 5.3 3.6
Grants 1.7 1.5 0.8 0.7 0.4
Expenditure 22.3 25.1 24.8 24.3 25.8
OW Recurrent 16.1 18.8 19.4 18.6 19.8
Personal Emoluments 7.3 8.2 9.6 9.0 8.5
Goods and Services 3.6 3.3 3.1 2.4 2.9
Interest Payments 1.4 1.5 2.3 1.9 2.6
Subsidies 1.5 3.5 2.0 2.0 4.3
Other Recurrent 2.3 2.3 2.4 3.3 1.5
OW Public Investment 6.2 6.3 5.4 5.7 6.0
Fiscal Deficit (cash basis) -3.2 -6.7 -5.5 -4.6 -8.0
Financing 5.4 -0.6 9.4 4.6 6.4
Net Domestic 1.7 -1.0 4.1 1.7 -0.2
Net External 3.7 0.4 5.3 2.9 6.6
2015
Table Fiscal trends
1
Source: Ministry of Finance and staff projections
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
11
In October 2015, the government presented its 2016 national budget, aimed at: “Fiscal
Consolidation to Safeguard Our Past Achievements and Secure a Prosperous Future for
All”. The Minister of Finance called for moderation of the expansionary fiscal stance
of the past four years given global economic conditions. Typically, fiscal consolidation
involves lower expenditure, but in this fiscal plan, expenditure was to increase to 25.8%
GDP, leaving all the hard work with improving domestic revenue collection. Plans to
increase domestic revenue to 20.4% in 2016 (from 17.8% in 2015), perhaps possible
over the medium term, are extremely optimistic. Especially given the recent slowdown
in the mining sector and deteriorating economic conditions in the second half of 2015.
Substantial new expenditure pressures have also emerged since the budget, including
increasing debt service costs and a planned increase in emergency power imports. If
the government is to reduce the fiscal deficit in 2016, the framework will require close
review. At a press conference on November 26, 2015, the President of Zambia an-
nounced some ‘austerity measures’ including expenditure reductions, and reiterated
the government’s commitment to cost-reflective tariffs for electricity and to removing
the subsidy on fuel. The expenditure measures included now new capital projects, a re-
view of government emoluments and benefits (including cars), and restricted overseas
and domestic travel. No time frame was given, but the announced measures would
help in the move towards fiscal sustainability.
1
Box Huge recent subsidy bills for government
	 When asked about fuel subsidies, many people respond that they are cost-reflective prices and no 	
	 subsidies are in place in Zambia. However, a consequence of the rapidly depreciating kwacha has
been a mismatch between revenues from electricity tariffs and pump prices (paid in kwacha) and the cost
of supply of emergency electricity and fuel (paid in US dollar). This leaves the Ministry of Finance having to
pay the difference.
The Energy Regulation Board (ERB) sets wholesale and retail fuel prices according to a formula that marks
up the landed price of each shipment of oil as it arrives in Dar es Salaam by the cost of transporting, refin-
ing, and distributing fuel in Zambia. The stated objective of ERB’s cost-plus pricing model is to ensure that
all costs relevant to procurement are recovered through sales of petroleum products.
Fuel pump prices were increased on July 13, 2015, but between then and end-November, the kwacha-US
dollar exchange rate depreciated by 31%, and no changes have been made by the ERB. This meant that the
government had to contribute US$50 million in October alone to cover the cost of supplying fuel. In Octo-
ber and November, prices were less than US$1 per liter, an event that last occurred beyond the memory of
most fuel consumers. These expenditures are not pro-poor and are arguably unaffordable as the economy
slows down and the cost of borrowing increases.
Typically fiscal
consolidation
involves lower
expenditure, but
in this fiscal plan,
expenditure was
increased to 25.8%
GDP.
Substantial new
expenditure
pressures have also
emerged since the
budget, including
increasing debt
service costs.
-10%
-5%
0%
5%
10%
15%
20%
25%
2010 2011 2012 2013 2014 2015f
Revenue + Grants Expenditure Fiscal Deficit
Figure Growing and repeat fiscal deficits
9
Source: Ministry of Finance and staff projections
Public debt looms large
Large exchange rate depreciations carry the risk of balance sheet effects, especially
where there is substantial offshore foreign currency borrowing by the government and
corporations. Foreign currency risks have become a reality in Zambia in 2015, as the
weakening kwacha has increased the level of external debt and cost of servicing the
borrowing.
The repeat fiscal deficits of the past four years have been financed by external non-
concessional borrowing. In July 2015, Zambia issued its third Eurobond for US$1.25
billion (with an average tenor of 11 year) at a considerably higher cost (the yield at issue
was 9.375%). These Eurobond issues now total US$3 billion and have sharply increased
overall debt levels. The recent and rapid depreciation has also pushed the kwacha cost
of repaying and servicing this external debt much higher. In consequence, public debt
is now around 55% of GDP, representing a near doubling of debt levels (as measured in
local currency) since 2012, raising important issues of debt sustainability.
In light of the economic difficulties and deterioration of fiscal metrics, Moody’s down-
graded Zambia’s government issuer rating from B2 to B1, and its outlook from negative
to stable (25 September 2015), thereby aligning their rating with those of other rating
agencies. The consequence of higher levels and lower ratings is that access to interna-
tional debt markets, where opportunities are already narrowing for frontier markets,
will be more costly for Zambia in 2016 and going forward.
Trade imbalances emerge
Zambia relies on copper for 77% of its exports and as global prices have fallen, the cur-
rent account surpluses enjoyed between 2009 and 2012 have been replaced by small
deficits. Trade deficits have been recorded in each of the first three quarters in 2015,
led by a decline in the amount and value of copper exported to international com-
modity firms and directly to China, following lower global demand, softer global copper
prices, and an increase in the value of imports following the depreciation of the kwacha
(figure 10).
Preliminary data suggested year-to-date copper exports were valued at US$4.1 billion
in September, down 28% from US$5.7 billion the previous year. Non-traditional exports
(i.e. goods other than copper and cobalt) declined sharply in 2014, reversing a trend
of previously steady growth and similar levels of performance have been recorded in
2015 as other trading partners’ economies continue to grow slowly. Key non-copper
export destinations are the Democratic Republic of Congo (7.7% of exports and mainly
sulphuric acid for mining) and South Africa (6.8% of exports).
The repeat fiscal
deficits of the past
four years have
been financed
by external non-
concessional
borrowing.
The BoZ’s
November
2015 monetary
policy statement
highlighted a
widening of the
current account
deficit in Q3 to
US$401 million.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
12
-5,000
-3,000
-1,000
1,000
3,000
5,000
7,000
9,000
11,000
13,000
15,000
17,000
19,000
2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3
MillionsZMK
Imports Exports Trade Balance
Figure The trade balance has become negative in 2015
10
Source: Central Statistical Office
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
13
The BoZ’s November 2015 monetary policy statement highlighted a widening of the
current account deficit in Q3 to US$401.0 million from US$305.9 million recorded in
Q2, on account of higher import related service payments and the increase in income
on equity payments by foreign-owned enterprises .
The cost of imports increased in Q2 and Q3 2015, following the depreciation of the
kwacha. Given the rising costs of imported goods, consumers will, where possible (e.g.
imported food items), shift to domestically produced goods and otherwise reduce their
consumption, serving to reduce the trade imbalance.
Poverty levels and shared prosperity
The benefits of recent GDP growth have accrued mainly to the population living in ur-
ban areas. Almost 90% of Zambians living below the extreme poverty line are concen-
trated in rural areas, and the poverty gap index (a measure of how far average incomes
fall below the poverty line) is far higher for the rural population than their urban coun-
terparts (20% and 3.7%, respectively, as of 2010). Real income growth between 2006
and 2010 was greatest among those with higher incomes and relatively weak for those
with lower incomes. Incomes of the poor have not been growing rapidly enough, or at
all, to lift them out of poverty, with households at the bottom 40% experiencing very
modest real consumption growth below 1%. As a result, although poverty rates were
declining until the mid-2000s, poverty in Zambia remains high, with an estimated 62%
of Zambians living on less than US$1.90 per day (2011 PPP). Forthcoming results of the
2015 Living Conditions Monitoring Survey will provide the first firm update on poverty
levels since the 2010 survey.
Zambia also has one of the most unequal distributions of income in SSA, with a Gini co-
efficient of 57.5. Many of the gainful economic activities in the country are concentrated
primarily along the rail line in the highly urbanized Copperbelt and Lusaka regions. The
rest of the country is fairly underdeveloped, and its labor depends primarily on subsist-
ence agriculture.
C. ECONOMIC OUTLOOK, RISKS AND POLICY CHALLENGES
The outlook for 2016 has become more somber following announcements of expected mine clo-
sures, the severity of the power crisis and the rapid depreciation of the kwacha. Given the external
and domestic challenges, we expect GDP growth to drop to 3 to 3.5% this year and next, before re-
turning to potential (5 to 6%) by 2018, as copper prices stabilize and domestic pressures ease. Tough
action is required in 2016 to curb runaway expenditures, double digit inflation and growing twin
deficits. Fiscal policy should be put center stage and efforts made to shift the country back onto a
sustainable fiscal path.
Medium-term outlook
The outlook for the Zambian economy is underpinned by three main trends.
i. The current low price of copper, on which the economy depends for revenue
and foreign currency, will pressure fiscal and current account balances. World
Bank forecasts suggest commodity prices, including copper, are likely to stay in
the doldrums throughout 2016, but should start to pick up in 2017 and beyond.
ii. There is huge uncertainty about whether persistent and growing fiscal deficits can
be reined in. Zambia has been able to issue three Eurobonds in four years to fund its
exuberance, but as markets tighten and Zambian debt levels have soared, the costs of
borrowing will remain much higher than when the Eurobonds were issued in 2012 or
2014.
iii. The severity of the power crisis, and the government’s ability to mitigate it by sourc-
ing emergency power and ensuring the cost is affordable via tariffs that better reflect
the rising cost of supplying electricity.
Reflecting on the external headwinds and domestic pressures, the expectation is that
GDP growth will remain in the region of 3 to 3.5% in 2016, before reaching potential
(between 5 and 6%) in 2017 and 2018, as new power generation capacity comes fully
online and global copper prices stabilize. Despite the current problems, long-term in-
vestment in the mineral and non-mineral sectors in Zambia remains attractive.
The benefits of
recent GDP growth
have accrued
mainly to the
population in
urban areas.
Reflecting the
external headwinds
and domestic
pressures, the
expectation is
that GDP growth
will remain in the
region of 3 to 3.5%
in 2016.
The government remains committed to a target of single digit inflation, set as part of
the 2016 budget, but this appears ambitious given the recent rapid depreciation of the
kwacha. However, given the extent of the recent depreciation, it is likely that prices will
increase and peak in Q2 2016 before recovering to an average of around 15-20% for
2016.
Risks to Zambia’s economic outlook
The outlook is subject to downside risks, both domestic and external. Externally, lower
than predicted growth in China would weigh on the demand for Zambia’s exports, fur-
ther reducing copper prices, and would severely affect Zambia’s prospects. Further-
more, strengthening of the US dollar, in the event the Federal Reserve increase interest
rates, would also likely add volatility to the exchange rate.
The main domestic risks are threefold. First, that the power crisis will worsen. This could
occur via delays in new generation coming online or a further reduction of generation
capacity at the main hydropower plants, serving to reduce both mining and non-mining
activity, increase joblessness and push the economy into contraction. Second, a dete-
rioration of confidence in the economy, leading to further weakening of the currency
and increased levels of inflation. This might result in the absence of measures to cur-
tail runaway expenditure, especially in the run-up to the 2016 elections, that would
make any substantial dent in the fiscal deficit. In this event, external financing would
also become more costly and would put further pressure, via increased debt service
obligations, on the 2016 budget and for years to come. Lastly, another bad harvest
that serves to increase food prices and reduce rural and agricultural incomes, with the
greatest impact falling on the poorest households.
Policy challenges
Commodity-exporting countries’ policy makers face increasing challenges across the
globe. Zambia is no exception and must grapple with multiple challenges as the econo-
my slows down. Falling copper prices and a power crisis could be met with fiscal buffers,
but in Zambia, no savings were made or stabilization measures carried out when the
economy was prospering. Furthermore, debt levels have soared following repeat non-
concessional borrowing making it more expensive to borrow from international debt
markets.
This leaves the government with little room to maneuver, limited fiscal space to com-
pensate for slower growth and recent job losses and only hard choices. Trade-offs ex-
ist between cushioning people from the impact of the depreciation and power crisis
by subsidizing the cost of fuel and electricity and reducing the fiscal deficit to restore
confidence, and fixing the underlying problems in the economy. These trade-offs are
particular stark in 2016, given that it is an election year.
The 2016 budget puts all the pressure on revenue, but year-on-year increases to public
expenditure, funded by borrowing, should be center stage. Large fiscal deficits and inef-
ficient government spending persist as sources of vulnerability for Zambia. It is neces-
sary to strengthen the fiscal position and restore fiscal buffers to increase confidence in
the economy, reduce the need for costly borrowing and build resilience against further
exogenous shocks.
Fiscal adjustment would also put less pressure on monetary policy and potentially make
space for interest rates to be reduced, easing the pressure on individuals and firms.
Keeping inflation expectations anchored in single digits remains critical to maintaining
macroeconomic and wider development objectives.
Any adjustment should involve a shift in spending priorities that supports both the ef-
ficiency of public expenditures and long-term inclusive growth. While in many areas this
is difficult to achieve, there are obvious areas for attention including the growing cost
of fuel subsides. Policy announcements have been made for cost-reflective electricity
tariffs and fuel prices, but the reality is a huge outflow of subsidy from the Ministry of
Finance. If the stated intentions for meeting the cost of supply with tariffs were realized,
then fiscal pressures would ease considerably. Much better, pro-poor cushioning can
be achieved via investment projects targeted at regions, and via targeted cash trans-
The outlook
is subject to
downside risks,
both domestic and
external.
Commodity-
exporting
countries’
policy makers
face increasing
challenges across
the globe.
Fiscal adjustment
would put less
pressure on
monetary policy.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
14
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
15
fers, rather than with fuel subsidies.
The targeted 2016 fiscal deficit of 3.8% presented in the budget may prove too optimis-
tic given the slowdown, but fiscal adjustment is required and would signal the govern-
ment’s commitment to fiscal sustainability.
With market access comes greater scrutiny and policy responses are judged by real ac-
tion that affects the interest rate paid on new borrowing. Eurobond issuance has also
increased international interest in the Zambian economy and events are being watched
much more closely than prior to 2012. To help maintain confidence in the economy,
and Zambia as an investment destination, better dialogue on the economy should be
targeted and confusing messages avoided.
In addition, the commodity price shock highlights the need for Zambia to reduce its
dependency on copper, a challenge it has been grappling with for over 50 years. Talk
about diversification and growing manufacturing needs to be met by a clear and real-
istic strategy and structural reforms aimed at removing impediments to private sector
activity and improving the business environment.
With market access
comes greater
scrutiny and
policy responses
are judged by
real action that
affects the interest
rate paid on new
borrowing.
SECTION
D. THE ELECTRICITY CHALLENGE
Economic progress since 2000, driven by mining production and services, has substantially increased
the demand for electricity in Zambia. A growing shortfall in supply has been exacerbated in 2015 by
a reduction in hydroelectric generation due to low water levels at the country’s main reservoirs. This
has increased power outages and impacted on all aspects of the economy, contributing to slower
economic growth in 2015 and higher production costs.
Zambia’s economy has expanded by an average of 6.4% per year between 2010 and
2014, and 7.4% over the last decade. This economic expansion has lifted the demand
for electricity by 4% per annum over the same period. With very little new generation
capacity being brought online in the past 30 years, Zambia has been experiencing a
power deficit over the past 4-5 years, characterized by power outages commonly re-
ferred to as load-shedding.
Approximately 95% of generation capacity is linked to hydropower plants, hence the
electricity supply is heavily dependent on hydrology. This puts the country at risk in the
event of drought, more so recently as the gap between generation and demand has
closed.
The mining industry consumes the majority of Zambia’s electricity (55%) using it not
only for mining itself, but also processing (e.g. concentrating, smelting and refining) and
other associated services such as water pumping. Most mines in the Copperbelt Prov-
ince receive their power via the Copperbelt Energy Corporation (CEC) based on prices
agreed in long-term Power Supply Agreements (PSAs) that run back-to-back with Bulk
Supply Agreements (BSAs) between CEC and ZESCO Limited. For legacy reasons, these
agreements are not overseen by the ERB. The ERB does however set tariffs for other
consumer categories and provides its consent to ZESCO’s other long-term bulk power
agreements.
While installed capacity, measured in Mega Watts (MW), has been higher than existing
peak demand, available energy generation, measured in Giga Watt Hours (GWh) and
which has an approximate linear relationship to the water used, has remained below
the country’s total energy demand (figure 11). This has been exacerbated in 2015 due
to low water levels in the main reservoirs used for hydroelectric generation (box 2).
Despite plenty of warning about dependency on hydro power and rising power de-
mand, there has been very little improvement in generation capacity. Until 2006, Zam-
bia had surplus power and this partly explains why prior to the 360MW Kariba North
Bank Extension that was completed in 2015, the last major plant to be commissioned
was the Kariba North Bank in 1977. The history of surplus has also contributed to low
2
POWERING
THE
ZAMBIAN
ECONOMY
Approximately
95% of generation
capacity is linked
to hydropower
plants, hence the
electricity supply is
heavily dependent
on hydrology.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
16
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
17
tariffs which have been one of several barriers to investment in the grid and new gen-
eration capacity to meet rising demand.
Load-shedding has been increasingly common since 2006, but it has got much worse
in 2015. The shortfall in energy supply has impacted on manufacturing and industry
(including mining), increasing the costs of production, and is negatively impacting on
the quality of life of Zambians with access to grid electricity. The power crisis adds to
the list of negative shocks impacting on the Zambian economy in 2015 as discussed in
Section 1.
Adequate power supply and coverage is central to Zambia’s development strategy. Zam-
bia’s 2030 Vision highlights that: “Energy is one of the important driving forces behind the
development of an economy as it cuts across most economic and social activities.” The
Sixth National Development Plan also stresses that: “Poor and inadequate infrastruc-
ture remains the major constraint to economic development and poverty reduction”. Pre-
liminary results from the Living Conditions Monitoring Survey (LCMS) show the number
of households reporting to have an electricity connection grew from 584,000 in 2010 to
948,000 in 2015, an increase of 364,000 households. However, almost all the new con-
nections haven taken place in urban areas and just 75,000 or 4% of rural households
are connected, compared to 67% of urban households (there are approximately 3 mil-
lion households in Zambia).
Zambia’s challenges are mirrored in other African countries. Countries across the conti-
nent are grappling with the challenge of supplying reliable electricity to meet the needs
of a growing economy and providing universal access to electricity in order to improve
the quality of life of citizens. The key issues faced in the power sector include poor reli-
ability, low access, and insufficient capacity to meet existing demand; some 24% of the
population of SSA has access to electricity versus 40% in other low income countries.
Excluding South Africa, the entire installed generation capacity of SSA is only 28 GW,
equivalent to that of Argentina.
Load-shedding has
been increasingly
common since
2006, but it has
got much worse in
2015.
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capacity(GWh)
Annual generation capacity (GWh) Annual demand (GWh)
Figure Electricity generation capacity fallen below demand
11
Source: ZESCO and World Bank staff calculations
2
Box Hydro-Electricity in Zambia
	 Zambia is reliant on four hydroelectric power stations:
	 •	 Victoria Falls, commissioned in 1938 with an installed capacity of 108 MW (since 1972).
	 •	 Kariba North Bank, commissioned in 1960 with an installed capacity of 600 MW that pro
		 vides power to both Zambia and Zimbabwe.
	 •	 Kafue Gorge, commissioned in 1971 with an installed capacity of 900 MW since 1977.
	 •	 Kariba North Bank Extension, commissioned in 2014 at 360 MW.
In the 1970s and following the commissioning of Kafue Gorge, Zambia experienced a period of power
surplus, during which power was sold and exported to Zimbabwe and South Africa. Falling and low copper
prices and a lack of investment (mines were nationalized in 1972) meant there was reduced demand for
power. Mining firms are the biggest users of power and as production began to pick up in the late 1990s,
and the economy grew robustly, the power surplus slowly decreased.
Source: Kapika (2013) and Whitworth (2014)
E. ZAMBIA’S POWER CRISIS
Since July 2015, ZESCO has increased the extent of rolling black-outs (load-shedding) to at least 8
hours per day on a rotational basis for the majority of its household, commercial and industrial con-
sumers. And although they are not subject to rotational load-shedding, ZESCO has requested the
mining industry to curtail its load by 30%. This is in order to manage a power deficit of around 591
MW each month (September to December 2015), representing approximately 34% of demand.
The decision by ZESCO to limit electricity generation is due to the historically low wa-
ter levels at the country’s reservoirs (including Kariba, Itezhi Tezhi and Kafue Gorge)
that store water for hydroelectric generation. Prior to the start of the increased load-
shedding in July, ZESCO generation capacity was in the range of 1,800 – 2,000 MW. The
reason for the low water levels is a combination of lower rainfall (during the 2014-15
rainy season) and increased water usage.
Zambia’s and Zimbabwe’s water allocation at Kariba dam is regulated by the Zambezi
River Authority (ZRA) and in both 2013 and 2014, ZESCO exceeded its allocation by 5%
and 22% respectively. The commissioning of the Kariba North Bank Extension project in
2014 contributed to increased water use at the Kariba reservoir and the reservoir has
not reached its maximum retention levels since 2010. Water levels in the reservoirs will
recover somewhat during the 2015 -16 rain season, assuming usage according to al-
location, but it will take several years of rainfall and balanced usage for them to recover
to maximum levels.
As of mid-November 2015, most areas of Zambia had experienced low rainfall and if
this trend continues (the El Niño is expected to last into Q1 2016), there will be only
limited recovery in 2016. If, however, reservoir levels continue to drop, ZESCO may be
forced to curtail generation at the Kafue Gorge and at Kariba North Bank (including the
extension) power stations even more.
2015 load-shedding
Initially, the burden of load-shedding was only imposed on households, businesses and
industry, but excluded the mining sector. In July 2015, however, a decision was made
to reduce power supply to the mines by 30% and since then, the mining companies
have been asked to operate within restricted power allocations, been offered additional
power at higher cost and had their compliance monitored by ZESCO.
The load-shedding has typically been for 8 hours per day. Between June and August,
it was restricted to six hours on the Copperbelt, but since then the country has been
without power for on average eight hours per day. The load-shedding aims to reduce
demand, but there is not a full saving as often consumers delay some of their consump-
tion to times when power is available.
The reason for the
low water levels
is a combination
of lower rainfall
(during the 2014-15
rainy season) and
increased water
usage.
Given reservoir
levels continue to
drop, ZESCO may
be forced to curtail
generation further.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
18
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
19
Given the severity of the power deficit, the government announced several short- and
long-term measures to alleviate the situation. To supplement the country’s available
generation and reduce the power deficit, ZESCO has entered into contracts with South-
ern African Power Pool (SAPP) utilities and emergency power suppliers (including Ag-
greko PLC). In November 2015, these contracts totaled 172 MW delivered during differ-
ent times of the day. Once domestic generation and electricity imports (as at November
2015) are taken into account, the country faces an average monthly deficit of 591 MW
(September to December 2015), representing approximately 34% of demand (table 2).
2015 tariffs and subsidy
The emergency power imported in 2015 has come at considerable cost to the govern-
ment. A burden made worse by the rapid depreciation of the kwacha in 2015. Imports
from Aggreko are costing ZESCO US cents (USc) 18.4 per Kwh, imports from Mozam-
bique are priced at USc 7.6 per Kwh and the average tariff on imports from the day
ahead market (DAM) has increased from USc 2.7 Kw/h in April 2015 to USc 6.7 Kw/h
in October 2015, a near doubling of prices. The total cost of emergency power (cost of
supply minus tariffs) is estimated at ZMW 539 million or US$44 million in 2015. Greater
transparency on what the mines are each paying relative to the cost of supply would
greatly improve the public’s understanding.
Given the severity
of the power
deficit, government
announced several
short- and long-
term measures
to alleviate the
situation.
September to December 2015
Monthly
Average
ZESCO Generation 987.5
Lunsemfwa Hydro 22.0
Ndola Energy 41.0
Emergency Imports - Day Ahead Market 38.0
Emergency Imports - Electricidade de Mozambique (EDM) 27.0
Emergency Imports - Aggreko (148MW for 16hrs daily) 107.0
Itezhi Tezhi Power Station -
Total Generation 1,222.5
Transmission Losses 73.4
Total Demand 1,740.0
Total Deficit 590.9
Total Deficit 34.0%
Total Deficit Estimate
September to December 2015 Number of Months Active
ZESCO Generation 0
Lunsemfwa Hydro 0
Ndola Energy 0
Emergency Imports - Day Ahead Market 0
Emergency Imports - Electricidade de Mozambique (EDM) 0
Emergency Imports - Aggreko (148MW for 16hrs daily) 0
Itezhi-Tezhi Power Station
Total Generation Monthly
Transmission Losses Monthly
Total Demand Monthly
Total Deficit Monthly
Total Deficit Monthly
Table A power generation deficit in 2015
2
Source: ZESCO and World Bank staff calculations
Note: For the period September-November 2015
At present there are six power plants at various stages of preparation/development,
some of which have been in the pipeline for more than a decade. The total capacity of
these plants is about 1,730 MW (table 3). Generation of between 150 and 300 MW is ex-
pected in 2016 from Maamba Collieries (depending on the speed of project completion
and the quality of coal used), along with 70 MW from Itezhi Tezhi (60% of its potential
capacity due to low reservoir levels) starting in early to mid-2016. The largest, Kafue
Gorge Lower (750 MW), has gone through several procurement/contracting phases,
and has recently been contracted at a cost of US$ 2 billion and is scheduled to be com-
missioned in 2020. The remaining three projects are negotiating power purchase and
other support agreements with ZESCO and the government.
In addition, there are good prospects for solar generation in 2016 and beyond (box 3).
The International Development Corporation (IDC) has been working to attract private
sector partners for two 50MW solar PV projects, with support from the World Bank
Group as transaction advisor. These projects should provide a diversified form of gen-
eration in early 2017.
There is also potential for thermal power generation by Independent Power Producers
(IPP) for 200 MW worth of generation over the coming years, assuming the potential
revenues, partly determined by the level of electricity tariffs, are sufficient to attract
interest and that other constraints such weak management of the tendering process
can be addressed.
The prospect of solar and thermal generation in the next few years will help diver-
sify Zambia’s power generation and make it slightly less dependent on hydro. Climate
change has increased the frequency of floods and droughts in Zambia, and the Zam-
bezi river basin will remain sensitive to global warming, adding further justification for a
gradual diversification to other renewable sources of generation such as solar.
At present
there are six
power plants at
various stages
of preparation/
development, some
of which have been
in the pipeline
for more than a
decade.
Despite these
projects, the
modelling of
different hydrology
conditions shows
that even in a wet
(above average
rainfall) scenario,
current power
shortages will
continue through
2018.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
20
Project
Capacity
(MW) Primary Fuel
Estimated Cost
(US$ m)
Itezhi Tezhi Power Station 120 Hydro 240
Maamba Coallieries 300 Coal 750
Lunzua Power Authority 210 Hydro n/a
Ndola Energy Extension 50 HFO 75
EMCO 300 Coal 750
Kafue Gorge Lower 750 Hydro 2,000
Total Capacity 1,730
Table Private power plant contract status
3
Source: ZESCO and World Bank staff calculations
Despite these projects, the modelling of different hydrology conditions shows that
even in a wet (above average rainfall) scenario, current power shortages will continue
through 2018. In a dry (lower than average rainfall) scenario, power shortages may
continue through 2020. It should be noted that the assumptions in these scenarios do
not include tackling the large portion of the population without access to electricity ser-
F. MANAGING THE COST OF MITIGATION
Power is essential for the Zambian economy to function. Despite new generation projects, the mod-
elling of different hydrology conditions shows that even in a wet (above average rainfall) scenario,
current power shortages will continue through to at least 2018. For 2016, the authorities have made
the difficult choice to increase the import of expensive emergency options. This puts huge pressure
on the budget at current tariff rates, in tough economic conditions, and unless tariffs are revised
upwards, the government’s subsidy of the sector will rise dramatically and will be unaffordable. At
November 2015 tariff rates, the government will need to provide ZESCO with an additional US$ 340
million in 2016 to meet the cost of emergency power. However, the financing requirement can be
substantially reduced if the average tariff is increased.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
21
Emergency power imports in 2016
Notwithstanding the risk that ZESCO may be forced to curtail generation completely
at the Kafue Gorge and at Kariba North Bank, reduced generation is likely from these
sources (assuming water quotas are followed) for at least the first half of 2016 until
rainfall helps replenish the reservoirs. Maamba Collieries and Itezhi Tezhi, when com-
pleted, will provide some relief, but to prevent a large increase in load-shedding ZESCO
is contracting further emergency imports (table 4). In 2016, 300 MW is likely to be avail-
able from two Karpower ships (to be docked off Mozambique), further use of the day
ahead market and a continuation on imports from Aggreko PLC (reduced to 40MW 16
hours daily in 2016).
The importation of power is complex given the number of wheelers (i.e. number of
countries the power must pass through to get to Zambia). Power from Mozambique
typically passes South Africa, then Botswana or Zimbabwe, to get to Zambia. Some
power can arrive directly across the Zambia-Mozambique border, but the grid capacity
there is limited to small volumes. The imports are also expensive, with Aggreko tariffs at
USc 18.8 per Kwh, Karpower at USc 16.7 per Kwh, and the day ahead market remaining
around USc 6.5 per Kwh. If further emergency inland power is sought, then the cost of
supply might be as high as USc 25 per Kwh.
The new generation and emergency measures will result in an average deficit of 496
MW in 2016 or 26% of demand. The deficit is likely to be highest in Q1 2016, but im-
prove as emergency power and new generation comes online (figure 12) in Q2.
The imports are
expensive, with
Aggreko tariffs at
USc 18.8 per Kwh,
Karpower at USc
16.7 per Kwh, and
the day ahead
market remaining
around USc 6.5 per
Kwh.
A substantial
increase in tariffs
will be required to
meet the cost of
supply in 2016 and
any gap between
revenues and the
costs of supply will
need to be met by
the government.
3
Box Scaling solar in Zambia
Scaling Solar is an open, competitive and transparent approach that facilitates the rapid development
of privately-owned, utility-scale solar PV projects in sub-Saharan Africa. It is capable of rapid implementa-
tion support, and offers a ‘one-stop-shop’ package of advisory services, contracts, financing, guarantees and
insurance. This enables governments and utilities to procure solar power transparently and at the lowest
possible cost.
The government and IDC hope that this initial 100 MW procurement round for solar generation will ulti-
mately lead to a rapid scale-up of solar PV capacity, forming a natural complement to Zambia’s extensive
hydro resources. If they and the other public sector stakeholders adhere to the risk allocation under Scaling
Solar, it is hoped that these projects will qualify for WBG financing, political risk insurance and partial risk
guarantees.
2016
Monthly
Average (MW)
ZESCO Generation 950.8
Lunsemfwa Hydro 22.0
Itezhi Tezhi Power Station 70.0
Ndola Energy 41.0
Reduction in Agrekko Imports (40 MW for 16 hrs daily) 40.0
Emergency Imports - Karpower Ship (100 MW for 24 hours) 91.7
Emergency Imports - Day Ahead Market 44.0
Emergency Inland power ( 200MW for 24 hours daily) -
Maamba Coal 88.8
Emergency imports -Karpower ship (200MW 24 hours) 150.0
Total Generation 1,498.3
Transmission Losses 89.9
Total Demand 1,905.0
Total Deficit 496.6
Total Deficit 26.1%
Table Emergency power imports for 2016
4
vices, which remains an additional and core priority of government which will require
even more generation capacity.
Source: ZESCO and World Bank staff calculations
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
22
Electricity tariffs
The issue of electricity tariffs has been a longstanding one and there has long been
discussion of moving towards costs-reflective tariffs. In 2008, the tariff was increased
33% with the financial viability of the power supply in mind (Zambian tariffs were some
of the lowest across the continent), but the prices have not been inflation linked and
have reduced considerably in real terms.
On 1 July, 2014, ZESCO was permitted by the ERB to raise tariffs on all customer cat-
egories except mining. Accordingly, commercial tariffs were increased by 15.4% and
residential consumers’ tariffs by 24.6%. This followed a four-year period from August
2010 where no adjustments were made despite cumulative inflation of 28%. Attempts
have also been made to increase tariffs paid by mining firms to cover the actual cost of
supply but many hurdles have been encountered.
The cost of emergency power in 2016 will substantially increase the cost of supplying
electricity as it has in the second half of 2015. In July 2015, and to improve the financial
sustainability of ZECSO, the government stated its intention to revise electricity tariffs to
take the cost of supply into account. This government statement was repeated several
times since July 2015, but as of end-November 2015, no action had been taken.
To move towards this goal, ZESCO applied to the ERB to increase most of the various
non-mining tariffs and fixed charges from between 167 and 248%. Public consultations
were held and as of end-November, no final decision had been made. Despite the large
changes to some tariff lines, the proposal kept the R1 tariff (a ‘life-line’ tariff aimed at
providing lower pricing to low-income consumers) at US Cents (USc) 1.5 per KWh and
increased the threshold to receive this tariff from 100 Kwh up to 300 KWh of consump-
tion. The aim of this tariff is to protect low-income residential consumers, but the move
to allowing up to 300 KWh will include many of the non-poor as well. In addition, ZESCO,
CEC and the mining industry began discussions to renegotiate the agreements under
which bulk power sales to the mining industry are governed in order that they include
the full cost of emergency power imports.
A substantial increase in tariffs will be required to meet the cost of supply in 2016 and
any gap between revenues and the costs of supply will need to be met by the govern-
ment. Average tariffs, including both mining and non-mining, are currently (i.e. prior to
any increase) estimated at between USc 5 and 6 per KWh. At this tariff rate, the govern-
ment will need to provide ZESCO with an additional US$340 million in 2016 to meet
the cost of emergency power. However, the financing requirement can be substantially
reduced if the average tariff is increased and remains at that level (figure 13). For ex-
ample, if government could move the average tariff to USc 10 KWh, then the required
subsidy and associated fiscal pressure will reduce to approximately of US$146 million
in 2016.
The issue of
electricity tariffs
has been a
longstanding one
and there has long
been discussions
of moving towards
costs-reflective
tariffs.
15%
20%
25%
30%
35%
40%
45%
50%
55%
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2016 Demand Estimate (MW) (LHS) 2016 Total Generation (MW) (LHS)
2016 Supply Deficit (%) (RHS) 2016 Average Supply Deficit (%) (RHS)
Figure The power deficit in 2016
12
Source: ZESCO and World Bank staff calculations
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
23
ZESCO applied to
the ERB to increase
most of the various
non-mining tariffs
and fixed charges
from between 167
and 248%.
Key to note is that an increase in tariffs to reflective levels is necessary but not suffi-
cient to increase private investment in electricity generation in Zambia. There are many
other hurdles to overcome as well. Management and regulation of the sector have
been improving, but there is still substantial work to do. Particular efforts are needed
to improve sector planning and the procurement processes for large power projects.
At the national
level, the power
crisis has already
caused reduced
output and
redundancies
across businesses
in the services,
manufacturing and
industrial sectors.
0 50 100 150 200 250 300 350
5
7
8
9
10
11
GRZ Subsidy for EmergencyPower in 2016 (US$ million)
Average2016Tariff(UScKwh)
Figure The cost to government of emergency power depends on the tariff
13
Source: ZESCO and World Bank staff calculations
Note: Does not include emergency inland power
The impact of load-shedding
The costs of emergency power are considerable when compared to existing hydropow-
er plants, as is the likely impact of increased electricity tariffs on the economy. However,
so too is the impact of load-shedding. As was highlighted in Section 1, the economy has
slowed considerably in 2015 and is expected to remain at similar levels of below trend
growth in 2016. The impact of load-shedding is a key driver of the decline, along with
the external headwinds and domestic pressures being faced.
At the national level, the power crisis has already caused reduced output and redun-
dancies across businesses in the services, manufacturing and industrial sectors. Manu-
factures are reporting increased costs of production, as they are forced to run costly
generators or switch shifts to when they have electricity (extra pay is often needed for
night shifts) and many declare they are only meeting between 30 and 40% of scheduled
production. Firms engaging in complex procedures (some machines are designed to
run 24 hours and require 3-4 hours of heating before use) and those requiring refriger-
ation are suffering particularly badly. The mining sector, already impacted on by lower
copper prices, has announced closures, laid-off 7,700 workers and postponed invest-
ment. Load-shedding of 30% and increasing costs of electricity have further weighed on
mine profitability and production.
Added to the economic costs are the social and environmental impacts of the power
crisis. It becomes much harder to provide quality health care and education if hospitals,
schools, clinics and universities are experiencing electricity power outages. The For-
estry Department has reported an increase in land degradation as load-shedding has
become worse. The cost of replanting trees and soil degradation must be considered in
any assessment of impacts. In 2015, 32.9% of households in Zambia report using char-
coal for cooking and 50.7% report using firewood. Only 16.0% report typically cooking
with electricity, but a good proportion of those cooking on electricity will have switched
to using charcoal, or LPG where available, when load-shedding has denied them power.
Zambia produces LPG at the Indeni refinery, but 80% is exported. Encouraging and fa-
cilitating the use of LPG would help reduce the demand for electricity and help protect
the forest cover around urban areas.
G. GRADUATING TO SUSTAINABLE SUPPLY
The new generation capacity and emergency measures for 2016 will help in mitigating the impact of
the power crisis in the coming year, but global experience shows there is no substitute for effective
planning. Furthermore, Zambia may again face a similar crisis in the near future if structural weak-
nesses in the sector are not adequately addressed. There remains a need to shift from being reactive
to anticipatory or preemptive in dealing with reduced generation capacity. Additionally, the need to
increase access to electricity in the country should not be neglected.
The current power crisis, which impacts considerably on the economy, should be used
to correct policy and regulatory anomalies that prevent the sector from achieving its
potential.
i. Strengthening sector planning and procurement processes: The long-term
sustainability of the power sector to ensure an adequate, quality and reliable electricity
supply requires a robust planning function. Zambia should develop and update regu-
larly, e.g. every two years, a Least Cost Power Development Plan (LCPDP) that lays out
the investments required in all the segments of the power sector i.e. generation, trans-
mission and distribution. For generation, the LCPDP should contain a pipeline of pro-
jects ranked by cost i.e. the most economically and financially viable projects should be
developed first. The LCPDP process should be anchored by a load-forecast that is also
routinely updated and, given Zambia’s dependency on hydro, the relevant hydrological
modelling to guide the extent to which the generation mix should be diversified.
Planning on its own is however an insufficient condition for power sector sustainability
unless its outputs lead to the procurement of new generation capacity and the related
investments in the transmission network. A procurement framework that ensures the
transparent and competitive delivery of new plants and which is linked to planning
outcomes should therefore be established. Due to the existing structure of the power
sector in Zambia, such a procurement framework should also have a mechanism for
allocating new build opportunities between state-owned ZESCO and the private sector
through Independent Power Producers (IPPs). The current procurement method by
which developers enter into lengthy post-award negotiations with ZESCO and govern-
ment should be reviewed in order to reduce implementation delays. This could include
the development of template agreements (power purchase agreement, implementa-
tion agreement etc.) and the establishment of indicative security arrangements.
ii. Improving financial sustainability of the power sector: The power crisis has
revealed the importance of ensuring that the power sector has sufficient funds for
electricity service provision. Inadequate electricity tariffs limit the extent to which the
existing generation and grid network is maintained, and investments in new generation
capacity and network expansion by either ZESCO or private parties can be made. Elec-
tricity tariffs that are lower than the cost of service only benefit those with existing elec-
tricity connections in the short-term and in the long-term compromise the quality and
reliability of supply. Furthermore, low tariffs slow down the rate at which those without
access, which is the majority of the population, can receive connections.
In addressing financial sustainability, it is crucial that an electricity tariff framework that
reflects the costs of efficient service provision is established and effectively applied.
ZESCO and other utilities in the sector should be allowed to collect revenues suffi-
cient to cover efficient costs, through tariffs charged to all consumers able to pay them.
These revenues should also be sufficient to fund a subsidy program (social safety net)
aimed at those consumers whose ability to pay is lower than the level that reflects the
full cost of supply. In the event that this is not possible wholly or in part, an affordable
subsidy program should be provided through direct and transparent transfers from the
government treasury.
iii. Increasing access to electricity: Given Zambia’s low electrification rate (32%
overall), it would also be important to complement the LCPDP with a strategy, complete
with action plans to scale-up access to electricity. This should comprise the priorities
for electrification, a definition of funding sources (e.g. grants, loans, national budget
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
24
The long-term
sustainability of
the power sector
to ensure an
adequate, quality
and reliable
electricity supply
requires a robust
planning function.
It is crucial that
an electricity
tariff framework
that reflects the
costs of efficient
service provision
is established and
effectively applied.
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
25
allocations, tariff levies etc.), technical options and implementation arrangements for
different geographic locations e.g. urban and rural areas.
iv. Implementing demand size measures: To complement measures to import
electricity and other short-term generation interventions, demand side management
measures should also be considered (box 4). ZESCO previously distributed 1 million
compact fluorescent lamps (CFLs) that were swapped with less efficient but cheaper in-
candescent light bulbs, and was able to shed-off approximately 57MW of peak demand.
The possibility of a further large-scale distribution of CFLs should be considered. This
would require an assessment of how widespread the use of incandescent bulbs is. It is
also important to recognize that at low tariffs, there is limited incentive to use electricity
more efficiently.
4
Box Diversification and demand-side measures in Ethiopia
	 Ethiopia suffered a similar power crisis to Zambia in 2009-10, prior to which diversification of electric-
ity generation, away from hydro to some degree, was not among its priorities. However, after experiencing
severe load shedding, Ethiopia started to diversify its generation portfolio by investing heavily in geothermal
and wind energy to complement its hydro resources.
Ethiopia has also aggressively pursued demand side management activities to mitigate the impact of its
power crisis and improve the country’s energy efficiency. Central to these efforts was an energy-efficiency
program that distributed 350,000 compact fluorescent lamp bulbs free of charge, following lessons from
similar interventions in the Philippines, Rwanda, Thailand, Uganda and Vietnam.
A recent World Bank evaluation estimates the impact of the program to be about 45-50 kilowatt hours per
customer per month, or about 13.3 megawatts of energy savings in total. The study finds that the majority of
beneficiaries were low-volume customers— mostly from among the poor—although the program was not
specifically targeted. It also suggests that energy savings were larger for the poor. On the downside how-
ever, about 20% of the initial energy savings disappeared within 18 months of the program’s completion,
suggesting sustained efforts are needed to counter such rebound effects.
Source: Costolanski, P., Elahi, R., Iimi, A. and R. Kitchlu (2013) ‘Impact Evaluation of Free-of-Charge CFL Bulb Distri-
bution in Ethiopia’, Policy Research Working Paper 6383, World Bank, Washington D.C
To complement
measures to
import electricity
and other short-
term generation
interventions,
demand side
management
measures should
also be considered.
Costolanski, P., Elahi, R., Iimi, A. and R. Kitchuilu (2013) ‘Impact Evaluation of Free-of-Charge CFL Bulb Distribu-
tion in Ethiopia’, Policy Research Working Paper 6383, World Bank, Washington D.C.
Engineering Institute of Zambia (2015), ‘Report of ZESCO Load Shedding’, Technical Experts Team, September
2015.
Kapika, J, (2004), ‘The Zambian Power System and Issues Confronting the ERB, Energy Regulation Board,
http://www.narucpartnerships.org/documents/zambian%20power%20market.pdf
Kapika, J. (2013), ‘Zambia: Looking East for Additional Generation Capacity’, Chapter in Kapika, J. and A. Eber-
hand (2013), ‘ Power-Sector Reform and Regulation in Africa’, HSRC Press, Cape Town, South Africa.
Smith, G. (2015), ‘Zambia Budget Brief’, Policy Note, World Bank, Washington D.C.
Whitworth, A. (2014), ‘Energy Policy’, Chapter in ‘Zambia Book’, Oxford University Press.
World Bank (2015), Africa’s Pulse, October 2015:
http://documents.worldbank.org/curated/en/2015/10/25116683/africas-pulse-october-2015.
IREFERENCES
1
African Pulse, World Bank (2015): http://documents.worldbank.org/curated/en/2015/10/25116683/africas-
pulse-october-2015.
2
See the World Bank’s previous Economic Brief (July 2015): Making Mining Work for Zambia.
3
See: http://documents.wfp.org/stellent/groups/public/documents/ena/wfp274160.pdf
4
See:http://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/CountryHighlights/
Zambia-2013.pdf
5
See: http://www.boz.zm/Publishing/Speeches/MPC_Statement_Nov_2015-v2.pdf
6
A simple way of understanding the relationship between capacity and energy is equating this to a truck. In
order for a truck to carry a certain load, its engine should at least be of a certain size (capacity). But to do so
over a distance, say 100km, requires that the truck has sufficient diesel (energy).
7
Republic of Zambia, Zambia 2030 vision, p.9.
8
These results were presented by the CSO at a 2015 African Statistics Day Event on 18th November 2015.
9
Engineering Institute of Zambia (2015), ‘Report of ZESCO Load Shedding’, Technical Experts Team,
September 2015.
INOTES
6th
ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY
26
World bank zambia economic brief 6 december 2015

More Related Content

What's hot

China's economic slowdown isn't just bad for china
China's economic slowdown isn't just bad for chinaChina's economic slowdown isn't just bad for china
China's economic slowdown isn't just bad for china
94ajay
 
China: kicking the can down the road
China: kicking the can down the roadChina: kicking the can down the road
China: kicking the can down the road
RBS Economics
 
Whitepaper: Latin America: Room for growth
Whitepaper: Latin America: Room for growthWhitepaper: Latin America: Room for growth
Whitepaper: Latin America: Room for growth
DubaiChamber
 
2018 Global Outlook Webinar
2018 Global Outlook Webinar2018 Global Outlook Webinar
2018 Global Outlook Webinar
Dun & Bradstreet
 
2014 World Economic Situation and Prospects
2014 World Economic Situation and Prospects2014 World Economic Situation and Prospects
2014 World Economic Situation and Prospects
Dr Lendy Spires
 
79 i chronicle
79 i chronicle79 i chronicle
LBS July 2016
LBS July 2016LBS July 2016
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
Le Hung
 
Global Outlook July 2012
Global Outlook July 2012Global Outlook July 2012
Global Outlook July 2012
Dun & Bradstreet
 
Trade & development report 2013overview en
Trade & development report 2013overview enTrade & development report 2013overview en
Trade & development report 2013overview en
UnitedPac Saint Lucia (Conservative Movement)
 
Le 250 più grandi aziende al mondo nel 2015
Le 250 più grandi aziende al mondo nel 2015Le 250 più grandi aziende al mondo nel 2015
Le 250 più grandi aziende al mondo nel 2015
Quotidiano Piemontese
 
pl_global-powers-cons-products-2015
pl_global-powers-cons-products-2015pl_global-powers-cons-products-2015
pl_global-powers-cons-products-2015
Blossom Out
 
Q&A: Everything You Need to know About the National Debt
Q&A: Everything You Need to know About the National DebtQ&A: Everything You Need to know About the National Debt
Q&A: Everything You Need to know About the National Debt
Fix the Debt Campaign
 
Slowdown in Chinese Economy and its Impact on the World
Slowdown in Chinese Economy and its Impact on the WorldSlowdown in Chinese Economy and its Impact on the World
Slowdown in Chinese Economy and its Impact on the World
inamdaramaan
 
2015 Economic Review and 2016 Forecast
2015 Economic Review and 2016 Forecast2015 Economic Review and 2016 Forecast
2015 Economic Review and 2016 Forecast
Caribbean Development Bank
 
Political risk quarterly update Q3 2016
Political risk quarterly update Q3 2016Political risk quarterly update Q3 2016
Political risk quarterly update Q3 2016
Graeme Cross
 
Agcapita January 2010 Economy Briefing
Agcapita January 2010 Economy BriefingAgcapita January 2010 Economy Briefing
Agcapita January 2010 Economy Briefing
Veripath Partners
 
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
Shehryar Nur
 

What's hot (18)

China's economic slowdown isn't just bad for china
China's economic slowdown isn't just bad for chinaChina's economic slowdown isn't just bad for china
China's economic slowdown isn't just bad for china
 
China: kicking the can down the road
China: kicking the can down the roadChina: kicking the can down the road
China: kicking the can down the road
 
Whitepaper: Latin America: Room for growth
Whitepaper: Latin America: Room for growthWhitepaper: Latin America: Room for growth
Whitepaper: Latin America: Room for growth
 
2018 Global Outlook Webinar
2018 Global Outlook Webinar2018 Global Outlook Webinar
2018 Global Outlook Webinar
 
2014 World Economic Situation and Prospects
2014 World Economic Situation and Prospects2014 World Economic Situation and Prospects
2014 World Economic Situation and Prospects
 
79 i chronicle
79 i chronicle79 i chronicle
79 i chronicle
 
LBS July 2016
LBS July 2016LBS July 2016
LBS July 2016
 
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
Mc kinsey vietnam macro (taking vietnam's economy to the next level)_feb 2012
 
Global Outlook July 2012
Global Outlook July 2012Global Outlook July 2012
Global Outlook July 2012
 
Trade & development report 2013overview en
Trade & development report 2013overview enTrade & development report 2013overview en
Trade & development report 2013overview en
 
Le 250 più grandi aziende al mondo nel 2015
Le 250 più grandi aziende al mondo nel 2015Le 250 più grandi aziende al mondo nel 2015
Le 250 più grandi aziende al mondo nel 2015
 
pl_global-powers-cons-products-2015
pl_global-powers-cons-products-2015pl_global-powers-cons-products-2015
pl_global-powers-cons-products-2015
 
Q&A: Everything You Need to know About the National Debt
Q&A: Everything You Need to know About the National DebtQ&A: Everything You Need to know About the National Debt
Q&A: Everything You Need to know About the National Debt
 
Slowdown in Chinese Economy and its Impact on the World
Slowdown in Chinese Economy and its Impact on the WorldSlowdown in Chinese Economy and its Impact on the World
Slowdown in Chinese Economy and its Impact on the World
 
2015 Economic Review and 2016 Forecast
2015 Economic Review and 2016 Forecast2015 Economic Review and 2016 Forecast
2015 Economic Review and 2016 Forecast
 
Political risk quarterly update Q3 2016
Political risk quarterly update Q3 2016Political risk quarterly update Q3 2016
Political risk quarterly update Q3 2016
 
Agcapita January 2010 Economy Briefing
Agcapita January 2010 Economy BriefingAgcapita January 2010 Economy Briefing
Agcapita January 2010 Economy Briefing
 
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
Pakistan’s economy and the impact of flood jang group articles_pak_eco_n_the_...
 

Similar to World bank zambia economic brief 6 december 2015

OCR F585 Global Economy Extract 5
OCR F585 Global Economy Extract 5OCR F585 Global Economy Extract 5
OCR F585 Global Economy Extract 5
tutor2u
 
Africa Market Update - February 2019
Africa Market Update - February 2019Africa Market Update - February 2019
Africa Market Update - February 2019
AMBOKO H. JULIANS
 
ppt-namibia-worldeconomy-standardbank.ppt
ppt-namibia-worldeconomy-standardbank.pptppt-namibia-worldeconomy-standardbank.ppt
ppt-namibia-worldeconomy-standardbank.ppt
TestOrg1
 
Sub-Saharan Africa Economic Outlook
Sub-Saharan Africa Economic OutlookSub-Saharan Africa Economic Outlook
Sub-Saharan Africa Economic Outlook
Investisseurs & Partenaires
 
IOC Zimbabwe 19052015
IOC Zimbabwe 19052015IOC Zimbabwe 19052015
IOC Zimbabwe 19052015
James T Chiuta
 
Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?
Richard Ramsey
 
Banking Association presentation to Creative Economy conference
Banking Association presentation to Creative Economy conferenceBanking Association presentation to Creative Economy conference
Banking Association presentation to Creative Economy conference
Yacoob Abba Omar
 
2011 Economic Symposium
2011 Economic Symposium2011 Economic Symposium
2011 Economic Symposium
Dr Joseph Kanyekanye
 
Reviving Growth to Transform Africa
Reviving Growth to Transform AfricaReviving Growth to Transform Africa
Reviving Growth to Transform Africa
SDGsPlus
 
World Quest Caribbean Islands
World Quest Caribbean IslandsWorld Quest Caribbean Islands
World Quest Caribbean Islands
guest083a623
 
Assingment 2
Assingment 2Assingment 2
Assingment 2
Kamini Peersia
 
Africa Market Update - July 2018
Africa Market Update - July 2018Africa Market Update - July 2018
Africa Market Update - July 2018
AMBOKO H. JULIANS
 
Could Sub-Saharan Africa Be the Next China?
Could Sub-Saharan Africa Be the Next China?Could Sub-Saharan Africa Be the Next China?
Could Sub-Saharan Africa Be the Next China?
QNB Group
 
Sean Johnston
Sean JohnstonSean Johnston
15430 STANDPOINT October 2015 F.PDF
15430 STANDPOINT October 2015 F.PDF15430 STANDPOINT October 2015 F.PDF
15430 STANDPOINT October 2015 F.PDF
Jeanne-Ann Stott
 
Structural Adjustment Programmes in Ghana
Structural Adjustment Programmes in GhanaStructural Adjustment Programmes in Ghana
Structural Adjustment Programmes in Ghana
Agbolosoo Mensah Solomon Wise
 
IMF as a tool for survival of poor countries (14.12.2022).pptx
IMF as a tool for survival of poor countries (14.12.2022).pptxIMF as a tool for survival of poor countries (14.12.2022).pptx
IMF as a tool for survival of poor countries (14.12.2022).pptx
MirjonNikGegvataj
 
My country UAE No reflection UAE relies heavily on the busin.docx
My country UAE     No reflection UAE relies heavily on the busin.docxMy country UAE     No reflection UAE relies heavily on the busin.docx
My country UAE No reflection UAE relies heavily on the busin.docx
griffinruthie22
 
My country UAE No reflection UAE relies heavily on the busin.docx
My country UAE     No reflection UAE relies heavily on the busin.docxMy country UAE     No reflection UAE relies heavily on the busin.docx
My country UAE No reflection UAE relies heavily on the busin.docx
roushhsiu
 
World Economic and Financial Surveys - Regional Economic Outlook - Western He...
World Economic and Financial Surveys - Regional Economic Outlook - Western He...World Economic and Financial Surveys - Regional Economic Outlook - Western He...
World Economic and Financial Surveys - Regional Economic Outlook - Western He...
FGV Brazil
 

Similar to World bank zambia economic brief 6 december 2015 (20)

OCR F585 Global Economy Extract 5
OCR F585 Global Economy Extract 5OCR F585 Global Economy Extract 5
OCR F585 Global Economy Extract 5
 
Africa Market Update - February 2019
Africa Market Update - February 2019Africa Market Update - February 2019
Africa Market Update - February 2019
 
ppt-namibia-worldeconomy-standardbank.ppt
ppt-namibia-worldeconomy-standardbank.pptppt-namibia-worldeconomy-standardbank.ppt
ppt-namibia-worldeconomy-standardbank.ppt
 
Sub-Saharan Africa Economic Outlook
Sub-Saharan Africa Economic OutlookSub-Saharan Africa Economic Outlook
Sub-Saharan Africa Economic Outlook
 
IOC Zimbabwe 19052015
IOC Zimbabwe 19052015IOC Zimbabwe 19052015
IOC Zimbabwe 19052015
 
Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?
 
Banking Association presentation to Creative Economy conference
Banking Association presentation to Creative Economy conferenceBanking Association presentation to Creative Economy conference
Banking Association presentation to Creative Economy conference
 
2011 Economic Symposium
2011 Economic Symposium2011 Economic Symposium
2011 Economic Symposium
 
Reviving Growth to Transform Africa
Reviving Growth to Transform AfricaReviving Growth to Transform Africa
Reviving Growth to Transform Africa
 
World Quest Caribbean Islands
World Quest Caribbean IslandsWorld Quest Caribbean Islands
World Quest Caribbean Islands
 
Assingment 2
Assingment 2Assingment 2
Assingment 2
 
Africa Market Update - July 2018
Africa Market Update - July 2018Africa Market Update - July 2018
Africa Market Update - July 2018
 
Could Sub-Saharan Africa Be the Next China?
Could Sub-Saharan Africa Be the Next China?Could Sub-Saharan Africa Be the Next China?
Could Sub-Saharan Africa Be the Next China?
 
Sean Johnston
Sean JohnstonSean Johnston
Sean Johnston
 
15430 STANDPOINT October 2015 F.PDF
15430 STANDPOINT October 2015 F.PDF15430 STANDPOINT October 2015 F.PDF
15430 STANDPOINT October 2015 F.PDF
 
Structural Adjustment Programmes in Ghana
Structural Adjustment Programmes in GhanaStructural Adjustment Programmes in Ghana
Structural Adjustment Programmes in Ghana
 
IMF as a tool for survival of poor countries (14.12.2022).pptx
IMF as a tool for survival of poor countries (14.12.2022).pptxIMF as a tool for survival of poor countries (14.12.2022).pptx
IMF as a tool for survival of poor countries (14.12.2022).pptx
 
My country UAE No reflection UAE relies heavily on the busin.docx
My country UAE     No reflection UAE relies heavily on the busin.docxMy country UAE     No reflection UAE relies heavily on the busin.docx
My country UAE No reflection UAE relies heavily on the busin.docx
 
My country UAE No reflection UAE relies heavily on the busin.docx
My country UAE     No reflection UAE relies heavily on the busin.docxMy country UAE     No reflection UAE relies heavily on the busin.docx
My country UAE No reflection UAE relies heavily on the busin.docx
 
World Economic and Financial Surveys - Regional Economic Outlook - Western He...
World Economic and Financial Surveys - Regional Economic Outlook - Western He...World Economic and Financial Surveys - Regional Economic Outlook - Western He...
World Economic and Financial Surveys - Regional Economic Outlook - Western He...
 

Recently uploaded

China's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SUChina's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SU
msthrill
 
KYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksKYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
KYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
Any kyc Account
 
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
28xo7hf
 
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
nimaruinazawa258
 
Singapore 2024 Sustainability Reporting and Accountancy Education Slides
Singapore 2024 Sustainability Reporting and Accountancy Education SlidesSingapore 2024 Sustainability Reporting and Accountancy Education Slides
Singapore 2024 Sustainability Reporting and Accountancy Education Slides
International Federation of Accountants
 
Discovering Delhi - India's Cultural Capital.pptx
Discovering Delhi - India's Cultural Capital.pptxDiscovering Delhi - India's Cultural Capital.pptx
Discovering Delhi - India's Cultural Capital.pptx
cosmo-soil
 
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptxExploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
cosmo-soil
 
PM pre reads for the product manager framework
PM pre reads for the product manager frameworkPM pre reads for the product manager framework
PM pre reads for the product manager framework
KishoreKatta6
 
Accounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptxAccounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptx
TIZITAWMASRESHA
 
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
28xo7hf
 
5 Compelling Reasons to Invest in Cryptocurrency Now
5 Compelling Reasons to Invest in Cryptocurrency Now5 Compelling Reasons to Invest in Cryptocurrency Now
5 Compelling Reasons to Invest in Cryptocurrency Now
Daniel
 
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdfGUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
ProexportColombia1
 
Enhanced metrics to measure the Regulatory impact
Enhanced metrics to measure the Regulatory impactEnhanced metrics to measure the Regulatory impact
Enhanced metrics to measure the Regulatory impact
Alexander Belyaev
 
China's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SUChina's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SU
msthrill
 
Singapore Event 2024 State of Play Slides
Singapore Event 2024 State of Play SlidesSingapore Event 2024 State of Play Slides
Singapore Event 2024 State of Play Slides
International Federation of Accountants
 
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
Henry Tapper
 
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
brunasordi905
 
Macroeconomic-digest-of-Ukraine-0624-Eng.pdf
Macroeconomic-digest-of-Ukraine-0624-Eng.pdfMacroeconomic-digest-of-Ukraine-0624-Eng.pdf
Macroeconomic-digest-of-Ukraine-0624-Eng.pdf
olaola5673
 
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
vpqasyb
 
Understanding-Stocks-and-Real-Estate.pptx
Understanding-Stocks-and-Real-Estate.pptxUnderstanding-Stocks-and-Real-Estate.pptx
Understanding-Stocks-and-Real-Estate.pptx
cosmo-soil
 

Recently uploaded (20)

China's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SUChina's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SU
 
KYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksKYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
KYC Compliance: A Cornerstone of Global Crypto Regulatory Frameworks
 
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
1比1复刻(ksu毕业证书)美国堪萨斯州立大学毕业证本科文凭证书原版一模一样
 
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
Tdasx: Interpreting the 2024 Cryptocurrency Market Funding Trends and Technol...
 
Singapore 2024 Sustainability Reporting and Accountancy Education Slides
Singapore 2024 Sustainability Reporting and Accountancy Education SlidesSingapore 2024 Sustainability Reporting and Accountancy Education Slides
Singapore 2024 Sustainability Reporting and Accountancy Education Slides
 
Discovering Delhi - India's Cultural Capital.pptx
Discovering Delhi - India's Cultural Capital.pptxDiscovering Delhi - India's Cultural Capital.pptx
Discovering Delhi - India's Cultural Capital.pptx
 
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptxExploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
Exploring-Madhya-Pradesh-Culture-Heritage-and-Land-Records.pptx
 
PM pre reads for the product manager framework
PM pre reads for the product manager frameworkPM pre reads for the product manager framework
PM pre reads for the product manager framework
 
Accounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptxAccounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptx
 
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
真实可查(nwu毕业证书)美国西北大学毕业证学位证书范本原版一模一样
 
5 Compelling Reasons to Invest in Cryptocurrency Now
5 Compelling Reasons to Invest in Cryptocurrency Now5 Compelling Reasons to Invest in Cryptocurrency Now
5 Compelling Reasons to Invest in Cryptocurrency Now
 
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdfGUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
GUIA_LEGAL_CHAPTER_2_FOREIGN EXCHANGE.pdf
 
Enhanced metrics to measure the Regulatory impact
Enhanced metrics to measure the Regulatory impactEnhanced metrics to measure the Regulatory impact
Enhanced metrics to measure the Regulatory impact
 
China's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SUChina's Investment Leader - Dr. Alyce SU
China's Investment Leader - Dr. Alyce SU
 
Singapore Event 2024 State of Play Slides
Singapore Event 2024 State of Play SlidesSingapore Event 2024 State of Play Slides
Singapore Event 2024 State of Play Slides
 
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
Pension Playpen - TAS300 v2 maths and governance resets pension strategies (3...
 
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
欧洲杯投注-欧洲杯投注买球-欧洲杯投注买球网|【​网址​🎉ac22.net🎉​】
 
Macroeconomic-digest-of-Ukraine-0624-Eng.pdf
Macroeconomic-digest-of-Ukraine-0624-Eng.pdfMacroeconomic-digest-of-Ukraine-0624-Eng.pdf
Macroeconomic-digest-of-Ukraine-0624-Eng.pdf
 
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
一比一原版宾夕法尼亚大学毕业证(UPenn毕业证书)学历如何办理
 
Understanding-Stocks-and-Real-Estate.pptx
Understanding-Stocks-and-Real-Estate.pptxUnderstanding-Stocks-and-Real-Estate.pptx
Understanding-Stocks-and-Real-Estate.pptx
 

World bank zambia economic brief 6 december 2015

  • 1.
  • 2. POWERING THE ZAMBIAN ECONOMY 6th ZAMBIA ECONOMIC BRIEF December 2015
  • 3. @ 2015 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Macroeconomic and Fiscal Management and Energy and Extractives Global Practices of the World Bank Group. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. This report was designed and edited by Katarina Zeravica, Lusaka. Cover design: Clement Masiye Daka Photos: World Bank, Zambia
  • 4. ICONTENTS Acronyms i Foreword ii Acknowledgements iii Executive Summary 1 Section 1: Recent Economic Developments 3 A. Regional Economic Developments 3 B. The State of the Zambian Economy 7 C. Economic Outlook, Risks and Policy Challenges 13 Section 2: Powering the Zambian Economy 16 D. The Electricity Challenge 16 E. Zambia’s Power Crisis 18 F. Managing the Cost of Mitigation 20 G. Graduating to Sustainable Supply 24 References 26 Notes 26 Boxes 1 Huge recent subsidy bills for government 11 2 Hydro-Electricity in Zambia 18 3 Scaling solar in Zambia 21 4 Diversification and demand-side measures in Ethiopia 25 Figures 1 Commodity prices have continued to fall in 2015 3 2 Current account and fiscal balances are growing 4 3 The US$ has strengthened against frontier market currencies 5 4 Sovereign bond spreads have widened 5 5 Growth in SSA and developing countries has slowed 6 6 Global copper prices have been falling since 2011 7 7 The kwacha has deprecated considerably 2015 8 8 Inflation increased substantially in Q3 2015 9 9 Growing and repeat fiscal deficits 11 10 The Trade Balance has become negative in 2015 12 11 Electricity generation capacity fallen below Demand 17 12 Power deficit trends in 2016 22 13 The cost to government of emergency power depends on the tariff 23 Tables 1 Fiscal trends 10 2 A power generation deficit in 2015 19 3 Private power plant contract status 20 4 A power deficit is expected in 2016 21
  • 5. BoZ Bank of Zambia BSA Bulk Supply Agreements CEC Copperbelt Energy Corporation CFL Compact Fluorescent Lamps CSO Central Statistical Office DAM Day Ahead Market DFID Department for International Development ERB Energy Regulation Board FDI Foreign Direct Investment GDP Gross Domestic Product GWh Giga Watt Hours IDC International Development Corporation IMF International Monetary Fund IPP Independent Power Producers KW Kilo Watt LCMS Living Conditions Monitoring Survey LCPDP Least Cost Power Development Plan LPG Liquefied Petroleum Gas MW Mega Watts PSA Power Supply Agreements SAPP Southern African Power Pool SSA Sub-Saharan Africa US$ United States Dollar USc United States Cent VAT Value Added Tax WBG World Bank Group ZRA Zambezi River Authority ZMW Zambian Kwacha IACRONYMS 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY i
  • 6. I am pleased to share the sixth Zambia Economic Brief with a focus section on the power sector. This Brief is part of a series of short economic updates produced twice a year by the World Bank. Each Brief includes two sections: the World Bank’s assessment of recent economic developments and outlook in the short- to medium-term, and its analysis of a spe- cific development topic or theme. Previous Briefs covered opportunities for mining, human develop- ment, jobs, trade, and financial inclusion. Zambia faces its toughest economic challenges in at least a decade. The economy has come under strain in 2015 as external headwinds and domestic pressures have intensified. Insufficient fiscal buffers were built up in the times of higher copper prices, limiting the room to maneuver now that prices are low. Stark trade-offs exist between cushioning peo- ple from the impact of the power crisis by sourcing emergency electricity and reducing the fiscal deficit to restore confidence and fix the underlying prob- lems in the economy. In the power sector, global experience shows there is no substitute for effective planning. Zambia may again face a similar crisis in the near future if struc- tural weaknesses in the sector are not adequately addressed. There remains a need to shift from be- ing reactive to anticipatory or preemptive in dealing with reduced generation capacity. Additionally, the need to increase access to electricity in the country should not be neglected. We hope that the findings of this Brief will stimulate a healthy debate around these questions so that Zambia can weather the current economic difficul- ties and power crisis and shift to inclusive growth underpinned by a reliable power supply. Ina Ruthenberg Country Manager for Zambia The World Bank IFOREWORD 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY ii
  • 7. The sixth Zambia Economic Brief has been prepared jointly by the Macroeconomic and Fiscal Management and Energy and Extractives Global Practices of the World Bank Group. The team was led by Gregory Smith, and included Zivanemoyo Chinzara, Joseph Kapika and Raihan Elahi. Simon Davies and Annelies Raue (UK’s DFID) provided peer review and useful comments were also received from Catriona Purfield and Tobias Ras- mussen (IMF). Jumbe Ngoma led the dissemination activities with support from Wisdom Mulenga, Hellen Mungaila, Mofya Mwanalushi, Kelvin Ng’andu and Gebisa Chisanga. Gebisa Chisanga and Hellen Mungaila provided adminis- trative support. Ina Ruthenberg, the Zambia Country Manager; Mark Thomas, Practice Manager for Macro- economic and Fiscal Management Global Practice; and Catriona Purfield, Program Leader, provided overall guidance. IACKNOWLEDGEMENTS 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY iii
  • 8. Regional economic developments As African economies face difficult global conditions combined with domestic challenges, Sub-Saharan Africa’s (SSAs) economic growth will continue to slow in 2015 to 3.7% from 4.6% in 2014, according to World Bank projections. The end of the commod- ity price super cycle − with a substantial drop in the price of oil, copper and iron ore; a slowdown of the Chinese economy; and tightening global financial conditions underpin the deceleration in growth. Worsening current account and fiscal imbalances have propagated a depreciation in most resource- dependent currencies. This depreciation has been compounded by a general increase in the demand for the United States dollar (US$) in anticipation of an increase in the US Federal Reserve rate. Domes- tic factors have also weighed on some currency de- preciation. Another recent trend is increased access to interna- tional debt markets by low income and lower-mid- dle income countries. But the cost of borrowing has increased sharply in 2015 for many sovereigns and the spreads on African countries’ Eurobonds have widened over uncertainty about government poli- cies and a slowdown in the economies. The spreads have increased the most where market confidence is weakest. The state of the Zambian economy Zambia faces its toughest economic challenges in at least a decade. The economy has come under strain in 2015 as external headwinds and domestic pres- sures have intensified. Growth of the economy is expected to drop beneath 4% in 2015 for the first time since 1998, resulting in only marginal growth of per capita incomes. The external headwinds in- clude slower regional and global growth (crucially in China who purchase 40% of global copper produc- tion) and a US$ that has strengthened considerably against the kwacha. Domestic pressures include a power crisis impacting on all sectors of the econo- my, repeat fiscal deficits that have reduced inves- tor confidence, and low and poorly-timed rains that have reduced the agricultural incomes of 62% of the population living in poverty. Medium-term outlook The outlook for 2016 has become more sombre fol- lowing announcements of expected mine closures, the severity of the power crisis and the rapid depre- ciation of the kwacha. Given the external and do- mestic challenges, we expect GDP growth to drop to 3 to 3.5% this year and next, before returning to potential (5 to 6%) by 2018 as copper prices stabi- lize and domestic pressures ease. Tough action is required in 2016 to curb runaway expenditures, double digit inflation and growing twin deficits. Fis- cal policy should be put center stage and efforts made to shift the country back onto a sustainable fiscal path. The outlook is subject to downside risks, both do- mestic and external. Externally, a further slowdown in China’s economy would weigh on the demand for Zambia’s exports by further reducing copper prices, and would severely affect Zambia’s prospects. Fur- thermore, strengthening of the US$ in the event of the Federal Reserve increasing interest rates would lead to added volatility of the kwacha. The main domestic risks are threefold. Firstly, that the power crisis will worsen. This could occur via delays in new generation coming online or a fur- ther reduction of generation capacity at the main hydropower plants. Secondly, a deterioration of confidence in the economy, leading to further weak- ening of the currency and increased levels of infla- tion. This might result in the absence of measures to curtail runaway expenditure and failure to make any substantial dent in the fiscal deficit. In this event, external financing would also become more costly and put further pressure on the 2016 budget and for years to come via increased debt service obliga- tions. Lastly, a bad harvest that serves to increase food prices and reduce rural and agricultural in- comes, with the greatest impact falling on the poor- est households. EXECUTIVE SUMMARY 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 1
  • 9. Policy challenges Commodity-exporting countries’ policy makers face increasing challenges across the globe. Zambia is no exception and must grapple with multiple challeng- es as the economy slows down. Falling copper prices and a power crisis could be met with fiscal buffers, but in Zambia no savings were made, or stabiliza- tion measures carried out when the economy was prospering. Furthermore, debt levels have soared following repeat non-concessional borrowing mak- ing it more expensive to borrow from international debt markets. This leaves the government with little room for maneuver, limited fiscal space to compensate for slower growth and recent job losses, and only hard choices. Trade-offs exist between cushioning peo- ple from the impact of the depreciation and power crisis by subsidizing the cost of fuel and electricity, and reducing the fiscal deficit to restore confidence to fix underlying problems in the economy. These trade-offs are particularly stark in 2016 given it is an election year. Large fiscal deficits and inefficient government spending persist as sources of vulnerability for Zam- bia. Strengthening the fiscal position and restoring fiscal buffers are necessary to increase confidence in the economy, reduce the need for costly borrow- ing and build resilience against further exogenous shocks. Fiscal adjustment would also put less pres- sure on monetary policy and potentially make space for interest rates to be reduced, easing the pressure on individuals and firms. Keeping inflation expecta- tions anchored in single digits remains critical to maintaining macroeconomic and wider develop- ment objectives. With market access comes greater scrutiny and pol- icy responses are judged by real action that affects the interest rate paid on new borrowing. Eurobond issuance has also increased international inter- est in the Zambian economy and events are being watched much more closely than prior to 2012. To help maintain confidence in the economy, and Zam- bia as an investment destination, better dialogue on the economy should be targeted and confusing messages avoided. In addition, the commodity price shock highlights the need for Zambia to reduce its dependency on copper, a challenge it has been grappling with for over 50 years. Talk about diversification and grow- ing manufacturing needs to be met with a clear and realistic strategy and structural reforms aimed at re- moving impediments to private sector activity and improving the business environment. Powering the Zambian economy Economic progress since 2000, driven by mining production and services, has substantially increased the demand for electricity in Zambia. A growing shortfall in supply has been exacerbated in 2015 by a reduction in hydroelectric generation due to low water levels at the country’s main reservoirs. This has increased power outages and impacted on all aspects of the economy, contributing to slower eco- nomic growth in 2015 and higher production costs. Since July 2015, ZESCO has increased the extent of rolling black-outs (load-shedding) to at least 8 hours per day on a rotational basis for the majority of its household, commercial and industrial consumers. And although they are not subject to rotational load- shedding, ZESCO has requested the mining industry to curtail its load by 30%. This is in order to manage a power deficit of around 591 MW each month (Sep- tember to December 2015), representing approxi- mately 34% of demand. Mitigating the power crisis Power is essential for the Zambian economy to func- tion. Despite new generation projects, the modelling of different hydrology conditions shows that even in a wet (above average rainfall) scenario, current pow- er shortages will continue through to at least 2018. For 2016, the authorities have decided to increase the import of expensive emergency power options. This puts huge pressure on the budget at current tariff rates, in tough economic conditions, and un- less tariffs are revised upwards, the government’s subsidy of the sector will rise dramatically. At No- vember 2015 tariff rates, the government will need to provide ZESCO with an additional US$ 340 million in 2016 to meet the cost of emergency power. How- ever, the financing requirement can be substantially reduced if the average tariff is increased. Key to note is that an increase in tariffs to cost-re- flective levels is necessary but not sufficient to in- crease private investment in electricity generation in Zambia. There are many other hurdles to overcome as well. Management and regulation of the sector have been improving, but there is still substantial work to do. Particular efforts are needed to improve sector planning and the procurement processes for large power projects. Graduating to sustainable supply The new generation capacity and emergency meas- ures for 2016 will help in mitigating the impact of the power crisis in the coming year, but global ex- perience shows there is no substitute for effective planning. Furthermore, Zambia may again face a similar crisis in the near future if structural weak- nesses in the sector are not adequately addressed. There remains a need to shift from being reactive to anticipatory or preemptive in dealing with a re- duced generation capacity. Additionally, the need to increase access to electricity in the country should not be neglected. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 2
  • 10. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 3 SECTION A. REGIONAL ECONOMIC DEVELOPMENTS As African economies face difficult global conditions combined with domestic challenges, Sub-Saha- ran Africa’s economic growth will continue to slow in 2015 to 3.7% from 4.6% in 2014, according to World Bank projections. The end of the commodity price super cycle − with a substantial drop in the price of oil, copper and iron ore; a slowdown of the Chinese economy; and tightening global financial conditions underpin the deceleration in growth. The World Bank’s Africa Pulse published in October 2015 highlights that continued dependency on oil and commodity exports has left the Sub-Saharan Africa (SSA) region vulnerable to periodic shocks from the prices of international commodities. The region remains a net exporter of oil, minerals, and agricultural commodities. Specifically, ener- gy (oil and gas) and minerals comprise two-thirds of SSA’s exports.1 International com- modity prices have steadily softened since early 2014, although they remain above the levels experienced during the 2008 financial crisis. In August 2015, oil prices reached their lowest level since the end of the financial crisis (figure 1). Similarly, copper prices fell to their lowest level since August 2009. The slowdown and economic transition in China has been a driver of weakening international commodity prices. China is SSA’s largest trading partner and its slowdown and economic transition has direct spillover effects, especially to the oil-exporting and mineral-rich SSA countries. Angola, Democratic Republic of the Congo, Mauritania, Republic of Congo, Sierra Leone, 1 RECENT ECONOMIC DEVELOPMENTS China’s slowdown and economic transition has direct spillover effects. 30 40 50 60 70 80 90 100 110 120 130 01/01/2014 15/01/2014 29/01/2014 19/02/2014 04/03/2014 17/03/2014 28/03/2014 11/04/2014 25/04/2014 12/05/2014 23/05/2014 09/06/2014 20/06/2014 03/07/2014 17/07/2014 30/07/2014 12/08/2014 25/08/2014 09/09/2014 22/09/2014 10/10/2014 23/10/2014 05/11/2014 18/11/2014 02/12/2014 15/12/2014 29/12/2014 13/01/2015 27/01/2015 09/02/2015 02/03/2015 13/03/2015 26/03/2015 10/04/2015 23/04/2015 07/05/2015 20/05/2015 03/06/2015 16/06/2015 30/06/2015 14/07/2015 27/07/2015 07/08/2015 20/08/2015 02/09/2015 18/09/2015 Oil Copper Iron Ore Agriculture Figure Commodity prices have continued to fall in 2015 1 Source: World Bank (2015) Weakening oil and mineral prices have propagated a deterioration of the terms of trade of oil-exporting and mineral-rich economies.
  • 11. Worsening current account and fiscal imbalances have propagated a depreciation in most resource-dependent currencies (figure 3). This depreciation has been compound- ed by a general increase in the demand for the US dollar in anticipation of an increase in the US Federal Reserve rate. Domestic factors have also weighed on some currency depreciation. For example, in Zambia, investors’ concerns about the government’s com- mitment to reining in the fiscal deficit has caused volatility in the Zambian kwacha. De- preciating currencies have exposed oil-exporting and mineral-rich countries to inflation through imported inputs and consumables. Having remained stable over the past few years, and declined to 5.9% in 2014 from 6.1% in 2013, inflation rates in the SSA are expected to increase to 6.5% in 2015. The Gambia, and Zambia have been the most affected given that 40% of their exports go to China. Central Africa Republic, Eritrea, Mali, South Africa, and Zimbabwe have also been affected as their exports to China are above 20% of total exports. Conse- quently, the growth of SSA is expected to slow to 3.7% in 2015 on the back of poor growth performance in the oil-exporting and mineral-rich economies. Domestic factors such as poor agricultural yields due to drought (e.g. Zambia), power supply bottlenecks (e.g. South Africa, Nigeria, Zambia), political instability (Burundi, Burkina Faso, South Sudan), and insurgency (e.g. Nigeria, Cameroon, Chad, Niger) are expected to further drag down growth. Nevertheless, in the majority of oil-importing countries, particularly those that are non- mineral rich, growth is expected to remain robust. Notable examples include Cote d’Ivoire, Ethiopia, Mozambique, Rwanda, and Tanzania, where growth will not only be driven by low oil costs, but also by government investment in infrastructure, and an ex- panding services sector. However, in some economies, there is a risk that low growth in the oil-exporting and mineral-rich countries will spill over to some of the non-resource rich economies through reductions in intra-regional trade and investment. Weakening oil and mineral prices have propagated a deterioration of the terms of trade of oil-exporting and mineral-rich economies. This has led to weakened current account positions for most of these economies (figure 2). For example, in Nigeria, the current account deficit widened from 0.6% of GDP in Q4 2014 to 3.6% of GDP in Q1 2015. In Zambia, the current account deficit deteriorated to 3.4% of GDP in 2014 from 0.8% of GDP in 2013. Furthermore, in countries such as Angola, Nigeria, and Zambia, where oil and mineral exports contribute to part of the government revenue, the fiscal deficit has widened (figure 2). However, in other cases, fiscal imbalances have been worsened by recurring domestic factors, among others, which include rising wage bills, large expend- iture on infrastructure, and high expenditure on subsides. In countries such as Ghana and Zambia, these fiscal deficits have been financed by borrowing in the international debt markets, resulting in substantial increases in the debt to GDP ratios. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 4 -15 -10 -5 0 5 10 15 Angola Nigeria Zambia South Africa Kenya Ghana Tanzania %ofGDP Fiscal balance 2008 Fiscal balance 2014 Current Account Balance 2008 Current Account Balance 2014 Figure Current account and fiscal balances are growing 2 Worsening current account and fiscal imbalances have propagated a depreciation in most resource- dependent currencies. Depreciating currencies have exposed countries to inflation through imported inputs and consumables. Source: World Bank (2015)
  • 12. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 5 Domestic factors such as fiscal expansion in the lead-up to elections, and poor agri- cultural harvests and electricity bottlenecks, are also going to be drivers of inflation in some countries. At the sub-regional level, the Central African region is set to continue being the least inflationary. This is mainly because of the common monetary policy pursued by most countries in this region (being administered by the regional central bank ― the Bank of Central African States, through pegging of their common currency, the CFA franc, to the Euro). A recent trend is increased access to international debt markets by low income and lower-middle income countries. Since 2007, 17 SSA countries, in addition to South Af- rica, have tapped over US$24 billion, typically at fixed interest rates, with bullet repay- ment structures and in US dollars, thereby adding foreign currency risks that these countries need to manage. The cost of borrowing has increased sharply in 2015 for many sovereigns, with Ghana issuing US$1 billion (15 year tenor) at 10.75% and Zambia US$1.25 billion at 9.375% (11 year tenor on average); rates that are much higher than previous issues. Further, having narrowed in April and May 2015, the spreads on Afri- can countries’ Eurobonds have widened over uncertainty about government policies and a slowdown in the economies. The spreads have increased the most where market confidence is weakest (figure 4). A recent trend is increased access to international debt markets by low income and lower middle income countries. Spreads on African countries’ Eurobonds have widened over uncertainty about government policies and a slowdown in the economies. -140 -130 -120 -110 -100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 2014-Jan 2014-Feb 2014-Mar 2014-Apr 2014-May 2014-Jun 2014-Jul 2014-Aug 2014-Sept 2014-Oct 2014-Nov 2014-Dec 2015-Jan 2015-Feb 2015-Mar 2015-Apr 2015-May 2015-Jun 2015-Jul 2015-Aug 2015-Sept 2015-Oct 2015-Nov CumulativeDepreciation(%) South Africa Nigeria Kenya Zambia Figure The US$ has strengthened against frontier market currencies 3 Source: World Bank (2015) 0 200 400 600 800 1000 02/01/2014 02/03/2014 02/05/2014 02/07/2014 02/09/2014 02/11/2014 02/01/2015 02/03/2015 02/05/2015 02/07/2015 02/09/2015 02/11/2015 Basispointsspread Africa region Emerging markets Ghana Namibia Nigeria South Africa Zambia Figure Sovereign bond spreads have widened 4 Source: Bloomberg
  • 13. The medium-term growth outlook of the region is subject to several downside risks. The global risks include the slow growth and economic transition in China, which is ex- pected to spill over to the SSA region through depressed prices and volumes of oil and mineral exports. Furthermore, an anticipated increase in the US Federal Reserve inter- est rate is expected to tighten global financing conditions and investment flows into the SSA region, and possibly cause further weakening of regional currencies. Countries with large external and fiscal imbalances are expected to be the most vulnerable to these factors. In this regard, fiscal consolidation and structural reforms can potentially help countries to contain the effects of these shocks. Domestically, the risks include politi- cal instability in Burundi and South Sudan, and security risks caused by insurgency in parts of Nigeria, Cameroon, Chad, Niger, and Kenya, while weather-related shocks are expected to negatively affect medium-term growth prospects. When the global financial crisis hit the region, some countries were able to use govern- ment investment in infrastructure and other built-in buffers to finance policy responses to enable growth. Overall, the analysis shows that before the current bout of global difficulties, these policy buffers were already showing signs of vulnerability from over- valued currencies and growing fiscal deficits. Today, these policy buffers are lower than before the global financial crisis, according to the report, and will make it more difficult for countries to grow in the current situation. Outlook for Sub-Saharan Africa In the medium term, the overall growth for the SSA region is expected to rebound to 4.4% in 2016 and improve to 4.8% in 2017, albeit with mixed recovery across countries due to domestic factors (figure 5). In some of Africa’s frontier markets, medium-term growth recovery is expected to be much quicker on the back of rising oil production, easing external and fiscal imbalances, and continued large investment in infrastructure. However, factors such as power bottlenecks (in Nigeria, South Africa, and Zambia), fiscal consolidation and high costs of imported inputs imposed by weaker currencies (Nige- ria, Zambia), political instability (Burundi and South Sudan), and policy uncertainties will also drag on growth recovery in the region. Power bottlenecks, fiscal consolidation and high costs of imported inputs will drag on growth recovery in SSA. Policy buffers are lower than before the global financial crisis, making it more difficult for countries to grow. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 6 0% 2% 4% 6% 8% 10% 12% 2008 2009 2010 2011 2012 2013 2014 2015f 2016f 2017f China Developing countries excluding China Sub-Saharan Africa Zambia Figure Growth in SSA and developing countries has slowed 5 Source: World Bank (2015) and staff projections
  • 14. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 7 Despite decreasing copper prices and declining mining output, growth in 2014 was supported by a good harvest (maize production increased 32% relative to the previous year), expanding services and construction sectors (both growing just above 7%), gov- ernment investment in infrastructure, and rapid growth in the transport (12.5%) and financial and insurance sectors (up 13.2%). Contrastingly, growth in 2015 is expected B. THE STATE OF THE ZAMBIAN ECONOMY Zambia faces its toughest economic challenges in at least a decade. The economy has come un- der strain in 2015 as external headwinds and domestic pressures have intensified. Growth of the economy is expected to drop beneath 4% in 2015 for the first time since 1998, resulting in only marginal growth of per capita incomes. The external headwinds include slower regional and global growth (crucially in China who purchase 40% of global copper production) and a US dollar that has strengthened considerably against the kwacha. Domestic pressures include a power crisis impacting on all sectors of the economy, repeat fiscal deficits that have reduced investor confidence, and low and poorly-timed rains that have reduced the agricultural incomes of 62% of the population living in poverty. The Zambian economy grew at an average annual rate of 6.4% between 2010 and 2014, above the overall growth rate of SSA and on the back of high copper prices, foreign direct investment (FDI) in the manufacturing and mining sectors, government investment in infrastructure, and expanding private sector investment in construction and services. Until recently, inflation remained stable due to prudent monetary policy, the currency remaining relatively stable, and good agricultural harvests recorded. Min- ing and fiscal pressures have been building since 2012-13, but in 2015 the economy has slowed considerably as global headwinds and domestic pressures have intensified. The slowdown in China and fall in international commodity prices is having a ripple ef- fect globally and particularly so in Zambia. Some relief has been provided in the form of lower global oil prices, but the dominant effect is negative and comes via low copper prices, which have been falling since 2011. The Zambian economy remains dependent on copper mining, including for 77% of its exports, and the decline in global copper prices, falling 20% in 2015 and ever since its 2011 peak, has put additional pressure on the sector (figure 6). Mining companies are looking globally to scale back operations in high-cost environ- ments and low copper prices have meant that in Zambia, copper mines are being closed, new investment is being delayed and substantial job losses have started in the sector (7,700 between January and end-November 2015). In addition to lower prices, the mining sector is being impacted on by the current power crisis and uncertainty from frequent changes to the mining tax and royalty regime and the back-log of VAT refund payments.2 The slowdown in China and fall in international commodity prices is having a ripple effect globally and particularly so in Zambia. Growth in 2015 is expected to fall to a range of 3 to 3.5% highlighting the impact of the lower copper prices and domestic pressures. 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000 250,000 275,000 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 Domestic Copper Production, MT(LHS) World Copper Price, US$/MT (RHS) Figure Global copper prices have been falling since 2011 6 Source: Bank of Zambia, Ministry of Finance and World Bank staff calculations
  • 15. to fall to a range of 3 to 3.5%, highlighting the impact of the lower copper prices and domestic pressures such as a poor maize harvest and the current power crisis. Low rainfall has reduced agricultural production, harming rural households’ incomes. The 2014 -15 agricultural (October-March) season was characterized by extensive rain- fall deficits resulting in markedly below average end of season vegetation (World Food Program3 ). This has reduced agricultural production for 2015 and increased the prices of food items. Recent drier weather patterns have been strongly influenced by the El Niño, an event active since March 2015 and expected to last into Q1 2016. Furthermore, climate change has increased the frequency of floods and droughts over the past three decades and will continue to have an impact on climate-sensitive sectors such as rain- fed agriculture, fishing, and forestry. The contribution of the agriculture sector to economic growth is expected to be nega- tive in 2015 (preliminary estimates are for a 7.5% decline in output from agriculture, forestry and fishing this year). Food prices have been increasing steadily and high prices for mealie-meal (the main staple in Zambia) and meat have repeatedly hit the headlines. The November 2015 bulletin from the Central Statistical Office (CSO) shows maize grain prices have increased by 32% (year-on-year). While a small proportion of farmers have benefited from the higher prices and sold their maize abroad (especially to the US dol- lar denominated Zimbabwean economy), the vast majority of rural households’ incomes have been hit hard by lower production in 2015. Slower growth and reduced agricul- tural incomes are likely to halt poverty reduction, given the sector is the primary source of income for close to three-fifths of poor households. The current power crisis, discussed in Section 2, is impacting on all sectors of the econ- omy. Like mining, the manufacturing and services sectors have been hit hard as costs have increased and margins squeezed, leading to 7,700 job losses in 2015 and lower output. Sharp kwacha depreciation followed by an inflationary spike As is typical in this part of Zambia’s copper price cycle, the kwacha has depreciated considerably (the kwacha tends to depreciate as the copper price falls and appreciate as it rises). However, on this occasion, global headwinds have combined with domestic pressures and ebbing confidence in the economy, resulting in huge shifts and market turbulence. While the strength of the US dollar fused with worsening current account and fiscal imbalances have propagated a depreciation in most resource dependent cur- rencies, the kwacha’s decline stands out (figure 2). There have been three distinct phases to the kwacha to US dollar exchange rate be- tween January and November 2015 (figure 7). There was the gradual depreciation be- tween January and mid-August, where the kwacha depreciated by 21% over 30 weeks, moving from ZMW 6.4 to ZMW 7.9 per US$. Next followed huge volatility and a steep de- cline in the exchange rate and in the 10 weeks to end-October, the kwacha depreciated -110% -100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 09-Jan-15 23-Jan-15 06-Feb-15 20-Feb-15 06-Mar-15 20-Mar-15 03-Apr-15 17-Apr-15 01-May-15 15-May-15 29-May-15 12-Jun-15 26-Jun-15 10-Jul-15 24-Jul-15 07-Aug-15 21-Aug-15 04-Sep-15 18-Sep-15 02-Oct-15 16-Oct-15 30-Oct-15 13-Nov-15 US$ GB£ Euro Rand Figure The kwacha has deprecated considerably in 2015 7 Food prices have been increasing steadily and high prices for mealie- meal and meat have repeatedly hit the headlines. Global headwinds have combined with domestic pressures and ebbing confidence in the economy resulting in huge shifts and market turbulence. At the end of November, annual inflation reached 19.5%. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 8 Source: Bank of Zambia
  • 16. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 9 by 69% to ZMW 12.5 per US$. By November 11, 2015, the exchange rate reached ZMW 14.2 per US$ but by the end of that month had recovered to ZMW 10.3 per US$, an ap- preciation of 27% in 19 days. The net effect is that the kwacha depreciated by 61% over the 11 months to end-November 2015. Put differently, the kwacha lost 38% of its value. The recovery in November is linked to a belief that the decline of the kwacha had been over-blown, as well as better targeted and timed intervention by the Bank of Zambia (BoZ), who look to calm the volatility in the foreign exchange market but not set its rate. Furthermore, it was recognized in September and October that the rule governing for- eign exchange trading did not perform well during days of thin markets and large shifts in the exchange rate. Between January 2012 and September 2015, inflation remained stable at an average rate of 7.2%. Low inflation was attributed to low oil prices, a stable currency, and pru- dent monetary policy by the BoZ. In 2015, inflation fell consecutively during Q1 and Q2. However, since mid-2015, inflationary pressures began building up due to the depreci- ating kwacha. However, October inflation (year-on-year) jumped to 14.3% and Novem- ber inflation to 19.5% (figure 8), a shift driven by food inflation that increased to 16.2% in October and 23.4% in November, from 8.1% in August 2015. The basket of food measured includes both domestically produced foods, where price is largely depend- ent on the quality of the harvest, and imported foods where prices are impacted by the depreciation of the kwacha. Non-food inflation also rose to 15.5% in November from just 7.3% in September, on the back of increased transport costs as vehicles and car parts became more costly to import. The big jump in inflation is consistent with expectations about the pass-through from currency deprecation to inflation in Zambia. There is often a lag in pass-through and the effects can still be felt up to 9 months after an episode of depreciation. Zambia is viewed as having a relatively high rate of pass-through as even firms producing goods for the domestic market rely on the import of parts and intermediary goods. Many food products are also imported. Food inflation has been a big factor and in response to concerns about the affordability of core staples, the government, via the Food Reserve Agency, has announced its intention to sell grain below market prices to mills that are contracted to sell mealie-meal to consumers at lower cost (the target price is ZMW 65 for a 25 kg bag, while actual prices ranged between ZMW 65 to 105 across the country in November 2015. In 2014 and 2015, while fiscal policy has been expansionary, monetary policy shoul- dered the burden of moderating inflation. In Q1 2015, the BoZ increased the statu- tory reserve ratio to 10% from 14%, but kept the policy rate constant at 12.5% until November 3, 2015 when it was increased to 15.5% (figure 8). Caps on lending rates were removed to improve the functioning of the credit market. The rising interest rates Over the 11 months to end-November 2015, the kwacha lost 38% of its value. The big jump in inflation is consistent with expectations about the pass-through from currency deprecation to inflation in Zambia. Fiscal policy has been expansionary, monetary policy shouldered the burden of moderating inflation. 3% 8% 13% 18% 23% 28% Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014 Dec2014 Jan2015 Feb2015 Mar2015 Apr2015 May2015 Jun2015 Jul2015 Aug2015 Sep2015 Oct2015 Nov2015 Inflation rate BOZ policy rate Avg. interbank rate Avg. T-Bill rate Figure Inflation increased substantially in Q3 2015 8 Source: Bank of Zambia and Central Statistical Office
  • 17. have helped moderate inflation, but at a cost. Higher interest rates increase the cost of borrowing and make it even harder for firms and individuals to access credit. In a 2013 published Enterprise Survey of 720 Zambian firms, access to finance was highlighted as the largest business environment constraint.4 Fiscal policy continues to be expansionary Over the past few years, fiscal policy has been loose, and expenditure has increased from around 22% of GDP in 2012 to an average of 24.5% of GDP since then (table 1). To fund these higher levels of expenditure, that have exceeded revenues and grants, large fiscal deficits of 6.7% and 5.5% of GDP (cash basis) were realized in 2013 and 2014 respectively. The underlying fiscal deficit has been higher still (10.6% in 2014), reflecting an accumulation of VAT refund claims and expenditure arrears. External borrowing has plugged this gap between what was spent and what was earned in tax. External financing was 5.3% of GDP in 2014 and is expected to end 2015 around 6.6% following the issuance of Eurobonds in each of the two years. The increased expenditure in 2015 has been absorbed in several areas. First is an in- crease in public investment from 5.6% to 6.0% of GDP, focused on tackling core infra- structure bottle-necks. Second is the increasing costs of debt servicing, as a result of the non-concessional borrowing at high interest rates and depreciation of the kwacha (the external debt is serviced in US dollars). Third is a huge unbudgeted outlay on sub- sidies, especially fuel, but also for emergency power; up to 4.3% of GDP 2015 from 2% of GDP in 2014. Fuel subsidies have cost the government US$300 million in 2015 and some payments will be carried over into 2015 (box 1). This subsidy is equivalent to ZMW 3,300 million, ZMW 220 for every Zambian. The cost of emergency power in 2015 has reached ZMW 493 million (US$45 million) (discussed in Section 2). Revenues have fallen short of expectations at the time of budgeting as growth of the economy has slowed. Tax revenues will end the year around 13.8% of GDP, slightly above target, but non-tax revenues (that include royalties) will end 2015 at 3.5% below the target of 5.3%. Grants also fall short of the target by 0.3% of GDP. The extra expen- ditures and revenue shortfalls will result in an estimated fiscal deficit of 8% of GDP in 2015, considerably higher than the budgeted 5.7% and the deficits recorded in recent years (figure 9). Fiscal policy has been loose, and expenditure has increased from around 22% of GDP in 2012 to an average of 24.5% since then. There’s been a huge unbudgeted outlay on subsidies, especially fuel, but also for emergency power. Revenues have fallen short of expectations at the time of budgeting as growth of the economy has slowed. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 10 2012 2013 2014 Actual Actual Actual Budget Proj. Total Revenue and Grants 19.1 18.4 19.3 19.7 17.8 Tax 15.0 14.7 15.8 13.7 13.8 Non-Tax 2.4 2.2 2.7 5.3 3.6 Grants 1.7 1.5 0.8 0.7 0.4 Expenditure 22.3 25.1 24.8 24.3 25.8 OW Recurrent 16.1 18.8 19.4 18.6 19.8 Personal Emoluments 7.3 8.2 9.6 9.0 8.5 Goods and Services 3.6 3.3 3.1 2.4 2.9 Interest Payments 1.4 1.5 2.3 1.9 2.6 Subsidies 1.5 3.5 2.0 2.0 4.3 Other Recurrent 2.3 2.3 2.4 3.3 1.5 OW Public Investment 6.2 6.3 5.4 5.7 6.0 Fiscal Deficit (cash basis) -3.2 -6.7 -5.5 -4.6 -8.0 Financing 5.4 -0.6 9.4 4.6 6.4 Net Domestic 1.7 -1.0 4.1 1.7 -0.2 Net External 3.7 0.4 5.3 2.9 6.6 2015 Table Fiscal trends 1 Source: Ministry of Finance and staff projections
  • 18. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 11 In October 2015, the government presented its 2016 national budget, aimed at: “Fiscal Consolidation to Safeguard Our Past Achievements and Secure a Prosperous Future for All”. The Minister of Finance called for moderation of the expansionary fiscal stance of the past four years given global economic conditions. Typically, fiscal consolidation involves lower expenditure, but in this fiscal plan, expenditure was to increase to 25.8% GDP, leaving all the hard work with improving domestic revenue collection. Plans to increase domestic revenue to 20.4% in 2016 (from 17.8% in 2015), perhaps possible over the medium term, are extremely optimistic. Especially given the recent slowdown in the mining sector and deteriorating economic conditions in the second half of 2015. Substantial new expenditure pressures have also emerged since the budget, including increasing debt service costs and a planned increase in emergency power imports. If the government is to reduce the fiscal deficit in 2016, the framework will require close review. At a press conference on November 26, 2015, the President of Zambia an- nounced some ‘austerity measures’ including expenditure reductions, and reiterated the government’s commitment to cost-reflective tariffs for electricity and to removing the subsidy on fuel. The expenditure measures included now new capital projects, a re- view of government emoluments and benefits (including cars), and restricted overseas and domestic travel. No time frame was given, but the announced measures would help in the move towards fiscal sustainability. 1 Box Huge recent subsidy bills for government When asked about fuel subsidies, many people respond that they are cost-reflective prices and no subsidies are in place in Zambia. However, a consequence of the rapidly depreciating kwacha has been a mismatch between revenues from electricity tariffs and pump prices (paid in kwacha) and the cost of supply of emergency electricity and fuel (paid in US dollar). This leaves the Ministry of Finance having to pay the difference. The Energy Regulation Board (ERB) sets wholesale and retail fuel prices according to a formula that marks up the landed price of each shipment of oil as it arrives in Dar es Salaam by the cost of transporting, refin- ing, and distributing fuel in Zambia. The stated objective of ERB’s cost-plus pricing model is to ensure that all costs relevant to procurement are recovered through sales of petroleum products. Fuel pump prices were increased on July 13, 2015, but between then and end-November, the kwacha-US dollar exchange rate depreciated by 31%, and no changes have been made by the ERB. This meant that the government had to contribute US$50 million in October alone to cover the cost of supplying fuel. In Octo- ber and November, prices were less than US$1 per liter, an event that last occurred beyond the memory of most fuel consumers. These expenditures are not pro-poor and are arguably unaffordable as the economy slows down and the cost of borrowing increases. Typically fiscal consolidation involves lower expenditure, but in this fiscal plan, expenditure was increased to 25.8% GDP. Substantial new expenditure pressures have also emerged since the budget, including increasing debt service costs. -10% -5% 0% 5% 10% 15% 20% 25% 2010 2011 2012 2013 2014 2015f Revenue + Grants Expenditure Fiscal Deficit Figure Growing and repeat fiscal deficits 9 Source: Ministry of Finance and staff projections
  • 19. Public debt looms large Large exchange rate depreciations carry the risk of balance sheet effects, especially where there is substantial offshore foreign currency borrowing by the government and corporations. Foreign currency risks have become a reality in Zambia in 2015, as the weakening kwacha has increased the level of external debt and cost of servicing the borrowing. The repeat fiscal deficits of the past four years have been financed by external non- concessional borrowing. In July 2015, Zambia issued its third Eurobond for US$1.25 billion (with an average tenor of 11 year) at a considerably higher cost (the yield at issue was 9.375%). These Eurobond issues now total US$3 billion and have sharply increased overall debt levels. The recent and rapid depreciation has also pushed the kwacha cost of repaying and servicing this external debt much higher. In consequence, public debt is now around 55% of GDP, representing a near doubling of debt levels (as measured in local currency) since 2012, raising important issues of debt sustainability. In light of the economic difficulties and deterioration of fiscal metrics, Moody’s down- graded Zambia’s government issuer rating from B2 to B1, and its outlook from negative to stable (25 September 2015), thereby aligning their rating with those of other rating agencies. The consequence of higher levels and lower ratings is that access to interna- tional debt markets, where opportunities are already narrowing for frontier markets, will be more costly for Zambia in 2016 and going forward. Trade imbalances emerge Zambia relies on copper for 77% of its exports and as global prices have fallen, the cur- rent account surpluses enjoyed between 2009 and 2012 have been replaced by small deficits. Trade deficits have been recorded in each of the first three quarters in 2015, led by a decline in the amount and value of copper exported to international com- modity firms and directly to China, following lower global demand, softer global copper prices, and an increase in the value of imports following the depreciation of the kwacha (figure 10). Preliminary data suggested year-to-date copper exports were valued at US$4.1 billion in September, down 28% from US$5.7 billion the previous year. Non-traditional exports (i.e. goods other than copper and cobalt) declined sharply in 2014, reversing a trend of previously steady growth and similar levels of performance have been recorded in 2015 as other trading partners’ economies continue to grow slowly. Key non-copper export destinations are the Democratic Republic of Congo (7.7% of exports and mainly sulphuric acid for mining) and South Africa (6.8% of exports). The repeat fiscal deficits of the past four years have been financed by external non- concessional borrowing. The BoZ’s November 2015 monetary policy statement highlighted a widening of the current account deficit in Q3 to US$401 million. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 12 -5,000 -3,000 -1,000 1,000 3,000 5,000 7,000 9,000 11,000 13,000 15,000 17,000 19,000 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 MillionsZMK Imports Exports Trade Balance Figure The trade balance has become negative in 2015 10 Source: Central Statistical Office
  • 20. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 13 The BoZ’s November 2015 monetary policy statement highlighted a widening of the current account deficit in Q3 to US$401.0 million from US$305.9 million recorded in Q2, on account of higher import related service payments and the increase in income on equity payments by foreign-owned enterprises . The cost of imports increased in Q2 and Q3 2015, following the depreciation of the kwacha. Given the rising costs of imported goods, consumers will, where possible (e.g. imported food items), shift to domestically produced goods and otherwise reduce their consumption, serving to reduce the trade imbalance. Poverty levels and shared prosperity The benefits of recent GDP growth have accrued mainly to the population living in ur- ban areas. Almost 90% of Zambians living below the extreme poverty line are concen- trated in rural areas, and the poverty gap index (a measure of how far average incomes fall below the poverty line) is far higher for the rural population than their urban coun- terparts (20% and 3.7%, respectively, as of 2010). Real income growth between 2006 and 2010 was greatest among those with higher incomes and relatively weak for those with lower incomes. Incomes of the poor have not been growing rapidly enough, or at all, to lift them out of poverty, with households at the bottom 40% experiencing very modest real consumption growth below 1%. As a result, although poverty rates were declining until the mid-2000s, poverty in Zambia remains high, with an estimated 62% of Zambians living on less than US$1.90 per day (2011 PPP). Forthcoming results of the 2015 Living Conditions Monitoring Survey will provide the first firm update on poverty levels since the 2010 survey. Zambia also has one of the most unequal distributions of income in SSA, with a Gini co- efficient of 57.5. Many of the gainful economic activities in the country are concentrated primarily along the rail line in the highly urbanized Copperbelt and Lusaka regions. The rest of the country is fairly underdeveloped, and its labor depends primarily on subsist- ence agriculture. C. ECONOMIC OUTLOOK, RISKS AND POLICY CHALLENGES The outlook for 2016 has become more somber following announcements of expected mine clo- sures, the severity of the power crisis and the rapid depreciation of the kwacha. Given the external and domestic challenges, we expect GDP growth to drop to 3 to 3.5% this year and next, before re- turning to potential (5 to 6%) by 2018, as copper prices stabilize and domestic pressures ease. Tough action is required in 2016 to curb runaway expenditures, double digit inflation and growing twin deficits. Fiscal policy should be put center stage and efforts made to shift the country back onto a sustainable fiscal path. Medium-term outlook The outlook for the Zambian economy is underpinned by three main trends. i. The current low price of copper, on which the economy depends for revenue and foreign currency, will pressure fiscal and current account balances. World Bank forecasts suggest commodity prices, including copper, are likely to stay in the doldrums throughout 2016, but should start to pick up in 2017 and beyond. ii. There is huge uncertainty about whether persistent and growing fiscal deficits can be reined in. Zambia has been able to issue three Eurobonds in four years to fund its exuberance, but as markets tighten and Zambian debt levels have soared, the costs of borrowing will remain much higher than when the Eurobonds were issued in 2012 or 2014. iii. The severity of the power crisis, and the government’s ability to mitigate it by sourc- ing emergency power and ensuring the cost is affordable via tariffs that better reflect the rising cost of supplying electricity. Reflecting on the external headwinds and domestic pressures, the expectation is that GDP growth will remain in the region of 3 to 3.5% in 2016, before reaching potential (between 5 and 6%) in 2017 and 2018, as new power generation capacity comes fully online and global copper prices stabilize. Despite the current problems, long-term in- vestment in the mineral and non-mineral sectors in Zambia remains attractive. The benefits of recent GDP growth have accrued mainly to the population in urban areas. Reflecting the external headwinds and domestic pressures, the expectation is that GDP growth will remain in the region of 3 to 3.5% in 2016.
  • 21. The government remains committed to a target of single digit inflation, set as part of the 2016 budget, but this appears ambitious given the recent rapid depreciation of the kwacha. However, given the extent of the recent depreciation, it is likely that prices will increase and peak in Q2 2016 before recovering to an average of around 15-20% for 2016. Risks to Zambia’s economic outlook The outlook is subject to downside risks, both domestic and external. Externally, lower than predicted growth in China would weigh on the demand for Zambia’s exports, fur- ther reducing copper prices, and would severely affect Zambia’s prospects. Further- more, strengthening of the US dollar, in the event the Federal Reserve increase interest rates, would also likely add volatility to the exchange rate. The main domestic risks are threefold. First, that the power crisis will worsen. This could occur via delays in new generation coming online or a further reduction of generation capacity at the main hydropower plants, serving to reduce both mining and non-mining activity, increase joblessness and push the economy into contraction. Second, a dete- rioration of confidence in the economy, leading to further weakening of the currency and increased levels of inflation. This might result in the absence of measures to cur- tail runaway expenditure, especially in the run-up to the 2016 elections, that would make any substantial dent in the fiscal deficit. In this event, external financing would also become more costly and would put further pressure, via increased debt service obligations, on the 2016 budget and for years to come. Lastly, another bad harvest that serves to increase food prices and reduce rural and agricultural incomes, with the greatest impact falling on the poorest households. Policy challenges Commodity-exporting countries’ policy makers face increasing challenges across the globe. Zambia is no exception and must grapple with multiple challenges as the econo- my slows down. Falling copper prices and a power crisis could be met with fiscal buffers, but in Zambia, no savings were made or stabilization measures carried out when the economy was prospering. Furthermore, debt levels have soared following repeat non- concessional borrowing making it more expensive to borrow from international debt markets. This leaves the government with little room to maneuver, limited fiscal space to com- pensate for slower growth and recent job losses and only hard choices. Trade-offs ex- ist between cushioning people from the impact of the depreciation and power crisis by subsidizing the cost of fuel and electricity and reducing the fiscal deficit to restore confidence, and fixing the underlying problems in the economy. These trade-offs are particular stark in 2016, given that it is an election year. The 2016 budget puts all the pressure on revenue, but year-on-year increases to public expenditure, funded by borrowing, should be center stage. Large fiscal deficits and inef- ficient government spending persist as sources of vulnerability for Zambia. It is neces- sary to strengthen the fiscal position and restore fiscal buffers to increase confidence in the economy, reduce the need for costly borrowing and build resilience against further exogenous shocks. Fiscal adjustment would also put less pressure on monetary policy and potentially make space for interest rates to be reduced, easing the pressure on individuals and firms. Keeping inflation expectations anchored in single digits remains critical to maintaining macroeconomic and wider development objectives. Any adjustment should involve a shift in spending priorities that supports both the ef- ficiency of public expenditures and long-term inclusive growth. While in many areas this is difficult to achieve, there are obvious areas for attention including the growing cost of fuel subsides. Policy announcements have been made for cost-reflective electricity tariffs and fuel prices, but the reality is a huge outflow of subsidy from the Ministry of Finance. If the stated intentions for meeting the cost of supply with tariffs were realized, then fiscal pressures would ease considerably. Much better, pro-poor cushioning can be achieved via investment projects targeted at regions, and via targeted cash trans- The outlook is subject to downside risks, both domestic and external. Commodity- exporting countries’ policy makers face increasing challenges across the globe. Fiscal adjustment would put less pressure on monetary policy. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 14
  • 22. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 15 fers, rather than with fuel subsidies. The targeted 2016 fiscal deficit of 3.8% presented in the budget may prove too optimis- tic given the slowdown, but fiscal adjustment is required and would signal the govern- ment’s commitment to fiscal sustainability. With market access comes greater scrutiny and policy responses are judged by real ac- tion that affects the interest rate paid on new borrowing. Eurobond issuance has also increased international interest in the Zambian economy and events are being watched much more closely than prior to 2012. To help maintain confidence in the economy, and Zambia as an investment destination, better dialogue on the economy should be targeted and confusing messages avoided. In addition, the commodity price shock highlights the need for Zambia to reduce its dependency on copper, a challenge it has been grappling with for over 50 years. Talk about diversification and growing manufacturing needs to be met by a clear and real- istic strategy and structural reforms aimed at removing impediments to private sector activity and improving the business environment. With market access comes greater scrutiny and policy responses are judged by real action that affects the interest rate paid on new borrowing.
  • 23. SECTION D. THE ELECTRICITY CHALLENGE Economic progress since 2000, driven by mining production and services, has substantially increased the demand for electricity in Zambia. A growing shortfall in supply has been exacerbated in 2015 by a reduction in hydroelectric generation due to low water levels at the country’s main reservoirs. This has increased power outages and impacted on all aspects of the economy, contributing to slower economic growth in 2015 and higher production costs. Zambia’s economy has expanded by an average of 6.4% per year between 2010 and 2014, and 7.4% over the last decade. This economic expansion has lifted the demand for electricity by 4% per annum over the same period. With very little new generation capacity being brought online in the past 30 years, Zambia has been experiencing a power deficit over the past 4-5 years, characterized by power outages commonly re- ferred to as load-shedding. Approximately 95% of generation capacity is linked to hydropower plants, hence the electricity supply is heavily dependent on hydrology. This puts the country at risk in the event of drought, more so recently as the gap between generation and demand has closed. The mining industry consumes the majority of Zambia’s electricity (55%) using it not only for mining itself, but also processing (e.g. concentrating, smelting and refining) and other associated services such as water pumping. Most mines in the Copperbelt Prov- ince receive their power via the Copperbelt Energy Corporation (CEC) based on prices agreed in long-term Power Supply Agreements (PSAs) that run back-to-back with Bulk Supply Agreements (BSAs) between CEC and ZESCO Limited. For legacy reasons, these agreements are not overseen by the ERB. The ERB does however set tariffs for other consumer categories and provides its consent to ZESCO’s other long-term bulk power agreements. While installed capacity, measured in Mega Watts (MW), has been higher than existing peak demand, available energy generation, measured in Giga Watt Hours (GWh) and which has an approximate linear relationship to the water used, has remained below the country’s total energy demand (figure 11). This has been exacerbated in 2015 due to low water levels in the main reservoirs used for hydroelectric generation (box 2). Despite plenty of warning about dependency on hydro power and rising power de- mand, there has been very little improvement in generation capacity. Until 2006, Zam- bia had surplus power and this partly explains why prior to the 360MW Kariba North Bank Extension that was completed in 2015, the last major plant to be commissioned was the Kariba North Bank in 1977. The history of surplus has also contributed to low 2 POWERING THE ZAMBIAN ECONOMY Approximately 95% of generation capacity is linked to hydropower plants, hence the electricity supply is heavily dependent on hydrology. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 16
  • 24. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 17 tariffs which have been one of several barriers to investment in the grid and new gen- eration capacity to meet rising demand. Load-shedding has been increasingly common since 2006, but it has got much worse in 2015. The shortfall in energy supply has impacted on manufacturing and industry (including mining), increasing the costs of production, and is negatively impacting on the quality of life of Zambians with access to grid electricity. The power crisis adds to the list of negative shocks impacting on the Zambian economy in 2015 as discussed in Section 1. Adequate power supply and coverage is central to Zambia’s development strategy. Zam- bia’s 2030 Vision highlights that: “Energy is one of the important driving forces behind the development of an economy as it cuts across most economic and social activities.” The Sixth National Development Plan also stresses that: “Poor and inadequate infrastruc- ture remains the major constraint to economic development and poverty reduction”. Pre- liminary results from the Living Conditions Monitoring Survey (LCMS) show the number of households reporting to have an electricity connection grew from 584,000 in 2010 to 948,000 in 2015, an increase of 364,000 households. However, almost all the new con- nections haven taken place in urban areas and just 75,000 or 4% of rural households are connected, compared to 67% of urban households (there are approximately 3 mil- lion households in Zambia). Zambia’s challenges are mirrored in other African countries. Countries across the conti- nent are grappling with the challenge of supplying reliable electricity to meet the needs of a growing economy and providing universal access to electricity in order to improve the quality of life of citizens. The key issues faced in the power sector include poor reli- ability, low access, and insufficient capacity to meet existing demand; some 24% of the population of SSA has access to electricity versus 40% in other low income countries. Excluding South Africa, the entire installed generation capacity of SSA is only 28 GW, equivalent to that of Argentina. Load-shedding has been increasingly common since 2006, but it has got much worse in 2015. 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Capacity(GWh) Annual generation capacity (GWh) Annual demand (GWh) Figure Electricity generation capacity fallen below demand 11 Source: ZESCO and World Bank staff calculations
  • 25. 2 Box Hydro-Electricity in Zambia Zambia is reliant on four hydroelectric power stations: • Victoria Falls, commissioned in 1938 with an installed capacity of 108 MW (since 1972). • Kariba North Bank, commissioned in 1960 with an installed capacity of 600 MW that pro vides power to both Zambia and Zimbabwe. • Kafue Gorge, commissioned in 1971 with an installed capacity of 900 MW since 1977. • Kariba North Bank Extension, commissioned in 2014 at 360 MW. In the 1970s and following the commissioning of Kafue Gorge, Zambia experienced a period of power surplus, during which power was sold and exported to Zimbabwe and South Africa. Falling and low copper prices and a lack of investment (mines were nationalized in 1972) meant there was reduced demand for power. Mining firms are the biggest users of power and as production began to pick up in the late 1990s, and the economy grew robustly, the power surplus slowly decreased. Source: Kapika (2013) and Whitworth (2014) E. ZAMBIA’S POWER CRISIS Since July 2015, ZESCO has increased the extent of rolling black-outs (load-shedding) to at least 8 hours per day on a rotational basis for the majority of its household, commercial and industrial con- sumers. And although they are not subject to rotational load-shedding, ZESCO has requested the mining industry to curtail its load by 30%. This is in order to manage a power deficit of around 591 MW each month (September to December 2015), representing approximately 34% of demand. The decision by ZESCO to limit electricity generation is due to the historically low wa- ter levels at the country’s reservoirs (including Kariba, Itezhi Tezhi and Kafue Gorge) that store water for hydroelectric generation. Prior to the start of the increased load- shedding in July, ZESCO generation capacity was in the range of 1,800 – 2,000 MW. The reason for the low water levels is a combination of lower rainfall (during the 2014-15 rainy season) and increased water usage. Zambia’s and Zimbabwe’s water allocation at Kariba dam is regulated by the Zambezi River Authority (ZRA) and in both 2013 and 2014, ZESCO exceeded its allocation by 5% and 22% respectively. The commissioning of the Kariba North Bank Extension project in 2014 contributed to increased water use at the Kariba reservoir and the reservoir has not reached its maximum retention levels since 2010. Water levels in the reservoirs will recover somewhat during the 2015 -16 rain season, assuming usage according to al- location, but it will take several years of rainfall and balanced usage for them to recover to maximum levels. As of mid-November 2015, most areas of Zambia had experienced low rainfall and if this trend continues (the El Niño is expected to last into Q1 2016), there will be only limited recovery in 2016. If, however, reservoir levels continue to drop, ZESCO may be forced to curtail generation at the Kafue Gorge and at Kariba North Bank (including the extension) power stations even more. 2015 load-shedding Initially, the burden of load-shedding was only imposed on households, businesses and industry, but excluded the mining sector. In July 2015, however, a decision was made to reduce power supply to the mines by 30% and since then, the mining companies have been asked to operate within restricted power allocations, been offered additional power at higher cost and had their compliance monitored by ZESCO. The load-shedding has typically been for 8 hours per day. Between June and August, it was restricted to six hours on the Copperbelt, but since then the country has been without power for on average eight hours per day. The load-shedding aims to reduce demand, but there is not a full saving as often consumers delay some of their consump- tion to times when power is available. The reason for the low water levels is a combination of lower rainfall (during the 2014-15 rainy season) and increased water usage. Given reservoir levels continue to drop, ZESCO may be forced to curtail generation further. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 18
  • 26. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 19 Given the severity of the power deficit, the government announced several short- and long-term measures to alleviate the situation. To supplement the country’s available generation and reduce the power deficit, ZESCO has entered into contracts with South- ern African Power Pool (SAPP) utilities and emergency power suppliers (including Ag- greko PLC). In November 2015, these contracts totaled 172 MW delivered during differ- ent times of the day. Once domestic generation and electricity imports (as at November 2015) are taken into account, the country faces an average monthly deficit of 591 MW (September to December 2015), representing approximately 34% of demand (table 2). 2015 tariffs and subsidy The emergency power imported in 2015 has come at considerable cost to the govern- ment. A burden made worse by the rapid depreciation of the kwacha in 2015. Imports from Aggreko are costing ZESCO US cents (USc) 18.4 per Kwh, imports from Mozam- bique are priced at USc 7.6 per Kwh and the average tariff on imports from the day ahead market (DAM) has increased from USc 2.7 Kw/h in April 2015 to USc 6.7 Kw/h in October 2015, a near doubling of prices. The total cost of emergency power (cost of supply minus tariffs) is estimated at ZMW 539 million or US$44 million in 2015. Greater transparency on what the mines are each paying relative to the cost of supply would greatly improve the public’s understanding. Given the severity of the power deficit, government announced several short- and long- term measures to alleviate the situation. September to December 2015 Monthly Average ZESCO Generation 987.5 Lunsemfwa Hydro 22.0 Ndola Energy 41.0 Emergency Imports - Day Ahead Market 38.0 Emergency Imports - Electricidade de Mozambique (EDM) 27.0 Emergency Imports - Aggreko (148MW for 16hrs daily) 107.0 Itezhi Tezhi Power Station - Total Generation 1,222.5 Transmission Losses 73.4 Total Demand 1,740.0 Total Deficit 590.9 Total Deficit 34.0% Total Deficit Estimate September to December 2015 Number of Months Active ZESCO Generation 0 Lunsemfwa Hydro 0 Ndola Energy 0 Emergency Imports - Day Ahead Market 0 Emergency Imports - Electricidade de Mozambique (EDM) 0 Emergency Imports - Aggreko (148MW for 16hrs daily) 0 Itezhi-Tezhi Power Station Total Generation Monthly Transmission Losses Monthly Total Demand Monthly Total Deficit Monthly Total Deficit Monthly Table A power generation deficit in 2015 2 Source: ZESCO and World Bank staff calculations Note: For the period September-November 2015
  • 27. At present there are six power plants at various stages of preparation/development, some of which have been in the pipeline for more than a decade. The total capacity of these plants is about 1,730 MW (table 3). Generation of between 150 and 300 MW is ex- pected in 2016 from Maamba Collieries (depending on the speed of project completion and the quality of coal used), along with 70 MW from Itezhi Tezhi (60% of its potential capacity due to low reservoir levels) starting in early to mid-2016. The largest, Kafue Gorge Lower (750 MW), has gone through several procurement/contracting phases, and has recently been contracted at a cost of US$ 2 billion and is scheduled to be com- missioned in 2020. The remaining three projects are negotiating power purchase and other support agreements with ZESCO and the government. In addition, there are good prospects for solar generation in 2016 and beyond (box 3). The International Development Corporation (IDC) has been working to attract private sector partners for two 50MW solar PV projects, with support from the World Bank Group as transaction advisor. These projects should provide a diversified form of gen- eration in early 2017. There is also potential for thermal power generation by Independent Power Producers (IPP) for 200 MW worth of generation over the coming years, assuming the potential revenues, partly determined by the level of electricity tariffs, are sufficient to attract interest and that other constraints such weak management of the tendering process can be addressed. The prospect of solar and thermal generation in the next few years will help diver- sify Zambia’s power generation and make it slightly less dependent on hydro. Climate change has increased the frequency of floods and droughts in Zambia, and the Zam- bezi river basin will remain sensitive to global warming, adding further justification for a gradual diversification to other renewable sources of generation such as solar. At present there are six power plants at various stages of preparation/ development, some of which have been in the pipeline for more than a decade. Despite these projects, the modelling of different hydrology conditions shows that even in a wet (above average rainfall) scenario, current power shortages will continue through 2018. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 20 Project Capacity (MW) Primary Fuel Estimated Cost (US$ m) Itezhi Tezhi Power Station 120 Hydro 240 Maamba Coallieries 300 Coal 750 Lunzua Power Authority 210 Hydro n/a Ndola Energy Extension 50 HFO 75 EMCO 300 Coal 750 Kafue Gorge Lower 750 Hydro 2,000 Total Capacity 1,730 Table Private power plant contract status 3 Source: ZESCO and World Bank staff calculations Despite these projects, the modelling of different hydrology conditions shows that even in a wet (above average rainfall) scenario, current power shortages will continue through 2018. In a dry (lower than average rainfall) scenario, power shortages may continue through 2020. It should be noted that the assumptions in these scenarios do not include tackling the large portion of the population without access to electricity ser- F. MANAGING THE COST OF MITIGATION Power is essential for the Zambian economy to function. Despite new generation projects, the mod- elling of different hydrology conditions shows that even in a wet (above average rainfall) scenario, current power shortages will continue through to at least 2018. For 2016, the authorities have made the difficult choice to increase the import of expensive emergency options. This puts huge pressure on the budget at current tariff rates, in tough economic conditions, and unless tariffs are revised upwards, the government’s subsidy of the sector will rise dramatically and will be unaffordable. At November 2015 tariff rates, the government will need to provide ZESCO with an additional US$ 340 million in 2016 to meet the cost of emergency power. However, the financing requirement can be substantially reduced if the average tariff is increased.
  • 28. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 21 Emergency power imports in 2016 Notwithstanding the risk that ZESCO may be forced to curtail generation completely at the Kafue Gorge and at Kariba North Bank, reduced generation is likely from these sources (assuming water quotas are followed) for at least the first half of 2016 until rainfall helps replenish the reservoirs. Maamba Collieries and Itezhi Tezhi, when com- pleted, will provide some relief, but to prevent a large increase in load-shedding ZESCO is contracting further emergency imports (table 4). In 2016, 300 MW is likely to be avail- able from two Karpower ships (to be docked off Mozambique), further use of the day ahead market and a continuation on imports from Aggreko PLC (reduced to 40MW 16 hours daily in 2016). The importation of power is complex given the number of wheelers (i.e. number of countries the power must pass through to get to Zambia). Power from Mozambique typically passes South Africa, then Botswana or Zimbabwe, to get to Zambia. Some power can arrive directly across the Zambia-Mozambique border, but the grid capacity there is limited to small volumes. The imports are also expensive, with Aggreko tariffs at USc 18.8 per Kwh, Karpower at USc 16.7 per Kwh, and the day ahead market remaining around USc 6.5 per Kwh. If further emergency inland power is sought, then the cost of supply might be as high as USc 25 per Kwh. The new generation and emergency measures will result in an average deficit of 496 MW in 2016 or 26% of demand. The deficit is likely to be highest in Q1 2016, but im- prove as emergency power and new generation comes online (figure 12) in Q2. The imports are expensive, with Aggreko tariffs at USc 18.8 per Kwh, Karpower at USc 16.7 per Kwh, and the day ahead market remaining around USc 6.5 per Kwh. A substantial increase in tariffs will be required to meet the cost of supply in 2016 and any gap between revenues and the costs of supply will need to be met by the government. 3 Box Scaling solar in Zambia Scaling Solar is an open, competitive and transparent approach that facilitates the rapid development of privately-owned, utility-scale solar PV projects in sub-Saharan Africa. It is capable of rapid implementa- tion support, and offers a ‘one-stop-shop’ package of advisory services, contracts, financing, guarantees and insurance. This enables governments and utilities to procure solar power transparently and at the lowest possible cost. The government and IDC hope that this initial 100 MW procurement round for solar generation will ulti- mately lead to a rapid scale-up of solar PV capacity, forming a natural complement to Zambia’s extensive hydro resources. If they and the other public sector stakeholders adhere to the risk allocation under Scaling Solar, it is hoped that these projects will qualify for WBG financing, political risk insurance and partial risk guarantees. 2016 Monthly Average (MW) ZESCO Generation 950.8 Lunsemfwa Hydro 22.0 Itezhi Tezhi Power Station 70.0 Ndola Energy 41.0 Reduction in Agrekko Imports (40 MW for 16 hrs daily) 40.0 Emergency Imports - Karpower Ship (100 MW for 24 hours) 91.7 Emergency Imports - Day Ahead Market 44.0 Emergency Inland power ( 200MW for 24 hours daily) - Maamba Coal 88.8 Emergency imports -Karpower ship (200MW 24 hours) 150.0 Total Generation 1,498.3 Transmission Losses 89.9 Total Demand 1,905.0 Total Deficit 496.6 Total Deficit 26.1% Table Emergency power imports for 2016 4 vices, which remains an additional and core priority of government which will require even more generation capacity. Source: ZESCO and World Bank staff calculations
  • 29. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 22 Electricity tariffs The issue of electricity tariffs has been a longstanding one and there has long been discussion of moving towards costs-reflective tariffs. In 2008, the tariff was increased 33% with the financial viability of the power supply in mind (Zambian tariffs were some of the lowest across the continent), but the prices have not been inflation linked and have reduced considerably in real terms. On 1 July, 2014, ZESCO was permitted by the ERB to raise tariffs on all customer cat- egories except mining. Accordingly, commercial tariffs were increased by 15.4% and residential consumers’ tariffs by 24.6%. This followed a four-year period from August 2010 where no adjustments were made despite cumulative inflation of 28%. Attempts have also been made to increase tariffs paid by mining firms to cover the actual cost of supply but many hurdles have been encountered. The cost of emergency power in 2016 will substantially increase the cost of supplying electricity as it has in the second half of 2015. In July 2015, and to improve the financial sustainability of ZECSO, the government stated its intention to revise electricity tariffs to take the cost of supply into account. This government statement was repeated several times since July 2015, but as of end-November 2015, no action had been taken. To move towards this goal, ZESCO applied to the ERB to increase most of the various non-mining tariffs and fixed charges from between 167 and 248%. Public consultations were held and as of end-November, no final decision had been made. Despite the large changes to some tariff lines, the proposal kept the R1 tariff (a ‘life-line’ tariff aimed at providing lower pricing to low-income consumers) at US Cents (USc) 1.5 per KWh and increased the threshold to receive this tariff from 100 Kwh up to 300 KWh of consump- tion. The aim of this tariff is to protect low-income residential consumers, but the move to allowing up to 300 KWh will include many of the non-poor as well. In addition, ZESCO, CEC and the mining industry began discussions to renegotiate the agreements under which bulk power sales to the mining industry are governed in order that they include the full cost of emergency power imports. A substantial increase in tariffs will be required to meet the cost of supply in 2016 and any gap between revenues and the costs of supply will need to be met by the govern- ment. Average tariffs, including both mining and non-mining, are currently (i.e. prior to any increase) estimated at between USc 5 and 6 per KWh. At this tariff rate, the govern- ment will need to provide ZESCO with an additional US$340 million in 2016 to meet the cost of emergency power. However, the financing requirement can be substantially reduced if the average tariff is increased and remains at that level (figure 13). For ex- ample, if government could move the average tariff to USc 10 KWh, then the required subsidy and associated fiscal pressure will reduce to approximately of US$146 million in 2016. The issue of electricity tariffs has been a longstanding one and there has long been discussions of moving towards costs-reflective tariffs. 15% 20% 25% 30% 35% 40% 45% 50% 55% 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2016 Demand Estimate (MW) (LHS) 2016 Total Generation (MW) (LHS) 2016 Supply Deficit (%) (RHS) 2016 Average Supply Deficit (%) (RHS) Figure The power deficit in 2016 12 Source: ZESCO and World Bank staff calculations
  • 30. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 23 ZESCO applied to the ERB to increase most of the various non-mining tariffs and fixed charges from between 167 and 248%. Key to note is that an increase in tariffs to reflective levels is necessary but not suffi- cient to increase private investment in electricity generation in Zambia. There are many other hurdles to overcome as well. Management and regulation of the sector have been improving, but there is still substantial work to do. Particular efforts are needed to improve sector planning and the procurement processes for large power projects. At the national level, the power crisis has already caused reduced output and redundancies across businesses in the services, manufacturing and industrial sectors. 0 50 100 150 200 250 300 350 5 7 8 9 10 11 GRZ Subsidy for EmergencyPower in 2016 (US$ million) Average2016Tariff(UScKwh) Figure The cost to government of emergency power depends on the tariff 13 Source: ZESCO and World Bank staff calculations Note: Does not include emergency inland power The impact of load-shedding The costs of emergency power are considerable when compared to existing hydropow- er plants, as is the likely impact of increased electricity tariffs on the economy. However, so too is the impact of load-shedding. As was highlighted in Section 1, the economy has slowed considerably in 2015 and is expected to remain at similar levels of below trend growth in 2016. The impact of load-shedding is a key driver of the decline, along with the external headwinds and domestic pressures being faced. At the national level, the power crisis has already caused reduced output and redun- dancies across businesses in the services, manufacturing and industrial sectors. Manu- factures are reporting increased costs of production, as they are forced to run costly generators or switch shifts to when they have electricity (extra pay is often needed for night shifts) and many declare they are only meeting between 30 and 40% of scheduled production. Firms engaging in complex procedures (some machines are designed to run 24 hours and require 3-4 hours of heating before use) and those requiring refriger- ation are suffering particularly badly. The mining sector, already impacted on by lower copper prices, has announced closures, laid-off 7,700 workers and postponed invest- ment. Load-shedding of 30% and increasing costs of electricity have further weighed on mine profitability and production. Added to the economic costs are the social and environmental impacts of the power crisis. It becomes much harder to provide quality health care and education if hospitals, schools, clinics and universities are experiencing electricity power outages. The For- estry Department has reported an increase in land degradation as load-shedding has become worse. The cost of replanting trees and soil degradation must be considered in any assessment of impacts. In 2015, 32.9% of households in Zambia report using char- coal for cooking and 50.7% report using firewood. Only 16.0% report typically cooking with electricity, but a good proportion of those cooking on electricity will have switched to using charcoal, or LPG where available, when load-shedding has denied them power. Zambia produces LPG at the Indeni refinery, but 80% is exported. Encouraging and fa- cilitating the use of LPG would help reduce the demand for electricity and help protect the forest cover around urban areas.
  • 31. G. GRADUATING TO SUSTAINABLE SUPPLY The new generation capacity and emergency measures for 2016 will help in mitigating the impact of the power crisis in the coming year, but global experience shows there is no substitute for effective planning. Furthermore, Zambia may again face a similar crisis in the near future if structural weak- nesses in the sector are not adequately addressed. There remains a need to shift from being reactive to anticipatory or preemptive in dealing with reduced generation capacity. Additionally, the need to increase access to electricity in the country should not be neglected. The current power crisis, which impacts considerably on the economy, should be used to correct policy and regulatory anomalies that prevent the sector from achieving its potential. i. Strengthening sector planning and procurement processes: The long-term sustainability of the power sector to ensure an adequate, quality and reliable electricity supply requires a robust planning function. Zambia should develop and update regu- larly, e.g. every two years, a Least Cost Power Development Plan (LCPDP) that lays out the investments required in all the segments of the power sector i.e. generation, trans- mission and distribution. For generation, the LCPDP should contain a pipeline of pro- jects ranked by cost i.e. the most economically and financially viable projects should be developed first. The LCPDP process should be anchored by a load-forecast that is also routinely updated and, given Zambia’s dependency on hydro, the relevant hydrological modelling to guide the extent to which the generation mix should be diversified. Planning on its own is however an insufficient condition for power sector sustainability unless its outputs lead to the procurement of new generation capacity and the related investments in the transmission network. A procurement framework that ensures the transparent and competitive delivery of new plants and which is linked to planning outcomes should therefore be established. Due to the existing structure of the power sector in Zambia, such a procurement framework should also have a mechanism for allocating new build opportunities between state-owned ZESCO and the private sector through Independent Power Producers (IPPs). The current procurement method by which developers enter into lengthy post-award negotiations with ZESCO and govern- ment should be reviewed in order to reduce implementation delays. This could include the development of template agreements (power purchase agreement, implementa- tion agreement etc.) and the establishment of indicative security arrangements. ii. Improving financial sustainability of the power sector: The power crisis has revealed the importance of ensuring that the power sector has sufficient funds for electricity service provision. Inadequate electricity tariffs limit the extent to which the existing generation and grid network is maintained, and investments in new generation capacity and network expansion by either ZESCO or private parties can be made. Elec- tricity tariffs that are lower than the cost of service only benefit those with existing elec- tricity connections in the short-term and in the long-term compromise the quality and reliability of supply. Furthermore, low tariffs slow down the rate at which those without access, which is the majority of the population, can receive connections. In addressing financial sustainability, it is crucial that an electricity tariff framework that reflects the costs of efficient service provision is established and effectively applied. ZESCO and other utilities in the sector should be allowed to collect revenues suffi- cient to cover efficient costs, through tariffs charged to all consumers able to pay them. These revenues should also be sufficient to fund a subsidy program (social safety net) aimed at those consumers whose ability to pay is lower than the level that reflects the full cost of supply. In the event that this is not possible wholly or in part, an affordable subsidy program should be provided through direct and transparent transfers from the government treasury. iii. Increasing access to electricity: Given Zambia’s low electrification rate (32% overall), it would also be important to complement the LCPDP with a strategy, complete with action plans to scale-up access to electricity. This should comprise the priorities for electrification, a definition of funding sources (e.g. grants, loans, national budget 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 24 The long-term sustainability of the power sector to ensure an adequate, quality and reliable electricity supply requires a robust planning function. It is crucial that an electricity tariff framework that reflects the costs of efficient service provision is established and effectively applied.
  • 32. 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 25 allocations, tariff levies etc.), technical options and implementation arrangements for different geographic locations e.g. urban and rural areas. iv. Implementing demand size measures: To complement measures to import electricity and other short-term generation interventions, demand side management measures should also be considered (box 4). ZESCO previously distributed 1 million compact fluorescent lamps (CFLs) that were swapped with less efficient but cheaper in- candescent light bulbs, and was able to shed-off approximately 57MW of peak demand. The possibility of a further large-scale distribution of CFLs should be considered. This would require an assessment of how widespread the use of incandescent bulbs is. It is also important to recognize that at low tariffs, there is limited incentive to use electricity more efficiently. 4 Box Diversification and demand-side measures in Ethiopia Ethiopia suffered a similar power crisis to Zambia in 2009-10, prior to which diversification of electric- ity generation, away from hydro to some degree, was not among its priorities. However, after experiencing severe load shedding, Ethiopia started to diversify its generation portfolio by investing heavily in geothermal and wind energy to complement its hydro resources. Ethiopia has also aggressively pursued demand side management activities to mitigate the impact of its power crisis and improve the country’s energy efficiency. Central to these efforts was an energy-efficiency program that distributed 350,000 compact fluorescent lamp bulbs free of charge, following lessons from similar interventions in the Philippines, Rwanda, Thailand, Uganda and Vietnam. A recent World Bank evaluation estimates the impact of the program to be about 45-50 kilowatt hours per customer per month, or about 13.3 megawatts of energy savings in total. The study finds that the majority of beneficiaries were low-volume customers— mostly from among the poor—although the program was not specifically targeted. It also suggests that energy savings were larger for the poor. On the downside how- ever, about 20% of the initial energy savings disappeared within 18 months of the program’s completion, suggesting sustained efforts are needed to counter such rebound effects. Source: Costolanski, P., Elahi, R., Iimi, A. and R. Kitchlu (2013) ‘Impact Evaluation of Free-of-Charge CFL Bulb Distri- bution in Ethiopia’, Policy Research Working Paper 6383, World Bank, Washington D.C To complement measures to import electricity and other short- term generation interventions, demand side management measures should also be considered.
  • 33. Costolanski, P., Elahi, R., Iimi, A. and R. Kitchuilu (2013) ‘Impact Evaluation of Free-of-Charge CFL Bulb Distribu- tion in Ethiopia’, Policy Research Working Paper 6383, World Bank, Washington D.C. Engineering Institute of Zambia (2015), ‘Report of ZESCO Load Shedding’, Technical Experts Team, September 2015. Kapika, J, (2004), ‘The Zambian Power System and Issues Confronting the ERB, Energy Regulation Board, http://www.narucpartnerships.org/documents/zambian%20power%20market.pdf Kapika, J. (2013), ‘Zambia: Looking East for Additional Generation Capacity’, Chapter in Kapika, J. and A. Eber- hand (2013), ‘ Power-Sector Reform and Regulation in Africa’, HSRC Press, Cape Town, South Africa. Smith, G. (2015), ‘Zambia Budget Brief’, Policy Note, World Bank, Washington D.C. Whitworth, A. (2014), ‘Energy Policy’, Chapter in ‘Zambia Book’, Oxford University Press. World Bank (2015), Africa’s Pulse, October 2015: http://documents.worldbank.org/curated/en/2015/10/25116683/africas-pulse-october-2015. IREFERENCES 1 African Pulse, World Bank (2015): http://documents.worldbank.org/curated/en/2015/10/25116683/africas- pulse-october-2015. 2 See the World Bank’s previous Economic Brief (July 2015): Making Mining Work for Zambia. 3 See: http://documents.wfp.org/stellent/groups/public/documents/ena/wfp274160.pdf 4 See:http://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/CountryHighlights/ Zambia-2013.pdf 5 See: http://www.boz.zm/Publishing/Speeches/MPC_Statement_Nov_2015-v2.pdf 6 A simple way of understanding the relationship between capacity and energy is equating this to a truck. In order for a truck to carry a certain load, its engine should at least be of a certain size (capacity). But to do so over a distance, say 100km, requires that the truck has sufficient diesel (energy). 7 Republic of Zambia, Zambia 2030 vision, p.9. 8 These results were presented by the CSO at a 2015 African Statistics Day Event on 18th November 2015. 9 Engineering Institute of Zambia (2015), ‘Report of ZESCO Load Shedding’, Technical Experts Team, September 2015. INOTES 6th ZAMBIA ECONOMIC BRIEF - POWERING THE ZAMBIAN ECONOMY 26