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Copper-Bottomed Money Pot

Published 10 years ago
By Forbes Africa

In September 2011 the Patriotic Front’s Michael Sata defeated the Movement for Multiparty Democracy’s (MMD) incumbent Rupiah Banda. Banda gracefully conceded defeat and handed over power to Sata, a three-time presidential aspirant. The peaceful handover of power set an example to the rest of the continent and a sign of Zambia’s maturing democracy.

The Patriotic Front (PF) government pledged to fight poverty through wealth redistribution and job creation. Government’s pro-labor stance has seen a flurry of strikes as workers demand higher pay and improved working conditions.

The government has also embarked on an anti-corruption drive spearheaded by prominent anti-corruption lawyer, Mutembo Nchito. This campaign has seen scores of public servants, including the governor of the central bank, dismissed, with investigations of a number of MMD ministers. In addition, Sata has reversed a number of deals, including the $5.4 million sale of Finance Bank Zambia to South Africa’s First National Bank.

This anti-corruption drive has already begun bearing fruit with some donors resuming aid and others set to follow. Donors will take further comfort through the government’s engagement with the International Monetary Fund (IMF) under the Extended Credit Facility (ECF) program.

Economic fundamentals in the country remain robust. The IMF expects the economy to expand 6.7% this year and next. Inflation is expected to remain in single digits, with some upside risks.

Zambia’s economic growth will be driven by government’s expansionary fiscal policy, focused on the agricultural and construction. Copper revenues will finance much of this expenditure. Government increased mineral royalty rates from 3% to 5% for base metals and and 6% for precious metals. While the fundamentals in the copper market point to a robust price, uncertainty emanating from the Eurozone crisis will place a ceiling on copper prices as well increase price volatility.

Zambia’s robust economic fundamentals coupled with the countries priorities have strengthened the government’s resolve of tapping into the international bond market through the issue of a Eurobond. The government announced that it plans to raise $700 million this year, up from an initial $500 million. This resolve has been vindicated by rating agencies Fitch and Standard & Poor’s, both of which assigned a B+ long term credit rating to Zambia. This is on par with Ghana and Kenya.

The World Bank and IMF both indicated that Zambia can afford up $1.7 billion in non-concessional loans over the next six years without compromising debt sustainability. However the issue of a euro bond depends on the fortunes of the Eurozone debt debacle. The launch is likely to be delayed until concerns around the Eurozone debt crisis subside.

Once a Eurobond is issued government has to ensure that the proceeds are managed prudently. Effective spending of Eurobond proceeds should in turn boost growth and allow the government to tackle social and economic problems.

There is a likelihood of social unrest if government fails to meet its election pledges as there is high unemployment and many Zambians struggling below the poverty line. Such protests could be avoided if the government delivers.

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Related Topics: #Copper, #Economy, #Elections, #Financial Plan, #Michael Sata, #Zambia.