The perfect storm: Resilient Zambia hangs on for dear life as economy hits rough stretch

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Sometimes it is your trusty friend who throws you under the bus.

THE joke in Zambia is that the economy is so bad that even the police have increased their fines, after the force last week gazzetted a rise in the amounts paid for services and sanctions.

But for many Zambians, bludgeoned from all sides, the state of the economy is no laughing matter, with a tumbling currency, increased cost of living, power and water shortages and job losses among the most visible.

A lot of it is attributable to nature—a prolonged dry period has wreaked havoc on dam levels and water tables.

But another chunk of the trouble can be traced to the door of China—with which it ironically has had a healthy decades-long dalliance that despite hiccups, has actually been quite popular with Zambians.

At its height, China gobbled up the raw materials like there was no tomorrow—one analysis shows the country used more cement in three years than the rival US did in one century. In the three decades to 2010, China’s economy grew at an average 10%. 

But there has in recent months been signs of a slowdown—whether structural or market enforced remains a debate. The net effect has been a tumbling of commodity prices over demand concerns, a mild panic that has spooked markets across the world.

Copper trouble

One of the hardest hit commodities has been copper, with its prices having fallen between 20-40%. 

For Zambia, the damage threatens to be deep, rivalling the economic shocks that followed the adoption of a socialist path in the late 1960s, and which conflated with the headwinds of a crash in copper prices and the oil shocks that followed. 

And with a general election on the horizon next year, the government in the continent’s second biggest producer of copper and which accounts for 70% of exports and 12% of GDP will understandably be nervous. 

On September 23, Swiss mining giant Glencore, hard hit by collapsing commodity prices, notified the Zambian government that its Mopani copper mine will lay off nearly 3,800 workers.

It is part of the fallout from its decision this month to stop production for at least 18 months to build new facilities that will be more efficient to run, as the realities of the global market hit home hard.

Mopani cited low copper prices and power shortages in the southern African country as the reason for the job losses. 

The Canada-headquartered Glencore has lost 57% of its market value this year, and its actions follow the path of other miners that have sent hundreds of mine workers on enforced leave. 

With mining firms all over the continent battling to navigate the slump in commodities demand it is an event that would not look too out of place, with Glencore also set to shed jobs in neighbouring DR Congo, and South Africa miners claiming unprofitability locked in battle with unions.

But Mopani is not just any other mine: it accounts for almost a third of the country’s copper production, and is the largest employer in the country’s mining sector with a workforce of 10,000. 

Lungu softens stance

When it first announced the job losses the government initially flat out rejected the plan. But following a meeting with the company president Edgar Lungu relented, urging a “a careful balance of keeping the workforce intact and also the need to keep the mines viable,” according to his spokesman, Amos Chanda.

Mining unions are now battling to save their members, with Glencore’s initial plan having been to lay off 4,300 workers. Firings will be “far lower” than that and some workers will be sent on leave to be called back later, Chanda told Bloomberg news agency on Tuesday.

“These mines only need the workers when everything is well with them but that should not be the case. They should be with the workers even in bad times,” Mine Workers’ Union of Zambia president Chishimba Nkole told news wire AFP.

But it is a tough situation: another significant copper player, the Canada-headquartered First Quantum Minerals could see Zambia production drop due to the crippling power shortages, putting the brakes on planned capital expenditures for which it recently tapped international debt markets to finance.

The markets have also recognised the risk to the country’s economy, marked by a yawning budget deficit. In July, the government raised $1.25 billion from the sale of its third Eurobond in as many years. The appetite for this one was markedly different—the hole was 9.38%, the highest ever for an African issuer, with orders totalling just $2.5 billion. 

Its first Eurobond sale in 2012 attracted nearly four percentage points less in yield meaning investors were happy about its ability to pay, and orders had reached an enthusiastic $12 billion. 

Since then the debt market has shifted rapidly in sentiment—in all fairness, though, most African countries are pulling back on borrowing due to prevailing volatility. 

The social effect of redundancies will be an acute concern for Zambian authorities, with the suddenly jobless miners unlikely to find another job quickly, and the resulting revenue dip hurting government operations and services.

Worst power shortages

But the job losses also have another direct cause: the worst power shortages on record. This week Mines, Energy and Water Development minister Christopher Yaluma told parliament that the country’s power deficit was expected to be 985 Megawatts in September, or half of its peak demand. Lungu, in a recent state of the nation address, described this a “national emergency”.

Talks were on with the already battered mining firms to ration power, Yaluma said, while the rest of the country has had to endure daily debilitating blackouts. Yaluma’s expansive ministry is one of those targeted for a split in an attempt to increase growth by in part reducing bureaucracy.

The country is now relying on imports and costly thermal generation, while Lungu has raised the price at which the government buys power in an attempt to attract much-needed foreign investment in energy as it explores solutions to tide it over. Two dams are expected to add at least 400 Mw by early next year, but it will still not be enough. 

Due to drought, water levels at the Kariba dam, the world’s biggest man-made reservoir, are down to about half, the lowest in nearly a generation.       

The capital is also battling a shortage of water, with demand in Lusaka, a city of over 2 million, twice as high as supplies with rain due in coming months expected to be lower than usual, and boreholes drying up.

A turbulent future

The turbulence could last for several months. Currently the jury is out over whether the low metal prices represent the bust of a super-cycle or just a “rest”, with a recovery in prices due in two years.

There is also the risk of further capital outflows from Zambia as the US Federal Reserve looks to raise interest rates—last week it stayed its hand citing global market concerns— giving policy makers on the continent some reprieve but analysts say it is only a matter of time before the freeze is lifted. 

But for Zambians who have seen their currency become the worst performing in Africa and recently were treated to the spectacle of local traders quoting prices in dollars, illegally so the government said, the problem is a very existential one and which sharply highlights the decades-long lack of economic diversification.

For the government, low on reserves, that dreaded acronym is being whispered: the IMF.

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