VZCZCXRO2730
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0571/01 2261358
ZNR UUUUU ZZH
R 141358Z AUG 09
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 7216
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 02 LUSAKA 000571 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ZA
SUBJECT: HIGHER COPPER PRICES, BUMPER MAIZE CROP LIFT 
ZAMBIA'S ECONOMIC PROSPECTS 
 
REF: LUSAKA 339 
 
SUMMARY 
-------- 
 
¶1. (SBU) Amid signs of economic recovery, Embassy contacts 
expressed cautious optimism that Zambia may have turned from 
crisis to stability and growth.  Copper prices have risen 
over 100 percent from their lows in early 2009, reviving the 
moribund sector and spurring export growth.  Zambia recorded 
a bumper maize harvest, with a projected 600,000 ton surplus 
of its staple crop.  The Kwacha has stabilized and 
strengthened 12.5 percent from its 2009 low to under 4,900 
Kwacha per dollar.  Food surpluses and a strengthened Kwacha 
could ease inflationary pressure through the end of the year. 
 The Zambian Government (GRZ) revised its GDP growth forecast 
to 4.5 percent, although other observers expect growth to be 
somewhat lower.    Government revenues were down almost 25 
percent in the first half of 2009, mainly due to lower 
revenue from trade and a delay in budget support from donors. 
 The GRZ drew on an IMF facility to make up some of the 
difference to maintain expenditures, and Ministry of Finance 
and National Development (MFND) contacts told us that a 
pickup in economic activity in the second half of the year 
should make up revenue shortfalls.  End Summary. 
 
GRZ Expects 4.5 percent GDP Growth 
---------------------------------- 
 
¶2. (SBU) The Minister of Finance and National Development 
reported to Parliament at the end of July that the GRZ 
projected 4.5 percent GDP growth in 2009, an improvement over 
the June projection of 4 percent growth, but lower than the 5 
percent growth projected at the beginning of the year.  The 
Minister reported that government revenue was down by almost 
25 percent through June, mainly due to lower trade and delays 
in disbursement of donor budget support funding.  Lower 
revenues put pressure on government spending, especially the 
GRZ's capital expenditure program. 
 
¶3. (SBU) IMF ResRep Birgir Arnson told econoff that the GRZ 
had drawn on its IMF reserve facility and pledged the drawn 
amount to a loan from the Bank of Zambia (BoZ) to cover about 
33 percent of the revenue shortfall and maintain its spending 
program.  Arnson estimated that the 2009 budget deficit would 
increase to 3.2 percent from 2.6 percent of GDP, with a 
commensurate increase in domestic financing.  Arnson said 
that the GRZ's public debt was well-contained at less than 25 
percent of GDP and that there was little risk of debt 
distress. 
 
¶4. (SBU) Arnson suggested that the GRZ was being a bit 
optimistic in its 4.5 percent GDP growth projection, saying 
that the IMF projected about 4 percent growth.  The Economist 
Intelligence Unit (EIU) also revised its growth projection 
for Zambia to 2.6 percent GDP growth in 2009 from the 
previously projected 0.8 percent contraction. 
 
A Rising Copper Price Lifts All Boats 
------------------------------------- 
 
¶5. (SBU) World copper prices have rebounded from a low of 
about USD 1.20/lb to over USD 3.00/lb in August, spurring 
production and export growth in the sector and leading to a 
USD 71 million trade surplus in July.  Nathan Chishimba, the 
Chairman of the Chamber of Mines, told emboff that a soft 
recovery in global demand and production issues in Chile and 
Mexico was driving price recovery.  He expected prices to 
soften to about USD 2.5/lb by the end of the year but said 
that, at that price, even Zambia's most inefficient mines, 
which have a production cost of around USD 2.0/lb, could 
remain productive and profitable. 
 
¶6. (SBU) Hanson Sindowe, Chairman of Copperbelt Energy 
Corporation (CEC), which supplies electricity to the 
Copperbelt told econoff that many of Zambia's mines 
overreacted to the drop in prices, and were now scrambling to 
come back online.  CEC lost about 25 percent of its load in 
early 2009, but Sindowe predicted that CEC's load would 
return to its pre-crisis levels by the end of the year as 
mines increase production and the Luanshya mine emerges from 
"care and maintenance." 
 
¶7. (SBU) While the mining sector represents about 8 to 10 
percent of the GDP, Savior Chibiye, Managing Director of 
Citibank in Zambia, said that the ancillary benefits to the 
economy, in services, equipment, transport, energy and labor, 
could not be overstated.  Chishimba agreed, describing what 
he called the "Plane and Hotel Index."  Chishimba knows that 
things are going well when he has difficulty booking flights 
to and hotels in Ndola.  After nearly empty flights and 
hotels in early 2009, he said, booking has once again become 
 
LUSAKA 00000571  002 OF 002 
 
 
a problem because "everything is sold out." 
 
Kwacha Stabilizes -- Could Further Strengthen in Short Term 
--------------------------------------------- -------- 
 
¶8. (SBU)  After falling to over 5,600 per dollar in early 
2009 due to low copper prices, capital flight and delays in 
donor funding, the Kwacha stabilized and has strengthened to 
under 4,900 Kwacha per dollar.   Increased copper exports 
combined with lower consumption (thus lower imports) eased 
pressure on the Kwacha.  Citibank's Chibiye said that the 
financial sector has also seen the return of some foreign 
portfolio investment after foreign investors withdrew almost 
half of their estimated USD 200 million in late 2008 and 
early 2009.  He speculated that the Kwacha could further 
strengthen to about 4,600 per dollar but said that he 
expected the longer-term rate to fall somewhere between 5,000 
and 5,500 Kwacha per dollar. 
 
¶9. (SBU) After depleting its reserves to smooth exchange rate 
volatility, the Bank of Zambia (BoZ) utilized a portion of a 
USD 280 million IMF reserve support facility to increase its 
reserves to over USD one billion.  ResRep Arnson expected 
that Zambia's USD 600 million Special Drawing Rights (SDR) 
facility could be in place by the end of September resulting 
in five months import coverage, which he said should allow 
the BoZ to better manage exchange rate volatility. 
 
Bumper Maize Crop Could Boost Exports, Ease Inflation Pressure 
-------------------------------------- 
 
¶10. (SBU) Zambia recorded an estimated 1.88 million ton maize 
crop in 2009.  With domestic consumption at about 1.3 million 
tons, the country should have a surplus of almost 600,000 
tons.  Market observers expect the surplus to ease corn meal 
prices and allow for significant maize exports.  The GRZ 
announced that it will lift the maize export ban for an 
initial 100,000 tons of exports, but the GRZ is expected to 
allow further exports, as the domestic market cannot absorb a 
500,000 ton surplus. 
 
¶11. (SBU) ResRep Arnson expects inflation to ease somewhat, 
due to lower maize prices and a strengthened and stable 
Kwacha.  Inflation has already dropped to 14 percent from 
14.7 percent in May.  He said that if conditions continue, 
the GRZ could get close to its 2009 target of 10 percent 
inflation.  Separately, an MFND official told us that the 
revised 4.5 percent GDP growth projection was based on 13.8 
percent inflation. 
 
COMMENT 
------- 
 
¶12. (SBU)  The doom and gloom economic scenarios of just a 
few months ago have been replaced with cautious optimism. 
While the Zambian economy remains vulnerable to world copper 
price volatility and structural weaknesses, we expect that 
improved copper prices, coupled with a strong maize harvest, 
mean Zambia is on a fairly rapid economic rebound. 
BOOTH