Zambia

Country Summary

Economic performance and outlook:  Zambia weathered two years of below-average rainfall in the agriculture seasons of 2015 and 2016. The two dry periods affected the regeneration of key hydropower reservoirs, which lost about 50% of their generation capacity, leading to significant load shedding of up to 12 hours. Combined with low copper prices, economic activity declined to its lowest in more than a decade, reaching 2.9% GDP growth in 2015; it rebounded to 3.4% in 2016. Good rains in 2017 increased agricultural production and ended load shedding. Growth is projected to exceed 4% in the medium term, aided by rising global demand for copper that boosted prices by more than 16% this year. 

Macroeconomic evolution: Indicators show improvement throughout 2016 and 2017, despite slow growth. Following a spike in inflation that reached 18.2% in 2016 and excessive exchange rate volatility in 2016, the Central Bank effectively controlled prices by tightening monetary policy. The monetary policy rate was raised to 15.5% and the statutory reserve ratio to 18%, reducing market liquidity. Following a return to single-digit inflation in November 2016 and stable exchange rates, the Central Bank gradually rolled back the policy rate to 11%. The government’s aggressive spending program increased public borrowing in 2014 and 2015 and widened the budget deficit. In 2016, the deficit reached 6%; it is expected to decline in the medium term as the government implements its Economic Stabilization and Growth Program. Accrued public debt reached 61% of GDP in 2016, up from 21% in 2011. Higher debt and depreciation of the Zambian kwacha increased debt servicing. Despite high debt levels, international investors are regaining confidence in the government’s ability to manage the economy. 

Tailwinds: Demand for copper in China is projected to continue to 2018; combined with the forecasted copper supply deficit, prices are expected to remain at their current levels or rise slightly into 2018. From 2016, the stability of the mining tax regime increased, which is expected to support copper investment and production in 2018. Ongoing energy reforms, driven by higher electricity tariffs, will continue into 2018; revisions to the Electricity Act and the Energy Regulation Act will increase guidance on grid access and encourage private sector involvement. Reduced subsidies to the electricity and oil subsectors will help offset some fiscal pressures caused by higher interest payments and continued infrastructure investment drive. In 2016, international portfolio investors returned to Zambian securities, maintaining international reserves at $2.3 billion and raising domestic borrowing to more than 4% of GDP in 2017. The high domestic borrowing is expected to dampen growth of credit to the private sector. 

Headwinds: Fiscal consolidation will be the key driving force for spending in 2018 as the government strives to meet its targets. The International Monetary Fund’s (IMF) October 2017 reclassification of the country as being at high risk of debt distress in October 2017 will pose challenges for the government in the coming years. The reclassification is expected to add upward pressure on lending rates, although the more positive growth outlook is likely to push interest rates downward. Agreeing to a fiscal stabilization program with the IMF in 2018 would help offset some of the effect. The government needs to prioritize lending in the coming years as it tries to regain market confidence, leading up to the rolling over of the 2022 Eurobond. Contractor-financed projects, with no clear tendering process, increased the cost of projects, leading Zambians to question whether their taxes are achieving value for money.

Source: African Economic Outlook 2018

Fixed Income

Summary

The government securities yield curve extended to 15 years with three benchmark points along the curve (3-5 and 10 years). 

The strategy is to issue securities for  domestic financing needs, to roll over debt and boost market development. 

Issuance strategy 

The national debt strategy aims to reach the following domestic debt structure: 40% for T-Bills and 60% for T-Bonds. 

Benchmark issues 

Up to 2014, benchmark bonds (of 3-5 and 10 years) were re-opened while the other bonds were new lines. The single-price auction method is used by Zambia. While constructing the yield curve is a consideration, it is yet seen as the utmost priority. The focus remains on meeting domestic financing needs and developing the market for issuance strategy, etc. The criteria used to choose the benchmark is to track the most popular and most liquid bonds. 

Yield curve 

Yield curve calculation models 

There is no benchmark yield curve in Zambia although the only yield curve is constructed from the primary market yields of government securities. 

Interpolation methods 

There is no secondary yield curve in Zambia, but the primary market yield curve is interpolated using the simple extrapolation method.

Yield curve managed by 

Although there is no formal yield curve in Zambia, the Bank of Zambia (Central Bank) is responsible for calculating the curve from the primary market.

Display platform 

There is no benchmark yields curve in Zambia but the Bank of Zambia website shows all the yields from the primary market. 

Challenges in building an efficient yield curve 

  • Lack of transparency: the challenge in building an efficient yield curve is that there is no institution that publishes secondary market prices/yields at which bonds are traded, hence the difficulty in constructing an efficient yield curve. 

Guide to Buying Bonds

Procedures for market participation

The primary market for Government securities is open to all financial institutions and to the non-bank entities. The minimum amount to invest in non-competitive bids is K1,000 and the minimum amount to invest in a competitive bid is K 30,000. Bidders are allowed to participate to a maximum of one bid per maturity bucket. The administrative steps for transaction settlement are provided on the document about the rules and practices on government securities. 

There are also tender sales to the non-bank entities through authorized dealers.

Taxation

Interest income on Treasury bonds is taxable at a rate of 15%.

There is no capital gains tax.

Settlement cycle

For Government bonds, settlement is done on Monday, with a settlement cycle of T+3. Similar to treasury bills, settlement of government bonds is through commercial banks’ accounts at the Central Bank. 

Market restrictions

Capital Controls

There are little to no capital controls in Zambia.

Restrictions on foreign exchange and profit repatriation

All foreign exchange controls in Zambia were removed. As a result, there is no exchange control on current or capital account transactions.  Investors are free to repatriate capital investments, interest, profit, dividends, management fees, technical fees, and royalties. However, the recent volatility of the Zambian Kwacha has seen the BoZ adopt a more restrictive foreign exchange stance. In 2012 and 2013, the government instituted two new regulations (Statutory Instruments 32 and 33) aimed at monitoring the flows of foreign currency in the country.

Credit rating

In May 2015, Moody's confirmed Zambia B1 rating but changed its outlook from table to negative; Fitch affirm B rating and S&P B+.

List of Primary Dealers

The list of dealers authorized by BoZ is as follows:

Documents & Resources

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