LUSAKA, June 7, 2024 ¡ª While Zambia experienced an economic boom in the 2000s, growth was unable to be sustained or inclusive enough to significantly reduce poverty and create enough good jobs. From 1996 to 2015, even as the economy grew, the number of poor increased by over 2.4 million people, with the majority residing in rural areas. By 2022, after the COVID-19 pandemic, the poverty rate reached 60%, affecting approximately 11.7 million Zambians.
In October 2023, the Government of the Republic of Zambia (GRZ) reached a debt restructuring agreement with the Official Creditor¡¯s Committee (OCC) under the G20 Common Framework. By late March 2024, an agreement in principle with bondholders was also achieved. The Zambian authorities are now in the final phase of negotiations with other private lenders. This marks a significant step in Zambia¡¯s ambitious reform program initiated in 2021, which has already seen the primary balance improve by 6.6 percentage points in 2022, achieving a surplus in 2023 and halving inflation.
However, structural challenges remain. The newly published sheds light on some existing constraints and opportunities to the country¡¯s economic growth and sustainable development.
The Underlying Challenges
Macroeconomic and Social Challenges
Zambia's major challenges result from a combination of unsustainable macroeconomic policies, external debt crises, and the impact of the COVID-19 pandemic. A decade of fiscal challenges and declining copper prices led to a significant increase in external debt, from 6.7% of GDP in 2011 to 66.4% in 2019. The pandemic worsened these vulnerabilities, causing a recession and leading to Zambia's external debt default in 2020. Even before the pandemic, and despite recent economic recovery efforts and reforms, the growth experienced during the last 20 years has not been inclusive, failing to alleviate poverty or generate sufficient quality employment. The number of people living in poverty has risen, particularly in rural areas, and the gap between the rich and the poor has widened. Most of the Zambian working population is engaged in subsistence agriculture or informal services, earning low wages. "The challenge of achieving sustained and inclusive growth remains one of Zambia¡¯s major tasks,¡± highlighted Albert Pijuan Sala, Senior Economist at the World Bank.
Agriculture productivity
Zambia's agricultural sector continues to face significant challenges, primarily due to policies that have historically emphasized maize production through the Farmer Input Subsidy Program (FISP) and the Food Reserve Agency (FRA). This approach has proven to be socially inefficient, as it fails to lift the average smallholder maize farmer above the poverty threshold of $2.15 per day, even with subsidy support. The sector's focus on maize limits diversification and adaptation to climate change, perpetuating poverty and restricting inclusive growth.
Climate change significantly threatens Zambia's agricultural productivity and environmental resources. The CEM recommendations emphasize the need to rapidly implement agronomic solutions such as crop diversification, improved soil fertility management, and agroforestry. It also highlights the importance of investing in resource-efficient irrigation and promoting water-conserving tillage practices to adapt to climate change and enhance the profitability of large commercial farms. ¡°Zambia has the natural capital for its agricultural sector to become an engine of economic growth and poverty alleviation,¡± remarked Vanina Forget, Senior Agricultural Economist at the World Bank.
Private sector-led job creation
The private sector is currently unable to create enough productive jobs for its rapidly growing working-age population to foster sustained and inclusive growth. ¡°The country needs to generate over 10 million new jobs by 2050 to prevent declines in labor force participation and employment rates,¡± emphasized Ryan Chia Kuo, Economist from the World Bank. Most formal firms are small, concentrated in Lusaka, and belong to the services sector, which limits the potential for broad-based economic growth. Low productivity is prevalent, restricting Zambia's ability to diversify its economy and create quality jobs. Equally, real wages in the formal sector have declined, reflecting the inability of productivity and pay to keep pace with inflation, which further complicates improving living standards among Zambians.
Recommendations from the CEM:
Zambia¡¯s expected debt resolution and the ambitious reforms underway are poised to ignite private sector investment and support macroeconomic stability. However, disappointing job creation trends and a limited poverty response to economic growth in the past question Zambia¡¯s prospects for achieving sustained and inclusive growth. Between 1996 and 2015, during most of the growth period, the number of poor increased by more than 2.5 million, with the rural population accounting for more than 95% of all new poor. ¡°Zambia must increase productivity and accelerate economic transformation to generate better jobs and deliver sustained and inclusive growth,¡± remarked Jorge Tudela Pye.
Recommendations include:
- Increasing productivity and expediting economic transformation, to create better jobs that lift citizens out of poverty and improve living standards.
- Comprehensively reforming FISP and the FRA, aiming to increase funds towards more productive investments. The report also highlights the need to remove trade barriers, enhance transport and storage infrastructure, and create a supportive business environment for the agricultural sector.
- Leveraging Zambia's private sector for better job creation to promote formal firms' growth and productivity. Strategies should include incentivizing the expansion of firms beyond the concentrated regions of Lusaka and Copperbelt provinces to stimulate economic activity nationwide. Support for scaling up micro and small firms is also necessary, as they are numerous but contribute less to employment and value-added compared to larger firms
