2015 Economic Forecast: Cloudy, with a chance of lower fuel prices later

It is no easy feat to forecast what is going to happen during this year, until the 'clouds of elections' clears up. The able Government economists use models and industry knowledge to make forecasts. We know that models are not precise. Those who have studied forecasting in any detail know that a forecast is composed of a point estimate (a value at a certain point in time) and a level of uncertainty around that estimate. That uncertainty is usually very large, making the point estimate seem almost meaningless.

Models aside, the one thing that is on most people's minds is how the year will unravel after the January 20th presidential by-election. We asked Robert Liebenthal, the Vice President of the Economic Association of Zambia, about his views on how the economy will perform in 2015. He also had the elections on his mind. He said “Much depends on post-election policies, which are hard to foresee at this point”.

Beyond the election cloud, Mr. Liebenthal is of the view that the economy will be in the 5-6 percent range, which is lower than the 6 percent 2014 growth and also lower than the projected 7 percent for 2015. “Lower copper prices and tax issues will constrain mining output, which might be lower than 2014”, he said.

The mining sector was the weakest link in the 2014 GDP estimates. The introduction of a new mining tax regime did not go down well with the mining companies who reckoned it would hurt their investments and Lumwana announced it would suspend its operations. Government wants to maximise on the revenues that the country has been getting from the mines and, without any hard data, it is not convinced that the mines will be adversely affected. The price of copper, which started 2014 at around US$7,400 per tonne, declined by about 14 percent to end the year at around US$6,350. Going forward, the news out of China, which gobbles about 40 percent of the global copper production, is that of weak demand due to a slowdown in manufacturing. That cannot be good news for us. We are therefore likely to see further declines in the price of our largest export.

At the time of the 2015 Budget Speech on October 10, 2014, the price of copper was about US$6, 700. No one anticipated a 5 percent decline in the red metal three months after the Budget Speech. As the controversial mining tax regime is now in operation, it is time to rework the numbers, as the anticipated revenues are definitely going to be lower since the mineral royalty tax regime is directly linked to the prevailing price of copper.

Daily Copper Prices 2012-2014

Another issue of concern is the fiscal deficit, which Government plans to bring down to 4.6 percent in 2015 from 5.5 percent last year. Government's objective is to reduce the overall fiscal deficit in the medium term to 3.2 percent of GDP by 2017. Mr. Liebenthal is of the view that controlling the fiscal deficit will be a significant challenge in the wake of the upcoming elections. So inflation, which ended 2014 at 7.9 percent and lending rates which ended at about 20 percent, are likely to remain high. Over the medium term, 2015 - 2017, Government anticipates that the real GDP growth is expected to escalate to an average of 7 percent principally as a result of increased agriculture production, electricity generation, construction and growth in transport and communication. For 2015, Mr. Liebenthal contends that the fast-growing sectors (particularly construction and communications) may be quite sensitive to mining sector prospects and public spending, both of which may be constrained. Mr. Liebenthal is however optimistic that if the lower international prices are passed onto the domestic consumers, it will have a positive effect on the economy. He said “Lower oil prices may work in the opposite direction, but we have yet to see whether a mechanism will be found to pass lower world prices through to the domestic consumer.”

Last week, Acting President Dr. Guy Scott announced, during a tour of fuel storage depots, that the Energy Regulation Board will soon consider the revision of the domestic fuel prices in line with the international prices. As a net importer of oil, Zambia will definitely benefit from lower fuel prices which may in turn boost economic growth.