Zambia’s Manufacturing Pulse Could Be in the Doldrums for Longer in 2024
Africa’s top copper producer, Zambia, may experience a prolonged contraction in its manufacturing sector this year as input inflation continues to rise. As indicated by the Purchasing Managers’ Index (PMI), manufacturing activity is heavily influenced by input prices, which are determined by currency and energy prices, liquidity, employment, and business confidence measures. Zambia has been burdened for an extended period by a lack of liquidity, currency depreciation, and increasing petroleum prices, which have kept its PMI below 50. (Readings below 50 signal contraction, while those above 50 indicate expansion).
The latest headline reading in May was 47.7, down from 48.8 the previous month, marking five consecutive months of contraction as cost-of-living pressures and limited money circulation took their toll. These conditions have not improved, and as such, the forecast remains bleak.
On the cusp of alleviating an enormous debt burden after securing 90% approval from Eurobond holders, the Southern African nation is on track to reorganize its external obligations. This restructuring aims to realign its fiscal posture with increased chances of enhancing economic output. Zambia was the first African country to default on its dollar bond obligations during the COVID-19 pandemic, yet it is also the first to reverse that negative status after successful efforts to restructure under the G20 common framework.
Headwinds have continued to batter the red metal producer, including climate change effects that have disrupted normal precipitation patterns, leading to electricity generation constraints. As a result, the Kariba Dam, the largest man-made lake, remains alarmingly low. Zambia currently faces a 750MW power deficit, triggering rationing of 8-12 hours daily, affecting not only retail consumers but also manufacturers at all levels. Additionally, energy tariffs are under review, with a proposed hike until 2027 to address the financial challenges of the national power utility. These factors are likely to increase overhead costs for businesses, keeping the manufacturing pulse in the doldrums.
Liquidity, both in local and foreign currency, remains a significant challenge for the markets, following tightened monetary policy as the central bank attempts to stabilize the depreciating Kwacha. The Bank of Zambia has raised its benchmark interest rate twice, by a total of 200 basis points to 13.5%, while the cash reserve ratio rose by 9% to 26%, the second highest in history. These measures have kept the cost of funds elevated.
Zambia’s growth estimate for 2024 was recently downgraded to 2.3% by the International Monetary Fund due to drought effects.
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