By Chamber of Mines
THE macro-economic picture The World Bank regards Zambia, along with five other countries, as being highly exposed to the trade (and therefore economic) impacts of COVID-19, due to its reliance on the export of commodities, and its connection with China.
Taking these effects into consideration, the IMF now predicts the real GDP growth in Zambia to be -5.1%5 in 2020, compared to the 3% target6 announced by the Minister of Finance in the 2020 Budget Speech.
Furthermore, the depreciation of the Kwacha against the US dollar, estimated at 30% for the period January to May 2020, is causing more wealth and more new jobs. If negative, the economy is shrinking.
And, two consecutive three-month periods of shrinking meets the most widely accepted definition of a recession.
Secondly, GDP is often used to illustrate the proportionate size of a country’s debt pile, compared to the nation’s annual earnings (i.e. XX% of GDP). Why is this an important measure? It is no different to evaluating a personal loan; lenders will be concerned about your ability.
What is GDP?
Gross Domestic Product an increase in the already unsustainable debt servicing costs, a large portion of which is denominated in dollars. As a result, the IMF predicts total debt in Zambia will swell to over 100% of GDP in 2020 (75% 2019), compared to a Sub-Saharan African country average of 56%.
A study by the World Bank7 found that countries whose debt-to-GDP ratio exceeds 77% for prolonged periods experience significant slowdowns in economic growth.
Pointedly: every percentage point of debt above this level costs countries 1.7% in economic growth. This phenomenon is even more pronounced in emerging markets, where each additional percentage point of debt over 64% annually slows growth by 2%.
Further signaling the concern of outside observers, in April 2020, the Fitch Ratings agency downgraded Zambia from its CCC rating to a CC rating. This downgrade was based on the view that the shock from the coronavirus pandemic has exacerbated Debt to GDP comparison Zambia’s already constrained external liquidity, now increasing the likelihood of a ‘default event’ (in other words, a failure to repay debts on time, and as agreed)8.