The Macro Poverty Outlook is jointly produced by the Poverty & Equity and Macroeconomics & Fiscal Management Global Practices of the World Bank. This semi-annual report, which analyses macro and poverty developments in developing countries, is released for the Spring and Annual Meetings of the World Bank and IMF.

Botswana

Improvement from the 2015 downturn in Botswana’s growth is expected over the medium term. Real GDP should advance by 4 percent by 2017, as commodity prices improve and fiscal buffers are used for counter-cyclical stimulus. Structural reforms remain critical to manage volatility and sustainability risks, including reforms in the water and energy sectors and addressing labor market distortions to spur private sector job creation. With recovery to low per capita growth, poverty-reduction gains can be expected to be only modest.

Recent developments

Weak global demand for rough diamonds and relatively low prices of metals caused real GDP to contract by 0.3 percent in 2015, down from a gain of 3.2 percent in 2014. Mining plummeted by 21 percent for the year. Continuing electricity and water supply disruptions have impacted manufacturing, whereas the regional drought adversely effected agriculture. In contrast, services and retail led the non-mining sectors to overall growth of above 3 percent. The first half of 2016 showed encouraging signs of improved economic conditions. Most importantly, rough diamond sales started recovering and helped deliver a welcome boost to exports and government revenues.

The fiscal position moved sharply into deficit in FY2015/16 after three years of consecutive surpluses. The fiscal balance swung from surplus of 3.7 percent of GDP in FY2014/15 (the fiscal year starts April 1) to an estimated deficit of 6.3 percent of GDP in FY2015/16, largely due to much lower than expected revenue. Government relies mainly on two volatile sources of revenue inflows, mineral revenues (which accounts for almost 40 percent of total revenue) and SACU customs revenues (over one-quarter of total revenue). Both have declined, the former due to weak global demand and the latter from decline in South Africa’s economic growth. Total revenues dropped by 7.8 percent of GDP in 2015, while expenditures increased by 2.2 percent of GDP due to counter-cyclical fiscal stimulus including the start of the Economic Stimulus Program.

The Government has substantial fiscal savings from diamond revenues (i.e., the Pula fund), and international reserves stand at about 12 months of imports, which provides Botswana ample space to gradually adjust expenditures to the SACU shock in the long run, and to provide counter-cyclical stimulus in the near term. Weaker performance across the mining sector will tend to narrow the current account surplus. In 2014, Botswana achieved a substantial surplus of 15.6 percent of GDP. But external factors noted above adversely affected exports in 2015, and the current account surplus narrowed to 7.2 percent of GDP.

Economic growth has been pro-poor, leading to significant and rapid poverty reduction. Between 2002/03 and 2009/10, the share of the population living on less than $1.90 a day at 2011 PPP exchange rate, declined steadily from 29.8 percent to 18.2 percent thanks to a combination of equitable growth, demographic changes (e.g. decreasing fertility rates and dependency ratios), increased credit, and expansion of social assistance schemes (especially direct transfers to rural households), and employment expansion (especially of agricultural employment in rural areas by 5.6 percent). Progress in rural poverty reduction has been especially rapid, as it was almost halved (from 45.2 percent in 2002/03 to 23.7 percent in 2009/10). However, inequality in Botswana remains high with a Gini coefficient of 60.5 in 2009/10, slightly down from 64.7 in 2002/03. Given the recent real GDP contraction, poverty is estimated to have remained stagnant between 2013 and 2015, at 13.2 percent and 13.4 percent of the population respectively.

Outlook

The economy is expected to rebound to real growth near 3 percent this year and 4 percent by 2017, driven mainly by improved diamond sector conditions and continued fiscal stimulus that will propel non-mining activity. Lower fuel and commodity prices, slower credit growth and weakening economic activity will keep CPI inflation at the lower end of the Central Bank’s band of 3-6 percent. The fall in mining revenue is expected to gradually recover as developed economies stabilize. However, SACU transfers are expected to remain soft mainly due to a weak nearterm economic outlook for South African growth. The combination of strong expenditure growth and lower revenue is expected to keep the fiscal balance in the red for the next few years. The current account surplus should continue to narrow in 2016 and 2017 on continued softness in the mining sector before gradual improvement.

The country is expected to make modest progress toward poverty reduction over the medium-term. Poverty is projected to decline from 13.2 percent in 2016 to 11.9 percent in 2018. Achieving further poverty reduction will be challenging with the pace of progress constrained by limited private sector job creation, particularly in urban areas, and reliance on low productivity agricultural jobs in rural areas, combined with reduced credit growth and high levels of household indebtedness.

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Lesotho

The easing of GDP growth since 2013 is expected to continue through 2016 due to persistent drought effects and weak regional conditions, leading to a decline in SACU revenues and associated fiscal pressures. The drought will likely translate into only a moderate decline of 1.36 percentage points in the poverty rate ($1.9 PPP a day) to 55.4 percent by 2018.

Recent developments

Following average growth of 4.7 percent in 2012 and 2013, the advance in real GDP softened to 3.6 percent in 2014 and slackened further to 1.7 percent in 2015. The main drivers of growth deceleration include shrinking agricultural production due to El-Nino, a slowdown in industrial output due to uncertainty of AGOA extension, and slippage in mining production.

Services remain a brighter spot, growing at 2.6 percent in 2015. Net exports declined due to supply reductions and weak demand from trade partners. Investment growth was modest due to the shortfall in the government’s capital budget, uncertainty over AGOA and the completion of the Metelong Dam. Although government consumption remained high as the wage bill increased to 21.8 percent of GDP, government investment was limited due to under-execution of the capital budget (65 percent).

Fiscal balances are likely to deteriorate over the next years due to lower SACU revenues-which amounted to 30 percent of GDP in 2014/15. The overall fiscal balance registered a modest surplus of 0.6 percent of GDP in 2015, while the non-SACU fiscal deficit is estimated to stand at 24 percent of GDP in 2015/16, improving from 28.6 in FY2014/15. The current account deficit widened to 9.4 percent of GDP; while Lesotho’s public debt increased to 59.5 percent of GDP in 2015 due to depreciation of the local currency.

Due to the severe drought, year-on-year inflation increased to 7.5 percent in June 2016, tied in large measure to increasing food prices. Food prices surged by 14 percent in June 2016 contrasted with levels for the same period a year earlier. CPI inflation registered 6 percent in 2015 and is likely to rise to 8.5 percent in 2016. International reserves were the equivalent of 6.1 months of imports in 2015, similar to year earlier ratios.

Between 2002 and 2010 Lesotho made little progress in reducing extreme poverty. The headcount poverty rate was 57.1 percent in 2010 (national poverty line), accompanied by high inequality, measured at 53.8 percent by the Gini coefficient – such inequality itself an obstacle to poverty reduction. Lesotho’s economic structure and poorly targeted social protection policies are at the heart of high and stagnant poverty and inequality. Low-productivity agriculture remains the main source of income for over 1 in 3 households. The benefits of a well-paid public sector mainly flow to the most affluent households. Most social protection transfers do not target the poor.

Outlook

Growth is expected to increase slightly to 2.4 percent in 2016 – a downward revision from the last forecast (2.6 percent). Weaker growth prospects in South Africa, and uncertainty due to the sustainability of the exchange rate peg are key factors in the markdown to growth. Over the medium term growth is expected to pick up gradually to 3.7 percent in 2017/18 driven by the commencement of operations at the Liqhobong mine in the 4th quarter of 2016, and accelerate further to 4 percent by 2018/19 supported by construction activity tied to the Second Phase of the Highlands Water project.

Fiscal balances will come under increasing pressure over the next years due to lower SACU revenues. Such revenues are projected to fall to 15.9 percent of GDP in FY2016/17 – almost halving from earlier levels – driven by a slowdown in the South African economy, and are expected to remain low into the medium term. Still, the fiscal shortfall is anticipated to ease from 9.4 percent of GDP in 2016 to 3.2 percent by 2018. Lesotho is expected to finance this deficit by drawing down reserves. Limited commercial bank interest in government bonds and potential additional spending needs arising from a mid-term budget review have the potential to exacerbate the fiscal stance. And significant deterioration in the current account deficit is expected (to 19 percent of GDP in 2016) due to the sharp falloff in SACU revenues.

Inflation is anticipated to bounce back to 6 percent over the medium term, while private consumption should advance only modestly in 2016 due to lower wage increases. Investment has dropped considerably following completion of the Metelong Dam and increased uncertainty regarding AGOA. Capital outlays should grow once more in 2016 due to commencement of mine operations, and remain strong in 2017 and 2018 due to the second phase of the Lesotho Highlands Water Project.

Tied to persistent effects of drought, the poverty rate ($1.9 PPP a day) is projected to fall only moderately by 1.36 percentage points from 56.7 to 55.4 percent between FY2016 and FY2018. This is attributable to the sectoral composition of growth. Adverse weather conditions led to lower agricultural production during FY 2015 with persisting effects through FY 2016. The decline in production and corresponding increases in food prices will carry a more negative impact among the poor, deriving most of their income from agriculture. Though mining will grow quickly, the sector will not generate many jobs due to its capital intensity.

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Namibia

As new mining investment winds down and production begins, Namibia’s current account deficit should narrow, while government works toward fiscal consolidation. GDP gains are expected to reach 5.5 percent by 2018, grounded in extractive industries. Strong growth and spending on social programs have contributed to impressive reductions in poverty. But further progress will require structural reforms to generate more jobs for the unskilled. Persistent drought poses food and water security risks; and as agriculture employs 70 percent of the population, poverty reduction will be pressured in coming years.

Recent developments

Growth of the Namibian economy moderated in 2015 to 4.5 percent from 6.4 percent in 2014. Growth was driven by ongoing massive extractive sector investments and continued government stimulus, offsetting in part the effects of lower commodity prices, slower private sector credit growth (9.5 percent in 2015, down from 16.5 percent in 2014) and weaker agricultural production and exports stemming from drought and foot and mouth disease.

Namibia has maintained an expansionary fiscal stance since 2011, with government pursuing a stimulus program to support job creation and poverty reduction. The overall deficit was 6.6 percent of GDP in 2015, higher than the budgeted deficit of 5.4 percent due to over-optimistic income tax revenue projections. The deficit was partially financed by a US$750 million Eurobond in 2015 (5.375 percent coupon with 10-year maturity), with proceeds bolstering reserves and financing investment projects. Total government debt now stands at around 36 percent of GDP up substantially from 12 percent in 2010.

Inflation remained low and stable during 2015, at 3.4 percent down from 5.3 percent in 2014, with easing energy prices partly offsetting the effects of depreciation and increased food prices arising from drought. Monetary policy has tightened, however, to maintain alignment with South African interest rates and avoid capital outflows, and in response to incipient inflationary pressures arising from depreciation, continued credit growth, and increasing food prices. The repo rate has been increased five times since June 2014, including a 25 bps increase to 6.75 percent in February 2016.

The current account deficit remains substantial, registering some 14.3 percent of GDP in 2015,reflecting low prices for mineral exports and elevated imports for both mining investment and consumer products – the latter driven by fiscal stimulus and credit growth. International reserves reached a low of just 1.5 months of import cover during 2015, but have since recovered to 3.5 months, primarily due to SACU receipts and currency depreciation.

Relatively strong economic growth has not been sufficient to deal with poverty, inequality, and unemployment. And this has recently been exacerbated by persistent and deepening drought, conditions that have hit agricultural production hard, as crops failed and livestock deaths surged. About 19.5 percent of the population lived on less than $1.9 a day in 2015 compared to 20.0 percent in 2014. 42.8 percent lived below the $3.1 per day international poverty line in 2015 compared to 43.2 percent in 2014. Namibia remains one of the most unequal countries in the world, with a consumption Gini coefficient of 0.597 in 2010.

High unemployment is of particular concern. The 2014 Labor Force Survey reports an unemployment rate of 28.1 percent in 2014, down slightly from 29.6 percent in 2013. At 39.2 percent, unemployment is highest among youth and is higher among women (31.7 percent) compared to men (24.3 percent). Most employment (31.4 percent) is in low productivity sectors, including agriculture, forestry and fishing. While a full 47.1 percent of employment is in the informal sector, contributing to income insecurity and vulnerability.

Outlook

The economy is expected to grow by 4.2 percent in 2016, with weak prices for mineral exports and continuing negative drought effects partially offset by increased exports from new extractive projects. Over the medium-term, growth is expected to reach 5.5 percent, with spillovers of declining investment and fiscal consolidation offset by recovery in extractive sector export prices and increasing volumes, as new projects reach capacity.

Responding to downward revision in revenue figures, the government expects expenditure cuts averaging 1.7 percent of GDP per year over 2016-2018, bringing the deficit down to around 3 percent of GDP by 2018. Fiscal consolidation is welcome but may prove difficult to implement, with a history of slippage against expenditure targets set under successive MTEFs.

Inflation is expected to remain moderate, at around 5 percent, as monetary measures constrain credit growth, fiscal consolidation restrains domestic consumption, and recovery of agricultural production helps to ease food prices. The current account is expected to deteriorate further in 2016, widening to 16.6 percent of GDP, as imports for investment projects gain momentum and mineral prices remain weak. Over the medium-term, however, the current account deficit is expected to narrow to around 9.3 percent of GDP as export prices strengthen and completion of extractive projects reduces imports and increases mineral production and exports.

Steady yet moderate progress in poverty reduction is expected due to both stronger GDP gains and public social sector outlays. 19.2 percent of the population will be living below the $1.90/day international extreme poverty line in 2016, 18.8 percent in 2017, and 18.3 percent by 2018. Using the $3.1/day poverty line, 42.5 percent of Namibians are expected to be poor in 2016, declining to 41.6 percent by 2018.

The on-going drought is expected to put a damper on poverty reduction. The 2014/15 and 2015/16 harvests were the worst in 80 years, prompting the President to declare in June 2016, the country to be in a state of emergency. Adverse effects are expected for the rural poor who rely on subsistence farming as well as the urban poor via upward pressure on food prices. Spending on transfers and grants will provide a degree of relief for the affected population.

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South Africa

For South Africa, 2016 may mark the trough of the business cycle, and a recovery from 2017 – although modest and fragile – is expected to improve the odds for reducing high levels of poverty, inequality, and unemployment. As fiscal space is exhausted, and with a possible bond-rating downgrade to ‘junk’ status looming, ambitious structural policies are vital to support the recovery. Policy uncertainty is arguably the biggest risk to turning the page on three years of falling per capita growth.

Recent developments

2016 may mark a turning point for South Africa’s slowing economy. Following a contraction in the first quarter (Q1), a strong rebound in manufacturing, and sustained performance in commerce and finance prevented a technical recession in Q2. The decline in agricultural output is easing, as 2015 El-Niño drought-related effects begin to dissipate. And though mining has been contracting, momentum has improved in Q2. On the demand side, recovery in industry and mining was reflected in rising exports of 1.9 percent y/y in Q2, while imports contracted by 2.6 percent. Yet in spite of green shoots in the economy, growth in the first six months of 2016 remained at 0.3 percent, which points to a third year of falling GDP per capita growth, estimated to raise poverty by 0.25 percentage points compared to 2015.

Investment is declining for a third quarter, as the end of the commodity boom – but also policy uncertainty surrounding extractives-related legislation – discourages mining investment. Policy uncertainty extends into other structurally important areas, including the introduction of a national minimum wage, the auctioning of band-width spectrum to roll out broadband communications, expropriation legislation, and concern regarding opaque reshuffles of the cabinet, which all contribute to keeping investor confidence low. Better news emerges from the energy sector, where load-shedding has not occurred in a year. It is also good news that the government has strengthened dialogue with the private sector and has been carefully managing labor relations.

South Africa’s foreign-currency denominated debt is rated one notch above ‘junk’ by S&P (with a negative outlook) as well as by Fitch. The 2016/17 budget introduced fiscal measures to stay the consolidation course. Slower upward revisions to tax brackets, an increased fuel levy, and higher tobacco and alcohol tax collections have supported revenues this fiscal year, while a new sugar ‘sin tax’ – currently hotly debated – is to be introduced in April 2017. In an environment of weak economic growth, demands to loosen fiscal policy are strong but the government’s commitment to fiscal consolidation is credible. While some future revenue measures are yet to be identified, the budget deficit is expected to ease to 2.4 percent of GDP in FY2018/19 from 3.9 percent in FY2015/16, whereas the government expects net public debt to stabilize at 46.2 percent of GDP in 2017/18, two years earlier than previously anticipated.

The rand has been depreciating, by a substantial 35 percent between December 2010 and January 2016. In spite of relatively rigid factor and product markets, this has resulted in some economic restructuring with exports, from vehicles to tourism, countering some of the weakening of domestic demand. Yet the rand strengthened once more over 2016, partly supported by a cumulative 75 basis-point rate increase by the South African Reserve Bank to limit exchange rate pass-through on prices, while aiming to bring inflation back below the 6 percent upper target.

As exports outgrew imports, the trade deficit narrowed and swung into balance in the middle of the year. Yet other outflows through the current account, including FDI-related dividend payments, and weaker factor income from operations of South African companies continued to keep the current account deficit at 4.2 percent of GDP during the first half of 2016. The shortfall continues to be financed by volatile and unreliable capital flows.

While South Africa made progress in reducing poverty in the past decade, close to 36.9 percent of the population lived below the lower bound national poverty line of R501 per month in 2011. Extreme poverty, based on the international poverty line of $1.9 per day (PPP, 2011), was 16 percent in 2011. Given low economic growth, estimated progress in poverty reduction since 2011 is limited. South Africa’s Gini coefficient of 0.634 is one the highest globally.

South Africa’s high and rising unemployment remains the key challenge for poverty reduction, averaging 25.3 percent from 2000 to 2016. The unemployment rate remained near 25 percent in 2015, and increased to 26.6 percent in Q2-2016. Construction and manufacturing, both labor intensive, were hit by sluggish growth, with quarterly employment declines of 88,000 and 80,000, respectively. And the “wide” unemployment rate, which includes discouraged workers, increased to 36.3 percent, above the previous quarter’s 33.8 percent.

Outlook

The recovery is expected to be slow. 2016 growth has been revised down to 0.4 percent (from 0.8 percent in the last MPO). This is consistent with heightened policy uncertainty dampening investor sentiment. Private consumption remains constrained by unemployment, high household indebtedness, and inflation. And belt-tightening by the government will provide little impetus to growth. Though the recent strengthening of the rand provides less of an impetus for exports, the significant depreciation compared to 2011 may continue to foster a restructuring of the economy. In addition, the recent stabilization of the rand has reduced imported inflationary pressures, which may serve to reduce the central bank’s bias toward further tightening. This paves the way for a cautious economic rebound, to 1.1 percent in 2017 and 1.8 percent in 2018, as the economy restructures, commodity prices rise, and electricity capacity improves. Yet this will be insufficient to make a major dent in poverty and inequality: growth in consumption of the poorest 40 percent of South Africans is projected to be essentially flat, while there is some increase at the top of the income distribution.

Risks and challenges

Policy uncertainty is one of the greatest challenges for South Africa, as investment is urgently required to support the restructuring of the economy against a weaker rand, and to raise potential output growth. Municipal elections in which opposition parties captured major South African cities are seen as a testament to South Africa’s strong institutions. Continued demonstration of their integrity will be crucial to bring investment. Given a tight fiscal position, structural reforms, hinging on political will, can be good value for money and should focus on the rollout of broad-band networks, improvements to the education system, strengthening the governance of State-Owned Enterprises and continued efforts to build bridges with organized labor. While the FY2016/17 budget kept fiscal consolidation on track, structural policies to foster growth are what will be needed to avert downgrade of South Africa’s credit rating to sub-investment grade in the near term.

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Swaziland

GDP is expected to contract by some 0.9 percent in 2016, the weakest performance in 34 years, and a falloff from 1.7 percentage growth in 2015. The decline in output during the year is tied to persistent drought, currency depreciation, and weak regional economic conditions. 2016 wage increases in the context of declining revenues threaten fiscal sustainability. And the persistence of drought poses further significant food and water security risks, and is expected to increase poverty given that the majority of the population depend on agriculture for their livelihood.

Recent developments

Swaziland’s economic growth declined to 1.7 percent in 2015 from 2.7 percent in 2014. This was driven by declining SACU revenues, adverse weather conditions caused by the El Nino phenomenon, and poor regional economic performance, especially in South Africa. The 2015 economic decline in South Africa, the major export destination for Swaziland, weighed negatively on textile exports.

The weak economic environment, together with persistent drought conditions slowed poverty reduction in the country. Three in four Swazis live in rural areas making agriculture their main source of livelihood. As a result, the adverse weather conditions have limited poverty reduction, with the poverty rate at the international extreme poverty line of $1.9 per day in 2015 stagnating at 39.4 percent, compared to 39.5 percent in 2014. Further, with a Gini coefficient of 49.5, inequality is high and indeed rising in rural areas. The labor force participation rate is lower among women (46 percent) compared to men (55.3 percent). And at 28.1 percent, the unemployment rate is high, exacerbated by skills mismatch and a high HIV/AIDS prevalence rate of 27.7 percent among adults. The bulk of employment is in low value added activities, particularly in subsistence agriculture, contributing to relatively high poverty rates.

The fiscal deficit has been on an upward trend, from 1.4 percent of GDP in FY2014/15 to 6.8 percent in FY2015/16, amid falling Southern African Customs Union (SACU) revenues. The July 2016 salary review resulted in a minimum 17 percent salary increase for civil servants and 32 percent for politicians; an additional E850 million to government expenditure in 2016. Total public debt stood at 16 percent of GDP for the second quarter of 2016- up from 14 percent in the first quarter of the year.

The current account surplus narrowed by 1.4 percent of GDP in the first quarter of 2016, from 4.2 percent in the third quarter of 2015. This development is driven mainly by a decline in exports (falling 15.3 percent in the first quarter), linked to a drop in soft drink concentrates and textiles. Overall, the BOP registered surplus during the first quarter of 2016, at about 0.5 percent of GDP. International reserves averaged 4.1 months of import cover from January to July 2016, slightly above 3.6 months estimated for the whole of 2015. However, current international reserves are lower than the regional target of six months.

Swaziland’s monetary policy is closely interlinked with that of South Africa. The lilangeni is pegged at par to the South African rand, which is also legal tender in the country. The scope to use monetary and exchange rate policy is therefore limited by its membership in the Common Monetary Area. In May 2016, the Central Bank increased the bank rate from 6.5 percent to 7 percent, matching the repo rate of South Africa, and helping to mitigate capital outflows to South Africa. However, the increase further pushed the prime lending rate to 10.5 percent in the second quarter from 10 percent in the first quarter of 2016. Private sector credit growth at the end of 2015 was -0.2 percent and averaged 0.7 percent in the first six months of 2016. Swaziland’s inflation rate remained the highest among the Common Monetary Area members at 7.5 percent on average. Inflation pressures are driven by rising food prices as a result of the prevailing drought and depreciating exchange rate.

Outlook

Swaziland’s economic outlook is weak, as drought and depressed regional prospects continue to weigh on growth. GDP is expected to decline by 0.9 percent in 2016, as sugar production, one of the major export earners, is viewed to drop by 25 percent; maize by 64 percent, and electricity generation by 23 percent. Swaziland’s main trading partner, South Africa, is projected to grow by only 0.4 percent in 2016, a rate that presents risks to already declining SACU revenues and Swaziland’s textile exports. The fiscal situation is expected to deteriorate further, as the impact of the 2016 salary review and falling SACU revenues take stronger effect, with the budget deficit widening to 15.3 percent of GDP in 2016. SACU revenues are projected to decrease to E5.3 billion, representing a significant 25 percent decline between FY2015/16 and FY2016/17.

The current account surplus should continue to compress during the remainder of 2016, amid an increase in grain imports, and a decline in exports-especially of textiles. The falloff in exports is expected to be cushioned by the depreciating exchange rate. Further, the manufacturing sector continues to suffer from the loss of the country’s African Growth and Opportunity Act (AGOA) trade benefits since January 2015.

As a result of these weak economic prospects, poverty and inequality are expected to remain critical challenges as growth of disposable income and job creation slows. The international extreme poverty ($1.9 per day) rate is projected to remain near 39 percent through to 2018. The 2016 Swaziland Drought Assessment Report concluded that water sources declined by 50 percent which resulted in a reduction of 64 percent in crop production in the FY2015/16 season and an increase in the number of vulnerable people by 68 percent in 2016. Further, the drought is expected to exert more inflationary pressure on food prices: the inflation outlook is expected to continue at an elevated level, averaging 8 percent in 2016, and easing to below 6 percent only by 2018. This will affect the poor who spend a very high share of their total expenditures on food.

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Zambia

The economy has come under recent strain as external headwinds and domestic pressures have intensified. GDP growth slowed to 2.8 percent in 2015 from 5.0 percent in 2014. External headwinds have included slower regional and global growth, lower copper prices and the strengthening of the U.S. dollar against the kwacha. Domestic pressures include a power crisis affecting all sectors of the economy and repeat fiscal deficits that have weighed on investor confidence. Growth in 2016 is expected to remain sluggish at 2.9 percent, leading to only a marginal decline in poverty.

Recent developments

The Zambian economy has come under strain since mid-2015. Real GDP growth slowed to 2.8 percent in 2015, well below its historical average. Weaker growth has been tied to both global headwinds and domestic pressures which have intensified. Zambia is sensitive to slower regional and global growth and a sharp fall in the price of copper, given that copper typically contributes about 75 percent to exports. Domestically, a power crisis has affected all sectors of the economy as well as low and poorly-timed rains that dented the agricultural incomes of 61.3 percent of the population living in poverty. Accordingly, poverty rates in rural areas likely went up in 2015 relative to past years.

Lower, El Nino-influenced rainfall led to 2015 agriculture output falling, while lower copper prices suppressed the mining and quarrying sector, which grew by only 0.3 percent. Over the course of 2015 copper exports fell, leading to a current account deficit of 3.4 percent in 2015. The industrial sector (which includes mining) was supported by strong growth in construction (18.9 percent), driven by public infrastructure investment. Services gained at a slower 2.3 percent pace in 2015.

Lower copper prices are typically followed by a depreciation of the Kwacha. This pressure on the currency was worsened by ebbing investor confidence related to the power crisis, repeat fiscal deficits, a widening trade deficit and large external borrowing. The Kwacha lost 41 percent of its value against the US$ in 2015. Weakness and volatility in the Kwacha was more severe compared to other emerging market currencies.

The depreciation, together with an increase in food prices and a loose fiscal position lifted annual inflation to a peak of 22.9 percent in February 2016. To mitigate this, the Bank of Zambia reduced liquidity severely through a variety of measures. The central bank also intervened in the foreign exchange market, impacting the level of reserves. These interventions helped to tame annual inflation to 19.6 percent by August 2016 and to bring stability to the Kwacha-US$ exchange rate. However, this achievement has not been without cost and has led to a reduction in private sector investment and growth.

Recent fiscal expansion has been financed by external borrowing, including large Eurobond issues beginning in 2012 which nearly tripled the size of external debt relative to GDP. Both domestic and external financing has been more challenging to source during 2016, and revenue has fallen short of budget projections for the first half of the year. At the same time expenditure has not been curtailed, leading to a build-up in arrears, and forcing the Government to borrow from the Central Bank. Current pressures on expenditure include the import of emergency power, a fuel subsidy, debt service costs and spending in the build-up to the August 2016 elections. The 2016 fiscal deficit (cash basis) is likely to register almost twice its target of 3.6 percent of GDP.

The benefits of GDP growth have accrued mainly to the richer segments of the population in urban areas. Despite gradual poverty reduction over the past decade, poverty in Zambia remains high with 54.4 percent of households at incomes below the national poverty line in 2015. Poverty is estimated at 57.5 percent in 2015 when measured by a $1.90/day (2011 PPP).

Overall, the level of inequality is also very high in Zambia. In 2015, the Gini coefficient was 0.559, an indication that expenditure has continued to be unevenly distributed among the population. Many of the gainful economic activities in the country are concentrated along the economic corridor that runs from the highly urbanized Copperbelt region to Lusaka.

Outlook

The medium-term outlook has been revised downward from the previous MPO, mainly following slower regional and global growth and lower copper prices. On the upside however, is the likely realization of stronger agricultural sector growth following late but not reduced rains as earlier feared in the second of the El Nino influenced agricultural seasons.

GDP growth for 2016 is projected at 2.9 percent, before improving in 2017 (4.0 percent) and 2018 (4.2 percent), assuming that copper prices stabilize and domestic pressures ease. Per capita GDP growth of 0.5 percent in the current year is expected to keep the proportion of people living under the $1.90/day poverty line in 2016 at 57.5 percent, which is the same as in 2015. However, at the existing population growth rates the actual number of poor is expected to increase from 9.32 million people in 2015 to 9.61 million in 2016.

Tough action is required in the second half of 2016 and 2017 to curb runaway fiscal expenditures, with inflation close to 20 percent and persisting twin deficits. The outlook is also subject to down-side risks, both domestic and external. A further slowing in China’s economy could weigh on demand for Zambia’s exports by further reducing copper prices. While main domestic risks are two-fold: first that the power crisis will continue to worsen (this could occur via continued reduced capacity at the main hydropower plants); and second, that a falloff in confidence in the economy re-occurs, following recent improvement tied to expectations that there will be a post-election IMF program and World Bank support.

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Zimbabwe

Zimbabwe has been severely affected by a financial crisis and drought; the economy is projected to grow by only 0.4 percent this year. An expansionary fiscal policy has cushioned the slowdown so far. Going forward, external payment arrears may lead to a further contraction in imports and a decline in GDP. The financial crisis continues to have a significant impact on incomes, while the drought has disproportionately affected the rural poor.

Recent developments

The first half of 2016 indicates weakening economic activity compounded by a liquidity crisis that has intensified since May 2016. The El Niño induced drought coupled with a decline in agricultural productivity, adversely affected the agricultural sector leading to growth of 1.1 percent in 2015, down from 3.8 percent in 2014. While declining agricultural growth was more than offset by continued growth in services (at over 3 percent per year on average), poverty increased. This was particularly pronounced in rural arears. The number of extremely poor people are estimated to have increased by 100,000 during 2015 to 3.2 million.

During 2015-16, aggregate demand was supported by an expansionary fiscal policy. From March 2015 to June 2016, government borrowing from the banking sector increased by US$1.4 billion or about 10 percent of GDP. Most of the increase in public borrowing was to pay Reserve Bank of Zimbabwe (RBZ)-and selected State-Owned Enterprises arrears. In turn, this was financed primarily by Treasury Bills (T-Bills), which were purchased by the commercial banks at a discount.

Bank’s purchases of T-Bills and other public sector borrowing may have contributed to liquidity shortages and crowded out bank lending to the private sector. Faced with cash shortages, banks were unable to honor demand deposits. Quantitative limits on cash withdrawals (supported by the RBZ) were imposed. To address liquidity shortages, the RBZ announced on May 4, 2016 that it would issue “bond notes”, triggering increased demand for US dollars. At present, demand for imports is constrained by liquidity shortages as well as restrictions introduced to protect domestic producers.

The domestic-interbank payment system continues to function, but cash payments command a premium, complicating the measurement of inflation. Officially, inflation at end July 2016 year-on-year was reported to be -1.6 percent. However, discounts for US dollar cash payments exist and complicate the effective monitoring of price developments.

The external position remains difficult. The current account deficit narrowed by 4½ percentage points of GDP in 2015, due to the rising cost of financing options. In June 2016, the government imposed temporary restrictions on imports of basic goods that compete with local production, contributing to a further narrowing of the current account deficit. During January – July 2016 imports declined by US$568 million (16 percent) compared to the same period in 2015. And despite a fall in exports (a decrease of 10 percent) the current account narrowed by US$420 million, 3 percentage points of annual GDP.

The Central Government deficit widened for the first six months of 2016 as revenues contracted and expenditures increased. Revenues from January to June 2016 fell by 3.6 percent year-on-year, while total expenditure increased by 21 percent. As a result, the deficit increased to US$623 million, up from US$57 million during the same period last year. Expenditures are dominated by the wage bill which accounted for over 97 percent of revenues and 70 percent of total expenditures during January to June 2016. This wage bill leaves little for non-wage expenditures, which have become increasingly financed by user fees and extra-budgetary funds.

Outlook

The economic outlook remains challenging. Agriculture is projected to shrink by 4.2 percent in 2016 due to the drought, while growth in services is expected to slow in the wake of the financial crisis. Industry continues to expand thanks to a recovery in gold and platinum production. While imports and exports are viewed to contract by 18 percent and 9 percent, respectively. As supply compresses, investment is projected to fall by two-thirds and private consumption by 0.3 percent. Fiscal revenues are seen to fall by 4 percent, driven mainly by a fall in import-based fiscal revenues, such as customs duties and value added tax. Government borrowing from the banks and non-bank financial institutions has reached its limit, and hence the fiscal deficit is projected at 4.2 percent of GDP, implying dramatic narrowing of the deficit during the remainder of the year.

The fall in agricultural output will increase poverty. The number of extremely poor people is expected to increase to 3.28 million in 2016 up from 3.16 million in 2015. Moreover, the number of food insecure people will increase to over 4.4 million people by end 2016 and early 2017.

In response to the crisis, the Government announced a fiscal adjustment program in the Mid-Year Fiscal Statement presented on September 8, 2016. The program involved measures to limit the wage bill. However some of these were subsequently reversed. The Mid-Term Monetary Policy Statement published on September 16, reiterated the authorities’ commitment to issuing “bond notes” later this year.