Zambia: A Year to the Polls – Navigating Key Risks
As Zambia nears its 2026 polls, it could be facing mounting economic and political pressures. Like many African sovereigns, pre-election cycles drive policy shifts, often aimed at fulfilling electoral commitments. These developments also shape country and sovereign risk, influencing investor sentiment.
1. Power Deficit:- Energy security remains a concern. Despite improved rainfall, dam levels are unlikely to exceed 50%, limiting hydro power generation. While authorities have committed to providing residential areas with 7hrs of stable power daily, cost-reflective tariffs remain a hurdle. Emergency tariffs have been extended for 3months, but delays in adjustments could undermine needed sector reforms. Stable power supply is essential for Zambia’s projected 2025 growth, as mining recovers. ZESCO’s solar projects may provide partial relief, but an unstable grid will likely fuel cost-of-living pressures.
2. FX Risks: The Kwacha faces depreciation risks due to structural demand-supply imbalances. While FX demand remains high—driven by imports such as fuel and industrial equipment—the mining sector’s muted performance constrains FX supply. Sovereign debt service obligations and the need to rebuild FX reserves further strain liquidity. If left unchecked, continued FX slided could breed inflation, while efforts to defend the currency, risks depleting reserves.
3. Healthcare Funding Risks Amid U.S. Aid Shifts: Zambia’s healthcare sector relies heavily on donor support, with an est. 60% of the budget funded externally. However, the recent U.S. decision to suspend foreign aid for 90 days—pending policy reviews—poses a huge risk. Should aid cuts become permanent, Zambia would need to reallocate domestic resources, straining its fiscal position. Given the ongoing debt restructuring efforts, any additional budgetary pressures could widen the fiscal deficit and undermine economic stability.
4. Fiscal Policy and Debt Restructuring Risks: Zambia’s fiscal outlook remains vulnerable, worsened by external shocks such as drought and budgetary constraints. With the IMF 38-month ECF expiring in Oct, securing a successor IMF program is critical for sustaining investor confidence. Failure to reach a deal could push credit spreads on Zambia’s Eurobonds higher, increasing borrowing costs and exacerbating fiscal stress. Additionally, post-restructuring debt servicing obligations remain a major concern, requiring tight fiscal discipline to maintain solvency.
5. Social Protection and Inflationary Pressures: At 16.7% (Jan25), inflation remains elevated, intensifying cost-of-living pressures. The rising JCTR food basket cost signals growing financial strain on households, heightening the risk of social unrest. Expanding social protection programs may be necessary but will further strain public finances. With elections approaching, managing inflation while ensuring fiscal sustainability will be a delicate balancing act.
