Zambia Unveils Austerity Measures

KAMPALA Uganda—Mineral-rich Zambia has announced a program of austerity measures to try to close a gaping budget deficit and restore confidence in southern Africa's third-largest economy amid a global commodity bust and crippling power blackouts.

The proposed measures, which include scrapping subsidies on gasoline and diesel, will save the state $300 million, the Zambian presidency said Friday.

Other measures include suspending new road projects, banning nonessential foreign travel by government officials, and postponing the creation of a national airline, initially scheduled for next year.

"In light of the recent financial challenges, the financing of ambitious infrastructure development programs has to be realigned to ensure budgetary sustainability" President Edgar Lungu said in a statement.

The moves come as inflation runs at close to 20%, the highest level in more than a decade, and the value of the local currency is down more than 40% against the dollar since the start of the year.

Subsidies on electricity and agricultural inputs are also being reviewed as the price of copper—which accounts for the bulk of Zambia's export earnings â "hovers around its lowest level since the 1998 financial crisis.

Concerns are rife that the belt tightening could drive prices still higher, triggering social unrest. In the 1990s, a series of riots over high food prices toppled the government led by President Kenneth Kaunda.

The austerity measures are the outcome of days of cabinet meetings after the International Monetary Fund said Zambia needed to bridge its budget deficit.

"The Zambian economy is under stress," IMF mission chief to Zambia Tsidi Tsikata said last week. "Fiscal discipline has been undermined by additional spending commitments that stand in contrast to lower-than-budgeted revenues."

After more than a decade of unprecedented growth, boosted by investment from major miners such as Glencore PLC, First Quantum Minerals and Vedanta Resource PLC, Zambia is expected to grow at its slowest pace since 1998, weighed down by weak copper prices, according to World Bank data.

The reversal of fortune shows how volatility in global resources markets can have far-reaching consequences in a country whose economy relies heavily on a single commodity.

This week, Glencore and Vedanta Resource, which operate Zambia's largest copper operations, cut more than 6,500 mining jobs in the country as part of efforts to stem escalating costs. The Zambian finance ministry expects copper output to drop below 700,000 metric tons for the first time in five years as miners scale down output.

But Mr. Lungu has warned that miners should be prepared to pay higher tariffs as hydropower-dependent nations like Zambia import electricity to make up for a generating shortfall, due to low water levels caused by drought.

Zambia forecast the budget deficit would widen to 6.9% of gross domestic product this year, from 4.6% in 2014, although some analysts expect it to reach as high as 8.4% of GDP.

Analysts say inflation may average over 20% in 2016 due to weak copper prices as well as the effects of El Niñ o-induced drought.

Irmgard Erasmus, an analyst with NKC Economics in Zambia, said the effects of weak copper prices on Zambia could be prolonged.

"Copper price may make a moderate recovery in 2016 but this may be well below the incentive price for high-cost mines in Zambia," Ms. Erasmus said, referring to a price level that would motivate miners to restart paused operations.

Write to Nicholas Bariyo at [e-mail]

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November 27, 2015 10:35 ET (15:35 GMT)

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