Zambia's Path to Inclusive Growth: Addressing Poverty, Debt, and Job Creation Challenges

LUSAKA, June 7, 2024 — Despite Zambia’s economic boom in the 2000s, the growth was neither sustained nor inclusive enough to significantly reduce poverty or create sufficient quality jobs. Between 1996 and 2015, although the economy expanded, the number of people living in poverty grew by over 2.4 million, with the majority residing in rural areas. By 2022, following the COVID-19 pandemic, the poverty rate reached 60%, affecting approximately 11.7 million Zambians.

In October 2023, the Government of Zambia (GRZ) secured a debt restructuring agreement with the Official Creditor's Committee (OCC) under the G20 Common Framework. By late March 2024, a preliminary agreement was also reached with bondholders. Currently, Zambian authorities are in the final stages of negotiations with other private lenders. This marks a significant step in Zambia's ambitious reform program initiated in 2021, which has already resulted in a 6.6 percentage point improvement in the primary balance by 2022, achieving a surplus in 2023 and cutting inflation in half.

However, structural challenges persist. The newly released Zambia Country Economic Memorandum (CEM): Unlocking Productivity and Economic Transformation for Better Jobs highlights the constraints and opportunities facing Zambia's economic growth and long-term development.

Key Challenges

Macroeconomic and Social Issues

Zambia's primary challenges stem from a combination of unsustainable macroeconomic policies, external debt crises, and the impact of the COVID-19 pandemic. A decade of fiscal instability and declining copper prices led to a sharp rise in external debt, from 6.7% of GDP in 2011 to 66.4% in 2019. The pandemic exacerbated these issues, causing a recession and leading to Zambia’s external debt default in 2020. Even before the pandemic, and despite recovery efforts, growth over the past two decades has not been inclusive, failing to significantly reduce poverty or create enough quality jobs. Poverty levels have increased, particularly in rural areas, and income inequality has widened. Most Zambians work in subsistence agriculture or informal services, earning low wages. “The challenge of achieving sustained and inclusive growth remains one of Zambia’s key tasks,” noted Albert Pijuan Sala, Senior Economist at the World Bank.

Agricultural Productivity

Zambia’s agricultural sector faces ongoing challenges, largely due to policies that have historically prioritized maize production through programs like the Farmer Input Subsidy Program (FISP) and the Food Reserve Agency (FRA). These policies have proven inefficient, as they fail to lift smallholder maize farmers above the poverty threshold of $2.15 per day, even with subsidies. The focus on maize production limits crop diversification and adaptation to climate change, perpetuating poverty and hindering inclusive growth.

Climate change also poses a significant threat to Zambia’s agricultural productivity and natural resources. The CEM stresses the urgent need for agronomic solutions such as crop diversification, improved soil fertility management, and agroforestry. It also highlights the importance of investing in resource-efficient irrigation and promoting water-conserving tillage practices to adapt to climate change and increase the profitability of large commercial farms. “Zambia has the natural resources for its agricultural sector to become a driver of economic growth and poverty reduction,” said Vanina Forget, Senior Agricultural Economist at the World Bank.

Private Sector-Led Job Creation

The private sector is currently unable to generate enough productive jobs for Zambia’s growing working-age population, a critical factor for sustained and inclusive growth. “To prevent declines in labor force participation and employment rates, Zambia needs to create over 10 million new jobs by 2050,” emphasized Ryan Chia Kuo, Economist at the World Bank. Most formal firms in Zambia are small, concentrated in Lusaka, and focused on the services sector, limiting the potential for widespread economic growth. Low productivity and declining real wages further hinder progress in improving living standards.

Recommendations from the CEM

Zambia’s debt resolution and ongoing reforms are expected to encourage private sector investment and support macroeconomic stability. However, the disappointing job creation trends and limited impact on poverty reduction during past periods of growth raise concerns about Zambia’s ability to achieve sustained and inclusive development. Between 1996 and 2015, during much of the economic boom, the number of poor increased by more than 2.5 million, with over 95% of the new poor living in rural areas. “Zambia must boost productivity and accelerate economic transformation to generate better jobs and achieve sustained, inclusive growth,” stated Jorge Tudela Pye.

Key recommendations include:

Increasing productivity and accelerating economic transformation: To create better jobs that lift citizens out of poverty and improve living standards.

Comprehensive reforms to FISP and FRA: Redirecting funds to more productive investments, removing trade barriers, enhancing transport and storage infrastructure, and fostering a supportive business environment for the agricultural sector.

Leveraging the private sector for job creation: Encouraging the expansion of formal firms beyond Lusaka and the Copperbelt provinces, and supporting the growth of micro and small enterprises, which are numerous but contribute relatively little to employment and value-added compared to larger firms.

These strategic actions are essential for ensuring that Zambia's economic growth benefits all segments of society and secures long-term prosperity