THE 2025 ZAMBIA NATIONAL BUDGET: THE BATTLE BETWEEN FISCAL RESPONSIBILITY AND GROWTH UNCERTAINTY

KEY POINTS

• Record Revenue Funding Target: 80.2% of the 2025 budget is set to be funded by domestic revenue, the highest in Zambian history.
• Growth Target of 6.6%: If economic growth lags behind expectations, the government may need to borrow, challenging its fiscal goals.
• Risks to Interest Rates: While aiming for lower borrowing, economic uncertainties may keep interest rates elevated, affecting investors.

On the 27th of September 2024, Zambia’s Minister of Finance, Honourable Dr Situmbeko Musukotwane, presented the largest national budget in the country’s history, amounting to K217 billion. Despite its size, this budget is set to operate with the tightest financial constraints seen in recent times. The government aims to fund 80.2% of this budget through domestic revenue, marking the highest proportion of locally sourced funding ever recorded. This ambitious target beats the previous record set by the 2024 budget, which was derailed by severe drought conditions, causing a shift from a projected primary surplus to a primary deficit.

At first glance, this budget signals a commitment to reducing reliance on borrowing. A budget funded primarily through domestic revenue would typically suggest that interest rates should trend lower, as the government would depend less on debt markets and more on the taxation of economic activities. However, 2024 has shown us that when growth targets fail, interest rates remain elevated—or even rise—due to increased government borrowing.

For investors, particularly those in the fixed-income space, this budget serves as a reminder that economic indicators like copper export data, Purchasing Managers' Index (PMI), and overall economic growth will play a pivotal role in determining whether the government can maintain this fiscal path. The 2025 budget sets an economic growth target of 6.6%, and if this target is not achieved, the government may be forced to tap into the money markets for additional financing, potentially reversing its goal of fiscal restraint.

What is a Primary Budget Surplus, and Why is it Important?

A primary budget surplus occurs when a government’s revenues exceed its expenditures before accounting for interest payments on existing debt. In simple terms, the government is generating more money than it spends on its regular operations, excluding the cost of servicing its debts.

This is significant for a few reasons:

• It signals fiscal health, as the government demonstrates the ability to cover its current spending needs without needing to borrow further.
• It helps reduce the debt burden by allowing the government to use the excess revenue to pay off existing debts. This leads to lower future interest obligations.
• It boosts investor confidence, particularly in the bond markets, as it shows that the country is managing its finances responsibly.

In Zambia’s case, achieving a primary budget surplus could have important implications for interest rates. A government that spends less and borrows less puts downward pressure on interest rates. This is because there is reduced competition for funds between the government and the private sector, freeing up capital for businesses and households at lower costs. A lower interest rate environment can also spur economic growth by making borrowing cheaper for investment in key sectors.

A Record Primary Surplus and Reduced Domestic Borrowing

One of the standout figures in the budget is the proposed fiscal primary surplus of K11.08 billion. This marks the largest operational surplus in Zambia’s history, signaling that the government intends to reduce debt rather than accumulate it. Coupled with a reduction in domestic borrowing—projected to be 1.9% of GDP, down from 2.5% in 2024 and 3% in 2023—this signals a clear strategy to lower the cost of capital over time.

However, while these figures point to a fiscal tightening, it’s crucial to remember that the government is only one part of the economic equation. External factors, particularly those beyond Zambia’s control, could significantly alter the trajectory of interest rates and economic growth.

The Elephant in the Room: Economic Risks Ahead

Despite the government's efforts to push interest rates lower, the economic realities facing Zambia may impede this ambition. The nation continues to grapple with an energy crisis, with the energy sector requiring higher tariffs to expand production, particularly for industrial commodities like copper. Meanwhile, the agricultural sector remains in contraction, adding further pressure on economic recovery.

Globally, the outlook remains precarious. While inflationary pressures from 2022–2024 have eased, central banks like the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) are attempting to navigate a “soft landing,” reducing interest rates without triggering a recession. This delicate balancing act will affect Zambia’s copper outlook, a key driver of government revenue and economic growth.

Although 2026 is expected to be a more favorable year for copper prices, 2025 remains a touch-and-go situation. Concerns around slower-than-expected growth in electric vehicle (EV) demand could dampen the copper market. Investors should, therefore, anticipate a battle between the government's plans for fiscal discipline and the economic risks that threaten these ambitions.

Interest Rates: The Outlook for 2025

Given the balance of fiscal policy and external risks, interest rates are likely to remain elevated through the first half of 2025. However, we may begin to see downward pressure on rates in the second half of the year, assuming the government manages to stick to its fiscal plan and global economic conditions stabilize.

The strong policy signal from the 2025 budget is that rates are not expected to rise significantly beyond current levels, but they are also unlikely to fall sharply in the near term. This is particularly true given that bond yields historically tend to stay 6% to 9% above inflation, and with inflation not fully tamed yet, the cost of borrowing will remain high for a while longer.

Historical Context: The Mwanawasa-Banda Era Comparison

The fiscal strategy of the 2025 budget (and the administration at large) bears similarities to the policies of the Mwanawasa-Banda administrations. During their tenure, Zambia’s budget shifted from being 53% tax-funded in 2002 to 76% by 2009. This period saw a gradual decline in interest rates, coupled with private-sector-led growth. However, that era was also supported by a booming copper market, driven by China’s urbanization.

While the 2025 budget is aimed at fiscal responsibility, the key difference lies in the uncertainty surrounding the materialization of growth drivers. Copper prices remain volatile, and global demand faces headwinds. Investors will need to remain vigilant, tracking both domestic fiscal performance and international market trends to navigate the fixed-income landscape in the coming year.

Conclusion: Navigating Treacherous Waters

The 2025 budget sends a clear message: Zambia is committed to fiscal discipline, but it faces significant economic risks. For investors, particularly in the bond and fixed-income markets, the next six to nine months will be critical. Growth data will be a key indicator of whether the government can meet its ambitious targets, and whether interest rates will begin to fall as planned.

In this environment, cautious optimism is warranted, but investors should be prepared for continued volatility in interest rates and remain guided by economic performance metrics to make informed decisions in 2025.

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