Zambia's Private Sector Under Siege for 12-Months Straight

The Struggle is Real

Gerald Hamuyayi , Lusaka, Thursday, 19 December 2024 - Zambia's November Purchasing Managers Index (PMI) plunged for the twelfth successive month, as cost pressures, exacerbated by the country's widening energy deficit and depreciating currency, weighed on private businesses. Fiscal, monetary, and geopolitical factors persist in shaping developments in the exchange rate market.

The Stanbic Bank Zambia PMI gauges private business activity across five key sectors, including agriculture, mining, manufacturing, construction, wholesale, retail, and services. These sectors encompass various business metrics, such as new orders, output, employment, delivery times, and inventory. A PMI reading above 50 indicates expansionary private business conditions, while readings below 50 signal contraction.

In November, the PMI hovered in contractionary territory, registering 49.2, missing the 50-no-change benchmark by 0.8 points. Despite the marginal deterioration, the downturn reflects the contraction in business activity among private businesses in November. This decline marks the twelfth consecutive month of deteriorating business conditions in the private sector, with Zambia's private sector business activity last improving in November 2023. The ‘PMI Monthly Adjustment From 50-Benchmark’ chart illustrate the trends in Zambia PMI.

As the country grapples with a power deficit north of 1300MW, the decline in private vitality is not surprising. The energy crisis has led to suboptimal operational capacity utilisation of producers' plants and surged energy bills for businesses sourcing alternative power such as deploying diesel generators. As a result, some inadequately capitalised businesses have been forced to shut down, with survival becoming the ultimate goal for most business owners.

Zambia's prospects for an energy rebound remain unclear, and the US dollar rally post-Trump's election has accelerated the depreciation of the Zambia Kwacha. Opening the year 2024 at 25.75 ZMW per USD, the Kwacha has shed approximately 8.0% of its value year-to-December 17, 2024. Fiscal, monetary, and global developments have significantly impacted Zambia's currency movements.

Cognisant of the various macroeconomic variables influencing the exchange rate market, debt restructuring development progress, the International Monetary Fund 's (IMF) Extended Credit Facility, and Bank of Zambia ’s monetary policy have played a significant role in supporting the Kwacha's free fall since the start of the year. The most significant support in Q1 arose from an upward adjustment of the statutory reserve ratio by 900 basis points from 17% to 26%, followed by a 150-basis point adjustment in the monetary policy rate. Additionally, the completion of the debt restructuring in Q1 also supported Zambia's legal tender. Subsequent support emanated from a series of monetary policies, debt restructuring and the International Monetary Fund's Extended Credit Facility outcomes in 2024 Q2 through 2024 Q4, as shown in the ‘2024 Debt and Monetary News vs ZMW/USD Performance Chart.’

From the PMI trends, it is clear that Zambian citizens have borne the brunt of struggling private businesses, as they confront the twin devils of rising prices and shrinking earnings arising from reduced output. The resurgence in demand, as evidenced by the rising new orders in November’s PMI, has supported businesses in raising selling prices. However, capacity remains under-optimised, leading firms to reduce employment numbers, with some implementing retrenchments to cut costs.

With November's inflation rate surging to 16.5%, driven by food inflation standing at 18.2%, the cost of living for the majority of citizens has worsened. Additionally, the power and food crises have significantly dimmed Zambia's prospects of attaining lower-middle-income country status by 2030, as citizens slide back into poverty.

Zambia's private sector continues to face significant challenges, including a widening energy deficit, depreciating currency, and rising cost pressures. These factors have led to a decline in business activity, reduced employment, and increased cost of living for citizens. Despite the difficulty of improving the macroeconomic situation, addressing these challenges will be crucial to revitalising Zambia's economy and achieving its development goals.