GDP UPDATE
October 2006
McIlvaine Company
INDUSTRY ANALYSIS
1. AMERICAS
U.S.
1.) The International Monetary Fund cut its 2007 growth forecast for the US to 2.9 percent from 3.3 percent, the weakest since 2003.
2.) The pace of US economic growth softened more sharply than expected in the second quarter and corporate profits rose feebly, according to a Commerce Department report on Thursday that pointed to a significant easing in expansion.
Gross domestic product or GDP that measures total economic activity within US borders advanced at a revised 2.6 percent annual rate, down from the 2.9 percent estimated a month ago and less than half the first quarter’s 5.6 percent rate. Wall Street economists surveyed by Reuters had expected second-quarter GDP to be unchanged at 2.9 percent but the government said inventory building was weaker than first thought and imports of services - which detract from domestic output - were higher.
BRAZIL
Brazil's central bank lowered its 2006 economic growth and inflation forecasts as a currency rally pushes down the cost of imports and prompts manufacturers to pare staff and delay investment plans. The bank, in its quarterly inflation report, cut its growth forecast to 3.5 percent from 4 percent and reduced its inflation forecast to 3.4 percent from 3.8 percent.
“This year's growth forecast is a higher growth rate than the average decade, but it's less than what we'd like the Brazilian economy to be expanding,” Afonso Bevilaqua, the central bank's director of economic policy, told reporters in Brasilia today
CANADA
Canada's economy, the world's eighth-largest, expanded 0.2 percent in July, the most in four months, led by mining, wholesaling and financial services. The increase reported by Statistics Canada in Ottawa compares with no growth in June and matches the median estimate in a Bloomberg News survey of 19 economists.
These figures suggest the economy is rebounding after falling short of expectations for four months. Consumer spending and strong foreign demand for commodities boosted growth, while manufacturing stalled because factory exports were hurt by a strong currency and slower growth in the U.S., the biggest buyer of the country's goods. July's growth wasn't fast enough to push the central bank to raise interest rates, economists said.
“Simply put, this report is Exhibit `A' for the Bank of Canada to remain on the sidelines for quite some time yet,'' Doug Porter, an economist with BMO Capital Markets in Toronto, said in a note to clients. “Even with the decent monthly gain, growth for all of the third quarter will be hard-pressed to reach the Bank of Canada's latest estimate of 3 percent.''
The central bank raised its main lending rate seven times from September 2005 to May and paused in July, predicting growth of 3 percent in the second half of the year. The economy slowed to 2 percent in the second quarter, short of the bank's 3.2 percent estimate. Policy makers have since said they're still confident the 4.25 percent benchmark rate is at the right level to bring inflation to the central bank's 2 percent target.
EL SALVADOR
Economic growth in El Salvador will increase to about 4.5 percent in 2007 compared with 3.5 percent expected this year, the finance ministry said in a budget bill sent to Congress. The Central American nation's central bank predicted at the beginning of September that the economy would grow 3.5 percent in 2006. Gross domestic product rose 2.8 percent last year.
Delivered to Congress by Finance Minister William Handal, the annual budget bill also forecast inflation between 2 and 3 percent next year in the country, which uses the U.S. dollar as its currency. It said remittances from abroad, a major source of income, would grow 18.4 percent next year to $3.575 billion.
2. ASIA
AUSTRALIA
AAP's economic indicator for October shows real gross domestic product (GDP) is likely to have increased by a seasonally adjusted 0.9 percent in the September quarter, for an annual pace of 2.5 percent. This would be an improvement on the Australian Bureau of Statistics (ABS) calculation of a rise of 0.3 percent in the June quarter and an annual increase of 1.9 percent.
Economists said the ABS third quarter GDP data, due December 6, should show the pace of domestic economic growth had picked up. But UBS chief economist Scott Haslem said most of the growth in the three-month period was expected to have been driven by inventories and exports.
"It's really a rebound in inventories together with a sizeable contribution to growth from the external sector," he said.
"This is reflecting the fact that business investment is peaking and import growth is now slowing, together with increased exports, on the back of recently completed mineral and resource projects."
UBS is looking for GDP growth of 1.3 percent in the September quarter and 2.9 percent over the year, while Nomura Australia expects growth of 0.8 percent in the quarter and 2.4 percent over the year.
"We're anticipating a bit of a contribution from net exports for the first time in quite a lot of quarters," Nomura Australia senior economist Tom Kenny said.
"We've had a few good trade numbers lately, so I think that the exports are looking positive for growth. Household spending will be a little bit firmer, probably on the back of some tax cuts early on in the quarter. And there was likely to be a rebound in stocks after the fairly large drag of the previous quarter”, he said.
Business inventories made a negative contribution to GDP growth of 0.7 percentage points in the June quarter, while net exports subtracted 0.2 percentage points.
Mr Kenny said that beyond the third quarter, an area of concern would be how the dry weather impacted on farms, with the Australian Bureau of Agricultural and Resource Economics downgrading its farm production outlook and the Bureau of Meteorology warning of an extension of dry weather.
"That could have quite an adverse effect on farms and for GDP going forward, so it's something worth keeping an eye on at the moment," he said.
Thomson IFR chief economist Asia Pacific George Worthington said inventories were unlikely to weigh on growth the way they did in the June quarter.
"We're not expecting them to add much but we're certainly not expecting them to drag like that again," he said.
Net exports would make a small negative contribution, but household spending was likely to have strengthened slightly.
"Residential investment looks likely to be around the same as it was last quarter," he said.
Thomson IFR expects GDP growth of 0.7 percent in the quarter and 2.2 percent over the year.
CHINA
1.) China's economy will expand 10 percent in 2006, its fourth straight year of double-digit growth, according to the International Monetary Fund.
2.) The People’s Bank of China, China’s central bank, estimates the country’s economy will grow by 10.5 percent this year, according to State media reports, while growth for the first half of next year has been projected at 9.5 percent. China’s economy is to maintain a fast and steady growth, though the growth rate might slow down.
Growth rates for domestic investments and net exports are also expected to decline, due in part to the slowing global economy as well as rising trade frictions.
This latest report was compared with an earlier report released by the National Bureau of Statistics in China, which predicted that the gross domestic product (GDP) in China would likely grow by about 10 percent this year while inflation would record about 2 percent.
The World Bank has forecasted China’s economic growth this year to be about 10.4 percent.
China’s economy last year grew by 10.2 percent while GDP in the first half of this year was up by 10.9 percent. The boom in the country’s economy has led many economists and analysts, including those working within the government, to worry that the economy of the world’s most-populous nation may be overheating.
As a result, the Chinese government recently unveiled a string of measures designed to cool down the economy in the country and reign in foreign domestic investments that have been the major driver of the country’s economic growth.
INDIA
1.) Forecasting the growth of the Indian economy has become a hazardous business. The numbers for the first quarter of 2006-07, released late last week, beat even the most optimistic forecasts and had GDP growing at 8.9 percent over the corresponding quarter of the previous year, which itself had shown a growth rate of 8.5 percent over the first quarter of 2004-05. While government agencies do not publish quarter-on-quarter growth forecasts, it is clear that they are systematically under-predicting growth. Mr. Chidambaram went on record a few weeks ago saying that he expected growth during the quarter to be above 7 percent, which was a no-brainer. The Reserve Bank of India still sees growth for the year in the 7.5-8 percent range, which it believes is consistent with a 5-5.5 percent inflation rate. It will almost certainly have to change its view on the sustainable growth-inflation combination, particularly in the light of the recent softening in oil prices. It is not that private forecasters are doing much better. The consensus for the first quarter was well below what has turned out to be the case, and no one had predicted even 8.5 percent.
Where has the growth come from? In the services sector, the trade, transport, hotels and communication segments, accounting for more than half of overall services and more than a quarter of GDP, grew by 13.2 percent, up from 11.7 percent last year. Manufacturing, accounting for about 16 percent of GDP, grew by 11.3 percent, up from 10.7 percent last year. Most other components, including agriculture, grew at close to last year’s rates. The two segments which saw noticeable declines were electricity, gas and water, which went from 7.4 percent last year to 5.4 percent this year, and construction, which declined from 12.4 percent to 9.5 percent. At the level of these aggregates, it is clear that the growth momentum is quite broad-based across industry and a variety of services, which augurs well for sustainability.
Why is the forecasting community underestimating the capacity of the economy to grow? The answer probably has something to do with the role of historical data in the forecasting models used. If so, significant technological change is called for; to the extent that policy decisions are made on the basis of these forecasts, errors in the latter will very likely result in wrong turns in the former. More importantly, how is growth being sustained, even accelerated, in the face of such obvious constraints in infrastructure (note the slowdown in the power sector), not to mention the challenges that the ruling coalition faces in charting its economic policies? Perhaps the constraints are not as binding as they appear to be, and considerable innovation and investment are going into finding ways around them. This may be a costly waste from a social welfare perspective, but it helps to keep the momentum going. As far as economic policy is concerned, this growth performance is one more piece of evidence that unshackling private enterprise will make a vital difference to growth and development.
2.) The International Monetary Fund raised its forecast for India to 8.3 percent this year, from a 7.3 percent estimate in April. The Indian economy grew 8.5 percent in 2005.
MALAYSIA
CIMB Investment Research has raised real gross domestic product (GDP) growth estimate for Malaysia to 5.6 percent for 2006 from 5.3 percent previously, supported by stronger than expected growth of 5.7 percent in the first half of 2006.
“Though we expect real GDP growth to moderate in the second half at 5.4 percent year-on-year, it will not fall off the cliff as the underlying strength will be underpinned by the continued expansion of domestic demand amid the softening exports,” it said in a research note.
The research house also expects real GDP growth to sustain at 5.6 percent in 2007 with key driver coming largely from private sector demand, augmented by the expansionary fiscal spending amounting to RM44.5 billion.
“Exports are expected to grow at decent pace of 6 percent to 7 percent in 2007, down from an estimated 10.3 percent in 2006,” it said.
CIMB Research said the leading index (LI), which is a forward gauge of economic expectations, moderated to 4.3 percent in July after hitting a nine-month high of 7.3 percent in June. “This signals a moderate pace of economic growth in 1Q07,” it added.
On the external sector, CIMB Research said the OECD forward-looking composite leading indices were down for the fourth consecutive month to 2.1 percent in July from 3.1 percent in June, suggesting that slowing economic expansion in the OECD area. All three major economies - the US, Japan and the Euro area - posted a synchronised moderation in July’s index growth, it added.
“We observe that Malaysia’s LI growth lags behind that of the OECD by approximately three months, hence we had expected Malaysia’s leading index to hit a turning point in 2H06,” CIMB Research said. Therefore, the moderation of Malaysia’s LI in July came in line with its expectations, it added.
OMAN
High energy prices and the diversification push are expected to help Oman's nominal GDP to grow by 16 percent this year. But the impact of trade agreements has yet to translate into significantly greater non-hydrocarbon trade, said a new study by the National Bank of Abu Dhabi.
Oman's national income is projected to reach $35.3 billion in 2006 exhibiting strong growth in line with other GCC member states due to higher energy prices, said the study. The share of gas revenues has risen to 8.9 percent in the first half of 2006, up from 5.7 percent of total revenues in first half 2005.
The diversification push continues to focus on gas, chemicals, aluminum and tourism sectors. The Sultanate's GDP stood at $30.7 billion in 2005.
Oman concluded a free trade agreement with the US two months ago and, in the process, allowed the formation of trade unions in order to finalize the treaty. Oman, like other GCC states had been reluctant to allow unions given that the country has a predominantly foreign labor force composition. The country is also to open its doors to US firms in telecommunications, an element that was required under WTO agreements.
With hydrocarbon activity comprising 49 percent of GDP in 2005, Oman is extremely dependent on oil and gas sectors. The share of the hydrocarbon sector rose in 2006 first quarter to 50.6 percent of GDP reflecting the rise in oil prices during the period, the report added.
Services represented 36.4 percent of economic activity and non-hydrocarbons industry 13.2 percent with agriculture and fishing accounting for a mere 1.2 percent of output.
THAILAND
In a new analysis after the military coup, United Nations economists predicted today that Thailand’s gross domestic product (GDP) growth could reach 4.7 percent next year if the new government maintains political stability, but would only reach 3.1 percent in the case of instability.
“In our ‘best-case scenario,’ we expect public spending to increase under the new interim government and play a key role in boosting GDP growth,” UN Economic and Social Commission for Asia and the Pacific (UNESCAP) Executive Secretary Kim Hak-Su said.
“Thailand’s macroeconomic fundamentals remain strong. We expect growth to be robust at 4.5 per cent this year. Exports are strong and inflation is falling. The relatively flexible exchange rate regime and high foreign exchange reserves have contributed to these good outcomes,” he added.
As of today UNESCAP economists see no significant impact on the economy from the 19 September coup which toppled the Thaksin government. They note that the Thai stock market remains steady, the Thai baht is stable, and contagion to other regional markets is limited.
But although the macroeconomic forecast remains favorable, uncertainty remains for the Thai economy’s short-term outlook. Under a ‘worse-case scenario’ of political instability, UNESCAP predicts that in 2007 economic growth could fall to 3.1 percent, with inflation increasing to almost 10 percent. The baht would depreciate by more than 20 percent, reaching almost 46 baht for $1.
“The next few months will be closely watched by investors,” Mr. Kim said. “The interim government will have a heavy responsibility to maintain economic stability and investor confidence in the economy. In the short-term the new administration will need to outline policies regarding the investment climate, especially macroeconomic policies and economic governance measures.
“It will be very important for the new interim government to provide timely clarification on government spending, particularly on the infrastructure investment component of the fiscal budget,” he added.
VIETNAM
Vietnam is estimated to record gross domestic product (GDP) growth of 7.8 percent in the first nine months of this year, Vietnam News Agency reported. Between January and September, the industry sector is estimated to record an increase of 16.8 percent in production value.
Meanwhile, the country is set to gain export earnings of 29.4 billion U.S. dollars in the first nine months, a year-on-year rise of 24.2 percent.
Vietnam is expected to witness a GDP growth of 8-8.2 percent in 2007, Vietnamese Minister of Planning and Investment Vo Hong Phuc said at a recent domestic meeting, noting that it has targeted an economic growth of 8 percent in 2006 and more than 8 percent in 2007.
Vietnam's GDP grew 8.43 percent to 53 billion U.S. dollars or GDP per capita of 640 dollars last year, according to the country's General Statistics Office.
3. EUROPE / AFRICA / MIDDLE EAST
ANGOLA
Angolan Assistant Prime Minister Aguinaldo Jaime said hat the country foresees an economic growth of 27 percent, one of the highest in the world. He said that in the last three years, the Angolan national economy has continually increased, inflation has been reduced and employment rates have increased.
Formerly, Angola was characterized by political and economic instability because of war, there were serious insufficiencies in the financial system and lack of investments, except in oil production. The situation was so critical that there was no hope of improvement for Angolan citizens, the national currency was devaluated and consumers purchased US dollars, causing bad effects on the national economy
When investments disappeared, a process of inflation started. In 2004, it was 21.85 percent, went down to 12.59 in 2005 and now, in 2006, it is only 6.6 percent.
Economic growth went up 11 percent in 2004, 22 percent in 2005, and will reach 27 percent in 2006, according to predictions.
AZERBAIJAN
The Azerbaijani government forecast that growth of the GDP will make 26.3 percent as well as 45 percent in the oil sector. Growth of the industry is expected to be 42 percent which will constitute 59.7 percent of the GDP. The rise of the other economic sectors is believed to ranger from 10 percent to 25 percent. Investment of AZN 7.8bn (domestic investment-AZN 4.2bn and foreign investment –AZN 3.6bn) will be made in the development of economy.
CROATIA
After reaching peak in the 1Q 2006 (6.0 percent y/y), GDP growth in 2Q moderated to 3.6 percent y/y in real terms. As short-term statistics were suggesting, private consumption in 2Q moderated to 2.1 percent y/y (down from 4 percent in 1Q). Aside from that investments also moderated to 8.4 percent y/y, which although relatively high is significantly below our optimistic expectations. Exports and imports trends brought some improvement, as exports outpaced imports (5.1 percent vs. 4.1 percent), though dynamics slowed down as in 1Q double digit growth rates were recorded (14.0 percent and 16.1 percent y/y respectively). Government consumption slightly accelerated to 1.7 percent y/y, but it continued to reduce its share in overall GDP. Although 2Q figures came somewhat lower than we expected (due to slightly stronger moderation of private consumption and our over-optimism regarding the investments activity), they present no surprise as monthly –frequency indicators indicated slowdown in 2Q 2006. As for the 2H 2006 we remain optimistic and are still anticipating 2006 growth rate likely above 4.5 percent.
IRELAND
Analysts at Goodbody Stockbrokers say that the Irish economy appears to be on track to achieving 5.5 percent GDP growth for the full year.
In a research note published this morning, the analysts mention that although GDP growth declined from 5.7 percent y/y in 1Q to 5.0 percent y/y in 2Q, the strength of the Irish economy remains impressive. The economy recorded 3.6 percent y/y growth in domestic demand in 2Q, taking the 1H figure up 5.0 percent y/y, the analysts say. Although gross domestic fixed capital formation declined 2.2 percent y/y in the quarter, this was mostly on account of a large y/y dip in aircraft imports, Goodbody Stockbrokers points out.
MIDDLE EAST
The International Monetary Fund has forecast a slowdown in Middle East region's combined Gross Domestic Product (GDP) growth and current account surplus next year. While real GDP growth in the Middle East, which is to reach 5.8 percentin 2006, will decline to 5.4 percentin 2007, the current account surplus will start declining in 2007, the IMF said in its World Economic Outlook. The current account surplus is projected to rise further to 23 percent of GDP in 2006 to around $280 billion.
However, the regional GDP forecast is 14 percent better than the 5.1 percent growth predicted for the global economy in 2006 and 10 percent above the 4.9 percent global forecast for 2007.
"With continued prudent financial policies and little growth in oil production, GDP growth is expected to moderate slightly to about 5.5 percent in 2007," the report said.
IMF said with non-oil sector growth running at eight per cent, inflation has begun to pick up, although it remains generally well contained by the combination of pegged exchange rates, open product and labor markets, a low global inflation. Equity markets in the region faced major corrections in early 2006 — prices fell by some 25 to 35 per cent from their peaks— but so far, financial stability has been preserved and the macroeconomic impact is likely to be contained, it said.
"With many oil exporters in the region pegging their currencies to the US dollar, inflation will inevitably rise somewhat with higher expenditure, as prices of locally produced goods and services will increase compared to those traded internationally. However, if expenditure increases are appropriately aligned with macroeconomic conditions and are accompanied by structural reforms, any pick-up in inflation should remain contained and temporary."
However, in contrast to the generally low inflation in the region, inflation is running at about 12 percent in Iran, reflecting the combination of rising government expenditure and expansionary monetary policy. With monetary control hampered by multiple, internally inconsistent policy objectives and limited operational autonomy of the central bank, some fiscal policy tightening will be required to reduce inflation, with additional support from greater exchange rate flexibility.
According to the report, near-term prospects for oil exporters are generally more propitious than for non-oil exporters in the Mashreq (Egypt, Syria, Jordan and Lebanon) which account for about 20 percent of regional GDP.
"On the upside, surging oil revenues could provide for higher government expenditure, while possible further corrections in some still richly valued asset prices are a downside risk. For the non-oil exporters, the external balance implications of the large terms-of-trade losses add an element of vulnerability to the outlook. Finally, geopolitical risks remain a serious concern," the report said.
"However, the central policy challenge for the oil-exporting countries remains managing booming oil revenues. Most countries have appropriately begun to use the opportunity provided by higher revenues to increase spending to address long-standing structural problems, in particular the need to generate employment for the rapidly growing working-age population and to boost infrastructure and human capital development. In addition, national oil companies in the region have developed plans for ambitious capacity expansion and are ratcheting up investment," the IMF report said.
"At the current juncture, there seems ample scope for this buildup of spending, given high unemployment in many countries and still low inflation, although with continued rapid credit growth, the risks of overheating need to be carefully monitored."
Cautioning on the prudential risks in the financial sector, the report said with oil export proceeds partly flowing into the domestic banking system and substantial net capital flows to non-oil exporters, broad money and credit growth have accelerated sharply in many countries over the past three years and remain very high. "At the same time, the favorable oil market outlook and buoyant investor confidence have underpinned large increases in equity and property prices relative to GDP in 2004-05, even though some of these gains were reversed in the first half of 2006. This combination has raised concerns about increased leverage in private sector balance sheets, including in the household sector, rising financial sector exposure to asset price corrections, and a possible deterioration in credit quality."
IMF said the region's central banks need to monitor such risks carefully and ensure adequate prudential standards. "At the same time, reforms aimed at improving market liquidity and transparency will help to reduce asset price volatility that is not related to fundamentals. The recent lifting of restrictions in equity markets for foreign investors in Saudi Arabia was a welcome step in this regard."
MOROCCO
The growth rate of the Moroccan economy in quarter 2 of the current year has shown a progression estimated at 7.9 percent of the Gross Domestic Product (GDP) against 2.2 percent during the same period of 2005.
A document of the haut commissariat au plan, which revealed the figures, ascribed this performance chiefly to a 32.2 percent improvement in the agricultural sector, against a drop of 16.5 percent in 2005. The growth rate of the non-agricultural GDP, the document added on the other hand, was slowed down to attain hardly 4.4 percent, compared to 5.6 percent in last year’s second quarter.
In terms of activity sectors, HCP said that except for the mining, energy and public administration sectors, which registered a growth rate lower than 2 percent, all the other sectors reached a growth rate higher than 3 percent.
RUSSIA
Slower export growth may pull GDP growth down by 2 percentage points, Russia's Economy Minister German Gref said at an economic forum in Sochi. Whereas in 2004-2005 exports grew at 10-12 percent, in the mid-term they are to add as little as 5.5 percent or even less. Such a decline will tell on Russia's economic growth at large, the minister noted. Yet he stressed that economic diversification was still regarded as the main method of keeping up the pace of Russia's economic development, specifically, by the creation of factory clusters. According to the minister, clusters set up in various economic spheres will boost the influence of innovation on economic growth, which will offset the loss from slower export growth.
Gref named several state structures which have been set up or are already underway to tackle the diversification of the economy, including the Russian Venture Company, special economic zones, high-technology parks, the Investment Fund, federal target programs, and a state development corporation. The Russian economy needs to be diversified because with the rise in personal incomes the gap between the quality of Russian-made goods and consumer requirements is deepening, of which the high import growth rate, which exceeds domestic consumer goods production growth 3 times, and the production of innovative goods 7-8 times, is indirect proof.
SWITZERLAND
The Swiss state secretariat for economic affairs (SECO) reiterated its forecast of 2.7 percent GDP growth for 2006, and raised its 2007 growth forecast to 1.7 percent from the 1.5 percent predicted in June.
SECO left inflation forecasts unchanged, at 1.2 percent in 2006 and 1.0 percent in 2007.
SECO also repeated its predictions for an unemployment rate of 3.3 percent this year and 2.8 percent next year.
TURKEY
Turkey will be ranked 20th in the world with an expected gross domestic product (GDP) of $400.4 billion in 2007, reported the Anatolian news agency. According to a recent report released by the International Monetary Fund (IMF), Turkey's GDP will increase 66.4 percent from $240.6 billion in 2003 to $400.4 billion in 2007. Turkey was 22nd in GDP in 2003.
Turkey's GDP was $302.6 billion in 2004 and stood at $ 362.5 billion in 2005. Estimates show Turkey's GDP at $378.4 billion by the end of the year. Turkey is expected to leave behind several European Union member countries such as Poland, Austria, Denmark, Greece, Ireland, Finland and Portugal in terms of GDP in 2007.
Poland's GDP is expected to be $351.3 billion, Austria's $340.6 billion, Denmark's $296.4 billion, Greece's $266.7 billion, Ireland's $242.8 billion, Finland $217.8 billion and Portugal 203.3 billion in 2007.
In world GDP rankings, the United States will top the list with a GDP of $13.9 trillion in 2007, followed by Japan, Germany and China.
UNITED KINGDOM
Sterling was under pressure recently, falling to its lowest in two weeks versus the euro and to its worst in over a week against the dollar following a lower than expected read on UK second quarter GDP. The data showed growth in the British economy was slower than expected in the second quarter, according to the Office for National Statistics.
It downwardly revised the pace of UK economic growth for the three months to June to 0.7 percent, following an earlier forecast of 0.8 percent. Despite the lower measure, the annual rate of growth was left unchanged at 2.6 percent.
ZAMBIA
By the mid-1980s Zambia was the most indebted nation in the developing world. In 1991 the Chiluba government came to power after democratic multi-party elections. The government was committed to extensive economic reform, privatized many state enterprises, attracted foreign direct investment and maintained sounds macroeconomic policies. Free market principles based on the Washington Consensus were endorsed, contributing to a period of transition, contraction and then gradual expansion in the latter half of 1990, continuing through to the first half of 2006.
Today the economy is robust. Inflation is at its lowest level in 30 years. Foreign currency reserves hit record highs. International debt obligations owed to rich Western countries were forgiven. Record levels of foreign investment are flowing and record tourism is demanding a national airline. How could this happen in sub-Saharan Africa? The world looks at sub-Saharan Africa as the stepchild left to figure out how to survive on its own, yet there are real success stories like Zambia.
Although plagued by corruption, the government’s macroeconomic management and fiscal austerity has led to strong, consistent economic growth. In 2005 GDP growth peaked at 5 percent. Inflation fell from 30 percent in 2000 to under 9 percent in the first half of 2006. The multilateral donor community, including the IMF, World Bank and Paris Club, eliminated over $5bn of debt with further write-downs expected in 2006. According to the IMF, resources from debt relief provided under the Multilateral Debt Relief Initiative (MDRI) will be used accordingly as annual debt-service savings are realized. Spending on priority agriculture and infrastructure projects identified in the government’s National Development Plan is gradually increasing. Global demand for commodities such as copper allowed the Bank of Zambia to accumulate foreign currency reserves, reporting a record $357mn in the first half of 2006. Global demand for commodities and deeper engagement with the world economy will contribute to an estimated 6 percent GDP growth in 2006.