IMF Staff Concludes Visit to Zambia

IMF News, November 1, 2016

Source details

IMF team led by Tsidi Tsikata visited Zambia during October 19-31 at the authorities’ invitation to assess the economic situation and provide policy advice.
The mission will not result in a Board discussion; at the authorities’ request the mission will return in early 2017 to conduct Article IV consultation and program discussions.
The mission met with Finance Minister Felix Mutati, Bank of Zambia Governor Denny Kalyalya, National Development Planning Minister Lucky Mulusa, other senior government and BoZ officials, members of parliament, representatives of the private sector, labor unions, civil society organizations, and Zambia’s development partners.

Pace of economic activity remains sluggish in 2016.
Growth projected at 3 percent in 2016 due to continued electricity shortages, low exports, and subdued private sector consumption and investment.

Fiscal performance through the first three quarters of 2016: shortfalls in revenue and substantial spending overruns on fuel and electricity subsidies.
Government has been accumulating payment arrears to suppliers and contractors.
Stock of arrears projected to increase from about ZMW10 billion (5 percent of GDP) at end-2015 to about ZMW 20 billion (9 percent of GDP) at the end of 2016.
On a cash basis, the fiscal deficit for the whole year is projected to reach 5 percent of GDP.
The deficit on a commitment basis (i.e., taking into account the net accumulation of arrears during the year) projected at about 10 percent of GDP.
To date, the cash deficit has been largely financed with domestic borrowing, mainly from the Bank of Zambia.

Monetary policy tightening helped stabilize the exchange rate and put inflation on a downward trajectory.
Tight liquidity conditions, the slowdown in growth, and accumulation of government payment arrears have put the private sector and the banking system under stress and led to an increase in non-performing loans.
Monetary policy has continued to carry the burden of policy adjustments; recommended gradual unwinding of the current tight stance as fiscal adjustment restores space.

Discussed measures to create fiscal space to:
- begin clearing government arrears;
- scale up social spending and protect social spending, including on health and education; and
- reduce the fiscal deficit on a commitment basis in 2017.
These adjustments would help put public debt on a downward path and allow monetary policy to gradually ease to support recovery.
Specific measures welcomed by the mission:
- recent adjustment of fuel prices to cost-reflective levels;
- announced intention to reduce electricity subsidies.
Emphasized the need to couple subsidy adjustments with structural reforms to reduce inefficiencies and increase capacity utilization in the energy sector to raise potential growth.
Mission welcomes authorities’ plan to scale up social cash transfers to mitigate potential impact on the poor.
Mission welcomes the authorities’ decision to undertake a broad-based consultative process to ensure support within government and across national stakeholders for policies and reforms that could be implemented under an IMF arrangement.

IMF Press Release No. 16/475 — November 1, 2016.