Press Release No. 15/233

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with Zambia

May 22, 2015

On May, 20, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Zambia.

Zambia has strong growth potential, but lingering vulnerabilities pose risks to the outlook. In the last two years, the Zambian economy has been weighed down by large fiscal imbalances, lower copper prices and policy uncertainties. Real GDP growth has slowed, the current account has deteriorated, international reserves have fallen and the exchange rate has been under downward pressure. Fund staff estimate that real GDP growth slowed from 6.7 percent in 2013 to 5.6 percent in 2014, driven by a contraction in copper production. Year-on-year inflation fell from a peak of 8.1 percent in November 2014 to 7.2 percent in March 2015, largely driven by lower fuel prices. The fiscal deficit on a cash basis rose sharply to 6.5 percent of GDP in 2013 and remained elevated at 6 percent in 2014.

The Zambian kwacha has fluctuated widely since the beginning of 2014. After depreciating by about 20 percent in the first half of the year, it recovered in the second half of the year reflecting tightened monetary policy and the issuance of Zambia’s second Eurobond in the amount of US$1 billion. Downward pressures on the Kwacha re-emerged in the first quarter of 2015 reflecting external developments (U.S. dollar strength, and lower copper prices) as well as domestic factors (growing fiscal deficit, depleting government deposits and a change in the fiscal regime that adversely affected the outlook for the mining sector). Monetary policy has carried the burden of containing inflation and countering the depreciation pressures on the Kwacha.

Growth is projected to average 5.5–7 percent a year over the medium term, reflecting the impact of investments in mining and electricity in recent years. Inflation is projected to stay in single digits and decline gradually to 5 percent. Key risks to the outlook are delayed fiscal adjustment in the lead-up to general elections in 2016, persistent low copper prices, and policy uncertainties that could undermine investment in the economy. On the upside, steps taken by the government to resolve mining taxation problems by easing documentation for VAT refund claims by exporters and the decision to rescind the new fiscal regime for mining introduced in January 2015 could lead to higher copper production and growth.

Executive Board Assessment²

Executive Directors noted that, after a period of strong macroeconomic performance, the Zambian economy is facing significant challenges arising from large fiscal deficits, lower copper prices, and policy uncertainties. Directors emphasized that steadfast and strong efforts are needed to ensure macroeconomic stability and foster inclusive growth.

Directors underscored the need for significant fiscal consolidation in 2015 and over the medium term, to reduce the deficit, stabilize debt, and create conditions for lower interest rates. They welcomed the authorities’ decision to implement the policy of full cost recovery in the pricing of petroleum products. Directors called for sustained expenditure and revenue efforts, including efforts to contain the wage bill, target social spending through cash transfers, broaden the tax base, and put the pension system on a sustainable footing. They also welcomed the authorities’ decision to rescind the royalty-based mining fiscal regime, and called for swift action to resolve the issue of outstanding VAT refund claims to exporters.

Directors welcomed recent progress in the implementation of public financial management reforms, including the Integrated Financial Management Information System and the pilot phase of Treasury Single Account. They encouraged the authorities to utilize these tools to strengthen budget controls to avoid the accumulation of arrears, and to enhance the transparency of the budget process by improving fiscal reporting.

Directors noted that Zambia’s moderate risk of external debt distress calls for prudence in borrowing on commercial terms. Recognizing the need to address infrastructure gaps, they advised the authorities to strengthen the project selection process and prioritize capital spending. They also called for the development of a comprehensive debt management strategy to help address public debt vulnerabilities.

Directors supported the commitment of the Bank of Zambia to maintain a tight monetary policy stance to contain inflationary pressures. They stressed the importance of continued exchange rate flexibility and rebuilding reserves to provide adequate buffers for the economy.

Directors noted that the financial sector remains well capitalized and stable, and commended the strengthened banking supervision. They recommended continued efforts to enhance financial inclusion, including improving access to financial services in rural areas. Directors also called for the elimination of interest rate ceilings as they restrict access to credit.

Directors noted that poverty remains high, particularly in rural areas. To foster job creation, inclusive growth, and economic diversification, Directors encouraged the authorities to improve the business climate by restraining labor costs and ensuring a stable regulatory environment. They also recommended action to address infrastructure and electricity supply constraints; develop skills; and rationalize farm subsidies with a reallocation of resources to the social cash transfer program.