IMF Executive Board Concludes 2019 Article IV Consultation with Zambia
August 2, 2019
On July 24, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Zambia.Zambia’s development strategy has focused on a rapid-scaling up of public investment to address the country’s infrastructure needs. While public investment has increased sharply, economic growth remains well below levels seen earlier this decade and is estimated at 3.7 percent in 2018. Inflation averaged 7 percent in 2018, but a depreciation of the currency late in 2018 and again this spring coupled with food price rises has pushed inflation above 8 percent. Fiscal revenues exceeded budget targets in 2018, but the deficit widened above 10½ percent on a commitment basis (over 8 percent of GDP on a cash basis) due to a rising interest bill and a surge in public investment reflecting faster than expected execution of public investment projects. Total public and publicly-guaranteed (PPG) debt including arrears at end-2018 was 78 percent of GDP. The current account deficit widened to 2.6 percent of GDP in 2018 due to higher imports and debt service, while reserves declined from 2.4 months of import cover in 2017 to 1.9 months at end-2018.
The outlook is clouded by the ongoing drought and heightened debt vulnerabilities. Growth is projected to slow to 2 percent in 2019, reflecting a decline in mining sector activity in an uncertain environment for mining companies and the drought’s impact on hydro power production. Absent significant policy adjustments, growth is likely to remain subdued over the medium term as expenditure arrears and an ongoing forced adjustment in response to increasing debt-related pressures weigh on the private sector. Inflation is projected to remain above the top of the Bank of Zambia’s (BoZ) target band in 2019 and 2020. The BoZ increased the policy rate by 50 bps to 10.25 percent in May. While the central bank has moved to shore up reserves as market conditions have permitted, reserves are projected to decline to 1.6 months of import cover by end-2019. Key risks include the uncertain impact of the drought, a potential tightening of global financial conditions, a further escalation in trade tensions, and the uncertain growth dividend from recent infrastructure investments.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They noted the deterioration in macroeconomic outcomes in Zambia and heightened vulnerabilities due to the ongoing drought and recent policy slippages. They expressed concern that public debt and debt service have increased rapidly due to heavy reliance on non‑concessional debt to finance large infrastructure investment, while growth has lagged, thus putting Zambia at high risk of external and public debt distress. Against this background, Directors emphasized the urgency of reforms and of a firm commitment to implement them.
Directors noted that under current policies public debt is on an unsustainable path, and ongoing financing constraints have started to force the inevitable fiscal adjustment to occur in a disorderly way, with mounting expenditure arrears. They cautioned that there is a narrow window for tackling fiscal challenges in an orderly and planned manner. This would require a large front‑loaded and sustained fiscal adjustment centered on stronger control and prioritization of public investment projects and postponing the contracting of new non‑concessional debt, accompanied by enhanced revenue mobilization and the scaling back of exemptions and tax expenditures, while reducing domestic expenditure arrears. Directors stressed that the adjustment strategy should aim to minimize drag on growth and contain the impact on priority social spending. Some Directors also urged the authorities to carefully consider the benefits and disadvantages of shifting from a value‑added tax to a sales tax.
Directors welcomed the Cabinet decision in late May to indefinitely postpone the contracting of all new non‑concessional loans, cancel some committed but undisbursed loans and enhance the control and management of disbursements of foreign‑financed loans, and to strictly adhere to public financial management rules under the 2018 PFM Act. Directors emphasized that strong actions would be needed to reduce debt‑related vulnerabilities and called for continued efforts to enhance debt management and transparency. They urged the authorities to address weaknesses in procurement and in project selection and management to ensure prioritization and greater investment efficiency. They also stressed that stronger procedures are needed to ensure that budget execution reflects the authorities’ fiscal goals. Directors noted the importance of ongoing and future technical assistance in enhancing the authorities’ capacity in these areas.
Directors welcomed the recent monetary tightening by the Bank of Zambia (BoZ). They underscored the important role for forward‑looking monetary policy in securing macroeconomic stability and supporting reserves, in conjunction with a reorientation of the fiscal stance. They commended BoZ’s actions to implement the recommendations of the 2017 FSAP, including strengthening its supervisory capacity and enhancing the crisis preparedness framework. Directors urged the authorities to closely monitor pressures from the macrofinancial linkages between the financial system and the sovereign. They also recommended continuing to address nonperforming loans.
Directors saw potential for growth to accelerate over the medium term with the appropriate fiscal adjustment. They emphasized that achieving inclusive growth and reducing poverty will require a steady focus on improving the investment climate, promoting productivity and human capital, and addressing the risk of corruption. They advised the authorities to develop proactive strategies to respond to the drought and climate‑related risks and to promote well‑functioning support programs in the agricultural sector to enhance resilience.
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
||
|
Proj. |
|||||||||
|
(Percentage change, unless otherwise indicated) |
|||||||||
|
National account and prices |
|||||||||
|
GDP growth at constant prices |
3.5 |
3.7 |
2.0 |
1.7 |
1.7 |
1.6 |
1.5 |
1.5 |
|
|
Mining |
3.0 |
6.3 |
-2.0 |
2.0 |
2.0 |
3.0 |
3.0 |
3.0 |
|
|
Non mining |
3.6 |
3.4 |
2.5 |
1.7 |
1.7 |
1.4 |
1.3 |
1.3 |
|
|
GDP deflator |
10.1 |
9.5 |
10.0 |
9.7 |
8.2 |
8.3 |
8.0 |
7.7 |
|
|
GDP at market prices (millions of kwacha) |
246,252 |
279,441 |
313,496 |
349,831 |
385,196 |
423,750 |
464,432 |
507,929 |
|
|
Consumer prices |
|||||||||
|
Consumer prices (average) |
6.6 |
7.0 |
9.9 |
10.0 |
8.0 |
8.0 |
8.0 |
8.0 |
|
|
Consumer prices (end of period) |
6.1 |
7.9 |
12.0 |
8.0 |
8.0 |
8.0 |
8.0 |
8.0 |
|
|
External sector |
|||||||||
|
Terms of trade (deterioration -) |
16.0 |
-3.8 |
-6.4 |
-1.5 |
0.3 |
0.1 |
-0.2 |
-1.1 |
|
|
Average exchange rate (kwacha per U.S. dollar) |
9.5 |
10.5 |
… |
… |
… |
… |
… |
… |
|
|
(percentage change; depreciation +) |
-7.7 |
9.9 |
… |
… |
… |
… |
… |
… |
|
|
Money and credit |
|||||||||
|
Domestic credit to the private sector |
5.2 |
16.7 |
7.5 |
7.9 |
7.9 |
6.2 |
6.9 |
7.1 |
|
|
Reserve money (end of period) |
-25.6 |
-0.6 |
10.3 |
13.4 |
11.0 |
11.9 |
11.6 |
10.5 |
|
|
Broad Money (M3) |
21.4 |
16.5 |
11.9 |
11.0 |
10.1 |
11.0 |
10.7 |
10.5 |
|
|
(Percent of GDP, unless otherwise indicated) |
|||||||||
|
National accounts |
|||||||||
|
Gross investment |
41.0 |
43.3 |
41.1 |
40.2 |
37.3 |
36.6 |
36.0 |
35.7 |
|
|
Government |
5.5 |
8.6 |
7.3 |
8.4 |
6.9 |
6.5 |
6.1 |
6.1 |
|
|
Private |
35.5 |
34.8 |
33.8 |
31.9 |
30.5 |
30.2 |
29.9 |
29.6 |
|
|
National savings |
39.3 |
40.7 |
37.5 |
36.8 |
34.4 |
34.0 |
33.7 |
33.7 |
|
|
External current account balance |
-1.7 |
-2.6 |
-3.6 |
-3.4 |
-2.9 |
-2.6 |
-2.3 |
-2.0 |
|
|
Central government budget |
|||||||||
|
Revenue |
17.5 |
19.1 |
19.4 |
19.7 |
19.8 |
19.8 |
19.7 |
19.7 |
|
|
Taxes |
14.8 |
15.8 |
15.7 |
15.9 |
16.0 |
16.0 |
15.9 |
15.9 |
|
|
Grants |
0.2 |
0.2 |
0.2 |
0.1 |
0.1 |
0.1 |
0.1 |
0.1 |
|
|
Other revenue |
2.5 |
3.1 |
3.5 |
3.7 |
3.7 |
3.7 |
3.8 |
3.8 |
|
|
Expenditure |
25.0 |
27.4 |
24.2 |
24.8 |
23.3 |
22.9 |
22.6 |
22.4 |
|
|
Expense |
19.4 |
18.8 |
16.8 |
16.4 |
16.4 |
16.4 |
16.5 |
16.3 |
|
|
Net acquisition of nonfinancial assets |
5.5 |
8.6 |
7.3 |
8.4 |
6.9 |
6.5 |
6.1 |
6.1 |
|
|
Fiscal balance (cash basis)2 |
-7.5 |
-8.3 |
-4.8 |
-5.1 |
-3.4 |
-3.1 |
-2.9 |
-2.6 |
|
|
Excluding grants |
-7.7 |
-8.5 |
-5.0 |
-5.2 |
-3.6 |
-3.2 |
-3.0 |
-2.7 |
|
|
Fiscal balance (commitment basis)3 |
-6.8 |
-10.7 |
-9.0 |
-5.6 |
-4.0 |
-3.1 |
0.0 |
-5.6 |
|
|
Net acquisition of financial assets |
0.3 |
-0.7 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
Domestic |
0.3 |
-0.7 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
Foreign |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
Net incurrance of liabilities |
8.1 |
7.6 |
4.8 |
5.1 |
3.4 |
3.1 |
2.9 |
2.6 |
|
|
Domestic |
5.2 |
2.7 |
1.0 |
0.8 |
0.8 |
0.8 |
0.8 |
0.7 |
|
|
Foreign |
2.9 |
4.9 |
3.9 |
4.3 |
2.7 |
2.3 |
2.1 |
1.9 |
|
|
External sector |
|||||||||
|
Current account balance |
-1.7 |
-2.6 |
-3.6 |
-3.4 |
-2.9 |
-2.6 |
-2.3 |
-2.0 |
|
|
Gross International Reserves (months of prospective imports) |
2.4 |
1.9 |
1.6 |
1.3 |
0.9 |
0.6 |
0.6 |
0.5 |
|
|
Excluding FDI-financed imports |
2.5 |
2.0 |
1.7 |
1.3 |
1.0 |
0.6 |
0.6 |
0.6 |
|
|
Public debt |
(Percent of GDP) |
||||||||
|
Total central government debt, gross (end-period) |
65.5 |
78.1 |
91.6 |
95.5 |
98.0 |
97.6 |
96.7 |
95.1 |
|
|
External |
38.2 |
48.1 |
59.9 |
65.6 |
69.5 |
70.8 |
71.5 |
71.3 |
|
|
Domestic |
27.3 |
30.0 |
31.7 |
29.8 |
28.5 |
26.8 |
25.2 |
23.8 |
|
Sources: Zambian authorities; and IMF staff estimates and projections.
1 Excludes Zimbabwe.
2 Measured from total financing below the line.
3 Adjusted for the accumulation/clearance of VAT refund claims and arrears relating to FRA, FISP, subsidies, public investment projects, and pensions.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Acting Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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