Press Release No. 24/202

IMF Reaches Staff-Level Agreement on the Third Review of the Extended Credit Facility with Zambia

June 3, 2024

• The IMF and Zambia have reached a staff-level agreement on economic policies and reforms to conclude the third review of the Extended Credit Facility (ECF).
• The ongoing drought has created a more challenging economic environment. For 2024, real GDP growth is now projected at 2.3 percent, with additional external and fiscal financing needs. The authorities have therefore requested an augmentation of access by 30 percent of quota (SDR 293.46 million) to preserve macroeconomic stability and support Zambia’s response to external shocks.
• Zambia has agreed to target emergency relief to the most vulnerable while sustaining fiscal consolidation efforts to restore debt sustainability, tighten monetary policy to curb inflation while maintaining exchange rate flexibility, and strive to create an environment that promotes private sector development.

Washington, DC: An International Monetary Fund staff team led by Mercedes Vera Martin, IMF mission chief for Zambia, held in-person discussions with the authorities in Lusaka from April 24 to May 7. Discussions were focused on the authorities’ reforms and policy priorities in the context of the third review of Zambia’s 38-month IMF-supported program under the Extended Credit Facility (ECF). Discussions continued virtually subsequently. This staff-level agreement is subject to IMF Management approval and Executive Board consideration. The arrangement was approved by the IMF Executive Board for SDR 978 million (US$1.3 billion) on August 31, 2022.

At the conclusion of the discussions, Ms. Vera Martin issued the following statement:

“We are pleased to announce that the Zambian authorities and the IMF team have reached a staff-level agreement on economic policies to complete the third review of Zambia’s ECF.

“In the context of significant macroeconomic challenges that have become more complex to manage due to the severe drought, staff also considered the authorities’ request for an augmentation of the IMF’s financial support to Zambia from the approved SDR 978.2 million (about $1.3 billion) to SDR 1,271.66 million (about $1.7 billion). Once approved by IMF Management and completed by the Executive Board, Zambia will have immediate access to SDR 433.34 million.

“The 2024 outlook has worsened due to the drought; GDP growth is now projected at 2.3 percent, half the forecast in December 2023. Agriculture production is expected to contract by 19 percent; power outages will hinder manufacturing activity; and copper production is expected to recover more gradually than initially envisaged. Inflation, at 14.7 percent in May, is projected to remain elevated. The medium-term outlook remains favorable, supported by expanding mining production and restored debt sustainability.

“Our discussions on policies and reforms revolved around four pillars.

“First, the revised 2024 Budget will seek to reprioritize spending to accommodate emergency relief for one million additional households. Additional external support will help finance a temporary expansion of emergency social cash transfers, with existing beneficiaries temporarily receiving double the current transfer value. Publishing all drought-related government contracts will support accountability amid limited financing options.”

“Second, fiscal consolidation will remain paramount to restore debt sustainability. The authorities committed to maintaining fiscal prudence over the medium term and considering additional domestic revenues, including by rationalizing tax exemptions, and improving tax compliance and administration. Better cash and liability management, improved expenditure and commitment controls, and enhanced decentralization efforts will also help reduce financing needs.”

“Third, monetary policy will need to remain appropriately tight, while allowing the exchange rate to play its role as a shock absorber. With inflation still outside the target band, the Bank of Zambia will remain vigilant in curbing inflation toward the 6-8 percent target band. Improving the monetary transmission will help develop interbank money markets. The Bank of Zambia will continue strengthening banking supervision, including by developing an effective deposit insurance scheme and reviewing the financial services framework.

“Finally, scaling up structural reforms’ implementation to level the playing field for all is key for the economic recovery and much-needed economic diversification. Greater transparency in the energy sector will be crucial to maximizing competition in the use of the oil pipeline, reducing fuel costs, and refraining from reintroducing fuel subsidies. Enacting the Access to Information Bill, enhancing the transparency of State-Owned Enterprises, and adopting anti-corruption legislation will strengthen governance and public accountability.

“We look forward to the bilateral agreements for the implementation of the agreed debt treatment with official creditors. We also welcome the authorities’ progress in reaching an agreement with bondholders and ongoing discussions with other private creditors to agree on a debt treatment in line with program parameters and with comparability of treatment as defined by the official creditors.

“The IMF staff team would like to thank the authorities for the constructive dialogue, warm hospitality, and strong cooperation to finalize the reform package in support of the completion of the third review. A Board meeting is expected by the end of June.”