Press Release No. 99/10

Press Release: IMF Approves ESAF Loan for Zambia

March 26, 1999

The International Monetary Fund (IMF) has approved a three-year arrangement for Zambia under the Enhanced Structural Adjustment Facility (ESAF),¹ equivalent to SDR 254.45 million (about US$349 million) to support the government’s 1999/2001 economic and financial program. The first annual loan of SDR 40 million (about $55 million) is available in 4 equal installments, the first of which will be available on March 31, 1999.

Background

In 1998, the Zambian economy suffered serious setbacks, owing to adverse external developments including the pronounced fall in copper prices, unfavorable weather conditions, and unexpected delays in the privatization of the Zambia Consolidated Copper Mines (ZCCM).

Real GDP contracted by an estimated 2 percent in 1998, compared with growth of 3.5 percent in the previous year, as copper production declined sharply and agriculture was affected by El Niño. The 1998 budget outcome deviated in important respects from plans, reflecting, among other things, a much weaker economy, shortfalls in external assistance, and continued weakness in budget management. Domestic revenue was more than 4 percent below budget estimates, and expenditure overruns occurred in wages, public service retrenchment, and the settlement of domestic arrears. A 35 percent decline in metal exports contributed to a significant weakening of Zambia’s external position in 1998.

The kwacha depreciated by 39 percent, and international reserves fell by US$170 million to US$44 million at the end of 1998, or less than two weeks of import cover.

The 1999 Program

The government’s objectives for the 1999 economic and financial program are to achieve real GDP growth of 4 percent, reduce inflation to 15 percent, and strengthen gross reserves to the equivalent of 1 ½ months of imports. The principal structural reforms in 1999 relate to privatization, public service reform, and a strengthening of the banking system.

In line with the medium-term objectives, the fiscal program for 1999 aims at reducing the overall budget deficit to 3 percent of GDP. The program envisages an increase in the revenue yield of 0.5 of 1 percentage point of GDP in 1999, a firm control over the public wage bill, and an increase in public investment. Total revenue and grants are programmed to increase to 28 percent of GDP, reflecting the resumption of external program assistance and higher domestic revenue. Although the projected increase in tax revenue is ambitious, notably since the netpositive impact of discretionary tax measures is negligible, recent efforts to address weaknesses in tax administration and the projected pickup in economic activity should make it possible.

Total expenditures (excluding the contingency reserve) are budgeted to increase to 29 percent of GDP. Consistent with the medium-term objectives of the program, the structure of government outlays will change in favor of higher investment and spending on health and education. A strengthening of budget implementation, including the improved control and analysis of spending commitments, cash outlays, and domestic arrears will have priority in the government’s 1999 program.

On the monetary side, the 1999 program has been geared toward bringing inflation down by firmly controlling the growth or reserve money, which is programmed to slow to 18 percent (from 36 percent in 1998), consistent with a projected 20 percent growth of broad money. While the depreciation of the kwacha has considerably improved Zambia’s external competitiveness, as measured by the real effective exchange rate, its inflationary impact has complicated the authorities’ efforts to regain control over inflation. A rapid deceleration in inflation will need to be achieved in order to preserve these gains in competitiveness.

Structural Reforms

The government will increase reforms in the areas of privatization, public service, and monetary and banking supervision.

The damaging impact on Zambia’s economy from delays faced in the privatization of the ZCCM have amply demonstrated the need for a rapid completion of this process. The program also envisages further progress on the divestiture of large state-owned enterprises in the nonmining sector. As regards the transport sector, the government has entered into a management contract with Zambia Railways; in 1999, the government will tender the granting of concessions with regard to the railway system and management rights on the operations of the National Airports Corporation.

The government is also committed to implement a comprehensive public service reform in 1999 program including a reduction in the public service workforce of 7,000 employees through retrenchment, natural attrition, and the hiving off of public institutions. The monitoring of the World Bank-supported retrenchment plan will require reliable payroll data and effective controls on the establishment register. At the same time, the government intends to continue the reorganization of ministries.

Social Issues

Poverty remains a most pressing problem in Zambia. According to World Bank estimates, in 1996 about 70 percent of Zambians were living in poverty, with 58 percent of the populationlacking basic nutrition. The Public Welfare Assistance Scheme (PWAS) is the government’s main vehicle for meeting the needs of the poorest, but its coverage and effectiveness have been limited. The World Bank is supporting the government’s effort to reform the PWAS, with the aim of making the scheme more community-based. The government is also seeking to alleviate poverty by reorienting public expenditure toward the social sectors, primarily health and education.

The Challenge Ahead

In 1998, Zambia’s economic performance suffered major setbacks, which have significantly weakened the economy and eroded some of the gains achieved under the government’s adjustment policies. The government’s 1999 program aims at restoring macroeconomic stability and promoting sustainable growth by reducing inflation, strengthening the external position, and emphasizing the critical role of private sector development. Steadfast implementation of the program for 1999 would contribute to the restoration of private sector confidence and lay basis for sustained economic growth over the medium term.

Zambia joined the IMF on September 23, 1965. Its quota² is SDR 489.1 million (about US$670) and its outstanding use of IMF resources currently totals SDR 843 (about US$1.2 billion).