Press Release No. 04/117

Press Release: IMF Approves US$320.41 Million PRGF Arrangement for Zambia

June 16, 2004

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Zambia in an amount equivalent to SDR 220.095 million (about US$320.41 million) to support the government's economic program into June 2007. The first disbursement of SDR 82.536 million (about US$120.15 million) under the arrangement will become available immediately.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the IMF Executive Board discussion on Zambia, Takatoshi Kato, Deputy Managing Director and Acting Chairman, stated:

"Zambia's performance continues to improve, with the economy now enjoying the strongest period of growth in the last two decades and the lowest rate of inflation in two decades. Nevertheless, the country's economy remains fragile and significant progress toward the Millennium Development Goals (MDGs) will require even faster economic growth and better targeted public spending. In this regard, prudent macroeconomic management and a deepening of structural reforms will be critical.

"The government's program for 2004, which will be supported by the Poverty Reduction and Growth Facility (PRGF), responds to the urgent need for fiscal consolidation to limit the recent increase in domestic debt and to redirect spending to priority areas. Under the program, non-priority expenditures, including on wages, will be contained and plans for rightsizing and pay reform of the civil service will be expedited to support the effective delivery of public services. Fiscal adjustment and a prudent monetary policy should help bring about a sustainable decline in domestic interest rates and prices.

"The government's structural reform agenda focuses on improving public expenditure management and financial accountability; addressing the problems of the insolvent state-owned nonbank financial institutions; and completing the privatization of the Zambia National Commercial Bank. The government also intends to improve the environment for private sector activities by removing obstacles to investments.

"Zambia's first Poverty Reduction Strategy Paper (PRSP) Progress Report concludes that PRSP implementation was weaker than intended because of pressures on the budget. However, in light of the recent reforms and policy commitments, the strategy proposed in the PRSP continues to provide a sound basis for continued access to Fund concessional assistance. To pave the way for reaching the HIPC completion point, Zambia will need to satisfactorily implement the PRSP, complete a six month track record under the PRGF, and attain the few remaining HIPC triggers," Mr. Kato said.

ANNEX

Recent Economic Developments

Zambia's growth performance has continued to strengthen and reached 5.1 percent in 2003, marking the fourth consecutive year of economic expansion and the longest period of sustained growth in more than two decades. At the same time, inflation declined to 17 percent at the end of 2003, the lowest level in over 20 years.

These favorable outcomes for growth and inflation in 2003 were, however, aided by exogenous developments that helped to offset the impact of serious slippages. Large unbudgeted expenditures related to security, payment of benefits and wage arrears to workers in the mining sector, and shortfalls in external assistance resulted in domestic borrowing in 2003 equivalent to 5 percent of GDP, compared to the 2 percent in 2002. At the same time, spending on poverty- reduction programs fell short of the budgeted levels.

The authorities' budget for 2004 is geared to averting a further upward spiral in domestic debt and interest costs. In the first three months of 2004, fiscal performance improved significantly. Revenues through end-March were in line with targets established under the extended Staff Monitored Program (SMP). The ceiling on domestic financing was met by a comfortable margin, and all expenditure categories were at or below their programmed levels.

Program Summary

The centerpiece of the policy framework is a strong, front-loaded fiscal adjustment to halt the unsustainable cycle of rising domestic debt and interest payments, and increase spending on poverty-reducing programs. The program aims to increase real growth GDP to at least 5 percent per annum over the medium term. In combination with a reorientation in expenditures attained through structural reforms, this would allow an increase in spending on priority poverty-reducing programs to 3.7 percent in 2007 from 1 percent of GDP in 2003.

The structural reform agenda covers four main areas that support the objectives of the PRSP and were identified as priorities: reforms in public expenditure management and restructuring of the public sector will support fiscal consolidation and a reorientation of spending towards poverty reduction; financial sector reforms will support improvement in the efficiency and scope of financial intermediation; private sector development will be fostered by completion of the privatization program and a removal of obstacles to private sector growth; and there will be continued improvement in governance and in transparency of government operations.

The macroeconomic framework does not assume sharply higher assistance over the medium term, although sustained high levels of external assistance needed to support faster growth are likely to be forthcoming as policy implementation continues to improve.

Macroeconomic objectives for 2004 include real GDP growth of about 3.5 percent, an inflation rate of no more than 20 percent, and a build-up of gross international reserves to about one month of import cover by end-2004. The government has reiterated its intention to hold the wage bill to no more than 8 percent of GDP in 2004. The monetary program aims at limiting broad money growth to 18 percent in 2004 to preserve the gains in reducing inflation in the face of less favorable trends in fuel prices.

Zambia became a member of the IMF on September 23, 1965. Its quota is SDR 489.10 million (about US$712 million, and its outstanding use of Fund resources currently totals SDR 576.89 million (about US$839.83 million).