Press Release: IMF Approves Three-year ESAF and One-year SAF Loans for Zambia

December 6, 1995

The International Monetary Fund (IMF) today lifted Zambia's ineligibility to use IMF financial resources and approved loans for Zambia totaling SDR 883.4 million (about $1,313 million). Approval of the credit follows the clearance of Zambia's arrears to the IMF of SDR 830.2 million (about $1,234 million), which was facilitated by bridge financing provided by several countries. Of the total loan, SDR 701.7 million (about $1,043 million) are provided under a three-year enhanced structural adjustment facility (ESAF) arrangement and a further SDR 181.7 million (about $270 million) under a one-year structural adjustment facility (SAF) arrangement in support of the Government's economic and financial reform program for the period 1995/96-1997/98.1 These loans correspond essentially to an encashment of rights, accumulated under Zambia's rights accumulation program (RAP), which was successfully completed on December 4, 1995.

Under the rights approach, which represents an element in the IMF's collaborative strategy for countries with protracted overdue financial obligations to the IMF, certain members with protracted overdue financial obligations to the IMF can earn rights based on the member's performance under an economic program endorsed by the IMF. Following (a) satisfactory performance under its program; (b) clearance of its arrears to the IMF; and (c) approval by the IMF of a successor arrangement or arrangements, the member can then encash the accumulated rights as the first disbursement under the successor arrangement from the IMF.

Clearance of its arrears to the IMF has allowed Zambia to consent to, and pay for, its quota2 increase under the Ninth General Review of Quotas. As a result, Zambia's quota in the IMF has increased from SDR 270.3 million (about $402 million) to SDR 363.5 million (about $540 million).


Zambia was declared ineligible to use IMF financial resources on September 30, 1987 following the accumulation of overdue financial obligations to the IMF. When the rights accumulation program was established on July 17, 1992, Zambia's arrears to the IMF totaled SDR 920.7 million (about $1,369 million). In November 1991 when the current Government took office, the Zambian economy had long been in decline, with per capita income down by one third since the early 1970s. The new Government introduced an Economic Recovery Program that aimed to reverse the economic decline through far-reaching market-oriented reforms. The pace of economic reform gained momentum with the endorsement by the IMF of a RAP on July 17, 1992 (see Press Release No. 92/57). Zambia has made great strides in some areas of structural reform under the RAP, notably in freeing markets and by eliminating government intervention and control. In the area of macroeconomic policy, however, inflationary fiscal and quasi-fiscal operations have at times hindered effective policy implementation. The authorities have responded to such problems with a variety of corrective fiscal measures, as well as reforms to deal with the fundamental sources of the problems. Since embarking on economic reforms at the end of 1991, Zambia has had to face problems caused by drought and falling production of copper, its main export. Despite recurrent episodes of macroeconomic instability, positive effects are now beginning to emerge and the reforms have laid the groundwork for economic growth.

Medium-Term Strategy and the 1995/96 Program

Zambia's program for 1995/96-1997/98 aims at strengthening the macroeconomic stabilization effort, while consolidating and advancing the structural reforms begun under the RAP. The objectives of the program include real economic growth of 6 percent in 1996-98; a single-digit inflation rate; a significant accumulation of foreign exchange reserves; and completion of the process of liberalizing the economy. To these ends, the Government will seek to achieve a surplus on its domestic budget through a tax reform that will reduce reliance on trade taxation; through a containment of the civil service wage bill in real terms; and through significant receipts from privatization. In its conduct of monetary policy during the program period, the Bank of Zambia will endeavor to keep inflation on a downward path. The exchange rate will continue to float.

Within this medium-term framework, the objectives of the 1995/96 (July-June) program are to achieve real economic growth of 6 percent in 1996, after stagnation in 1995; to reduce the rate of inflation to 10 percent in the same period; and to narrow the external current account deficit to 6.4 percent of GDP in 1996, from 7.9 percent of GDP in 1995. To these ends, fiscal policies will target a domestic budget surplus of 1 percent of GDP, while monetary policy will be tightened to reduce broad money growth to about 13 percent (annualized) in the first half of 1996, from 32 percent in 1995.

Structural Reforms

The program envisages a number of structural reforms. In the financial sector, the Bank of Zambia will strengthen its supervisory capacity and improve the quality of bank inspections. It will also develop a system of prudential indicators for early warning of banking problems, and will establish objective criteria for determining bank solvency. In the parastatal area, the authorities are carrying out a privatization program, which is to include privatizing the copper company ZCCM. As part of their program of civil service reform, they are downsizing the civil service through a partial hiring freeze that is expected to reduce the size of the civil service by about 2 percent in 1995/96.

Addressing Social Problems

The best hope for a reduction in poverty, which is pervasive in Zambia, lies in a resumption of economic growth that is expected to result from sound structural adjustment policies. The authorities are also seeking to alleviate poverty by reorienting public expenditure toward the social sectors, and by providing training and limited financial support to workers laid off in the privatization process. In addition, drought-relief programs are currently being run with donor-provided maize.

The Challenge Ahead

Steadfast implementation of the program s policies in the period ahead will do much to bolster confidence in macroeconomic management, thereby reducing the uncertainty that deters potential domestic and foreign investors from commitment to the Zambian economy. Zambia will continue to need external support on highly concessional terms for some years if it is to achieve external viability.

Zambia joined the IMF on September 23, 1965. Zambia's outstanding use of IMF credit currently totals SDR 833.4 million (about $1,240.3 million).

Zambia: Selected Economic Indicators

  1994 1995* 1996* 1997* 1998*

(percent change)
Real economic growth –5.1 -- 6.0 6.0 6.0
Consumer prices
    (end of period)
35.1 35.0 10.0 5.0 4.0
(percent of GDP)
External current account balance
    (deficit –)
–1.9 –7.9 –6.4 –5.3 –7.9
Overall domestic budget balance
    (deficit –)
–2.2 0.8 1.0 1.0 1.0
Gross official foreign reserves
    (in months of nonmaize imports)
2.5 2.5 2.9 4.0 4.0

Sources: Zambian authorities; and IMF staff estimates.
1. The ESAF and the SAF are concessional IMF facilities for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF and SAF loans carry an interest rate of 0.5 percent, and are repayable over 10 years, with a 5 1/2-year grace period.

2. A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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