Public Information Notices

Zambia and the IMF

Public Information Notice (PIN) No. 99/39
April 29, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Article IV Consultation with Zambia

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On March 25, 1999, the Executive Board concluded the Article IV consultation with Zambia1 and approved a three-year ESAF arrangement in an amount equivalent to SDR 254.45 million (for further details, see press release number 99/10).


Zambia embarked on its structural adjustment program in late 1991, with a view to transforming a state-led, stagnating economy into a growing market economy. Comprehensive reforms were implemented, including far-reaching trade and exchange liberalization, a liberalization of agri-cultural policies, an ambitious privatization program, civil service reform, and a strengthening of the legal framework. Much has been accomplished over the past seven years as the macroeconomic situation has improved appreciably. Nonetheless, these accomplishments have been overshadowed by limited success in significantly reducing the incidence of poverty.

Real GDP growth, which averaged 5 percent per year during 1996-97, turned negative in 1998. Production problems and a further worsening of the financial position of the copper parastatal (ZCCM), in conjunction with an El Niño-related drop in the cereal harvest, slowed overall economic activity by 2 percent.

Higher food prices, coupled with the pass-through effects of the sharp depreciation of the kwacha, led to a rise in consumer price inflation, to an annual rate of 31½ percent in January 1999, from 18½ percent in December 1997.

Owing to revenue shortfalls and expenditure overruns on wages, public service retrenchment and the clearance of arrears, domestic fiscal operations (i.e., the fiscal operations excluding external transactions) showed a cash surplus of 0.4 percent of GDP in 1998, against a budget surplus target of 1.2 percent of GDP.

The external position weakened considerably in 1998, reflecting, inter alia, lower exports, shortfalls in donor assistance, and the loss of confidence resulting from the delays in the privatization of the main assets of the ZCCM. As a result, the kwacha depreciated sharply, and gross international reserves declined from US$213 million at end-1997 to US$44 million at end-1998 (less than two weeks of import cover).

Further progress was made on the privatization of parastatals. Most of the smaller asset packages of the ZCCM were sold, and a preliminary agreement was reached on the sale of the largest packages. Under the government’s public service reform program, 15,500 public servants were separated during 1997-98.

The program for 1999 aims to achieve real GDP growth of 4 percent; reduce inflation to 15 percent; and strengthen net international reserves by US$73 million. Fiscal policy will be geared toward reducing inflation and supporting growth by allocating an increasing share of resources to social expenditure and public investment. The program aims to reduce the overall fiscal deficit by 1 percentage point of GDP to 3.2 percent of GDP, exercise firm control over the growth of the money supply, and maintain positive real interest rates on treasury bills. Key structural components of the program are in the areas of expenditure control, privatization, civil service reform, and a further strengthening of the banking system.

Executive Board Assessment

Executive Directors noted that Zambia’s economic performance had been affected by adverse external developments in 1998, including the decline in world copper prices and a weather induced fall in agricultural production. The slowdown in economic activity was compounded by the protracted delay in the privatization of the copper parastatal Zambia Consolidated Copper Mines (ZCCM).

Directors regretted that economic and financial policies in 1998 had been only partially successful in arresting the deterioration in economic conditions. In particular, the loosening of the monetary policy stance in early 1998 had contributed to an accelerated depreciation of the currency and loss of international reserves, while expansionary fiscal policies during the last quarter had exerted strong upward pressure on inflation.

In this regard, Directors welcomed the government’s adjustment program for 1999, which aims at restoring macroeconomic stability and promoting sustainable growth by reducing inflation, strengthening the external position, and emphasizing the critical role of private sector develop-ment. However, given the uncertainties associated with Zambia’s heavy dependence on copper exports, and the budgetary risks emanating from the financial problems of the ZCCM, they urged the authorities to tighten their financial policies, and deepen their program of structural reforms, so as to restore private sector confidence, and lay the basis for sustained economic growth over the medium term. They also stressed the importance of firm and effective implementation of the program, and avoidance of a repetition of the policy slippages that had undermined Zambia’s performance in recent years.

Directors welcomed recent progress made in the sale of the major assets of the ZCCM to a prominent international mining house, which was crucial for macroeconomic stability, and would lay the basis for the restoration of the financial health and development of Zambia’s mining sector. They noted, however, that the sales agreement had not yet been finalized, and strongly urged the authorities to do everything in their power to expedite the transfer of the assets.

Directors emphasized the need for a strong fiscal adjustment effort that would have to be supported by supplementary expenditure restraint to offset the effects of any adverse shocks. In this context, they urged the authorities to take firm action to address the serious existing weaknesses in expenditure controls, and to avoid the accumulation of domestic payments arrears. Moreover, it was imperative to limit the increase in the wage bill and implement additional public sector retrenchment, in order to bring current expenditures to a more sustainable level and allow a reorientation of expenditure toward health, education, and poverty reduction. In addition, Directors stressed the need to strengthen revenue performance by improving tax administration and refraining from introducing new tax exemptions or preferential tax treatment. In this regard, some Directors expressed concern about the generosity of the tax concessions granted in the context of the privatization of ZCCM, which would entail significant fiscal costs in the long term, while other Directors agreed that these concessions were important for the recovery of the copper sector in Zambia.

As regards monetary policy, Directors noted that the rise in interest rates in 1998 was appropriate in light of the mounting inflationary pressures, and urged the authorities to maintain positive real interest rates to promote savings and restore confidence in the kwacha. They expressed concern about the weaknesses in the commercial banking system and noted that the current high share of nonperforming loans in total loans was not sustainable. Accordingly, they urged the authorities to strengthen loan repayment efforts, to strictly apply minimum liquidity and capital requirements, and to strengthen prudential supervision.

Directors regretted that limited progress had been made in privatizing state enterprises in the nonmining sector in 1998. They welcomed the high priority accorded in the government’s medium-term adjustment program to the divestment of public enterprises, including public utilities, parastatals in the petroleum sector, and financial institutions.

Directors commended the authorities for the trade liberalization measures taken in 1998, and emphasized that trade liberalization should remain one of the key elements of the authorities’ medium-term adjustment program.

Directors noted that Zambia’s external current account deficit would remain large, and that the external position would be subject to a number of uncertainties, in particular the availability of external financing, and the timing of the completion of the privatization of the ZCCM. In this connection, they stressed the critical importance of sustained program implementation and further progress on fighting corruption so as to improve the prospects for timely and adequate mobilization of external support, including through the HIPC Initiative. Directors encouraged the authorities to take the necessary steps toward accepting the obligations of Article VIII of the IMF’s Articles of Agreement.

Directors noted with concern the weaknesses in economic and financial statistics, including the recent deterioration in the reliability of external debt service statistics. They urged the authorities to improve the quality of economic and financial statistics, as a matter of urgency.

Zambia: Selected Economic Indicators, 1995-99

1995 1996 1997 1998 19991

Output and prices (change in percent)
Real GDP -2.3 6.4 3.5 -2.0 4.0
Consumer prices (period average) 34.9 43.1 24.4 24.5 21.6
Investment and savings (percent of GDP)
Gross investment 13.1 14.8 13.6 14.4 17.6
Public investment 6.6 6.0 5.4 7.7 8.5
Private investment 6.5 8.7 8.2 6.7 9.0
Gross domestic savings 7.3 8.5 8.1 5.4 5.1
Public domestic savings 3.6 3.5 3.7 1.5 0.5
Private domestic savings 3.7 5.0 4.4 3.8 4.6
Central government finance (percent of GDP)
Total revenue and grants 29.1 26.8 24.8 24.5 27.8
Total expenditure and net lending 32.9 29.4 26.8 28.8 31.0
Overall government deficit (excluding grants) -13.0 -8.7 -7.0 -10.6 -12.3
Overall government deficit (including grants) -3.8 -2.6 -1.9 -4.3 -3.2
Primary balance (including grants) 4.3 2.2 2.2 -1.0 -0.9
Total domestic public debt outstanding ... 11.7 10.0 14.3 10.0
Money and credit
Broad money (end-year, percent change) 55.3 34.4 23.9 18.5 20.4
Treasury bill yield (91 days; period average; in percent) ... 52.5 30.6 26.6 30.7
External sector (in percent of GDP)
Current account (including official transfers) -4.2 -3.7 -6.1 -8.1 -8.9
Current account (excluding official transfers) -13.4 -13.0 -11.1 -15.2 -19.8
Total foreign public debt outstanding 197 210 179 197 221
Exchange rates
Zambian kwachas per U.S. dollar (period average) 865.9 1,207.5 1,314.6 1,861.8 ...
Real effective exchange rate (1995=100) 100.0 104.6 125.3 114.4 ...

Sources: Zambian authorities; and IMF staff estimates.

1Staff projections.

1Under 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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