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Public Information Notice (PIN) No. 01/123
December 6, 2001
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2001 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 November 7, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zambia.1


Zambia embarked on its structural adjustment and reform 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 agricultural policies and an ambitious privatization program.

While limited success has been achieved in attaining macroeconomic stability, Zambia has made substantial progress with structural reforms in many sectors over the decade of the 1990s. In contrast to early 1990s, Zambia today has an open economy where prices are largely market determined and a greater part of the previously state-owned enterprises has been restructured and divested to the private sector including the all-important copper company. Nonetheless, these accomplishments have been overshadowed by limited success in significantly reducing the incidence of poverty.

Available indicators of economic activity suggest that Zambia's economic performance through end-June 2001 continued to improve. Despite the lower-than-expected output of maize, the targeted real GDP growth of 5 percent for 2001 should be achieved on the basis of a strong recovery in mining, wholesale and retail trade, and manufacturing. The 12-month inflation rate through August fell to about 17 percent compared with 21 percent in the program, largely on account of prudent financial policies, deceleration of food prices reflecting improved supply earlier in the year, and a larger-than-expected appreciation of the kwacha.

Fiscal performance during the first half of the year was generally favorable. The overall fiscal deficit was significantly smaller than programmed because of an overperformance in tax and nontax revenues while cash expenditures were held below the program estimates. However, within this aggregate performance, there were overruns in some areas while cash releases to social sectors were markedly below budgeted levels. Also, the start of spending on HIPC-financed programs was delayed by one quarter, but debt relief has now been transferred to a special account, from which disbursements have begun. The stock of domestic payments arrears at end-June was substantially higher than programmed and amounted to about 3 percent of GDP.

Between end-December 2000 and end-June 2001, broad money contracted by 5 percent (compared to a programmed increase of about 1.5 percent), reflecting the tight monetary conditions following an increase in the cash reserve ratio from 11 percent to 15 percent,2 and an increase of the core liquid asset ratio of banks from 25 percent to 35 percent. This tightening also caused a considerable appreciation of the kwacha (see below) and a reduction in foreign currency deposits (FCDs) whose share in broad money declined from a high of 47 percent at end-December 2000 to 39 percent at end-June 2001. The tightened monetary conditions led to a drop in March in the net foreign assets of the banking system. Interest rates on 91-day treasury bills rose from 34 percent at end-2000 to about 50 percent in early March, but have declined to about 45 percent by end-August. However, real interest rates have risen substantially as the sharp reduction in inflation during the second quarter was not accompanied by a similar reduction in nominal rates.

Between end-December 2000 and end-August 2001, the kwacha had appreciated against the U.S. dollar by 13 percent in local currency terms, and by 18 percent in real terms, owing to tight financial policies. Most of the appreciation took place during the first half of the year, as the kwacha has been broadly stable since end-June.

Balance of payments developments during the first-half of 2001 were mixed. The privatization of the copper mines led to a 32 percent increase in copper export receipts over the same period in 2000. However, growth of non-traditional exports was lower than programmed, mainly because of political turmoil in regional trading partners countries. The increase in total exports was offset by a substantial increase in imports; the latter was partly related to the appreciation of the kwacha and to the pickup in economic activity. External balance of payments support through end-June was about US$56 million short of program as a result of delays in aid disbursements which adversely affected the fiscal and external sector performance. However, the program's targets on gross international reserves, for end-March and end-June, were met after adjusting for the net shortfall in balance of payments support and in Fund disbursements.

Substantial progress was made in implementing structural reforms. At end-March 2001 the government issued instructions to the Zambia Privatization Agency (ZPA) to proceed with technical work on the divestiture of government's interests in the ZNCB, consistent with commitments under the PRGF and HIPC Initiative. The work has subsequently proceeded in accordance with the timetable prepared by ZPA. In the meantime, the financial position of the bank has improved somewhat following the payments by government on guarantees to ZNCB on its loans to Zambia National Oil Company (ZNOC) and to a lesser extent by Roan Antelope Mining Company of Zambia. In further efforts to strengthen the banking system, the BoZ issued instructions to inject new capital to a private bank, and this was completed by end-June, 2001. In addition, two other banks have been put under liquidation.

In the petroleum sector, where the operations of ZNOC have substantially undermined public sector finances and the soundness of the banking system, progress in implementing the reform program agreed with the World Bank has been slow. However, in recent months, the authorities have implemented measures to effectively deregulate oil prices and to liberalize oil imports. The Cabinet approved the privatization option for ZESCO and directed ZPA to proceed with the selection of consultants to assist in the concessioning process.

Executive Board Assessment

Directors noted that Zambia's economic performance has continued to improve in 2001, reflecting in part the authorities' commitment to the reform program and progress so far in its implementation. Despite weak agricultural production because of poor weather, targets for real GDP growth and inflation are likely to be met because of strong growth in the nonagricultural sectors. Nevertheless, Directors stressed that the economic situation remains fragile, especially in the copper sector, in the context of slowing world economic growth and declining commodity prices. They emphasized the importance of substantial and early further progress in improving economic management which, they noted, would be critical in mobilizing the financial and technical assistance that Zambia needs from the international community.

Regarding the fiscal situation, Directors welcomed the recent strength of revenue collection, and recognized that the shortfall in external assistance has complicated the task of fiscal management. At the same time, they emphasized the need for fiscal consolidation and regretted that the central government deficit in 2001 will significantly exceed the initial target. Directors expressed serious concern at the overruns in wages and recurrent departmental charges as well as at the increase in domestic payments arrears.

Directors welcomed various measures being adopted to strengthen expenditure management and control, notably regarding internal reporting and verification systems. They encouraged the government to ensure that its accounts at the Bank of Zambia are properly consolidated. Directors stressed the need for determined implementation of these measures. They looked forward to an increase in expenditures financed under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and a reorientation of non-HIPC Initiative resources toward the social sectors. They expressed satisfaction that the interim system for tracking HIPC Initiative-financed expenditures appears to be functioning well, but emphasized the importance of tracking all poverty-related expenditures to ensure that they are efficiently oriented to the goal of poverty reduction. They also strongly recommended that expenditure budgeting take place within a multiyear framework.

Directors urged caution and realism in formulating the 2002 budget in view of the uncertainties related to the deterioration in the global economic environment, donor assistance, and the possible costs from the privatization of the Zambia National Commercial Bank (ZNCB), as well as the need to reduce the stock of domestic arrears. They strongly underlined the need to prevent a continuation of the adverse trends in the composition of expenditure evident in 2001, and welcomed the authorities' efforts to control non-priority spending.

Directors considered that monetary policy should aim to reduce inflation and stabilize the foreign exchange market. They welcomed the progress in reducing inflation, and considered that further substantial reduction should be an urgent priority. Directors also welcomed steps to improve the Bank of Zambia's capacity to conduct monetary policy, and urged the authorities to allow interest rates and the exchange rate to be more flexible to reflect underlying market conditions. In this regard, they endorsed the central bank's policy of intervening in the foreign exchange market only to meet the program's international reserves targets. Directors looked forward to the results of the Financial Sector Assessment Program (FSAP) scheduled for 2002.

Directors underlined the importance of deepening structural reforms. They pointed to the need to restructure public enterprises and privatize the Zambia National Commercial Bank as soon as possible, and welcomed recent steps regarding the latter. Directors also urged quick implementation of reform measures in the oil sector and of steps to enhance external competitiveness as well as broaden the export base. They emphasized the importance of improving governance, through a broad approach aimed at strengthening the Ministry of Finance and line Ministries, making the office of the Auditor General an independent entity, and improving institutional checks and balances. Directors welcomed the government's intention to finalize the government accounts for 2000 as well as to finalize and publish the report on cobalt sales.

Directors welcomed the authorities' progress in formulating their poverty reduction strategy. They underscored the importance of ensuring that the fiscal cost of the strategy is fully reflected in the government's budgets for 2002 and beyond. In this context, Directors also emphasized the need to address the very serious social and economic costs that the HIV/AIDS pandemic is having on Zambia, and noted that the support of the international community will be helpful in this regard.

Directors supported the authorities' request for technical assistance, particularly in the area of public expenditure management and control. However, noting the substantial technical assistance that Zambia has already received, they emphasized the need for additional assistance to be used effectively. Given Zambia's urgent need for external financial assistance as well, Directors expressed concern that Zambia has not yet been able to reach bilateral debt rescheduling agreements with Paris Club creditors.

Directors noted with concern the increasing weakness in Zambia's statistics, and urged the authorities to make a concerted effort to ensure effective implementation of past technical assistance provided by the Fund and other donors in this area.

Zambia: Selected Economic and Financial Indicators, 1998-2001

    1998 1999 2000 2001
     Act.  Est.  Est. Proj. 1/

    (Annual percentage change, unless otherwise indicated)
National income and prices          
Real GDP   -1.9 2.4 3.6 5.0
GDP deflator   19.6 21.7 27.9 23.3
Consumer prices (annual average) 24.5 26.8 26.1 21.3
Consumer prices (end of period) 30.6 20.6 30.1 17.5
Average exchange rate (kwacha/U.S. dollar) 1,862 2,388 3,111 ...
Real effective exchange rate   -8.7 -2.3 -14.3 ...
Terms of trade   -13.8 -5.6 4.4 -1.8
Money and credit          
Broad money   22.6 29.2 74.1 12.8
Treasury bill rate (in percent; end of period) 34.3 36.2 34.1 ...
    (In percent of GDP)
Investment and savings          
Gross national savings 2/   3.5 6.0 6.7 7.9
Gross foreign savings 3/   11.4 8.4 12.8 12.6
Gross domestic investment   14.9 14.4 19.5 20.5
Of which: public investment 11.1 10.5 10.2 11.4
Central government budget          
Revenue and grants   24.9 25.5 25.7 23.9
Revenue (excluding grants)   18.4 17.6 19.8 18.1
Expenditures (excluding interest) 26.7 26.4 28.6 28.9
Interest due 4/   3.3 2.8 3.1 2.6
Overall balance, cash basis   -4.3 -4.0 -7.2 -7.4
External sector          
Current account balance   -17.7 -16.9 -18.3 -18.5
    (In percent of exports of goods and services)
External debt          
External debt service 5/   16.0 16.2 18.3 15.7
External program assistance   0.0 21.1 21.6 13.8
    (In millions of U.S. dollars, unless otherwise indicated)
Current account balance   -574 -532 -583 -668
Overall balance of payments   -453 -348 -373 -434
Gross official reserves (end of period) 44 46 114 187
In months of imports of goods and services 0.4 0.5 1.0 1.5

Source: Zambian authorities; and IMF staff estimates and projections.

1/ IMF staff estimate and projection.
2/ Gross national disposable income minus consumption.
3/ Current account balance including grants.
4/ After debt relief.
5/ Refers to official and private sector external debt service.

1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the November 7, 2001 Executive Board discussion based on the staff report.
2 The minimum cash reserve ratio was subsequently lowered to 10 percent in March and raised again to 12.5 percent in late June.


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