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Press Release No. 99/10
March 26, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves ESAF Loan for Zambia

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).


Zambia: Selected Economic and Financial Indicators, 1996-2001









1996

1997

1998

1999

2000

2001




Est.

Program









National income and prices







Real GDP

6.6

3.3

-2.0

4.0

4.5

5.5

GDP deflator

23.4

26.8

23.1

20.8

11.3

5.4

Consumer prices (annual average)

43.1

24.4

24.5

21.6

11.6

5.3

Consumer prices (end of period)

35.2

18.6

30.6

15.0

8.0

4.0

Nominal GDP (in billions of kwacha)

3,945

5,169

6,241

7,839

9,118

10,135

Copper production (in thousands of metric tons)

314

314

291

300

330

347








External sector







U.S. dollar value of exports of goods and services

-13.1

17.2

-24.6

8.3

15.1

14.6

Of which: copper

-33.3

14.4

-33.6

4.9

13.2

18.5

U.S. dollar value of imports of goods and services

-11.2

15.5

-15.5

13.8

8.7

7.6

Export volume

9.4

7.0

-12.4

11.8

11.8

7.0

Import volume

-10.9

25.3

-10.2

13.2

7.2

6.5

Copper export volume

-4.1

-8.0

-13.9

15.7

10.0

5.0

Copper exports (in thousands of metric tons)

327

301

259

300

330

347

Copper export prices (average, US$ per metric ton)

1,734

2,156

1,661

1,507

1,550

1,750

Nominal effective exchange rate

-26.4

-1.7

-24.1

...

...

...

Real effective exchange rate

3.8

19.8

-8.7

...

...

...

Average official exchange rate (kwacha per U.S.







dollar)

1,208

1,315

1,862

...

...

...

Terms of trade

-22.8

21.6

-10.3

-5.1

0.8

6.0








Money and credit







Net foreign assets

-23.6

7.2

-100.3

11.1

9.2

10.6

Net domestic assets

27.4

4.4

65.8

-0.8

-0.4

-1.4

Net domestic credit

36.3

6.9

91.0

-2.4

-1.2

-4.4

Net claims on government

22.7

8.4

355.4

-19.6

-22.3

-33.7

Claims on nongovernment

40.4

6.5

20.2

15.0

13.7

9.8

Broad money

34.4

24.0

22.6

20.3

12.9

9.7

Velocity1

6.0

6.3

6.5

6.3

6.4

6.4

Official bank rate (in percent; end of period)

69.5

23.5

43.6

...

...

...

Treasury bill rate (in percent; end of period)

57.7

14.4

34.0

...

...

...








Central government budget






Revenue (excluding grants)

37.0

25.2

10.6

29.1

19.0

14.5

Grants

-12.0

7.6

52.8

80.3

-42.1

10.7

Expenditure and net lending

9.6

19.8

33.4

39.3

-0.4

11.6

Current expenditure

3.2

23.0

15.6

7.2

20.4

10.5

Capital expenditure

28.1

13.0

74.7

22.8

7.6

15.8









(In percent of GDP)

Investment and savings







Gross national savings2

11.0

7.5

6.4

8.7

11.3

13.2

Gross domestic investment

14.8

13.6

14.4

17.6

20.3

20.0

Of which: public investment

6.0

5.4

7.7

8.5

7.4

7.9








Central government budget







Revenue and grants

26.8

24.8

24.5

27.8

23.6

24.2

Grants

6.1

5.0

6.4

9.1

4.6

4.5

Expenditures (excluding interest)3

22.6

20.9

24.4

28.4

23.9

24.6

Interest due4

4.8

4.1

3.3

2.3

2.6

2.3

Overall balance, cash basis

-2.6

-1.9

-4.3

-3.2

-1.3

-1.2

Overall balance, cash basis, excluding grants

-8.7

-7.0

-10.7

-12.3

-7.5

-7.3








External sector







Current account balance5

-3.7

-6.2

-8.0

-8.8

-10.7

-8.3








(In percent of exports of goods and services)

External debt







External debt service before rescheduling6

40.7

28.8

33.2

37.0

36.7

49.0

Net present value of total debt6

430.4

374.6

509.7

467.3

431.3

390.7

External program assistance

12.7

9.2

0.0

28.8









(In millions of U.S. dollars, unless otherwise indicated)








Current account balance

-122

-239

-269

-281

-362

-302

Overall balance of payments

-105

-127

-249

-111

-294

-209

Gross official reserves (end of period)

186

213

44

165

306

403

In months of imports of goods and services

1.7

1.7

0.4

1.4

2.3

2.8



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

1GDP/average broad money.







2Gross national disposable income minus consumption.




3Including contingency reserve (1999-2001).






4After debt relief.







5U.S. dollar GDP calculated on the basis of changes in real GDP and U.S. GDP deflator

(base year =1998).

6External debt pertains to public and publicly guaranteed debt.


1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 ½ year grace period.
2 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100