Press Release: IMF Approves Third Annual PRGF Arrangement for Zambia
April 17, 2001
The Executive Board of the International Monetary Fund (IMF) completed the second review of Zambia's program under the Poverty Reduction and Growth Facility (PRGF)1 and approved the third annual arrangement of SDR 99.76 million (about US$126 million) to support the government's economic program for 2001. The review's completion enables the immediate release of SDR 24.94 million (about US$32 million).
Zambia's three-year program, originally supported under the Enhanced Structural Adjustment Facility (ESAF), was approved on March 26, 1999 (see Press Release No 99/10), amounting to SDR 254.45 million (about US$322 million) of which SDR 30 million (about US$38 million) has been disbursed.
After the Executive Board's discussion on Zambia, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following statement:
"Zambia's economic performance improved in 2000 and most of the program's targets and performance criteria were observed. For the first time in recent years, real per-capita GDP growth was positive. The program for 2001 aims to achieve macroeconomic stability, accelerate growth, and underpin efforts to reduce poverty. In support of the authorities' goal of poverty reduction, the program will substantially increase poverty-related spending, made possible by the resources released under the HIPC Initiative, while maintaining a sustainable fiscal position. Strong political commitment will be needed to maintain expenditure control in an election year and ensure that social and poverty-related expenditures reach the intended beneficiaries. Measures to improve the expenditure management system will be essential to achieve the program objectives.
"Fighting inflation is a priority in Zambia, and an appropriately tight monetary policy is needed. The health of the banking system, in particular the weak financial situation of the state-owned Zambia National Commercial Bank (ZNCB), remains a concern. The Bank of Zambia has appropriately instituted additional supervisory measures, including daily monitoring of ZNCB's financial position, but divestiture of the government's majority-controlling interest in the bank, in accordance with the recent cabinet decision, will be key to addressing its long-term problems and is a central element of the 2001 program.
"The structural reforms and governance measures for 2001 are aimed at restoring investors' confidence and removing major bottlenecks to growth. To enhance accountability in the management of public resources, the study on cobalt sales is in the process of being finalized, and the authorities intend to take appropriate follow-up actions.
"Notable progress has been achieved in developing a participatory Poverty Reduction Strategy Paper. As envisaged by the authorities, consultations with stakeholders, particularly in provinces, will be enhanced and extended to ensure ownership of the final document. A high-level steering group will provide political leadership and support to the process," Mr. Sugisaki said.
Zambia's economic performance in 2000 improved substantially. For the first time in recent years, real per-capita GDP growth was positive. Notwithstanding these gains, the economy experienced macroeconomic instability, particularly during the last quarter of 2000. The 12-month inflation rate reached about 30 percent in 2000 and the exchange rate depreciated by 37 percent in foreign currency terms.
The key policy challenges facing Zambia continue to be achieving sustained economic growth with low inflation, and improving the living standards of all Zambians by making sure that the benefits of economic growth are shared by the poor.
The main objectives of the 2001 program are macroeconomic stability, laying the basis for poverty reduction by increasing social and poverty-related spending, and strengthening investor confidence through structural reforms and governance measures. Accordingly, the program targets real GDP growth of 5 percent, a reduction in inflation to 17.5 percent, and an increase in gross reserves to the equivalent of two months of imports. Appropriate financial policies will help achieve the inflation and growth objectives while allowing for adequate investment in the social sectors and infrastructure, made possible by debt relief under the HIPC Initiative.
Fiscal policy in 2001 will aim to support the program's inflation objectives, while increasing substantially poverty-related spending. Notwithstanding an anticipated decline in revenues, the overall fiscal deficit is projected to narrow from 7.3 percent of GDP in 2000 to about 5 percent of GDP, mainly as a result of containing expenditures and substantially larger external program grants.
Taking account of HIPC Initiative-related financing and outlays, total expenditures are programmed to decline from 32.4 percent of GDP to 31.9 percent, despite significant one-off events like the Organization of African Unity (OAU) summit, as well as the parliamentary and presidential elections.
The monetary program for 2001 aims at reducing the 12-month rate of inflation to 17.5 percent and stabilizing the kwacha exchange rate, while facilitating an appropriate increase in credit to the private sector to support faster economic activity. To achieve this target and guard against reigniting inflationary pressures, including those from the lagged effects of the depreciation, broad money is projected to increase by about 17 percent.
Structural reform and governance measures for 2001 are aimed at progress towards restoring investor confidence and removing major bottlenecks to growth. The privatization of the Zambia Consolidated Copper Mines (ZCCM) in March 2000, which had proved to be a major political hurdle, improved the climate for private sector investments and helped boost Zambia's prospects for economic growth. With regard to strengthening governance, the government launched a study in July 2000 to investigate the discrepancy between the realized export prices of ZCCM cobalt sales in 1998-99 and the world market prices. The report will be finalized by end-June 2001. The structural reform and governance agenda also focuses on addressing the weaknesses of the Zambian National Commercial Bank (ZNCB) and privatization of the government's majority controlling interest, completing the deregulation of petroleum prices and imports, and effectively privatizing the oil sector entities, strengthening information systems and expenditure control, and improving economic and financial governance.
PRSP, poverty reduction and social policies
The elaboration of a full PRSP will need to, among other things, establish a new three-year policy matrix with targets and indicators, develop a coordinated monitoring information system, produce costing and a budget reflecting policy priorities, in line with the annual budget and, submit all this for public consultation.
While PRSP priorities are being developed, a list of poverty-oriented programs (roads and water, school supplies and drugs) to be supported by HIPC Initiative resources and estimated to cost US$86 million was drawn up by the authorities. Thus, 68 percent of the resources from the HIPC initiative will go to expanding existing poverty-oriented programs and the rest to new poverty-oriented programs.
Zambia joined the Fund on September 23, 1965; its quota2 is SDR 489.10 million (about US$619 million). Its outstanding use of IMF financing currently totals SDR 873.43 million (about US$1,106 million).
Table. Zambia: Selected Economic and Financial Indicators, 1998-2003
Source: Zambian authorities; and Fund staff estimates and projects.
1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and donors, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. For Zambia, an interim PRSP dated July 12, 2000 was considered by the Executive Boards of the IMF and the World Bank as an adequate basis for concessional assistance. The authorities aim to produce their full-fledged PRSP by October 2001 through a participatory process involving civil society, to supplement and update the interim PRSP. It is understood that all policy undertakings in the interim PRSP beyond 2001 are subject to reexamination and modification in line with the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for subsequent reviews under this PRGF arrangement. PRGF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 1/2-year grace period on principal payments.
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 of the allocation of SDRs.