Press Release: IMF Executive Board Completes Second Review Under Zambia's PRGF Arrangement and Approves US$8.3 Million Disbursement
April 8, 2005
The Executive Board of the International Monetary Fund (IMF) today completed the second review of Zambia's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement, which was approved on June 16, 2004 (see Press Release No. 04/117). The Board also approved waivers for the nonobservance of the continuous quantitative performance criterion on the nonaccumulation of new external arrears and the end-February 2005 structural performance criterion on cabinet approval of proposals to repeal sections of various acts that are in conflict with the Banking and Financial Services Act.
The completion of the review enables the release of a further SDR 5.5 million (about US$8.3 million), which will bring the total amount drawn under the arrangement to about SDR 170.6 million (about US$256.7 million).
Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:
"Zambia's economic performance continued to strengthen in 2004, and over the last five years annual growth averaged nearly 4½ percent. This performance is particularly encouraging against the backdrop of the economic decline in the preceding two decades. However, growth is still not strong enough to make large inroads into widespread poverty, and inflation is high, even though progress was made in this area in 2004 despite increases in fuel prices.
"The implementation of the large fiscal adjustment envisaged under the PRGF-supported program, which embraced politically difficult spending restraint, allowed for a sharp decline in government domestic borrowing and halted an unsustainable rise in domestic debt. The wage bill was held to less than 8 percent of GDP and, for the first time, priority poverty-reducing programs (PRPs) were fully funded. The 2005 budget framework seeks to consolidate these gains to contain domestic borrowing while allowing for increased spending on priority PRPs, including the hiring of a substantial number of additional teachers and frontline health workers.
"Lower government borrowing allowed for a large increase in bank credit to the private sector in 2004, which had a positive impact on investment and the prospects for future economic growth. Moreover, the authorities are taking active steps to deepen financial intermediation through the privatization of the Zambia National Commercial Bank, resolution of some problem state-owned nonbank financial institutions, and strengthening of the supervisory role of the Bank of Zambia. In addition, rapid progress in implementing the private sector development initiative would further enhance economic growth.
"Zambia's attainment of the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC) will greatly improve its debt sustainability position and provide greater resources for poverty-reducing priorities. The authorities are strongly encouraged to quickly reach agreements with all creditors on the delivery of HIPC assistance. In addition, timely implementation of the comprehensive work plan to strengthen public expenditure management, along with further progress toward macroeconomic stabilization, could lead to a scaling up of donor support for Zambia's efforts to reduce poverty. In this connection, it is important that the authorities complete the updating of Zambia's Poverty Reduction Strategy Paper/ National Development Plan before the year's end," Mr. Kato said.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.