Statement by the IMF Staff Mission at the Conclusion of a Visit to Zambia

Press Release No. 07/62
April 2, 2007

An International Monetary Fund (IMF) mission to Zambia, lead by Mr. Francesco Caramazza, made the following statement on March 28 in Lusaka:

"An IMF mission visited Zambia during March 14-28, 2007 for discussions on the fifth and sixth reviews of Zambia's three year economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF). The mission reviewed economic and financial developments and held productive discussions with the Zambian authorities on economic performance in 2006 and on policies and prospects for 2007. The mission also met with representatives of the private sector, civil society, and Zambia's cooperating partners.

"The Zambian economy continues to perform well. Strengthened macroeconomic policies and a favorable external environment have been major factors behind the improved performance in recent years. Annual real GDP growth is estimated to have reached almost 6 percent in 2006, led by solid expansions in the mining and construction sectors and a strong recovery in agriculture. Inflation slowed to single digits for the first time in three decades, largely owing to stable food prices following a bumper maize harvest in early 2006. The renaissance of the copper sector and extensive debt relief have markedly strengthened the economy's prospects.

"The stance of fiscal policy remained appropriately prudent in 2006, as indicated by the decline in the budget deficit excluding grants. However, government domestic borrowing substantially exceeded the planned amount because a sizeable portion of budgetary releases made in 2005 were not spent until 2006. Monetary expansion was significantly greater than targeted during the last few months of 2006, leading to a substantial buildup of liquidity, which the Bank of Zambia is now addressing.

"Looking ahead, economic prospects are favorable. Bolstered by sizable investments, particularly in mining and manufacturing, and by construction, real GDP is projected to grow by about 6 percent a year over the medium term. Depending on the quality and extent of implementation of the Fifth National Development Plan growth could be higher still. Sustaining robust growth, however, hinges on maintaining macroeconomic stability, making more effective use of public resources, and undertaking the improvements in infrastructure and the financial and private sector reforms which are essential to enhance productivity and competitiveness. The government's revenue base needs to be boosted to provide scope for increased spending on infrastructure and social programs to meet the national development goals.

"The 2007 budget appropriately targets a decline in net domestic financing. This is necessary to contain domestic debt and create scope for the expansion of credit to the private sector. Tax revenue is projected to increase by about 1 percentage point of GDP, mainly from the mining sector, where some companies have started to declare taxable profits, and VAT collections. The announced changes in the fiscal regime for the mining sector are welcome, as is the government's intention to remove fiscal terms from future development agreements. Zambia's tax system is very competitive in the region. While targeted tax incentives for investment can be appropriate under special circumstances, inefficient use of tax incentives, in particular tax holidays, entail significant costs. Therefore, great care needs to be taken to ensure that such incentives associated with multi-facility economic zones do not erode the tax base over time. In this respect, the monitoring and reporting of tax expenditure would be helpful."

"It is essential to consolidate the gains that have been made on the inflation front in recent years. While fluctuations in the inflation rate are inevitable, not least because of the volatility of food prices which account for more than half of the consumer price index, Zambia should be able to sustain single digit inflation. This outcome depends, of course, on the pursuit and consistent implementation of an appropriate monetary policy. The Bank of Zambia's efforts in the first few months of 2007 to absorb excess liquidity are thus welcome."

"The mission will continue its work in Washington D.C., in close consultation with the Zambian authorities, with a view to completing the fifth and sixth reviews under the PRGF arrangement in early June."



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