Press Release: Statement by the IMF Staff Mission at the Conclusion of a Visit to Zambia
February 28, 2008Press Release No. 08/34
An International Monetary Fund (IMF) mission to Zambia, led by Mr. Francesco Caramazza, released the following statement in Lusaka today:
"An IMF mission visited Zambia during February 13-27, 2008 to continue discussions on an economic program that could be supported by the IMF. The mission met with Hon. Ng'andu P. Magande, Minister of Finance and National Planning; Dr. Caleb Fundanga, Governor of the Bank of Zambia; and other senior officials, as well as with representatives of the business community, civil society, and Zambia's cooperating partners.
"The discussions were fruitful and the authorities and the mission reached understandings on an economic program that could be supported by a new three-year arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF). The overarching goal of the program is to assist the authorities in achieving the Fifth National Development Plan's objectives of boosting economic growth and reducing poverty by creating an environment conducive to private sector growth through sustained macroeconomic stability, public sector efficiency and accountability, and creating fiscal space for increased investments in infrastructure and the social sectors while maintaining debt sustainability.
"The Zambian economy continues to perform favorably. In 2007, economic growth remained robust, inflation stayed in the single digits, and a strong external position allowed a further buildup of international reserves. Implementation of fiscal and monetary policies was not without difficulties, however. The fiscal stance was tighter than planned, partly owing to setbacks in the execution of capital spending, while the bunching up of fiscal spending made maintaining an appropriately tight monetary stance a challenge, particularly toward the end of the year. We welcome the steps the authorities are taking to strengthen budget execution and liquidity management.
"Looking ahead, Zambia's economic prospects remain good, although not without risk. Real GDP is expected to continue to expand at 6-7 percent per year over the medium term on continued investment in mining and manufacturing, a modest recovery in agriculture, and buoyant construction and telecommunication sectors. The main risks to the outlook would spring from a sharper-than-assumed decline in international copper prices and the intensification of the ongoing shortages of electric power.
"The 2008 budget maintains the prudent approach to fiscal policy of recent years. Despite increased spending, including on capital projects, the fiscal position is expected to strengthen with rising revenue from the mining sector. The projected modest government recourse to domestic financing should allow ample scope for private sector credit growth. Monetary policy will aim to reduce inflation further.
"The proposed fiscal regime for the mining sector is expected to generate substantial additional government revenue. In implementing the new regime, particular care needs to be taken to maintain Zambia's attractiveness as a destination for mining investment. Also, it is important to ensure that the additional resources are used transparently and effectively. The IMF mission welcomes the government's intention to set aside in a special account revenue accruing from the new regime in 2008 for spending in subsequent years when greater capacity for capital spending would have been built up.
"The electricity situation in Zambia is grave, with available generating capacity falling well short of demand. This situation is compounded by the general power shortage in the region. Urgent action is needed to ensure that additional power generating capacity can come on line as soon as possible. External borrowing will likely be needed for investment in additional capacity but should only be undertaken for economically viable projects so as not to undermine debt sustainability. An increase in electricity tariffs to levels that reflect costs as well as reform of ZESCO, the state-owned electricity company, are critical for the economic viability of new power generating projects.
"The mission will continue its work in Washington, D.C., in close consultation with the Zambian authorities, with a view to bringing the new program to the IMF Executive Board for its consideration in May."