## cr17328

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### Fiscal sustainability assessment
- Sustainable fiscal policy: continue current fiscal policies over the medium-to-long-run without weakening solvency or defaulting on debt or accumulating arrears.
- Recent developments:
  - After an average deficit of 1.6 percent of GDP in 2007–11, fiscal loosening began in 2012; cash fiscal deficit reached 6.4 percent of GDP in 2013.
  - Cash fiscal deficit averaged 6.6 percent of GDP in 2014–16 compared to 10.8 percent of GDP on a commitment basis during the same period.
  - Zambia’s risk of debt distress: low → moderate in the 2015 DSA → high in the 2017 DSA.
- Key indicators:
  - Tax-to-GDP ratio: 14 percent of GDP in 2015 vs SADC average 23.7 percent of GDP.
  - External debt: 20 percent of GDP at end-2014 → 43 percent of GDP at end-2015; external debt-to-GDP declined to 36.5 percent in 2016.
  - Zambia kwacha lost over 40 percent of its value in 2015.
  - Spreads on the 2012 Eurobond increased to 1432 basis points by January 2016.
  - Projected disbursements and planned borrowing:
    - $4 billion contracted since early 2016 through H1 2017.
    - Additional government borrowing plans for another $4 billion mostly on non-concessional terms over the next five years.
    - Combined effect projected to raise total debt burden to over 60 percent of GDP and PV of external debt to over 40 percent of GDP by 2019.

### Drivers of fiscal performance and rising public debt
- Narrow tax base and low tax productivity:
  - Total revenue 2015: 18.8.
  - Tax revenue 2015: 14.4.
  - Non-tax revenue rose from about 1 percent of GDP in 2009 to 4 percent of GDP in 2015.
  - VAT:
    - Current standard VAT rate: 16 percent.
    - VAT C-efficiency: 0.28 percent in 2015 vs SADC average 0.45 percent.
    - IMF staff estimate: if current exemptions are kept, VAT rate would need to increase to 25 percent to reach SADC VAT collections levels.
  - CIT productivity: CIT yielded 1.5 percent of GDP in 2015 vs SADC average 3.5 percent of GDP.
  - Trade taxes: Customs duty collection 1 percent of GDP in 2015 vs SADC average 3.8 percent of GDP; Value of Imports for Duty Purposes narrowed from 24 percent of total value of imports in 2014 to 19.5 percent in 2015.
  - Contributing factors: significant tax exemptions, multiplicity of rates, high PIT exemption threshold (about two thirds of wage earners estimated below the exempted threshold), and widespread tax incentives.
- Unsustainable expenditure levels:
  - In 2016 wage bill, energy and agriculture subsidies, and debt service absorbed over 100 percent of domestic revenues:
    - Wage bill: 48.4 percent of domestic revenues (2016).
    - Energy and agriculture subsidies: 29.9 percent of domestic revenues (2016).
    - Debt service: 24.2 percent of domestic revenues (2016).
  - Wage bill dynamics:
    - Wage bill <38 percent of domestic revenues in 2011 → nearly 52 percent in 2014.
    - Wage bill 6.5 percent of GDP in 2011 → 9.4 percent of GDP in 2014.
    - Wage freeze Sep 2014–Dec 2015 lowered wage bill to 8.5 percent of GDP in 2015 and to less than 48 percent of domestic revenue in 2015.
    - Projected share of domestic revenues to cover wage bill in 2017: 53 percent (given salary adjustments and new hiring) absent action.
  - Subsidies:
    - Energy and agriculture subsidies increased from 21 percent of 2015 domestic revenues to nearly 30 percent of 2016 domestic revenues.
    - Poor targeting:
      - Fuel subsidy: 92 percent captured by the wealthiest 10 percent.
      - Electricity subsidy: close to 85 percent captured by the richest 20 percent.
      - The poorest families get less than one percent in both cases.
  - Grants declined sharply since 2012, reducing the overall resource envelope.

### Debt dynamics and market pressures
- Rapid accumulation of public external debt driven by exchange rate depreciation and external financing reliance:
  - External public debt doubled in 2015 compared to 2014 (20 percent → 43 percent of GDP).
  - External debt-to-GDP fell to 36.5 percent in 2016 due to a 10 percent appreciation of the kwacha in 2016.
- Market access and rollover difficulties:
  - Monetary tightening in 2015Q4: Policy Rate raised by 300 bps to 15.5 percent; Overnight Lending Facility (OLF) premium increased from 600 to 1000 bps over the PR; statutory reserve requirements increased from 14 percent to 18 percent — causing difficulties in rolling over maturing securities in late 2015 and H1 2016.
  - Government could not access international capital markets as spreads widened (1432 basis points by January 2016).

### Liquidity, arrears, and borrowing costs
- Liquidity and arrears:
  - Despite U.S.$3 billion raised in the international capital markets, huge liquidity problems emerged since 2014.
  - New arrears in 2016 reached nearly 3.5 percent of GDP; total stock as of end-2016: 8 percent of GDP.
  - Government deposits run down from 5 percent of GDP in 2012.
- Eurobond issuance and effective costs:
  - Eurobonds: $750 million in 2012, $1 billion in 2014, $1.25 billion in 2015.
  - Nominal interest (coupon) rates: 5.375 (2012), 8.500 (2014), 8.970 (2015).
  - Yield at Issuance (percent): 5.625 (2012), 8.625 (2014), 9.375 (2015).
  - Yield as at July 5, 2017 (percent): 6.971 (2012), 7.868 (2014), 8.210 (2015).
  - Issue Price (Percent): 98.108 (2012), 99.174 (2014), 97.257 (2015).
  - Maturities: Sep-22 (2012); Apr-24 (2014); Jul - 25, 26, 27 (2015).
  - Fixed annual interest payments in U.S. dollar, million: 40 (2012), 85 (2014), 112 (2015).
  - In kwacha, million, estimated at issuance: 203 (2012), 521 (2014), 860 (2015).
  - In kwacha, million, effective payment in 2016: 431 (2012), 812 (2014), 1,206 (2015).
  - Effective Interest payments in 2016 (percent): 11.4 (2012), 13.3 (2014), 12.6 (2015).
  - Exchange rate depreciation effect (percent): 112.8 (2012), 55.9 (2014), 40.1 (2015).
  - Average annual rate of depreciation (percent): 17.1 (2012), 19.4 (2014), 19.4 (2015).
  - Effective borrowing cost in Kwacha (percent) = coupon rate + average annual kwacha depreciation: 22.5 (2012), 27.9 (2014), 28.4 (2015).
  - Effective borrowing cost (coupon plus average annual depreciation) is three to four times the nominal interest rate.
  - Interest payments rose from less than 1 percent of GDP in 2011 to 3 percent of GDP in 2016.

### Evolution and composition of public debt
- Total public debt: <21 percent of GDP in 2011 → 61.2 percent of GDP in 2015.
- Share of external debt in total public debt: 40 percent in 2011 → 66 percent in 2015.
- External debt at commercial terms rose from 23 percent to over 70 percent in 2015 (driven by three Eurobonds).
- Concessional external debt from multilateral sources: 65 percent of external debt in 2011 → 25 percent in 2015.

### Analytical framework and sustainability indicators
- Fiscal sustainability assessed using Blanchard’s sustainability indicators: primary balance gap and tax gap, based on government intertemporal budget constraint.
- Primary balance gap indicator: difference between estimated permanent primary balance required to stabilize debt ratio and projected primary balance under current policies.
- Tax gap indicator: difference between permanent tax-to-GDP ratio required to stabilize debt and current tax ratio.
- Effective borrowing cost (local currency) defined as coupon rate + average annual rate of depreciation (ZMK/USD).
- Negative primary gap or negative tax gap indicates current fiscal policy leads to rising public debt and is unsustainable.

### Baseline macroeconomic and fiscal assumptions (selected variables)
- Primary spending (ps): 25.3 (2015), 20.5 (2016), 21.7 (2017), 22.2 (2018), 21.6 (2019).
- Primary deficit (pd): 6.5 (2015), 2.3 (2016), 4.5 (2017), 3.5 (2018), 2.8 (2019).
- Public debt (b): 61.4 (2015), 60.5 (2016), 55.6 (2017), 60.0 (2018), 62.4 (2019).
- Real GDP growth (y): 2.9 (2015), 3.4 (2016), 4.0 (2017), 4.5 (2018), 4.5 (2019).
- Real interest rate (r): 3.2 (2015), 1.6 (2016), 2.4 (2017), 2.9 (2018), 2.7 (2019).

### Study results: required adjustments to stabilize debt (2017–19)
- Average primary deficit needed to stabilize public debt: 0.8 percent of GDP vs estimated primary deficit average of 3.6 percent of GDP.
- Implied average adjustment required: 2.8 percent of GDP over the period (increase revenues or lower spending).
- Average permanent tax ratio required to stabilize public debt: about 20.8 percent of GDP vs projected average 18.1 percent of GDP.
- Implied revenue gap: around 2.7 percent of GDP.
- Alternative summary for 2017-19 in conclusions:
  - Primary balance needs adjustment by an average of 1.7 percent of GDP.
  - Revenue gap to avoid insolvency estimated at an average of 1.9 percent.
  - Target deficit to reach: 4.0 percent of GDP compared to current estimates of about 7 percent of GDP.
- Selected table excerpts:
  - t*: 25.4 (2015), 19.4 (2016), 20.8 (2017), 21.2 (2018), 20.3 (2019).
  - Revenue gap: -6.6 (2015), -1.2 (2016), -3.5 (2017), -2.8 (2018), -1.9 (2019).
  - pd*: -0.1 (2015), 1.1 (2016), 0.9 (2017), 0.7 (2018), 0.9 (2019).
  - Primary balance gap: -6.6 (2015), -1.2 (2016), -3.5 (2017), -2.8 (2018), -1.9 (2019).

### Key conclusions
- Public debt rose substantially since 2011 due to unsustainable fiscal policies and a weak local currency.
- Low and stagnant revenues, large spending overruns (large wage bill, expensive and poorly targeted subsidies), and infrastructure spending pushed public debt to over 60 percent of GDP in 2015 — 30 percentage points higher than 2011.
- Recent DSA: public debt vulnerabilities increased and Zambia is at high risk of debt distress.
- Absent additional strong fiscal consolidation beyond measures implemented since late 2016 and in 2017, debt dynamics will remain weak over the projection period.

### Policy recommendations and options discussed
- General: Fiscal consolidation is necessary to restore sustainability.
- Revenue-side measures (possible):
  - Eliminate or reduce tax exemptions that erode VAT and CIT bases.
  - Harmonize corporate income tax rates (raise rates on low-tax sectors).
  - Revise personal income tax exempted threshold and brackets (threshold has trebled since 2011; about two thirds of wage earners estimated below the exempted threshold).
  - Rationalize tax expenditures.
  - Introduce property tax (estimated to generate up to 1.5 percent of GDP; full implementation requires updated cadaster and country-wide revaluation; alternative: pilot projects in Lusaka and the Copperbelt district).
- Expenditure-side measures (possible):
  - Restrain growth in the wage bill to projected annual inflation (including comprehensive civil service reform).
  - Address costly and poorly targeted energy subsidies — enforce full cost recovery in petroleum pricing and move to cost-reflective electricity pricing.
  - Rationalize agricultural subsidies (FISP and FRA).
- Targeted measures highlighted as implemented since late 2016 and in 2017:
  - Removal of fuel and electricity subsidies.
  - Streamlining of the Farmer Input Program.
- Debt and financing management:
  - Limit reliance on non-concessional external borrowing and carefully sequence and assess fiscal impact of projected disbursements (projected $4 billion disbursed since early 2016 through H1 2017 and planned $4 billion over five years would raise total debt burden to over 60 percent of GDP and PV of external debt to over 40 percent by 2019).
  - Develop a sound Medium Term Debt Management Strategy (MTDS) to balance developmental borrowing and debt distress risk; address exchange rate and rollover risks; strengthen debt composition and creditor base.
- Institutional and operational reforms to improve budget credibility and arrears management:
  - Full implementation of IFMIS.
  - Implement Treasury Single Account.
  - Roll-out output based budgeting.
  - Enact the Planning and Budgeting Bill and revise the Public Finance Act.
  - Strengthen public investment cycle: project selection, feasibility studies, procurement reforms, revise Public Procurement Act.
  - Strengthen institutional capacity for collection and monitoring of public-sector debt data, including on-lent and publicly guaranteed debt.

### Monetary policy framework, operational performance, and recommendations
- Operational outcomes and stylized facts:
  - First two years after MPR introduction: BoZ kept OIR within policy corridor 95 percent of the time.
  - From July 2012 to December 2016: OIR outside corridor 40 percent of the time.
  - 2015–2016: OIR outside corridor 65 percent of the time.
  - Two prolonged episodes when BoZ set aside declared objective:
    - Mid-March to mid-August 2014 (six months).
    - Mid-November 2015 to mid-September 2016 (almost a year).
    - Discrepancy magnitude as large as 13 percentage points.
  - Consequences: blurred policy signals, impaired transmission mechanism, and reduced credibility of operational framework.
- Instrument mix and operational actions (selected):
  - 2014: Policy rate moves and SRR changes (e.g., March: 9.75% → 10.25%; Statutory Reserves 8% → 14%; OLF cost 250 bps → 600 bps).
  - 2015: November: 12.50% → 15.5%; Caps on lending rates lifted; OLF cost 600 bps → 1000 bps; Forced sale of FX.
  - 2016–2017: subsequent adjustments including Feb 2017 15.5% → 14.0% and May 2017 14.0% → 12.5%; reserve requirement adjustments.
- Side-effects and economic costs from end-2015 reaction:
  - Liquidity crunch; banks accessed costly discount window facilities (OLF usage surged).
  - Undersubscription of government securities and decreased tender sizes; government funding problems.
  - Across-the-board increase in interest rates; credit growth collapsed.
  - Build up of NPLs; yield curve moved up and flattened; average lending rates continued to rise despite interbank rate falls.
  - Monetary dominance constrained fiscal policy, and constrained MP.
- Interbank FX market dysfunction:
  - Heavy BoZ intervention (end-2015) and coercive measures displaced FX transactions to bilateral trades; interbank FX volumes plunged.
  - Nominal ER (ZMW/USD) unusually stable since end-2015, potentially preventing proper adjustment.
- Root causes and institutional constraints:
  - “Policy rate smoothness problem” linked to political/public concerns over cost of credit and growth limiting BoZ’s PR adjustments.
  - Lack of a coherent MPF; multiple conflicting objectives (cost of credit, inflation, nominal ER) led to resort to quantitative and administrative measures.
  - Absence of fully operational Treasury Single Account impeded liquidity assessment and forecasting.
- Modernization roadmap and recommendations:
  - Three pillars: monetary operations (move to interest-rate operational target), MP strategy (internally consistent, forward-looking MPF), and institutional measures (grant operational independence).
  - Use OMOs as main MP instrument; increase frequency of OMOs.
  - Minimize use of statutory reserve requirements for short-run liquidity control; decrease rate and use.
  - Formalize and narrow the policy rate corridor (current symmetric corridor 4 percentage points; recommendation no more than one percentage point; BoZ recently reduced width from ±2 p.p. to ±1 p.p. and reduced reserve requirements from 18 to 12 percent).
  - Do not mix liquidity management with emergency liquidity assistance; avoid administrative limits on OLF that introduce risks.
  - Refine government security auctions (consider fixed-rate full allotment).
  - Strengthen forecasting and policy analysis (implement FPAS with IMF support) and increase MPC meeting frequency (quarterly currently — recommended more frequent).
  - Limit FX intervention to smoothing volatility and buffer building; heavy interventions depleted reserves (2014 net sales USD 700 million; 2015 net intervention surpassed USD 750 million).
  - Address dollarization (45 percent of deposits and 30 percent of loans in dollars) and consider issuance of inflation-indexed securities to extract market inflation expectations and lower Treasury costs.
  - Improve expectations surveys and communication (increase frequency; publish inflation report when feasible).

### Distributional impact of subsidies and mitigation through Social Cash Transfers (SCT)
- Purpose and methodology:
  - Assess distributional impact of fuel, electricity, and FISP subsidies and reforms; consider SCT scaling-up as mitigation.
  - Method: Commitment to Equity (CEQ) Institute tool with IMF and World Bank inputs; micro-data from LCMS.
- Petroleum (fuel):
  - Procurement: nearly all petroleum products procured by government; INDENI refinery fully state-owned; TAZAMA pipeline ownership Zambia 66 percent, Tanzania 34 percent.
  - CPM introduced in 2008; failure to adjust retail prices led to subsidies in 2014–15.
  - Estimated budget cost: about $350 million in 2015 and about $525 million accrued in 2016.
  - Policy: pump prices set at cost-covering levels since October 2016; fuel prices adjusted downwards Jan and Aug 2017.
  - Distribution:
    - Fuel subsidy: 92 percent goes to the wealthiest 10 percent; poorer half receive less than one percent.
    - Pre-subsidy income effect: poorest 20 percent improve by less than 0.5 percent; richest decile increase by about 1¾ percent.
- Electricity:
  - Origins: emergency/private imports after 2014/15 poor rainfall; average private import cost $0.12/kWh vs ZESCO average tariff $0.051/kWh ($0.028 non-mining, $0.067 mining).
  - Government subsidy to ZESCO about US$225 million in 2016 after tariff hike reversal.
  - Access: 31.4 percent of households connected to national grid (urban 67.3 percent; rural 4.4 percent).
  - Distribution:
    - Richest decile receive 64 percent of subsidy; poorer half receive 1.5 percent.
    - PMRS (2017): richest 20 percent receive about 70 percent of electricity subsidies; poorest 20 percent receive less than 1 percent.
  - Tariff reforms:
    - Non-mining customers: two-step increases in 2017 (50 percent in May; 16 percent in September); cumulative headline increase 75 percent.
    - Effective average tariff increase about 48 percent due to doubling lifeline threshold.
    - Mining companies: average tariff increased from about 6 cents/kwh to 9.3 cents (effective retroactively from Jan 2017).
    - Ongoing cost-of-service study expected in 2018.
- Farmer Input Support Program (FISP):
  - Objectives: subsidized fertilizer and improved maize seed; introduced 2002.
  - Coverage expanded: beneficiaries 120,000 in 2002/03 → about 1.6 million in 2016/17; crops expanded from 1 to 9.
  - Incidence and targeting:
    - 48 percent of benefit accrues to lower 50 percent; 52 percent accrues to higher income households.
    - Poorest households receive around 5.5 percent of total amount.
    - Pre-FISP income increase for poorest: 2½ percent.
  - Issues: benefits mainly to larger farmers; large resources crowd out extension, R&D.
  - E-voucher migration: pilot in 13 districts (2015/16); full migration announced for 2017/18 aimed at better targeting and reducing beneficiaries (planned reduction from 1.6 million to 1 million).
- Food Reserve Agency (FRA):
  - FRA purchases often above-market and sales to millers subsidized; interventions regressive and poorly targeted; 2017 budget limited FRA to strategic reserve procurement and management; 2017/18 purchase limit announced at 500,000 metric tons.
- Social Cash Transfer (SCT) and social protection:
  - SCT: unconditional cash transfers to disabled, poor and vulnerable.
  - Coverage evolution:
    - 2003 pilot: 159 households.
    - By 2011: about 33,000 households in 12 districts.
    - 2016: reached 242,000 beneficiaries in 78 districts.
    - 2017 budget: expand to 500,000 poor households in all 103 districts; increase monthly benefit by 28 percent.
  - Transfers up to 2016: K70/month to poor households and K140/month to households with members with disabilities.
  - Impact: randomized trials show significant impacts on poverty reduction, food security, school enrollment, asset ownership, and housing.
  - Incidence: 19 percent of SCT received by the 10 percent poorest households; income of poorest boosted by almost 5 percent; nearly 60 percent of SCT cost accrued by the 40 percent lowest income households.
- Fiscal incidence analysis and findings:
  - CEQ approach: disposable, consumable, and final income concepts; accounting approach (no behavioral or GE effects).
  - 2015 results: fiscal system reduced inequality (largest impact from in-kind education); fiscal policy increased poverty because taxes collected from the poor exceeded benefits received by many poor households.
  - Distribution of subsidy benefits:
    - Fuel: 92 percent to wealthiest 10 percent; poor half <1 percent; poorest 20 percent pre-subsidy income improves <0.5 percent.
    - Electricity: richest decile 64 percent; poorer half 1.5 percent; using 2015 subsidy cost (~$37 million) poorest households improve market income by about 0.2 percent; using 2016 subsidy cost poorest improve by about 1.2 percent via indirect effects.
    - FISP incidence greater for poor relative to fuel and electricity; poorest pre-FISP income increases by 2½ percent.
- Simulation and mitigation (selected scenarios):
  - Scenario definitions:
    - "Gradual": elimination of fuel and electricity subsidies; 28 percent increase in SCT benefit level; coverage 500,000 beneficiaries.
    - "Accelerated": full elimination of fuel and electricity subsidies; 100 percent increase in SCT benefit level; coverage 500,000 beneficiaries.
  - Selected simulated results (table summary presented):
    - Baseline (2015): Poverty 54.4; Inequality 0.546 (Disposable Income) — Poverty 56.3; Inequality 0.543 (Consumable Income).
    - Gradual: Poverty 53.9; Inequality 0.539 (Disposable Income) — Poverty 56.0; Inequality 0.534 (Consumable Income).
    - Accelerated: Poverty 50.3; Inequality 0.539 (Disposable Income) — Poverty 53.3; Inequality 0.537 (Consumable Income).
  - Interpretation: fully eliminating fuel and electricity subsidies while scaling up SCT coverage and benefits could reduce poverty significantly.
- Policy implications:
  - Fuel and electricity subsidies are costly and poorly targeted; phasing them out is supported by results.
  - FISP is neutral in progressivity but needs better targeting and efficiency; migration to E-vouchers can save resources for productivity-enhancing activities.
  - SCT is better targeted and should be scaled-up to mitigate negative impacts of subsidy removals and tariff increases.

### Selected demographic, income and poverty indicators (2015)
- Total population: 15.5 million (Rural: 9 million; Urban: 6.5 million).
- Households: 3 million (Rural: 1.7 million; Urban: 1.3 million).
- Average household size: 5.1 (Rural: 5.2; Urban: 5.0).
- Gini coefficient: 0.69.
- Poverty Headcount (proportion of population below national poverty line):
  - All Zambia: 54.4 percent (Rural: 76.6 percent; Urban: 23.4 percent).
- Distribution of Population by Level of Poverty:
  - Poor: 54.4 percent (Extreme: 40.8 percent; Moderate: 13.6 percent).
  - Non-poor: 45.6 percent.

*Prepared by IMF staff; Conclusions, findings, projections, and policy recommendations as reported in the source document.*

### Conclusions and Policy Recommendations _________________________________________ 14

### Conclusions and Policy Recommendations _________________________________________ 14

### Fiscal sustainability assessment
- Fiscal sustainability is critical for macroeconomic stability and sustainable growth; sustainable fiscal policy means continuing current fiscal policies over the medium-to-long-run without weakening solvency or defaulting on debt or accumulating arrears.
- Recent developments:
  - After an average deficit of 1.6 percent of GDP in 2007–11, loose fiscal policies began in 2012 and the fiscal deficit on a cash basis reached 6.4 percent of GDP in 2013.
  - Cash fiscal deficit averaged 6.6 percent of GDP in 2014–16 compared to 10.8 percent of GDP on a commitment basis during the same period.
  - Zambia’s risk of debt distress rose from low to moderate in the 2015 DSA and to high in the 2017 DSA.
- Key indicators:
  - Zambia’s tax-to-GDP ratio was 14 percent of GDP in 2015 versus an un-weighted SADC average of 23.7 percent of GDP.
  - External debt increased from 20 percent of GDP at end-2014 to 43 percent of GDP at end-2015; external debt-to-GDP declined to 36.5 percent in 2016.
  - Zambia kwacha lost over 40 percent of its value in 2015.
  - Zambia's spreads on the 2012 Eurobond increased to 1432 basis points by January 2016.
  - Projected disbursements of the $4 billion in external loans contracted since early 2016 through the first half of 2017 and additional government borrowing plans for another $4 billion mostly on non-concessional terms over the next five years will raise the total debt burden to over 60 percent of GDP and the present value of external debt to over 40 percent of GDP by 2019, both above their respective thresholds.

### Drivers of fiscal performance and rising public debt

- Narrow tax base and low tax productivity
  - Total revenue and tax revenue:
    - Total revenue 2015: 18.8 (table entry).
    - Tax revenue 2015: 14.4 (table entry).
  - Non-tax revenue grew from about 1 percent of GDP in 2009 to 4 percent of GDP in 2015.
  - VAT and VAT efficiency:
    - Current standard VAT rate: 16 percent.
    - VAT C-efficiency estimated at 0.28 percent in 2015 compared to an average of 0.45 percent for SADC members.
    - IMF staff estimate: if current exemptions are kept, Zambia would need to increase its rate to 25 percent to reach SADC’s VAT collections levels.
  - Corporate Income Tax (CIT) productivity:
    - CIT yielded 1.5 percent of GDP in 2015 compared to SADC’s average of 3.5 percent of GDP.
  - Trade taxes:
    - Customs duty collection was 1 percent of GDP in 2015 versus SADC average 3.8 percent of GDP.
    - Value of Imports for Duty Purposes narrowed from 24 percent of total value of imports in 2014 to 19.5 percent in 2015.
  - Contributing factors: significant tax exemptions (e.g., kerosene, health, education, rental income, water, transport, some financial services, life insurance, food and agriculture), multiplicity of tax rates, high PIT exemption threshold (about two thirds of wage earners estimated below the exempted threshold), and widespread tax incentives.

- Unsustainable expenditure levels
  - In 2016, the wage bill, energy and agriculture subsidies, and debt service absorbed over 100 percent of the budget’s domestic revenues:
    - Wage bill: 48.4 percent of domestic revenues (2016).
    - Energy and agriculture subsidies: 29.9 percent of domestic revenues (2016).
    - Debt service: 24.2 percent of domestic revenues (2016).
  - Wage bill dynamics:
    - Wage bill rose from less than 38 percent of domestic revenues in 2011 to nearly 52 percent in 2014.
    - Wage bill jumped from 6.5 percent of GDP in 2011 to 9.4 percent of GDP in 2014.
    - A wage freeze from September 2014 to December 2015 lowered the wage bill to 8.5 percent of GDP in 2015 and to less than 48 percent of domestic revenue in 2015.
    - Given salary adjustments and new hiring, the share of domestic revenues to cover the wage bill in 2017 was projected to reach 53 percent.
  - Subsidies:
    - Energy and agriculture subsidies increased from 21 percent of 2015 domestic revenues to nearly 30 percent of 2016 domestic revenues.
    - Targeting of subsidies is poor:
      - Fuel subsidy: 92 percent captured by the wealthiest 10 percent of the population.
      - Electricity subsidy: close to 85 percent captured by the richest 20 percent of the population.
      - The poorest families get less than one percent in both cases.
  - Grants declined sharply since 2012, reducing the overall resource envelope.

### Debt dynamics and market pressures
- Rapid accumulation of public external debt was driven by exchange rate depreciation and reliance on external financing.
  - External public debt doubled in 2015 compared to 2014 (from 20 percent of GDP at end-2014 to 43 percent at end-2015).
  - External debt-to-GDP ratio fell to 36.5 percent in 2016 due to a 10 percent appreciation of the kwacha in 2016.
- Market access and rollover difficulties:
  - Domestic liquidity tightened following monetary policy tightening in 2015Q4 (Policy Rate raised by 300 bps to 15.5 percent; Overnight Lending Facility premium increased from 600 to 1000 bps over the PR; statutory reserve requirements increased from 14 percent to 18 percent), causing difficulties in rolling over maturing securities in late 2015 and H1 2016.
  - In 2016, the government was not able to access international capital markets as spreads widened (1432 basis points by January 2016).

### Findings (summary of substantive diagnostics)
- Fiscal policy loosened from 2012, producing large deficits and rapid public debt increases.
- Zambia faces a narrow tax base, low tax productivity across VAT, CIT, and trade taxes, and large tax exemptions and thresholds that depress revenues.
- Expenditure pressures—especially a high wage bill and large poorly targeted subsidies—have absorbed domestic revenues and driven borrowing.
- External vulnerabilities amplified debt dynamics: exchange rate depreciation, heavy non-concessional borrowing plans, and worsening market sentiment increased debt distress risk from low to high.
- Without additional strong fiscal consolidation beyond measures implemented since late 2016 and in 2017, debt dynamics will remain weak over the projection period.

### Policy recommendations and options discussed
- Fiscal consolidation is necessary to restore sustainability; identified measures include:
  - Reduce and better target subsidies:
    - Removal of fuel and electricity subsidies is explicitly identified as part of measures implemented since late 2016 and in 2017.
    - Improve targeting so that subsidies no longer disproportionately benefit the middle and high income groups (noting the current distribution: fuel subsidy—92 percent to wealthiest 10 percent; electricity subsidy—close to 85 percent to richest 20 percent).
  - Streamline and reform large programs:
    - Streamlining of the Farmer Input Program is cited as an implemented reform.
  - Strengthen revenue mobilization:
    - Reduce exemptions and narrow zero-rating under VAT (IMF staff note zero-rating should be limited to exports under modern VAT design).
    - Consider VAT rate adjustments if exemptions remain (IMF staff estimate that if current exemptions are kept, the VAT rate would need to increase to 25 percent to reach SADC’s VAT collection levels).
    - Address PIT thresholds and broaden the tax base (noting the high tax-free threshold has trebled since 2011 and that about two thirds of wage earners are estimated to be below the exempted threshold).
    - Curtail widespread tax incentives and preferential corporate tax rates to improve CIT productivity (CIT yielded 1.5 percent of GDP in 2015 vs SADC average 3.5 percent).
  - Control recurrent spending pressures:
    - Reassess wage bill dynamics and hiring/salary adjustments to contain wage bill share of revenues.
    - Maintain or design credible measures to limit future wage and hiring pressures given projected rise to 53 percent of domestic revenues in 2017 absent action.
  - Limit reliance on non-concessional external borrowing and manage financing plans:
    - Carefully sequence and assess the fiscal impact of projected disbursements and new borrowing (projected disbursements of $4 billion contracted since early 2016 through H1 2017 and another $4 billion planned over five years would raise total debt burden to over 60 percent of GDP and PV of external debt to over 40 percent by 2019).
- The note emphasizes that absent additional strong fiscal consolidation measures beyond those already implemented since late 2016 and in 2017, debt dynamics will remain weak over the projection period.

*Prepared by IMF staff; Conclusions and policy recommendations as reported in the source document.*

### 16.      Despite U.S.$3 billion raised in the

### cr17328 - 16.      Despite U.S.$3 billion raised in the

### Liquidity and Arrears
- Despite U.S.$3 billion raised in the international capital markets, huge liquidity problems emerged since 2014.
- Relative static domestic revenue and spending overruns led the government to accumulate arrears since 2014.
- New arrears accumulated during 2016 reached nearly 3.5 percent of GDP and the total stock as of end-2016 stood at 8 percent of GDP.
- Government deposits were run down from 5 percent of GDP in 2012.

### Borrowing Requirements and Effective Costs
- Eurobonds issued: $750 million in 2012, $1 billion in 2014, and $1.25 billion in 2015.
- Nominal interest (coupon) rates on Eurobonds: 5.375 (2012), 8.500 (2014), 8.970 (2015).
- Yield at Issuance (percent): 5.625 (2012), 8.625 (2014), 9.375 (2015).
- Yield as at July 5, 2017 (percent): 6.971 (2012), 7.868 (2014), 8.210 (2015).
- Issue Price (Percent): 98.108 (2012), 99.174 (2014), 97.257 (2015).
- Maturities: Sep-22 (2012); Apr-24 (2014); Jul - 25, 26, 27 (2015).
- Fixed annual interest payments in U.S. dollar, million: 40 (2012), 85 (2014), 112 (2015).
- In kwacha, million, estimated at issuance: 203 (2012), 521 (2014), 860 (2015).
- In kwacha, million, effective payment in 2016: 431 (2012), 812 (2014), 1,206 (2015).
- Effective Interest payments in 2016 (percent): 11.4 (2012), 13.3 (2014), 12.6 (2015).
- Exchange rate depreciation effect (percent): 112.8 (2012), 55.9 (2014), 40.1 (2015).
- Average annual rate of depreciation (percent): 17.1 (2012), 19.4 (2014), 19.4 (2015).
- Effective borrowing cost in Kwacha (percent) (coupon rate plus average annual kwacha depreciation): 22.5 (2012), 27.9 (2014), 28.4 (2015).
- The effective borrowing cost (coupon plus the average annual kwacha depreciation) is three to four times the nominal interest rate.
- Interest payments rose from less than 1 percent of GDP in 2011 to 3 percent of GDP in 2016.

### Evolution and Composition of Public Debt
- Total public debt rose from less than 21 percent of GDP in 2011 to 61.2 percent of GDP in 2015.
- Share of external debt to total public debt: 40 percent in 2011 to 66 percent in 2015.
- External debt at commercial terms rose from 23 percent to over 70 percent in 2015 (driven by three Eurobonds).
- Concessional debt from multilateral sources dropped from 65 percent of external debt in 2011 to 25 percent in 2015.

### Analytical Framework and Sustainability Indicators
- Fiscal sustainability assessed using Blanchard’s sustainability indicators: primary balance gap and tax gap.
- Primary balance gap and tax gap are based on the government’s intertemporal budget constraint: the net present value of all future primary balances must be sufficient to pay back the stock of debt.
- The paper applies the primary gap and tax gap indicators, noting advantages (simplicity and ease of interpretation) and criticisms (e.g., implying public debt must remain unchanged).

### Baseline Macroeconomic and Fiscal Assumptions (selected variables)
- Primary spending (ps): 25.3 (2015), 20.5 (2016), 21.7 (2017), 22.2 (2018), 21.6 (2019).
- Primary deficit (pd): 6.5 (2015), 2.3 (2016), 4.5 (2017), 3.5 (2018), 2.8 (2019).
- Public debt (b): 61.4 (2015), 60.5 (2016), 55.6 (2017), 60.0 (2018), 62.4 (2019).
- Real GDP growth (y): 2.9 (2015), 3.4 (2016), 4.0 (2017), 4.5 (2018), 4.5 (2019).
- Real interest rate (r): 3.2 (2015), 1.6 (2016), 2.4 (2017), 2.9 (2018), 2.7 (2019).

### Study Results: Required Adjustments to Stabilize Debt
- For 2017-19, the average primary deficit needed to stabilize public debt is estimated at 0.8 percent of GDP compared to the estimated primary deficit average of 3.6 percent of GDP.
- Implied average adjustment required: 2.8 percent of GDP over the period—either by increasing revenues or lowering spending—to avoid further debt accumulation.
- Average permanent tax ratio required to stabilize public debt: about 20.8 percent of GDP compared to the projected average of 18.1 percent of GDP.
- Implied revenue gap: around 2.7 percent of GDP.
- Alternative summary for 2017-19 in conclusions: primary balance needs to be adjusted by an average of 1.7 percent of GDP; the revenue gap to avoid insolvency is estimated at an average of 1.9 percent over the same period; target deficit to reach: 4.0 percent of GDP compared to current estimates of about 7 percent of GDP.
- Table excerpts (selected):
  - t*: 25.4 (2015), 19.4 (2016), 20.8 (2017), 21.2 (2018), 20.3 (2019).
  - Revenue gap: -6.6 (2015), -1.2 (2016), -3.5 (2017), -2.8 (2018), -1.9 (2019).
  - pd*: -0.1 (2015), 1.1 (2016), 0.9 (2017), 0.7 (2018), 0.9 (2019).
  - Primary balance gap: -6.6 (2015), -1.2 (2016), -3.5 (2017), -2.8 (2018), -1.9 (2019).

### Key Conclusions
- Zambia’s public debt increased substantially since 2011 due to unsustainable fiscal policies and a weak local currency.
- Low and stagnant revenues, large spending overruns (large wage bill, expensive and poorly targeted subsidies), and infrastructure spending pushed public debt to over 60 percent of GDP in 2015—30 percentage points of GDP higher than 2011 levels.
- The most recent DSA indicates Zambia’s public debt vulnerabilities have increased and is now at high risk of debt distress.
- Loose fiscal policies will keep fiscal deficits high and public debt metrics weakening absent strong adjustment measures.

### Policy Recommendations (Revenue and Expenditure)
- Revenue-side measures (possible):
  - Eliminating or reducing tax exemptions that erode the tax base for VAT and CIT.
  - Harmonizing corporate income tax rates (by raising rates on low-tax sectors).
  - Revising the personal income tax exempted threshold and its different brackets and rates.
  - Rationalizing tax expenditures.
  - Introducing the property tax (estimated to generate up to 1.5 percent of GDP; full implementation requires updated cadaster and country-wide revaluation; alternative: pilot projects in Lusaka and the Copperbelt district).
- Spending-side measures (possible):
  - Restraining growth in the wage bill to projected annual inflation rate (including through a comprehensive civil service reform).
  - Addressing costly and poorly targeted energy subsidies, including enforcing full cost recovery in pricing of petroleum products and moving to cost-reflective electricity pricing.
  - Rationalizing subsidies to the agriculture sector (FISP and FRA).

### Institutional and Operational Reforms
- Strengthen the institutional framework for the budget process and the Medium-Term Expenditure Framework (MTEF) to improve budget credibility; annual fiscal targets need to be binding.
- Improve commitment controls to address accumulation of payment arrears:
  - Full implementation of IFMIS.
  - Implement Treasury Single Account to bring all central government institutions under a single financial operational system.
  - Roll-out output based budgeting to curtail non-essential expenditures.
  - Enact the Planning and Budgeting Bill and revise the Public Finance Act.
- Improve public investment cycle:
  - Strengthen project selection to align with the national development plan.
  - Ensure project appraisal framework requires feasibility studies and selection based on economic and social rates of return.
  - Strengthen procurement processes and revise the Public Procurement Act to reduce high procurement costs.
- Develop a sound Medium Term Debt Management Strategy (MTDS) to reduce debt vulnerabilities:
  - Balance borrowing between developmental goals and debt distress risk.
  - Include strategy to address exchange rate and rollover risks and strengthen debt composition and creditor base.
  - Strengthen institutional capacity for collection and monitoring of all public-sector debt data, including on-lent and publicly guaranteed debt.

### Methodology (Annex I) — Core Equations and Indicators
- Government intertemporal budget constraint: net present value of all future primary balances must be sufficient to pay back the stock of debt.
- Definitions and formulations provided for:
  - Primary balance gap indicator: difference between estimated permanent primary balance required to stabilize debt ratio and projected primary balance under current policies.
  - Tax gap indicator: difference between permanent tax-to-GDP ratio required to stabilize debt and the current tax ratio.
- Key implicit relationships:
  - Effective borrowing cost in local currency = coupon rate + average annual rate of depreciation (ZMK/USD).
  - Negative primary gap or negative tax gap indicates current fiscal policy would lead to rising public debt and is unsustainable.

*Source: ZAMBIA INTERNATIONAL MONETARY FUND*

### References

### References

### Cited works

- Blanchard, Olivier J., 1990, “Suggestions for a New Set of Fiscal Indicators,” OECD Economics Department Working Papers. Working Paper, No. 79, (Paris: OECD).
- Buitter, Willem H., 1985, “Guide to Public Sector Debt and Deficits,” Economic Policy: A European Forum, Vol. 1 (November), pp. 13-79.
- Chalk, Nigel, and Richard Hemming, 2000, “ Assessing Fiscal Sustainability in Theory and Practice,” IMF Working Paper, No. 00/81, (Washington, D.C.: International Monetary Fund).
- Cottarelli, Carlo, and Reza Moghadam, 2011, “ Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis,”August 2011, (Washington, D.C.: International Monetary Fund).
- Croce, Enzo, and V. Hugo Juan-Ramon, 2003, “ Assessing Fiscal Sustainability: A Cross-Country Comparison,” IMF Working Paper, No. 03/145, (Washington, D.C.: International Monetary Fund).
- Hamilton, James D., and Marjorie A. Flavin, 1986, “ On the Limitations of Government Borrowing: A Framerwork For Empirical Testing,” American Economic Review, Vol. 76 (September), pp 809-19.
- International Monetary Fund, “Assessing Sustainability,” May 2002, (Washington, D.C.: International Monetary Fund). Also available at http://www.imf.org/external/np/pdr/sus/2002/eng/052802.pdf
- New Zealand, 2013, “Affording Our Future: Statement on New Zealand’s Long-Term Fiscal Position,” July 2013. Available at http://treasury.govt.nz/government/longterm/fiscalposition/2013/affordingourfuture

*Source: cr17328 - References*

### 15.      The implementation of the new operational procedures has faced several challenges,

### 15.      The implementation of the new operational procedures has faced several challenges,

### Overview: operational framework outcomes
- In the first two years following the introduction of the MPR the BoZ kept the OIR within the (wide) policy corridor 95 percent of the time.
- From July 2012 to December 2016, the OIR remained outside the MPR corridor 40 percent of the time.
- During 2015 and 2016, the frequency of the OIR being outside the corridor increased to 65 percent.
- Two prolonged episodes when the BoZ set aside its declared operational objective:
  - Mid-March to mid-August 2014: OIR deviated substantially from the upper bound of the corridor (six months).
  - Mid-November 2015 to mid-September 2016: OIR surged well above the MPR for almost a year.
- In both prolonged episodes the discrepancy between OIR and corridor bounds reached a magnitude as large as 13 percentage points.
- Table 1. Interbank Rate: Frequency Outside the Corridor:
  - First two years: 5%
  - 2012.7 to 2016.12: 40%
  - 2015.1 to 2016.12: 65%

### MPR role, signaling, and transmission
- The MPR has lost its aspiring role in Zambia’s MPF:
  - In an interest-rate framework, the MPR is central to signaling the MP stance and the CB’s assessment of future economic developments.
  - Frequent discrepancies between the MPR and the OIR:
    - Blur policy signals, making MP opaque.
    - Harm the transmission mechanism of MP.
    - Undercut the credibility of the new operational framework.
  - When interbank rates reflect monetary conditions but are volatile and unpredictable, they cannot perform properly as a meaningful reference rate.

### Multiple objectives, instrument mix, and stylized facts
- MP in Zambia appears to be trying to achieve multiple and often conflicting objectives:
  - Containing the cost of credit.
  - Controlling inflation.
  - At certain junctures, controlling the nominal ER.
- Consequence: the BoZ resorts to a peculiar instrument mix, including unconventional and non-market based measures.
- Stylized facts for Zambia under this setting:
  - a) A "smooth" MPR (MPR changes smaller than those implied by economic fundamentals), reflecting concerns over borrowing costs.
  - b) Frequent use of quantitative-type measures, despite the move to an interest-rate operational framework.
  - c) Frequent use of administrative and ad hoc measures, including moral suasion and coercive-type measures.
- Examples of measures cited:
  - Forced sale of FX to banks to mop up liquidity in end-2015.
  - “Heightened monitoring of commercial banks activities.”
  - BoZ acknowledging moral suasion as one of the MP instruments available to the CB.

### Monetary policy instrument mix (selected actions and values)
- 2014 Actions:
  - March: 9.75 % → 10.25%; Statutory Reserves 8% → 14%; OLF cost: 250 bps → 600 bps; OLF access restricted to once a week.
  - April: 10.25% → 12.00%.
  - May: OLF cost: 600 bps → 1000 bps.
  - June: Daily compliance; Lending rate ceiling increased.
  - November: 12.00% → 12.50%.
- 2015 Actions:
  - March: OLF cost: 950 bps → 600 bps.
  - April: Statutory Reserves 14% → 18%.
  - November: 12.50% → 15.5%; Caps on lending rates lifted; OLF cost: 600 bps → 1000 bps; OLF access restricted to once a week; Forced sale of FX.
- 2016 Actions:
  - November: Weekly compliance; Restrictions on OLF access lifted.
- 2017 Actions:
  - February: 15.5% → 14.0%; Statutory Reserves 18% → 15.5%; OLF cost: 600 bps → 1000 bps.
  - May: 14.0% → 12.5%; 15.5% → 12.5%.
- Operational notes:
  - Failure to repay cash obtained via intraday repo facility treated as default, and securities covering the loan are automatically forfeited to BoZ.
  - Automatic roll over of intraday credit into overnight loan (OLF), when banks fail to repay cash obtained via the intraday repo facility.

### Side-effects and economic costs from end-2015 MP reaction
- Liquidity and funding:
  - The strong MP reaction of end-2015 created a liquidity crunch, forcing banks to access en masse costly discount window facilities (OLF usage surged).
  - Tight liquidity led to protracted undersubscription of government securities and a decrease in tender sizes, adding to government funding problems.
  - The stock of government securities fell after November 2015, driven by a decrease in the stock of Treasury Bills.
- Funding costs and credit:
  - Tight liquidity conditions led to an across-the-board increase in interest rates, raising government and private sector funding costs.
  - Credit growth collapsed (year-on-year percentage change).
- Asset quality:
  - High funding costs have played a key role in the build up of non performing loans (NPLs), threatening financial stability.
- Transmission mechanism impairments:
  - Yield curve moved upwards and flattened, reflecting tight liquidity and heightened uncertainty; this persisted for more than one year.
  - Despite recent falls in interbank rates, average lending rates continued to rise.
- Fiscal impacts:
  - Fiscal policy was adversely affected: banks started not to fully roll over maturing public securities, tender sizes and subscription rates fell, exacerbating government financing problems.
  - Resulted in a situation where "monetary dominance" constrained fiscal policy, which in turn constrained MP.

### Interbank FX market dysfunction
- BoZ heavy intervention in the FX market (end-2015), including moral suasion and coercive measures (forcing banks to buy large volumes of FX, imposing a very narrow bid-offer spread), displaced most FX transactions to bilateral trades.
- Consequences:
  - Volumes traded in the interbank market shrank to levels not seen since at least 2011.
  - The relative size of the interbank FX market plunged.
  - While FX trading outside the interbank market fell in line with trade flows, the fall in interbank FX trading was considerably higher.
  - The nominal ER (ZMW/USD) has been unusually stable since the end of 2015, potentially preventing proper adjustment to shocks.

### Root causes and institutional constraints
- One key reason for the “policy rate smoothness problem” is constraints on the BoZ’s ability to adjust its PR:
  - Public and political concerns over the cost of credit and growth limit the BoZ’s ability to move the PR.
  - The monetary authority sets the MPR, but market conditions determine the interbank rate, transferring to commercial banks the ownership of high interest rates.
  - This constraint reflects the importance of operational independence; similar constraints are common in other countries.
- Lack of a coherent MPF:
  - Opaque, inconsistent and confusing monetary policies reflect the absence of a solid and coherent MPF and weak fiscal policies.
  - This leads to large swings in MP stance and the resort to non-market-friendly measures, creating unnecessary economic volatility.
- Operational challenges managing liquidity:
  - The absence of a fully operational Treasury Single Account makes it difficult for government to assess liquidity needs and produce accurate cash flow forecasts.
  - It becomes harder for the BoZ to assess short-run liquidity, gauge excess reserves, and determine needed interventions.
  - The government holding several accounts with commercial banks entails a higher level of liquidity in the system.

### Modernization roadmap: pillars and required actions
- The modernization of MPFs rests on three interconnected pillars:
  - Monetary operations: change the operational target from monetary aggregates to interest rates.
  - MP strategy: set up an internally consistent MPF (absence of multiple, often conflicting, objectives) and implement MP in a forward-looking manner.
  - Institutional measures: grant operational independence to the central bank.
- Departure point:
  - Move to an interest rate-based operational framework to gain operational flexibility and policy transparency, enhancing policy signals and MP efficiency.
- Implementation challenges and emphasis:
  - The "policy rate smoothness problem" is closely linked to a weak MP strategy pillar.
  - Effective modernization requires a broader view beyond operational rules — the MP environment depends on actual willingness and commitment to the new MPF.
- Suggested comprehensive actions (implied by the text’s discussion of needed reforms):
  - Strengthen the second pillar by reducing conflicting objectives (e.g., avoid simultaneous goals of controlling lending costs, inflation, and nominal ER when inconsistent).
  - Enhance institutional independence to reduce political constraints on adjusting the MPR.
  - Improve liquidity management arrangements, including establishing a fully operational Treasury Single Account and consolidating government accounts to improve cash flow forecasting and support BoZ liquidity operations.

*International Monetary Fund — cr17328, chapter 15*

### 27.      Not all the liquidity management challenges faced by the BoZ reflect structural issues

### 27.      Not all the liquidity management challenges faced by the BoZ reflect structural issues

### Liquidity management: instruments and recent practice
- The best instrument for fine-tuning MP are OMOs, however the BoZ does not carry out OMOs at the frequency required by the new operational framework.
- The BoZ makes intense use of reserve requirements and discount window facilities, though reserve requirements are not suited for short-run liquidity management.
- The BoZ has preferred a more quantitative approach and has not often used OMOs to control liquidity.
- Weekly compliance was restored in November 2016, but the averaging period is short by international standards.

### Causes and effects of high structural liquidity and policy uncertainty
- High levels of "structural" liquidity reflect precautionary behavior by banks due to enhanced liquidity risks.
- Liquidity risks stem from BoZ's poor liquidity management due to the lack of a coherent MPF, and heterodox reaction during episodes of stress (i.e. sharp ER depreciation).
- Frequent ad hoc interventions, frequent changes in discount window access (including restricting access to once a week), high statutory reserves, short averaging period and daily compliance, coupled with high interest rate volatility, increase policy opacity and uncertainty.
- Heightened uncertainty causes banks to maintain high precautionary balances, increasing costs and reducing their ability to extend credit.
- Despite high structural liquidity, the interbank rate has been above the PR for around 80 percent of the time since the introduction of the PR.
- During 2015–16 the OIR was outside the PR corridor above 65 percent of time.

### Empirical performance on interbank control
- Example performance: before the interbank rate soared above the corridor in 2015 the BoZ kept the OIR hovering very close to the upper bound of the corridor from May to October; the average absolute deviation from the upper bound was 0.27 p.p. in that period.
- From September 2013 to February 2014 the average absolute deviation around the PR amounted to 0.28 p.p.

### Policy recommendations for liquidity instruments and auctions
- Use OMOs as the main MP instrument:
  - OMOs are best-suited for controlling short-run liquidity and steering the OIR towards the MPR.
  - OMOs act immediately, can be deployed at discretion and in varying magnitudes; the BoZ should carry out OMOs more frequently.
- Minimize the use of reserve requirements:
  - Changes in statutory reserves affect liquidity with a lag and produce large discrete movements.
  - Reserve requirements are not proper for short-term rate control, could increase liquidity risks and threaten financial stability.
  - When not remunerated, statutory reserves are an implicit tax on the financial system.
  - The BoZ should decrease the rate and use of reserve requirements as an instrument for MP.
- Do not mix liquidity management with emergency liquidity assistance:
  - Administrative limits on OLF (e.g., reducing access to once a week) introduce heightened liquidity management risks.
- Refine government security auctions:
  - Consider introducing a fixed-rate full allotment system in government security auctions (cited examples: ECB during 2008 crisis; Uganda; Kenya).

### Policy rate corridor: formalization and width
- The BoZ does not have a de jure corridor (no standing deposit and lending facilities) nor a de facto corridor (has allowed interbank rate to leave the PR corridor).
- Recommendation: formalize the corridor by introducing the necessary standing facilities to guarantee the interbank rate floats inside the corridor, increasing transparency and predictability.
- The (symmetric) policy rate corridor currently stands at 4 percentage points; this width is too large.
- Recommendation: drastically reduce the corridor width or preferably eliminate the corridor system. Given BoZ's liquidity management capabilities, an interest corridor of no more than one percentage point wide seems feasible and would markedly enhance the signal and effectiveness of MP.
- Note: The BoZ has recently reduced the PR corridor width from ±2 p.p. to ±1 p.p., increased use of OMOs and reduced reserve requirements from 18 to 12 percent.

### Costs and trade-offs in instrument choice
- BoZ's reluctance to use OMOs and to implement a standing deposit facility partially reflects concern about financial costs (interest-bearing nature of these instruments).
- The financial costs of using OMOs pale compared to the wide-ranging economic costs of poor liquidity management and a less transparent MP:
  - Distortions and opaqueness transfer costs to the financial system, raise liquidity management risks, constrain credit markets, slow financial development, and produce a more volatile and uncertain MP transmission mechanism.

### Monetary policy strategy, forecasting and decision-making
- MP needs to be more forward looking:
  - Example: when the BoZ acted in November 2015 the ER had already depreciated over 60 percent in the previous three months and around 100 percent during the year; the delayed policy response increased pass-through to inflation and required a stronger policy response.
  - Subsequently the BoZ maintained MP too tight for too long while waiting for annual inflation to fall before unwinding MP.
- MP analysis and forecasting capabilities need improvements:
  - Priority is implementing a Policy Analysis and Forecasting System (FPAS) with IMF support.
- MPC meeting frequency should increase:
  - The BoZ's MPC meets quarterly; this is too infrequent for an economy subject to frequent shocks.
  - Comparators: Bank of England's MPC meets "at least once a month"; Fed's FOMC and Bank of Canada's Governing Council meet 8 times per year; Brazil's Copom meets 8 times per year; South African Reserve Bank's MPC meets 6 times per year; CBK's MPC meets "at least once every two months"; BOU's MPC meets 6 times per year.
  - More frequent MPC meetings facilitate forward-looking policy and provide recurrent guidance to markets.

### FX intervention, dollarization and real bonds
- FX intervention policy:
  - The BoZ should intervene in the FX market only to smooth excessive volatility and to build buffers.
  - Heavy interventions have compromised scarce international reserves; in 2014 the BoZ sold a net amount of USD 700 million, while in 2015 the net intervention surpassed USD 750 million – a total amount larger than the 2015 Eurobond placement (USD 1.25 billion) – in a context of growing current account deficits and limited international reserves.
  - Since end-2015 the nominal ER has been unusually stable, which might imply inadequate adjustment to changing fundamentals.
- Dollarization challenges:
  - Around 45 percent of deposits in the banking system and 30 percent of loans are in dollars.
  - Dollarization:
    - Hinders the transmission mechanism of MP (flight to dollar deposits can boost depreciation and nonlinear pass-through to inflation).
    - Makes assessment of monetary conditions more difficult due to ER effects on monetary aggregates via valuation.
    - Increases risks to financial stability via currency risk and balance sheet mismatches.
- Real (inflation-indexed) bonds:
  - The BoZ and the Treasury would benefit from introducing inflation-indexed securities:
    - Potentially lower Treasury costs (lower risk premium).
    - Provide a means to extract market inflation expectations at higher frequency and help implement forward-looking MP.
  - Acknowledge technical difficulties in disentangling inflation expectations and risk premia (maturity, liquidity).

### Expectations surveys and communication
- Surveys of expectations:
  - BoZ currently conducts a semi-annual Survey of Business Opinion and Expectations (it was quarterly until 2013).
  - Recommendation: increase frequency; worst-case quarterly, ideally monthly with a small lag between data collection and reporting.
  - Since early 2017, the survey is back to its previous quarterly frequency.
  - High-frequency, low-cost online surveys are feasible (example: CB of Brazil’s online survey updated weekly).
- Communication improvements:
  - BoZ's communication strategy has fallen short at key junctures (e.g., after November 2015 tightening, and missing the third scheduled MP meeting of the year with delayed notification).
  - Recommendation: publish an inflation report once the BoZ feels comfortable; a rough yet transparent assessment is preferable to leaving markets guessing.
  - Coherent MPF and operational independence make communication easier and more effective; providing a coherent view of how MP works and the contingent nature of decisions is more important than attempting highly accurate forecasts.

*Source: IMF staff report excerpt — "Not all the liquidity management challenges faced by the BoZ reflect structural issues" (content unit: cr17328).*

### 45.      The overriding objective of MP should be price stability. The CB should have a clear

### The overriding objective of MP should be price stability. The CB should have a clear

### Rationale for price stability as the overriding objective
- Price stability should take precedence because:
  - "there is no long-run trade-off between inflation and real variables, while inflation impinge many economic costs, especially on the poor."
  - Short-run trade-offs between inflation and growth "could give rise to opportunistic behavior and generate political business cycles," reinforcing instability.
- Benefits of making price stability the focal point of the monetary policy framework (MPF):
  - Provides a coherent MPF, decreasing macroeconomic uncertainty.
  - A more stable economic environment decreases macroeconomic risks, reduce real interest rates (via lower risk premium), and is conducive to financial development.
  - "price stability is a necessary condition for financial stability, another key objective of the CB."

### Central Bank (CB) operational independence: scope and institutional features
- Operational independence is multidimensional and goes "well beyond a formal guarantee granted by law."
- Evidence supports that the CB can best pursue price stability with operational independence.
- Key institutional design elements recommended:
  - "The law should provide operational independence to the CB, which means it should be granted by the constitution."
  - "The MPC members should have fixed-term mandates."
  - MPC members should only be fired "in very specific situations duly described in the legislation (e.g. conflict of interest, corruption)."
  - "The mandates of the MPC members should not overlap with that of the president of the country" so that only a share of MPC members are replaced during each presidential term.
  - "The members of the MPC should have clear expertise in MP, and should be approved by Congress."
  - CB staff appointed to MPC should come from relevant departments (e.g. "research, economics").
  - "No member of the Ministry of Finance or any other governmental body should participate in any internal committee of the CB, even as an ex officio member."
  - Financial independence: "The CB needs to be financially independent" to cover duties such as "pay interest on OMOs" and operational expenses ("wages, operational costs, etc.").
  - The CB "should not provide advances and direct financing to the government." The text notes that some de jure independent CBs still have CB Acts that allow government financing (e.g. Kenya), which "goes against the very rationale of independence."

### Inflation targeting and setting of short- and medium-run inflation targets
- The BoZ should set "clear and meaningful short and medium-run inflation targets."
- Characteristics of a meaningful target:
  - Timing: "The target should be set well in advance."
    - Rationale: must "consider the lags in the MP transmission mechanism" so the CB can act early; acting preemptively stabilizes the economy and allows smaller MP adjustments.
    - Should "ideally reflect the longer-term MP strategy." Example: if inflation is above its aimed long-run level, the CB should "define a clear disinflation path."
  - Clarity and design:
    - "The target should be clearly defined."
    - Trade-offs in target design noted:
      - A point target acts as a focal point, but is often infeasible because "MP works with a lag and the economy is frequently hit by shocks."
      - A target range adds flexibility but, unless "that range is very narrow," may create ambiguity.
    - Suggested balance: "either to set a point target with an implicit interval or a tolerance interval in which the CBs clearly states that it would seek to reach its mid-point in the medium-run."

### Findings on Zambia’s recent monetary policy framework (MPF) and operational performance
- Modernization of Zambia’s MPF has been difficult:
  - "Five years after the BoZ introduced the policy rate, and early encouraging signs, the modernization of Zambia ́s MPF has stalled and even slid backwards."
  - Evidence: "growing frequency in which the BoZ has set aside its new operational framework and allowed the policy rate to deviate from the MPR corridor."
- Characterization of recent MP implementation (transitioning period):
  - a) "a 'smooth' MPR (i.e. whose changes are smaller than those required by economic fundamentals);"
  - b) "frequent use of quantitative-type measures, despite the move to an interest-rate operational framework;"
  - c) "frequent use of administrative and ad hoc measures, including moral suasion and coercive-type measures."
  - Result: "monetary conditions have been very volatile, even though the policy rate has been relatively stable, adding unnecessary volatility to the economy."
- Multiplicity and conflict of objectives:
  - MP has been used to pursue multiple objectives that often conflict:
    - a) "containing the cost of credit;"
    - b) "controlling inflation;"
    - c) "at certain junctures, controlling the nominal ER."
  - This overburdening and lack of an internally consistent MPF contributed to opacity and an instrument mix reflecting these multiple aims.

### Benefits of modernizing the MPF and recent BoZ steps
- Benefits of a modern, internally consistent, forward-looking MPF:
  - Removes conflicting goals, reducing the need for large policy stance changes and ad hoc measures.
  - Preemptive action allows smaller magnitude policy adjustments and mitigates economic cycles.
  - Early and structured policy responses "help to decrease uncertainty and allows economic agents to take decisions that are more efficient."
- Operational independence and prioritizing price stability are "key ingredients of a modern MPF."
- Recent BoZ measures to deepen and speed modernization:
  - "decreased the width of the MPR corridor, increasing MP transparency and predictability,"
  - "increased the use OMOs to implement MP,"
  - "set a medium-term inflation target."
  - "It intends to start publishing its inflation report in the coming months and has increased efforts to strengthen its analytical and forecasting capacity."
  - These measures aim to "pave a solid ground towards a forward-looking MPF and, ultimately, upgrade to an ITF."

### Fiscal pressures from subsidies and related policy measures (brief)
- Subsidies have been "a major source of pressure on public finances."
  - The overall fiscal deficit rose from "nearly 3 percent of GDP in 2012 to 6½ percent in 2013."
  - In 2014, cash deficit fell "to under 6 percent," but on a commitment basis the deficit "amounted to nearly 9½ percent of GDP."
  - "expenditure commitments on subsidies increased from 3½ to 5½ percent of GDP between 2014 and 2016."
- 2017 Budget measures aimed at reducing the fiscal deficit by reducing subsidies:
  - Announced plans "to move to cost-reflective electricity tariffs by the end of 2017."
  - In October 2016, "the authorities had increased fuel prices to cost-covering levels and announced that henceforth retail prices would be adjustment as often as needed to eliminate the subsidy."
  - Announced limits on FRA operations and reforms to improve FISP efficiency.

*Source: cr17328 - 45.      The overriding objective of MP should be price stability.*

### 5. This note assesses the distributional impact of subsidies and proposed measures

### 5. This note assesses the distributional impact of subsidies and proposed measures

### Overview
- Purpose: Assess distributional impact of subsidies (fuel, electricity) and FISP, and proposed measures to eliminate or reform them; consider scaling-up of the Social Cash Transfer (SCT) as mitigation.
- Methodology: New fiscal incidence work using the Commitment to Equity (CEQ) Institute tool; joint work by IMF, World Bank, and CEQ Institute.
- Key questions:
  - Who benefits from the subsidies?
  - What will be the impact of proposed measures to eliminate fuel and electricity subsidies on inequality and poverty?
  - What measures should be implemented to mitigate adverse effects of eliminating the subsidies?

### Organization of the note
- Section B: Main features of each subsidy and proposals for elimination/reform.
- Section C: Social protection programs with focus on SCT.
- Section D: CEQ methodology, application to Zambia, main results, simulations (subsidy elimination + SCT scaling).
- Section E: Concluding remarks.

### Petroleum Products (Fuel)
- Market structure and procurement:
  - Nearly all petroleum products are procured by the government.
  - About half of domestic supply is imported as feedstock through the port of Dar-es-Salaam for the INDENI refinery using the TAZAMA pipeline; the other half is imported as refined products (delivered by road).
  - INDENI is fully state (Zambia) owned; TAZAMA pipeline ownership: Zambia 66 percent, Tanzania 34 percent.
  - Feedstock blend: crude oil, condensate, naphtha, and gasoil (diesel).
- Cost-Plus Model (CPM) and subsidies:
  - CPM introduced in 2008; designed to cover all costs and a fair profit margin.
  - Failure to systematically adjust retail prices in line with CPM led to fuel subsidies re-emerging in 2014 and 2015.
  - Estimated budget cost of subsidies: about $350 million in 2015 and about $525 million accrued in 2016.
- Policy developments:
  - Government announced elimination of fuel subsidies in April 2013; pump prices set at cost-covering levels since October 2016.
  - Fuel prices adjusted downwards in January and August 2017.
  - 2017 Budget Speech: government to disengage from procurement of finished products, limit role to regulation; examining viability of refinery and pipeline.

### Electricity
- Origins of subsidies:
  - Electricity subsidies emerged in 2015 after poor rainfall in 2014/15 halved hydro generation; emergency and private imports contracted at average cost $0.12/kWh versus ZESCO average tariff $0.051/kwh ($0.028 for non-mining and $0.067 for mining customers).
  - A 180 percent tariff hike approved to take effect from December 2015 was reversed in January 2016, leading to government subsidy to ZESCO of about US$225 million in 2016.
- Access and regressivity:
  - LCMS: 31.4 percent of households are connected to the national grid; urban 67.3 percent; rural 4.4 percent.
  - PMRS (2017) finding: richest 20 percent receive about 70 percent of electricity subsidies; poorest 20 percent receive less than 1 percent.
  - Tariff increases have most impact on poorest households mainly indirectly (e.g., through food prices).
- Tariff reforms and impacts:
  - Tariffs to non-mining customers raised in two steps: 50 percent increase in May 2017 and 16 percent in September 2017; cumulative headline increase 75 percent.
  - Because the lifeline threshold was doubled, estimated increase in effective average tariff is about 48 percent.
  - Mining companies: average tariff increased from about 6 cents/kwh to 9.3 cents, effective retroactively from January 2017.
  - Ongoing cost-of-service study expected to be completed in 2018.
  - Policy aim: move to cost-reflective tariffs to attract investment and boost generation capacity.

### Farmer Input Support Program (FISP)
- Objectives and outcomes:
  - Introduced in 2002 to increase maize production and improve incomes and food security of small-holder farmers via subsidized fertilizer and improved maize seed; promote private sector participation.
  - Zambia’s maize production rose since FISP, mainly from increased acreage rather than productivity growth.
  - Program has not graduated small-holders into commercially viable farmers; benefits have accrued mainly to larger farmers who can afford their share of costs.
  - Large resources devoted to FISP have crowded out extension services, research and development.
- Scope expansion:
  - Beneficiaries increased from 120,000 in 2002/03 to about 1.6 million in 2016/17.
  - Crops covered expanded from one (maize) to nine (white maize, orange maize, sorghum, rice, groundnuts, beans, soya beans, cotton and sunflower).
  - Program has benefited farmers with plots exceeding 5 hectares.
- E-voucher migration:
  - Pilot introduced in 13 districts during 2015/16 season alongside conventional FISP using prepaid cards covering inputs for crops, livestock and fisheries.
  - Government announced full migration to E-vouchers in the 2017/18 season.
  - Objectives: increase private sector participation, ensure timely access to inputs, improve targeting, and promote diversification.
  - Expected outcome: number of beneficiaries reduced by stricter eligibility criteria.

### Operations of the Food Reserve Agency (FRA)
- Role and issues:
  - FRA established in 1996 for national food reserve management; has become very active in the maize market, sometimes exceeding announced purchase targets.
  - IAPRI (2016): FRA tended to buy at above-market price and sell to millers at subsidized price; scale of activities crowds out private sector and inhibits diversification.
  - Studies found FRA interventions to be regressive, purchases poorly targeted, and subsidies to millers not passed to consumers.
  - CUTS (2016a): interventions harm large proportion of rural households who are net buyers of maize.
- Recent policy:
  - 2017 budget: limit FRA operations to procurement and management of strategic food reserve.
  - FRA announced limit on maize purchase in 2017/18 season to 500,000 metric tons.

### Social Protection Programs (focus on SCT)
- Key programs include:
  - Social Cash Transfers (SCT): unconditional cash transfers to the disabled, poor and vulnerable.
  - Public Welfare Assistance Scheme: targets vulnerable persons not covered by SCT; provides health care, education (up to secondary), food and shelter for orphans, neglected children, and chronically ill persons.
  - Home Grown School Feeding Program: provides daily meals to about 1 million students; sources supplies from local small-scale farmers.
  - Food Security Pack: inputs and technical assistance to small farming households affected by floods, droughts.
  - Women Empowerment Program: micro credits to groups of poor and vulnerable women entrepreneurs.
  - Youth Empowerment Program: vocational and entrepreneur training and start-up capital.
- SCT reach and benefits:
  - Launch 2003 pilot: 159 households in one district.
  - By 2011: about 33,000 households in 12 districts.
  - 2016: reached 242,000 beneficiaries in 78 districts.
  - Up to 2016: transfers K70/month to poor households and K140/month to households with members suffering disabilities.
  - 2017 budget: expand coverage to 500,000 poor households in all 103 districts, and increase monthly benefit by 28 percent.
- Impact and issues:
  - Randomized controlled trial results show significant impacts on poverty reduction, food security, school enrollment, asset ownership, and housing conditions.
  - Transfers have been unpredictable and declining relative to the budget in recent years.

### Fiscal Incidence Analysis — Concepts and Methodology
- CEQ tool quantifies impact of taxes and spending on income distribution and poverty (Lustig and Higgins, 2016).
- Income concepts constructed:
  - Disposable income = market income adjusted for direct transfers and direct taxes.
  - Consumable income = disposable income adjusted for indirect transfers (subsidies) and indirect taxes.
  - Final income = consumable income adjusted for in-kind transfers.
- Approach:
  - “Accounting approach”; does not capture behavioral responses or general equilibrium effects.
  - Measures of impact: change in Gini coefficient (inequality) and head count (poverty) between pre- and post-fiscal distributions.
  - Two key descriptors:
    - Concentration shares: Share of total benefit received (or taxes paid) by household distributed by income decile.
    - Incidence: Benefit received (or taxes paid) by households as a share of their market income.
- Application to Zambia:
  - Used micro-data from LCMS to allocate taxes and benefits; subsidies (FISP and energy) allocated based on LCMS spending data.
  - Some imputation applied for SCT allocation based on provinces covered and eligibility.
  - Broader study derived a Gini coefficient from consumption expenditure of 0.546 (CSO (2016) reported a Gini of 0.69 based on incomes; consumption preferred due to income data reliability concerns).

### Distribution of Subsidy Benefits — Key Findings
- General:
  - Analysis focused on subsidies for electricity, fuel and FISP. FRA excluded due to allocation complications.
- Fuel subsidies:
  - Very regressive and concentrated in highest income households.
  - 92 percent of the subsidy goes to the wealthiest 10 percent of households.
  - The poorer half of households receive less than one percent of the benefit.
  - Pre-subsidy income for the poorest 20 percent improves by less than 0.5 percent.
  - Pre-subsidy income for the richest decile increases by about 1¾ percent through both direct and indirect effects.
- Electricity subsidies:
  - Quite regressive.
  - Richest decile receive 64 percent of the subsidy; poorer half receive 1.5 percent of the total (reflecting low access by poor households).
  - Using 2015 cost of the electricity subsidy (i.e., approximately $37 million) yields very small impact on households' market income: poorest households improve by about 0.2 percent.
  - Using 2016 subsidy cost increases impacts but remains limited: poorest households' market income improves by about 1.2 percent through indirect effects versus more than 1.5 percent for the richest households through both direct and indirect effects.
- PMRS (2017) electricity finding:
  - Richest 20 percent of households receive about 70 percent of subsidies; poorest 20 percent receive less than 1 percent.
- FISP and other findings:
  - FISP benefits have accrued mainly to larger farmers (e.g., those with plots exceeding 5 hectares); program expansion has favored larger participants.

### Simulation and Mitigation (summary of approach)
- Simulations include combinations of subsidy elimination and scaling up of the SCT to assess potential mitigation of adverse distributional effects.
- SCT scaling-up is considered as a primary mitigating measure given its positive impacts on poverty and vulnerability.

*Source: cr17328 - 5. This note assesses the distributional impact of subsidies and proposed measures*

### 30. The Farmer Input Support Program can be considered neutral in terms

### 30. The Farmer Input Support Program can be considered neutral in terms of progressivity

### Farmer Input Support Program (FISP): incidence and targeting
- 48 percent of the benefit accrues to the lower 50 percent of the households and 52 percent accrues to higher income households.
- The poorest households receive around 5.5 percent of the total amount.
- The incidence of FISP on the poor is much larger than the fuel and electricity subsidies combined; their pre-FISP income increases by 2½ percent.
- In the context of the government's plan to reduce the number of beneficiaries from 1.6 million to 1 million during the 2017/18 Farming season and improve the targeting of FISP, a better fit for the poorest families might be the Food Security Pack.

### Social Cash Transfer (SCT): incidence and targeting
- 19 percent of the social cash transfers are received by the 10 percent poorest households.
- The income of the poorest households is boosted by almost 5 percent.
- Nearly 60 percent of the cost of the social cash transfer program are accrued by the 40 percent lowest income households.

### Results from the broader study
- In 2015, Zambia’s fiscal system reduced inequality. The largest impact arose from in-kind public expenditures on education.
- Fiscal policy increased poverty. The burden of taxes collected from the poor was greater than the amounts received in benefits. The number of poor and vulnerable individuals/households who experienced net cash subtractions from their incomes exceeded those who experienced net additions.
- Eliminating subsidies and moving to directly compensate poorer households would help reduce the poverty headcount.

### Simulated reform scenarios (compared to baseline)
- Scenario definitions:
  - "Gradual" reform includes the elimination of fuel and electricity subsidy, a 28 percent increase in the benefit level, and coverage of 500,000 beneficiaries.
  - "Accelerated" reform refers to the full elimination of fuel and electricity subsidies, a 100 percent increase in the benefit level, and coverage of 500,000 beneficiaries.
- Simulated results (table summary as presented):
  - Baseline (2015): Poverty 54.4; Inequality 0.546 (Disposable Income) — Poverty 56.3; Inequality 0.543 (Consumable Income).
  - Gradual: Poverty 53.9; Inequality 0.539 (Disposable Income) — Poverty 56.0; Inequality 0.534 (Consumable Income).
  - Accelerated: Poverty 50.3; Inequality 0.539 (Disposable Income) — Poverty 53.3; Inequality 0.537 (Consumable Income).
- The results indicate that fully eliminating the subsidies on fuel and electricity while scaling up SCT coverage and benefits could reduce poverty significantly.

### Conclusions and policy implications
- Fuel and electricity subsidies have been very costly and poorly targeted. Most of the benefits go to the richest households, with the poor only benefiting marginally and mainly through indirect effects.
- The results from various studies support the government's decision to phase out the fuel and electricity subsidies.
- The FISP program, while neutral in terms of its progressivity, can be enhanced by better targeting of beneficiaries and increased efficiency in the delivery of inputs.
- The migration to the E-voucher system, if implemented effectively, has the promise of saving resources which could be used to support productivity enhancing activities such as extension services and research and development.
- The social cash transfer is a better targeted intervention and should be scaled-up to mitigate the negative impact from the increases in fuel prices and electricity tariffs.

### Selected demographic, income and poverty indicators (2015)
- Total population: 15.5 million
  - Rural: 9 million
  - Urban: 6.5 million
- Households: 3 million
  - Rural: 1.7 million
  - Urban: 1.3 million
- Average household size: 5.1
  - Rural: 5.2
  - Urban: 5.0
- Gini coefficient: 0.69
- Poverty Headcount (proportion of population living below the national poverty line)
  - All Zambia: 54.4 percent
    - Rural: 76.6 percent
    - Urban: 23.4 percent
- Distribution of Population by Level of Poverty
  - Poor: 54.4 percent
    - Extreme: 40.8 percent
    - Moderate: 13.6 percent
  - Non-poor: 45.6 percent

*Source: IMF staff calculations and excerpts from the Commitment to Equity Institute, Central Statistics Office, and referenced studies as presented in the original chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17328.pdf_