## 1zmbea2022001

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### Executive summary and context
- Zambia faces large fiscal and external imbalances after an overly ambitious public investment drive that did not boost growth or revenues.
- Drought in 2019 and the COVID-19 pandemic worsened outcomes; poverty, inequality, and malnutrition rates are among the highest in the world.
- Zambia is in debt distress, defaulted on its Eurobonds in November 2020, and accumulated arrears to other creditors.
- Authorities requested a 38-month arrangement under the Extended Credit Facility (ECF) for SDR 978.2 million (100 percent of Zambia’s quota).

### Macroeconomic performance (selected figures)
- Real GDP growth: contracted by 2.8 percent in 2020; recovered to 3.6 percent in 2021; expanded by 2.4 percent in 2022Q1.
- Inflation: peaked at almost 25 percent in mid-2021; 9.7 percent in June 2022.
- Kwacha: appreciated by 33 percent in the twelve months to end-June 2022.
- Reserves and SDR allocation:
  - Unencumbered reserves about $970 million by end-October 2020 (about 2.4 months of imports).
  - $1.3 billion SDR allocation increased reserves to $2.9 billion or 3.1 months of prospective 2023 imports at end-March 2022.
  - Estimated optimal reserve level cited as 5 months of imports.
- Current account surplus: 12 percent of GDP in 2020; 7.6 percent in 2021.
- Fiscal deficit (commitment basis): 13.9 percent of GDP in 2019; 17.4 percent in 2020; 14.5 percent in 2021.
- Arrears and debt:
  - Principal and interest arrears: $2.2 billion by end-2021; $2.4 billion by end-March 2022.
  - External PPG debt (including non-resident holdings of domestic-currency debt and $1.3 billion arrears to external suppliers): $20 billion or 78 percent of GDP at end-2021.
  - Total PPG debt: $33.8 billion or 133 percent of GDP at end-2021.
  - VAT refund arrears stock: 2.4 percent of GDP at end-2021; expenditure arrears stock: 13.4 percent of GDP at end-2021.

### Outlook and key risks
- Growth: projected 3.0 percent in 2022; medium-term settle around 4½-5 percent.
- Inflation: expected to fall within the BoZ’s target band of 6-8 percent by 2023H1, with program guidance to return to target thereafter.
- Risks: copper price and production volatility; climate shocks; spillovers from the war in Ukraine (fuel and fertilizer price increases); reform fatigue; refinancing risks from non-resident investor exit.

### ECF-supported program objectives and pillars
- Overall aims:
  - Restore macroeconomic stability.
  - Foster higher, more resilient, and more inclusive growth.
  - Support the authorities’ Eighth National Development Plan.
- Priority challenges:
  - (i) Restore sustainability through fiscal adjustment and debt restructuring.
  - (ii) Create fiscal space for social spending.
  - (iii) Strengthen governance and reduce corruption vulnerabilities, including PFM improvements.
- Program pillars:
  - A. Restoring Medium-Term Fiscal Sustainability.
  - B. Enhanced Social Spending.
  - C. Restoring Debt Sustainability and Improving Debt Management and Transparency.
  - D. Strengthening Governance.
  - E. Strengthening Monetary Policy and Re-Building External Resilience.
  - F. Safeguarding Financial Stability.
  - G. Improving Statistical Capacity.
- Program modality: 38-month ECF arrangement for SDR 978.2 million.

### Fiscal consolidation strategy and targets
- Front-loaded, sustained consolidation to improve primary balance (commitment basis) from a deficit of 6.0 percent of GDP in 2021 to a surplus of 3.2 percent by 2025.
- Main measures:
  - Remove fuel subsidies in 2022 and reform agricultural subsidies starting 2023.
  - Scale back excessive and poorly targeted public investment.
  - Net clearance of budgetary arrears on expenditure and VAT refunds; a strategy for clearing arrears by 2026 published on August 4, 2022 (prior action).
- Domestic revenue mobilization:
  - Non-grant fiscal revenues (adjusted for VAT refund arrears) to increase by about 3¼ percent of GDP by 2025 compared to 2019 level of 19.6 percent.
  - Structural benchmark: prepare and adopt by end-October 2022 an action plan to boost revenue mobilization.
  - Specific tax measures include broadening the VAT base, unifying CIT to around 25-30 percent, limiting VAT exemptions on unprocessed foodstuffs, raising excises on tobacco and alcoholic beverages, and levying duties on sugar-sweetened beverages, cement, coal, single-use plastics, fertilizers and pesticides.
  - Remove implicit fuel subsidies projected to cost 1.7 percent of GDP in 2022; authorities intend to eliminate them at end-September 2022 (structural benchmark).
- Detailed revenue measures (Measures % of GDP):
  - Total: 1.7 (2022), 0.9 (2023), 0.5 (2024), 0.3 (2025), 3.4 (Total).
  - Value-added tax: 1.5 (2022), 0.4 (2023), 0.2 (2024), 0.1 (2025), 2.2 (Total).
  - Mining CIT: 0.0 (2022), 0.2 (2023), 0.1 (2024), 0.1 (2025), 0.3 (Total).
  - Non-mining CIT: 0.0 (2022), 0.1 (2023), 0.1 (2024), 0.0 (2025), 0.2 (Total).
  - Excise taxes: 0.2 (2022), 0.1 (2023), 0.0 (2024), 0.0 (2025), 0.4 (Total).
  - Mineral royalties: 0.0 (2022), 0.2 (2023), 0.1 (2024), 0.1 (2025), 0.3 (Total).

### Expenditure-side measures and arrears clearance
- Curtail public investment and eliminate explicit fuel subsidies.
- Prior action: cancel, rescope, or postpone a considerable share of contracted but undisbursed debt.
- Prior action: restored cost-plus pricing for petroleum products in December 2021 and shortened pricing cycle from 60 to 30 days.
- Increase in social protection projected from 0.7 percent of GDP in 2020 to 1.6 percent by 2025.
- Social Cash Transfers: recipients increased to 994,000 in 2021; monthly benefit increased from 90 to 110 kwacha; plans to expand benefits and programs in 2022.

### Debt sustainability, restructuring, and limits on new borrowing
- DSA: without restructuring, public debt is in distress; authorities requested restructuring under the G20 Common Framework to achieve “moderate” risk of debt distress over the medium term.
- Debt stock and arrears:
  - External public and publicly guaranteed debt reached $20 billion or 78.6 percent of GDP at end-2021.
  - Total public and publicly guaranteed debt $33.8 billion or 132.7 percent of GDP (end-2021).
  - External public debt arrears at end-March 2022: $2.43 billion (including $1.63 billion principal arrears and $793.9 million interest arrears).
- Authorities intend to exclude domestically-issued debt from restructuring (domestic debt accounts for 48 percent of GDP).
- Limits on new borrowing:
  - New disbursements on contracted but undisbursed project loans limited to $1.4 billion during 2022-25 (including $834 million from World Bank and AfDB).
  - Continuous zero ceiling on new non-concessional borrowing.
  - Ceiling on the present value of new external borrowing (TMU/Table 3).
- Financing needs and restructuring assumptions:
  - Overall BOP financing needs estimated at $11 billion over 2022-25.
  - Authorities seek cash debt relief amounting to $8.4 billion during 2022-25 to close the BOP financing gap.
  - IMF ECF requested SDR 978.2 million (about $1.3 billion or 5.0 percent of GDP); Fund financing expected to close about 12 percent of the projected 2022-25 overall BOP financing gap and cover 51 percent of the residual financing gap after external debt restructuring.
  - Official financing (IMF, World Bank, other) totals and timing shown in staff tables (Total Financing Gap 2022–2025 cumulative: 11,036; Official financing total: 2,626; IMF ECF total: 1,346; World Bank total: 1,280; Financing from external debt restructuring total: 8,410).

### Creditor engagement and arrears (selected figures)
- Reported arrears (end-2021):
  - $280 million interest arrears to Eurobond holders.
  - $632 million to other private external creditors (interest and principal).
  - about $1.3 billion in other accounts payable to external suppliers (ZESCO IPP external arrears, fuel and contractor arrears).
- Zambia reported $1.3 billion of interest and principal arrears to official bilateral creditors as at end-2021.
- IFI arrears: $6.1 million at end-2021 (cleared by end-March 2022 except $1.16 million to NDF as at end-March 2022).

### Financial sector condition, regulatory forbearance, and stability measures
- Banking sector capitalization and profitability: 25 percent of risk-weighted assets and 5.1 percent of total assets at end-March 2022.
- Banking sector assets: domestically-issued government securities represent 29 percent of total banking sector assets.
- Reported gross NPLs: 6.4 percent of total loans at end-March 2022; inclusion of restructured pandemic loans would likely push gross NPLs above 10 percent.
- Authorities implemented pandemic-era regulatory forbearance including revised loan classification and provisioning rules and IFRS 9 transitional arrangements; unwind planned as conditions allow.
- Financial sector reforms and supervision:
  - Banking sector review and thematic asset quality exam scheduled for completion by end-2022 (structural benchmark).
  - Deposit Protection Scheme unit established June 2022; full operationalization planned.
  - Develop macro-prudential toolkit and crisis management and resolution framework (linked to new BoZ Act).

### Monetary policy, FX, and reserve objectives
- BoZ policy: maintain inflation reduction efforts, let exchange rate reflect market conditions, rebuild reserves gradually.
- Fund staff: optimal unencumbered reserves around five months of prospective imports; achieving five months feasible by 2025 (total reserve target about 5.5 months).
- BoZ commitments: review FX market rules, normalize interaction with the FX market, reverse pandemic-era administrative measures, upgrade monetary policy framework; new Bank of Zambia Act pending Presidential assent (prior action).

### Social programs, human capital, and safety nets
- Social protection execution historically weak: execution rates averaged 65 percent over 2014-21; safety net budget execution averaged 54 percent.
- Planned social measures:
  - Social protection to increase to 1.6 percent of GDP by 2025 from 0.7 percent in 2020.
  - Health: hire 11,000 additional medical staff in 2022.
  - Education: add 30,000 teachers in 2022; free education expansion.
  - Social Cash Transfer recipients increased to 994,000 in 2021; monthly benefit increases and program expansions planned.
  - Food Security Pack expansion to 290,000 households planned for 2022.
- Zambia Integrated Social Protection Information System implemented in 2021 to improve targeting and reduce duplication.

### Public financial management, IFMIS, and procurement reforms
- Commitment Control Module in IFMIS operational July 2022; goal to register all commitments for 59 MPSAs by mid-2023 (structural benchmark).
- Procurement: regulations to implement the 2020 Public Procurement Act finalized and issued in May 2022 (prior action); further work on beneficial owners register required.
- New Public Debt Management bill submitted to National Assembly; timely enactment critical (structural benchmark).
- Publish quarterly debt statistics bulletin (structural benchmark) and summary information on newly contracted external loans (structural benchmark).

### ZESCO and electricity sector reforms (key figures and actions)
- ZESCO outstanding (end-2021/ end-March 2022):
  - Debt amounts: about $1.5 billion in loans (end-2021); $1.4 billion of payables outstanding to local and external IPPs noted earlier; total outstanding debt as at end March 2022 amounted to $3 billion comprising $1.87 billion in payables and $1.13 billion in domestic and external loans.
  - ZESCO recorded a net profit in 2021 (unaudited) of K12.1 billion ($607 million) after a 2020 net loss of K12.2 billion (USD580 million).
- Turnaround actions:
  - Adopt cost-reflective tariffs while maintaining lifeline tariffs.
  - Curtail operating costs, renegotiate PPAs, voluntary separation scheme, optimize CAPEX, initiate asset divestment in 2023.
  - Include ZESCO external debt in restructuring to improve balance sheet.
- Energy sector structural benchmarks:
  - Publish COSS and government response (prior action).
  - Cabinet endorsement and publication of multi-year tariff framework and migration to cost-reflective tariffs prior to ERB decision (prior action/structural benchmark).

### External sector assessment and balance of payments
- NIIP end-2021: -142 percent of GDP; gross assets 32 percent of GDP; gross liabilities 174 percent of GDP.
- Gross international reserves (millions of U.S. dollars): 2018 1,569; 2019 1,450; 2020 1,203; 2021 2,796; 2022 3,060; projected 2025 6,237.
- Reserves in months of prospective imports: 2018 2.4; 2019 3.0; 2020 1.9; 2021 3.2; 2025 5.5.
- Balance of payments financing gap and exceptional financing assumptions presented in staff tables (Financing gap 2022: 3,068; 2022–25 total: 11,036).

### Program monitoring, performance criteria, and safeguards
- Quantitative performance criteria and continuous targets include:
  - Primary balance, new central bank credit to government, net official international reserves.
  - Continuous performance criteria: new external debt arrears and contracting/guaranteeing new non-concessional external debt.
- Indicative targets: fiscal revenues, new external borrowing, disbursement of contracted but undisbursed external debt, social spending, net clearance of budgetary arrears.
- Structural benchmarks include IFMIS commitment registration, revenue action plan, debt bulletin publication, COSS publication and response, banking sector review, and governance diagnostic completion.
- Safeguards: updated safeguards assessment of the BoZ in progress; Memorandum of Understanding between government and BoZ to govern servicing of IMF obligations to be signed by end-August 2022.

### Risk Assessment Matrix — selected scenarios and policy responses
- Domestic risks:
  - COVID-19 variant outbreaks (Relative Likelihood: M; Impact: H) — policy: step up health support; BoZ monitor financial stress.
  - Natural disasters related to climate change (M; H) — policy: support vulnerable populations; diversify crops; consider reservoirs.
  - Widespread social discontent (H; M) — policy: strengthen governance; orderly fiscal adjustment; protect social spending.
  - Financial instability from rising NPLs (H; M) — policy: monitor vulnerabilities; take prudential corrective actions.
- External risks:
  - Russia–Ukraine escalation (H; H) — policy: enhance export competitiveness; diversify economy; maintain exchange rate flexibility.
  - Abrupt slowdown in China (M; H) — policy: diversify exports; enhance competitiveness.
  - Slow progress in debt restructuring or exit of non-resident investors (M; H) — policy: credible fiscal adjustment; broaden tax base; prioritize CAPEX.

### Staff appraisal — diagnosis and policy recommendations (selected)
- Diagnosis: deep socio-economic challenges rooted in years of mismanagement, high public investment inefficiency, drought, pandemic, and war in Ukraine impacts.
- Key recommendations:
  - Large, upfront, sustained fiscal consolidation anchored on cutting wasteful public investment, eliminating regressive fuel subsidies, and reforming agricultural subsidies; domestic revenue mobilization to play a larger role.
  - Deep and comprehensive debt restructuring under the G20 Common Framework to restore sustainability.
  - Strengthen fiscal controls and governance: halt accumulation of domestic arrears, register commitments in IFMIS, strengthen PFM, procurement, SOE oversight, and anti-corruption and AML/CFT frameworks.
  - BoZ: persist in reducing inflation, let exchange rate reflect market conditions, rebuild reserves, and preserve financial stability by addressing NPLs and capital buffers.

*International Monetary Fund — Executive Summary and selected excerpts, Zambia (content unit 1zmbea2022001).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Zambia faces large fiscal and external imbalances resulting from years of economic mismanagement, notably an overly ambitious public investment drive that did not yield significant boosts to growth or revenues.
- A drought in 2019 and the COVID-19 pandemic exacerbated economic and social challenges; poverty, inequality, and malnutrition rates are among the highest in the world.
- Zambia is in debt distress, having defaulted on its Eurobonds in November 2020 while accumulating arrears to other creditors.
- The war in Ukraine has increased prices of fuel and fertilizer, amplifying pressures further.
- The authorities requested a 38-month arrangement under the Extended Credit Facility (ECF) in the amount of SDR 978.2 million (100 percent of Zambia’s quota).

### Recent developments and macroeconomic performance
- Growth and activity
  - The economy contracted by 2.8 percent in 2020.
  - Growth recovered to an estimated 3.6 percent in 2021.
  - Real GDP expanded by 2.4 percent in 2022Q1, mostly driven by public sector and education.
- Inflation and exchange rate
  - Inflation receded from a peak of almost 25 percent in mid-2021 to 9.7 percent in June 2022.
  - The kwacha appreciated by 33 percent in the twelve months to end-June 2022.
- External sector and reserves
  - Unencumbered reserves shrank to about $970 million by end-October 2020 (about 2.4 months of imports).
  - The $1.3 billion SDR allocation, together with higher FX inflows, brought reserves to $2.9 billion or 3.1 months of prospective 2023 imports at end-March 2022.
  - Estimated optimal reserve level cited as 5 months of imports (see ¶37).
  - The current account surplus shrank from 12 percent of GDP in 2020 to 7.6 percent in 2021.
- Fiscal developments
  - Fiscal deficit on a commitment basis increased from 13.9 percent of GDP in 2019 to 17.4 percent in 2020 and remained high at 14.5 percent in 2021.
  - One-off dividends from the Bank of Zambia contributed to revenue strength in 2020 and 2021.
  - Spending increases: agricultural subsidies from 1.9 percent of GDP in 2019 to 3.0 percent in 2020 and 2.4 percent in 2021; explicit fuel subsidies claimed a combined 3.9 percent of GDP in 2020-21.
  - Social protection spending increased from 0.1 percent of GDP in 2019 to 1.3 percent in 2021.
  - Foreign-financed public investment fell from 8.4 percent of GDP in 2019 to 1.9 percent in 2021.
  - Net domestic financing rose from 3.4 percent of GDP in 2019 to 9.3 percent of GDP in 2020 and 7.3 percent of GDP in 2021.
  - Interest on domestic debt increased from 3.9 percent of GDP in 2019 to 5.9 percent of GDP in 2021.
- Arrears and debt service
  - Principal and interest arrears reached $2.2 billion by end-2021, and $2.4 billion by end-March 2022.
  - External PPG debt, including non-resident holdings of domestic-currency debt and $1.3 billion of arrears to external suppliers (including ZESCO’s arrears to IPPs), reached $20 billion or 78 percent of GDP at end-2021.
  - Total PPG debt reached $33.8 billion or 133 percent of GDP at end-2021.
  - Accumulation of budgetary arrears: VAT refund arrears stock was 2.4 percent of GDP at end-2021; expenditure arrears stock reached 13.4 percent of GDP at end-2021.
- Year-to-date 2022 fiscal performance (January–May)
  - Revenues: weakness in indirect taxes offset by overperformance in income taxes (particularly mining CIT).
  - Overall fiscal expenditure (cash basis) was in line with the budget; the primary balance (cash basis) was 0.7 percent of GDP lower than the budget target, reflecting an ambitious planned compression of primary expenditure.
- Use of SDR allocation
  - Authorities plan to use about half of the $1.3 billion SDR allocation to support the 2022 budget, with the remaining half divided equally between 2023 and 2024.
  - In 2022 the allocation supported clearance of pension arrears, purchases of drugs and medical supplies, the Social Cash Transfer (SCT) program, and the Food Security Pack program.

### The COVID-19 pandemic (Box 1 key points)
- First COVID-19 cases reported on March 18, 2020; Zambia experienced several waves, with the Delta-driven third wave between June and December 2021 causing highest infections and deaths.
- Following the fourth (Omicron) wave starting December 2021, infections dropped and remain relatively low.
- Government social distancing measures peaked in stringency in May 2020.
- Vaccination target: at least 70 percent of the eligible population (adults over 18).
- As of end-June 2022, vaccination rate stood at 41 percent of the eligible population or 25 percent of the total population.
- Vaccine availability improved via COVAX and bilateral partners; vaccine hesitancy addressed through communication campaigns; still, low overall vaccination rates leave risk of a more severe outbreak.

### Outlook and risks
- With a resolution to the debt crisis, economic recovery is anticipated to continue in 2022 and inflation should continue falling.
- Key risks to the outlook include:
  - Volatility in copper prices and production.
  - Climate shocks.
  - Spillovers from the war in Ukraine (notably fuel and fertilizer price increases).
  - Reform fatigue, especially in the face of a large fiscal adjustment.

### Program objectives and policies (ECF-supported program)
- Overall aims
  - Restore macroeconomic stability.
  - Foster higher, more resilient, and more inclusive growth.
  - Support the authorities’ Eighth National Development Plan.
- Priority challenges to address
  - (i) Restoring sustainability through fiscal adjustment and debt restructuring.
  - (ii) Creating fiscal space for social spending to cushion the burden of adjustment.
  - (iii) Strengthening governance and reducing corruption vulnerabilities, including by improving public financial management.
- Monetary and exchange rate policy
  - Ensure monetary and exchange rate policies support restoration of macroeconomic stability, rebuild international reserves to adequate levels, and maintain financial sector stability.
- Specific program pillars (as structured in the document)
  - A. Restoring Medium-Term Fiscal Sustainability (see ¶10–13 for fiscal context and measures).
  - B. Enhanced Social Spending (use of SDRs and protection of social programs).
  - C. Restoring Debt Sustainability and Improving Debt Management and Transparency (debt restructuring and arrears resolution).
  - D. Strengthening Governance (public financial management, anti-corruption measures).
  - E. Strengthening Monetary Policy and Re-Building External Resilience (reserve accumulation and central bank policy).
  - F. Safeguarding Financial Stability (banking sector and financial soundness).
  - G. Improving Statistical Capacity.
- Program modality
  - 38-month ECF arrangement for SDR 978.2 million (100 percent of quota), designed to restore stability while protecting social spending and strengthening governance and debt transparency.

### Institutional and process notes
- Discussions took place over 18 months, including virtual missions in February-March 2021, April-May 2021, and November-December 2021.
- A staff level agreement was announced on December 3, 2021; the macroeconomic framework was updated during a June 2022 virtual staff visit.
- Staff team leadership and participants are listed in the document (names and organizational affiliations preserved in source).

*International Monetary Fund — Executive Summary, Zambia (August 9, 2022).*

### 15.      Regulatory forbearance measures have helped the financial sector weather the impact

### 15.      Regulatory forbearance measures have helped the financial sector weather the impact

### Financial sector condition and asset quality
- Average banking sector capitalization and profitability remain robust at 25 percent of risk-weighted assets and 5.1 percent of total assets, respectively, at   end-March 2022.
- Earnings on domestically-issued government securities underpin profitability; these securities represent 29 percent of total banking sector assets.
- Reported gross non-performing loans (NPLs) stood at 6.4 percent of total loans at   end-March 2022.
- Inclusion of loans restructured during the pandemic (currently not subject to provisioning) would likely bring gross NPLs above 10 percent.
- General weaknesses in the recognition of NPLs imply the underlying level may be understated.
- Banks might be under-provisioning for credit losses, including to take advantage of pandemic-specific forbearance measures.

### Outlook and macro-financial risks
- Growth projection: 3.0 percent in 2022 and to settle around 4½-5 percent over the medium term.
- Inflation: projected to fall within the BoZ’s target band of 6-8 percent by 2023H1, reflecting base effects and the continued impact of the stronger kwacha.
- Current account: will remain in surplus, supported by robust copper exports, although the surplus is projected to shrink in the near term as imports recover before increasing again over the medium term.
- Balance of risks around the baseline is to the downside, including risks from:
  - (i) delays in reaching a final debt restructuring agreement in line with program parameters;
  - (ii) climate, commodity, and COVID-related shocks that could complicate macroeconomic management and raise the cost of adjustment;
  - (iii) reform fatigue due to political and social pressures, particularly in the context of a large fiscal adjustment; and
  - (iv) refinancing risks for domestic government debt stemming from the exit of non-resident investors.
- Mitigants: authorities’ demonstrated commitment to the program and strong ownership of policies and reforms.
- Authorities should stand ready to tighten monetary policy if currency and inflation pressures reappear (e.g., if capital inflows reverse).

### Spillovers from the war in Ukraine and fiscal pressures
- Fuel prices increased by 38-57 percent since December 2021 (political costs of fuel subsidy reform have risen); between end-November 2021 and end-June 2022, petrol increased 52 percent, diesel increased 57 percent, and kerosene increased 38 percent.
- Inflationary impact partly mitigated by kwacha appreciation and a high CPI base.
- Food security relatively protected by Zambia’s self-sufficiency in maize production; inflationary risks would be compounded if external demand pressures (or drought) translate into higher food prices.
- Political and economic costs are likely to grow over time, highlighting the importance of the IMF-supported program.

### Program objectives and policies (overview)
- ECF-supported program goals:
  - (i) restoring fiscal and debt sustainability through a fiscal adjustment and debt restructuring;
  - (ii) creating fiscal space for social spending to cushion the burden of adjustment; and
  - (iii) strengthening governance and reducing corruption vulnerabilities, including by improving public financial management (PFM).
- Program seeks to ensure monetary and exchange rate policies support restoration of macroeconomic stability, international reserves return to adequate levels, and the financial sector remains stable.

### A. Restoring Medium-Term Fiscal Sustainability
- Program targets a large, front-loaded, and sustained fiscal consolidation.
- Primary balance (commitment basis) targeted to improve from a deficit of 6.0 percent of GDP in 2021 to a surplus of 3.2 percent by 2025.
- Consolidation front-loaded by reforming regressive and wasteful subsidies—removing fuel subsidies in 2022 and reforming agricultural subsidies starting in 2023—and reducing excessive and poorly targeted public investment.
- Program aims for net clearance of budgetary arrears on expenditure and VAT refunds (MEFP ¶53-55).
- A strategy for clearing budgetary arrears by 2026 was published on August 4, 2022 (prior action).
- Beyond 2022, domestic revenue mobilization will play a relatively bigger role; the MTBF for 2023-25 is aligned with program objectives (prior action).

Key fiscal figures from program period (2021–25) and totals (2021-25) as presented:
- Improvement in primary balance (cash basis): 5.7 0.3 1.8 0.7 0.7 3.5 9.2
- Improvement in primary balance (commitment basis): 4.1 6.7 1.5 0.5 0.5 9.2 13.3
- Improvement in primary balance excluding large one-off revenues (commitment basis): 3.4 8.2 1.5 0.5 0.5 10.7 14.1
- Revenue increases (cash basis): 3.0 -2.0 0.9 0.4 0.1 -0.5 2.5
- Revenue increases (commitment basis): 1 3.0 -1.1 0.9 0.3 0.1 0.3 3.3
- Revenue increases excluding large one-offs (commitment basis): 2.3 0.4 0.9 0.3 0.1 1.7 4.1
- Reduction in primary spending (cash basis): 2.7 2.3 0.9 0.3 0.6 4.0 6.7
- Current primary spending: -1.0 1.2 0.8 0.4 0.6 3.0 2.0
- Compensation of employees: 0.6 -0.4 -0.7 -0.3 0.4 -1.1 -0.5
- Goods and services: -0.4 0.2 0.1 0.0 -0.1 0.2 -0.3
- Subsidies: -0.2 2.0 1.2 0.5 0.5 4.2 4.0
  - Of which: Agricultural (FISP and FRA): 0.7 0.1 0.4 0.5 0.4 1.5 2.2
  - Of which: Energy (fuel and electricity): -1.0 1.5 0.8 0.0 0.0 0.0 2.3 1.3
- Social protection: -0.6 0.0 -0.1 0.0 -0.1 -0.3 -0.8
- Other: -0.3 -0.5 0.3 0.2 0.0 -0.1 -0.4
- Capital spending: 3.6 1.1 0.1 0.0 -0.1 1.1 4.7
- Increase in net clearance of expenditure arrears: -1.6 5.4 -0.2 -0.2 -0.2 4.9 3.3

### Domestic revenue mobilization (targets and measures)
- Non-grant fiscal revenues (adjusted for arrears on VAT refunds) should increase by about 3¼ percent of GDP by 2025, compared to their pre-COVID 2019 level of 19.6 percent.
- By end-October 2022, authorities will prepare and adopt an action plan to boost revenue mobilization (structural benchmark).
- Key reform priorities:
  - Policy changes to increase revenues from CIT, VAT, and excises, including broadening the VAT base and unifying the CIT rate to around 25-30 percent, limiting VAT exemptions on unprocessed foodstuffs to specific items in the food basket of the poor, raising excises on tobacco and alcoholic beverages, and levying duties on sugar-sweetened beverages, cement, coal, single-use plastics, fertilizers and pesticides.
  - Improvements in tax administration, including implementing a comprehensive taxpayer compliance program based on data analytics, improved tax audits and compliance management, increased use of electronic fiscal reporting, and regular matching of tax and customs data.
  - Removing implicit subsidies on fuel: tax expenditures from reduced excises and VAT zero-rating on petrol and diesel are projected to cost the budget 1.7 percent of GDP in 2022; authorities intend to eliminate them at end-September 2022 (structural benchmark).

Detailed revenue measures (Measures % of GDP):
- Total: 1.7 (2022), 0.9 (2023), 0.5 (2024), 0.3 (2025), 3.4 (Total)
  - Mining CIT: 0.0 (2022), 0.2 (2023), 0.1 (2024), 0.1 (2025), 0.3 (Total)
  - Non-mining CIT: 0.0 (2022), 0.1 (2023), 0.1 (2024), 0.0 (2025), 0.2 (Total)
  - Value-added tax: 1.5 (2022), 0.4 (2023), 0.2 (2024), 0.1 (2025), 2.2 (Total)
  - Excise taxes: 0.2 (2022), 0.1 (2023), 0.0 (2024), 0.0 (2025), 0.4 (Total)
  - Mineral royalties: 0.0 (2022), 0.2 (2023), 0.1 (2024), 0.1 (2025), 0.3 (Total)
- Note: 1.7 percent of GDP would happen in 2022, with the rest (1.7 percent) over 2023-25.

### Expenditure-side measures
- Key measures include curbing public investment and eliminating explicit fuel subsidies.
- Authorities will scale back public investment to focus on highest priority projects, including cancelling, rescoping, or postponing a considerable share of contracted but undisbursed debt (prior action).
- Authorities restored cost-plus pricing for petroleum products in December 2021 and shortened the pricing cycle from 60 to 30 days (prior action).

### B. Enhanced social spending
- Objective: gradually increase the level and quality of social spending to reduce poverty and inequality and improve access to basic social services (MEFP ¶67-69).
- Poverty rate increased from 58.7 to 60.1 percent between 2015 and 2020.
- Social spending execution rates have averaged only 65 percent over 2014-21; social safety net budget execution averaged 54 percent.
- Spending on social protection projected to increase from 0.7 percent of GDP in 2020 to 1.6 percent by 2025.
- Social cash transfers (SCT): number of recipients increased to 994,000 in 2021 (almost 50 percent increase over 2019); monthly benefit increased from 90 to 110 kwacha.
- Food Security Pack program recipients increased in 2021 from 80,000 to 263,000 households, with further expansion to 290,000 households planned for 2022.
- Other expansions: Keeping Girls in School and Home-Grown School Feeding Program; continued implementation of WB-financed GEWEL Project complemented with budgetary funds.
- Expansion in the social safety net intended to mitigate adverse effects on poorest from elimination of fuel and electricity subsidies.

### Health, education, and local services
- Health: plans to hire 11,000 additional medical staff in 2022 (MEFP ¶48).
- Education: plans to add 30,000 teachers in 2022 and provide access to free education for all.
- Increased transfers to local governments, including for school bursaries, as part of fiscal decentralization (MEFP ¶105).
- Measures to strengthen fiscal institutions at the subnational level (MEFP ¶51).
- Overall: benefits from increased social spending should outweigh the impact from removal of fuel and electricity subsidies for low-income households.

### C. Restoring debt sustainability and improving debt management and transparency
- Debt sustainability analysis (DSA) confirms that, without restructuring, public debt is in distress; all external debt burden indicators exhibit large and persistent breaches of prudent thresholds through the medium term and beyond under both baseline and stress scenarios.
- Authorities requested a debt restructuring from creditors to restore debt sustainability and achieve a “moderate” risk of debt distress over the medium term.
- Actions taken: appointed financial and legal advisors in mid-2020; requested a debt treatment under the G20 Common Framework in January 2021; bondholders established a creditors committee and advisors in mid-2020; Official Creditor Committee (OCC) under the G20 CF formed in June 2022.
- Authorities intend to exclude domestically-issued debt from the restructuring perimeter.
  - Domestically-issued debt accounts for 48 percent of GDP and represents the most significant source of budget financing in the near to medium term.
  - Non-residents hold about 26 percent of this stock; the Zambian financial sector holds the bulk.
  - These securities account for almost one third of banking sector assets (or about 12 percent of GDP).
  - Restructuring domestically-issued debt could trigger significant financial instability and broader economic risks.
- Debt management and transparency reforms:
  - New Public Debt Management (PDM) bill submitted to the National Assembly; timely enactment is critical to controlling debt accumulation (structural benchmark).
  - Draft bill aims to strengthen oversight, clarify objectives, tighten control on authority to borrow, and enhance risk management around government guarantees on on-lending; clarifies roles of central government units in debt management.
  - Authorities started publishing a quarterly debt statistics bulletin with comprehensive statistics (structural benchmark).
  - Authorities will start publishing summary information on all newly contracted external loans (structural benchmark).
  - Authorities provided detailed information to Fund staff on all external debt contracted or guaranteed by the public sector, for both disbursed and undisbursed debt (prior action).

*Source: 1zmbea2022001 - 15.      Regulatory forbearance measures have helped the financial sector weather the impact*

### 30.      In parallel, the authorities will limit the accumulation of new debt vulnerabilities.

### 1zmbea2022001 - 30.      In parallel, the authorities will limit the accumulation of new debt vulnerabilities.

### Limits on new borrowing and debt-management measures
- New disbursements on contracted but undisbursed project loans will be limited to $1.4 billion during 2022-25 (including $834 million from the World Bank and AfDB).
- New external borrowing will be limited to only concessional debt:
  - Continuous zero ceiling performance criterion on new non-concessional borrowing.
  - A ceiling on the present value of new external borrowing (MEFP Table 3).
  - The present value limit is set in line with the expected borrowing plan for 2022-23 (text table).
- TMU definition note: debt ceilings do not include new financing from IMF, World Bank, and projected issuances of local-currency debt to non-residents.

### Governance, anti-corruption, and diagnostic assessment
- Authorities signaled a zero-tolerance approach to corruption (MEFP ¶80).
- A comprehensive IMF-staff supported governance diagnostic assessment was launched in January 2022 to:
  - Identify governance weaknesses and corruption vulnerabilities.
  - Produce specific recommendations (structural benchmark) and inform a comprehensive action plan.
- Once completed, the diagnostic report will be published, including specific recommendations.

### Public procurement, PPPs, and legal-framework reforms
- Public Procurement Act implementation:
  - Regulations to implement the 2020 Public Procurement Act were finalized and issued in May 2022 (prior action, MEFP ¶63).
  - Objectives: make procurement more competitive (public tendering), more cost-effective (benchmark pricing provisions), and more transparent (publication of awarded-contract details, including names of beneficial owners).
  - Further work required to operationalize the register of beneficial owners and ensure public accessibility and data completeness.
- Public-Private Partnerships (PPPs) Act:
  - A new PPPs Act is being developed to address weaknesses, strengthen fiscal-risk management, ensure transparent project evaluation, align PPPs with fiscal realities, limit unsolicited proposals, and ensure greater control over SOEs’ PPP commitments (structural benchmark, MEFP ¶82).
  - Revised guidelines and stakeholder training are planned to improve project selection, appraisal, and contingent-liability assessment and reporting.

### Managing fiscal risks from SOEs and electricity sector reforms (Box 2)
- ZESCO specifics:
  - As of end-2021, ZESCO’s debt amounts to about $1.5 billion in loans, on top of $1.4 billion of payables outstanding to local and external IPPs.
  - ZESCO’s debt—both explicitly guaranteed and non-guaranteed—is included in the PPG debt measure used in the DSA.
- Turnaround actions and policy steps:
  - December 2020 ZESCO board approved a turnaround strategy (MEFP ¶60 and ¶101).
  - Introduce cost-reflective tariffs while maintaining lifeline tariffs for low-income households.
  - Curtail operating costs via renegotiated power purchase agreements and a voluntary separation scheme to reduce labor costs.
  - Optimize capital expenditures through review of non-committed investment projects.
  - Initiate optimization and strategic divestment of ZESCO’s operating assets in 2023.
  - Include ZESCO’s external debt in the restructuring operation to improve balance-sheet structure.
- Recent performance and deliverables:
  - In 2021, ZESCO recorded a substantial operating profit, with overall earnings benefiting from kwacha appreciation.
  - A multi-year tariff framework (MYTF) based on the Cost-of-Service Study (COSS) is a structural benchmark; Cabinet response and publication of COSS and response are prior actions for MYTF adoption and public consultation before ERB decision.

### Strengthening commitment controls and IFMIS rollout
- Goal: register electronically all commitments assumed by 59 ministries, provinces, and spending agencies (MPSAs) through IFMIS by mid-2023 (structural benchmark, MEFP ¶56 and ¶78).
- Current status:
  - Approximately 30 percent of commitments against budget allocations are recorded electronically.
  - IFMIS functionality enhancements completed, training provided to controlling officers and budget personnel, and roll-out of new IFMIS functionalities has begun.

### Monetary policy, inflation, and external resilience
- Inflation and FX:
  - Inflation is expected to continue receding, aided by a stronger kwacha and fiscal consolidation, and return to the BoZ’s 6-8 percent policy band over the program.
  - FX market conditions expected to improve due to better supply, including IFI disbursements; risks remain from capital flow reversals, copper price volatility, or climate shocks.
- Reserve objectives:
  - Program targets a gradual build-up in international reserves to strengthen resilience.
  - Fund staff cost-benefit analysis suggests an optimal level of unencumbered reserves of around five months of prospective imports for Zambia.
  - Achieving five months of unencumbered reserves should be feasible by 2025.
  - Note: this corresponds to a total (encumbered and unencumbered) reserve target of about 5.5 months of imports.
- BoZ commitments:
  - Review current FX market rules and normalize interaction with the FX market (MEFP ¶89).
  - Reverse pandemic-era administrative measures as pressures wane (e.g., tight interbank quotation rules, moral suasion, informal prioritization, government collection of mining taxes in U.S. dollars).
  - Upgrade monetary policy framework and improve transmission; new Bank of Zambia Act (submission is a prior action) pending Presidential assent to strengthen mandate, autonomy, and governance (MEFP ¶85-88).

### Financial stability, prudential measures, and supervision
- BoZ will unwind temporary prudential measures taken during COVID-19 according to original timelines or as conditions allow (MEFP ¶90-95).
- Interim guidance: banks should follow standard prudential rules while using temporary flexibility to support borrowers.
- Actions under way:
  - Enhance supervisory capacity and monitor loans linked to temporarily-relaxed prudential rules.
  - Conduct a banking sector review, including a thematic examination of asset quality, scheduled for completion by end-2022 (structural benchmark).
  - Assess implications of increased digitalization and payment-system developments for competition and financial sector development.
  - Implement a Deposit Protection Scheme with a dedicated unit established in June 2022.
  - Finalize governance arrangements and fully operationalize crisis management and resolution framework as provided in the new Bank of Zambia Act.
  - Develop macro-prudential toolkit to mitigate risks from excessive credit growth, leverage, maturity mismatches, market illiquidity, exposure concentration, and moral hazard.

### Improving balance-of-payments (BOP) statistics
- Historical divergence between current account and reserve assets noted (e.g., reserves declined in 2020 despite a large current account surplus).
- Analysis suggests underreporting of BOP outflows, including imports of goods and services; mining-sector practices and non-repatriated copper export receipts were considerations.
- Ongoing IMF-supported TA to understand and address underreported flows and BOP uncertainties.
- Authorities committed to improving BOP compilation by:
  - Strengthening data analysis capacity and cross-referencing BOP transactions across data sources.
  - Stepping up outreach to private operators involved in cross-border transactions.
  - Improving quality of underlying BOP surveys.

### Overall financing needs, debt restructuring, and IMF program financing
- Overall BOP financing needs are estimated at $11 billion over 2022-25 (Table 6), consistent with bringing unencumbered reserves to five months of prospective imports.
- Debt restructuring:
  - Authorities seek cash debt relief amounting to $8.4 billion during 2022-25 to close the BOP financing gap.
  - To bring risk of debt distress to “moderate” over the medium term, requested debt relief must bring the debt service-to-revenue ratio to 14 percent by 2025 and maintain it at this level on average for 2026-2031.
  - Achieving “moderate” risk also implies restructuring should bring the PV of external debt-to-exports ratio to a level consistent with “substantial space” by 2027; for countries with weak debt-carrying capacity like Zambia, that level is 84 percent.
  - Additional cash debt relief will likely be needed over 2026-31 to maintain targets.
- IMF program access and phasing:
  - Authorities requested a 38-month arrangement under the Extended Credit Facility (ECF) in the amount of SDR 978.2 million (100 percent of quota, about $1.3 billion, or 5.0 percent of GDP).
  - Proposed access phases uniformly over the life of the program; 50 percent of each disbursement will be on-lent by the central bank to the government to help finance the budget, with the remainder to rebuild BoZ reserves.
  - A Memorandum of Understanding between the government and the BoZ will set responsibilities for servicing financial obligations to the Fund.
  - Fund financing expected to close about 12 percent of the projected 2022-25 overall BOP financing gap.
  - Access under the ECF-supported arrangement will cover 51 percent of the residual financing gap after accounting for financing from the external debt restructuring.
  - The remainder of financing to be filled by other development partners (principally the World Bank), with firm commitments in place for the upcoming 12-month period.
- Assurances on restructuring:
  - OCC provided financing assurances through committee discussions and a joint statement published on July 30.
  - Authorities committed to finalizing MOUs with official creditors by the time of the first review and to reaching agreements on comparable terms with other creditors by the time of the second review, at the latest (MEFP ¶73).

*Source: IMF staff calculations and related text from the provided content.*

### 47.      The authorities have engaged  actively with all external  private creditors on the need

### 47. The authorities have engaged  actively with all external  private creditors on the need for debt restructuring.

### Creditor engagement and arrears
- Engagement channels: creditors’ financial and legal advisors; sharing relevant non-confidential information through open discussion forums; publication of debt statistics reports and technical presentations summarizing key macro developments and the government’s economic program.
- Advisors shared, under non-disclosure agreements, key information presented to the G20 OCC so private creditors could provide early input on restructuring design.
- Staff assessment: prompt Fund support is considered essential for successful implementation of the member’s adjustment program; authorities are making a good faith effort to reach a collaborative restructuring agreement, as required under the Fund’s Lending into Arrears (LIA) policy.
- Reported arrears (end-2021):
  - $280 million in interest arrears to Eurobond holders.
  - $632 million to other private external creditors (both interest and principal).
  - about $1.3 billion in other accounts payable to external suppliers (ZESCO IPP external arrears, fuel and contractor arrears).
- Zambia reported $1.3 billion of interest and principal arrears to official bilateral creditors as at end-2021. Because the OCC has provided financing assurances that are adequately representative and include representatives of the Paris Club creditors, arrears to other official bilateral creditors are deemed away under the Lending into Official Arrears (LIOA) Policy.
- Zambia reported $6.1 million of interest and principal arrears to IFIs as at end-2021, of which $0.93 million are estimated to be technical interest arrears owed to the World Bank, AfDB, IFAD, and EIB.
  - These arrears were cleared by end-March 2022, except arrears owed to the Nordic Development Fund (NDF), which reached $1.16 million as at end-March 2022.
  - There is no indication yet whether the OCC would expect comparability of treatment (CoT) from the NDF.

### Financing gap and official financing (IMF staff estimates and projections)
- Total Financing Gap (2022–2025 and cumulative):
  - 2022: 3,068
  - 2023: 2,346
  - 2024: 3,192
  - 2025: 2,430
  - Total: 11,036
- Official financing:
  - 2022: 737
  - 2023: 664
  - 2024: 633
  - 2025: 592
  - Total: 2,626
- IMF ECF:
  - 2022: 190
  - 2023: 382
  - 2024: 386
  - 2025: 388
  - Total: 1,346
- World Bank (includes assumed financing from the World Bank such as a Development Policy Operation of $275 million and emergency health sector financing of $150 million):
  - 2022: 547
  - 2023: 282
  - 2024: 247
  - 2025: 204
  - Total: 1,280
- Financing from external debt restructuring:
  - 2022: 2,331
  - 2023: 1,682
  - 2024: 2,559
  - 2025: 1,838
  - Total: 8,410

### Capacity to repay the Fund and program risks
- Fund-related projections and indicators:
  - Debt service to the Fund projected to peak at 1.2 percent of exports.
  - Fund credit outstanding to GDP peaks at 4.2 percent in 2025.
  - Debt service to revenue excluding grants at 2.4 percent in 2031.
  - These metrics are above the third quartile of past UCT-quality arrangements for low-income countries (Figure 5).
- Risk factors:
  - Complexity, scale, and scope of required reforms.
  - Constrained institutional capacity.
  - Ongoing debt restructuring discussions.
  - Broader risks to the outlook, including from copper prices.
  - Measurement challenges in the BOP.
- Mitigating factors:
  - Strong political support for the program.
  - Comprehensive and ambitious set of prior actions.
  - Front-loading of proposed fiscal adjustment and structural reforms.
  - Zambia’s strong track record of repaying the Fund.

### Debt composition and PRGT safeguard requirement
- PRGT enhanced safeguard requirement on debt composition is met.
- Share of multilaterals and other IFIs in Zambia’s FX-denominated external debt:
  - Expected to increase to 30 percent over the program period (from 16 percent at end-2021).
  - Remains well below the mean and median for PRGT programs, indicating a significant buffer of restructurable debt.
- FX-denominated external debt with some form of security or escrow arrangement considered as collateralized debt:
  - about 9.5 percent of GDP at end-2021.
  - Expected to decline under the program as it is included in the authorities’ restructuring request.

### Prior actions, monitoring, and safeguards
- Prior actions: authorities have completed all but one prior action. The publication of the COSS and the government’s response will be completed ahead of the Executive Board’s consideration of the program request (MEFP ¶60).
- Program monitoring (semi-annual program reviews based on quarterly and continuous targets and structural benchmarks):
  - Quarterly and continuous quantitative targets (MEFP Table 3):
    - Performance criteria on the primary balance, new central bank credit to the central government, and net official international reserves.
    - Continuous performance criteria cover new external debt arrears and the contracting or guaranteeing of new non-concessional external debt.
    - Inflation monitored through a monetary policy consultation clause.
    - Indicative targets: fiscal revenues, new external borrowing, disbursement of contracted but undisbursed external debt, social spending, net clearance of budgetary arrears.
  - Structural benchmarks (MEFP Table 2): aim to restore fiscal and debt sustainability; improve debt management and transparency; strengthen governance and financial stability; reduce corruption vulnerabilities.
- Safeguards: an updated safeguards assessment of the BoZ is in progress; identified areas for improvement include transparency and accountability mechanisms, stronger oversight and audit quality procedures, and reinforcement of the process for compilation of program monetary data.
- Statistical issues and capacity development (CD) priorities:
  - Data provision broadly adequate for surveillance but shortcomings in national accounts, monetary, fiscal, and external sector statistics.
  - CD priorities include tax policy and administration, PFM, debt management, real and external sectors statistics, and governance reforms.
  - Zambia is a medium-intensity user of Fund TA with a mixed implementation record.

### Staff appraisal: diagnosis and policy recommendations
- Economic context:
  - Zambia faces deep socio-economic challenges: high poverty levels and low growth.
  - Roots of the crisis: years of economic mismanagement and an overly ambitious and inefficiently managed public investment drive.
  - Drought in 2019 and the COVID-19 pandemic exacerbated challenges; Zambia is in debt distress, defaulted on Eurobonds in November 2020, and accumulated arrears to other creditors.
  - War in Ukraine amplified macroeconomic pressures by increasing global prices of fuel and fertilizer.
- Key policy recommendations:
  - Restore fiscal sustainability through a large, upfront, and sustained fiscal consolidation.
    - Anchor consolidation on sharply reducing public investment, eliminating regressive fuel subsidies, and reforming the agricultural subsidy program (decisive action needed to ensure implementation in time for the 2023/24 growing season).
    - Domestic revenue mobilization should support adjustment over the medium term.
    - Create fiscal space for increased social spending to cushion the burden on the most vulnerable; expansion of the Social Cash Transfer program and plans to increase public spending on health and education are welcomed.
  - Undertake a deep and comprehensive debt treatment under the G20 Common Framework to place public debt on a sustainable path.
    - A considerable share of contracted but undisbursed debt—and associated public investment projects—needs to be canceled, rescoped, or postponed.
    - Significant improvements in debt management and transparency required to contain debt vulnerabilities and upgrade debt-carrying capacity.
  - Strengthen fiscal controls and governance to support adjustment and address governance and corruption vulnerabilities:
    - Halt accumulation of domestic arrears and gradually clear the existing stock.
    - Require all government agencies to register purchase orders in IFMIS to ensure ongoing spending commitments are monitored.
    - Strengthen public investment management and procurement practices.
    - Bolster framework for monitoring fiscal risks, particularly related to large SOEs.
    - Strengthen anti-corruption and AML/CFT frameworks in line with the Governance Diagnostic Assessment recommendations.
  - Bank of Zambia (BoZ) policy priorities:
    - Persist in efforts to reduce inflation, support the recovery, and preserve financial stability.
    - Let the exchange rate reflect market conditions; gradually replenish international reserves as market conditions allow; limit market interventions to smoothing excessive volatility.
    - Preserve financial stability by addressing high NPL levels and deteriorating capital buffers, and enhance policies to safeguard financial sector stability.

*Source: IMF staff estimates, projections, and staff appraisal as provided in the supplied content.*

### 61.      Based on the strength of the proposed program, the prior actions taken by the

### 1zmbea2022001 - 61.

### Program approval and financing
- Staff supports the authorities’ request for a 38-month ECF arrangement in the amount equivalent to SDR 978.20 million (100 percent of Zambia’s quota), based on:
  - the strength of the proposed program;
  - prior actions taken by the Government of Zambia;
  - financing assurances provided by official bilateral creditors.

### Recent macroeconomic developments and near-term outlook
- Growth:
  - "Growth is expected to slow down in 2022 after a strong recovery in 2021."
  - "The 2022 slowdown is driven by a contraction in agriculture and the mining sector."
- Exchange rate and inflation:
  - "The kwacha depreciated through mid-2021 but has appreciated sharply since the August 2021 elections."
  - "Inflation has slowed down markedly from its 25 percent peak in July 2021 to under 10 percent in June 2022."
- Selected growth and price projections (Table 1, GDP and prices):
  - GDP growth: 2018 4.0; 2019 1.4; 2020 -2.8; 2021 3.6; 2022 3.0; 2023 3.9; 2024 4.1; 2025 4.5.
  - Consumer prices (average): 2018 7.5; 2019 9.2; 2020 15.7; 2021 22.0; 2022 13.0; 2023 9.5; 2024 7.6; 2025 7.1.
  - Consumer prices (end of period): 2018 7.9; 2019 11.7; 2020 9.2; 2021 16.4; 2022 12.7; 2023 8.0; 2024 7.3; 2025 7.0.
  - GDP deflator: 2018 7.4; 2019 7.6; 2020 13.7; 2021 23.4; 2022 8.4; 2023 8.7; 2024 7.3; 2025 6.8.
  - Average exchange rate (kwacha per U.S. dollar): 2018 10.5; 2019 12.9; 2020 18.3; 2021 20.0 (series continues as "...........").

### External sector developments and projections
- Current account and reserves:
  - "The current account deficit has turned into a large surplus...reflecting higher copper prices...and depressed imports."
  - Gross international reserves (millions of U.S. dollars): 2018 1,569; 2019 1,450; 2020 1,203; 2021 2,796; 2022 3,060; 2023 3,841; 2024 4,814; 2025 6,237.
  - Reserves in months of prospective imports: 2018 2.4; 2019 3.0; 2020 1.9; 2021 3.2; 2022 3.3; 2023 3.9; 2024 4.6; 2025 5.5.
- Balance of payments (Table 2a, selected items, Millions of U.S. dollars):
  - Current account: 2018 -341; 2019 325; 2020 2,181; 2021 1,616; 2022 371; 2023 857; 2024 598; 2025 58.
  - Trade balance: 2018 514; 2019 938; 2020 3,216; 2021 4,731; 2022 2,935; 2023 2,561; 2024 2,897; 2025 3,100.
  - Exports, f.o.b.: 2018 9,029; 2019 7,246; 2020 8,003; 2021 11,115; 2022 11,908; 2023 12,211; 2024 12,982; 2025 13,851.
  - Of which: Copper exports (f.o.b.): 2018 6,658; 2019 4,995; 2020 5,868; 2021 8,345; 2022 8,920; 2023 9,081; 2024 9,620; 2025 10,249.
  - Imports, f.o.b.: 2018 -8,515; 2019 -6,308; 2020 -4,787; 2021 -6,384; 2022 -8,973; 2023 -9,650; 2024 -10,085; 2025 -10,751.
  - Income (net): 2018 -407; 2019 -414; 2020 -763; 2021 -2,658; 2022 -1,990; 2023 -1,884; 2024 -1,524; 2025 -1,581.
  - Of which: Interest on public debt: 2018 -567; 2019 -627; 2020 -635; 2021 -736; 2022 -936; 2023 -922; 2024 -822; 2025 -770.

### Fiscal developments and outlook
- Key fiscal aggregates (Table 1 and Table 3a/3b):
  - Central government revenue (percent of GDP): 2018 19.4; 2019 20.4; 2020 20.3; 2021 23.3; 2022 21.6; 2023 21.4; 2024 22.3; 2025 22.7.
  - Taxes (percent of GDP): 2018 16.1; 2019 16.1; 2020 15.7; 2021 16.8; 2022 16.7; 2023 17.6; 2024 17.9; 2025 18.1.
  - Expenditure (percent of GDP): 2018 27.7; 2019 29.8; 2020 34.1; 2021 31.8; 2022 28.3; 2023 29.4; 2024 28.9; 2025 27.7.
  - Net lending/borrowing (cash basis, percent of GDP): 2018 -8.3; 2019 -9.4; 2020 -13.8; 2021 -8.5; 2022 -6.7; 2023 -9.4; 2024 -7.1; 2025 -6.3.
  - Primary balance (commitment basis, percent of GDP): 2018 -6.9; 2019 -6.9; 2020 -10.1; 2021 -6.0; 2022 0.7; 2023 2.2; 2024 2.7; 2025 3.2.
- Composition and pressures:
  - "Indirect taxes bore the brunt of the COVID shock, while income taxes and non-tax revenues held up well."
  - "Primary budget spending was dominated by the wage bill, public investment, and (increasingly) subsidies."
  - "Larger-than-budgeted cash deficits were driven mostly by spending overruns."
  - "The cash deficit was increasingly financed with domestic resources."
  - "There was a substantial accumulation of arrears (including on VAT refunds)."
  - Public debt (total public debt, gross, end-period, percent of GDP): 2018 77.8; 2019 103.3; 2020 150.3; 2021 126.0; 2022 122.8; 2023 115.6; 2024 109.7; 2025 104.7.
  - External public and publicly guaranteed debt (percent of GDP): 2018 48.1; 2019 62.1; 2020 95.8; 2021 64.7; 2022 69.5; 2023 69.1; 2024 68.5; 2025 67.3.
  - Domestic debt (percent of GDP): 2018 29.7; 2019 41.2; 2020 54.5; 2021 61.3; 2022 53.3; 2023 46.5; 2024 41.3; 2025 37.4.

### Monetary and financial sector developments
- Monetary aggregates and credit (Table 4):
  - Broad money (M3, millions of Kwacha): 2018 62,997; 2019 70,900; 2020 103,829; 2021 107,626; 2022 119,496; 2023 133,909; 2024 148,330; 2025 160,426.
  - Reserve money (end-of-period, annual percent change): 2018 -0.6; 2019 25.8; 2020 57.0; 2021 8.5; 2022 14.7; 2023 17.8; 2024 10.8; 2025 17.2.
  - Credit to the private sector (percent of GDP): 2018 11.7; 2019 12.5; 2020 12.3; 2021 8.9; 2022 9.2; 2023 9.3; 2024 9.5; 2025 9.8.
  - Gross foreign exchange reserves of the Bank of Zambia (millions of U.S. dollars): 2018 1,569; 2019 1,450; 2020 1,203; 2021 2,796; 2022 3,060; 2023 3,841; 2024 4,814; 2025 6,237.
- Financial soundness indicators (selected, Table 5):
  - Regulatory capital to risk-weighted assets (percent): 2013 26.8 ... 2020 19.1; 2021 22.8; 2022 Dec 24.7; 2022 Mar 25.0.
  - Past due advances (NPL) to total advances (percent): 2013 7.0 ... 2020 11.4; 2021 9.1; 2022 Mar 6.9; 2022 Jun 5.8; 2022 Sep 6.4.
  - Loan loss provisions to nonperforming loans (percent): 2013 83.2 ... 2020 91.6; 2021 75.9; 2022 Mar 75.3; 2022 Jun 77.9; 2022 Sep 92.3; 2022 Dec 102.8; 2023 Mar 93.8.

### External financing needs, sources, and financing gap
- Total external requirements (Table 6, Millions of U.S. dollars):
  - 2018 2,555; 2019 2,030; 2020 2,412; 2021 6,251; 2022 5,164; 2023 4,541; 2024 5,759; 2025 5,222.
- Main components:
  - Current Account Deficit, excluding Official Transfers: 2018 341; 2019 -325; 2020 -2,181; 2021 -1,616; 2022 -371; 2023 -85; 2024 -759; 2025 -858.
  - Debt Amortization: 2018 921; 2019 1,051; 2020 1,922; 2021 2,497; 2022 3,248; 2023 2,679; 2024 3,553; 2025 2,953.
  - Gross Reserves Accumulation, incl SDR allocation: 2018 -506; 2019 -119; 2020 -248; 2021 1,668; 2022 265; 2023 781; 2024 973; 2025 1,422.
- Total sources (Millions of U.S. dollars): 2018 2,554; 2019 2,122; 2020 1,620; 2021 2,841; 2022 2,095; 2023 2,195; 2024 2,567; 2025 2,792.
  - Official Transfers (Current and Capital): 2018 669; 2019 780; 2020 778; 2021 883; 2022 80; 2023 77.
  - BoZ Liabilities, incl. SDR allocation: 2021 1,328 (noted as BoZ Liabilities, incl. SDR allocation).
  - Foreign Direct Investment, net: 2018 363; 2019 -148; 2020 -208; 2021 -31; 2022 75; 2023 1,113; 2024 1,476; 2025 1,628.
  - Loan Disbursements to Public Sector: 2018 2,189; 2019 2,073; 2020 1,424; 2021 571; 2022 511; 2023 469; 2024 382; 2025 265.
- Financing gap (I - II, Millions of U.S. dollars): 2018 1; 2019 -92; 2020 923; 2021 3,410; 2022 3,068; 2023 2,346; 2024 3,192; 2025 2,430.
- Expected sources of financing (IV, Millions of U.S. dollars): 2018 0; 2019 611; 2020 1,322; 2021 2,172; 2022 3,068; 2023 2,346; 2024 3,192; 2025 2,430.
  - Exceptional Financing (Restructuring) listed in expected sources: 2019 611; 2020 1,322; 2021 2,172; 2022 2,331; 2023 1,682; 2024 2,559; 2025 1,838.
  - IMF ECF Arrangement amounts appear in expected sources: 2021 0; 2022 190; 2023 380; 2024 238; 2025 638; 2026 388 (note: table indicates "IMF ECF Arrangement 0190382386388" in the financing table context).

### Capacity to repay the Fund and IMF credit profile
- Table 8 (Indicators of Capacity to Repay the Fund, 2022–32) highlights:
  - Fund obligations based on existing credit (charges and interest, millions of SDRs): 2022 1.5; 2023 3.4; 2024 3.4; ... 2032 3.4.
  - Fund obligations based on existing and prospective credit (principal, millions of SDRs): 2028 42.0; 2029 97.9; 2030 153.9; 2031 195.6; 2032 195.6.
  - Total obligations based on existing and prospective credit (Millions of SDRs): 2022 3.0; 2023 6.8; 2024 6.8; 2025 6.8; 2026 6.8; 2027 6.8; 2028 48.7; 2029 104.7; 2030 160.6; 2031 202.4; 2032 202.4.
  - Total obligations in Millions of U.S. dollars: 2022 4.1; 2023 9.2; 2024 9.4; 2025 9.4; 2026 9.5; 2027 9.5; 2028 68.5; 2029 147.2; 2030 225.9; 2031 284.6; 2032 284.7.
  - Outstanding Fund credit based on existing and prospective credit (Millions of SDRs): 2022 139.9; 2023 419.6; 2024 699.4; 2025 978.2; 2026 978.2; 2027 978.2; 2028 936.2; 2029 838.3; 2030 684.5; 2031 488.8; 2032 293.2.
  - Outstanding Fund credit (Millions of U.S. dollars): 2022 189.5; 2023 575.8; 2024 968.7; 2025 1,364.1; 2026 1,372.1; 2027 1,378.6; 2028 1,319.5; 2029 1,181.5; 2030 964.6; 2031 688.9; 2032 413.2.
  - Percent of quota (outstanding Fund credit): 2022 14.3; 2023 42.9; 2024 71.5; 2025 100.0; 2026 100.0; 2027 100.0; 2028 95.7; 2029 85.7; 2030 70.0; 2031 50.0; 2032 30.0.
  - Percent of gross international reserves (outstanding Fund credit): 2022 6.2; 2023 15.1; 2024 20.2; 2025 22.0; 2026 17.2; 2027 16.0; 2028 14.2; 2029 11.8; 2030 9.0; 2031 6.0; 2032 3.0.
- Memorandum items (Table 8):
  - Exports of goods and services (Millions of U.S. dollars): 2022 12,475; 2023 12,812; 2024 13,625; 2025 14,540; 2026 15,817; 2027 17,469; 2028 18,841; 2029 20,324; 2030 21,856; 2031 23,537; 2032 25,273.
  - Gross international reserves (Millions of U.S. dollars, memorandum): 2022 3,048; 2023 3,823; 2024 4,790; 2025 6,205; 2026 7,965; 2027 8,600; 2028 9,286; 2029 10,025; 2030 10,756; 2031 11,540; 2032 13,715.
  - Nominal GDP (Millions of U.S. dollars): 2022 26,885; 2023 28,153; 2024 30,124; 2025 32,304; 2026 34,739; 2027 37,382; 2028 40,303; 2029 43,458; 2030 46,807; 2031 50,361; 2032 54,137.

### Program implementation and disbursement schedule
- Table 7: Schedule of Reviews and Disbursements (SDR amounts and percent of quota):
  - Availability Date August 31, 2022: 139.88 Millions of SDR; 14.3 percent of quota — Board approval of arrangement.
  - April 1, 2023: 139.88 Millions of SDR; 14.3 percent of quota — Observance of end-December 2022 and continuous performance criteria and completion of first review.
  - October 1, 2023: 139.88 Millions of SDR; 14.3 percent of quota — Observance of end-June 2023 and continuous performance criteria and completion of second review.
  - April 1, 2024: 139.88 Millions of SDR; 14.3 percent of quota — Observance of end-December 2023 and continuous performance criteria and completion of third review.
  - October 1, 2024: 139.88 Millions of SDR; 14.3 percent of quota — Observance of end-June 2024 and continuous performance criteria and completion of fourth review.
  - April 1, 2025: 139.88 Millions of SDR; 14.3 percent of quota — Observance of end-December 2024 and continuous performance criteria and completion of fifth review.
  - October 1, 2025: 138.92 Millions of SDR; 14.2 percent of quota — Observance of end-June 2025 and continuous performance criteria and completion of sixth review.
  - Total: 978.20 Millions of SDR; 100.0 percent of quota.
  - Note: "Zambia's IMF quota is SDR 978.2 million."

### Key risks and fiscal/financing challenges (as reflected in the tables)
- Large public debt stock and elevated external debt service needs in the near term (Debt Amortization: 2022 3,248; 2023 2,679; 2024 3,553; 2025 2,953, Millions of U.S. dollars).
- Financing gap and dependence on exceptional financing and creditor support to cover external requirements (Financing gap in 2022 3,068; expected exceptional financing and IMF ECF components shown in Table 6).
- Accumulation of arrears and backlog of VAT refunds remain material (Stock of expenditure arrears: 2018 24,777; 2019 36,498; 2020 42,506; 2021 57,039; backlog of VAT refunds (stock) 2018 5,378; 2019 6,893; 2020 8,451; 2021 10,368).

*Source: IMF staff estimates, projections, and tables from the Zambia report excerpt (figures and tables as presented).*

### Annex I. Risk Assessment  Matrix

### 1zmbea2022001 - Annex I. Risk Assessment Matrix

### Domestic Risks: key scenarios, impacts, and policy responses
- Outbreaks of lethal and highly contagious COVID-19 variants.
  - Relative Likelihood: M
  - Impact if Realized: H. Growth could decelerate and public financing needs could increase sharply, further undermining debt sustainability. Financial sector stress could increase.
  - Policy Response: The government should step up support for the health system and adopt measures to contain the spread of the pandemic while limiting its impact on the economy. The BoZ should closely monitor growing stress in the financial system.

- Natural disasters related to climate change.
  - Relative Likelihood: M
  - Impact if Realized: H. Adverse impact on the agriculture sector and on the poor, through higher food prices, reduced maize exports, higher spending on social safety nets and on subsidies for agricultural inputs, negative impact on hydropower generation, downward pressures on growth.
  - Policy Response: Provide effective support to vulnerable populations. Diversify food crops away from maize to crop varieties that are better aligned to shortened rainy seasons. Consider medium-term strategies such as building reservoir dams to help regulate water flow to main dams during high or low rain periods.

- Widespread social discontent and political instability.
  - Relative Likelihood: H
  - Impact if Realized: M. Further increases in fuel and electricity prices may lead to social unrest. This could slow down much needed reforms and dent investor confidence.
  - Policy Response: Take measures to strengthen governance and anti-corruption frameworks. Implement orderly fiscal adjustment, notably by increasing domestic revenue and reducing capital expenditures and reforming subsidies for agricultural inputs. Use some of the fiscal space to boost spending on social assistance. Improve the efficiency in fuel procurement.

- Financial instability caused by a rise in non-performing loans.
  - Relative Likelihood: H
  - Impact if Realized: M. Deteriorating bank balance sheets could lead to a contraction in credit to the private sector and dampen economic activity.
  - Policy Response: Closely monitor the buildup of vulnerabilities on financial sector balance sheets and implement swift and decisive prudential corrective actions if required.

### External Risks: key scenarios, impacts, and policy responses
- Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions.
  - Relative Likelihood: H
  - Impact if Realized: H. Expensive fertilizer could negatively affect the budget or agricultural productivity. Lower global growth could reduce demand for Zambia’s exports, notably copper and tourism, leading to a loss of reserves and increased pressure on the kwacha. Negative impact on debt sustainability.
  - Policy Response: Accelerate reforms enhancing export competitiveness. Diversify the economy to build resilience against external shocks. Enhance regional integration, including through existing SADC and AfCFTA protocols. Maintain exchange rate flexibility.

- Abrupt growth slowdown in China.
  - Relative Likelihood: M
  - Impact if Realized: H. Declines in tax and export revenues could lead to fiscal and exchange rate pressures.
  - Policy Response: Accelerate reforms enhancing export competitiveness. Diversify the economy to build resilience against external shocks.

- Financing risks driven by slow progress in debt restructuring negotiations or exit of non-resident investors from domestic debt market.
  - Relative Likelihood: M
  - Impact if Realized: H. Continued accumulation of domestic arrears would increase stress on the financial sector through higher NPLs and hamper private sector activity. Domestic refinancing risks for government securities would increase. Uncertainty over VAT refund claims could hurt revenue collection and exacerbate the fiscal deficit, while weakening incentives for new investment. Exiting non-resident investors from the government domestic securities market would adversely impact reserves and exert pressure on the exchange rate. Significant downward pressures on growth.
  - Policy Response: Implement credible fiscal adjustment measures. Broaden the tax base to increase domestic fiscal revenues. Consolidate capital expenditures by prioritizing infrastructure projects and postponing those with a smaller growth impact and those not aligned with development priorities. Reduce the public sector wage bill by restricting new hires to priority sectors only. Stand ready to tighten monetary policy as appropriate.

*Based on the April 2022 update of the Global Risk Assessment Matrix.*

---

### Annex II. External Sector Assessment — key findings and policy responses

### Overall assessment and potential policy responses
- Overall Assessment: Zambia’s external position in 2021 was weaker than the level implied by fundamentals and desirable policies. This is evident in the country’s unsustainable external debt, inadequate level of FX reserves, and very weak net international investment position.
- Potential Policy Responses:
  - Restore external sustainability through adjustment policies in line with the ECF-supported program.
  - Upfront and sustained fiscal adjustment, including a shift in spending away from wasteful subsidies and towards social spending.
  - Structural reforms to address inefficiencies in the energy and agricultural input markets, enhance governance and reduce corruption risks, shore up social safety nets, and boost and diversify exports.
  - Continue to monitor risks of a potentially disorderly reversal of recent portfolio inflows and stand ready to deploy counter measures.
  - Address the external debt overhang through a comprehensive restructuring as requested by the authorities under the G20 Common Framework.

### Foreign Assets and Liabilities: position and trajectory (end-2021, percent of GDP)
- NIIP: -142
- Gross Assets: 32
- Debt Assets: 21
- Gross Liabilities: 174
- Debt Liabilities: 127

- Background: Zambia’s NIIP deteriorated to -142 percent of GDP at end-December 2021, compared to -110 percent of GDP at end-2018, mainly driven by high levels of government borrowing and a sharp currency depreciation.
- Assessment: The large negative NIIP poses a significant risk to external sustainability and points to the urgent need for adjustment and external public debt reduction. Policy reforms under the ECF program, along with expected debt restructuring, should help reduce IIP liabilities and boost reserve assets over the medium term. Actions to bring the NIIP down to around -58 percent of GDP are noted as appropriate.

### Current Account: background and assessment
- Key facts:
  - Current account (CA) surplus shrank in 2021—from 12 percent of GDP in 2020—to 7.6 percent of GDP.
  - BoZ gross reserves—excluding the recent one-off SDR allocation—declined from $1.45 billion to $1.29 billion between January 2020 and December 2021.
- Background: The lower 2021 CA surplus reflects a strong rebound in imports from 2020 and higher reinvested earnings. Copper prices are close to all-time highs and expected to be sustained over the medium term, with production projected to increase to record levels, keeping the CA structurally in surplus over the medium term.
- Assessment:
  - Disconnect among CA trends, overall external stock position, and reserves accumulation complicates assessment based on CA alone.
  - CA model estimates yield a CA gap of 0.5 percent of GDP, equivalent to an estimated REER gap of -1.8 percent.
  - Staff assigns more weight to stock indicators (reserves and NIIP) given the weakness in external stock position.

### Real Exchange Rate (REER)
- Background:
  - Following a 25 percent depreciation in 2020, the average REER appreciated by 8 percent in 2021, driven by nominal appreciation of the kwacha in the second half of 2021.
  - Drivers included confidence effects (election outcome, SDR allocation, staff-level agreement on IMF-supported program) and improved FX supply (higher copper receipts and portfolio inflows).
- Assessment:
  - REER model estimates for 2021 suggest an REER gap of –4.1 percent and a corresponding CA gap of 1.2 percent of GDP, implying the exchange rate is under-valued and the external position is stronger than fundamentals. However, models may not fully account for Zambia’s large financial account outflows and external default.

### Capital and Financial Accounts: flows and policy measures
- Background:
  - Capital and financial account transactions resulted in large net outflows in 2020 and 2021, mainly reflecting sizable NFCs’ assets held abroad.
  - These outflows accounted for 42 percent of copper exports in both 2020 and 2021.
  - Portfolio inflows into the domestic bond market over May-November 2021 were estimated at more than a $1 billion, with about 60 percent going into bonds of 10-year or longer maturities.
  - Net FDI inflows remained depressed in 2021, with outflows broadly matching reported inflows.
  - The government accumulated about $1.8 billion in further debt service and payment arrears in 2021.
- Assessment:
  - Sudden influx of portfolio flows raises risk of disorderly exit. Authorities should monitor risks, assess implications, and prepare mitigation strategies such as prudent reserves management, close oversight of banks’ FX exposure, and strengthening micro- and macroprudential policies.

### FX intervention and reserves level
- Key facts:
  - BoZ closed 2021 with gross reserves of $2.6 billion or 3.2 months of prospective imports (mainly due to one-off SDR allocation).
  - Underlying gross reserves excluding the SDR allocation barely increased from $1.2 billion to $1.3 billion over 2021.
  - A new regulation requires payment of mining taxes in US dollars directly to the government; BoZ has adopted a policy of systematically selling all copper tax proceeds into the market.
  - BoZ initiated purchases of gold from domestic mining companies; scope and implications on reserves are currently unclear.
  - Authorities indicated intention to use the SDR allocation to help finance the budget over 2022-24, with a little over half expected to be drawn in 2022 and the rest over 2023-2024.
- Assessment:
  - Reserve position improved thanks to the SDR allocation but remains below adequate levels.
  - A higher reserve buffer than the three-month rule may be needed; Fund staff analysis suggests an optimal level of 5.5 months of prospective imports.
  - Building reserves to this level should be achievable over the program through fiscal adjustment, subsidy reform, successful debt restructuring, higher copper prices, and IMF disbursements.

*Annex II, Annex II Table 1, and associated figures and assessments are presented in the source document.*

### 4. The policies of the Zambian Government in the MEFP have been tailor-made in order to:

### 1zmbea2022001 - 4. The policies of the Zambian Government in the MEFP have been tailor-made in order to:

### Policy objectives and priorities
- Return to debt sustainability through debt restructuring with official and commercial creditors.
- Gradually and sustainably improve public finances through revenue enhancement and expenditure rationalization.
- Enhance commitment controls to reduce wasteful expenditure and build up in domestic arrears.
- Maintain recent gains in inflation to single digit after more than three years of double-digit inflation, through a multi-pronged strategy involving a combination of fiscal and monetary policy measures as well as improved agricultural production, particularly food.
- Strengthen external resilience and reserve buffers through policies that support trade surpluses, and encourage net exports and foreign direct investment.
- Enhance the sustainability of growth through creation of a supportive environment for the major sectors of agriculture, mining, tourism, manufacturing, and services.
- Fight corruption and strengthen AML/CFT while promoting good governance overall.

### Commitments, prior actions, and program implementation
- Eight of the nine prior actions described in Table 1 of the MEFP have been implemented; the remaining one will be completed ahead of IMF Executive Board consideration of the program request.
- Commit to ensuring appropriate use, monitoring, and reporting of the recent increase in SDR allocation, which will be used for social and priority spending.
- Reaffirmed commitment to upholding obligations of Article VIII of the Fund’s Articles of Agreement.
- Will provide timely information necessary for monitoring economic developments and implementation of policies as agreed in the TMU, or upon request.
- Government stands ready to take any additional measures necessary and will consult with the IMF in advance of any revision of the policies contained in the MEFP, in accordance with IMF policies on consultations.
- Government commits to providing the IMF with information on implementation as provided for in the TMU and authorizes publication of the letter, attachments, staff report, and debt sustainability analysis after program approval.

### MEFP scope and strategic anchors (2022–25)
- The MEFP contains the Government of the Republic of Zambia’s economic and financial policies for the period 2022 to 2025, supported under a three-year Extended Credit Facility (ECF) arrangement.
- The MEFP provides: an assessment of recent economic developments (Section I), medium term outlook and risks (Section II), policies for 2022 and the medium term (Section III), economic statistics (Section IV), and programme funding and monitoring (Section V).
- Overarching medium-term objectives: entrench macroeconomic stability, attain higher and more sustainable growth, build resilience to external shocks, and return to debt sustainability. Other objectives: improvements in human development and attainment of a conducive governance environment.
- Economic transformation agenda anchored on four pillars: economic transformation and job creation; human and social development; environmental sustainability; and a good governance environment. These form the bedrock of the Eighth National Development Plan (8NDP), 2022-2026.

### Recent economic developments — COVID-19 and health response
- As at 27th June, 2022, Zambia had recorded 325,348 cases, with 4,003 deaths, since mid-March 2020.
- In the 2022 Budget, K704.3 million was allocated towards procurement of vaccines.
- Part of the $1.33 billion received from the IMF under the SDR allocation has been earmarked for the health sector, including procurement of drugs and medical supplies.
- Vaccination coverage as at 27th June, 2022: 40.4 percent full vaccination, against a target of 70 percent by end-June 2022.
- Vaccines being sourced include AstraZeneca, Johnson & Johnson, Sinopharm, Moderna and Pfizer.

### Growth and sectoral performance
- Real GDP (preliminary) in 2021: 3.6 percent, from a contraction of 2.8 percent in 2020; real GDP growth was 1.4 percent in 2019.
- 2021 growth drivers: information and communication technology and construction sectors. Manufacturing, wholesale and retail trade, transport and tourism returned to positive growth.
- Agricultural sector contribution to growth: negligible.
- Mining sector contracted due to operational challenges and drop in ore-grades despite high copper prices.

### Fiscal performance and revenues (selected figures)
- Fiscal deficit on cash basis: 8.7 percent of GDP in 2019, 14.2 percent of GDP in 2020, and 9.0 percent of GDP in 2021. Targeted budget deficits were 6.5 percent of GDP in 2019, 5.5 percent of GDP in 2020, and 9.3 percent of GDP in 2021.
- Total revenues and grants in 2021: K98.9 billion, higher than target by 45.6 percent.
  - Income taxes over-performance: 55.4 percent.
  - VAT over-performance: 14.4 percent.
  - Customs and Excise duties over-performance: 4.2 percent.
- Non-tax revenues in 2021: K25.3 billion, exceeding target by 101 percent (largely mineral royalties and a dividend receipt from Bank of Zambia).
- Mineral royalty collections in 2021: K12.4 billion (target K5.7 billion).
- Government spending including amortization in 2021: K138.0 billion, 15.4 percent higher than target K119.6 billion.
  - Social benefits spending above target by 29.7 percent.
  - Capital projects below target by 5.9 percent.

### Financing, debt stock, and domestic financing (selected figures)
- Net external financing averaged 5.3 percent of GDP over 2019-2021; all external financing during the period was project loans.
- Domestic borrowing peaked at 14.4 percent of GDP in 2020.
- Domestic financing in 2021: K31.2 billion (target K17.5 billion).
  - Government securities in 2021: K16.0 billion (4.4 percent of GDP).
  - FISP and fuel refinancing in 2021: K14.0 billion (3.8 percent of GDP).
- Stock of Government securities as at end-September 2021: K189.7 billion (increase of 45.7 percent from end-December 2020).
- External debt stock as at end March 2022: $13.22 billion (from $13.04 billion at end-December 2021). (This amount excludes interest arrears and other debt related charges.)
  - Commercial debt share of total central Government external debt at end-March 2022: 44.7 percent.
  - Multilaterals (including plurilaterals) share: 25.3 percent.
  - Bilateral creditors share: 30.0 percent.
- Publicly guaranteed debt as at end March 2022: $1.51 billion (from $1.55 billion at end 2021); 92.7 percent of guaranteed debt relates to ZESCO.
- Stock of public and publicly guaranteed external debt, excluding interest arrears, fuel arrears and guarantees on ZESCO payables, at end March 2022: $14.73 billion (67.7 percent of GDP) from $14.57 billion at end 2021.
- Stock of public and publicly guaranteed debt reduced from $26.15 billion at end December 2021 to $25.87 billion at end March 2022 due mainly to exchange rate changes.
- Undisbursed Central Government External debt at end March 2022: $3.93 billion; guaranteed external loans undisbursed: $787.49 million.

### Arrears and contingent fiscal risks
- External public debt arrears as at end-March 2022: $2.43 billion, composed of $1.63 billion in principal arrears (included in the debt stock) and $793.9 million in interest arrears.
- Additional arrears to contractors as at end January 2022: $563 million.
- Government communicated suspension of debt service to non-multilateral external creditors in October 2020, with exceptions for a few bilateral/commercial creditors financing nearly completed priority projects.
  - Actual debt service in 2021: $232.58 million against budgeted $1.39 billion.
  - Total debt service as at end March 2022: $19.65 million.
- Central Government domestic arrears (excluding fuel, ZESCO arrears and unverified VAT refund claims) at end December 2021: K48.1 billion (from K41.1 billion at end December 2020).
  - Major arrears: road projects, goods and services, capital expenditure in health and education, pensions and compensation and awards.
- ZESCO outstanding payables as at end-March 2022: $1,873 million to various suppliers and IPPs.
  - Government guaranteed loan arrears for ZESCO: $64.5 million (external $41.4 million; domestic $23.1 million).
- Fuel arrears as at end-December 2021: $597 million including $169 million of late payment interest. Pump prices had not been adjusted since 2019 until mid-December 2021.

### Monetary and financial sector developments; inflation dynamics
- Inflation averages:
  - 2019: 9.1 percent.
  - 2020: 15.6 percent.
  - 2021: 22.1 percent.
- Drivers of inflation increase: depreciation of the Kwacha, upward adjustments in energy prices (fuel pump prices and electricity tariffs) in December 2019 and early 2020, upward pressures on food prices from the 2018/19 drought, and COVID-19 related trade disruptions.
- Bank of Zambia policy actions in 2020:
  - Policy Rate reduced cumulatively by 350 basis points to 8.0 percent.
  - Launched K10.0 billion Targeted Medium-Term Refinancing Facility (TMTR).
  - Launched K8.0 billion Secondary Market Bond Purchase Program (SMBPP).
  - As at June 30, 2022, K9.8 billion was disbursed under the TMTRF.
  - SMBPP fully executed by November 2020; additional augmentations and partial executions noted in 2021.
- Policy Rate adjustments:
  - February 2021: raised by 50 basis points to 8.5 percent.
  - November 2021: raised by 50 basis points to 9.0 percent.
  - Policy rate maintained at 9 percent based on projected lower inflation and expectations of reversion into target range by end of 2023.
- Inflation trends in 2022:
  - First quarter 2022 average annual overall inflation: 14.1 percent (from 18.9 percent in last quarter of 2021).
  - June 2022 inflation: 9.7 percent (from 11.5 percent in April).
  - Fall in inflation attributed to dissipation of base effects in prices of meat, fish and poultry; seasonal supply increases in vegetables; lagged pass-through from Kwacha appreciation; improved supply of some food items; and reduction in fuel pump prices.

*Memorandum of Economic and Financial Policies (MEFP), Government of the Republic of Zambia, 2022–25 (extract).*

### 27.      Rising inflationary pressures, high lending rates, the sustained depreciation of the

### 27.      Rising inflationary pressures, high lending rates, the sustained depreciation of the

### Banking sector performance and asset quality
- High inflation, high lending rates, sustained depreciation of the Kwacha, and sharp deceleration in economic growth weakened borrowers’ ability to repay loans and raised non-performing loans (NPL).
- NPL ratio trajectory:
  - Averaged 12.2 percent in 2018.
  - Improved to 9.7 percent in 2019.
  - Deteriorated to an average of 11.2 percent in 2020 despite regulatory forbearance.
  - Improved to 5.8 percent as of 31st December 2021 owing to repayments and write-offs.
- Asset quality remains exposed to COVID-19 restructured loans which accounted for 7.2 percent of the loan book.
- Sovereign credit rating downgrades increased asset impairment on loans, off-balance sheet exposures, and Government securities under IFRS 9 expected credit loss model, pressuring profitability.
- Profitability indicators trended downwards, constraining capital formation through retained earnings.

### Capital adequacy and buffers
- High capital levels helped buffer asset quality shocks:
  - Capital adequacy ratios at end-December 2021: primary regulatory capital 23.2 percent; total regulatory capital 24.6 percent.
  - Corresponding figures at end-May 2022: 23.7 percent and 24.8 percent, respectively.
- Regulatory minimum requirements:
  - Primary regulatory capital minimum: 5.0 percent.
  - Total regulatory capital minimum: 10.0 percent.

### Prudential measures by the Bank of Zambia (COVID-19 response)
- Revised loan classification and provisioning rules to allow more permissible collateral types and extended relief period from one year to five years.
- Allowed renegotiation of terms and conditions for credit facilities impacted by COVID-19 through restructuring or modifying loan agreements; such renegotiated facilities were to be treated as current with no adverse classification and provisions for loan losses.
- Extended the IFRS 9 transitional arrangement to amortise the ‘Day 1 Impact’ for regulatory capital adequacy purposes to 31st December 2022. Financial institutions were allowed to add back to regulatory capital any expected credit losses arising from the COVID-19 Pandemic.
  - The add back would include the ‘IFRS 9 Day 1 Impact’ and increases in provisions on account of the COVID-19 Pandemic, amortised over the period 1st April, 2020 to 31st December, 2022.

### Non-bank financial institutions (NBFIs)
- Overall financial performance and condition of the NBFIs sector has been less than satisfactory over the past three years due to poor asset quality and unsatisfactory earnings performance by two state-owned institutions.
- Drivers of poor asset quality: delays by Government to extinguish arrears on loans extended to civil servants and adverse effects of COVID-19.
- Government reduced its arrears to NBFIs by July 2021 and has since remained current, expected to improve asset quality.
- Bank of Zambia is closely monitoring expected cost rationalisation measures at loss-making NBFIs.

### Credit growth and composition
- Growth of credit to the private sector:
  - 17.2 percent in 2019.
  - 8.5 percent in 2020.
  - 7.8 percent in 2021.
- Slowdown in credit due to macroeconomic deterioration and strict lending conditions; reduction in foreign currency denominated credit contributed to contraction in private sector credit growth in 2021.
- Kwacha denominated credit expanded in 2021 largely due to drawdowns on the Bank of Zambia Targeted Medium-Term Refinancing Facility (TMTRF) and switches from foreign currency denominated loans to local currency loans.
- Q1 2022 private sector lending growth: 1.3 percent year-on-year, driven by increased Kwacha denominated credit, continued TMTRF drawdowns, and increased utilisation of overdraft facilities.

### Lending rates, foreign exchange developments, and market interventions
- Commercial banks’ average lending rates:
  - Averaged 26.0 percent over 2019-2021.
  - 25.9 percent in December 2021.
  - 26.0 percent in the first quarter of 2022 (broadly unchanged).
- High lending rates reflected high cost of funds and high Government security yield rates due to large Government domestic borrowing.
- Kwacha exchange rate movements:
  - K14.05/USD in December 2019.
  - Depreciated to K21.17/USD at end 2020.
  - Appreciated to K16.67/USD at end-December 2021 (21.7 percent appreciation for 2021 as a whole).
  - Depreciated moderately by 1.8 percent to K16.96/USD as at 30th June, 2022.
- Drivers of appreciation between May and August 2021 included portfolio inflows following news of SDR 937.5 million allocation (equivalent to US $1.33 billion) from the IMF, positive election-related sentiments, and anticipated prospects for an IMF-supported programme.
- Bank of Zambia market interventions and regulatory actions:
  - Strengthened foreign exchange market rules in 2020 including mechanism for declaring market stress and registering all foreign exchange brokers.
  - Sold into the market foreign exchange directly purchased from mining companies as tax payments.
  - Purchased locally produced gold starting December 2020 to strengthen reserves.

### External sector performance and reserves
- Current account (CA) surpluses:
  - 0.6 percent of GDP in 2019.
  - 12.0 percent of GDP in 2020.
  - 7.6 percent of GDP in 2021.
  - Estimated 19.6 percent of GDP in Q1 2022 (from 21.2 percent in Q4 2021).
- Gross international reserves:
  - $1.6 billion in 2018.
  - Declined to $1.2 billion in 2020.
  - Increased to $2.8 billion at end-December 2021 mainly due to receipt of SDR equivalent to $1.33 billion in August 2021.
  - Increased to $3.03 billion at end-June 2022.
- Key contributors to reserve increase: SDR allocation (US $1.33 billion), receipt of $156.8 million World Bank support to the Ministry of Health, and mining tax payments.
- Reserves decline in earlier years reflected external debt service and waning balance of payments support; moderated by Bank of Zambia purchases from market and mineral royalties, mining companies channeling U.S. dollars tax obligations through the Bank of Zambia since June 2020.

### Medium-term outlook and risks
- Growth projections:
  - 3.1 percent in 2022.
  - 4.0 percent in 2023.
  - 4.1 percent in 2024.
  - Projection is way below trend growth of around 5 percent.
- Realization of the positive medium-term outlook depends on strong policy action and effective implementation of structural reforms, movement towards fiscal and debt sustainability, reducing arrears, and increasing social sector spending.
- Key risks to the medium-term outlook:
  - Increases in global energy and food prices, exacerbated by the on-going Russia-Ukraine conflict, posing an inflation risk.
  - A fall in copper prices reducing foreign exchange, investment, growth in mining and related sectors, and Treasury revenues.
  - Unfavorable weather conditions affecting agriculture, mining and energy.
  - Delayed and weak implementation of policy reforms.
  - Protracted and/or delays in undertaking debt restructuring.
  - Outbreaks of more infectious strains of COVID-19.

### Policies for 2022 and the medium term — Fiscal policy and reforms
- Overriding fiscal objective: progressively improve the primary balance (cash basis) from a deficit of 2.1 percent of GDP in 2021 to a surplus of 0.7 percent of GDP in 2024.
- Commitment on a commitment basis: improve the primary balance to a surplus of 3.2 percent of GDP by 2024 from a deficit of 6.0 percent of GDP in 2021.
- Government will undertake revenue, expenditure, and contingency measures; the Green Paper for the 2023-25 Medium Term Budget Plan and the 2023 Annual Budget is aligned with these objectives.

### Revenue projections and tax measures
- Domestic revenues projected to remain above 20 percent of GDP at 22.2 percent of GDP in 2024 from 22.7 percent of GDP in 2021.
- Expected revenue composition changes by 2024:
  - VAT collections to 5.7 percent of GDP in 2024 from 4.5 percent of GDP in 2021.
  - Customs and excise duties to increase to 2.7 percent of GDP in 2024 from 2.4 percent of GDP in 2021.
  - Income taxes to increase to 5.5 percent of GDP in 2024 from 5.4 percent of GDP in 2021.
- Tax policy actions in 2022:
  - Upward adjustment of excise duties on alcohol and cigarettes and expansion of goods subject to excise duty.
  - Streamlining of the tax incentives structure.
  - By end-September 2022, Government will reinstate VAT and excise duty on petroleum products (structural benchmark).
  - Excise duty for diesel will be restored to the level of the Road levy.
  - Reinstatement of VAT and excise duty and elimination of fuel price support undertaken in mid-December 2021 will result in elimination of all fuel subsidies.

### Tax administration and non-tax revenue measures
- Tax administration reforms and initiatives:
  - Fast track rollout of electronic fiscal devices to enhance VAT compliance.
  - Introduce digital stamps on excisable products to improve excise duty collection.
  - Complete implementation of the Telecommunications Traffic Monitoring System (TTMS) by end-2022.
  - Zambia Revenue Authority (ZRA) to enhance collaboration with local authorities and implement a data matching project on the Government Service Bus platform in 2022.
  - TADAT assessment conducted in Q1 2022 to identify strengths and weaknesses of tax administration.
  - Expected gains from tax administration and policy measures: 3.2 percent of GDP over 2022-2024.
- Non-tax revenue projection: 4.0 percent of GDP in 2024 from 3.4 percent of GDP in 2021.
  - Rise driven by utilization of e-payment platforms for Government services and projected increases in mineral royalty due to higher copper production and copper prices.
- Mineral monitoring: re-establish Mineral Data Analysis Centre under Large and Specialised Tax-Payer Office by March 2022 to undertake regular mineral data analysis.

### Consolidation and expenditure rationalisation
- Government will prepare a comprehensive tax policy and administration strategy and action plan by end-October 2022 (structural benchmark).
- Total expenditure (including amortization) projected to increase to 36.6 percent of GDP in 2024 from 32.4 percent of GDP in 2021.
  - Increase largely due to public service wage bill rising to 8.9 percent of GDP in 2024 from 7.5 percent of GDP in 2021 following recruitments.
  - Government intends to recruit 30,000 teachers and 11,726 health personnel in 2022; recruitment also for extension officers in the livestock sub-sector.
  - Significant resources allocated for the Constituency Development Fund (CDF) with widened utilisation scope.
- Farmer Input Support Programme (FISP):
  - Migration to e-Voucher system was intended from 2022/2023 farming season but delayed due to tight supply and high international prices; migration to broader system to be done from 2023/2024 farming season.
  - Expenditure on FISP in 2022 will remain elevated at 2.1 percent of GDP but reduce to 1.3 percent of GDP in 2024.

*Source: 1zmbea2022001 - 27.      Rising inflationary pressures, high lending rates, the sustained depreciation of the (PDF chapter content).*

### 50.      Capital expenditure is projected  to reduce  to 2.9 percent of GDP in 2024 from 4.1

### Capital expenditure is projected  to reduce  to 2.9 percent of GDP in 2024 from 4.1 percent  of GDP in 2021.

### Capital expenditure and public investment strategy
- Capital expenditure is projected to reduce to 2.9 percent of GDP in 2024 from 4.1 percent of GDP in 2021.
- This projection is in line with the Public Investment Strategy that aims at cost effectiveness in undertaking public investment projects and limiting Government’s exposure to such projects to within approved budgets.

### Local Authorities, CDF, and public financial management at local level
- Increased resource allocation to Local Authorities through the CDF commenced in 2022.
- Public financial management systems at local level are being strengthened through:
  - Preparation of guidelines and standards for utilization, management, monitoring and evaluation of resource use.
  - Capacity building, in line with the Constituency Development Fund Act No. 11 of 2018.
- The guidelines and standards were finalized in January 2022 and launched in February 2022.
- Sensitization and training of stakeholders, especially local authorities, have been conducted.
- Provisions in the Public Finance Management Act of 2018 including the sanction regime will be applied in managing the resources under the CDF.

### Use of the SDR Allocation
- In August, 2021 Zambia received Special Drawing Rights equivalent to $1.33 billion from the International Monetary Fund.
- Government intends to use at least 50 percent of the proceeds to finance the 2022 Budget.
- The balance of 50 percent will be used as a buffer against any financing shocks in the domestic market.
- A Memorandum of Understanding will be established between the government and the Bank of Zambia to clarify the roles and responsibilities for servicing the associated financial obligations to the Fund.

### Arrears on expenditure and VAT refunds — strategy and scope
- Government has developed and published a strategy for clearance of expenditure arrears and VAT refunds (prior action).
- Arrears are owed for:
  - Personal Emoluments,
  - bills for consumption of public utilities (telephone, water and electricity),
  - VAT refunds,
  - FISP,
  - maize purchases under FRA,
  - unpaid pension benefits,
  - outstanding bills on Road Construction Programme under the Road Development Agency (RDA),
  - Other Recurrent Departmental Charges (RDC’s),
  - Provisions (Rations),
  - awards and compensation,
  - Capital Expenditure on other civil works/contracts other than Road Projects.
- Fuel arrears, which are foreign currency denominated, will also be addressed through the strategy.
- ZESCO arrears owed to Independent Power Producers (IPP) and for emergency power imports (some of which are foreign currency denominated) will be addressed as part of the overall debt restructuring exercise.

### Medium-term arrears clearance plan and targets
- The medium-term expenditure and VAT refund arrears clearance strategy involves halting the accumulation of new arrears and dismantling the existing stock.
- A sum of K30.5 billion has been earmarked over the period 2022-2024 for arrears clearance.
- Key features of the strategy include increased budget provision, debt and/or cheque swaps, as well as debt refinancing and restructuring.
- Clearance of domestic arrears is targeted to be eliminated by end 2026.
- As a start, Government has dismantled all outstanding pension arrears accumulated for the period ending December 2021 for public service workers.

### Commitment control, IFMIS, and technical assistance
- A Commitment Control Module was developed in the Integrated Financial Management Information System (IFMIS) linking procurement commitments to the approved budget.
- Government adopted provisions to separate budget releases from cash releases, with budget releases done on a quarterly basis and based on procurement and cash plans.
- Configuration of Commitment Control Module in IFMIS was completed at the end of May 2022.
- Training of end users was completed in June 2022, and the module became operational in July 2022.
- Structural benchmark: Government will ensure that all ministries and provinces register purchase orders and other financial commitments in the IFMIS by end-June 2023.
- Government sought technical assistance from the IMF to enhance the commitment control system and expand the scope and capture of arrears.
- Recommendations from the technical assistance relate to payroll processes and controls, arrears management and clearance, and strengthening the Treasury Single Account, and are currently being implemented.
- Enforcement of the Public Finance Management Act and regulations, including punitive measures for non-adherence, will be used to deter accumulation of arrears.
- A Treasury Circular on punitive measures for non-adherence to the arrears clearance strategy and sticking to budgetary allocations was issued at the beginning of 2022.
- A Treasury Circular providing guidance on clearance of arrears was issued in February 2022.

### ZESCO — stock of challenges and key figures (as at end March 2022 and related data)
- ZESCO’s total outstanding debt as at end March 2022 amounted to $3 billion, comprising:
  - $1.87 billion in payables (including $1.7 billion for power purchases),
  - $1.13 billion in both domestic and external loans.
- The stock of on-lending facilities owed to the Central Government amounted to $368.6 million.
- $120.6 million owed to commercial lenders.
- $638.2 million Government guaranteed loans.
- As at end 2021, ZESCO had accumulated arrears on debt service amounting to $91.3 million.
- Revenue:
  - ZESCO recorded an improvement in revenues of 19 percent in 2021 compared with 2020.
  - Factors: increase in exports and sales volumes to domestic customers and depreciation of the Kwacha against the United States dollar.
- Costs:
  - Operating costs grew about 135 percent from 2015 to 2019.
  - Operating expenditure (OPEX) in 2020 totaled $650 million.
  - In 2021, operating costs were lower than 2020 driven by lower purchases of electricity from Ndola Energy, Maamba collieries and Lunsemfwa.
- Operations and financial performance:
  - In the financial year ended 31st December 2020, management accounts indicate a net loss margin of K12.2 billion (USD580 million).
  - Unaudited financial statements for the year ended 31st December 2021 recorded a net profit of K12.1 billion ($607 million) driven by lower cost of power purchases, reduced provision for doubtful debts and exchange rate gains.

### ZESCO 5-year turn-around Strategy (2021–2025) — five key focus areas
- a) Debt Restructuring:
  - Government is working with ZESCO to have its external debt restructured to ensure financial sustainability.
  - ZESCO’s guaranteed external debt will be restructured as part of the overall debt restructuring exercise for central Government.
  - Non-guaranteed external debt including emergency power imports will be restructured bilaterally between ZESCO and the respective creditors.
  - Negotiations on tariff revision concluded with Maamba, Itezhi Tezhi Power Corporation (ITPC) and Copperbelt Energy Company (CEC).
  - The effective date of the revised tariffs for Maamba was 1st June, 2022.
  - Finalization of the agreement with ITPC awaits conclusion of discussions on a payment plan for accrued arrears.
  - The negotiations are expected to be completed by end September 2022.
- b) Optimisation of CAPEX:
  - By end December 2022 ZESCO will reevaluate all non-committed CAPEX projects in the 2019-2025 corporate strategic plan that have not yet been drawn down.
  - All major projects that require financing from ZESCO’s balance sheet will not be embarked on during the stabilisation and recovery period.
  - New project selection criteria (Guiding Principles) will require projects to be self-financing and meet strict minimum investment criteria of:
    - 14 percent Internal Rate of Return (IRR),
    - 30 percent EBITDA margin,
    - 1.2 Debt Service Coverage Ratio.
  - Investment policy is in place and will undergo regular reviews.
  - Government-driven projects which neither contribute to ZESCO’s profitability nor support the turnaround will be suspended.
- c) Optimisation of OPEX:
  - Measures include reduction in labour costs through rationalisation and reduction of staff numbers and implementing a Voluntary Separation Scheme (VSS), automating processes and outsourcing some services via cost benefit analysis.
  - Other measures: suspending donations and grants and suspension of non-critical trainings.
  - Expected yields: 20 percent reduction in operating expenditure and a 10 percent reduction in the cost of labour in 2022.
- d) Tariff Adjustment and Revenue Efficiency:
  - Cost-of-Service Study (CoSS) completed in October 2021 and handed-over to the Government in December 2021.
  - Key CoSS finding: mining companies should pay a lower tariff, while upward adjustments should be made for retail and commercial consumers.
  - Findings were peer reviewed by local and international energy experts, and multilateral institutions; peer review concluded in July.
  - Government will finalize its policy response and publish it together with the cost of service study prior to consideration of the programme request by the IMF Executive Board (prior action).
  - Policy objective: multi-year migration to cost-reflective electricity tariffs, with the migration path published by end-December 2022 (structural benchmark).
  - For retail customers, ZESCO will apply to the ERB for tariff adjustment considering the lifeline tariff to cushion low income households, in line with the Electricity Act No. 11 of 2019.
- e) Asset Optimisation:
  - ZESCO will carry out valuation of all assets that are separate entities and pursue dilution of its holdings and outright sale of identified assets, including through IPOs.
  - Asset optimisation interventions will begin during the recovery phase of the turnaround strategy expected to begin in January 2023.
  - Intention: divest from ventures not delivering expected value and partially divest from investments delivering value to release capital for investment in core assets.

### Fuel arrears and reforms
- Accumulation of fuel supply arrears remains a challenge.
- Fuel arrears timeline and amounts:
  - As at December 2019, fuel arrears amounted to $499.39 million.
  - Increased to $717.26 million at end-June 2020.
  - Closed at $467.3 million at end-December 2020 following payments to reduce the arrears.
  - The stock of fuel arrears as at end-December 2021 was $597 million.
- Government will undertake an audit on the evolution of the fuel arrears to authenticate the quantum owed to fuel suppliers.
- Contributing factors:
  - Since 2016, accumulated arrears arose from the landed cost being lower than the pump price.
  - Sharp depreciation of the kwacha and increases in global petroleum prices have led to challenges in attaining cost reflectivity.
  - Increase in inflation in 2020 and 2021 made price adjustments challenging.
  - Accumulation of arrears resulted in Government reducing Excise duties on fuel and zero-rating VAT for diesel and petrol.
- Multi-step petroleum price adjustment and reform process:
  - First step: upward revision of petroleum prices to eliminate price support effected in December 2021.
  - Commencing 31st January, 2022, the pricing cycle for petroleum products was adjusted from 60 days to 30 days with prices adjusted based on the cost-plus pricing model, while maintaining the pricing trigger band of +/- 2.5 percent (prior action).
  - Second phase: reforms to remove inefficiencies in the fuel supply chain, including supplying diesel through the pipeline and procurement reforms to standardize supply contract prices in line with the recently adopted procurement regulations (prior action).
  - Final phase: Government will reinstate VAT and Excise duty on petroleum products by end-September 2022 (structural benchmark), concurrently with pumping diesel through the pipeline and the procurement reforms.

### FISP (Farmer Input Support Programme) reforms and CASP
- FISP is the flagship input delivery programme for more than one million small scale farmers.
- Delivery modes: direct input supply and use of electronic platforms.
  - Farmers under the electronic platform were getting fewer bags of fertilizer and seed relative to those under direct input support mode due to escalation in prices.
  - Direct input supply mode has been associated with a large monetary outlay consistently above budgetary allocations due to high administrative and transportation costs and input price escalations.
- Government will implement a new Comprehensive Agriculture Support Programme (CASP) beginning in the 2023/2024 farming season.
  - CASP scope will expand beyond subsidised inputs to include extension service support, access to finance, support to value addition, storage and logistics.
  - Design of the programme, including publication of its guidelines, will be undertaken by end-December 2022 (structural benchmark).
- Transparency and audit measures:
  - Government has published (prior action) and will publish the list of future suppliers of inputs on the Ministry of Agriculture website, including name of suppliers, products, quantity to be supplied, and contract amount, and beneficial owners in line with the Public Procurement Act.
  - The Controller of Internal Audit (CIA) undertook a value for money audit of the programme in 2021; findings included lack of accountable documents for stock management, no benchmarking of landed cost with average market price, no certification and verification of quality and weights of delivered inputs, uncollected inputs despite swiping by farmers on the e-voucher system, lack of an oversight committee, and unclear administrative structures regarding responsibility and accountability of FISP resources.
  - A firm of independent auditors has been engaged to increase audit coverage nationwide; work is ongoing.
  - Findings from the CIA and independent auditors will shape the design of the new programme.
  - The office of the Auditor General will continue with annual audits to ascertain compliance.

### Social protection measures (scaling up in 2022 and medium term)
- Specific actions to be undertaken include:
  - Increasing the number of beneficiaries under the flagship Social Cash Transfer Programme to over 1,024,000 households in 2022 from 880,539 households in August 2021.
  - Increasing the transfer value per household in 2022 to K200 per month from K150.
  - For households with a severely disabled member, the transfer value will be increased to K400 per month from K300.
  - Increasing the number of beneficiaries under the Food Security Pack Programme to 290,000 households in 2022 from 263,700 in August 2021.
  - Expanding support to the girl child through the Keeping Girls in School Programme to 43,520 girls in 2022 from 28,964 girls in 2021.
  - Scaling up of the home-grown school feeding programme from 39 to 59 districts.
  - Continued implementation and scaling up of the public welfare assistance scheme and women empowerment programme.
  - Clearing all outstanding pension arrears as at end 2021 for public service workers and eliminating accumulation of arrears by staying current on pension employee and employer contributions.

### Pension reform
- Pension system reforms aim to make the system financially sustainable and provide social security to retirees.
- Key reforms include creation of a statutory pension and an occupational pension.
- Reform measures being considered include a complete review and amendment of relevant legislation including Public Service Pension Fund, Local Authorities Superannuation Fund and the Pension Scheme Regulation Act.
- Aim: provide adequate safeguards to retirees.
- Government will make appropriate consultations including with trade unions and the World Bank as it undertakes the pension reforms.

*International Monetary Fund — Zambia country document (selected excerpts).*

### 69.      The Zambia Integrated  Social Protection  Information System was implemented in 2021

### 69.      The Zambia Integrated  Social Protection  Information System was implemented in 2021

### Social protection implementation and programs
- The Zambia Integrated Social Protection Information System was implemented in 2021 to assist in planning, policy formulation and eliminating duplications within social protection programmes.
- Coverage of social health insurance, currently in the formal sector, has been extended to the informal sector. Registration of the informal sector to the scheme will be a continuous process.
- Engagement approaches for informal sector registration include associations (e.g., marketeer’s association), door to door registration and utilization of the Zambia Integrated Social Protection Information System for vulnerable households.
- Informal sector players may be required to be National Health Insurance Management Authority (NHIMA) compliant to participate in Government programmes such as FISP or Food Security Pack (FSP).
- Descriptions of selected social protection programmes:
  - Food Security Pack (FSP): an agricultural–based Social Protection programme that provides agriculture inputs and accompanying services to poor and vulnerable farming household.
  - Home Grown School Feeding Programme (HGSFP): a social safety net used to tackle malnutrition and hunger among pupils and to help improve access and retention of pupils in schools.
  - Public Welfare Assistance Scheme (PWAS): supports the most vulnerable to fulfil basic needs (health, education, food and shelter); aimed at mitigating socioeconomic shocks and other negative effects such as poverty and the HIV and AIDS pandemic.
  - Women Empowerment Programme: offers women technical, financial and material empowerment to promote their participation in economic and social development.

### Public Investment Management Strategy (PIMS)
- A multisectoral public investment board will scrutinize investment proposals prior to inclusion in the budget.
- All projects will be required to undergo project appraisal, including cost effectiveness reviews, to inform budgeted costs and prioritization criteria.
- MPSAs will be required to develop projects whose objectives, outputs and indicators are in line with National Development Plans, Sectoral plans, Provincial, District Development Plans and Cabinet directives. Projects not aligned will not receive necessary approvals.
- At implementation stage, following successful appraisal, the Public Investment Planning Department (PIPD) in the Ministry of Finance and National Planning will oversee capital budget commitments and execution.
- All capital projects will be outlined in the Public Investment Plan and a database of the projects will be maintained by the PIPD.
- Comprehensive criteria will be developed on selection and prioritisation of projects to be included in the Budget.

### Restoring debt sustainability and improving debt management and transparency
- Zambia’s public debt is described as unsustainable using both solvency and liquidity thresholds.
- External debt measures to be implemented:
  - Non-contracting of non-concessional debt (continuous performance criterion).
    - Cabinet in December 2019 directed that Government halts contraction of non-concessional public external debt. No commercial facilities have been executed since 2020.
    - Government will continue this measure until public debt sustainability is restored.
    - Government is reviewing contraction of concessional debt mostly from Multilateral creditors (indicative target on the present value of new external concessional borrowing).
  - Cancellation and rescoping of external debt financed projects (IT ceiling on disbursements on contracted but undisbursed debt).
    - In 2020 Government cancelled and re-scoped loan financed projects by $5 billion to reduce contracted but undisbursed loans.
    - This exercise resulted in cancellation and re-scoping of loans amounting to $1.1 billion and $280 million, respectively.
    - Government has continued review with a view to cancel an additional $2.1 billion during the 2022 fiscal year.
    - As at end-December 2021, the stock of contracted but undisbursed external debt stood at $4.02 billion.
    - The halting of disbursements by non-multilateral creditors following accumulation of debt service arrears has resulted in unpaid IPCs of around $563 million as at end January 2022. (Footnote: This is a preliminary position; the actual figure is expected to be higher than $563 million after reviewing all the projects.)
    - Cancellation of $2.1 billion worth of undisbursed loans has advanced and will imply that implementation of affected projects will have to be financed through general budget revenues in a phased manner.
  - Asset Liability Management exercise:
    - Government has been working with financial and legal advisors since July 2020 to carry out an Asset Liability Management exercise to culminate in restructuring of the country’s debt.
    - Zambia is utilizing the G20 Common Framework for debt treatments beyond the DSSI. Application to the Common Framework was made in January 2021; the Official Creditor Committee started considering the debt restructuring exercise for Zambia on 16th June 2022.
    - Prior to the framework, Zambia made use of the Debt Service Suspension Initiative (DSSI) to obtain debt suspension from various creditors.
    - Government has implemented a debt service standstill for creditors that did not grant Zambia DSSI with the exception of multilaterals and a few creditors financing priority projects.
    - Commitment: finalize the MOU with official creditors by the time of the first program review, and reach agreements on comparable terms with other creditors by the time of the second review at the latest.
  - External arrears to contractors (continuous ceiling on the accumulation of new external debt arrears):
    - Arrears amounting to $563 million to contractors for works done on non-disbursing loans will be cleared over a ten-year period through budgetary allocations.
    - Fuel arrears which amounted to $597 million as at end-December 2021 will also be cleared over the same period through budgetary allocations, subject to the outcome of the planned audit.
  - Achievement of higher economic growth to improve revenue mobilisation and debt carrying capacity.
- Debt management and transparency measures:
  - Government will develop a Medium-Term Debt Management Strategy covering the period 2023-2025, subject to finalization of the debt restructuring exercise, and an Annual Borrowing Plan for 2023 by end-December 2022.
  - Government has regularly undertaken debt data validation and reconciliation activities and provided the IMF detailed information on all external debt contracted or guaranteed by the public sector, disbursed and undisbursed (prior action).
  - Government will publish on a quarterly basis a Debt Statistical Bulletin to cover external and domestic debt including loans contracted, new disbursements, information on guaranteed loans and any liabilities arising out of public private partnerships (structural benchmarks).
  - Government intends to expand coverage of the bulletin to include non-guaranteed State-Owned Enterprises (SOEs) debt among others.
- Revision of Loans and Guarantees Legislation:
  - Ministry of Finance and National Planning will submit the Loans and Guarantees, Grants (Authorisation) Bill to Parliament to repeal the current Loans and Guarantees (Authorisation) Act.
  - The new law is expected to be enacted by end-September 2022 (structural benchmark).
  - Objectives include aligning the law to the Constitution’s Parliamentary oversight requirement, addressing weaknesses in the current Act (definition of public debt, reporting requirements), and ensuring strong oversight, recording and monitoring of all contracted debt and guarantees.
- Domestic debt sustainability measures:
  - Issuance of Government securities will be primarily from the market via auctioned treasury bills and bonds.
  - Issuance programme will focus on longer dated instruments to reduce refinancing risk.
  - Target: attain a debt stock ratio of treasury bills to Government bonds of 40 percent to 60 percent over the medium term, i.e., treasury bills will be limited to 40 percent of the domestic debt stock.
  - Raising funds domestically will avoid increasing use of instruments that are of foreign currency denomination.
  - Government recognizes adverse impact of exchange rate volatility on domestic debt denominated in foreign currency maturities.
- Creditor engagement considerations (talks with official creditors commenced on 16th June, 2022):
  - (i) Seek a comprehensive debt treatment encompassing both Government and SOEs debt, whether guaranteed or not, to achieve “moderate” risk rating of debt distress over the medium term.
  - (ii) Exclusion of non-resident holdings of T-bills and bonds (classified by the IMF as external debt) due to financial stability, practical, legal, and fairness considerations.
  - (iii) Exclusion of short-term payables (non-financial claims mostly due to suppliers of petroleum products and contractors), while seeking appropriate repayment terms recognizing the country’s difficulties.

### Strengthening fiscal controls and governance
- Objective: entrench medium term fiscal sustainability through Public Financial Management (PFM) reforms to restore budget credibility, improve efficiency of public expenditures, halt accumulation of arrears, and improve fiscal transparency.
- Key reforms and actions:
  - Enhancement of Domestic Revenue Mobilisation and service delivery via Government Service Bus and Payment Gateway.
    - A total of 82 services from Immigration Department, Zambia Police, Registrar of Societies, Patents and Companies Registration Agency, the Road Transport and Safety Agency and Ministry of Lands (ground rent) are already online.
    - Target: bring online an additional 79 services by end-December 2022, and more services by 2023.
    - Interoperability of Government services and system-based controls expected to enhance tax compliance and management of tax debt and other arrears.
  - Implementation of the Planning and Budgeting Act to ensure stakeholder involvement and appraisal of major projects before inclusion in plans and the annual budget.
  - Continued enforcement of the Public Finance Management Act provisions and regulations to strengthen the sanction regime for financial mismanagement.
  - Repeal and replacement of the Loans and Guarantees (Authorisation) Act to enhance Parliamentary oversight on loan contraction and issuance of guarantees; for defence and security contracts, Parliament will establish a standing committee to review these loans.
  - Enhancement of Commitment Control in IFMIS to facilitate capture of expenditure arrears.
- Budget execution and reporting:
  - Government will continue publication of Quarterly Economic Reviews containing information on Budget performance; financial report will continue to be published annually.
  - Scope for the Budget Execution Report will be expanded to include performance on broad revenue and expenditure categories including social spending and its quality.
  - Government will migrate to the International Public Sector Accounting Standards (IPSAS) Accrual Accounting Basis in 2024 based on the approved roadmap.
- Fighting corruption:
  - Disciplinary action taken in 2021 against erring officers at the Ministry of Health involved in misappropriation of COVID-19 resources; cases reported to law enforcement and taken to court.
  - A committee headed by the Secretary to the Cabinet regularly meets to discuss audit queries of all affected MPAs; disciplinary action taken by the Secretary to the Treasury where required.
  - With IMF support, a Comprehensive Governance Assessment is being undertaken; initial diagnostic work will be completed and published by end-December 2022 (structural benchmark). The final report will be made public and will inform an action plan to strengthen governance and reduce corruption.
- Fiscal risk management:
  - Government is developing a fiscal risk management framework to be finalized by end-September 2022; key elements to be monitored include Local Authorities, PPPs, SOEs and climate/natural disasters.
- Public Private Partnership (PPP) reforms:
  - Amendments to the PPP Act will be submitted to Parliament by end-June 2023 (structural benchmark).
  - Amendments include provisions for the Minister of Finance and National Planning to approve or reject PPP projects based on potential fiscal implications.
  - Reforms aim to deliver cost effective, value for money, and sustainable infrastructure projects and service delivery while proactively managing PPP fiscal risks and contingent liabilities; supported by finalization and implementation of fiscal commitment and contingent liabilities guidelines.
- State-Owned Enterprises (SOEs):
  - Measures include enactment of the Public Finance Management Act No. 1 of 2018 and development of an SOE Policy.
  - The Act gives the Treasury mandate to develop code of governance guidelines and a supervisory and performance monitoring framework for SOEs, and requires SOEs to submit annual financial statements for analysis.
  - Ministry of Finance and National Planning will prepare periodic reports with in-depth analysis on health of SOEs; Treasury empowered to take appropriate action where performance is poor.
  - Cabinet approval of the SOE Policy will be done by end-September 2022.
  - IDC measures to ring-fence the Treasury: limit contracting of debt financing to commitments with a business case and serviceable from incremental cash flows; IDC will roll out the Group Treasury Management Policy for prudent treasury management, efficient capital allocation and best practice reporting.

### Enhancing monetary policy
- The Bank of Zambia will continue to rely on a forward-looking monetary policy framework anchored on the Policy Rate as a key signal for the monetary policy stance.
- Decisions on the policy rate will be guided by inflation forecasts, outcomes, and identified risks including those associated with financial stability and economic growth.
- The Bank will make effective use of open market operations, and enhance competition, transparency, and protection of consumers in financial markets.
- Monetary policy will focus on bringing inflation back to the 6-8 percent target range by mid-2023.
- The unwinding of the accommodative monetary policy measures implemented in 2020 to mitigate the adverse effects of the pandemic will continue, as conditions allow and in the context of the overall review of credit quality and health of the financial sector.

*Source: 1zmbea2022001 - 69.      The Zambia Integrated  Social Protection  Information System was implemented in 2021*

### 86.      The Bank will continue to pursue measures aimed at deepening the secondary market

### The Bank will continue to pursue measures aimed at deepening the secondary market

### Deepening the Government securities secondary market
- Develop and implement simplified registration of accounts and investing in Government securities to widen participation, particularly households.
- Full rollout of the Bloomberg E- Bond platform for secondary trading: envisaged by the end of the first quarter 2022, extended to the fourth quarter of 2022 to allow inclusion of all key market players.
- Expected outcomes:
  - Greater transparency in pricing.
  - Improved secondary market liquidity.
  - Broader investor participation leading to improved price discovery and strengthening of the interest rate channel of monetary policy transmission.

### Credit Guarantee Fund (CGF) pilot for MSMEs
- Introduce, on a pilot basis, a Credit Guarantee Fund to leverage private sector participation and support provision of affordable credit to MSMEs.
- Rationale: MSMEs faced high information costs and credit risks prior to COVID-19; pandemic exacerbated constraints and MSMEs were not predominant beneficiaries under the TMTRF.
- Environmental consideration: pilot will take into account the need to encourage environmentally sustainable growth.
- Initial amount anticipated: K3 billion, including administrative costs.

### Bank of Zambia Act review and central bank governance
- Completed review of the Bank of Zambia Act No. 43 of 1996; bill submitted to Parliament (prior action).
- Drivers: Constitutional (Amendment) Act No.2 of 2016 and adoption of the SADC Central Bank Model Law (2009).
- Constitutional provisions: Article 213(1) establishes the Bank of Zambia; Article 213(5) provides for operational independence.
- Proposed amendments based on principles:
  - Operational, financial, and personal autonomy as enshrined in the Constitution.
  - Strengthening mandate.
  - Corporate governance in line with best practices.
  - Enhancing Central Bank transparency and accountability.
- Institutional changes: establishment of the Monetary Policy Committee (formulation of monetary policy) and the Financial Stability Committee (macro-prudential policies); reports of the Committees will be published.
- Status: Bill presented to Parliament and pending Presidential assent.

### Exchange rate policy, reserves, and FX market measures
- Primary objective: maintain a flexible exchange rate system while mitigating excessive volatility to protect inflation objective.
- Commitment to building international reserves to boost market confidence in meeting external obligations.
- Measures to build reserves and support FX market functioning:
  - Mining companies to continue paying all tax obligations directly in U.S. dollars and through the Bank.
  - Continue the gold purchase programme with a target of at least 783.8kg of refined gold for 2022.
  - Review foreign exchange market rules and policies with a view to normalizing policies as market pressures abate; focus on efficiency in price discovery, transparency in trading, and promotion of a well-functioning market.

### Safeguarding financial stability — Problem Bank Framework and supervision
- Problem Bank Framework developed and approved by the Board in May 2022.
- Key goals:
  - Provide clear criteria for designating problem institutions.
  - Define pre-emptive and post-problem actions for weak institutions.
  - Minimize economic and financial contagion and potential fiscal risks.
- Off-site supervision enhancements:
  - Revised templates and pilot of enhanced returns; launch of the new Returns expected in quarter three 2022.
- Thematic examinations:
  - Thematic examinations on asset quality in 2022, including restructured facilities due to the COVID-19 Pandemic.
  - Examination will review facilities granted under the TMTRF to validate compliance with agreed terms and draw lessons.
  - Thematic on-site examinations commenced in April 2022 and are expected to be concluded by end-December 2022 (structural benchmark).

### Micro-prudential, stress testing, supervisory technology, and cyber resilience
- Micro-prudential stress testing framework developed; expected implementation by December 2022 to assess resilience of individual financial institutions.
- Supervisory technology project initiated to improve staff analytical capabilities, timeliness of analysis, and data integrity by December 2023.
- Cyber and Information Security Guidelines developed; regulatory impact assessment completed with IMF-AFRITAC South support.
  - Guidelines to be issued by the end of quarter three 2022.

### Banking sector review and unwinding COVID-19 prudential measures
- Bank of Zambia to undertake a banking sector review preparing for post-COVID-19 period and unwinding prudential measures.
- Review will assess:
  - Effectiveness of banking sector financial intermediation during the pandemic.
  - Impact of the COVID-19 Pandemic on banks’ capital and systemic risks.
  - Implications of increased digitalization and payment system developments on bank competition and financial sector development.
- Unwinding approach: measures to be unwound in accordance with timelines indicated when introduced and as financial conditions allow.
- Examples of pandemic-era measures and status:
  - Relief on IFRS impairment losses up to December 31, 2022.
  - Impairment losses on restructuring of existing credit facilities for bank-funded facilities for one year up to March 31, 2021; not unwound due to pandemic evolution and will be reviewed as part of the planned thematic examination in 2022.
  - Impairment losses on restructuring of facilities granted under the TMTRF for facility periods ranging from three years to five years.

### Deposit Protection Scheme and crisis management
- Implement a Deposit Protection Scheme through a dedicated unit to be established by end-September 2022.
  - Initially under the Bank Supervision Department; transition to a fully-fledged separate department when ready to operate independently.
- Directives developed to operationalize the Scheme.
- Crisis management and resolution framework established; to be fully operational once governance arrangements are finalized as provided in the new Bank of Zambia Act.

### Macro-prudential framework
- Macro-prudential toolkit developed to mitigate:
  - Excessive credit growth and leverage.
  - Maturity mismatches and market illiquidity.
  - Exposure concentration and moral hazard from misaligned incentives.
- Operationalization within the 2020-23 strategic planning cycle.
- Planned regulations and guidelines for:
  - Countercyclical capital buffers.
  - Loan-to-value ratio.
  - Buffers for domestic systemically important banks (in line with annual operational plans).
- Continued conduct of macro stress tests to assess system resilience.

### AML/CFT/PF supervision enhancements
- Establish and resource a dedicated AML/CFT/PF supervision unit to address deficiencies identified in the 2019 ESAAMLG Mutual Evaluation, 2022 Enhanced Follow-Up Report, and Zambia’s 2016 National Risk Assessment.
- Interim measures: risk-based AML/CFT focused on on-site examinations.
- Purpose of dedicated unit: support BoZ’s risk-based approach to AML/CFT/PF supervision and effective application of sanctions, particularly for high-risk entities and customers including politically exposed persons.

### Achieving higher and more inclusive growth — overview
- Government objective: raise living standards, reduce poverty and inequality by creating conditions for strong and inclusive growth through economic transformation and job creation.
- Focus sectors: agriculture, tourism, mining, manufacturing, energy, and transport.
- Improving the investment climate to promote productivity across these sectors.

### Agriculture sector priorities
- Address challenges: low production and productivity, dependence on rain-fed farming, limited crop diversity, restrictions on agriculture exports, and climate events.
- Irrigation infrastructure development projects (all at or above 80 percent completion): Chiansi in Kafue District, Mwomboshi in Chisamba, Musakashi in Mufulira, and Lusitu in Chirundu.
  - Expected to bring in excess of 3,000 hectares of land under irrigation, mainly for small scale farmers.
- Farm blocks development prioritized beginning with Nansanga Farm Block; works scheduled to begin by mid-2022.
- 2022 Budget tax incentives on selected agricultural equipment and accessories (examples: manure spreaders, combined harvesters, commercial sprinkler irrigation systems).
- Livestock: recruit extension officers, training in open grazing management, and continue animal disease prevention and control programmes.
- Fisheries: strengthen monitoring and conservation in natural water bodies; establish additional hatcheries and complete infrastructure such as aquaculture parks.

### Tourism
- Develop other parts of the country through infrastructure and regulatory frameworks to attract private sector hotels, lodges, and tourism facilities.
- Strategic investments in the Northern Tourism Circuit.
- Development partners engaged to undertake studies and launch tourism projects in 2022.

### Manufacturing and trade facilitation
- Support value addition from agriculture, forestry, and mining.
- Reinvigorate Multi-Facility Economic Zones (MFEZs) and industrial parks; undertake assessment of MFEZs with cooperating partners to draw lessons.
- Rationalize number of licenses and permits to reduce cost of doing business.
- Leverage market opportunities in neighboring countries (e.g., DRC) and regional initiatives (Tripartite Free Trade Agreement, AfCFTA).
- Export duty on maize and maize products lifted in November 2021; exports to the DRC have commenced.

### Energy sector reforms
- Energy reforms to support growth and diversification.
- Key reforms and timelines (structural benchmarks):
  - Finalization and publication of the multi-year tariff adjustment framework by end-December 2022.
  - Implementation of revised tariffs with Independent Power Producers by end-December 2022 to give financial stability to ZESCO.
  - Development of regulations for open market access by end-December 2022 to allow other off-takers besides ZESCO.
- Shift focus toward renewable energy sources such as solar and geo-thermal and reduce dependence on fossil fuels.
- Climate commitment: reduce emissions by 47 percent by 2030 using 2010 as the base year (Government’s commitment under the country’s Intended Nationally Determined Contribution to the 2015 Agreement).

### Mining sector policies
- Reviewed mining tax policy framework to introduce a more stable mining tax regime.
  - Reintroduction of deductibility of mineral royalties for income tax purposes in 2022.
  - Medium-term law amendment to have mineral royalty determination reflect both incremental and aggregate norm values.
- Strategies to increase production at mining companies where Government owns a significant stake.
- Geological mapping to be intensified to cover the whole country from current coverage of 70 percent over the medium term.
- Enhance value addition by facilitating investments in processing and refining capacity for minerals by 2023.
- Address obstacles to private sector investments and dismantle backlog of VAT Refunds to mining companies.
- Promote formalisation of the informal small mining sub-sector through establishment of cooperatives and trading centers in 2022.

### Climate resilience and green economy
- Creation of a Ministry of Green Economy and Environment to champion green economy and sustainable environment.
- Mainstream climate change adaptation and mitigation across policy and programme interventions.
- Develop legislation on climate change and establish a National Climate Change Fund to spearhead resource mobilisation.
- International commitments:
  - Attended COP26 in Glasgow in November 2021.
  - Committed to reduce emissions by 25 percent based on domestic resources and support received in 2015, and indicated willingness to reduce emissions up to 47 percent with substantial support from advanced economies.

### Human development and social spending
- Increased budgetary allocations in education and health in the 2022 budget to support increased hiring of teachers and health workers.
- Free education policy extended in 2022 to include secondary schools and early childhood education (other than primary school education).

### Constituency Development Fund (CDF) allocations
- CDF aims to bring resources closer to people for community-based projects, empowerment funds for youth and women, and bursaries for secondary and skills training.
- Total allocation in the 2022 National Budget: K4 billion.
  - 60.1 percent targeted for community-based projects.
  - 20.1 percent for empowerment programmes.
  - 19.8 percent for secondary schools and skills training bursaries.
- Sector Ministries to provide policy direction and expert advice for CDF-financed activities.

*Content unit 1zmbea2022001*

### 106.      Girls and Women Empowerment. Government  remains committed  to girls and women

### Girls and Women Empowerment. Government remains committed to girls and women

### Girls’ Education and Women’s Empowerment (GEWEL) Project
- The GEWEL Project will continue to be implemented.
- Expected outcomes:
  - Help keep more than 43,000 girls in school.
  - Empower more than 129,000 women.
- The GEWEL project will be complimented by financing for women empowerment programmes under the CDF.

### Financial inclusion: targets, reforms, and recent outcomes
- National Financial Inclusion Strategy (2017- 2022) key targets:
  - Increase overall financial inclusion (both formal and informal) from 59 to 80 percent by 2022.
  - Increase informal financial inclusion from 38 to 70 percent by 2022.
- Measures undertaken with Bank of Zambia, financial sector regulators, and international partners:
  i. Enacted legislation to enhance the provision of digital financial services, secured transactions using movable assets, data protection for borrowers and the regulation of credit reporting agencies.
  ii. Migrated government-to-person and person-to-government payments to digital platforms.
  iii. Implemented the National Financial Switch (NFS), resulting in enhanced interoperability of digital financial services.
  iv. Implemented a gender based supply-side financial inclusion data framework.
- FinScope Survey findings:
  - Financial inclusion increased to 69.4 percent in 2020 from 59.3 percent in 2015.
  - Formal financial inclusion rose to 61.3 percent in 2020 from 38.2 percent in 2015.
  - Mobile money uptake increased to 58.5 percent in 2020 from 14.0 percent in 2015.
- Medium-term financial inclusion commitments:
  - Improve access to affordable finance for farmers, agribusinesses, MSMEs and exporters of high value agricultural products.
  - Focus on increasing access to finance for the rural population, women and children primarily through promotion of digital financial services.
  - Enhance financial consumer protection and capability by strengthening regulatory capacity of financial sector regulators and establishing an external dispute resolution mechanism (Financial Ombudsperson).
  - Continue coordination of financial inclusion objectives through the NFIS Steering Committee chaired by the Ministry of Finance and National Planning.

### Economic statistics: data strengthening and schedules
- Ongoing priorities:
  - Strengthen data collection and estimation of key national economic statistics such as GDP and employment.
  - Develop cost effective instruments and methods for data collection, including enhancement of online data collection.
  - Under the Second-Generation Strategy for the Development of Statistics (NSDS2), require all Ministries, Provinces and other Agencies (MPAs) to establish functional Statistics Units and Management Information Systems over time.
- Specific statistical activities and timelines:
  - Census of Population and Housing will be undertaken in August 2022 to provide statistics on Zambia's population and housing stock.
  - Zambia Statistics Agency will rebase the national accounts to 2015 (from the current base year 2010) by end 2024.
  - Ministry of Finance and National Planning will continue timely publication of fiscal and debt statistics on its website.
  - Bank of Zambia will continue publication of monetary and financial statistics.
- External sector statistics and e-BoP:
  - Bank of Zambia will strengthen the electronic Balance of Payments (e-BoP) monitoring system by extending coverage to all BoP transactions and enhancing collaboration with other Government regulatory agencies.
  - e-BoP currently requires all authorized foreign exchange dealers (primarily commercial banks) to report foreign exchange receipts and payments of their clients (provided for under section 40A of the Bank of Zambia (Amendment) Act of 2013).
  - Significant gaps remain in coverage of external sector statistics, particularly:
    - Estimates of balances held abroad by resident enterprises.
    - Capture of all export earnings and other current as well as financial account flows.
  - Gaps related to unidentified flows largely attributed to accumulation of foreign assets by the private sector.
  - IMF technical assistance (TA) is supporting a detailed review of available data sources, including e-BoP, private capital flows (PCF) survey, financial statements, and customs data; TA is supporting preparation of flow of funds for selected companies to achieve an in-depth understanding of sector operations and comprehensively capture external sector flows.
  - A technical team comprising the Bank of Zambia and ZRA has been established to facilitate information sharing and analysis; a detailed action plan to implement recommendations will be developed and implemented by end-December 2022.
  - Bank of Zambia, Zambia Revenue Authority and the Ministry of Finance and National Planning will engage the corporate sector to improve reporting quality as measures are formulated and implemented.

### Program financing, monitoring, and safeguards
- Financing and commitments:
  - Programme is fully funded over the medium term with financing commitments from external partners—including firm assurances for the next 12 months and good prospects for the duration of the programme—to complement financing provided by the restructuring of external debt.
  - Authorities will continue to work with partners to ensure financing fully covers the financing gap for the remainder of the programme.
- Monitoring and reviews:
  - Progress will be monitored through semi-annual reviews of quantitative performance criteria, indicative targets, and structural benchmarks defined in attached Tables 2 and 3 and the Technical Memorandum of Understanding (TMU).
  - First semi-annual review based on end-December 2022 data and performance criteria and should take place on or after April 1, 2023.
  - Second semi-annual review based on end-June 2023 data and performance criteria and is expected to take place on or after October 1, 2023.
- Strengthening internal monitoring:
  - Ministry of Finance and National Planning will establish a Technical Committee to monitor the programme and submit monthly programme reports to the Minister.
- Use of IMF financing and safeguards:
  - Authorities intend to use half of IMF financing as budget support and the other half as a buffer to boost Zambia’s international reserve position.
  - In line with IMF safeguards policies, a Memorandum of Understanding between the Government and the Bank of Zambia clarifying respective roles and responsibilities for servicing associated financial obligations to the Fund will be signed by end-August 2022.

*Source: 1zmbea2022001 - 106. Girls and Women Empowerment. Government remains committed to girls and women*

### 8.      The data for new central bank credit to the central government will be reconciled with

### 1zmbea2022001 - 8.      The data for new central bank credit to the central government will be reconciled with

### Data reconciliation and reporting for central bank credit
- New central bank credit to the central government will be reconciled with the monthly monetary survey and submitted within 25 business days of the end of the month.
- Data submissions should include a breakdown of outstanding loans and advances, as well as outstanding amounts of other central bank claims on the government, including debt securities and on-lending of IMF credit.

### Floor on the Net Official International Reserves (NIR) of the Bank of Zambia — Definition
- NIR of the BoZ = gross international reserves minus official reserve liabilities.
- Gross international reserves consist of:
  - monetary gold;
  - foreign currency;
  - unencumbered foreign-currency deposits at non-resident banks;
  - foreign securities and deposits; and
  - SDR holdings and Zambia’s reserve position with the IMF.
- Gross international reserves exclude:
  - non-convertible currencies, except for operational balances in Rand with the South African Reserve Bank;
  - any encumbered reserve assets including but not limited to reserve assets pledged, swapped (maturing in less than one year), or used as collateral or guarantee for third-party external liabilities;
  - reserve requirements on other depository corporations’ foreign currency deposits;
  - any foreign assets not readily available to or not controlled by the BoZ; and
  - any foreign currency claims on Zambian residents.
- Foreign liabilities are defined as short-term (one year or less in original maturity) liabilities of the BoZ to non-residents, plus any outstanding use of IMF credit. Short-term liabilities exclude liabilities with an asset counterpart that is encumbered (excluded from the asset side as well).
- All values not in U.S. dollars are to be converted to U.S. dollars using the program exchange rates defined in paragraph 2 above.

### NIR — Reporting and adjustor
- Daily data on net international reserves, including their components, will be reported by the BoZ on a weekly basis, within 15 business days from the end of each week.
- Adjustor: If the amount of public sector disbursements expected to be channeled through the Treasury Single Account (TSA) at the BoZ falls short of the programmed amount (e.g., due to disbursement delays), the NIR target will be adjusted downward by the amount of the shortfall.

### Continuous Performance Criterion — Ceiling on New External Debt Arrears (central government, BoZ, ZESCO)
- The non-accumulation of new external debt arrears is defined as a cumulative flow in gross terms starting from the date of program approval (August 31, 2022), and applies on a continuous basis.
- External debt arrears are debt service (principal and interest) that is overdue (taking into account any contractually agreed grace periods) on external debt contracted or guaranteed by the central government, the BoZ, and ZESCO with non-residents. This performance criterion does not cover arrears on debt subject to renegotiation or restructuring.
- External debt is defined on a residency basis and uses the term “debt” as set forth in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 16919-(20/103) of the Executive Board (October 28, 2020)).
- Forms of debt include:
  - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
  - suppliers’ credits;
  - leases (debt equals the present value at inception of all lease payments expected to be made during the period of the agreement, excluding payments for operation, repair, or maintenance).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Reporting: Arrears will be monitored continuously by the MoFNP (including for ZESCO) and the BoZ. The MoFNP will immediately report to IMF staff any new accumulation of external arrears; otherwise, data will be compiled jointly and reported by the MoFNP on a quarterly basis, within 30 days from the end of each quarter.

### Ceiling on Contracting or Guaranteeing of New Non-Concessional External Debt (central government, BoZ, ZESCO)
- Concessional debt definition for ceiling: grant element of no less than 35 percent.
  - Grant element = difference between NPV of debt and its nominal value, expressed as a percentage of nominal value.
  - NPV at contracting calculated by discounting future payments of debt service due using a discount rate of 5 percent.
  - Loans provided by a private entity are not concessional unless accompanied by a grant or grant element provided by a foreign official entity such that combined grant element ≥ 35 percent.
- For variable-rate debt (benchmark rate + fixed spread), PV is calculated using a program reference rate plus the fixed spread specified in the contract.
  - Program reference rate for the three-month U.S. Secured Overnight Financing Rate (SOFR) is 2.38 percent and will remain fixed for the duration of the program.
  - Spread of three-month Euro EURIBOR over three-month USD SOFR is -150 basis points.
  - Spread of three-month JPY Tokyo Interbank Offered Rate (TIBOR) over three-month USD SOFR is -250 basis points.
  - Spread of three-month U.K. Sterling Overnight Index Average (SONIA) over three-month USD SOFR is -50 basis points.
  - For interest rates on currencies other than Euro, JPY, and GBP, the spread over three-month USD SOFR is -50 basis points.
  - Where the variable rate is linked to a benchmark other than three-month U.S. SOFR, a spread reflecting the difference between the benchmark rate and the three-month U.S. SOFR (rounded to the nearest 50 basis points) will be added.
  - Once operationally feasible, the TMU can be updated to reflect the benchmark replacement for JPY LIBOR, the Tokyo Overnight Average Rate (TONAR).
- The minimum grant element applies to debt and to commitments contracted or guaranteed for which value has not been received.
- New non-concessional external debt = any new debt other than concessional debt as defined above, contracted or guaranteed by the central government, BoZ, and ZESCO with non-residents.
- Exclusions from the ceiling:
  - loans stemming from restructuring or rescheduling of external debt;
  - central government securities issued in domestic currency, placed in domestic primary or secondary markets, and held by non-residents;
  - debt contracted from IMF, World Bank and AfDB;
  - short-term trade credits for imports, incurred since the beginning of the calendar year;
  - central bank debt issuance for monetary policy or reserves management and foreign exchange swaps for monetary policy or reserves management.
- A debt is considered contracted when all conditions for its entry into effect have been met in accordance with contract terms and national legislation. Contracting of credit lines with no predetermined disbursement schedules or multiple disbursements is also considered contracting of debt.
- Reporting: MoFNP will immediately report details of any new external loans contracted or guarantees issued; otherwise, detailed data on all new external debt (concessional and non-concessional) contracted or guaranteed will be provided monthly, within 30 days from the end of each month, including amounts contracted or guaranteed, currencies, and terms and conditions (interest rates, maturities, grace periods, payments per year, commissions and fees, and collaterals).

### Monetary Policy Consultation Clause
- Consultation bands apply to the average rate of CPI inflation as published by ZamStats.
- Observed quarterly average CPI inflation = average of the 3 monthly year-on-year inflation rates within a quarter.
- If the observed quarterly average CPI inflation falls outside the outer bands for June and December test dates, the authorities will complete a consultation with the IMF Executive Board covering:
  - the stance of monetary policy and whether the Fund-supported program remains on track;
  - reasons for program deviations, taking into account compensating factors;
  - proposed remedial actions if necessary.
- When such consultation is triggered, access to Fund resources would be interrupted until the consultation and the relevant program review are completed.
- If the observed quarterly average CPI inflation falls outside the inner bands for each test date, the authorities will conduct discussions with Fund staff.

### Indicative Targets — Floor on Fiscal Revenues Excluding Grants and Mining Revenues (adjusted by VAT refund backlog)
- Definition: Fiscal revenues of the central government include all tax and non-tax receipts, but exclude external grants and revenues from corporate income tax on the mining sector and the mineral royalty tax.
- Revenues will be adjusted upward (downward) by the reduction (increase) in the backlog of VAT refunds (see paragraph 38).
- Reporting: Data on fiscal revenues (cash basis) will be provided using current exchange rates, with a lag of no more than 60 days after the test date for December test dates; for all other test dates, with a lag of no more than 30 days after the test date.

### Indicative Target — Ceiling on the Present Value (PV) of New External Borrowing
- Ceiling applies to PV of all new external debt contracted or guaranteed by the central government, BoZ and ZESCO, including commitments contracted or guaranteed for which no value has been received. External debt is as defined in paragraph 18.
- PV calculated by discounting future debt-service payments (principal and interest) at a discount rate of 5 percent, taking account of maturity, grace period, payment schedule, upfront commissions, and management fees.
- For loans with grant element zero or less than zero, PV is set equal to the nominal value.
- Guarantee of debt includes any explicit legal obligation of the government to service a debt in case of nonpayment by the debtor.
- Exclusions from the ceiling:
  - loans from restructuring or rescheduling of external debt;
  - central government domestic-currency securities held by non-residents;
  - debt contracted from IMF, World Bank and AfDB;
  - short-term trade credits for imports incurred since beginning of the calendar year;
  - central bank debt issuance and foreign exchange swaps for monetary policy or reserves management.
- Reporting: Authorities will inform IMF staff of planned external borrowing and conditions before loans are contracted or guaranteed and will consult on potential debt management operations.

### Indicative Target — Ceiling on Disbursement of Contracted but Undisbursed External Debt to Central Government and ZESCO
- Ceiling applies to disbursement of contracted but undisbursed external debt to the central government and ZESCO, and contracted but undisbursed government-guaranteed external debt to ZESCO.
- Ceiling set based on data shared by authorities on projected disbursements of contracted but undisbursed external debt between 2022 and 2025, after considering authorities’ estimates for cancellation and rescoping of such loans, and applies to that list.
- Disbursements from IDA and AfDB are excluded from this ceiling.
- Reporting: Detailed data on disbursements of contracted but undisbursed external loans to the central government and ZESCO (government-guaranteed or not) will be provided quarterly, within 30 days from the end of each quarter, including amounts, currencies, creditors, and project names.

### Indicative Target — Floor on Social Spending by the Central Government
- Social spending = central government expenditure on:
  - Social Cash Transfer;
  - Food Security Pack;
  - Empowerment Fund (Women and Youth);
  - Public Welfare Assistance Scheme;
  - Water and Sanitation;
  - budget transfers to the Public Service Pensions Fund;
  - the Health Sector;
  - the Education Sector.
- Computed on a cash basis.
- Reporting: Data provided using current exchange rates, with a lag of no more than 60 days after the test date for December; for other test dates, lag no more than 30 days.

### Indicative Target — Floor on Net Clearance of Arrears on Expenditure and Tax Refunds by Central Government
- Definitions of arrears:
  - Wages, salaries, and pension contributions: any payments outstanding after the agreed date for payment of staff and for payroll deductions to third parties.
  - Goods & services and capital spending (including contractor payments): an arrear arises when the bill has been received and delivery verified, but payment has not been made within the normal period per standard GRZ policy (30 days), or as stated in the supplier’s contract.
  - Utilities: if unpaid for 30 days or more after receipt of invoice.
  - Subscriptions and leases: amounts outstanding after the due date.
  - VAT refunds: overdue if unpaid one month after claims were validated and approved for payment.
- Reporting: Information on central government arrears on expenditure and tax refunds will be compiled through quarterly audits of the accounts of the ZRA and spending ministries and agencies by the Internal Audit Department of the MoFNP. Audits will be completed and data submitted within 90 days from the end of each quarter.

### Structural Benchmarks
- Publish guidelines to implement the new comprehensive agricultural support program and ensure full migration of FISP to an electronic agricultural input system. This structural benchmark is met when the action plan is adopted by Cabinet and published. The action plan should include specific measures and a timeline for implementation.
- Adopt an action plan to boost revenue collections through changes in tax policy and improvements in revenue administration. This structural benchmark is met when the action plan is adopted by Cabinet and shared with Fund staff. The action plan should include specific measures, their revenue impact, and an implementation timeline in line with program objectives for domestic revenue mobilization.
- Publish a quarterly debt statistics bulletin with comprehensive statistics by currency, residency of creditors, and debt instrument for:
  - general government debt (including guaranteed debt);
  - debt of non-financial public enterprises (including non-guaranteed external debt);
  - contracted but undisbursed debt.
  - The bulletin should be published within 90 days of the end of each quarter.
- Publish summary information on the financing agreements for all newly contracted external loans by the general government, including new loan contracts guaranteed or new guarantees on existing loan contracts. Summary information should include at minimum amounts, beneficiary, use of proceeds, interest rate, maturity, grace period, and be published within 90 days of the end of each quarter.

*Source: 1zmbea2022001 - 8.      The data for new central bank credit to the central government will be reconciled with*

### 44.      Enact a revised Loans and Guarantees  Authorization Act. The revised Act  should

### 1zmbea2022001 - 44.      Enact a revised Loans and Guarantees  Authorization Act. The revised Act  should

### Fiscal and debt-management policy recommendations (paragraphs 44–48)
- Enact a revised Loans and Guarantees Authorization Act that should establish, in line with Fund advice:
  - i) a clear definition of public debt;
  - ii) a comprehensive institutional scope and debt instruments coverage;
  - iii) timely publication of the medium-term debt strategy, annual borrowing plan, and annual evaluation reports;
  - iv) a robust framework for managing government guarantees, and mitigating associated risks;
  - v) well-defined institutional arrangements;
  - vi) a sound transparency and accountability framework.
- Ensure that at least 59 ministries, provinces, and spending agencies (MPSAs) register all purchase orders and other financial commitments in the IFMIS. The structural benchmark will be met when all of the following conditions have been met:
  - (i) MoFNP has regulations in place that require all commitments where government has a legal obligation to make expenditures at a future date (including contracts signed or purchase orders issued) to be entered into the IFMIS at the time when those commitments are made;
  - (ii) the commitment module in the IFMIS is functional at 59 MPSAs or more;
  - (iii) those MPSAs are using the system to systematically enter all commitments as they are made.
  - MoFNP will verify (iii) above through quarterly reviews, whereby total commitments, expenditures, and arrears will be compared to those registered in IFMIS.
- In consultation with the IMF staff, submit to Parliament an amended PPP Act. The amended act should strengthen the framework for managing the fiscal risks related to PPPs, including:
  - establishing a clear and comprehensive definition of PPP projects;
  - providing the Minister of Finance and National Planning with the mandate to approve or reject PPP projects based on potential fiscal implications;
  - requiring public disclosure of key risks and fiscal implications of proposed PPP projects and awarded PPP contracts.
- Cabinet to endorse and publish a multi-year tariff framework and a related action plan to ensure cost-reflective and sustainable electricity tariffs, regulations for periodic tariff reviews, and medium-term policies for targeted tariff subsidies. The package should include timelines for implementation and be based on the cost-of-service study and the integrated resource plan.
- Undertake a comprehensive review of the health of the banking sector, including to assess the impact of the COVID-19 pandemic on bank balance sheets. This structural benchmark will be met when the BoZ completes:
  - a comprehensive internal review of the banking sector (including an action plan for the unwinding of the prudential measures taken to address the COVID-19 pandemic, as financial conditions allow);
  - an asset quality review as part of the planned resumption of on-site inspections of financial institutions.

### Monitoring and reporting requirements (paragraph 49 and Table 2)
- To facilitate monitoring of the program, specified information will be reported to IMF staff within the timeframe indicated. These data will be provided electronically by email to AFRZMB@IMF.ORG.
- Key data categories and reporting cadences (selected items):
  - Monetary and financial sector:
    - Reserve money and its components (NDA and NFA) at current and program exchange rates — Frequency: D; Agency: BoZ; Date: T15
    - Excess reserves — Frequency: D; Agency: BoZ; Date: T15
    - Overnight interbank rates — Frequency: D; Agency: BoZ; Date: T15
    - Treasury bill and BoZ bill auction results — Frequency: D; Agency: BoZ; Date: T7
    - Financial soundness indicators by bank — Frequency: M; Agency: BoZ; Date: T30
  - External sector:
    - Exchange rates — Frequency: D; Agency: BoZ; Date: T15
    - Gross international reserves and foreign exchange purchases and sales — Frequency: D; Agency: BoZ; Date: T15
    - BoZ FX cash flow — Frequency: D; Agency: BoZ; Date: T30
    - FX backlog — Frequency: D; Agency: BoZ; Date: T30
  - Fiscal:
    - Net domestic financing — Frequency: M; Agency: MoFNP; Date: T30
    - Fiscal table including revenue, expenditure, and financing — Frequency: M; Agency: MoFNP; Date: T30
    - Social spending — Frequency: M; Agency: MoFNP; Date: T30
    - Stocks of arrears on expenditure, tax refunds, and domestic debt service — Frequency: M; Agency: MoFNP; Date: T30
  - Real sector:
    - Consumer price index and monthly statistical bulletin — Frequency: M; Agency: ZamStats; Date: Mar. 15
    - National accounts — Frequency: Sep. 15; Agency: ZamStats
  - External debt:
    - New external loans contracted or guaranteed by the central government, BoZ, and ZESCO, or any other agency on their behalf, with detailed information on the amounts, currencies, terms, conditions, and purposes — Frequency: M; Agency: MoFNP; Date: T30
    - Disbursements of contracted but undisbursed external loans to the central government and contracted but undisbursed external loans to ZESCO (government-guaranteed or not) — Frequency: M; Agency: MoFNP; Date: T30
  - Program monitoring:
    - Report on program performance — Frequency: Q; Agency: MoFNP; Date: T90
- Abbreviations in reporting table: D = Daily, W = Weekly, M = Monthly, Q = Quarterly, BA = Bi-annual, A = Annual; TX = X days after the date of the last observation.

### Debt coverage and Debt Sustainability Analysis (selected findings and numeric indicators)
- Public debt definition used in the DSA covers:
  - central government direct and guaranteed debt (including expenditure arrears);
  - the nonguaranteed external debt of a fiscally important state-owned enterprise (SOE);
  - the guaranteed and nonguaranteed domestic and external arrears of the same enterprise.
- Using the authorities’ official debt definition (central government direct and guaranteed debt and budget expenditure arrears):
  - total public and publicly guaranteed (PPG) debt stood at $23.6 billion (150 percent of GDP) at end-2020;
  - projected to stand at $32.1 billion (126 percent of GDP) at end-2021.
- Inclusion of ZESCO-related contingent liabilities:
  - Nonguaranteed external debt of ZESCO expected to add $139 million (or 0.5 percent of GDP) to the external debt stock by end-2021.
  - Outstanding payables to independent power producers (IPPs) estimated at $1.56 billion at end-December 2021 (all FX-denominated), split as:
    - $161 million owed to nonresident IPPs (external side);
    - about $1.40 billion owed to resident IPPs (domestic side).
- Other contingent items included in the DSA:
  - Stock of arrears owed to fuel distributors and suppliers: $467 million at end-2020, growing to $597 million by end-December 2021 (included as external debt).
  - Arrears to external contractors for services on foreign-financed capital projects: $563 million as of end-December 2021 (included as external debt).
  - Outstanding government guaranteed external loan to the Public Service Pension Fund: $52.7 million as of end-December 2021.
- SDR allocation usage:
  - Authorities plan to use the SDR allocation (approved by the IMF in August 2021) to finance the budget over 2022-24;
  - Current intention is to use 50 percent of the allocation in 2022 and 25 percent in each of 2023 and 2024;
  - The SDR allocation is equivalent to about $1.3 billion.
- Residency basis and nonresident holdings of domestic-currency debt:
  - Nonresident holdings at end-2020: about 18 billion kwacha or $853 million (14 percent of outstanding domestic-currency government securities), equivalent to 5¼ percent of GDP.
  - End-December 2021: grown to 54 billion kwacha or about $3.2 billion (28 percent of outstanding domestic-currency government securities).
- Debt burden and sustainability assessment:
  - Even before the COVID-19 pandemic, Zambia’s debt burden indicators had deteriorated relative to the July 2019 DSA.
  - Impact of COVID-19 in 2020: economy estimated to have contracted by 2¾ percent; exchange rate depreciating by 50 percent y/y; unmet external financing need of 7¼ percent of GDP financed through accumulation of arrears.
  - Accumulation of arrears continued in 2021, reaching 10½ percent of GDP.
  - Absent deep debt restructuring and significant fiscal adjustment, Zambia’s public debt is unsustainable.
  - Under the baseline, all four external debt burden indicators would breach their indicative thresholds by large margins throughout the medium term.
  - The Zambian government requested a debt treatment under the G20 Common Framework (CF).
- Historical and end-2021 aggregates:
  - Public and publicly guaranteed debt climbing to an estimated $33.8 billion (or 133 percent of GDP) by year-end 2021.
  - External PPG debt reached $20 billion (78.6 percent of GDP) at end-2021 (or $16.8 billion or 66 percent of GDP excluding nonresident holdings of domestic-currency debt).
  - Domestically issued local-currency PPG debt stock (including nonresident holdings) reached $11.6 billion (or 192 billion kwacha) or 45.5 percent of GDP at end-2021.
  - Domestic budget arrears and ZESCO domestic IPP arrears represent an additional 21.4 percent of GDP (or 32 percent of domestic-currency debt).
- Debt-carrying capacity and thresholds:
  - Zambia’s debt-carrying capacity is currently rated as low based on the composite indicator (CI).
  - External debt burden thresholds for Zambia are:
    - PV of debt-to-GDP ratio: 30 percent;
    - PV of debt-to-exports ratio: 140 percent;
    - debt service-to-exports ratio: 10 percent;
    - debt service-to-revenue ratio: 14 percent.
- Contingent liability stress test adjustments:
  - An additional 10 percent of GDP has been added to the standard SOE shock to account for risks from foreign currency-denominated domestic debt of SOEs and potential risks from the acquisition of the Mopani mine by ZCCM-IH.

*Source: 1zmbea2022001 - 44. Enact a revised Loans and Guarantees Authorization Act (excerpt).*

### 5.      The current  creditor composition of external debt  reflects a noteworthy  shift away

### 1zmbea2022001 - 5.      The current  creditor composition of external debt  reflects a noteworthy  shift away

### Creditor composition of FX-denominated external PPG debt
- Multilateral and other IFIs represent only 16 percent of Zambia’s FX-denominated external debt stock (end-2021).
- Bilateral creditors represent 47 percent of FX-denominated external debt, of which non-Paris Club creditors comprise 39 percent.
- Eurobonds represent 20 percent of FX-denominated external debt.
- Other commercial creditors account for 9 percent of FX-denominated external debt.
- Government guaranteed debt (mostly to Chinese commercial creditors) accounted for 9 percent of total FX-denominated external PPG at end-2021.
- Notes on classification in Text Figure 1:
  - Other accounts payables to external suppliers (budget and IPP external arrears) and non-guaranteed SOE external debt are not included due to lack of historical data.
  - The figures for 2021 include as official bilaterals also commercial central government and guaranteed SOE external debt backed by guarantee from official export-credit agencies, as most of these loans were in arrears.
  - Other commercial creditors also include guaranteed SOE debt not backed by a guarantee from official export-credit agencies.

### Key debt stock and contracted debt-service figures (as of end-2021, Table 1)
- Total debt stock: 33,786 (US$) — 100.0 percent of total debt — 132.7 percent of GDP.
- External foreign-currency debt: 16,763 (US$) — 49.6 percent of total debt — 65.8 percent of GDP.
- Multilateral creditors total: 2,655 (US$) — 7.9 percent of total debt — 10.4 percent of GDP.
  - World Bank: 1,405 (US$) — 4.2 percent of total debt — 5.5 percent of GDP.
  - ADB/AfDB/IADB: 835 (US$) — 2.5 percent of total debt — 3.3 percent of GDP.
  - Other Multilaterals: 416 (US$) — 1.2 percent of total debt — 1.6 percent of GDP.
    - o/w EIB: 181 (US$) — 0.5 percent of total debt — 0.7 percent of GDP.
    - o/w IFAD: 144 (US$) — 0.4 percent of total debt — 0.6 percent of GDP.
- Bilateral creditors total: 7,952 (US$) — 23.5 percent of total debt — 31.2 percent of GDP.
  - Paris Club: 1,332 (US$) — 3.9 percent of total debt — 5.2 percent of GDP.
    - o/w: Israel: 458 (US$) — 1.4 percent of total debt — 1.8 percent of GDP.
    - o/w: UK: 172 (US$) — 0.5 percent of total debt — 0.7 percent of GDP.
  - Non-Paris Club: 6,620 (US$) — 19.6 percent of total debt — 26.0 percent of GDP.
    - o/w: China: 5,935 (US$) — 17.6 percent of total debt — 23.3 percent of GDP.
    - o/w: India: 326 (US$) — 1.0 percent of total debt — 1.3 percent of GDP.
- Eurobonds: 3,280 (US$) — 9.7 percent of total debt — 12.9 percent of GDP.
- Commercial creditors: 1,555 (US$) — 4.6 percent of total debt — 6.1 percent of GDP.
- Fuel arrears: 597 (US$) — 1.8 percent of total debt — 2.3 percent of GDP.
- Arrears to external contractors: 563 (US$) — 1.7 percent of total debt — 2.2 percent of GDP.
- ZESCO external IPP arrears: 161 (US$) — 0.5 percent of total debt — 0.6 percent of GDP.
- Domestic-currency debt: 17,024 (US$) — 50.4 percent of total debt — 66.9 percent of GDP.
  - Held by residents, total: 8,328 (US$) — 24.7 percent of total debt — 32.7 percent of GDP.
  - Held by non-residents, total: 3,246 (US$) — 9.6 percent of total debt — 12.8 percent of GDP.
  - T-Bills: 2,094 (US$) — 6.2 percent of total debt — 8.2 percent of GDP.
  - Bonds: 9,481 (US$) — 28.1 percent of total debt — 37.2 percent of GDP.
- Domestic budget arrears and ZESCO domestic IPP arrears: 5,449 (US$) — 16.1 percent of total debt — 21.4 percent of GDP.
- Collateralized debt (memo): 2,428 (US$) — 7.2 percent of total debt — 9.5 percent of GDP.
- SOE guaranteed external debt: 1,580 (US$) — 6.2 percent of total debt.
- SOE non-guaranteed external debt (ZESCO): 139 (US$) — 0.5 percent of total debt.
- Total external PPG debt: 20,009 (US$) — 78.6 percent of total debt.
- Nominal GDP: 21,203 (US$).

- Footnotes and methodological points:
  - Table includes direct debt to central government, SOE guaranteed debt and non-guaranteed debt of ZESCO.
  - Based on end-December 2021 data from the authorities and IMF staff estimates; includes arrears on principal and interest; does not include penalty fees or interest on arrears.
  - Collateralized debt amount ($2.4 billion) reflects disbursed external foreign-currency debt with security or escrow arrangements; all this debt is in arrears and reported escrow account balances are zero where applicable.

### Market sentiment, domestic liquidity, and financing conditions
- Spreads on Zambia’s Eurobonds dropped sharply since the August 2021 elections but started to increase since April 2022, standing at 3,541 basis points as of July 5, 2022.
- Domestic financing pressures through 2019 to H1 2021 led to growing budgetary financing challenges and expenditure arrears reaching 12.8 percent of GDP by the start of 2021.
- Banking and monetary support in 2020:
  - Treasury bills stock rose to 33 billion Kwacha at end-December 2020 from 21 billion Kwacha at end-2019.
  - Private placements provided support amounting to 23.6 billion Kwacha.
  - Bank of Zambia injected liquidity through an 18 billion Kwacha (5 percent of GDP) targeted medium-term refinancing facility and a secondary market bond repurchase program.
  - In 2021, the stock of Treasury bills stabilized at 34 billion Kwacha at end-December 2021.
- Foreign investor participation in local-currency debt:
  - Local currency debt held by foreign investors increased from 18 billion Kwacha at end-2020 (14 percent of stock outstanding) to 45 billion Kwacha (about 25 percent of stock outstanding) at end-June 2021, and further to 51 billion Kwacha (about 34 percent of stock outstanding) at end-December 2021.
  - Average maturity of local currency debt securities held by non-resident investors was about 6.6 years.
- Market improvements since mid-2021 driven by higher copper prices, the SDR allocation, and post-election optimism, producing:
  - A marked appreciation of the kwacha against the US dollar (close to 30 percent since end-March).
  - A sharp drop in yields (400-800 basis points across the yield curve).
- Despite improvements, sustained large gross financing needs and the need for a debt restructuring mean financing risks remain elevated consistent with the DSF market-financing module.

### External debt service pressure and arrears
- In 2020-2021, contracted FX-denominated external debt service (on PPG debt, including ZESCO’s nonguaranteed debt) amounted to about $3.6 billion (up from about $1 billion in 2018), larger than FX reserves ($2.7 billion as of November 26, 2021).
- On current contracted terms, a similar amount of FX-denominated external debt service would fall due over 2022-23.
- Resource constraints led to accumulation of large external debt arrears despite debt service relief under the G20-DSSI.

### Macroeconomic assumptions and outlook under the proposed Fund-supported program
- Program baseline assumptions:
  - Economy projected to grow by about 3 percent in 2022.
  - Medium-term growth gradually picks up towards 4½ percent as the economy recovers and macroeconomic management improves.
  - Current account surplus tapers to about 2.7 percent of GDP as private imports normalize.
  - Inflation gradually converges to 7 percent.
- Growth expectations:
  - Growth expected to average around 4.5 percent over 2022-31.
  - This implies a sustained 1.1 ppt increase relative to the average over the most recent ten years (3.4 percent).
  - Historical comparisons: ten years after HIPC Decision Point (December 2000) average growth was 7.5 percent. Alternative comparisons: growth averaged 4.3 percent over 2011-2019 and 4.9 percent over 2010-2019.
- The macroeconomic framework assumes credible steps to restore medium-term debt sustainability, including scaling back the public investment program and a significant, but feasible, fiscal adjustment starting from 2022.

### Pandemic impact and 2020–2021 macro-fiscal developments
- 2020 economic outcomes:
  - Economy contracted by 2¾ percent in 2020.
  - Copper prices dipped to $5,000 per metric ton (mt) in April 2020 and rebounded to $8,000 per mt by year-end 2020.
  - Current account registered a surplus of 12 percent of GDP in 2020.
  - Overall fiscal deficit in 2020 was 17.4 percent of GDP (13.8 percent of GDP on a cash basis).
  - Unmet external financing need of the order of 7¼ percent of GDP resulted in sizeable external arrears.
  - Exchange rate depreciated by 50 percent year-on-year in 2020; year-end inflation rose to 19.2 percent.
- 2021 outcomes:
  - Economy grew by 3.6 percent in 2021.
  - Current account surplus remained elevated at 7.6 percent of GDP.
  - Copper prices peaked at $10,000 per mt in May 2021, with a projected average of $9,225 over 2022-26.
  - Overall fiscal deficit in 2021 reached 14.7 percent of GDP (8.5 percent of GDP on a cash basis).
  - Stock of budget arrears reached 15.9 percent of GDP at end-2021.
  - SDR allocation and post-election optimism attracted significant portfolio inflows, reversing the kwacha’s fall and easing inflation.

### Fiscal adjustment strategy and policy measures
- Program anchor: primary balance on a commitment basis, monitored through a quantitative performance criterion on the primary balance on a cash basis together with an indicative target on net arrears accumulation.
- Fiscal adjustment goals:
  - Primary balance targeted to improve from a primary deficit of 6.0 percent of GDP in 2021 to a surplus of 3.2 percent of GDP by 2025 (a 9¼ percent of GDP improvement).
- Front-loaded expenditure rationalization:
  - Focus on reducing poorly targeted and wasteful spending, strengthening commitment controls, and enhancing fiscal governance.
  - Sharp reduction in spending on fuel subsidies in 2022.
  - In December 2021 the authorities removed explicit subsidies on petroleum products, reinstating the automatic pricing mechanism, with pump prices of petrol and diesel increasing by an initial 20 and 30 percent, respectively; prices adjusted monthly thereafter to prevent re-emergence of explicit fuel subsidies.
  - Reforms to the Farmer Input Support Program (FISP) in the 2022 budget intended to reduce spending from nearly 3 percent of GDP in 2020-21 to around 1 percent of GDP by 2025 by changing the mode of delivery while maintaining beneficiary numbers and choice.

### Public investment scaling back and project disbursements
- Authorities plan to scale back the public investment program to focus on highest priority projects, reducing poorly targeted and inefficient spending.
- Expected new disbursements on contracted but undisbursed project loans of only $1.4 billion during 2022-25 (including $834 million from the World Bank and AfDB) relative to an underlying stock of contracted but undisbursed external debt estimated at $3.9 billion at end-December 2021.
- With the exception of multilateral institutions, almost all creditors have already halted new disbursements on this debt given the impending debt restructuring.

*Source: Zambian authorities and IMF staff estimates, as presented in the provided content.*

### 15.      The fiscal consolidation will also be supported by domestic revenue mobilization efforts.

### 1zmbea2022001 - 15.      The fiscal consolidation will also be supported by domestic revenue mobilization efforts.

### Fiscal consolidation and revenue mobilization
- Revenues (adjusted for arrears on VAT refunds) are projected to increase by about 3¼ percent of GDP by 2025, compared to their 2019 (pre-COVID) level of 19.6 percent of GDP.
- The increase includes the expected elimination of tax expenditures (implicit subsidies) on fuel worth about 1.6 percent of GDP by end-September 2022, together with other measures to broaden the tax base and strengthen compliance.

### Social spending and growth impact
- The negative impact on growth from the fiscal adjustment is expected to be minimal due to space to increase investment in human capital and to expand the social safety net.
- Spending on social protection is projected to gradually increase to 1.6 percent of GDP by 2025, around the average for AFR countries, from 0.7 percent in 2020.
- Expected effects:
  - Increased social spending will support domestic consumption and enhance growth prospects.
  - Halting accumulation of new budget arrears (including on VAT refunds) and plans to begin clearing existing arrears should improve private sector cash flow.
  - Reduced domestic financing requirements should improve private sector access to finance and support private sector economic activity.

### DSA baseline — Drivers of GDP growth (Box 1)
- Short term (2021-22): 3.3 percent p.a.
  - Rebound from initial COVID-19 shock and post-election market confidence pushed GDP growth through Q3 2021 to 4.0 percent year-on-year.
  - Improved global copper prices and commissioning of a new 750MW power plant in Kafue increase industrial output and support short-term growth.
- Medium term (through 2025): 3.8 percent p.a.
  - Business sector boost expected as cashflows improve with clearance of arrears (of 8.4 percent of GDP).
  - Revisions to the Zambia Development Agency Act and other reforms expected to encourage private investment.
  - Policy changes (e.g., making mineral royalty tax deductible) and high copper prices projected to attract new FDI.
  - Financial stabilization of ZESCO and productivity gains from input subsidy reforms expected to spur industrial output and revive agriculture.
- Long term (through 2031): 4.4 percent p.a.
  - Structural, fiscal, and institutional reforms projected to build foundation for sustained private sector–driven growth.
  - Removal of market distortions to bring financial sustainability to the energy sector and removal of agricultural export bans to support agriculture.
  - Reorienting expenditure from inefficient subsidies toward education, health, and social protection to build human capital.
  - Decentralization of public services anticipated to increase spending efficiency and help increase budget credibility and fight corruption.

### Financing assumptions and market access
- External financing during 2022-25 includes:
  - Disbursements of $1.4 billion on contracted but undisbursed priority project loans.
  - Pipeline loans amounting to about $175 million (from World Bank, AfDB, IFAD, and EIB).
  - New financing assumed starting in 2022 from the IMF and World Bank, conditional on credible and specific financing assurances from official creditors and a credible process toward debt restructuring of private claims, and ultimately a successful debt restructuring.
- The baseline DSA assumes residual external financing gaps are effectively filled through the accumulation of further arrears (simulated issuance of a stylized “arrears bond”).
- Access to international capital markets is assumed to be lost through the medium term.
- Access to the domestic market is assumed to remain intact under the baseline, with net financing from the domestic market critical to fund government operations during consolidation; this is predicated on the assumption that this debt would be excluded from restructuring.
- Recent improvement in domestic financing conditions is expected to be preserved given assumed reform progress.
- Nonresident participation in domestic issuance is anticipated to decline back to historical trends, absorbing about 15 percent of new issuance going forward.

### Risks to the outlook
- Downside risks are substantial:
  - The programmed fiscal adjustment is large relative to outcomes in other LIC programs, and there is likelihood of diminished growth contribution from public investment.
  - Mitigants: specific plans to cut wasteful expenditures (especially on subsidies) and financing constraints on investment; low efficiency of recent public investment; positive impact of higher, more efficient social spending; reduction of arrears’ economic drag.
- Pandemic and commodity risks:
  - Uncertainty around duration of the COVID-19 pandemic and outlook for copper prices add to risks.
  - Low vaccination rates in Zambia increase vulnerability to new variants and renewed disruptions.
  - If copper prices were 10 percent lower than projected over the program period (or about $930 lower per metric ton), fiscal revenues could be up to $1 billion lower and export receipts $3 billion lower in aggregate over program period, or about 1 per cent and 3 percent of GDP a year on average.
  - Rainfall variability remains a structural risk affecting agriculture and electricity and aggravating external vulnerabilities.
- Risks around the debt restructuring process:
  - Diversity of creditor base raises coordination challenges, possibly complicating and delaying support for needed restructuring.
  - Availability and quality of assumed domestic market financing could come under pressure if restructuring negotiations are protracted and investor sentiment deteriorates.
  - Domestic financial institutions’ exposure to domestically-issued debt could aggravate financial stability risks if treatment of this debt comes under pressure, weakening market and business confidence and reducing private sector access to finance.
- Upside risks:
  - Faster global and domestic recovery aided by widespread vaccine distribution, a successful debt operation, greater confidence effects from stronger reform momentum, and higher copper production and prices.

### Debt-carrying capacity and DSA assessments
- Zambia’s debt-carrying capacity under the Composite Indicator (CI) rating is assessed as weak.
  - Latest CI score: 2.59 (below cut-off for medium debt-carrying capacity of 2.69).
- External DSA (baseline):
  - All four external debt burden indicators breach prudent thresholds, mostly by large margins through the medium term and beyond.
  - Debt service-to-revenue ratio soars to a peak of 61 percent in 2022 and remains well above the 14 percent threshold until 2034 (averaging about 37½ percent in 2022-31).
  - Debt service-to-exports ratio peaks at around 27¾ percent in 2022 and only falls to the threshold of 10 percent in 2030 and breaches again in 2031 (averaging about 18 percent over 2022-31).
  - PV of PPG external debt-to-GDP averages about 62 percent from 2022-31, falling below the prudent threshold of 30 percent only in 2039.
  - PV of PPG external debt-to-exports indicator breaches the 140 percent threshold through 2022-25 (averaging about 134 percent over 2022-31).
- Stress tests:
  - Under standardized exports shock, PV of PPG external debt-to-exports ratio peaks at 302 percent in 2024 and remains well above threshold.
  - For debt service-to-revenue, the one-time depreciation shock is most extreme.
- Public DSA (baseline):
  - PV of total PPG debt-to-GDP breaches the prudent threshold of 35 percent throughout the medium and long term.
  - After peaking at 125¼ percent in 2021, the ratio averages about 93 percent from 2022-31, falling below the threshold in 2039.
  - Standardized export shock peaks at 129 percent in 2024 for this indicator.
  - Combined contingent liabilities shock (SOE debt, PPPs, financial sector) peaks at 130 percent in 2023 and remains above threshold throughout the long-term horizon.

### Conclusion and implications for restructuring
- Zambia is in debt distress.
  - Pre-COVID fiscal and external positions had weakened relative to July 2019 DSA; COVID-19 exacerbated fiscal and external imbalances.
  - Authorities hired financial and legal advisors in mid-2020 and requested a temporary debt service standstill; accumulation of arrears culminated in default on Eurobonds on November 14, 2020.
- Restoring debt sustainability will require:
  - A deep restructuring of public debt under the G20 Common Framework (CF), together with significant and sustained fiscal adjustment.
  - The DSA is predicated on authorities’ commitment to undertake credible steps to restore medium-term debt sustainability, including scaling back the public investment program and incorporating projected new financing of around $2.6 billion from the IMF and World Bank together over 2022-25.
  - Large financing gaps would remain and need to be filled through a debt restructuring operation.
- A successful debt restructuring should provide sufficient relief to support a return to an assessment of a moderate risk of debt distress over the medium term by:
  - Addressing large threshold breaches for the external debt service-to-revenue ratio.
  - Ensuring PV of debt-to-exports ratio is brought substantially below its threshold after the program as a buffer against shocks and to mitigate elevated PV of external debt-to-GDP ratio.

*Source: 1zmbea2022001 - 15.      The fiscal consolidation will also be supported by domestic revenue mobilization efforts.*

### 29.      To support debt sustainability

### 29. To support debt sustainability

### Institutional and operational reforms
- The authorities are revising the Loans and Guarantees Act to provide for greater oversight on the contracting of debt and to modernize the debt management framework.
- These legal reforms will be supported by ongoing efforts to strengthen public financial management more broadly.
- At the operational level, debt sustainability will be supported by debt conditionality under the IMF program:
  - A zero ceiling on new nonconcessional external borrowing during the program period.
  - A ceiling on the PV of new concessional external borrowing.
  - This conditionality excludes nonresident holdings of local currency debt as well as loans from the IMF, World Bank and AfDB.

### Data, measurement, and analytical focus
- Given the ongoing work on rebasing GDP, and associated GDP-measurement challenges, the PV of debt-to-exports ratio is treated as the main indicator for assessing the evolution of the debt stock.
- Assumed financing from the World Bank in 2022 includes, among others:
  - a Development Policy Operation of $275 million
  - emergency health sector financing of $150 million.

### Projections, scenarios, and stress testing (high-level)
- Official-sector projected gross external financing flows are presented for 2022–2030 reflecting:
  - projected disbursements on current committed project grants,
  - requested IMF financing,
  - new World Bank financing for 2022–25;
  - and broad official sector financing assumptions embedded in the DSA for 2026 onwards.
- The DSA and associated stress tests:
  - use a variety of tailored and standardized shocks (commodity price, exports, depreciation, combined contingent liabilities, market financing, etc.);
  - treat the most extreme stress test as the one that yields the highest ratio in or before 2032;
  - assume all additional financing needs generated by shocks under the stress tests are covered by PPG external MLT debt in the external DSA, with default terms of marginal debt based on baseline 10-year projections.
- Notes on thresholds and diagnostics:
  - The PV of debt-to-exports ratio is emphasized as the primary indicator given measurement issues with GDP rebasing.
  - Stress-test conditionality explicitly excludes certain instruments (see operational reforms section above).

*Statement by the Staff Representative on Zambia, Executive Board Meeting, August 31, 2022.*

### 1. Prior actions and other policy reforms. On August 29, the authorities

### 1zmbea2022001 - 1. Prior actions and other policy reforms. On August 29, the authorities

### Prior actions and institutional reforms
- On August 29, the authorities published their response to the electricity cost-of-service study, alongside the study itself, fulfilling the remaining prior action for the program.
- The new Bank of Zambia Act received Presidential assent and was published on August 24.
- The new Act strengthens the Bank of Zambia’s mandate, autonomy, and governance, in line with Fund advice.
- Authorities published an updated medium-term expenditure framework aligned with ECF program objectives, IMF- and World Bank-vetted public procurement regulations, and a strategy for clearing expenditure and VAT refund arrears.
- A Commitment Control Module linking procurement commitments to the budget was added in IFMIS and became operational in July.

### Growth outlook and sectoral developments
- 2021 outturn exceeded staff’s estimate by a full percentage point: 4.6 percent versus 3.6 percent.
- Agricultural sector outturn in 2021: 6.9 percent versus staff estimate of -0.7 percent.
- Mining sector: announced mining expansion plans appear to be moving faster than anticipated; better prospects for cobalt and nickel production will help mitigate the impact of the recent drop in copper prices.
- Recent historical recovery and forward projections:
  - Real GDP: 3.6 percent growth in 2021 after a 2.8 percent contraction in 2020.
  - Medium-term growth is expected to average about 4.2 percent, up from a projected 3.0 percent in 2022, supported by effective implementation of the reform agenda.
- Vaccination progress: 41 percent of adults over 18 vaccinated by June 2022.

### Exchange rate, inflation, and price developments
- Exchange rate movements:
  - The exchange rate appreciated by a further seven percent since the end of June and is now 40 percent stronger than end-June 2021.
- Fuel prices:
  - On July 31, the Energy Regulation Board reduced fuel prices by 11-13 percent.
- Inflation developments:
  - Annual inflation rate: 9.7 percent in June; 9.9 percent in July; 9.8 percent in August.
  - Inflation decelerated from an average 22.1 percent in 2021 to 9.7 percent in June 2022.
  - Monetary Policy Statement projects inflation averaging 11.4 percent in 2022 and 8.4 percent in 2023.
  - Inflation is expected to reach the Bank of Zambia target range of 6 - 8 percent by the first quarter of 2024.
  - Inflation is projected to return to the target range by mid-2023 with continued fiscal consolidation and structural reforms.

### Fiscal developments and objectives
- Budget outturns through July are broadly in line with proposed program targets:
  - Fiscal revenues exceeding programmed levels.
  - Primary expenditure falling just short of programmed levels.
- Main fiscal objective: improve the primary balance.
- Budget Plan (2023-25) and 2023 Annual Budget aim to achieve a primary balance surplus of 3.2 percent of GDP by 2024 (commitment basis), starting from a 6.0 percent of GDP deficit in 2021.
- Measures to support this goal:
  - More effective revenue mobilization.
  - Rationalizing expenditures.
  - Restructuring debt.
- Revenue measures and reforms:
  - Eliminated explicit fuel subsidies at the end of 2021 by restoring cost-plus pricing for petroleum products.
  - Restoration of excise taxes on petrol and diesel later this year will remove the implicit fuel subsidy.
  - Firming copper prices and improved production expected to generate additional fiscal revenues in the short term.
  - Planned measures include upward adjustment of excise duties on alcohol and cigarettes; streamlining tax incentives and subsidies; reinstating VAT and excise duty on petroleum products; enhancing collaboration between ZRA and local authorities; fast-tracking electronic fiscal devices; introducing digital stamps on excisable products; matching customs and in-land revenue data.
- Social protection and spending priorities:
  - Scale up social protection programs in 2022 and over the medium term, including increases in cash transfers and budget provision for health and education.
  - Streamline Farmer Input Support Program (FISP) with a cost‑effective e-Voucher system and a new comprehensive agricultural support programme.
  - Reduce capital spending during the program period while leveraging PPP financing models to fill infrastructure gaps.
  - Cautious, structured selection of projects to avoid creating fiscal risks.
- Domestic arrears and procurement:
  - Cleared all outstanding pension arrears.
  - Published medium-term expenditure and VAT refund arrears clearance strategy (main elements: increased budget provision and debt and cheque swaps, alongside refinancing and restructuring of debt).
  - Enforce provisions of Public Financial Management Act and Public Procurement Act, including penalty regimes for noncompliance.

### Debt management and restructuring
- Deep and comprehensive debt treatment under the G20 Common Framework is seen as essential to complement fiscal restraint.
- Authorities seek debt treatment from private creditors and other official bilateral creditors on terms at least as favorable as those considered by the official creditor committee; urge the Fund to support engagement with private creditors (including bondholders).
- Authorities appreciate July decision by the official creditor committee and financing assurances provided by members.
- Debt management measures:
  - Halt non-concessional borrowing.
  - Cancel and rescope some externally financed projects.
  - Gradually eliminate arrears to contractors.
  - Cancel contracted but undisbursed commercial loans.
  - Strengthen local currency financing through increased issuance of longer-term instruments and broadening investor base to reduce currency and refinancing risk.
  - Advance a medium-term debt management strategy and annual borrowing plan.
  - New public debt management bill (Loans and Guarantees, Grants Authorization Bill) to enable parliamentary oversight of loan contracts and align public debt definition and reporting with international best practice.
  - Work on public debt data validation and reconciliation with creditors and commitment to regularly publish information.

### Balance of payments and reserves
- Exports growth boosting current account surpluses is being offset by large external financing needs, including for debt service, resulting in a balance of payments deficit.
- Foreign exchange reserves:
  - Increased from 1.9 months of prospective import cover in 2020 to 3.2 months in 2021.
  - Reserves have continued to grow in 2022 and are projected to reach 5.5 months of (prospective) import cover by 2025.
- Bank of Zambia measures contributing to reserve improvement included building trust, the general SDR allocation in August 2021, and some World Bank disbursements.

### Monetary, exchange rate, and financial sector policy
- Monetary policy stance:
  - Policy rate signaling the stance; in August 2022, the monetary policy rate was held at 9 percent.
  - Decision to hold at 9 percent despite recent declines in inflation reflects balance: inflation still above target and notable risks to inflation outlook, while domestic credit growth has slowed.
- Exchange rate policy: flexible exchange rate with interventions limited to smoothing excessive volatility.
- Secondary market development:
  - Continue development of a secondary market for government securities.
  - Effective implementation of the Bloomberg E-Bond platform for secondary trading expected to enhance transparency and improve liquidity.
- Financial sector condition and reforms:
  - Financial system assessed as sound with ample liquidity and capital buffers and profitable operations.
  - Central bank introduced reform measures to strengthen surveillance and supervision; plans to undertake a review of the banking sector’s health post-COVID.
  - New Problem Bank Framework developed in May 2022.
  - Strengthening micro-prudential surveillance and regulation and development of a micro-prudential stress testing framework.
  - Establishing a deposit protection scheme this year as part of the safety net arrangement.
- Bank of Zambia Act amendment to enhance operational independence of the central bank.

### Structural reforms and sectoral priorities
- Structural reform agenda aims to enhance transparency, accountability, governance, access to finance, and the business climate; support job-intensive sectors such as agriculture and manufacturing.
- PPP framework:
  - Amendment of the Public Private Partnership (PPP) Act to better manage fiscal risks from PPP financing weaknesses.
- Governance and anti-corruption:
  - Zero tolerance for corruption policy; disciplinary action taken in 2021 against Ministry of Health officials involved in misappropriation of resources.
  - Comprehensive governance diagnostic assessment launched with IMF technical assistance to identify governance vulnerabilities and design corrective measures.
  - Authorities addressing deficiencies identified in the AML/CFT Mutual Evaluation Report.
- Financial inclusion and digitalization:
  - Legislation revised to encourage digital financial services.
  - Digitalizing government services and implementing the national Financial Switch to promote interoperability.
- Energy sector reforms:
  - Five-year turnaround strategy for ZESCO (2021-25) focusing on debt restructuring, optimization of capital expenditure, tariff adjustment and revenue efficiency, and asset optimization.
  - Plans to shift to renewable energy sources such as solar and geo-thermal.
- Agriculture and manufacturing:
  - Investments in irrigation infrastructure to reduce dependency on seasonal rainfall.
  - Continue investing in expanding access to affordable finance, capacity development, and tax incentives for agriculture.
  - Improve Multi-Facility Economic Zones and industrial parks by rationalizing licenses and permits.
  - Review mining tax policy framework to encourage investment in the sector.
- Climate change and resilience:
  - Ministry of Green Economy and Environment established to mainstream climate change adaptation and program interventions to build resilience and promote green investment.
  - Plan to establish a National Climate Change Fund to lead resource mobilization for greener economic growth.

### Risks and program rationale
- Downside risks to the outlook include:
  - Pandemic and droughts affecting agricultural output, food prices and electricity supply.
  - Prolonged Russia-Ukraine war with persistently elevated food and energy prices.
  - Tightening global financial conditions and slowing global growth.
  - Spillovers from pandemic-linked supply chain disruptions.
  - Delays in debt restructuring.
- Authorities’ request:
  - Seek Executive Directors’ support for a 38-month Extended Credit Facility (ECF) arrangement to anchor reforms under NDP8, place debt on a sustainable footing, catalyze additional donor support, and complement debt restructuring under the Common Framework.
  - The ECF is expected to address protracted balance of payments challenges and provide technical assistance.

### Conclusion
- Authorities are committed to implementing NDP8 reforms and corresponding ECF program measures to restore macroeconomic stability, entrench debt sustainability, and support high, inclusive economic growth.
- Significant reform measures and prior actions have been undertaken and completed with staff.
- Authorities value Fund support and seek Executive Directors’ approval of the ECF program to help catalyze donor and creditor support.

*Source: 1zmbea2022001 - 1. Prior actions and other policy reforms. On August 29, the authorities*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1zmbea2022001.pdf_