## 1zmbea2023002

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### Context and reform progress
- Zambia has made "commendable progress" over the last two years implementing a reform agenda to stabilize the economy, lay the foundation for inclusive growth, and create jobs amid significant external shocks.
- Authorities reached an agreement with official creditors on June 22 on a debt restructuring "consistent with program parameters."
- Key vulnerabilities and development challenges:
  - Poverty and inequality are "amongst the highest in the world."
  - Climate vulnerabilities are "high."
- Policy imperative: sustain fiscal credibility while creating space for social, development, and climate spending.

### Program status and performance
- IMF Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) equivalent to 100 percent of quota (SDR 978.20 million) with first disbursement of SDR 139.88 million.
- On completion of the first review, access to an additional SDR 139.88 million (about $[188] million).
- Program supports:
  - Restoring sustainability through fiscal adjustment and debt restructuring.
  - Creating fiscal space for social spending.
  - Strengthening governance and reducing corruption vulnerabilities, including improving public financial management.
- Performance summary:
  - Program performance described as "strong."
  - All quantitative performance criteria (QPCs) for the first review were met.
  - All nine structural benchmarks (SBs) due by end-March 2023 have been met.
  - Two SBs due by end-June 2023 were reset—one to end-July and one to end-August.
  - Indicative targets (ITs) narrowly missed: floor on fiscal revenues excluding grants and mining revenues adjusted by VAT backlog; VAT refund arrears in 2022 increased by 1.8 billion kwacha.
  - Authorities remain committed to actions to ensure end-year targets are met.

### Recent economic developments and key statistics
- Growth and activity:
  - GDP growth registered 4.7 percent in 2022, "the highest level since 2014."
  - Contrast: 2019 Article IV projected medium-term growth of 1.5 percent; current projections are 5.0 percent.
- Inflation and exchange rate:
  - Inflation declined to 9.4 percent (y-o-y) in January 2023 (a 41-month low) from 24 percent in mid-2021; rose to 9.9 percent (May 2023).
  - Food inflation stable around 12 percent (y-o-y) since 2022 H2.
  - BoZ policy actions: statutory reserve ratio increased by 250 basis points to 11.5 percent on February 1, 2023; monetary policy rate increased by 25 basis points following each of the February and May MPC meetings and is now 9.5 percent.
  - Exchange: experienced a 35 percent depreciation over September 2022 – March 2023; appreciated in April 2023.
- External sector and reserves:
  - Decline in copper prices and production contributed to contraction in copper exports and narrowing of the current account surplus in 2022.
  - Gross reserves increased reflecting accumulation of further external debt arrears ($2.2 billion) and $950 million of new disbursements from the IMF and World Bank.
- Public finances and debt:
  - Primary balance (commitment basis) improved by 6.5 percentage points in 2022 to a surplus of 0.8 percent of GDP.
  - Social protection spending doubled to 1.5 percent of GDP compared to 2020 level.
  - Outstanding PPG external debt: $20.9 billion at end-2022 (increase of $930 million from a year earlier).
  - Arrears at end-2022 on claims within restructuring perimeter: $4.2 billion (breakdown: $1.4 billion official bilateral; $1.3 billion Eurobond holders; $1.5 billion other private external creditors); plus $1.7 billion arrears to external suppliers; and $2.3 million interest and principal arrears to other IFIs.
  - Outstanding domestically-issued government securities: 210 billion kwacha at end-2022 (44 percent of GDP), up from 193 billion at end-2021.
- Domestic market funding and yields:
  - Average auction-cover dropped to 64 percent in 2022 and to 45 percent January-April 2023, from 95 percent in 2021.
  - Demand for Treasury bills: average auction-cover 91 percent in 2022 and 79 percent in January-April 2023, down from 100 percent in 2021.
  - Yields increased by around 200 basis points on average across the curve in 2022; short-term yields rose by about another 40 basis points on average in January-April 2023.
- Banking sector and credit:
  - Private sector credit grew by 35 percent in 2022.
  - Loan-to-deposit ratio dropped from a peak of 56 to 39 percent in 2022.
  - Banking sector (2022): average return-on-assets of 5.0 percent; average capitalization around 23 percent; net NPLs less than 0.4 percent of loans; average NPL coverage ratio around 93 percent.

### Macro outlook and risks
- Growth outlook:
  - Post-COVID rebound expected to moderate in 2023, accelerate in 2024, and settle at around 5.0 percent over the medium term.
  - GDP at constant prices projections (selected): 2022: 4.7; 2023: 3.6; 2024: 4.3; 2025: 4.5; 2026: 4.7; 2027: 5.0; 2028: 5.1.
- Inflation:
  - Expected to peak around end-2023 then moderate and return to mid-point of BoZ’s 6-8 percent target range by 2025.
  - Consumer prices (end of period) projections: 2022: 9.9; 2023: 11.4; 2024: 7.9; 2025: 7.0; 2026: 7.0; 2027: 7.0; 2028: 7.0.
- Risks: "elevated and tilted to the downside."
  - Dominant sources: weather-related shocks (e.g., floods of February 2023) and weaker copper revenues, including production shortfalls.
  - Global channels: abrupt slowdown in China; escalation of Russia’s war in Ukraine increasing fertilizer and food prices.
  - Financial risks: delays in completing debt restructuring with private creditors could trigger exit of non-resident investors, exchange rate pressures, and higher government financing costs.
- Upside scenarios:
  - Higher copper prices.
  - Speedier rehabilitation and development of Mopani (MCM) or Konkola (KCM) copper mines.
  - Faster completion of debt restructuring accelerating private sector investment and growth.

### Fiscal policy, revenue mobilization, and public investment
- Fiscal consolidation and targets:
  - Primary balance (commitment basis) expected to improve from a deficit of 5.8 percent of GDP in 2021 to a surplus of 3.3 percent in 2025.
  - Authorities’ 2023 Budget and 2023-2025 MTBF aligned with program targets.
- Revenue mobilization plan (adopted September 2022) aims to yield up to 3.2 percent of GDP over 2022-2025 (including reinstating VAT and excise on fuel from October 2022).
- Mineral royalty tax (MRT) reform in 2023:
  - Changed from flat rate tax (5.5 to 10 percent depending on copper prices) to a marginal rate ranging from 4 to 10 percent.
- Personal income tax (PIT) reforms in 2023:
  - Raised exemption threshold; reduced lowest marginal rate from 25 to 20 percent; widened income bands subject to 20 and 30 percent rates.
- Mitigating measures to offset revenue loss:
  - Increase property transfer tax to 7.5 from 5 percent.
  - Increase carbon emission tax by 10 percent.
  - Increase excise duty on cigarettes.
  - Introduce excise taxes for plastic products.
  - Proposed 2024-25 measures: harmonize multiple CIT rates and review fiscal incentives for special economic zones.
- ZRA reforms and tax administration:
  - Establishing a unified Large Taxpayer Office (LTO); ZRA collects 80 percent of its revenue from large taxpayers constituting 0.3 percent of total registered taxpayers.
  - Fiscalization project to introduce electronic invoicing for VAT-registered taxpayers.
  - Clearing VAT-refund arrears: monthly VAT-refunds increased by 50 percent on average compared to previous five years; stepped-up VAT-refund audits; proposed modified IT on VAT-refund arrears clearance.
- Tax debt at end-2022:
  - Stock of tax debt (including penalties and interest) almost 100 billion kwacha (19.8 percent of GDP), of which 12.8 percent of GDP is tax arrears.
  - Almost 60 percent owed by mining companies; about half older than five years.
  - Tax amnesty (Oct 2022–extended to end-June 2023) yielded 2.6 billion kwacha as of end-March.

### Debt restructuring, financing gap, and program financing
- OCC agreement:
  - Agreement with Official Creditor Committee (OCC) under G20 Common Framework reached on June 22; work underway to codify in an MOU.
  - Agreement entails a fully quantified two-stage approach including state-contingent treatment with a trigger linked to Zambia’s debt carrying capacity (DCC).
- Financing gap (staff estimates, by year in millions):
  - 2022: 3,063
  - 2023: 2,282
  - 2024: 3,054
  - 2025: 2,282
  - Total: 10,680
- Official financing by year (millions):
  - 2022: 737; 2023: 765; 2024: 783; 2025: 744; Total: 3,029
- IMF ECF disbursements by year (millions of SDR): 2022: 187; 2023: 376; 2024: 376; 2025: 376; Total: 1,315
- World Bank financing by year (millions): 2022: 550; 2023: 389; 2024: 257; 2025: 218; Total: 1,414
- AfDB financing: 2024: 150; 2025: 150; Total: 300
- External debt restructuring expected to cover about 72 percent (or $7.65 billion) of the residual BOP financing gap over the program period.
- Arrears to IFIs and other creditors:
  - Zambia reported $2.3 million of interest and principal arrears to IFIs at end-2022; $0.25 million were technical arrears cleared by end-March 2023.
  - Arrears of $2.1 million due to the Nordic Development Fund remain outstanding.
- Capacity to repay the Fund:
  - Stock of debt to the Fund as a share of GDP peaks in 2025 at 4 percent of GDP.
  - Debt service obligations to the Fund peak at 1.2 percent of exports and 2.8 percent of reserves in 2031.

### Debt sustainability assessment (DSA) — key findings
- Risk of external debt distress: In debt distress (DSA).
- Total PPG debt (end-2022): $33,365 million (119.6 percent of GDP).
- Total external PPG debt (end-2022): $20,961 million (58.7 percent of GDP).
- Selected DSA indicators (selected projections and historical values):
  - Real GDP growth selected: 2022: 4.7; 2023: 3.6; 2024: 4.3; 2025: 4.5; 2026: 4.7; 2027: 5.0.
  - PV of PPG external debt-to-GDP (selected values shown in source tables).
- Under baseline, all four external debt burden indicators breach indicative thresholds by large margins through the medium term.
- Alternative scenario: if OCC treatment applied and commercial claims treated on comparable terms, debt could be assessed sustainable; two alternative treatment paths depend on DCC being weak or upgraded to medium with corresponding conditional treatments.

### Social spending, pensions, and energy tariffs
- Social spending and education/health:
  - Budget execution of social spending was 110 percent in 2022.
  - Introduction of free education for all; hiring of 41,000 additional health and education workers.
  - Social protection spending doubled in past two years to 1.4 percent of GDP in 2023.
  - Flagship social cash transfer beneficiaries grew to around 1 million households; benefits increased to partially compensate for inflation. Authorities intend to expand coverage further and double benefits in 2023.
- Public sector pensions:
  - Public Sector Pension Fund received a transfer of 2 billion kwacha; annual transfer of 300 million kwacha for next three years agreed to resolve Local Authorities Pension Fund arrears.
  - Government cleared contribution arrears to the National Pension Scheme and decided to liquidate predecessor scheme, cashing out remaining members.
  - Legal amendment permitting early withdrawal of 20 percent of past contributions being introduced ensuring NPS’ net liabilities don’t increase.
- Electricity tariffs and ZESCO viability:
  - ERB approved on April 21, 2023 a phased increase delivering cost-reflective tariffs over medium term.
  - ZESCO proposed increase in average electricity tariffs of 37 percent in nominal kwacha terms in 2023, with average annual increases of 12 percent for 2024-27 (targeted on large power users, with targeted lifeline and social tariffs).
  - ZESCO total outstanding debt as at end December 2022: US $3.9 billion (US $1.94 billion payables including US $1.75 billion for power purchases; US $1.96 billion in domestic and external loans).
  - ZESCO turnaround includes converting legacy IPP debt to long term concessional facilities and converting on-lent loans to equity in consultation with MoFNP.

### Energy sector findings and projections (Box 1)
- Structural vulnerability:
  - Hydropower accounts for over 80 percent of the 3,318 MW installed capacity.
  - Generation from hydropower is about 40 percent of estimated hydro potential of 6,000 MW.
- Supply shocks and impacts:
  - Significant loadshedding of between eight-twelve hours a day experienced by all sectors in first 6 weeks of 2023.
  - Most consumers resort to biomass for energy, accounting for over 70 percent of all energy consumed; environmental impact: clearing of 300,000 hectares of trees per year.
- Planning and supply mix:
  - Integrated Resource Plan projects total electricity demand to increase by 130 percent (+ 6,800MW/48,000 GWh per annum) by 2050.
  - To mitigate climate risks, 50 percent of additional generation capacity from solar and wind and 35 percent from run-of-river hydro.
- Financing needs:
  - Diversification of supply mix costed at about US$7 billion.
  - Further investments needed in transmission (US$2.3 billion) and distribution ($1.4 billion).

### Governance, anti-corruption, and public financial management
- Governance Diagnostic (requested November 2021; published December 30, 2022) assessed corruption severity and governance weaknesses across state functions.
- Key vulnerabilities with macro impact:
  - Public financial management, transparency in public procurement, granting and managing mining contracts, central bank autonomy, financial sector oversight, beneficial ownership transparency, and land management.
- Priority recommendations (selected):
  - Adopt legal framework guaranteeing public access to information; submit Access to Information Bill to Parliament (SB).
  - Ensure top anti-corruption and AML officials are selected through transparent, merit-based processes.
  - Operationalize beneficial ownership register of PACRA.
  - Mandate regular external publication of tax expenditure reports.
  - Prepare time-bound action plan and roll-out E-Government Procurement.
  - Increase internal audits in VAT refund process and customs warehouse management.
- Structural fiscal reforms and institutional strengthening:
  - Expand IFMIS to all branch offices of four ministries (including health and education) by end-2023; further expansion from 2025.
  - Rationalize number of bank accounts to expand TSA use (new SB).
  - First Fiscal Risk Statement completed in February 2023; expand scope to include SOEs, public financial corporations, PPPs, public pension schemes (SB).
  - Public Debt Management Act enacted September 2022; quarterly public debt bulletin published.

### Monetary policy, financial stability, and banking sector reforms
- Monetary policy:
  - BoZ’s mandate and independence strengthened by new BoZ Act.
  - Tightening monetary policy bias adopted: reserve requirements and policy rate increases noted.
  - Exchange rate flexibility should remain first response to external pressures; additional tightening warranted if pressures continue.
- Financial stability:
  - Public sector exposure accounts for more than 32 percent of bank assets on average, and almost 50 percent in some systemic institutions.
  - Ongoing reforms: micro-prudential stress-testing framework; supervisory technology project by December 2023; Deposit Protection Scheme implementation; crisis management and resolution framework under new BoZ Act.
  - Unwinding of most temporary COVID-19 prudential measures using risk-based approach; some forbearance extended to end-2023.
  - Creation of inter-agency Financial Stability Committee (FSC).
- Financial inclusion and credit policies:
  - Introduction of an SME Credit Guarantee Scheme.
  - Harnessing fintech and mobile money under "Go Cashless" campaign.
  - 2022 Capital Markets Master Plan to explore equity, venture capital, and bond financing.

### Capacity development, statistics, and monitoring
- Fund CD strategy anchored on ECF objectives: revenue mobilization, structural fiscal reforms, governance, and economic statistics; delivery supported by AFRITAC South and partners.
- Statistics improvements:
  - IMF STA worked with BoZ to address BoP data gaps; engagement started February 2022.
  - GDP rebasing work progressing, now expected to be completed in 2025.
  - Missions estimated "50 to 90 percent of copper exports in 2020-21 were not repatriated" and proposed adjustments reducing current account by about $700mn per year.
- Reporting and monitoring (Annex Table 2 highlights):
  - Required data series include daily reserve money, weekly exchange rates, monthly fiscal tables, quarterly social spending, and quarterly stocks of arrears with specified reporting lags (e.g., T15, T30, T90).
  - "Data provision has some shortcomings but is broadly adequate for surveillance."

### Program monitoring, conditionality, and next steps
- Staff supports completion of the first review under the ECF arrangement and the financing assurances review.
- Program is fully financed with firm commitments for next 12 months and good prospects for remainder.
- Review schedule (selected):
  - Second semi-annual review based on end-June 2023 data; expected on or after October 1, 2023.
  - Third review based on end-December 2023 test dates; on or after April 1, 2024.
- Key upcoming and reset SBs and targets include:
  - Ensure at least 59 MPSAs register purchase orders and commitments in IFMIS — End-August 2023 (reset).
  - Submit amended PPP Act to Parliament — End-July 2023 (reset).
  - Establish unified LTO — End-March 2024 (new SB).
  - Publish inaugural financial stability report — End-June 2024 (new SB).
- Technical Memorandum of Understanding (TMU) operational definitions:
  - NIR = gross international reserves − official reserve liabilities.
  - Program exchange rate references as of May 31, 2022 (e.g., US Dollar: 17.28 kwacha per currency unit).

*International Monetary Fund, EXECUTIVE SUMMARY (1zmbea2023002)*

### EXECUTIVE SUMMARY

### 1zmbea2023002 - EXECUTIVE SUMMARY

### Context and reform progress
- Zambia has made "commendable progress" over the last two years implementing a reform agenda to stabilize the economy, lay the foundation for inclusive growth, and create jobs amid significant external shocks.
- Authorities reached an agreement with official creditors on June 22 on a debt restructuring "consistent with program parameters."
- Restoration of fiscal and debt sustainability, together with reforms to boost private and human capital investment, and strengthen governance and anti-corruption, support a positive medium-term economic outlook.
- Key structural vulnerabilities and development challenges remain:
  - Poverty and inequality are "amongst the highest in the world."
  - Climate vulnerabilities are "high."
- Policy imperative: sustain fiscal credibility while creating space for social, development, and climate spending.

### Program status
- IMF Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) in an amount equivalent to 100 percent of quota (SDR 978.20 million) with a first disbursement of SDR 139.88 million.
- On completion of the first review, Zambia would have access to an additional SDR 139.88 million (about $[188] million).
- The arrangement supports:
  - Restoring sustainability through fiscal adjustment and debt restructuring.
  - Creating fiscal space for social spending.
  - Strengthening governance and reducing corruption vulnerabilities, including improving public financial management.

### Program performance
- Program performance described as "strong" despite a challenging domestic and global environment.
- All quantitative performance criteria (QPCs) for the first review were met.
- All nine structural benchmarks (SBs) due by end-March 2023 have been met.
- Two SBs due by end-June 2023 were reset—one to end-July and one to end-August.
- Specific implementation notes:
  - The SB on implementation of commitment controls through IFMIS delayed to August 2023 from June 2023; commitment control systems rolled out in 59 spending units, including all ministry-level spending units.
  - The SB on submitting a revised PPP Act to Parliament delayed to July 2023 for Cabinet scrutiny.
- Some indicative targets (ITs) narrowly missed:
  - The IT on the floor of fiscal revenues excluding grants and mining revenues and adjusted by the backlog of VAT refunds was narrowly missed; VAT refund arrears in 2022 increased by 1.8 billion kwacha.
  - Preliminary data for end-March suggest ITs on the primary balance and on net international reserves were missed due to frontloading of fiscal expenditures, weaker mining revenues, and external pressures.
- Authorities remain committed to actions to ensure end-year targets are met even if mining revenues continue to disappoint.

### Recent economic developments and key statistics
- Growth and activity:
  - GDP growth registered 4.7 percent in 2022, "the highest level since 2014."
  - Contrast with 2019 Article IV projected medium-term growth of 1.5 percent; current projections are 5.0 percent.
- Inflation and exchange rate:
  - Inflation declined to 9.4 percent (y-o-y) in January 2023 (a 41-month low) from 24 percent in mid-2021; rose to 9.9 percent (May 2023).
  - Food inflation stable around 12 percent (y-o-y) since 2022 H2.
  - BoZ policy actions: statutory reserve ratio increased by 250 basis points to 11.5 percent on February 1, 2023; monetary policy rate increased by 25 basis points following each of the February and May MPC meetings and is now 9.5 percent.
  - Exchange rate experienced a 35 percent depreciation over September 2022 – March 2023; appreciated in April 2023.
- External sector and reserves:
  - Decline in copper prices and production contributed to contraction in copper exports and narrowing of the current account surplus in 2022.
  - Gross reserves increased reflecting accumulation of further external debt arrears ($2.2 billion) and $950 million of new disbursements from the IMF and World Bank.
- Public finances and debt:
  - Primary balance (commitment basis) improved by 6.5 percentage points in 2022 to a surplus of 0.8 percent of GDP.
  - Social protection spending doubled to 1.5 percent of GDP compared to 2020 level.
  - Outstanding public and publicly guaranteed (PPG) external debt stood at $20.9 billion at end-2022, an increase of $930 million from a year earlier.
  - Arrears at end-2022 totalled $4.2 billion on claims within the restructuring perimeter: $1.4 billion due to official bilateral creditors, $1.3 billion to Eurobond holders, $1.5 billion to other private external creditors; plus an additional $1.7 billion of arrears due to external suppliers; and $2.3 million of interest and principal arrears to other IFIs.
  - Outstanding stock of domestically-issued government securities was 210 billion kwacha at end-2022 (44 percent of GDP), up from 193 billion at end-2021.
  - Non-resident holdings of domestically-issued securities: 47 billion kwacha (22 percent of the stock) at end-2022 (down from 59 billion kwacha (29 percent of the stock) at end-2021); dropped further to 46 billion kwacha by end-April 2023.
- Domestic market funding and yields:
  - Average auction-cover dropped to 64 percent in 2022 and further to 45 percent January-April 2023, from 95 percent in 2021.
  - Demand for Treasury bills: average auction-cover 91 percent in 2022 and 79 percent in January-April 2023, down from 100 percent in 2021.
  - Yields increased by around 200 basis points on average across the curve in 2022; short-term yields rose by about another 40 basis points on average in January-April 2023.
- Banking sector and credit:
  - Private sector credit grew by 35 percent in 2022.
  - Loan-to-deposit ratio dropped from a peak of 56 to 39 percent in 2022.
  - Banking sector profitability and soundness (2022):
    - Average return-on-assets of 5.0 percent.
    - Average capitalization around 23 percent at end-2022.
    - Net NPLs at less than 0.4 percent of loans.
    - Average NPL coverage ratio around 93 percent.
  - Risks: public sector exposure, increasing FX market imbalances, and potential rise in NPLs as COVID-era regulatory forbearance unwinds.

### Macro outlook and risks
- Growth:
  - Post-COVID GDP rebound expected to continue with moderation in 2023, acceleration in 2024, and settling at around 5.0 percent over the medium term.
- Inflation:
  - Due to exchange rate and base effects, inflation expected to peak around end-2023 (though at a lower level than 2021) and then moderate and return to the mid-point of the BoZ’s 6-8 percent target range by 2025.
- Risks:
  - Risks are "elevated and tilted to the downside" in the medium-term.
  - Dominant sources of risk: weather-related shocks and weaker copper revenues, including due to shortfalls in production.
  - There is program flexibility to mitigate ongoing challenges while still meeting program objectives.

### Policy priorities and reforms (themes highlighted)
- Rebuilding fiscal resilience:
  - Fiscal consolidation being implemented; continued focus on securing end-year targets and creating fiscal space for priority spending.
  - Improve revenue performance and control spending to sustain the 6.5 percentage point improvement in the primary balance achieved in 2022.
- Debt restructuring and external engagement:
  - Agreement with the Official Creditor Committee (OCC) under the G20 Common Framework on debt treatment reached on June 22.
  - OCC discussions covered program parameters, debt sustainability targets, MDB contribution through concessional financing, exclusion of non-resident holders of domestically-issued debt from proposed treatment, and inclusion of SOE debt related to financially viable projects.
- Strengthening governance and public financial management:
  - Reforms in anti-corruption, public financial management, public investment, debt management and transparency are advancing.
  - Removal of fuel subsidies and adjustment of electricity tariffs.
  - Commitment controls rolled out in IFMIS across spending units; periodic reviews to verify recording.
- Monetary and financial stability:
  - BoZ’s mandate and independence strengthened with enactment of the new BoZ Act.
  - Tightening monetary policy bias adopted to address inflationary pressures (reserve requirements and policy rate increases noted).
  - Monitor banking sector exposure to public debt and FX imbalances; prepare for potential increase in NPLs as forbearance measures unwind.
- Private sector and human capital:
  - Strategy grounded in the Eighth National Development Plan (adopted August 2022) to create jobs and growth by restoring fiscal and debt sustainability, attracting private investment, and investing in human capital.
  - Reforms to boost private and human capital investment remain essential to support the medium-term outlook.

*International Monetary Fund, EXECUTIVE SUMMARY (1zmbea2023002)*

### 17.      Significant downside risks remain (Annex II). Weather-related shocks (such as the floods of

### 17.      Significant downside risks remain (Annex II)

### Downside and upside risk assessment
- Dominant downside risks: weather-related shocks (such as the floods of February 2023) and weaker copper revenues, including due to production shortfalls.
- Global risk channels:
  - An abrupt slowdown in China would reduce copper prices.
  - An escalation of Russia’s war in Ukraine would increase fertilizer and food prices, increasing inflation and spending on agricultural inputs.
- Financial risks:
  - Delays in completing the debt restructuring with private creditors could lead to a further exit of non-resident investors, triggering new exchange rate pressures and raising the cost of government financing.
- Upside scenarios:
  - Higher copper prices.
  - A speedier rehabilitation and development of the Mopani (MCM) or Konkola (KCM) copper mines.
  - Faster completion of the debt restructuring could accelerate private sector investment and growth.
- Note: Both mines require new capital investment to realize their potential. The authorities are close to identifying a new strategic partner for MCM, but the development of KCM remains subject to legal challenges related to its forced provisional liquidation in 2019.

### Authorities’ views on outlook and risks
- The authorities broadly agreed with staff on the outlook and risks.
- They see strong potential for an extended growth episode once the impact of reforms under the ECF-supported program build traction and self-reinforcing positive dynamics emerge.

### Rebuilding fiscal resilience — outlook and program anchors
- Fiscal performance is expected to continue improving in 2023. Although the pace of fiscal expenditures in 2023 Q1 was more front-loaded than initially anticipated, the primary surplus (commitment basis) is expected to improve (see Table 2b), driven mostly by a revenue-based consolidation.
- Non-mining revenue performance drivers: reinstatement of VAT and excise on fuel (October 2022, SB), a recovery in economic activity, and higher copper prices than at the time of the budget approval.
- The primary balance (commitment basis) is expected to improve from a deficit of 5.8 percent of GDP in 2021 to a surplus of 3.3 percent in 2025.
- The authorities’ 2023 Budget and 2023-2025 Medium-Term Budget Framework (MTBF) are aligned with program targets and the proposed consolidation path.

### Revenue mobilization and tax policy
- The authorities adopted a revenue mobilization plan in September 2022 (SB) that includes policy measures aiming to yield up to 3.2 percent of GDP over 2022-2025 (including reinstating VAT and excise on fuel from October 2022).
- Mineral royalty tax reform:
  - The 2023 switch to a marginal mineral royalty tax (MRT) should smooth the impact of changing prices on fiscal revenues and make them more stable.
  - Footnote: The MRT was changed from a flat rate tax, ranging from 5.5 to 10 percent depending on copper prices, to a marginal rate, ranging from 4 to 10 percent.
- Personal income tax (PIT) reforms in 2023:
  - Raised the exemption threshold.
  - Reduced the lowest marginal rate from 25 to 20 percent.
  - Widened the income bands subject to the marginal rates of 20 and 30 percent.
- Mitigating measures to offset revenue loss:
  - Increase in the property transfer tax to 7.5 from 5 percent.
  - Increase in the carbon emission tax by 10 percent.
  - Increase in the excise duty on cigarettes.
  - Introduction of excise taxes for plastic products.
  - Proposed 2024-25 measures include harmonization of multiple CIT rates across sectors and review of fiscal incentives for special economic zones.

### Tax administration, arrears, and compliance measures
- Zambia Revenue Authority (ZRA) reforms and initiatives:
  - Establishing a Large Taxpayer Office (LTO, new SB). The ZRA collects 80 percent of its revenue from a small pool of large taxpayers (constituting 0.3 percent of the total registered taxpayers). A large taxpayer unit for direct taxes already established and a mirror unit for indirect taxes being established in 2023; the two units will be merged into the new LTO.
  - Fiscalization project to introduce an electronic invoicing system (app-based) for VAT-registered taxpayers to reduce the VAT gap.
  - Clearing VAT-refund arrears: authorities increased monthly VAT-refunds by 50 percent on average compared to the previous five years, using both cash payments and offsets; stepped-up VAT-refund audits; planned switch to risk-based audits; a modified IT on the clearance of VAT-refund arrears is proposed to distinguish legacy stock clearance from current flow of refund claims.
- Tax debt at end-2022:
  - Stock of tax debt (including penalties and interest) stood at almost 100 billion kwacha (19.8 percent of GDP, of which 12.8 percent of GDP is tax arrears).
  - Almost 60 percent of this debt is owed by mining companies.
  - About half is older than five years.
- Tax amnesty and collection:
  - Tax amnesty launched from October 2022, waiving interest and penalties; extended to end-June 2023 (from March 2023).
  - As of end-March, the amnesty had yielded 2.6 billion kwacha.
  - A debt management module is being established to automate processes and ensure government suppliers are current on tax liabilities before invoices are paid; ZRA will implement write-off procedures for uncollectable debt.
- Analytical and service delivery enhancements:
  - Establishing real-time data interfaces with MoFNP (IFMIS), business registration agency, Ministry of Lands, RTSA, and BoZ; expansion to more agencies in 2024.
  - Specialized units beyond the LTO for specific taxpayer segments; single-window services to reduce compliance costs and time.
  - Capacity development supported by cooperating partners; Fund TA to focus on strengthening VAT-systems, improving audit capacity, moving toward risk-based compliance management, and tax debt management.

### Key fiscal composition and program figures (selected lines from Text Table 1)
- Primary balance (cash basis) improvement: 5.8 0.5 1.7 1.1 0.6 3.9 9.7 (rows correspond to 2021 2022 2023 2024 2025 Cumulative Program Period (2022-25) Cumulative (2021-25))
- Primary balance (commitment basis) improvement: 4.4 6.5 1.2 1.0 0.4 9.1 13.5
- Primary balance excluding large one-off revenues (commitment basis): 3.7 7.7 1.4 1.0 0.4 10.5 14.2
- Revenue increases (cash basis): 2.0 -2.4 1.2 0.8 0.2 -0.2 1.8
- Direct taxes: 0.7 0.0 0.4 0.2 0.1 0.7 1.4
- Indirect taxes: -0.3 -0.3 1.3 0.2 0.0 1.2 0.8
- Other revenue, including mineral royalties and external grants: 1.7 -2.1 -0.5 0.4 0.0 -2.1 -0.4
- Of which: Mineral royalties: 1.2 -0.7 -0.5 0.1 0.0 -1.0 0.2
- Revenue increases (commitment basis)1: 2.1 -2.3 2.0 0.7 0.1 0.6 2.6
- Revenue increases excluding large one-offs (commitment basis): 1.4 -1.1 2.3 0.7 0.1 2.0 3.4
- Of which: Mining revenues: 2.5 -1.2 -0.3 0.3 0.1 -1.1 1.3
- Revenue increases excluding mining revenues and large one-offs (commitment basis): -1.0 0.1 2.5 0.5 0.0 3.1 2.1
- Reduction in primary spending (cash basis): 3.8 2.9 0.5 0.4 0.4 4.1 7.9
- Current primary spending: 0.0 2.3 0.3 0.5 0.4 3.4 3.4
- Compensation of employees: 0.9 -0.3 -0.5 0.1 0.1 -0.6 0.3
- Goods and services: -0.3 0.8 -0.6 0.0 0.1 0.3 0.0
- Subsidies: 0.0 3.4 0.1 0.3 0.3 4.1 4.1
- Of which: Agricultural (FISP and FRA): 0.9 1.0 -0.1 0.3 0.3 1.5 2.4
- Of which: Energy (fuel and electricity): -0.9 2.0 0.1 0.0 0.0 2.2 1.3
- Social protection: -0.5 -0.2 0.1 0.1 -0.1 -0.2 -0.7
- Other: -0.2 -1.4 1.2 0.1 0.1 -0.1 -0.3
- Capital spending: 3.8 0.6 0.2 -0.1 0.0 0.7 4.6
- Domestic capital spending: -0.6 0.0 0.8 -0.4 -0.4 -0.1 -0.7
- Foreign capital spending: 4.4 0.6 -0.5 0.3 0.4 0.9 5.3
- Increase in net clearance of expenditure arrears: -1.5 6.0 -1.3 -0.1 -0.1 4.4 2.9
- (Table rows correspond to years 2021 2022 2023 2024 2025 Cumulative Program Period (2022-25) Cumulative (2021-25))

### Social spending, pensions, and energy tariffs
- Social spending and education/health:
  - Budget execution of social spending was 110 percent in 2022.
  - Introduction of free education for all; hiring of 41,000 additional health and education workers.
  - Social protection spending doubled in the past two years to 1.4 percent of GDP in 2023.
  - Flagship social cash transfer program beneficiaries grew to around 1 million households; benefits were increased to partially compensate for inflation.
  - Authorities intend to expand coverage further and double benefits in 2023; World Bank assistance to improve targeting mechanisms.
- Public sector pensions:
  - Public Sector Pension Fund received a transfer of 2 billion kwacha, ensuring it is now current on its obligations.
  - Annual transfer of 300 million kwacha for the next three years agreed to resolve Local Authorities Pension Fund arrears.
  - Government cleared its contribution arrears to the National Pension Scheme (NPS) and decided to liquidate the NPS’ predecessor scheme, cashing out remaining members.
  - Legal amendment permitting early withdrawal of 20 percent of past contributions is being introduced in a manner that ensures NPS’ net liabilities don’t increase.
- Electricity tariffs and ZESCO viability:
  - ERB approved on April 21, 2023 a phased increase in tariffs (for customers not under a negotiated PPA) that will deliver cost-reflective tariffs over the medium term.
  - ZESCO’s application proposed an increase in average electricity tariffs of 37 percent in nominal kwacha terms in 2023, with average annual increases of 12 percent for 2024-27. The proposal targeted most of the adjustment on large power users, a more targeted lifeline tariff and the introduction of a social tariff (e.g., for public hospitals and schools).
  - Clear triggers defined to guide future automatic changes to ensure ZESCO’s viability is protected from changes in exogenous factors.

### Structural fiscal reforms and institutional strengthening
- Key reforms:
  - Expand IFMIS: introduce IFMIS at all branch offices of four ministries, including health and education, by end-2023; further expansion expected from 2025.
  - Enhance PFM capacities at local authority level to prepare for devolution as Constituency Development Fund funding increases.
  - Improve cash management and expand TSA use: rationalize number of bank accounts (new SB) to reduce costs, risks, and improve transparency for local authorities and lower-level spending units.
  - Improve public investment management (PIM) and PPP framework: early-2023 PIM guidelines adopted; recommended methodological guidance for project appraisal, cost-benefit analysis, and climate-aware investment planning; FAD provided advice on draft PPP Bill to reflect best practice and require proper accounting and reporting of future costs and fiscal risks (SB).
  - Embed fiscal risk monitoring: first Fiscal Risk Statement (FRS) completed in February 2023; FRS to be published and gradually expanded to include SOEs, public financial corporations, PPPs, public pension schemes, and other entities generating fiscal risks (SB).
  - Improve debt management and transparency: Public Debt Management Act enacted in September 2022; quarterly public debt bulletin published in a timely manner (latest end-2022 edition published in March 2023); TA supporting DSA training, debt management strategy formulation and implementation, and transition to front-middle-back-office setup.

### Authorities’ reaffirmation
- The authorities confirmed commitment to restoring fiscal sustainability and budget credibility, prioritizing social spending, education, health, and community investment through the Constituency Development Fund.
- They are confident that planned revenue mobilization efforts, combined with TA to strengthen VAT, risk-based tax audits, and data analytics, will reduce leakages and provide fiscal space for priorities.

### Fostering private sector–led and green growth
- Authorities developing a Green Growth Strategy aligned with COP commitments and the 8th National Development Plan; preparing a Climate Bill.
- Agriculture and climate resilience:
  - Comprehensive Agricultural Support Program (CASP) and National Adaptation Plan to support climate-smart agriculture focusing on carbon reduction (e.g., agro-forestry incentivized by carbon credits) and climate resilience (biodiversification, moisture retention, irrigation) (SIP).
- Renewable energy and private sector participation:
  - Strategy premised on greater private sector participation in renewables, currently impeded by ZESCO’s financial weaknesses.
  - Consistent implementation of tariff reform and unlocking alternative IPP financing modalities (e.g., direct power purchase agreements) are key to resolving the deadlock.
- Climate Bill provisions:
  - Will provide for a climate change fund as central conduit for national climate financing, including cross-border carbon credit flows and funding from cooperating partners.
  - A framework for domestic carbon-trading is being developed and will complement newly issued regulations for “green” bonds.

*Source: IMF staff and Zambian authorities (excerpts from the cited chapter).*

### 34.      Enhanced dialogue with the private sector, including through the newly established

### Enhanced dialogue with the private sector, including through the newly established Public-Private Dialogue Forum

### Private sector engagement and business-enabling reforms
- Enhanced dialogue with the private sector, including through the newly established Public-Private Dialogue Forum, is helping identify key obstacles to private sector development.
- Key challenges identified:
  - VAT-refund process and tax compliance.
  - Concerns about key infrastructure (roads) and energy (see Box 1).
  - Excessive bureaucracy (licensing, mandatory memberships).
  - Education and skills (SIP).
- Business-enabling reforms underway:
  - Passage of the Investment Act of 2022.
  - Ongoing efforts to simplify licensing and registration (MEFP ¶92).
  - Consolidation of regulations and levies across the government.
  - Moving licensing procedures online.

### Box 1 — Developing Zambia’s Energy Sector: findings and projections
- Structural vulnerability:
  - Hydropower accounts for over 80 percent of the 3,318 MW of installed electricity generation capacity in Zambia.
  - Generation from hydropower is currently about 40 percent of the estimated hydro potential of 6,000 MW.
  - Overreliance on hydropower exposes the country to rainfall variability and climate-change induced volatility.
- Recent supply shocks and impacts:
  - Over the last decade, constrained supply has led to many episodes of acute electricity shortages.
  - Significant loadshedding of between eight-twelve hours a day was experienced by all sectors in the first 6 weeks of 2023.
  - Increased costs for business due to reliance on expensive and polluting fossil fuel back-up generators, constraining growth in mining and manufacturing.
  - Most consumers resort to biomass for their energy needs, accounting for over 70 percent of all energy consumed.
  - Environmental impact: clearing of 300,000 hectares of trees per year.
- Market structure and institutional constraints:
  - ZESCO is the dominant player: about 78 percent of the installed generation capacity is under the control of ZESCO, which is also responsible for transmission and distribution.
  - Private sector Independent Power Producers (IPPs) and mini-grid operators are also important.
  - ZESCO’s financial troubles have led to arrears to IPPs, limiting its ability to purchase power and constraining its investment capacity.
- Planning and supply mix:
  - An Integrated Resource Plan (IRP) provides a 30-year planning horizon, mainstreaming climate and environmental impact assessments, gender and social inclusion, and technological developments (e.g., smart grids, distributed generation, clean cooking, electric vehicles, energy storage).
  - Total electricity demand is expected to increase by 130 percent (+ 6,800MW/48,000 GWh per annum) by 2050.
  - Projection assumptions: full electrification, higher agricultural and industrial growth, mining production of 3 million tonnes of copper per annum, and gradual increase in power exports.
  - To mitigate climate risks, 50 percent of additional generation capacity will be from solar and wind and 35 percent from run-of-river hydro, mostly in the northern region.
- Financing needs:
  - Diversification of the supply mix is costed at about US$7 billion.
  - Further investments needed in transmission (US$2.3 billion) and distribution ($1.4 billion), most required upfront.
  - Private sector participation expected to improve due to the 2019 Electricity Act, the recently approved multi-year cost-reflective tariff framework, and steps to repair ZESCO’s financial viability.
  - Significant concessional support will continue to be needed to meet financing needs.

### Growth, investment, and enabling environment
- Rising business confidence is yielding significant investor interest, including in the mining sector, bolstered by reform to the mineral royalty regime (note on reduced average royalty rate and elimination of “cliff effects”).
- Policy priorities to support investment:
  - Address key governance weaknesses and corruption vulnerabilities (implementation of Governance Diagnostic recommendations — Box 2).
  - Cabinet Office to oversee implementation with bi-annual monitoring reports (MEFP Section B).
  - Capacity development support requested from the Fund and cooperating partners.
  - SMEs to benefit from initiatives such as the $26.5 million WB-supported Off-Grid Loan Facility for private sector renewable energy projects to help electrify rural villages.
  - Access to bank credit expected to improve as government domestic financing demand eases.
  - New regulations for “green” bonds could facilitate capital market financing.
  - Critical infrastructure investment will require grant or concessional financing to preserve debt sustainability.

### Box 2 — Summary of Governance Diagnostic and Recommendations: findings and priority recommendations
- Purpose and scope:
  - GD requested by President Hichilema in November 2021; report published on December 30, 2022.
  - Assesses corruption severity and governance weaknesses across state functions: (i) fiscal governance; (ii) rule of law; (iii) market regulations; (iv) central bank governance and operation; (v) financial sector oversight; (vi) AML/CFT; and (vii) anti-corruption frameworks.
- Key vulnerabilities with macroeconomic impact:
  - Public financial management, especially planning and monitoring of large investment projects.
  - Transparency in public procurement, including monitoring of Politically Exposed Persons (PEPs).
  - Granting and managing contracts in the mining sector.
  - Autonomy of the central bank.
  - Effective financial sector oversight, especially for banks with government ownership.
  - Beneficial ownership transparency.
  - Land management.
- Priority recommendations (selected):
  - Adopt a legal framework guaranteeing public access to information.
  - Ensure top anti-corruption and AML officials are selected and appointed through transparent, merit-based and participatory processes.
  - Prepare, with participation of civil society, academia and legal profession, a comprehensive reform strategy to strengthen the independence, professionalism and efficiency of the judiciary and prosecution authorities.
  - Operationalize beneficial ownership register of the Patent and Copyright Registration Agency with accurate, complete and up-to-date information and effective sanctions.
  - Prepare a time-bound action plan and roll-out of E-Government Procurement.
  - Mandate regular preparation and external publication of tax expenditure reports on significant foregone revenue measures.
  - Increase internal audits in VAT refund process and customs warehouse management and other unstable IT-integrated processes.
  - Strengthen the Ministry of Mines and Minerals Development’s capacity to scrutinize license and transfer applications and monitor commitments on safety, environment, work programs, and production.
  - Bring the Public Audit Act of 2016 and the State Audit Commission Act of 2016 into force by issuing the statutory instrument by Ministry of Finance and National Planning.
  - Develop and reinforce supervisory processes for banks and other financial institutions with Government ownership.

### Securing monetary and external stability
- Monetary policy stance:
  - The BoZ has appropriately tightened the monetary policy stance.
  - To ensure inflation reaches the monetary policy band, vigilance to emerging pressures is required; exchange rate flexibility should remain the first response to external pressures.
  - Additional monetary tightening would be warranted if external pressures continue (¶8).
  - Authorities are enhancing monetary policy framework with Fund TA, including forecasting and analysis systems.
- External position:
  - Zambia’s external position is broadly in line with the level implied by fundamentals and desirable policies (Annex ESA).
  - Program and reform adjustments should ensure gross FX reserves reach their target of five months of prospective imports.

### Financial stability and banking sector reforms
- Banking sector vulnerabilities and structure:
  - BoZ’s 2022 banking sector review did not reveal major asset quality concerns but noted pockets of credit concentration risk.
  - With constrained access to external financing, domestic sovereign-bank nexus has strengthened: public sector exposure accounts for more than 32 percent of bank assets on average, and almost 50 percent in some systemic institutions.
- Ongoing and planned reforms:
  - Implement reform strategy to strengthen the banking sector to support recovery.
  - Development of a micro-prudential stress-testing framework.
  - BoZ initiated a supervisory technology project to improve analytical capabilities, timeliness, and data integrity by December 2023.
  - Deposit Protection Scheme being implemented, with a dedicated unit established in June 2022.
  - Crisis management and resolution framework in place as provided in the new BoZ Act.
  - Unwinding of most temporary COVID-19 prudential measures using a risk-based approach; some forbearance measures extended to end-2023.
  - Creation of an inter-agency Financial Stability Committee (FSC) to monitor and manage systemic risk from a macro-prudential perspective.
- Financial inclusion and credit policies:
  - Fiscal consolidation expected to reduce crowding-out and create space to increase credit to the private sector (SIP).
  - Policies to bring capital from the informal sector into the formal sector.
  - Introduction of an SME Credit Guarantee Scheme.
  - Harnessing fintech and mobile money technology under the “Go Cashless” campaign.
  - 2022 Capital Markets Master Plan proposes a medium-term sequenced reform plan to explore equity, venture capital, and bond financing.

### Capacity development and statistics
- Fund CD strategy:
  - Anchored on ECF objectives: revenue mobilization and structural fiscal reforms, governance, and economic statistics.
  - Delivery supported by AFRITAC South and coordinated with partners.
- Statistics improvements:
  - IMF Statistics Department worked with BoZ to address BoP data gaps related to the mining sector (Box A4.1.), engagement started in February 2022.
  - Data sources used: e-BOP system, Private Capital Flows survey, financial statements, customs data, and new flow-of-funds questionnaires.
  - Recommended adjustments to current and financial accounts to better reflect mining sector cross-border transactions are being considered by authorities.
  - GDP rebasing work progressing, now expected to be completed in 2025.
  - Data provision broadly adequate for surveillance despite shortcomings.

### Program financing and modalities
- Financing assurances and projections:
  - Program is fully financed with firm commitments for the next 12 months and good prospects for the remainder.
  - IDA disbursements of new financing in 2023 are expected at $389 million, with about $75 million in the form of grants.
  - IDA disbursements in 2024 expected at $257 million, of which about $100 million would be in the form of grants.
  - Disbursements from the African Development Bank for 2024-25 are expected to be at about $300 million.
  - SDR 70 million out of the SDR 139.88 million to be disbursed under the First Review will be on-lent to the budget.
  - Over the program period, about 72 percent (or $7.65 billion) of the residual BOP financing gap is expected to be covered by the debt restructuring.
  - Objective: bring gross international reserves to a level of five months of prospective imports.
- Creditor agreement:
  - Authorities’ agreement with official creditors represented by the OCC aligns with financing assurances provided in June 2022.
  - Agreement entails a fully quantified two-stage approach that includes a state contingent treatment with a trigger linked to Zambia’s debt carrying capacity (DCC).
  - Agreed debt treatment is consistent with program parameters and restoring Zambia’s debt sustainability over the medium term.
  - OCC financing assurances are adequately representative and include Paris Club creditor representatives; arrears to other official bilateral creditors can be deemed away under the Lending into Official Arrears (LIOA) Policy.

*Source: 1zmbea2023002 - 34. Enhanced dialogue with the private sector, including through the newly established Public-Private Dialogue Forum.*

### 49.      Prompt Fund support is considered essential for the successful implementation of

### Prompt Fund support is considered essential for the successful implementation of

### Fund support, debt restructuring, and program status
- Prompt Fund support is considered essential for the successful implementation of Zambia’s adjustment program.
- In line with the Fund’s Lending into Arrears (LIA) policy, the authorities are making a good faith effort to reach a restructuring agreement with external private creditors on comparable terms and consistent with program parameters.
- There have been several rounds of discussions with Eurobond holders, and relevant non-confidential information has been shared with other private creditors through presentations, webinars, and the regular publication of the debt statistics bulletin.
- Work on codifying the agreement with the OCC in an MOU is advancing and there are good prospects it will be finalized in the coming weeks.
- Once the MOU is implemented and comparable restructuring agreements reached with other creditors, Zambia’s debt would be sustainable on a forward-looking basis, with a moderate risk of debt distress (DSA, Text Figure 3).
- In the absence of those elements and as Zambia is in arrears to creditors, Zambia formally remains in debt distress (see DSA, Text Figure 1).
- Staff judges financing assurances are in place for the unresolved arrears to both official and private creditors, given the agreed OCC treatment and the good faith efforts to reach agreements with all creditors on comparable terms.

### Financing gap, official financing, and external debt restructuring (staff estimates and projections)
- Total Financing Gap by year and total:
  - 2022: 3,063
  - 2023: 2,282
  - 2024: 3,054
  - 2025: 2,282
  - Total: 10,680
- Official financing by year and total:
  - 2022: 737
  - 2023: 765
  - 2024: 783
  - 2025: 744
  - Total: 3,029
- IMF ECF by year and total:
  - 2022: 187
  - 2023: 376
  - 2024: 376
  - 2025: 376
  - Total: 1,315
- World Bank financing (includes new financing from the World Bank that will support budget implementation, including grants) by year and total:
  - 2022: 550
  - 2023: 389
  - 2024: 257
  - 2025: 218
  - Total: 1,414
- AfDB financing by year and total:
  - 2022: - 
  - 2023: - 
  - 2024: 150
  - 2025: 150
  - Total: 300
- Financing from external debt restructuring:
  - 2022: 2,326
  - 2023: 1,517
  - 2024: 2,271
  - 2025: 1,072
  - Total: 7,651
- Note on arrears: In 2022, the arrears accumulated on restructurable debt covered the financing gap. The pre-restructuring baseline includes a working assumption that the debt arrears would be cleared over 5 years. This was not applied here to the arrears accumulated in 2022 on restructurable debt to avoid double counting.

### Arrears to IFIs and other creditors
- Zambia reported $2.3 million of interest and principal arrears to IFIs as at end-2022, of which $0.25 million were technical arrears that were cleared by end-March 2023.
- Arrears of $2.1 million due to the Nordic Development Fund (NDF) remain outstanding.
- The NDF is not a global IFI, nor is it part of the global financial safety net; however, it did participate in the Heavily Indebted Poor Countries Initiative and has previously been excluded from the scope of previous restructurings by the Paris Club.
- The OCC’s decision on whether these claims will be within the scope of the restructuring perimeter will be finalized in the MOU.
- Based on available information, staff assess that there is a credible plan in place to clear these arrears.

### Capacity to repay the Fund and associated risks
- The stock of debt to the Fund as a share of GDP (based on existing and prospective drawings) remains at elevated levels, peaking in 2025 at 4 percent of GDP.
- Debt service obligations to the Fund reach a peak of 1.2 percent of exports and 2.8 percent of reserves in 2031.
- This assessment is subject to risks, most significantly from delays in the residual debt restructuring process, which are mitigated by the program design.

### Requested changes to prior performance criteria (ITs)
- Arrears clearance (proposed split into two ITs):
  - Split the IT on the net clearance of arrears between expenditure and tax (VAT-refund) arrears to better capture the different dynamics in each category.
  - The IT on net clearance of expenditure arrears will be assessed by calculating the net flow as the difference between the arrears clearance minus any new accumulation of arrears in the current fiscal year.
  - Any changes in the valuation of the pre-existing stock due to ongoing audits, interest or penalties accrued, or exchange rate valuation will not affect the target.
  - The separate IT on the clearance of VAT-refund arrears will target a level of VAT refunds consistent with clearing the legacy stock (as measured at the end of the previous year) by end-2027, and will incentivize the authorities to aim to remain current on the flow of new refund claims.
  - The new IT on the clearance of VAT refunds will be adjusted for any newly-validated claims for the previous year resulting from ongoing audits.
- Floor on revenues:
  - Dropping the adjustment for the VAT backlog to the IT on the floor on revenues as progress on the clearance of VAT refunds will be captured separately.

### New conditionality, structural benchmarks, and institutional reforms
- New structural and quantitative conditionality, and ITs, for September 2023-June 2024 have been agreed with staff (MEFP Table 1, 3).
- In addition to the continuous SB and the carry-forward of the SB on implementation of commitment controls through the IFMIS, eight new SBs are proposed on:
  - establishing a unified LTO,
  - strengthening fiscal risk monitoring and reporting,
  - improving cash management,
  - reforming the debt management office,
  - submitting the Access to Information Bill to Parliament,
  - publishing procurement contracts for FISP,
  - implementing the planned migration of FISP to the e-voucher,
  - publishing the inaugural financial stability report.
- The Bank of Zambia (BoZ) is progressing with implementation of the recommendations of the 2022 safeguards assessment.
  - Legislative reforms to strengthen the central bank’s mandate, autonomy, and governance arrangements have been enacted in line with staff’s advice.
  - The BoZ signed a MoU with the Government clarifying their respective roles and responsibilities for servicing the associated financial obligations to the Fund.
  - Continued efforts are required, including on the interpretation of the statutory limit on credit to government to ascertain its legal compliance; strengthening oversight bodies; and reinforcing controls over the reporting process for program monetary data.

### Staff appraisal: performance, risks, and reform priorities
- Zambia has begun correcting deep macro-economic imbalances to raise inclusive growth, create jobs, and reduce poverty.
- Authorities have taken steps to restore fiscal sustainability, raise social spending, and strengthen economic governance.
- Program performance:
  - All quantitative performance criteria for end-September and end-December 2022 were met.
  - Nine out of eleven structural benchmarks were met on time.
  - All but one of the indicative targets for the test dates were met.
- Fiscal performance and revenues:
  - Fiscal performance was in line with the budget in 2022; public expenditure was kept within budget limits.
  - Social spending was increased as set out in the budget.
  - Revenue growth has been in line with the program despite an underperformance from the mining sector due to production challenges and lower copper prices.
  - Overperformance in non-mining revenues, personal income tax and VAT should prove durable given underlying revenue-reform efforts.
  - Going forward, most of the fiscal adjustment should be driven by the authorities’ revenue mobilization efforts.
  - Substantive reforms are underway, with support from Fund capacity development, to modernize the ZRA, reduce the tax compliance gap, and improve service delivery for taxpayers.
- Governance and anti-corruption:
  - Strengthening economic governance and addressing corruption vulnerabilities should remain central to reforms.
  - Policies are being implemented to ensure value-for-money by following public procurement regulations, increasing transparency, and strengthening the fight against corruption in line with the recommendations of the IMF’s Diagnostic Report on Governance and Corruption, published in December 2022.
- External position, reserves, and monetary policy:
  - Zambia’s external position is in line with the level implied by fundamentals and desirable policies.
  - Planned reforms to restore fiscal and debt sustainability, together with the debt restructuring, will sustain the external position and help reserves reach their target level of five months of prospective imports.
  - The Bank of Zambia should remain alert to inflationary pressures and continue reforms to preserve financial stability.
  - Monetary policy has appropriately moved to a tightening bias given rising inflationary pressures, primarily driven by exchange rate movements.
  - In the event of heightened exchange market pressures, exchange rate flexibility should remain the first response, taking account of the pass-through to inflation and financial stability.
  - While the banking sector has remained resilient, continued vigilance is warranted. Credit and financial inclusion policies will be key to strengthening the financial sector’s role in supporting private sector growth.
- Growth, risks, and private sector:
  - Reforms to raise private sector growth and create jobs are key to sustaining the economic recovery, particularly as significant downside risks remain.
  - Dominant risks include weather-related shocks, shortfalls in copper production, and copper prices.
  - The government is committed to boosting private sector growth and attracting investment into Zambia, particularly to promote a green recovery.
  - Given the tight fiscal position, private sector investment will be key for Zambia.
- Statistics and technical assistance:
  - Further bolstering statistical capacity would help enhance policy design, as well as the accuracy and timeliness of data provision.
  - TA recommendations should be followed-up consistently and supported by appropriate prioritization in resource allocation.

*Source: IMF staff estimates and projections; extracted from the provided content.*

### 64.      Staff supports the completion of the first review under the ECF arrangement based on

### Staff supports the completion of the first review under the ECF arrangement based on

### Program assessment and IMF decisions
- Staff supports the completion of the first review under the ECF arrangement based on Zambia’s overall strong performance and commitments under the program.
- Staff also supports the completion of the financing assurances review.
- The next Article IV consultation will be held within 24 months in accordance with the Executive Board decision on consultation cycles for members with Fund arrangement.

### Growth and macroeconomic outlook
- Growth is expected to accelerate in 2023, driven by:
  - a recovery in mining and agriculture, and
  - continued expansion of the services sectors.
- GDP growth at constant prices:
  - 2022: 4.7
  - 2023 (projection): 3.6
  - 2024: 4.3
  - 2025: 4.5
  - 2026: 4.7
  - 2027: 5.0
  - 2028: 5.1

### Inflation and exchange rate
- Inflation developments:
  - Inflation declined rapidly from the 25 percent peak to single digits at the end of 2022.
  - Consumer prices (end of period): 2022: 9.9; 2023 (projection): 11.4; 2024: 7.9; 2025: 7.0; 2026: 7.0; 2027: 7.0; 2028: 7.0.
- Exchange rate:
  - Kwacha depreciated at the end of 2022, reversing a year-long appreciation trend.
  - Average exchange rate (kwacha per U.S. dollar): 2022: 17.0 (table notation).
  - End-of-period exchange rate (kwacha per U.S. dollar): 2022: 18.1.

### Fiscal developments and public debt
- Revenue and taxation:
  - A decline in indirect taxes (due to lower mining revenue) was partly compensated by a recovery in income taxes.
  - Revenue (percent of GDP): 2022: 21.4; 2023 (projection): 20.0; 2024: 22.3; 2025: 21.3; 2026: 21.2; 2027: 21.9; 2028: 22.2.
- Expenditure and consolidation:
  - Expenditure declined as wasteful fuel subsidies were eliminated and inefficient investment was pared back.
  - Expenditure (percent of GDP): 2022: 26.3; 2023 (projection): 26.2; 2024: 25.4; 2025: 26.0; 2026: 24.0; 2027: 23.5; 2028: 23.4.
- Overall balances and financing:
  - The overall cash balance improved compared to revised budget targets.
  - The deficit was financed mostly by external sources, with the SDR allocation accounting for 1/3 of those external financings.
  - The authorities started clearing arrears, with the overall commitment balance improving markedly.
- Public debt:
  - Total public debt (gross, end-period): 2019: 103.3; 2020: 150.3; 2021: 112.1; 2022: 110.9; 2023 (projection): 110.2; 2024: 100.8; 2025: 94.1; 2026: 88.5; 2027: 83.1; 2028: 77.6.
  - External public debt (percent of GDP): 2022: 58.8; 2023: 69.6; 2024: 65.9; 2025: 62.9; 2026: 59.2; 2027: 56.5; 2028: 54.1.
  - Domestic public debt (percent of GDP): 2022: 52.1; 2023: 40.6; 2024: 34.9; 2025: 31.3; 2026: 29.3; 2027: 26.6; 2028: 23.5.

### External sector and reserves
- Current account:
  - Current account balance (percent of GDP): 2022: 3.6; 2023 (projection): 4.7; 2024: 7.3; 2025: 8.6; 2026: 8.6; 2027: 8.7; 2028: 8.4.
  - The current account surplus narrowed in 2022, reflecting a drop in copper prices and lower copper production, and an import recovery.
- Copper and exports:
  - Copper prices (U.S. dollars per tonne) series around 2022 shown as 8,829 (table memo) and historical dynamics noted in figures.
  - Non-copper and copper export developments influenced the trade balance and current account.
- Reserves:
  - Gross international reserves (months of prospective imports): 2022: 3.5; 2023 (projection): 3.5; 2024: 4.2; 2025: 5.0; 2026: 5.0; 2027: 5.0; 2028: 5.0.
  - Despite sizeable outflows that proxy for copper receipts held abroad and the reversal of portfolio flows, the level of reserves increased in 2022.
  - SDR allocation is visible in reserve dynamics and accounted for a material share of external financing.

### Monetary and financial developments
- Exchange rate and market conditions:
  - The exchange rate has depreciated since September 2022 despite the rebound in copper prices.
  - Financing conditions are beginning to tighten due to reduced participation of non-resident holders.
  - Non-residents’ share in government debt has declined.
- Banking system and credit:
  - Domestic banks have increased their exposure to the government.
  - Bank credit to the private sector has been weak, albeit tentatively recovering.
  - Banks have scaled back exposure to riskier personal loans in favor of the manufacturing sector.
- Interest rates and yields:
  - Policy and interbank overnight rates, and weighted average yield rates on T-bills and bonds, show increases through 2022 into 2023 (figures presented in the source).

### Key indicators and projections (selected exact figures)
- GDP at market prices (millions of kwacha): 2022: 504,477; 2023 (projection): 585,449; 2024: 671,332; 2025: 752,580; 2026: 841,746; 2027: 941,300; 2028: 1,054,120.
- Consumer prices (average): 2022: 11.0; 2023 (projection): 10.6; 2024: 9.6; 2025: 7.5; 2026: 7.0; 2027: 7.0; 2028: 7.0.
- Credit to the private sector (percent of GDP): 2022: 15.2; 2023 (projection): 16.7; 2024: 18.1; 2025: 21.1; 2026: 21.8; 2027: 23.6.
- Broad money (M3) annual percentage change (memo): 2022: 17.2; 2023 (projection): 12.5; 2024: 11.0; 2025: 11.8; 2026: 11.9; 2027: 12.0.

### Program financing and disbursement schedule (highlights)
- The program timetable shows scheduled review-linked disbursements and the role of SDR allocation in financing.
- Table of availability dates and condition-linked disbursements is included in the source, culminating in total availability of 978.20 (Millions of SDR) equivalent to 100.0 percent of quota.

*Source: 1zmbea2023002 - 64.*

### Annex I. Key Recommendations of the 2019 Article IV

### Annex I. Key Recommendations of the 2019 Article IV Consultation

### Fiscal Policy
- Recommendations and implementation status:
  - Fiscal adjustment: Implement an orderly adjustment anchored on frontloaded revenue mobilization, a moratorium on new external non-concessional borrowing and guarantees, and scaled-back capital spending.
    - Status: Ongoing. Staff’s updated recommendations on fiscal adjustment are being implemented as part of 2022 ECF program. Large, frontloaded, and sustained fiscal consolidation through expenditure (including capital spending) adjustment and revenue raising is reflected in 2023 budget and MTFF—which are underpinned by a strategy for clearing budgetary arrears (published), an action plan to boost revenue mobilization (adopted), and reinstatement of VAT and excise taxes on fuel (completed). A zero limit is being implemented on non-concessional external borrowing.
  - PFM: Strengthen budget execution and commitment control to halt arrears both within and outside IFMIS system.
    - Status: Implemented. In the IFMIS, a Commitment Control Module (CCM) was developed to link commitments to budget, and became operational, while budget releases (now done on a quarterly basis) was separated from (monthly) cash release. All MPSAs will be required to make all financial commitments in the IFMIS by end-June 2023.
  - Debt management: Strengthening monitoring and management of debt including by launching a quarterly debt bulletin and stocktaking contracted but undisbursed debt (combined with prioritization).
    - Status: Implemented. Quarterly debt statistics bulleting is being published on an ongoing basis, and a ceiling (indicative target) is implemented on disbursement of contracted but undisbursed external debt underpinned by continual stocktaking and prioritization exercise.
  - Public investment management: Enhance the project selection, appraisal process, and oversight, including by establish a dedicated unit to monitor and mitigate risks related to implementation of large capital expenditure projects.
    - Status: Implemented. In line with the government’s Public Investment Management Strategy, a public investment board was established and is responsible for project scrutinization: including through project appraisal and cost effectiveness review. Public Investment Planning Department (PIPD) oversees planning, and management of public investment projects.

### Monetary and Financial Sector Policies
- Monetary policy stance: Tighten if inflation pressures emerge in line with BoZ’s forward looking framework and support reserve accumulation. Enhance monetary policy effectiveness by combining it with large and upfront fiscal consolidation.
  - Status: Ongoing. Staff’s updated recommendations are being implemented as part of the 2022 ECF program, including through QPC on NIR and a monetary policy consultation clause. Inflation has come down to single digits and is close to the upper policy band.
- Monetary Policy Framework: Grant BoZ formal operational independence to pursue price stability as its primary mandate by amending the BoZ Act.
  - Status: Implemented. New Bank of Zambia Act, which is in line with staff recommendation, has been enacted.
- Bank supervision: Strengthen banking supervision capacity, including by strengthening risk-based prioritization of onsite inspections, and crisis preparedness.
  - Status: Implemented. BoZ has revised templates and conducted a pilot of enhanced returns with a view to enhancing off-site analysis and developed a problem bank framework, to ensure consistent and effective early intervention to weak institutions.

### Energy Sector
- Recommendation: Complete the cost-of-service study and advance tariff reforms.
  - Status: Implemented. As part of ECF program commitments, a cost-of service study was completed and published, and a multi-year tariff framework was adopted and published.

### Risk Assessment Matrix — Selected Risks, Likelihood, Impact and Policy Responses
- Further delays in residual debt restructuring negotiations
  - Relative Likelihood: M
  - Impact if Realized: L. Exchange rate pressures could intensify while domestic yields may increase, in part reflecting further exit of non-resident holders of domestic debt. Continued accumulation of external arrears could bring increasingly larger uncertainly on restoring debt sustainability and undermine the growth outlook.
  - Policy Response: Further expedite fiscal adjustment and identify extra sources of fiscal financing (e.g., expedited use of SDR, additional IFI financing). Further expedite PIM reform and growth enhancing structural reforms to boost confidence and encourage more FDI. Further strengthen financial sector surveillance along with contingency planning.
- Social discontent
  - Relative Likelihood: L
  - Impact if Realized: M. Social unrest could weaken political impetus for economic adjustment and reform and dent investor confidence causing capital flight, growth slowdown, and higher inflation.
  - Policy Response: Strengthen governance and anti-corruption frameworks. Implement orderly fiscal adjustment, notably by increasing domestic revenue and reducing capital expenditures. Boost spending on social assistance. Maintain exchange rate flexibility to cushion balance of payments stress while keeping monetary policy focused on the inflation response.
- Extreme climate events
  - 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 and open-pit mining, 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. Maintain exchange rate flexibility to cushion balance of payments stress while keeping monetary policy focused on the inflation response.
- Financial instability caused by a rise in non-performing loans
  - Relative Likelihood: L
  - 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. Strengthen contingency planning.
- Abrupt global slowdown or recession
  - Relative Likelihood: H
  - Impact if Realized: H. Slow global activity and low and volatile copper price causes a growth shock to Zambia’s economy while exacerbating balance of payment and fiscal gaps.
  - Policy Response: Further expedite fiscal adjustment and identify extra sources of fiscal financing, while using exchange rate adjustment to cushion balance of payment shocks. Accelerate reforms enhancing export competitiveness. Diversify the economy to build resilience against external shocks.
- Intensification of regional conflict(s)
  - Relative Likelihood: H
  - Impact if Realized: M. Spillover through supply chains or commodity price could negatively affect growth, inflation, and balance of payment and financial system vulnerability.
  - Policy Response: Maintain exchange rate flexibility to cushion balance of payment stress while keep focusing monetary policy on inflation response. Closely monitor the buildup of vulnerabilities on financial sector balance sheets and implement swift and decisive prudential corrective actions if required. Accelerate reforms enhancing export competitiveness. Diversify the economy to build resilience against external shocks. Enhance regional integration, including through existing SADC and AfCFTA protocols.
- Deepening geo-economic fragmentation
  - Relative Likelihood: H
  - Impact if Realized: L. A disruption in global supply chains may weaken global demand for Zambia’s upstream exports and increase the costs of imports of intermediate goods.
  - Policy Response: Enhance export competitiveness and diversification through structural reforms. Diversify import supply chains. Enhance regional integration, including through existing SADC and AfCFTA protocols.

### Annex III — External Sector Assessment: Key Findings and Metrics
- Overall assessment: The external position of Zambia in 2022 was broadly in line with the level implied by fundamentals and desirable policies. This is driven by the positive effects of fiscal consolidation on current account. The weak external stock position and the level of reserves being less than adequate implies that the current account norm for Zambia should remain positive.
- Policy responses recommended:
  - Continue to implement policies in line with the ECF-supported program aimed at improving fiscal balance.
  - Implement structural reforms to enhance governance, boost growth, attract FDI, and diversify exports.
  - Continue accumulating foreign reserves in line with the ECF-program target, and monitor risks associated with volatile portfolio flows.
- Foreign assets and liabilities (June 2022, % GDP):
  - NIIP: -129
  - Gross Assets: 35
  - Debt Assets: 2
  - Gross Liab.: 164
  - Debt Liab.: 115
- Assessment: Despite improvement in 2022, Zambia’s NIIP poses a large risk to external sustainability and points to a need for substantial adjustment. Fiscal efforts envisaged under the ECF program as well as debt relief secured under the G20 Common Framework should sharply reduce foreign liabilities, increase foreign reserves, and stabilize the NIIP at a much lower level of -55 to -60 percent of GDP over the medium run.
- Current account:
  - Background: The 2022 current account surplus deteriorated sharply to 3.6 percent of GDP, down from 9.9 percent in 2021 and below the 4.9 percent average over 2018-2021. This drop was mostly driven by declining copper exports on account of much lower global prices and production disruptions in Zambia. With copper prices assumed to rebound to 2021 levels in the medium run, higher copper production and lower post-restructuring public interest payments, the current account surplus is expected to widen to 6.7 percent of GDP on average in 2023-25.
  - Assessment (EBA-lite): Estimates a current account norm for Zambia of -8.7 percent of GDP, or 11.5 percent of GDP below the cyclically adjusted level. Considering the need to bring NIIP to the target of -58 percent of GDP, the norm must be adjusted upwards by 11.2 percent of GDP, yielding a current account gap of 0.3 percent of GDP. External position assessed to be in line with fundamentals and desirable policies.
- Real exchange rate:
  - Background: Zambia’s average REER strengthened by 30 percent in 2022. The real kwacha appreciation started in 2021 and mirrored the nominal appreciation driven by high copper prices and large portfolio inflows into the domestic debt market. A drop in copper prices over the second half of 2022 and a reversal of portfolio flows led to a real exchange rate ending 2022 10 percent depreciated relative to the 2022 average.
  - Assessment: REER model in the EBA-lite implies a REER gap of -12.3 percent and a corresponding current account gap of 3.5 percent, suggesting the external position is stronger than implied by fundamentals. Staff assigns more weight to stock indicators given the weak external stock position and less-than-adequate reserves.
- Capital and financial accounts:
  - Background: Transactions resulted in large outflows in 2020-2022 (-11.6 percent of GDP in 2022 and -14.6 points of GDP on average over the period). Outflows driven by large outflows in the non-financial sector (mainly mining companies) and public sector scheduled loan repayments. These outflows were partially offset by new disbursements of public debt over 2018-2020, as well as large inflows into domestic debt market and the SDR allocation in 2021. Net FDI inflows exceeded $500mn in 2022, a two-fold increase over the 2018-21 average. Portfolio inflows reversed in 2022 as non-resident investors exited the domestic debt market due to the uncertainty surrounding unresolved debt-restructuring.
  - Assessment: Exit of non-resident investors from the domestic debt market poses a significant risk to local currency stability and reserves accumulation. Authorities should pursue ECF-aligned policies to improve business sentiment and attract FDI and portfolio investments, and capitalize on conclusion of debt restructuring negotiations with official creditors.
- FX intervention and reserves:
  - Background: Bank of Zambia gross reserves increased to $3.05bn ($250mn up from 2021). The level of reserves in dollar terms is now more than twice as high as the 2018-2020 average due to the $1.4bn one-off SDR allocation in 2021. Bank of Zambia maintains a managed float.
  - Assessment: The level of reserves accumulated by the Bank of Zambia is assessed to be below the adequate level. A cost-benefit analysis suggests an optimal level of 5-5½ months of prospective imports. Authorities should achieve this level by continuing planned fiscal adjustment, aided by debt restructuring and IFI disbursements.

### Annex IV — Capacity Development Strategy: Summary
- The Fund’s capacity development (CD) strategy for Zambia is anchored on the key objectives of the ECF-supported program (Annex III Table 1). Delivery of CD is strongly supported by experts based at AFRITAC South, and closely coordinated with key partners (e.g., GIZ and USAID on revenue mobilization action plan). Fund support for implementing recommendations of the Diagnostic Report on Governance and Corruption is expected to be complemented by other partners. The conclusion of debt restructuring negotiations will allow refocusing of the authorities’ efforts in key areas.
- Notable ongoing or recently concluded CD activities:
  - PFM and revenue mobilization: PEFA assessment (joint with the EC, ongoing); TADAT (to underpin revenue mobilization action plan, SB); advice on IFMIS changes (to enhance commitment controls, SB).
  - Legal framework: Advice on the amendments to the BoZ Act (program prior action) and new Public Debt Management Act (SB).
  - Public debt management: Training on debt sustainability analysis and MTDS (to help authorities meet the requirements of the new PDM Act).
  - Governance: Recently published governance diagnostic and action plan (SB).
  - Pensions: Recent CD mission (January 2023) to propose measures to improve the financial sustainability of public pension schemes and reduce medium-term fiscal risks.
  - Statistics: Intensive engagement on BOP statistics.

*Prepared from Annex I (and subsequent annexes) of the provided IMF content unit.*

### Annex IV. Table 1.  Zambia: Priority CD Areas

### 1zmbea2023002 - Annex IV. Table 1. Zambia: Priority CD Areas

### Priority capacity development (CD) areas and objectives
- Tax policy and revenue administration
  - Enhance domestic revenue mobilization as part of fiscal consolidation.
  - Focus on simplification, broadening the tax base, and strengthening compliance.
- PFM
  - Improve the budget preparation process.
  - Strengthen budget execution and controls to avoid payment arrears.
  - Strengthen the identification and management of fiscal risks, including those related to SOEs, PPPs, and local governments.
  - Improve public investment management to ensure better alignment of public investment projects with national priorities.
- Public debt management
  - Strengthen the formulation, implementation, and monitoring of a debt management strategy.
- Financial supervision and crisis management framework
  - Deepen the BoZ’s capacity to identify and manage risks in the financial sector.
  - Ensure the adequacy of the legal and regulatory framework for crisis management.
- Monetary policy implementation & operations
  - Strengthen monetary policy implementation to facilitate transition towards a more modern inflation-targeting framework.
  - Promote a well-functioning FX market.
- Economic statistics
  - Improve BOP statistics and complete the rebasing of GDP.

### Key statistics and explicit figures from priority table
- No additional numerical values were provided within the table beyond the objectives above.

---

### Annex IV. Box 1 — Enhancing Zambia’s Balance of Payments (BOP) Statistics

### Findings from missions and analyses
- Historical leakages:
  - Private sector assets held abroad averaged about one third of copper exports over the last 5 years.
  - Outflows have been as high as about 20 percent of GDP in 2012 and 2014.
- Missions and engagements:
  - Since February 2022, joint AFR-STA engagement with the Bank of Zambia (BoZ) undertook assessments.
  - Mission 1 examined existing mining sector statistics across various sources.
  - Mission 2 supported preparation of a “flow of funds” (FoF) analysis of the largest mining companies.
  - Mission 3 included site visits to seven of the biggest mining companies and concluded in-depth analysis of mining sector transactions (timeline: Mission 1 February 2022 (remote); Mission 2 April 2022 (in-person); Ongoing remote engagement; Mission 3 May 2023 (in-person)).
- Repatriation and adjustments:
  - Mission estimated that 50 to 90 percent of copper exports in 2020-21 were not repatriated.
  - Proposed adjustments to services imports and interest payments would result in a reduction of the current account balance of about $700mn per year.
- e-BOP and financial account revisions:
  - BoZ staff prepared adjustments to the financial account based on the e-BOP data.
  - Financial account revisions reflect the removal of current adjustments to other flows, as well as revised FDI flows, and trade credits.
  - Mission recommended using the methodology developed to estimate imports of services using e-BOP data on a recurring basis, and to initiate the flow-of-funds exercise for major companies in the manufacturing sector.
- Additional quantitative mission results (summary table)
  - Mission 1 results: 50-80 percent of exports non repatriated; imports likely understated by 20 percent.
  - Mission 2 results: Improved PCF reporting by mines; advise BoZ on appropriate BoP recording.
- Caveat:
  - The analysis of the eBOP transactions also suggests that outflows other than the accumulation of foreign assets by mining companies are not comprehensively captured in the balance of payments data.

### Key statistic figures preserved verbatim
- "one third of copper exports"
- "20 percent of GDP in 2012 and 2014"
- "50 to 90 percent of copper exports in 2020-21 were not repatriated"
- "reduction of the current account balance of about $700mn per year"
- Mission timeline entries: "February 2022", "April 2022", "May 2023"
- Mission 1 result: "50-80 percent of exports non repatriated; imports likely understated by 20 percent"

---

### Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) — Key policy commitments and recent developments

### Program commitments and requests
- Request: completion of the first review, completion of the financing assurances review, and a disbursement in the amount of SDR 139.88 million.
- Commitments:
  - Continue implementation of policies to safeguard macroeconomic stability, restore and maintain debt sustainability, and tackle economic and social challenges.
  - Ensure appropriate use, monitoring, and reporting of the 2021 General SDR Allocation.
  - Reaffirm commitment to Article VIII obligations and timely information provision as agreed in the TMU or upon request.
  - Consent to IMF publication of the letter, the MEFP, the TMU, and related staff report and debt sustainability analysis after Executive Board approval.

### Recent economic developments and outlook — Growth and budget performance
- Growth
  - Real GDP growth in 2022 is estimated to have been 4.7 percent.
  - Key drivers: education, ICT, and transport sectors.
  - Subdued: agriculture (delayed rains), mining (low grade ores and relatively lower copper prices), and construction (slowdown in infrastructure projects).
- Budget performance in 2022
  - Total revenue and grants: K100.7 billion (21.6 percent of GDP), in line with target.
  - Revenue excluding grants: K98.7 billion (21.2 percent of GDP), slightly below target of K98.9 billion.
  - Total expenditure, including amortization: K141.1 billion, 18.4 percent below the target of K173.0 billion.
  - Transfers and subsidies: K24.4 billion, 2.2 percent above the budget target of K20.0 billion.
  - Social benefits releases: K6.0 billion, 23.9 percent above the target of K4.8 billion.
  - Releases towards non-financial assets: K17.8 billion, 14.1 percent above the budget target of K15.6 billion.
  - Releases towards financial assets and liabilities: K9.5 billion, 73.0 percent above the budget target of K5.5 billion.
- Use of SDR Allocation
  - 2021 General SDR Allocation: equivalent to $1.4 billion received in August, 2021.
  - Government used about 50 percent of the proceeds to finance the 2022 Budget (mostly social sector spending including social cash transfer programme and pension arrears clearance).
  - Balance of 50 percent was kept as a buffer; 25 percent of the residual is intended to be used in 2023 to help finance the Budget, mostly for the social sectors including social protection programmes.

### Public debt and arrears
- Public and publicly guaranteed external debt (excluding interest arrears, fuel arrears and guarantees on ZESCO payables):
  - US $15.5 billion as at end-December 2022 (from US $14.7 billion at end 2021).
  - Composition: US $13.96 billion as central government, US $1.45 billion as guaranteed external debt, and US $0.09 billion as non-guaranteed debt.
- Central Government external debt
  - Increased to US $13.96 billion as at end-December 2022 from US $13.04 billion as at end-December 2021.
  - Proportion of commercial debt: 42.4 percent.
  - Multilaterals (including plurilaterals): 29.3 percent.
  - Bilateral creditors: 28.3 percent.
- Publicly guaranteed debt
  - US $1.45 billion as at end-December 2022 from US $1.53 billion at end 2021.
  - 93 percent of guaranteed debt relates to ZESCO.
- External debt service payments
  - $130.77 million paid in 2022.
  - $232.58 million paid in 2021.
- Cancellation and rescoping of projects
  - 2020 exercise: cancelled and scaled down loan financed projects by US $5 billion (cancellation US $1.1 billion; rescoping US $280 million).
  - Additional $2.1 billion of contracted but undisbursed loans were cancelled in 2022.
  - Contracted but undisbursed external debt: US $5.16 billion as at end-December 2022.
  - Unpaid IPCs around $582.22million as at end December 2022 (noted as a preliminary position expected to be higher).
- Domestic debt stock
  - Stock of Government securities: K210.0 billion at end-2022, an increase of 9.0 percent from K192.9 billion at end-December 2021.
- Public external debt arrears (total)
  - $5.1 billion as at end-December 2022, comprising:
    - $4.06 billion as external debt arrears,
    - $123.09 million as government Guaranteed loans,
    - $582.22 million as central Government contractor arrears,
    - $195.29 million as contractor arrears (SOEs),
    - $139.45 million as IPP import arrears.
  - External debt arrears increased to $4.06 billion from $2.2 billion at end 2021.
- Domestic arrears
  - Declined to K77.9 billion from K79.9 billion at end 2021.
  - Significant reductions: Personnel Emoluments, other RDCs, FISP, FRA, pensions and capital projects.
  - Notable increases: fuel, electricity and VAT arrears (mostly due to stock revaluations following ongoing audit expected to conclude by end-April 2023).

### Monetary and financial sector developments
- Inflation
  - Inflation trended downwards and reached a single digit of 9.7 percent in June 2022 (first time since August 2019) from 16.4 percent in December 2021.
  - Overall inflation averaged 11.1 percent in 2022, down from 22.1 percent in 2021.
  - Food inflation in December 2022: 11.9 percent (from 19.9 percent in December 2021).
  - Non-food inflation in December 2022: 7.3 percent (from 12.1 percent in December 2021).
  - Monetary Policy Rate: Bank of Zambia maintained at 9.0 percent throughout 2022.
  - 2023 adjustments: Monetary Policy Committee raised the Monetary Policy Rate by 25 basis points to 9.25 percent in February 2023, and by another 25 basis points to 9.5 percent in May 2023.
  - Target band: 6-8 percent over the 2023-24 period (inflation expected to remain above without policy actions).
- Banking sector
  - Overall performance and condition satisfactory as at end-December 2022.
  - Improvements due to favourable capital adequacy, asset quality, earnings performance and liquidity conditions.
  - Banking sector recorded higher profits driven by interest income from investments in Government securities.
- Non-bank financial institutions
  - Overall performance and condition satisfactory as at end-December 2022.
  - Regulatory capital to total risk-weighted assets: increased to 37.7 percent at end-December 2022 from 36.8 percent in December 2021 (prudential minimum 10.0 percent).
  - Asset quality improved to 13.7 percent from 17.2 percent in 2021.

*Source: 1zmbea2023002 - Annex IV. Table 1. Zambia: Priority CD Areas (PDF).*

### 19.      Domestic credit growth rose sharply from a low base and after years of decline. Total

### 19.      Domestic credit growth rose sharply from a low base and after years of decline. Total

### Domestic credit, private sector credit, and lending rates
- Total domestic credit growth more than doubled to 18.7 percent in 2022 compared to 8.6 percent in 2021.
- Credit to the private sector:
  - Grew by 34.2 percent in 2022.
  - Contracted by 7.8 percent in 2021.
  - Growth in 2022 was mostly explained by a significant increase in foreign currency denominated lending.
- Commercial bank lending rates:
  - Declined marginally to 25.0 percent in 2022 from 25.9 percent in 2021.
  - Partly attributed to a decrease in Treasury bill yield rates.

### Exchange rate developments and external sector performance
- Kwacha performance:
  - Faced depreciation pressure against the US dollar in Q4 2022 after earlier appreciation.
  - Depreciated against the US dollar by 8.4 percent to K18.07 in 2022.
  - As of March 31, 2023, the Kwacha depreciated by 17.1 percent against the US dollar to K21.25 per US dollar on a year-to-date basis.
  - Depreciation pressures due to elevated demand for foreign exchange (importation of agricultural inputs and petroleum products) and declining supply (declining copper production and prices, and portfolio flows).
  - Protracted debt restructuring discussions and sustained excess demand for foreign exchange continued to weigh on performance in 2023.
- Balance of payments and current account:
  - Balance of payments position deteriorated in 2022: deficit of US$1.3 billion (4.8 percent of GDP) vs. surplus of US$1.5 billion in 2021.
  - Current account surplus narrowed to US$1.11 billion (3.6 percent of GDP) in 2022 from US$2.14 billion (9.7 percent of GDP) in 2021.
  - Narrowing driven by a decline in net merchandise exports and a widening services account deficit (higher expenditures on transportation attributed to passenger travel).
  - Financial account recorded a significant widening in deficit reflecting agreed recognition of principal repayments due on Government debt as contracted.
- Gross international reserves:
  - Increased to US$3.0 billion at end-2022 from US$2.8 billion at end-2021.
  - Major inflows: project receipts US$771.7 million; Government receipts US$237.0 million; first tranche disbursement under the IMF Extended Credit Facility arrangement.
  - Notable outflows: net Bank of Zambia foreign exchange sales for market support US$1.5 billion; Government uses US$546.7 million.

### Medium-term outlook and risks
- Baseline scenario:
  - Assumes growth at 3.6 percent based on a recovery in agriculture and continued strong growth in ICT and transport.
  - Inflation projected to trend upwards in anticipation of an upward adjustment in electricity tariffs by the second quarter of the year and depreciation of the exchange rate.
  - Current account surplus expected to expand, supported by recovery in copper production and prices, and relatively lower imports due to depreciation of the Kwacha.
- Key risks (could have high adverse impact if realized):
  - (i) A slowdown in global growth adversely affecting commodity prices.
  - (ii) Increasing frequency of climate change events affecting key sectors such as agriculture and energy.
  - (iii) Reform fatigue arising from socially disruptive reform measures such as adjustment of electricity tariffs.

### Programme performance under the ECF (Extended Credit Facility)
- General compliance:
  - Performance under the ECF has been in line with program commitments.
  - All end-December 2022 quantitative performance criteria (QPCs) and continuous performance criteria were met.
  - Monetary policy consultation (targets) were met.
  - All but one of the indicative targets were met.
  - Structural benchmarks (SBs): all end-September, October and end-December 2022 benchmarks have been met; two end-June 2023 benchmarks expected to be met with some marginal delays.
- Fiscal and reserve outturns:
  - Primary fiscal deficit through end-December 2022: K7.5 billion (1.4 percent of GDP), about a K1 billion below the target; driven by positive revenue performance and expenditure rationalization except for priority programmes such as social safety nets.
  - No borrowing by Government from the Bank of Zambia adhered to.
  - Net official international reserves: US $2,267 million (against target US $2,225 million).
- Continuous performance criteria:
  - Met: no new external debt arrears by the central Government, Bank of Zambia and ZESCO; Government did not guarantee any new concessional debt.
- Monetary policy targets:
  - Quarterly average rate of CPI inflation fell within the upper and lower outer bands for end-December 2022 (Calculated as the average of the 3-monthly year-on-year inflation rates within a quarter).
- Indicative targets and ceilings:
  - Fiscal revenues of central government excluding grants and mining revenues, adjusted by the backlog of VAT refund: K74.5 billion vs. target K74.9 billion (narrow miss).
  - Social spending by central government: K39.4 billion, K3.4 billion above target.
  - Floor on the net clearance of arrears on expenditure, tax refunds, and domestic debt service by central government: target K11.7 billion achieved.
  - Ceiling on the present value of new external borrowing (millions of US dollars): 75 met as no new concessional external borrowing was done.
  - Disbursement of contracted but undisbursed external debt to central government and ZESCO (millions of US dollars): US $128.3 million, below ceiling US $205 million.
- Structural benchmarks implemented:
  - Reinstated VAT and excise taxes on fuel and adjusted fuel prices.
  - Parliament enacted the Public Debt Management Bill No. 15 of 2022 to enhance transparency in debt management and provide National Assembly oversight in loan contraction (SB, end-September, 2022).
  - Cabinet adopted an Action Plan to boost revenue collections through tax policy changes and revenue administration improvements (SB, end-October, 2022).
  - Guidelines published to implement the new comprehensive agricultural support program and ensure migration of FISP to an electronic agricultural input system; Cabinet endorsed and published a multi-year tariff framework and related action plan for cost-reflective and sustainable electricity tariffs (SB, end-December, 2022).
  - Prepared and published a comprehensive governance diagnostic with recommendations and a time-bound action plan (with IMF staff support); Bank of Zambia undertook a comprehensive review of the health of the banking sector, including assessing COVID-19 pandemic impacts on bank balance sheets — both done on time.
  - Two end-June 2023 benchmarks expected to be met with some marginal delays.

### Fiscal policy and reforms (Policies for 2023 and the medium term)
- Overarching fiscal objectives:
  - Goal: entrench macroeconomic stability and growth, attain debt and fiscal sustainability, and improve livelihoods, especially for the vulnerable; rest on four Pillars in the Eighth National Development Plan.
  - Government committed to a multi-year fiscal consolidation path to improve primary balance.
  - Primary balance targets:
    - Cash basis: improve to 1.5 percent of GDP in 2025 from a deficit of 1.6 percent of GDP in 2022.
    - Commitment basis: improve to a surplus of 3.1 percent of GDP by 2025 from a surplus of 0.8 percent of GDP in 2022.
  - White Paper for the 2023-25 Medium Term Budget Plan and the 2023 Annual Budget aligned with these objectives.
- Revenue mobilization:
  - Objective: increase domestic revenue mobilization to about 22 percent of GDP by 2025 from 21.6 percent of GDP in 2022.
  - Achieved by strengthening tax policies and leveraging technology to enhance tax administration and compliance.
- Tax policy measures:
  - September 2022: amalgamated tax policy and administration measures into a comprehensive strategy and action plan.
  - Measures included harmonizing Company income tax rates across sectors; standard rating VAT on Diesel and Petrol; reinstating excise duty on petrol and diesel (implemented end-September 2022); increasing the carbon emission tax by 10 percent (included in Budget 2023).
  - Expected revenue effects by 2025 compared with 2023 level:
    - VAT collections projected to rise by an additional 1.3 percent of GDP by 2025.
    - Income taxes projected to rise marginally by 0.1 percentage points.
    - Customs and excise duties projected to decline by 0.3 percent of GDP over the period.
- Tax administration modernization:
  - Measures from the August 2022 Memorandum earmarked for medium term:
    - Establishment of a dedicated Large Taxpayer Office (by streamlining Large and Specialized Taxpayer Office in Direct Taxes; and creating similar office in Indirect Taxes and Excise Division) completed by end-March of 2023.
    - Eventual merger of mirror LSTOs by January 2024.
    - Enhancing trade facilitation on a risk-based approach for large importers and exporters.
    - Increasing staff allocation to Operating Divisions with strong Regional Offices.
    - Enhancing analytics of internal and third-party data sources; interfacing ZRA with systems for Ministry of Lands and IFMIS by Q4 2023.
    - Full fiscalisation of VAT through implementation of a software based Electronic Invoicing System by January 2024.
    - Establishment and full operationalization of a dedicated Small and Medium sized mines Unit by May 2023.
    - Stabilising ZRA tax system by addressing challenges on Taxonline II and completing Phase II of the Taxonline Issues Resolution Project.
    - Stepped-up efforts to collect tax debt.
  - Expected gains from tax administration and policy measures: 1.01 percent of GDP over 2023-2025.
- Non-tax revenue:
  - Projected to decline by 0.8 percentage points, mostly associated with revenue loss under mineral royalty tax (MRT) made tax deductible in 2022 in computation of corporate income tax for mining companies.
  - Better MRT yields expected in the long-term with projected higher copper production.
- Expenditure rationalization:
  - Total expenditure projected to come down by 2.3 percent of GDP by 2025 compared to 2022.
  - Reduction largely due to subsidies: 1.5 percent of GDP in 2025 from 2.1 percent in 2022.
- Farmer Input Support Programme (FISP):
  - Migration to e-voucher system delayed: originally intended from 2022/2023, now for 2023/2024 farming season due to tight supply conditions and high international prices.
  - Projected FISP expenditure: decline to 0.9 percent of GDP in 2025 from 1.5 percent of GDP in 2022.
- Capital expenditure:
  - Projected to remain flat averaging 3.1 percent of GDP over 2023-2025, mostly financed from domestic resources.
  - Focus on completing key economic roads and infrastructure in health, education and water and sanitation sectors.
  - If more disbursements from development partners become available, domestic financing will be reduced to remain within overall spending envelope.
  - Scope for more capital expenditure from pledged World Bank grants.
- Public financial management (PFM) and procurement reforms:
  - Amend Public Procurement Act No. 8 of 2020 to reduce red-tape and limitations in oversight.
  - Amend National Planning and Budgeting Act No. 1 of 2020 to strengthen integration of development planning and budgeting; require MPSAs to develop objectives, outputs and indicators aligned with national development plans.
  - Review Constituency Development Act No. 11 of 2018 to align to expanded scope of the CDF and delegate approval processes from Central Government.
- Public-Private Partnership (PPP) Act review:
  - Under review in consultation with Fund staff; to be submitted to Parliament by end-July 2023 (structural benchmark, SB).
  - Objectives: strengthen management of fiscal risks related to PPPs by defining PPP projects, mandating Finance Minister to approve/reject PPPs based on fiscal implications, and requiring public disclosure of key risks and fiscal implications of proposed and awarded PPP contracts.
- Arrears clearance strategy and commitment control:
  - August 2022: strategy published for clearance of expenditure and VAT arrears.
  - Despite significant releases beginning in 2022 and projected over next 9 years, stock of arrears only marginally declined in 2022 due to late presentation and audits of invoices and VAT refund build up.
  - Commitment Control Module developed in IFMIS linking procurement commitments to approved budget, effective July 2022.
  - Treasury undertaking verification, reconciliation and loading of outstanding amounts with supporting documentation.
  - Government will ensure at least 59 ministries, provinces and agencies register purchase orders and other financial commitments in IFMIS by end-August 2023 (SB).
  - Roll-out of IFMIS to all spending units under ministries of health, education, agriculture, and livestock and fisheries by end-2023.
  - Road sector arrears: Ministry of Finance and National Planning, RDA and NRFA boards to explore capturing commitment in IFMIS from 2025.
- IMF technical assistance and enforcement:
  - Government sought IMF technical assistance to enhance commitment control and arrears capture; recommendations being implemented (payroll processes and controls, arrears management and clearance, strengthening Treasury Single Account).
  - Enforcement of the Public Finance Management Act and regulations with punitive measures to deter non-adherence; Secretary to the Treasury to ensure strict adherence and enhanced fight against corruption.
- Budget execution and reporting:
  - Continue publication of Quarterly Economic Reviews containing budget performance information; financial report published annually.
  - Expand scope of Budget Execution Report to include performance on broad revenue and expenditure categories including social spending and improve quality.
  - Government will migrate to IPSAS Accrual Accounting Basis in 2024 based on approved roadmap.

### FISP migration timeline (structural benchmarks)
- 2023/2024 farming season:
  - Implement migration from Direct Input Supply to e-voucher system in at least 33 districts in line with migration criteria and Action Plan by end-September, 2023 (Structural benchmark, SB).
  - Hybrid system for top 10 grain producing districts: Government procurement of inputs which farmers redeem using electronic payment system.
- 2024/2025 farming season:
  - Migrate an additional 31 districts, bringing total to 73 districts on the electronic agricultural input support system.
- 2025/2026 farming season:
  - Migrate remaining 42 districts to reach 100 percent coverage of beneficiaries in 116 districts.

*International Monetary Fund*

### 49.      In order to enhance transparency relating to FISP, Government published the list of

### 1zmbea2023002 - 49.      In order to enhance transparency relating to FISP, Government published the list of

### Fertilizer Input Support Programme (FISP) — Transparency and Procurement
- Government published the list of suppliers of inputs for the 2021/2022 and 2022/2023 farming seasons on the Ministry of Agriculture website and will continue doing so for subsequent procurements.
- Information for the 2022/2023 farming season includes the name of the suppliers, products, quantity to be supplied, and contract amount.
- Disclosure aligns with the Public Procurement Act No.8 of 2020.
- Going forward, Government will continue to publish information on suppliers awarded contracts under the FISP programme, including on beneficial ownership, within 3 months of contract award.
- An audit of the programme by an independent firm of auditors is expected to be finalized by end April 2023; findings will help improve controls and ensure value for money.

- For the 2023/2024 farming season:
  - Procurement methods: open international bidding for Urea fertilizer; direct bidding for compound D fertiliser.
  - Open bidding is intended to secure competitive prices for Urea fertiliser, which is not manufactured locally.
  - Direct bidding will be offered to local manufacturers for compound D fertiliser.
  - Contracting decisions:
    - Nitrogen Chemicals of Zambia will be contracted to supply 43,292.70 metric tonnes of compound D fertiliser.
    - United Capital Fertiliser Limited will supply 77, 087.55 metric tonnes of compound D fertiliser.

- FISP reforms are embedded within the Comprehensive Agriculture Transformation Programme (CATP).

### Energy Sector — Fuel arrears and reforms
- Fuel arrears:
  - US $721.3 million at end November 2022, up from a verified stock of US $597 million at end 2021.
  - Increase partly due to late payment penalties on legacy debt; policy is cost reflective pricing with monthly adjustments based on international oil prices and the Kwacha-dollar exchange rate.
  - An independent audit to reconcile suppliers' claims with Ministry of Energy records is ongoing and will be concluded by end June 2023.

- TAZAMA pipeline conversions and framework:
  - TAZAMA converted from crude oil to finished product pipeline; expected to reduce cost of diesel transportation by 60 percent.
  - New framework to guide transparent, fair, and equitable use of TAZAMA for low Sulphur diesel (LSG) importation; rights of access to OMCs for bulk transportation and uplift at Ndola fuel terminal.
  - OMCs to be selected through competitive bidding and prequalified via public tender; approved list will constitute registered suppliers of LSG for one year, with suppliers selected through quarterly competitive bidding.
  - Government will issue a Statutory Instrument for a new pricing mechanism by end-June 2023 to account for transportation of LSG through the pipeline and by road.

### Power utility (ZESCO) — Debt, turnaround and tariffs
- ZESCO total outstanding debt as at end December 2022 amounted to US $3.9 billion, comprising:
  - US $1.94 billion in payables (including US $1.75 billion for power purchases)
  - US $1.96 billion in both domestic and external loans
- Breakdown of on-lending and guaranteed exposures:
  - Stock of on-lending facilities owed to the Central Government: US $595.18 million
  - Owed to commercial lenders: US $421.62 million
  - Government guaranteed loans: US $944.42 million
- Drivers of arrears: drought impact on generation, higher purchase price from IPPs relative to tariff, high overhead costs, and non-cost reflective tariffs.
- Historical note: As at end 2021, ZESCO had accumulated arrears on debt service amounting to $91.3 million.

- Turnaround strategy and tariff application:
  - ZESCO implementing a 10-year turnaround strategy to improve debt position, enhance revenue and reduce CAPEX and OPEX.
  - In January 2023 ZESCO applied to the Energy Regulation Board for upward tariff adjustments based on cost-of-service study:
    - Requested average retail adjustments: 37 percent in 2023, 9 percent in 2024, 15 percent in 2025, 10 percent in 2026, and 14 percent in 2027.
    - Projected net profit margins if approved: 5.2 percent in 2023, 4.3 percent in 2024, 7.3 percent in 2025, 8 percent in 2026, and 13.1 percent in 2027.
  - Public hearings conducted on 9th March 2023; tariff schedule expected to be approved by ERB by end-April 2023.

- Debt mitigation and cost reductions:
  - ZESCO intends to convert legacy IPP debt to long term debt via a long-tenured loan facility (concessional terms) and convert on-lent loans to equity in consultation with the Ministry of Finance and National Planning.
  - Non-guaranteed external debt stock reduced by 48 percent to US$ 91 million as at 31 December 2022 from US$ 174 million at the close of 2021.
  - Negotiated lower tariffs with IPPs:
    - Mamba Collieries: from 13 cents per kWh to 9.06 cents per kWh.
    - Itezhi-Tezhi Power Cooperation: from an average of 8.66 cents per kWh to 5.33 cents KW per hour.

### Social protection and pensions
- Social Cash Transfer Programme:
  - Scale up beneficiaries to 1,097,657 households in 2023 from 1,027,000 households in 2022.
  - Increase transfer value per household in 2023 to K400 bimonthly month from K200.
  - Households with a severely disabled member: increase to K800 bimonthly month from K400.

- Food Security Pack Programme:
  - Increase beneficiaries to 273,000 households in 2023 from 241,000 in 2022.
  - Note: The Food Security Pack (FSP) provides agriculture inputs and accompanying services to poor and vulnerable farming households.

- Other social protection measures:
  - Continued implementation and scaling up of the public welfare assistance scheme and women empowerment programme.
  - Government cleared all outstanding arrears for public service workers and pension schemes in 2022.
  - 2023 focus: pay retiring public service workers within three months of retirement (three months is the average processing time).

- Pension reform:
  - Pension system to be reformed to make it financially sustainable and provide social security to retirees.
  - Government secured Technical Assistance in early 2023; findings and recommendations will inform reforms.
  - Government will consult including with trade unions and the World Bank.

### Public Investment Management
- Multisectoral independent technical committee to scrutinize investment proposals prior to budget inclusion.
- All projects required to undergo project appraisal, including cost effectiveness reviews, to inform budgeted costs and prioritization.
- MPAs must develop projects aligned with National Development Plans, Sectoral plans, Provincial, District Development Plans and Cabinet directives; non-aligned projects will not receive approvals.
- Public Investment Management Guidelines and an appraisal Manual have been published on the Ministry of Finance and National Planning website.
- The 2023 Public Investment Plan has been published.
- At implementation stage:
  - Public Investment Planning Department (PIPD) will oversee capital budget commitments and execution.
  - All capital projects will be outlined in the Public Investment Plan and a database maintained by PIPD.
  - A Master Plan for the road sector will be developed.
- Treasury issuance policy for domestic debt:
  - Issuance of Government securities exclusively through market auctions (treasury bills and bonds).
  - Focus on longer-dated instruments to reduce refinancing risk.
  - Target debt stock ratio of treasury bills to Government bonds of 40 percent to 60 percent over the medium term; treasury bills limited to 40 percent of the domestic debt stock.

### Restoring debt sustainability and debt management (A)
- Assessment: Zambia’s public debt is unsustainable using both solvency and liquidity thresholds.
- External debt measures Government will implement:
  i. Non-contracting of non-concessional debt (continuous performance criterion): Cabinet directive from December 2019 halting contraction of non-concessional public external debt; no commercial facilities executed since 2020. Continued implementation until public debt sustainability is restored. Government is reviewing contraction of concessional debt (indicative target on the present value of new external concessional borrowing).
  ii. Asset Liability Management exercise: Financial and legal advisors engaged since July 2020 to carry out an exercise culminating in restructuring of the country’s debt to restore sustainability. Zambia utilized the G20 Common Framework for debt treatments beyond the DSSI; application made to the Common Framework in January 2021. Official Creditor Committee (OCC) started considering Zambia’s debt restructuring on 16th June 2022.
    - Following in-depth discussions, an agreement on a debt treatment was reached with the OCC on June 22, 2023 and work on reflecting that in a Memorandum of Understanding (MOU) is advancing.
    - Government implemented a debt service standstill for all external creditors except multilaterals and a few creditors financing priority projects of high economic and social importance.
    - Continued engagement with private creditors (including Eurobond holders) on a non-disclosure basis; bilateral agreements to be signed with respective creditors following conclusion of talks.
  iii. Achievement of higher economic growth to improve revenue mobilisation and debt carrying capacity.

- External debt management and transparency measures:
  - Develop a Medium-Term Debt Management Strategy in 2023.
  - Continue preparing Annual Borrowing Plans and regular debt data validation and reconciliation with creditors.
  - Continue publishing quarterly Debt Statistical Bulletin covering external and domestic debt, including loans contracted, new disbursements, guaranteed loans and PPP liabilities (structural benchmarks, SB). Coverage includes non-guaranteed State-Owned Enterprises (SOEs) debt.

- Legal and institutional reforms:
  - Repealed and replaced the Loans and Guarantees (Authorisation) Act with the Public Debt Management Act No. 15 of 2022 to enhance transparency, Parliamentary oversight, and adherence to international best practice.
  - The Act mandates establishment of a Debt Management Office (DMO).
  - Cabinet office will by end-December 2023 approve a new organizational structure for the DMO to align with the Public Debt Management Act and best practice in readiness for operationalization in 2024.

- Debt perimeter and creditor negotiations:
  - Government commenced talks with official creditors on 16th June, 2022 to seek comprehensive debt treatment covering Government and SOE debt (guaranteed or not) aiming for “moderate” risk of debt distress over the medium term.
  - Government seeks exclusion of non-resident holdings of T-bills and bonds (classified by the IMF as external debt) from the perimeter, citing threats to financial stability and practical, legal, fairness considerations.
  - Government seeks exclusion of short-term payables (non-financial claims mostly due to suppliers of petroleum products and contractors), while seeking appropriate repayment terms.

### Governance and anti-corruption (B)
- Government stance: zero tolerance for corruption; disciplinary action taken against erring officers and increased allocations/releases for law enforcement wings.
- IMF Governance Diagnostic Assessment:
  - Requested by President Hakainde Hichilema; assessment completed in December 2022 with priority recommendations.
  - Government committed to adopt by end-October 2023 a legal framework guaranteeing public access to information by submitting the draft Access to Information Bill to Parliament (structural benchmark, SB).

- Priority recommendations and implementation timelines:
  - Introduce measures to ensure top anti-corruption and AML officials (Director General of the Anti Corruption Commission, Director General of the Drug Economic Commission, the Director General of the Financial Intelligence Center and the Director of Public Prosecutions) are selected and appointed through transparent, merit-based and participatory processes.
  - Prepare, with civil society, academia and legal profession participation, a comprehensive reform strategy to strengthen the independence, professionalism and efficiency of the judiciary and prosecution authorities by end-December 2023.
  - Mandate use of the IFMIS system for all transactions currently able to be undertaken through the system; roll-out is already underway.
  - Mandate regular preparation and external publication of tax expenditure reports on measures expected to result in significant foregone revenue; implementation is already underway with regular updates on revenue and expenditure performance and explanations for deviations.
  - Increase internal audits in VAT refund process and customs warehouse management, and in other processes where IT systems are not fully integrated or are unstable; Government accepts and will undertake these on an on-going basis.
  - Strengthen the MMMD’s capacity to scrutinize license and transfer applications, and monitor associated safety, environment, work programs, and production commitments by end-December 2023.
  - Operationalize PACRA’s beneficial ownership register, ensuring accurate, complete and up-to-date beneficial ownership information and imposing effective sanctions for non-compliance by end-June 2024.
  - Bring the Public Audit Act of 2016 and the State Audit Commission Act of 2016 into force by issuing the statutory instrument by the Ministry of Finance and National Planning (implementation will require a Constitutional amendment due to the autonomy of the Auditor General).
  - Prepare a time-bound action plan and roll-out E-Government Procurement by end-September 2023.
  - Develop and reinforce supervisory processes for banks and other financial institutions with Government ownership to address risks and challenges associated with these special entities by end-December 2023.

*Source: 1zmbea2023002 - 49. In order to enhance transparency relating to FISP, Government published the list of suppliers of inputs; https://www.imf.org/-/media/files/publications/cr/2023/english/1zmbea2023002.pdf*

### 70.      Steps have been taken to implement some of the recommendations. The Access to

### 70.      Steps have been taken to implement some of the recommendations. The Access to

### Governance, anti-corruption, and implementation oversight
- The Access to Information Bill has undergone public consultations; remaining steps toward presentation are internal Government approvals.
- External consultations for a new Anti-Corruption Policy have been completed; the policy, once finalized, will be launched with its implementation plan.
- Government will request technical assistance from the International Monetary Fund to implement recommendations in the Zambia Diagnostic Report on Governance and Corruption and will leverage support from other Cooperating Partners.
- Cabinet Office will provide oversight on the implementation process and produce bi-annual reports.

### Fiscal risks and fiscal risk management
- Given slowing growth, tighter fiscal conditions, and growing debt burden, Government will closely monitor fiscal risks.
- Government is developing a fiscal risk management framework to identify and quantify fiscal risks from expenditure pressures, revenue shocks, contingent liabilities, and other sources, and to design mitigation strategies.
- A first fiscal risk statement has been prepared for the 2023 Budget and medium term and is undergoing review.
- Structural Benchmark (SB): The scope of the Fiscal Risk Report will by end-June 2024 be expanded to include key risks from SOEs, Local Authorities, public pension schemes, PPPs and other obligations as well as potential consequences of climate change.
- Standard methodologies will be applied to quantifying risks in a forward-looking manner.

### State-Owned Enterprises (SOEs)
- Measures to strengthen fiscal control and governance of SOEs include enactment of the Public Finance Management Act No. 1 of 2018 and development of an SOE Policy.
- The Act mandates the Treasury to develop code of governance guidelines and a supervisory and performance monitoring framework for SOEs and requires SOEs to submit annual financial statements to the Treasury for performance analysis.
- Ministry of Finance and National Planning will prepare periodic reports with in-depth analysis on the health of SOEs; the Act empowers the Treasury to take appropriate action where performance is poor.
- Cabinet approval of the drafted SOE Policy will be done by end-September 2023.

### Cash management improvements (Structural Benchmark)
- Structural Benchmark (SB): Government will formulate an action plan by end-March 2024 to substantially reduce cash balances and the number of accounts held by local authorities and lower-level government entities in commercial banks.
- The strategy will: expand reliance on the Treasury Single Account; regularly receive account balance information from commercial banks; and introduce a system of regularly clawing back floats not needed for meeting short-term financial obligations.
- The Industrial Development Corporation (IDC) has limited 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 and best practice reporting.

### Monetary policy framework and market development
- The Bank of Zambia will rely on a forward-looking monetary policy framework anchored on the Policy Rate; decisions guided by inflation forecasts, outcomes, and identified risks including financial stability and growth.
- Monetary policy objective: bring inflation back to the 6-8 percent target range over the medium-term.
- The Bank will use open market operations, and enhance competition, transparency, and consumer protection in financial markets.
- Measures to deepen the secondary market for Government securities include simplified registration of accounts and investor participation measures, targeting wider participation by households.
- The full rollout of the Bloomberg E-Bond platform for secondary trading was extended from envisaged end-Q1 2022 to the third quarter of 2023 to include two local custodians; implementation expected to improve transparency in pricing and secondary market liquidity.
- Broadening investor participation is expected to strengthen the interest rate channel of monetary policy transmission.

### Credit support for MSMEs
- The Bank of Zambia will pilot a Credit Guarantee Fund (CGF) to leverage private sector participation and support affordable credit to MSMEs, with consideration for environmentally sustainable growth.
- In January 2021, the Bank of Zambia Board approved K5 billion as additional support following the establishment of the TMTRF; it is anticipated that K3 billion will be allocated to support establishment of the CGF.
- The Bank is working with the private sector through a Memorandum of Understanding on CGF design and implementation.

### Institutional arrangements and reporting (timelines)
- Following enactment of the BoZ Act No.5 of 2022 (yet to be operationalized), the Bank will establish Monetary Policy and Financial Stability Committees by the third quarter of 2023.
- Inaugural Monetary Policy Report expected in the third quarter of 2023; inaugural Financial Stability Report expected in the second quarter of 2024.

### Exchange rate policy, reserves, and foreign exchange measures
- Primary objective: maintain a flexible exchange rate while mitigating excessive volatility to support the inflation objective.
- The Bank will build international reserves and strengthen monitoring of foreign exchange flows.
- Mining companies will continue to pay all tax obligations directly in U.S. dollars and through the Bank.
- Gold purchase programme: revised target of at least 659.4 kg of refined gold for 2023.
- The Bank will review foreign exchange market rules and policies by end-2023 to normalize policies as market pressures abate, focusing on price discovery efficiency, trading transparency, and market functioning.

### Safeguarding financial stability and supervisory enhancements
- Problem Bank Framework approved by the Board in May 2022 provides criteria for designating problem institutions and supervisory actions; aims to minimize economic and financial contagion and fiscal risks.
- Off-site analysis enhancements and revised prudential returns templates collect more granular data.
- Micro-Prudential Stress Testing Framework developed and implemented as of November 2022 to assess resilience of individual institutions under severe but plausible stress events.
- Supervisory Technology Project to improve analytical capabilities, timeliness, and data integrity expected to be completed by December 2023.
- Cyber and Information Risk Management Guidelines were developed and issued in April 2023.
- A thorough review of banking sector regulations will be undertaken by end-2024 to update the BFSA (last updated 2017), address gaps from the 2022 thematic examination, tailor regulations by institution type, and strengthen coordination with PIA and SEC.

### Safety net and macroprudential measures
- Deposit Protection Scheme to be implemented by end-September 2023; a dedicated unit will be established within the Bank Supervision Department initially, with transition to a separate department once ready.
- Crisis management and resolution framework (developed in 2018) will be fully operational once governance arrangements are finalized under the new Bank of Zambia Act.
- Macro-prudential toolkit developed in April 2022 to mitigate excessive credit growth, leverage, maturity mismatch, market illiquidity, exposure concentration, and moral hazard; tools will be operationalized within the 2020-23 strategic cycle.
- Regulations and guidelines for countercyclical capital buffers, loan-to-value ratio, and buffers for domestic systemically important banks will be developed in 2023; macro stress tests will continue.

### AML/CFT/CPF supervision
- Commitment to establish and resource a dedicated AML/CFT/CPF supervision unit by Q3 2023 to address deficiencies identified in the 2019 ESAAMLG Mutual Evaluation, 2022 Enhanced Follow-Up Report, and Zambia’s 2016 National Risk Assessment.
- Interim risk-based AML/CFT focused on-site examinations are being conducted.
- The dedicated unit will support risk-based supervision and effective application of sanctions, particularly for high-risk entities and politically exposed persons.

### Growth strategy: sectoral priorities and investment climate
- Government’s objective: raise living standards, reduce poverty and inequality by creating conditions for strong and inclusive growth through economic transformation and job creation across agriculture, tourism, mining, manufacturing, energy, and transport.
- Government is digitizing public services to ease private sector interaction and improve productivity.
- Public Private Dialogue Forum (PPDF) established to streamline Government systems and create a better business enabling environment; overseen by a steering committee chaired by the Republican President.

### Agriculture, land, and diversification
- Comprehensive Agriculture Transformation Programme (CATP) will be developed to expand beyond subsidised inputs to include extension services, access to finance, support to value addition, storage and logistics for crop value chains such as maize, soya beans, wheat and cassava.
- CATP formulation expected to be finalized in the second quarter of 2023.
- National Crop Diversification Strategy is being developed.
- Government will continue development of farm blocks in all ten provinces over the long term; medium-term financing secured for Nansanga (Central), Luswishi (Copperbelt), and Luena (Luapula).

### Tourism, manufacturing, energy, and mining
- Tourism: government to develop infrastructure and regulatory frameworks, invest in the Northern Tourism Circuit; 2023 Budget provided incentives including suspension of customs duty on selected non-locally produced fixtures, fittings, capital equipment, machinery, and safari vehicles until end-December 2025; VISA requirements waived for a number of countries.
- Manufacturing: support value addition from agriculture, forestry and mining; reinvigorate Multi-Facility Economic Zones (MFEZs) and industrial parks; assessment of MFEZs with cooperating partners to learn from past implementation and evaluate incentives versus revenue foregone; rationalize licenses and permits; leverage market opportunities from DRC, Tripartite Free Trade Agreement, and AfCFTA.
- Energy: Integrated Resource Plan envisages a deficit of 8,000 MW by 2030 to achieve universal access; Government will create an enabling environment to attract private and cooperating partner investment, including climate finance, in generation, transmission and distribution.
- Mining: target production of 3 million metric tonnes in the next nine years; promote greenfield projects and resolve brownfield challenges at Konkola Copper Mine and Mopani; engage private companies to enhance operations such as S3 expansion at Kalumbila mine.

### Climate resilience and climate policy
- Climate change identified as a significant threat; Government to remain active in fora such as COP to press for urgent global response.
- Government is developing the Climate Change Bill which will include provisions for a Climate Change Fund to support mitigation, adaptation, research and ensure funds are integrated into the national budget.
- Project identification to follow Public Investment Management guidelines.

### Human development and social spending
- Government recruited 30,496 teachers and 11,276 health personnel in 2022.
- Planned employment: 15,500 frontline personnel in 2023 and 35,000 personnel between 2024 and 2025.
- Constituency Development Fund (CDF) in 2023 National Budget: total allocation K4.4 billion.
  - 60.1 percent of the CDF resources will be for community-based projects.
  - 20.1 percent will be for empowerment programmes.
  - 19.8 percent will be for secondary schools and skills training bursaries.
- Sector Ministries to provide policy direction and expert advice for CDF-financed activities.
- Procurement and awarding of contracts will follow provisions and regulations in the Public Procurement Act No. 8 of 2020.

*ZAMBIA  INTERNATIONAL MONETARY FUND*

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

### 1zmbea2023002 - 98.      Girls and Women Empowerment. Government remains committed to girls and women

### Girls and women empowerment
- Government will continue implementation of the Girls’ Education and Women’s Empowerment and Livelihood (GEWEL) Project.
- Program impacts stated:
  - Keep more than 43,000 girls in school.
  - Empower more than 129,000 women.
- GEWEL will be complemented by financing for women empowerment programmes under the CDF.

### Financial inclusion
- National Financial Inclusion Strategy (2017- 2022) was the Government framework to enhance financial inclusion with an overriding goal to increase overall financial inclusion (both formal and informal) from 59 to 80 percent.
- Outcomes during the strategy implementation:
  - Financial inclusion increased from 59.3 percent in 2015 to 69.4 percent in 2020.
- Reason target was not met:
  - Lack of financial infrastructure in rural areas such as access points.
- Successor strategy:
  - Expected to be finalized by end-December, 2023.
- Stakeholders involved in review:
  - Government, Bank of Zambia, and other stakeholders.

### Economic statistics — data collection, national accounts, and census
- Government actions to strengthen statistics:
  - Continue strengthening data collection and estimation of key national economic statistics such as GDP and employment.
  - Focus on developing cost effective instruments and methods, including enhancement of online data collection.
  - Align with the Second-Generation Strategy for the Development of Statistics (NSDS2).
  - Over the long term, require all Ministries, Provinces and Agencies (MPAs) to establish functional Statistics Units and Management Information Systems to produce statistics from administrative records.
- Census:
  - The Census of Population and Housing was undertaken in August 2022 to provide statistics on Zambia's population and housing stock.
- National accounts rebasing:
  - Zambia Statistics Agency will rebase the national accounts to 2022, from the current estimates which use 2010 as the base year, by end 2025.
- Publication commitments:
  - 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.

### Balance of payments (BoP) monitoring and export proceeds tracking
- Bank of Zambia actions:
  - Strengthen the electronic Balance of Payments (e-BoP) monitoring system by extending its coverage to all BoP transactions and enhancing collaboration with other Government regulatory agencies.
- Export Proceeds Tracking Framework:
  - Bank of Zambia, in collaboration with Zambia Revenue Authority, is exploring an Export Proceeds Tracking Framework that will require all export proceeds to be captured in the e-BoP System.
  - No restrictions on the use of foreign exchange outside existing restrictions relating to AML/CFT/CPF obligations.
  - Full operationalization of the Framework is planned for September 2023.
  - Following implementation, Bank of Zambia and Zambia Revenue Authority technical teams will share information regularly in line with the MoU.

### Gaps in BoP statistics and remedial actions
- Identified gaps:
  - Unidentified other flows largely attributed to accumulation of foreign assets by the private sector and underreported imports.
- Remedial work underway:
  - Initial flow of funds accounts completed for selected mining companies with assistance from the IMF TA mission.
  - A questionnaire was administered to mining companies prior to physical visits by the TA mission team and Bank and Zambia Statistics Agency (ZamStats) staff by the end second of the quarter 2023.
  - 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 2023.
  - Bank of Zambia, Zambia Revenue Authority and the Ministry of Finance and National Planning will engage the corporate sector to improve quality of reporting.

### Program monitoring, financing, and phasing
- Financing:
  - Programme is fully funded over the medium term.
  - Financing assurances obtained from external partners — firm commitments for the next 12 months and good prospects for the duration of the programme — to complement financing provided by restructuring of external debt.
  - Over the medium term, continued engagement with partners to fully cover the financing gap for the remainder of the programme.
- Monitoring and reviews:
  - Progress monitored through semi-annual reviews of quantitative performance criteria, indicative targets, and structural benchmarks as defined in the Technical Memorandum of Understanding (TMU).
  - Review schedule and test dates:
    - Second semi-annual review based on end-June 2023 data; expected on or after October 1, 2023.
    - Third review based on end-December 2023 test dates; should be completed on or after April 1, 2024.
    - Fourth review based on end-June 2024 test dates; should be completed on or after October 1, 2024.
    - Fifth review based on end-December 2024 test dates; should be completed on or after April 1, 2025.
    - Sixth review based on end-June 2025 test dates; should be completed on or after October 1, 2025.
- 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:
  - Intend to use half of the 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 was signed in January 2023 clarifying roles and responsibilities for servicing the associated financial obligations to the Fund.

### Structural benchmarks — status summary and next 12 months’ priorities
- Status of selected past structural benchmarks (from Table 2):
  - Reinstate VAT and excise taxes on fuel, adjusting fuel prices accordingly. — End-September 2022 — Met
  - Publish guidelines to implement the new comprehensive agricultural support program and migrate FISP to an electronic agro-input system. — End-December 2022 — Met
  - Adopt an action plan to boost revenue collections through tax policy and revenue administration improvements. — End-October 2022 — Met
  - Publish a quarterly debt statistics bulletin. — Quarterly (on an ongoing basis) — Met
  - Publish summary information on financing agreements for newly contracted external loans. — Quarterly (on an ongoing basis) — Met
  - Enact a revised Loans and Guarantees Authorization Act. — End-September 2022 — Met
  - Ensure at least 59 ministries, provinces, and spending agencies register all purchase orders and other financial commitments in the IFMIS. — End-June 2023 — Not met, reset to end-August 2023
  - Submit to Parliament an amended PPP Act (in consultation with Fund staff). — End-June 2023 — Not met, reset to end-July 2023
  - Cabinet to endorse and publish a multi-year tariff framework for electricity. — End-December 2022 — Met
  - Prepare and publish a comprehensive governance diagnostic with an action plan. — End-December 2022 — Met
  - Undertake a comprehensive review of the health of the banking sector. — End-December 2022 — Met
- Selected Structural Benchmarks for the next 12 months (summarized from Table 3):
  - PFM — Ensure at least 59 MPSAs register all purchase orders and other financial commitments in IFMIS. — End-August 2023
    - Conditions for meeting the SB include regulations, functional commitment module at 59 MPSAs, and systematic use.
  - PFM — In consultation with Fund staff, submit to Parliament an amended PPP Act. — End-July 2023
    - Amended act should strengthen framework for fiscal risks from PPPs and require disclosure of key risks and fiscal implications.
  - Debt transparency — Publish a quarterly debt statistics bulletin, including key information on new loans and guarantees. — Quarterly (ongoing)
    - Bulletin published on MoFNP website with a two months lag from reporting period.
  - Proposed new SB — Establish a unified Large Taxpayer Office (LTO). — End March-2024
    - Large taxpayers constitute 0.3 percent of the total taxpayer population and contribute to 80 percent of total revenue.
    - SB met when LTO is formally established, role defined, and unit staffed and operational.
  - Fiscal risks — Expand scope of the Fiscal Risk Report (FRR) to include SOEs, local authorities, public pension schemes, PPPs, and climate change; establish standard methodologies. — End-June 2024
    - Prepare and submit expanded FRR to IMF staff by end-June 2024; publish no later than end-September 2024.
  - Cash management — Prepare an action plan to rationalize banking arrangements of local authorities and discuss options for inclusion in TSA. — End-March 2024
    - Action plan to be approved by the Secretary to the Treasury and submitted to IMF.
  - Debt management — Approve a new organizational structure for the debt management office. — End-December 2023
    - Cabinet Office to approve new structure aligned with best practice and the Public Debt Management Act.
  - Governance and anti-corruption — Submit draft Access to Information Bill to Parliament. — End-October 2023
    - Bill should include proactive transparency requirements and designate an oversight agency.
  - FISP contracts — Publish summary information on all procurement contracts related to FISP or successor within 3 months of contract award. — Ongoing
    - Publish types/quantities of inputs, company names and beneficial owners, contract amounts, and procurement method on Ministry of Agriculture Website.
  - Migration to e-voucher system — Implement migration from Direct Input Supply to e-voucher in at least 33 districts (at least 300,000 beneficiaries). — Q3 2023
    - Publish list of at least 33 districts migrated in the 2023-24 farming season on the Ministry of Agriculture website by September 2023.
  - Financial stability — Produce and publish the inaugural annual financial stability report. — End-June 2024
    - Report published online.

### Technical Memorandum of Understanding (TMU) — selected operational definitions and reporting
- TMU defines indicators used to monitor the program and reporting requirements.
- Program exchange rates (Rates as of May 31, 2022) — Table 1:
  - US Dollar: Zambian Kwacha per currency unit 17.28; Currency units per US Dollar 1.00
  - GB Pound: Zambian Kwacha per currency unit 21.71; Currency units per US Dollar 0.80
  - Euro: Zambian Kwacha per currency unit 18.46; Currency units per US Dollar 0.94
  - Rand: Zambian Kwacha per currency unit 1.10; Currency units per US Dollar 15.67
  - SDR: Zambian Kwacha per currency unit 23.32; Currency units per US Dollar 0.74
  - Source: Bank of Zambia.
- Central government definition:
  - Budgetary central government includes national executive, legislative, judiciary branches covered by the national budget, Parliament, Office of the President, national judiciary, all ministries, departments, agencies, constitutional commissions, and independent offices.
- Fiscal year:
  - Starts on January 1 and ends on December 31.
- Quantitative performance criteria (selected definitions and reporting):
  - Floor on the Central Government's Primary Balance (Cash Basis):
    - Measured from the financing side at current exchange rates and on a cash basis.
    - Primary fiscal balance = government primary revenue (all tax and non-tax receipts, including external grants but excluding all interest revenue) minus primary expenditure (current plus capital expenditure, excluding all interest payments).
    - Data provided to the Fund 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, lag no more than 30 days after the test date.
    - Adjustor: If general budget support grants fall short of programmed amount, the floor will be adjusted downward by the shortfall (kwacha value calculated at program exchange rate). General budget support grants exclude grants linked to externally-financed capital projects or those earmarked for particular activities and programs.
  - Ceiling on New Central Bank Credit to the Central Government:
    - Defined as change in total stock of outstanding loans and advances by the BoZ to the central government.
    - Excludes:
      - purchases by BoZ of government debt securities in the open market for monetary and financial stability policies;
      - on-lending of IMF credit; and
      - interest accrued on stock of outstanding loans and advances by the BoZ to the Government, its institutions, agencies, statutory bodies, and local authorities.
    - Data reconciled with monthly monetary survey and submitted within 25 business days of end of month. Submissions should include breakdown of outstanding loans and advances and other central bank claims on the government (debt securities and on-lending of IMF credit).

*Source: 1zmbea2023002 - 98.      Girls and Women Empowerment. Government remains committed to girls and women*

### 11. The net official international reserves (NIR) of the BoZ will be calculated as the difference

### 11. The net official international reserves (NIR) of the BoZ will be calculated as the difference between its gross international reserves and official reserve liabilities.

### Net official international reserves (NIR)
- NIR = gross international reserves − official reserve liabilities.
- 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.

### Gross international reserves: components
- 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: exclusions
- 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.

### Official reserve liabilities: definition
- Short-term (one year or less in original maturity) liabilities of the BoZ to non-residents;
- plus any outstanding use of IMF credit;
- and swap arrangements (maturing in less than one year) with residents and non-residents.
- Short-term liabilities exclude liabilities with an asset counterpart that is encumbered (excluded from the asset side as well).

### Reporting and data frequency
- 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 for public sector disbursements through TSA
- If public sector disbursements expected to be channeled through the Treasury Single Account (TSA) at the BoZ fall short of the programmed amount, the NIR target will be adjusted downward by the amount of the shortfall (e.g., due to disbursement delays or delays in the transfer of the associated funds from GRZ accounts to BoZ gross international reserves).

### Continuous Performance Criteria — Ceiling on New External Debt Arrears
- Definition:
  - The performance criterion on 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 defined as 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 definition:
  - External debt is defined on a residency basis. The term “debt” has the meaning set forth in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements.
  - Debt forms described include:
    - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
    - suppliers’ credits;
    - leases (debt is the present value at inception of lease payments expected during the agreement period, excluding payments that cover 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 the IMF staff any new accumulation of external arrears; otherwise, data will be compiled jointly by the two institutions, and will be 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
- Concessionality threshold:
  - Newly contracted or guaranteed external debt is concessional if it includes a grant element of no less than 35 percent.
  - The grant element = (nominal value − NPV) / nominal value, where NPV is calculated by discounting the future stream of 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 from a foreign official entity such that the combined grant element ≥ 35 percent.
- Variable-rate debt PV calculation:
  - For variable interest rates of the form benchmark rate plus fixed spread, PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.
  - Program reference rate for the three-month U.S. SOFR is 2.38 percent and will remain fixed for the duration of the program.
  - Spreads specified:
    - three-month Euro EURIBOR over three-month USD SOFR is -150 basis points;
    - three-month JPY TIBOR over three-month USD SOFR is -250 basis points;
    - three-month U.K. SONIA over three-month USD SOFR is -50 basis points;
    - for 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.
  - TMU can be updated to reflect the benchmark replacement for JPY LIBOR, the Tokyo Overnight Average Rate (TONAR), once operationally feasible.
- Scope and exclusions:
  - Minimum grant element applies to debt and to commitments contracted or guaranteed for which value has not been received.
  - New non-concessional external debt is any new debt other than concessional debt contracted or guaranteed by the central government, BoZ, and ZESCO with non-residents.
  - Exclusions from the ceiling:
    - loans from restructuring or rescheduling of external debt;
    - central government securities issued in domestic currency, placed in domestic 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.
- Contracting date:
  - A debt is considered contracted when all conditions for entry into effect have been met in accordance with contract terms and national legislation.
  - Contracting of credit lines with no predetermined disbursement schedules or with 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 by the central government, BoZ, and ZESCO will be provided by the MoFNP on a monthly basis, within 30 days from the end of each month, including (i) amounts contracted or guaranteed; (ii) currencies; and (iii) terms and conditions, including 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 inflation in consumer prices as measured by the overall CPI published by ZamStats.
- If the observed quarterly average rate of CPI inflation (calculated as the average of the 3 monthly year-on-year inflation rates within a quarter) falls outside the outer bands for June and December test dates:
  - authorities will complete a consultation with the IMF Executive Board focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for program deviations, taking into account compensating factors; and (iii) proposed remedial actions if deemed necessary.
  - When this consultation is triggered, access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed.
- If the observed quarterly average rate of CPI inflation falls outside the inner bands for each test date:
  - the authorities will conduct discussions with Fund staff.

### Indicative Targets and Other Program Measures
- F. Floor on Fiscal Revenues of the Central Government Excluding Grants and Mining Revenues:
  - Definition: fiscal revenues 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.
  - Reporting: data on fiscal revenues (cash basis) will be provided to IMF staff, 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, lag no more than 30 days after the test date.
- G. Ceiling on the Present Value of New External Borrowing:
  - Applies to PV of all new external debt contracted or guaranteed by central government, BoZ and ZESCO, including commitments contracted or guaranteed for which no value has been received.
  - PV calculated by discounting future debt service at a discount rate of 5 percent, taking into account maturity, grace period, payment schedule, upfront commissions, and management fees.
  - If grant element is zero or less than zero, PV is set equal to nominal value.
  - Guarantee arises from any explicit legal obligation of the government to service a debt in the event of nonpayment by the debtor.
  - Exclusions: (i) restructuring/rescheduling loans; (ii) domestic-currency central government securities placed domestically and held by non-residents; (iii) debt from IMF, World Bank and AfDB; (iv) short-term trade credits for imports incurred since the beginning of the calendar year; and (v) central bank debt issuance and foreign exchange swaps for monetary policy or reserves management.
  - Reporting: authorities will inform IMF staff of any planned external borrowing and consult with staff on potential debt management operations before loans are contracted or guaranteed.
- H. Ceiling on Disbursement of Contracted but Undisbursed External Debt to Central Government and ZESCO:
  - Applies to disbursement of contracted but undisbursed external debt to central government and ZESCO, and contracted but undisbursed government-guaranteed external debt to ZESCO.
  - Ceiling is set based on data shared by authorities on projected disbursements between 2022 and 2025 and takes into account authorities’ estimates for cancellation and rescoping; Disbursements from IDA and AfDB are excluded.
  - Reporting: detailed data on disbursements will be provided quarterly, within 30 days from the end of each quarter, including amounts, currencies, creditors, and project names.
- I. Floor on Social Spending by the Central Government:
  - Definition: central government expenditure on the Social Cash Transfer, Food Security Pack, Empowerment Fund (Women and Youth), the Public Welfare Assistance Scheme, Water and Sanitation, budget transfers to the Public Service Pensions Fund, the Health Sector, and the Education Sector. Computed on a cash basis.
  - Reporting: data provided to IMF staff, 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, lag no more than 30 days after the test date.
- J. Floor on the Net Clearance of Expenditure Arrears and Floor on Net Clearance of Tax Refund Arrears by Central Government:
  - Expenditure arrears definitions:
    - wages, salaries, and pension contributions: payments outstanding after the agreed date for payment of staff and payroll deductions to third parties;
    - goods & services and capital spending: arrear arises when bill received and delivery verified, but payment not made within normal period per standard GRZ policy (30 days) or as stated in supplier’s contract;
    - utilities: unpaid for 30 days or more after receipt of invoice;
    - subscriptions and leases: amounts outstanding after the due date.
    - For assessment, changes due to ongoing audits, accumulation of penalties or interest, and exchange rate valuation effects will not affect the assessment.
    - Target considered met when agreed stock at end of previous fiscal year is reduced by an amount equal or larger than agreed pace of rundown of arrears.
  - Tax (VAT) refund arrears:
    - VAT refunds: overdue if unpaid one month after the claims were validated and approved for payment.
    - For assessment, impact of newly validated claims for the previous year will be neutralized. Target assessed as met if gross clearance of VAT refunds ≥ sum of new claims submitted for current year plus agreed pace of rundown of previous year’s arrears.
  - Reporting:
    - Information compiled through quarterly audits of accounts of the ZRA and spending ministries and agencies, conducted by the Internal Audit Department of the MoFNP.
    - Audits completed and data submitted within 90 days from the end of each quarter.
    - For expenditure arrears, arrears denominated in foreign currency will be reported in the original currency of denomination.
    - For VAT refund arrears, MoFNP will report separately clearance of the stock of audited VAT refunds accumulated up to the end of the previous fiscal year, and accumulation and clearance of newly approved VAT refund claims in the current fiscal year.

### Monitoring and reporting logistics
- To facilitate monitoring, the information listed in Annex Table 2 will be reported to the IMF staff within the timeframe indicated.
- These data will be provided electronically by email to AFRZMB@IMF.ORG.

*Source: 1zmbea2023002 - 11. The net official international reserves (NIR) of the BoZ will be calculated as the difference*

### Annex Table 2. Zambia: Reporting Requirements

### Annex Table 2. Zambia: Reporting Requirements

### Monetary and financial sector
- Required data series (frequency and reporting agency shown in source):
  - Reserve money and its components (NDA and NFA) at current and program exchange rates — Frequency: D; Agency: BoZ; Reporting lag: T15
  - Excess reserves — Frequency: D; Agency: BoZ; Reporting lag: T15
  - Overnight interbank rates — Frequency: W; Agency: BoZ; Reporting lag: T15
  - Treasury bill and BoZ bill auction results — Frequency: M; Agency: BoZ; Reporting lag: T15
  - Interest rates — Frequency: M; Agency: BoZ; Reporting lag: T15
  - Holdings of government and BoZ securities by maturity and type of investors (local commercial banks, non-banks, and foreigners) — Frequency: M; Agency: BoZ; Reporting lag: T15
  - Monetary survey (incl. the BoZ and ODC surveys) — Frequency: M; Agency: BoZ; Reporting lag: T15
  - Financial soundness indicators by bank — Frequency: M; Agency: BoZ; Reporting lag: T7

### External sector
- Required data series:
  - Exchange rates — Frequency: D; Agency: BoZ; Reporting lag: T15
  - Gross international reserves and foreign exchange purchases and sales — Frequency: D; Agency: BoZ; Reporting lag: T15
  - BoZ FX cash flow — Frequency: M; Agency: BoZ; Reporting lag: T15
  - FX backlog — Frequency: W; Agency: BoZ; Reporting lag: T15

### Fiscal
- Required data series:
  - Net domestic financing — Frequency: M; Agency: MoFNP; Reporting lag: T30
  - Fiscal table including revenue, expenditure, and financing — Frequency: M; Agency: MoFNP; Reporting lag: T30
  - Social spending — Frequency: Q; Agency: MoFNP; Reporting lag: T90
  - Stocks of arrears on expenditure, tax refunds, and domestic debt service — Frequency: Q; Agency: MoFNP; Reporting lag: T90
  - Stock of VAT arrears divided by stock of arrears as of end-year plus new approved VAT refund claims and payments in the current fiscal year — Frequency: Q; Agency: MoFNP; Reporting lag: T90

### Real sector
- Required data series:
  - Consumer price index and monthly statistical bulletin — Frequency: M; Agency: ZamStats; Reporting lag: T30
  - National accounts — Frequency: Q; Agency: ZamStats; Reporting lag: T90

### External debt
- Required data series:
  - 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; Reporting lag: 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: Q; Agency: MoFNP; Reporting lag: T90

### Program monitoring
- Required data series:
  - Report on program performance — Frequency: M; Agency: MoFNP; Reporting lag: T30

### Data adequacy and statistical issues (as of April 30, 2023)
- Overall assessment:
  - "Data provision has some shortcomings but is broadly adequate for surveillance."
- Specific issues and developments:
  - National accounts:
    - Current GDP estimates benchmark year: 2010.
    - Authorities now compile GDP using VAT and business income tax data from ZRA.
    - Since October 2016, CSO publishes quarterly GDP estimates using quarterly source data.
    - Priority: develop a new GDP benchmark within the next three years; AFRITAC South providing technical assistance.
  - Price statistics:
    - CPI classification closely follows COICOP.
    - Current CPI weights based on 2002 household expenditure data.
    - Urgent need for a household expenditure survey to update CPI weights.
    - AFRITAC South project on PPI expected to improve GDP volume measurement.
  - Government finance statistics (GFS):
    - Institutional coverage limited to budgetary central government; intergovernmental transfers ≈ 2 percent of GDP excluded from full coverage.
    - Monthly budget releases reported timely but often subject to substantial revisions.
    - Reconciliation between fiscal outturns and monetary statistics requires significant improvement.
    - IMF STA provided capacity development via D4D fund; most recent TA mission remotely in December 2021.
  - Monetary statistics:
    - BoZ reports central bank and ODC monetary data to STA timely; Other Financial Corporations reported with long delays.
    - Reporting uses standard report forms aligned with IMF MFSM.
    - BoZ reports basic Financial Access Survey series including mobile money and UN targets indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults).
  - Financial sector surveillance:
    - BoZ reports 13 core FSIs and 6 additional FSIs for deposit takers regularly and timely; disseminated on IMF’s FSI website.
  - Balance of payments:
    - Compilation according to BPM6; published quarterly but with publication lag > 120 days of reference quarter.
    - New services surveys implemented; revisions to services series and fob valuation of goods.
    - Quarterly investment survey coverage should be improved and incorporated in BOP.
  - External and domestic debt statistics:
    - Data provision broadly adequate; consolidation of debt databases improved with recent TA; further work ongoing.
- Data dissemination frameworks:
  - Participated in GDDS since November 2002; implemented e-GDDS recommendations in June 2016 and disseminated a National Summary Data Page publishing 14 of the 15 e-GDDS categories; updating of NSDP has not been consistent since June 2016.
  - Data ROSC Assessment published February 2005.

### Table of Common Indicators Required for Surveillance (selected entries, dates as reported)
- Exchange rates — Latest observation: Apr 30, 2023; Date received: Apr 30, 2023; Frequency of data: D; Frequency of reporting: D; Frequency of publication: D
- International reserve assets and reserve liabilities of the monetary authorities — Latest observation: Apr 30, 2023; Date received: May 2023; Frequency of data: D; Frequency of reporting: W; Frequency of publication: M
- Reserve/base money — Latest observation: March 2023; Date received: May 2023; Frequency: M; Reporting: M; Publication: M
- Broad money — Latest observation: March 2023; Date received: May 2023; Frequency: M; Reporting: M; Publication: M
- Central bank balance sheet — Latest observation: March 2023; Date received: May 2023; Frequency: M; Reporting: M; Publication: M
- Consolidated balance sheet of the banking system — Latest observation: March 2023; Date received: May 2023; Frequency: M; Reporting: M; Publication: M
- Interest rates — Latest observation: Apr 30, 2023; Date received: May 2023; Frequency: W; Reporting: W; Publication: M
- Consumer Price Index — Latest observation: Apr 2023; Date received: Apr 2023; Frequency: M; Reporting: M; Publication: M
- Revenue, expenditure, balance and composition of financing — central government — Latest observation: Feb 2023; Date received: Apr 2023; Frequency: M; Reporting: M; Publication: M
- Stocks of central government and central government–guaranteed debt — Latest observation: Q4 2022; Date received: Mar 2023; Frequency: Q; Reporting: Q; Publication: Q
- External current account balance — Latest observation: Q4 2022; Date received: Mar 2023; Frequency: Q; Reporting: Q; Publication: Q
- Exports and imports of goods and services — Latest observation: Q4 2022; Date received: Mar 2023; Frequency: M; Reporting: M; Publication: M
- GDP/GNP — Latest observation: Q4 2022; Date received: Mar 2023; Frequency: Q; Reporting: Q; Publication: M
- Gross external debt — Latest observation: Q4 2022; Date received: Mar 2023; Frequency: A; Reporting: A; Publication: A
- International investment position — Latest observation: Q3 2022; Date received: Mar 2023; Frequency: Q; Reporting: Q; Publication: Q

### Debt sustainability (joint Bank-Fund DSA summary)
- Risk ratings:
  - Risk of external debt distress: In debt distress
  - Overall risk of debt distress: In debt distress
  - Granularity in the risk rating: Unsustainable
  - Application of judgment: No
- Key findings and scenarios:
  - "Zambia remains in debt distress. The accumulation of external arrears continued in 2022 and reached 11 ½ percent of GDP."
  - Under the baseline, "all four external debt burden indicators would breach their indicative thresholds by large margins through the medium term."
  - Authorities have reached an agreement with official bilateral creditors on a debt treatment under the G20 Common Framework and are in ongoing discussions towards signing an MOU.
  - Alternative scenario: if the treatment agreed with official bilateral creditors is applied to the baseline and commercial claims are treated on comparable terms, "debt would be assessed to be sustainable."
- Debt-carrying capacity:
  - "Zambia’s debt-carrying capacity is currently rated as weak based on the composite indicator (CI). The composite indicator is calculated using data from the April 2023 WEO and the latest available 2021 CPIA."

*Prepared By African Department (In Consultation with Other Departments); June 30, 2023 — Annex Table 2. Zambia: Reporting Requirements*

### 1.      The coverage of Zambia’s public and publicly guaranteed (PPG) debt for the purpose of the

### The coverage of Zambia’s public and publicly guaranteed (PPG) debt for the purpose of the DSA

### Coverage of PPG debt for the DSA
- The DSA includes:
  - central government domestic and external debt, including $1.5 billion of arrears to external suppliers (fuel and contractors) and central government guaranteed external debt;
  - the nonguaranteed external debt of Zambia Electricity Supply Company (ZESCO), the fiscally important state-owned utility, and the domestic and external arrears of the same enterprise;
  - central bank external debt (including outstanding Fund credit), together with the debt of social security funds guaranteed by the central government.

### Treatment of non-guaranteed SOE debt (ZESCO) and other fiscal risks
- The DSA incorporates non-guaranteed SOE debt in the baseline due to fiscal risks posed by ZESCO.
- Specific inclusions for ZESCO (end-2022):
  - non-guaranteed external debt: $93 million at end-2022;
  - outstanding payables to domestic independent power producers (IPPs): $1.33 billion at end-2022;
  - outstanding payables to external IPPs: $139 million at end-2022.
- Authorities are taking steps to restore ZESCO’s financial viability; the inclusion of its non-guaranteed debt in the DSA perimeter will be reassessed as progress is made.
- Authorities reported no other outstanding non-guaranteed external debt of nonfinancial SOEs that staff consider to pose a contingent fiscal risk warranting inclusion in the DSA.
- Local governments cannot currently borrow without the central government’s guarantee.
- Authorities confirmed that no extrabudgetary funds with outstanding debt currently exist.

### SDR allocation use
- The 2021 General SDR allocation has been incorporated into the DSA in line with staff guidance.
- The authorities are using the SDR allocation to finance the budget over 2022-24; equivalent to about $1.3 billion.
- In line with plans:
  - used 50 percent of the allocation in 2022;
  - plan to use 25 percent in 2023; and
  - plan to use 25 percent in 2024.

### Residency basis and nonresident holdings of domestic-currency debt
- The DSA is conducted on a residency basis.
- Nonresident holdings of domestic-currency debt are treated as external debt for the purpose of this DSA.
- Stock of nonresident holdings:
  - end-2021: about 54.1 billion kwacha or $3.2 billion (28 percent of outstanding domestic-currency government securities), equivalent to 12.8 percent of GDP;
  - end-December 2022: 47.4 billion kwacha or about $2.6 billion (23 percent of outstanding domestic-currency government securities).

### Background on debt distress and restructuring process
- In the 2022 DSA, Zambia’s debt was assessed as in debt distress following a default on sovereign Eurobonds in 2020 and accumulation of arrears to official bilateral and commercial external creditors.
- By end-2022:
  - interest and principal arrears on external debt reached $4.2 billion, or 15 percent of GDP.
- Authorities requested a debt treatment under the G20 Common Framework (CF) in January 2021.
- Key process steps:
  - staff-level agreement on a new ECF-supported program in December 2021;
  - Official Creditor Committee (OCC) formed in June 2022 and delivered financing assurances in July 2022;
  - technical workshops and five OCC meetings; parallel negotiations with Eurobond holders facilitated by bondholder committee established in July 2020.

### Debt levels, composition, and arrears (end-2022)
- Total PPG debt: $33,365 (100.0 percent of total; 119.6 percent of GDP).
- Total external foreign-currency debt: $18,340 (55.0 percent of total; 65.7 percent of GDP).
- Total external PPG debt: $20,961 (62.8 percent of total; 58.7 percent of GDP).
- Key creditor and instrument stocks (end-2022):
  - Multilateral creditors total: $3,568 (10.7 percent of total; 12.8 percent of GDP).
    - IMF: $186 (0.6 percent of total; 0.7 percent of GDP).
    - World Bank: $2,078 (6.2 percent of total; 7.4 percent of GDP).
    - ADB/AfDB/IADB: $886 (2.7 percent of total; 3.2 percent of GDP).
    - Other Multilaterals: $418 (1.3 percent of total; 1.5 percent of GDP).
  - Bilateral creditors total: $6,327 (19.0 percent of total; 22.7 percent of GDP).
    - Paris Club: $1,477 (4.4 percent of total; 5.3 percent of GDP).
    - Non-Paris Club: $4,850 (14.5 percent of total; 17.4 percent of GDP).
    - o/w: China: $4,174 (12.5 percent of total; 15.0 percent of GDP).
    - o/w: India: $331 (1.0 percent of total; 1.2 percent of GDP).
  - Eurobonds: $3,517 (10.5 percent of total; 12.6 percent of GDP).
  - Commercial creditors: $3,235 (9.7 percent of total; 11.6 percent of GDP).
  - Fuel arrears: $721 (2.2 percent of total; 2.6 percent of GDP).
  - Arrears to external contractors: $832 (2.5 percent of total; 3.0 percent of GDP).
  - ZESCO external IPP arrears: $139 (0.4 percent of total; 0.5 percent of GDP).
- Domestic-currency debt total: $15,025 (45.0 percent of total; 53.9 percent of GDP).
  - Held by residents, total: $8,993 (27.0 percent of total; 32.2 percent of GDP).
  - Held by non-residents, total: $2,621 (7.9 percent of total; 9.4 percent of GDP).
  - T-Bills: $2,211 (6.6 percent of total; 7.9 percent of GDP).
  - Bonds: $9,403 (28.2 percent of total; 33.7 percent of GDP).
- Domestic budget arrears and ZESCO domestic IPP arrears: $3,412 (10.2 percent of total; 12.2 percent of GDP).
- Collateralized debt: $2,428 (7.3 percent of total; 6.8 percent of GDP).
- SOE guaranteed external debt: $1,517 (4.5 percent of total; 4.2 percent of GDP).
- SOE non-guaranteed external debt (ZESCO): $93 (0.3 percent of total; 0.3 percent of GDP).
- Nominal GDP (2022): 29,742.

### Developments in 2022 and market access
- External PPG debt increased to $20.9 billion in 2022, reflecting:
  - close to $1.17 billion in new foreign-currency denominated external debt disbursements to the central government—principally by the IMF and World Bank;
  - an increase in interest arrears on foreign currency-denominated external PPG debt of about $397 million in 2022.
- Stock of expenditure arrears due to non-resident suppliers (fuel and contractors) plus ZESCO arrears to external IPPs broadly unchanged at $1.7 billion at end-December 2022.
- ZESCO’s non-guaranteed external debt declined by $42.5 million in 2022 as it generated sufficient revenues to continue servicing it.
- External PPG debt ended 2022 about $896 million higher.
- Outstanding stock of domestically-issued government securities at end-2022: 210 billion kwacha (or 44 percent of GDP), up from 193 billion a year ago.
- Total PPG debt ended 2022 at $33.4 billion (or 119.6 percent of GDP).
- Zambia remains shut out from international capital markets; funding pressures in the domestic debt market have risen.
  - Spreads on Zambia’s Eurobonds:
    - averaged 6,400 since the beginning of 2023;
    - dropped to 2,332 as of June 23, 2023, following announcement of an agreement with the OCC on a debt treatment.
  - Share of non-resident holders of domestic debt: 23 percent at end-2022, down from a peak of around 29 percent earlier in the year.
  - Non-resident investors withdrew from the domestic debt market in 2022 (did not reinvest maturing holdings, engaged in some secondary market sales, and did not provide new inflows), causing a drop in demand at bond auctions and upward pressure on domestic yields.
- Financing risks remain elevated consistent with the DSF market-financing module, though the module’s signal is currently less relevant given Zambia’s market exclusion.

### Macroeconomic assumptions underpinning the DSA
- The macroeconomic framework is consistent with the baseline in the First Review of the ECF program.
- Key changes from the previous DSA include:
  - a slight upward revision to real GDP growth;
  - a slightly stronger current account balance on average; and
  - a modestly weaker exchange rate.

### Recent macroeconomic developments (2022) and fiscal performance
- Real GDP growth in 2022: 4.7 percent.
- Fiscal performance:
  - improvement in the primary balance (commitment basis) by 6.2 percentage points, leading to a surplus of 0.9 percent of GDP;
  - primary balance on a cash basis improved by 0.5 percentage points of GDP to a deficit of 1.6 percent of GDP.
- Reforms and adjustments contributing to performance:
  - removal of fuel subsidies;
  - reduction in cost of agricultural subsidy program;
  - electricity tariffs increased toward cost-reflective levels;
  - progress in public financial management to avoid accumulation of new expenditure arrears;
  - enhanced transparency on debt statistics and enactment of the 2022 Public Debt Management Act;
  - strengthened mandate and independence of the Bank of Zambia through the 2022 Bank of Zambia Act.

### Growth projections and structural reforms
- Growth is expected to average around 4.7 percent over 2023-32, a slight improvement from the previous DSA.
- Drivers and supportive developments:
  - perceived improvement in the business environment and increased interest in direct investment opportunities in 2022 (Zambia Development Authority reports);
  - near-term prospects: potential new strategic partner for Mopani Copper Mines and hoped resolution for Konkola Copper Mines to boost copper and cobalt production;
  - initiatives such as World Bank-supported Off-Grid Loan Facility to support private sector renewable energy projects and rural electrification;
  - reforms: removal of market distortions (energy, petroleum), removal of agricultural export bans, business license simplification, reorienting expenditure away from inefficient subsidies toward investments in education, health, and social protection, and decentralization of public services.

### Inflation outlook
- End-2022 inflation: 9.9 percent (down from 24.6 percent peak in August 2021).
- Contributing factors to disinflation:
  - removal of fuel subsidies;
  - confidence impact of the new ECF program;
  - appreciation of the kwacha over the first nine months of 2022.
- Bank of Zambia policy actions: tightened monetary conditions by increasing both the monetary policy rate and reserve requirements on deposits in early 2023.
- Inflation medium-term projection: stabilize around the mid-point of the Bank of Zambia target band, broadly unchanged from the previous DSA.
- Recent near-term outcome: inflation capped at 10 percent.

### External sector outlook
- 2022 external developments:
  - current account deteriorated by $1.1bn in 2022 due to a significant decline in the trade balance;
  - exports lower than projected owing to low copper prices in 2022H2 and weaker copper production;
  - imports increased by $1.8bn (high fuel and energy prices), though $800mn less than projections in the ECF-request;
  - financial account worsened due to exit of non-resident holders from the domestic debt market despite net FDI flows improving to $338mn (still $737mn short of the ECF-request projection).
- Bank of Zambia increased gross reserves notwithstanding pressures.
- Preliminary 2023 data: 15 percent increase in trade flows through April over 2022 levels.
- Projections and policy impact:
  - external position expected to improve following debt restructuring and continued program implementation;
  - current account balance is expected to register an average of 7.9 percent surplus for the period 2023-2032, a slight improvement from the previous DSA;
  - improved current and financial accounts are expected to support build-up of FX reserves to the targeted five months of prospective imports by the end of the program.
- Structural reforms to support external improvement include streamlining business licenses, strengthening legal framework for public-private partnerships, and addressing governance weaknesses and corruption vulnerabilities.

*Source: 1zmbea2023002 - The coverage of Zambia’s public and publicly guaranteed (PPG) debt for the purpose of the DSA.*

### 13.      Fiscal. Fiscal performance is expected to continue improving under the program. Building on the

### 13. Fiscal

### Fiscal stance and targets
- Primary balance (commitment basis) is targeted to improve to a surplus of 3.3 percent of GDP by 2025 (an additional 2.5 percentage point adjustment).
- Revenues (excluding grants and adjusted for arrears on VAT refunds) are projected to increase to 21.8 percent of GDP by 2025, compared to their 2019 (pre-COVID) level of 19.6 percent of GDP.
- The revenue increase includes the impact of eliminating tax expenditures (implicit subsidies) on fuel worth about 1.2 percentage points of GDP, together with other measures to broaden the tax base and strengthen compliance.
- Overall projected further adjustment in the primary balance (cash basis) is 3.4 percentage points.
- After the end of the program, the authorities are expected to maintain prudent fiscal policies.

### Financing assumptions and composition
- Financing assumptions are guided by the debt conditionality under the program; domestic borrowing will remain a key source of financing, with concessional borrowing from the IMF, World Bank and African Development Bank comprising an important part of the financing mix.
- External financing during 2022-25 is projected to come from:
  - disbursements of $1.5 billion on contracted but undisbursed priority project loans,
  - $1.4 billion of new financing from the World Bank (including grants),
  - $1.3bn financing from the IMF,
  - $300 million from the African Development Bank.
- Under the program, Zambia will not undertake any non-concessional borrowing unless an exception is granted in line with the IMF’s Debt Limits Policy or World Bank Sustainable Development Finance Policy.
- Access to international markets is assumed to be lost through the medium term; non-resident participation in the domestic debt market is expected to remain limited, including due to authorities’ efforts to limit their participation in new issues over the program period.

### Borrowing program and operational constraints
- Debt conditionality under the IMF program stipulates a zero ceiling on new non-concessional external borrowing during the program period, and a ceiling on the PV of new concessional external borrowing.
- The intent on the present value of new external borrowing is set in line with the expected borrowing plan for 2022-23 agreed at program approval, with envisaged new borrowing from IFIs to be signed in the second half of 2023 rather than in 2022.
- In 2024, no new external borrowing is expected to be contracted, except for World Bank and AfDB financing, and issuances on the domestic market.
- Authorities decided to limit non-resident participation in primary auctions to five percent of issuance.

### Restructuring strategy and creditor treatment
- The restructuring strategy is presented as an alternative scenario of the DSA while private creditor discussions continue.
- Official creditors represented by the G20 Common Framework OCC have reached an agreement on a debt treatment for Zambia aligned with financing assurances provided in June 2022; this entails a fully quantified two-stage approach subject to a review clause to be evaluated at the end of the program period.
- Conditioned on the review, a state-contingent treatment will be triggered linked to Zambia’s debt carrying capacity (DCC):
  - If Zambia remains assessed as having a weak DCC (base case), official creditors will significantly lengthen maturities and reduce interest costs consistent with ECF-arrangement parameters.
  - If Zambia’s DCC is upgraded to medium, the upside treatment will be triggered involving some acceleration of principal payments and higher interest payments to official creditors.
- The treatment will be anchored in the LIC-DSF and meet corresponding DSA thresholds at medium DCC: the PV of external debt-to-exports at “substantial space to absorb shocks” threshold at 108 percent by 2027 and maintain the external debt service-to-revenue ratio at or below the 18 percent threshold over 2026-31.
- Private creditors are expected to deliver a treatment on comparable terms with the OCC; comparability will be assessed taking into account change in debt service, NPV loss, and change in duration of claims.

### Debt-carrying capacity, DSA findings, and stress tests
- Zambia’s debt-carrying capacity under the Composite Indicator (CI) rating is assessed as weak; the latest CI score is 2.59, below the cut-off for medium DCC of 2.69.
- Under the baseline, all four external debt burden indicators breach their respective thresholds:
  - Debt service-to-revenue ratio soars to a peak of 60 percent in 2024 and remains well above the 14 percent threshold until 2033 (averaging about 34 percent in 2023-32).
  - Debt service-to-exports ratio peaks at around 27 percent in 2024 and falls to the 10 percent threshold only in 2029, breaching again in 2031 (averaging about 16 percent over 2023-32).
  - PV of PPG external debt-to-GDP averages about 55 percent from 2023-32, falling below the prudent threshold of 30 percent only in 2039.
  - PV of PPG external debt-to-exports breaches the 140 percent threshold in 2023 (averaging about 118 ½ percent over 2023-32).
- Stress-test results:
  - The standardized exports shock is the most extreme for all external debt indicators except debt service-to-revenue, for which the one-time depreciation shock is most extreme.
  - Under the standardized exports shock, PV of PPG external debt-to-exports peaks at 308 percent in 2025.
  - Under the one-time depreciation shock, the debt service-to-revenue ratio peaks at 76 percent in 2024 and remains well above the threshold throughout the projection period.
  - For public DSA, PV of total PPG debt-to-GDP peaked at 112 percent in 2022, averages about 78 percent from 2023-32, and only falls below the benchmark in 2036.
  - The combined contingent liabilities shock peaks at 115 percent in 2024 and remains above the threshold across the long-term forecast horizon.
- Realism tools indicate the programmed fiscal adjustment is large relative to outcomes in other LIC programs and that the growth contribution from public investment may diminish over the forecast period; however, feasibility risks are mitigated by the authorities’ demonstrated track record to take needed measures.

### Risk assessment
- Zambia remains in debt distress; debt is deemed unsustainable in the absence of a debt treatment in line with program parameters.
- The DSA update is based on a macro framework that entails significant fiscal adjustment and incorporates expected new financing of around $3.0 billion from the IMF, World Bank (including grants), and the African Development Bank together over 2022-25; nonetheless, large financing gaps will remain and need to be filled through a debt restructuring operation in line with program parameters.
- Downside risks:
  - Uncertainties around copper prices and production.
  - Rainfall variability affecting agriculture, electricity and mining, likely aggravating external vulnerabilities.
  - Materialization of these risks would increase debt vulnerabilities.
- Upside risks:
  - Faster global and domestic growth.
  - Speedy resolution of remaining aspects of the debt restructuring.
  - Greater confidence effects from stronger reform momentum and higher copper production and prices.

### Alternative restructuring scenario outcomes
- Under the alternative restructuring scenario reflecting the OCC treatment but accounting for arrears to private creditors, Zambia would remain in debt distress; however, ongoing good-faith negotiations with private creditors on comparable treatment could result in an assessment of sustainable debt on a forward-looking basis.
- Two alternative baselines depending on DCC evaluation at the end of the program period:
  - Weak DCC (base case treatment):
    - PV of external debt-to-exports falls steadily below the “substantial space to absorb shocks” threshold of 84 percent by 2027.
    - Debt service-to-revenue ratio drops below the 14 percent threshold by 2025 and averages 14 percent over 2026-31.
    - PV of PPG external debt-to-GDP averages about 39 percent from 2023-32, falling below the 30 percent threshold in 2032.
    - External debt service-to-exports averages 6½ percent over 2026-31.
  - Medium DCC (upside treatment triggered):
    - PV of external debt-to-exports falls below the “substantial space to absorb shocks” threshold of 108 percent by 2027.
    - External debt service-to-revenue ratio averages 18 percent over 2026-31.
    - PV of PPG external debt-to-GDP averages about 45 percent from 2023-32, falling below the 40 percent threshold in 2030.
    - External debt service-to-exports averages 8½ percent over 2026-31.
- Under either alternative baseline, external debt burden indicators decline toward levels consistent with Zambia reaching a moderate risk of external debt distress over the medium term, conditional on delivery of the agreed treatments and reforms.

*Source: IMF staff projections and analysis contained in the provided content.*

### 28.      Risks to the debt outlook are significant. This DSA is predicated on the Zambian authorities’

### 1zmbea2023002 - 28.      Risks to the debt outlook are significant. This DSA is predicated on the Zambian authorities’

### Risks to the debt outlook
- The DSA is predicated on the Zambian authorities’ commitment under their program to undertake credible steps to restore medium-term debt sustainability, including to restore macroeconomic stability and achieve higher economic growth.
- Delays or slippages in fiscal policy adjustment, or external shocks that impact the macroeconomic framework, could significantly impact the debt trajectory.
- These risks are mitigated by the authorities’ track record of implementing robust policy reforms since coming to power in August 2021.

### Reforms and measures to support debt sustainability
- Other reforms to support debt sustainability following the debt restructuring are underway or in the pipeline and will further mitigate risks.
- To strengthen the institutional framework, the authorities adopted a new Public Debt Management Act in August 2022.19
- Supporting measures include ongoing efforts to:
  - strengthen public financial management more broadly;
  - strengthen debt transparency; and
  - modernize and strengthen capacity of the debt management unit.

### Contextual points
- Paragraph references: 28 and 29.
- Noted legal/institutional milestone: Public Debt Management Act adopted in August 2022.19
- Political timing noted: authorities came to power in August 2021.

*Source: 1zmbea2023002 - IMF country report excerpt.*

### 30.      T he authorities shared staff’s assessment of their debt sustainability and em ph asized their

### 1zmbea2023002 - 30.      T he authorities shared staff’s assessment of their debt sustainability and em ph asized their

### Debt restructuring agreement and authorities' commitments
- The authorities shared staff’s assessment that debt sustainability would be restored once restructuring agreements are implemented.
- An agreement has been reached with the Official Creditor Committee (OCC) on a debt treatment consistent with the parameters of the IMF-supported program; work on signing the MOU is advancing.
- The authorities emphasized commitment to reach restructuring agreements with other external creditors on comparable terms and consistent with IMF-program parameters.
- Adoption of the Public Debt Management Act was supported under the IMF program and IDA’s Sustainable Debt Financing Policy.
- Authorities expressed gratitude to official creditors and named support:
  - China and France for co-chairing the OCC.
  - South Africa for its role as vice chair.
  - Appreciation for IMF Managing Director Madame Kristalina Georgieva and the Global Sovereign Debt Roundtable (GSDR).
  - Thanks to the G20 community for continuous support.
- Expected policy objective: unlocked resources to bolster efforts to entrench macroeconomic stability as enunciated in the Eighth National Development Plan (8NDP).

### Key debt sustainability indicators (selected projections and historical values)
- External debt (nominal): 150.2 (2020); 112.3 (2021); 100.6 (2022); 101.4 (2023); 93.3 (2024); 86.1 (2025); 77.6 (2026); 71.6 (2027); 68.1 (2028); 48.5 (2030); 48.3 (2031); 78.7 (2032); 71.4 (2033).
- Public and publicly guaranteed (PPG) external debt: 103.0 (2020); 75.8 (2021); 75.1 (2022); 77.7 (2023); 72.8 (2024); 69.2 (2025); 64.0 (2026); 61.1 (2027); 58.1 (2028); 47.0 (2030); 37.1 (2031); 47.5 (2032); 60.0 (2033).
- Change in external debt: 57.0 (2020); -37.9 (2021); -11.7 (2022); 0.8 (2023); -8.1 (2024); -7.2 (2025); -8.5 (2026); -6.0 (2027); -3.5 (2028); -4.1 (2030); 0.2 (2031).
- Identified net debt-creating flows: 14.3 (2020); -38.4 (2021); -32.2 (2022); -10.6 (2023); -14.1 (2024); -15.8 (2025); -16.6 (2026); -16.9 (2027); -16.5 (2028); -15.0 (2030); -13.2 (2031); -8.1 (2032); -15.3 (2033).
- Non-interest current account deficit: -15.0 (2020); -13.5 (2021); -6.1 (2022); -7.5 (2023); -9.7 (2024); -10.8 (2025); -10.8 (2026); -11.1 (2027); -10.8 (2028); -9.8 (2030); -8.6 (2031); -3.3 (2032); -10.1 (2033).
- Exports (percent of GDP): 47.3 (2020); 53.0 (2021); 41.8 (2022); 44.9 (2023); 47.1 (2024); 47.4 (2025); 47.3 (2026); 46.9 (2027); 46.6 (2028); 45.2 (2030); 38.1 (2031).
- PV of PPG external debt-to-GDP ratio (selected): 64.0; 66.5; 65.7; 62.7; 58.2; 55.7; 53.1; 41.2; 31.1 (values shown in table sequence).
- PV of PPG external debt-to-exports ratio (selected): 152.9; 148.0; 139.4; 132.4; 123.2; 118.6; 113.8; 91.3; 81.6 (values shown in table sequence).
- PPG debt service-to-exports ratio (selected): 26.9; 24.4; 10.6; 23.3; 27.2; 20.9; 21.4; 17.4; 10.3; 6.3; 4.6 (values shown in table sequence).
- PPG debt service-to-revenue ratio (selected): 64.2; 59.4; 22.7; 50.0; 59.9; 45.2; 46.6; 37.3; 21.6; 12.8; 7.9.
- Gross external financing need (Million of U.S. dollars) (selected): 17.7; 143.6; -357.7; 946.9; 914.9; -668.0; -946.0; -1938.1; -3404.4; -5667.1; -11250.2.
- Real GDP growth (in percent) (selected): -2.8 (2020); 4.6 (2021); 4.7 (2022); 3.6 (2023); 4.3 (2024); 4.5 (2025); 4.7 (2026); 5.0 (2027); 5.1 (2028); 4.9 (2029); 4.9 (2030); 3.2 (2032); 4.7 (2033).
- Nominal GDP (Million of US dollars) (selected): 18,111; 22,148; 29,742; 29,536; 31,042; 33,500; 36,227; 39,167; 42,407; 62,649; 92,810.
- PV of external debt (memorandum): 89.4; 90.1; 86.2; 79.6; 71.8; 66.2; 63.0; 42.8; 42.4 (values shown in table sequence).
- PV of PPG external debt (in Million of US dollars) (selected): 19,020.8; 19,631.8; 20,394.6; 21,009.7; 21,090.3; 21,800.0; 22,502.2; 25,834.8; 28,890.5.

### Public sector debt indicators (selected)
- Public sector debt (percent of GDP): 157.9 (2020); 128.1 (2021); 119.6 (2022); 115.4 (2023); 105.1 (2024); 96.5 (2025); 90.4 (2026); 84.6 (2027); 78.8 (2028); 72.8 (2029); 67.3 (2030); 61.9 (2031); 57.0 (2032); 52.4 (2033); 33.4 (2038); 68.8 (later year shown in sequence).
- Change in public sector debt: 87.7 (2020); -29.7 (2021); -8.5 (2022); -4.2 (2023); -10.3 (2024); -8.7 (2025); -6.1 (2026); -5.8 (2027); -5.8 (2028); -6.0 (2029); -5.5 (2030); -5.4 (2031); -4.9 (2032); -4.6 (2033); -3.4 (2038).
- Identified debt-creating flows: 28.0 (2020); -45.7 (2021); -2.3 (2022); -1.6 (2023); -6.9 (2024); -5.4 (2025); -4.1 (2026); -4.7 (2027); -4.9 (2028); -5.0 (2029); -4.7 (2030); -4.6 (2031); -4.3 (2032); -4.3 (2033); -3.5 (further year).
- Primary deficit (cash basis) (selected): 3.6 (2020); 2.0 (2021); 1.6 (2022); -0.3 (2023); -1.4 (2024); -2.3 (2025); -1.5 (2026); -2.2 (2027); -2.5 (2028); -2.6 (2029); -2.5 (2030); -2.4 (2031); -2.2 (2032); -2.3 (2033).
- Revenue and grants (percent of GDP): 20.3 (2020); 22.3 (2021); 20.0 (2022); 21.2 (2023); 22.0 (2024); 22.1 (2025); 21.8 (2026); 21.9 (2027); 22.2 (2028); 22.3 (2029); 22.4 (2030); 22.5 (2031); 22.5 (2032); 22.4 (2033).
- PV of public debt-to-GDP ratio (selected): 112.7; 108.7; 99.4; 91.0; 85.6; 80.1; 74.6; 68.5; 62.9; 57.3; 52.2; 47.4; 27.9 (values shown in table sequence).
- Debt service-to-revenue and grants ratio (selected): 110.8; 100.2; 89.3; 102.8; 106.9; 89.4; 93.8; 83.8; 58.3; 50.4; 39.0; 39.5; 30.4; 23.5; 4.2.

### Stress tests, alternative scenarios, and breach indicators
- Stress testing framework presents a range of scenarios: Baseline; Alternative Scenarios (A1, A2); Bound Tests (B1–B6); Tailored Tests (C1–C4).
- Table 3 highlights key thresholds and breaches (selected):
  - PV of debt-to-GDP ratio baseline values (2023–33): 148; 139; 132; 123; 119; 114; 110; 106; 99; 95; 91.
  - Debt service-to-exports ratio baseline values (2023–33): 66; 66; 63; 58; 56; 53; 51; 49; 45; 43; 41.
  - Thresholds shown include 30, 140, 10, 14, 35 (depending on indicator).
- Tailored test results include:
  - Commodity price shock impacts (example PV of debt-to-GDP under C3: 148; 214; 224; 208; 199; 189; 179; 176; 169; 165; 162).
  - Market Financing test results (C4) for selected indicators showing stress relative to thresholds.

### Realism, market-financing risk, and debt dynamics
- Figure analyses (summarized):
  - Drivers of debt dynamics emphasize contributions from nominal interest rate, real GDP growth, price and exchange rate changes, current account + FDI, and other residuals.
  - Realism tools compare projected public and private investment rates, and fiscal adjustment paths under multipliers: Multiplier = 0.2; 0.4; 0.6; 0.8; baseline.
  - Market-financing risk indicators signal potential heightened liquidity needs:
    - EMBI spreads: 570 (noted as value in figure caption).
    - Breach of benchmark: Yes.
    - GFN Benchmarks: 14.
    - Market-financing classification: High.

### Policy implications and next steps (implied by content)
- Implementation of OCC agreement and comparable restructuring with other external creditors are central to restoring debt sustainability.
- Signing of the MOU with OCC is advancing and will be an important operational step.
- Continued macroeconomic stabilization is tied to debt treatment outcomes and will support the authorities’ Eighth National Development Plan (8NDP) objectives.
- The Public Debt Management Act and alignment with IDA’s Sustainable Debt Financing Policy are institutional supports for debt management.

*Source: 1zmbea2023002 - 30.      T he authorities shared staff’s assessment of their debt sustainability and em ph asized their*

### Introduction

### Introduction

### Program Performance
- All quantitative performance criteria (QPC) for end-September and end-December 2022 were met.
- Primary fiscal deficit outturn was on target, benefiting from positive revenue performance and expenditure rationalization that prioritized bolstering social safety nets.
- Indicative targets (IT) on social spending by the central government, net clearance of arrears on expenditure, tax refunds, and domestic debt service by central government were met.
- The IT on fiscal revenues of central government, excluding grants, and mining revenues was narrowly missed.
- All nine end-March 2023 structural benchmarks (SBs) were met, with two benchmarks rescheduled:
  - SB on submission of the revised Public-Private Partnership (PPP) Act to Cabinet delayed to end-July 2023 to allow sufficient scrutiny by Parliament.
  - SB on implementation of commitment controls on Integrated Financial Management Information Systems (IFMIS) reset to end-August 2023.
- Authorities seek Executive Directors’ support to conclude the 2023 Article IV Consultation and complete the first review under the ECF arrangement.

### Recent Macroeconomic Developments and Outlook
- Real GDP growth:
  - 4.6 percent in 2021.
  - 4.7 percent in 2022.
  - Projected 3.6 percent in 2023 (softening commodity prices and projected contraction in agriculture due to late onset of rains).
  - Projected 4.3 percent in 2024.
  - Projected 4.5 percent in 2025.
- Growth drivers: impressive performance in transportation, information and communication technology, and education sectors.
- Risks to growth: climate shocks, spillovers from the war in Ukraine, volatile copper prices, adverse climate events affecting agriculture and power production, uncertainty from protracted debt restructuring negotiations.
- Inflation:
  - Decelerated from 15.0 percent in January 2022 to 9.9 percent in December 2022, supported by appreciation of the Kwacha and decline in food and non-food inflation.
  - Projected to increase to an average of 10.6 percent in 2023 on account of depreciation of the local unit.
  - Projected to moderate to 8.6 percent in 2024.
- External sector:
  - Decline in copper prices undermined current account performance in 2022.
  - Deficit on the financial account widened due to capital flow reversals.
  - Gross reserves remained static at 3.5 months of import cover in 2021 and 2022, reflecting moderating effects of IMF and World Bank disbursements.

### Fiscal Policy and Debt Management
- Fiscal consolidation and primary balance:
  - Primary balance (on a commitment basis) improved from a deficit of 5.8 percent of GDP in 2021 to a surplus of 0.8 percent of GDP in 2022.
  - Fiscal consolidation will continue in 2023 culminating in a projected primary balance surplus of 3.1 percent of GDP in 2025.
- Revenue mobilization measures include:
  - Switching to marginal mineral royalty tax to smoothen impact of price changes on fiscal revenues.
  - Raising the exemption threshold for personal income tax to provide inflation-related relief to low and middle-income households.
  - Increasing property transfer tax and carbon emission tax to offset tax relief measures elsewhere.
- Zambia Revenue Authority (ZRA) reforms:
  - Establishing a large taxpayer office.
  - Introduction of electronic invoicing system to reduce the VAT gap.
  - Clearing VAT-refund arrears by increasing monthly VAT-refunds by 50 percent and stepping-up the pace of VAT refund audit.
  - Interfacing government systems to enhance analytical capacity and service delivery.
- Trade facilitation plans:
  - Fully operationalize the Border Management and Trade Facilitation Act.
  - Streamline number of regulatory agencies at various borders.
  - Create a single electronic window for regulatory functions.
  - Implement electronic cargo tracking system to curtail transit fraud.
- Expenditure containment and social programs:
  - Continue adherence to priority projects, eliminate wasteful subsidies, and improve procurement procedures while supporting social programs and women empowerment.
  - Scale up Social Cash Transfer program by at least 70 000 households in 2023.
  - Increase beneficiaries under food security Programme by at least 30 000 households.
  - Continue the Girls’ Education and Women’s Empowerment and Livelihood (GEWEL) Project that will keep 43 000 girls in school and 129 000 women empowered.
  - Reduced spending on agricultural subsidies and other goods and services has allowed for doubling spending on social transfers, increased public investment, and subsidies to support ZRA’s reforms.
- SOE governance and fiscal transfers:
  - Energy Regulation Board approved phased increase in electricity tariffs to improve efficiency of ZESCO and gradually minimize fiscal transfers.
  - Authorities injected fiscal transfers and settled arrears on public sector pension schemes’ obligations and cleared arrears on contribution to the National Pension Scheme.
- Fiscal reforms and institutions:
  - Enhancements in budget credibility; public financial management at local authority level; efficiency of cash management; public investment management and transparency on PPP framework; embedding fiscal risk monitoring in the budget process.
- Debt sustainability and restructuring:
  - Debt assessed as unsustainable; restructuring ranks high on the agenda.
  - Recent debt restructuring under the G20 Common Framework viewed as important milestone to create borrowing space and enable Fund support under the ECF program.
  - Medium-Term Debt Strategy developed in early 2023: enhance debt management through Annual Borrowing Plans and regular debt data validation and reconciliation with creditors; mainly issue longer-dated government securities to spread the debt service burden.
- Legal and institutional debt transparency measures:
  - Replaced the Loan and Guarantee Act with a Public Debt Management Act 15 of 2022.
  - Developed a Public Financial Management Strategy for 2023-2026 to improve internal controls in the payroll system and improve coverage and timeliness.
  - Act mandated establishment of the Debt Management Office (DMO); new organizational structure for the DMO to be approved by the end of 2023.
- Expected benefits from agreement with the OCC:
  - Generation of US$5.8 billion in debt service savings to unlock resources for developmental programs.
  - Unlocking extra funds from cooperating partners like the IMF and the World Bank.
  - Creation of a pathway to restore debt sustainability in the medium-term and improved macroeconomic environment.
  - Promoting renewed interest in Zambia’s focus on economic transformation.
  - Authorities have begun negotiating outstanding debt arrangements, on comparable terms, with the private sector.

### Monetary Policy and Financial Sector
- Monetary stance and objectives:
  - Authorities tightened monetary conditions to bring down inflation alongside fiscal consolidation to curtail aggregate demand.
  - Monetary policy decisions will remain data-dependent under the forward-looking monetary policy framework.
  - Bank of Zambia (BOZ) stands ready to take appropriate actions to curb inflation and preserve central bank credibility through anchoring of inflation expectations.
  - Commitment to deepen the secondary market for government securities and rebuild external reserve buffers while allowing market forces in the foreign exchange market to absorb external shocks.
- Financial sector resilience and reforms:
  - Financial sector remained resilient, benefiting from ample liquidity and capital buffers, improved asset quality, and higher earnings performance.
  - Authorities considering establishing an SME Credit Guarantee Fund to support private sector lending and moderate the sovereign-bank nexus.
  - Harnessing fintech and mobile money technology to promote financial inclusion.
  - Strengthened financial safety nets through implementation of the new Deposit Protection Scheme and crisis management and resolution frameworks.
  - Central bank developed a micro-prudential stress-testing framework and will soon operationalize the Financial Stability Committee in line with the Bank of Zambia Act of 2022.

### Structural Reforms
- Governance and anti-corruption:
  - Authorities prioritize structural reforms to strengthen governance practices and intensify fight against corruption to create an enabling business environment.
  - Governance Diagnostic report (in collaboration with the IMF) identifying governance weaknesses and corruption vulnerability with recommendations was published in December 2022.
  - Authorities have increased funding to law enforcement agencies and oversight institutions.
- Energy and infrastructure:
  - Reforms to reduce cost of energy, including withdrawing from importation and supply of petroleum products and converting TAZAMA pipeline into a finished product pipeline with pricing via a Statutory Instrument.
  - Electricity generation has surplus capacity augmented by Kafue Gorge Lower Hydro Power Station and other substations.
  - Financial planning to conclude in-country circuits for the Zambia-Tanzania-Kenya interconnector, including exporting excess power, is underway.
- Human capital and social services:
  - Introduced free education up to grade 12 and provided bursaries and grants to vulnerable students.
  - Over 30 000 new teachers employed and deployed mostly to rural areas and increased investment in ICT infrastructure for education delivery.
  - More than 11 000 new health personnel recruited alongside increased investment in health facilities and supply of medical supplies and drugs.
- Agriculture and procurement:
  - Cabinet approved full migration of the Farmer Input Support Programme (FISP) from direct input supply to an electronic input support system effective 2023/2024 agricultural season.
  - Published list of suppliers of inputs for the 2021/2022 and 2022/2023 farming seasons on the Ministry of Agriculture’s website, effective 2023/2024.
  - Open international bidding for Urea fertilizer and direct bidding for compound D fertilizer supply to be used as key procurement methods.
- Climate change and resilience:
  - Strengthening climate mitigation and adaptation through project investment, active participation in relevant fora, and establishing guidelines for green bond trading.
  - Developing a Climate Change Bill to address impact of climate change.
  - Initiated process to enhance coverage of early warning systems for preparedness and prompt response to adverse weather events.
  - Authorities consider support under the Resilience and Sustainable Trust (RST) important to anchor efforts to build climate resilience.

### Conclusion
- Authorities remain committed to entrench macroeconomic stability, improve fiscal and debt sustainability, and implement comprehensive economic and governance reforms.
- Authorities undertake to conclude outstanding debt arrangements with the private sector and call for continued support from creditors.
- Authorities look forward to Executive Directors’ support in completion of the first ECF Review and conclusion of the Article IV Consultation.

*Source: Introduction (1zmbea2023002).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1zmbea2023002.pdf_