## 1zmbea2023004 ## Source details **Canonical URL:** [1zmbea2023004](https://www.imf.org/-/media/files/publications/cr/2023/english/1zmbea2023004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1zmbea2023004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1zmbea2023004.pdf.json) --- ### Executive summary and program status - IMF Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) in August 2022 in an amount equivalent to 100 percent of quota (SDR 978.2 million). - Approval of this review will grant access to about US$184 million, bringing IMF financial support under the arrangement to SDR 419.6 million (about US$555.7 million). - Authorities reached a Memorandum of Understanding (MoU) with official creditors in October and announced an Agreement in Principle (AIP) with the restricted committee of bondholders in November; the AIP and a revised proposal did not meet comparability of treatment (CoT) as defined by official bilateral creditors. - Program performance: - All but one quantitative performance criteria (QPC) for the second review were met; the end-June net international reserves (NIR) target was missed but end-September NIR target was met after corrective measures. - All but one end-June indicative targets (ITs) were met; the IT on clearance of expenditure and VAT refund arrears was missed. - Four out of seven structural benchmarks (SBs) were met; two others completed with minor delays. - External arrears on public and publicly guaranteed debt (principal and interest) amounted to US$5.3 billion as of end-September 2023, increasing by US$1.2 billion relative to end-December 2022 (increase pertains to claims under the debt restructuring perimeter). - All arrears with international financial institutions (IFIs) have been cleared. ### Recent economic developments and key statistics - Growth and sectoral dynamics: - Economy grew 6.2 percent and 5 percent in 2021 and 2022 respectively (new estimates). - Growth reached 4.7 percent (y/y) in 2023H1. - Copper production declined 12 percent in the first semester (y/y). - Agriculture contracted by 5.8 percent in 2023H1. - Non-mining, non-agricultural growth reached 7.1 percent in 2023H1. - Inflation and monetary policy: - Headline inflation accelerated to 12.6 percent y-o-y in October from 9.4 percent in January. - Bank of Zambia (BoZ) benchmark rate increased to 11 percent on November 22 after a 100 basis points hike; earlier increases included 50-bps in August and two 25-bps hikes in February and May. - Exchange rate and reserves: - Kwacha depreciated by 26 percent vis-à-vis the U.S. dollar during July–October 2023. - Depreciated by 4.5 and 2.9 percent in nominal and real effective terms, respectively, by end-September 2023. - BoZ net sales amounted to US$791million in the first three quarters of 2023. - Gross reserves declined by US$300 million to US$2.7 billion (equivalent to 3.0 months of import cover) at end-June 2023; recovered to US$2.9 billion by end-September 2023. - Excess liquidity increased from 1.8 percent of banks’ assets at end-2022 to 3.9 percent at end-September 2023. - Reserve requirements on Kwacha and foreign currency deposits were increased by 5 ½ percentage points to 17 percent in November. - External and fiscal: - Current account recorded a deficit of 3 percent of GDP in 2023H1, compared to a surplus of 6.5 percent of GDP in 2022H1. - End-June primary fiscal surplus (cash basis) reached K 2.2 billion, in line with program performance criteria. - Mining-related revenue shortfall of 0.8 percent of GDP in 2023H1 was offset by non-mining revenues and contained primary spending. - Authorities used the remaining half of the 2021 SDR allocation for budget financing in 2023H1. - Market and banking: - Weighted-average spreads on Eurobonds peaked at 6,954 basis points on March 20, 2023, and narrowed to 1,957 bps on November 14, 2023. - Average bond auction cover increased from 43 percent (January-May 2023) to 130 percent (June-October 2023). - Cumulative non-resident holders (NRHs) purchases (cost value) in the primary market during January-August 2023 amounted to K 3.2 billion. - Commercial bank loans grew by 27 percent between end-December 2022 and end-September 2023. - Private sector credit was 10.2 percent of GDP in 2022 (down from average 12.1 percent during 2018-20). - Gross NPLs decreased by end-September 2023; NPL coverage ratio was above 90 percent. - BoZ announced unwinding of remaining forbearance for restructured facilities by end-2023. ### Outlook and medium-term projections (selected extracts) - Growth and inflation: - Growth revised to 4.3 percent for 2023. - Projected to accelerate to 4.7 percent in 2024 and to 5 percent over the medium term. - CPI inflation projected to peak at 13 percent y/y around end-2023 before moderating in 2024-25. - Selected medium-term macro framework extracts: - Real GDP (percent change): 2023 Prel. 4.3; 2024 Est. 4.7; 2025 Proj. 4.8; 2026 Proj. 4.8; 2027 Proj. 4.9; 2028 Proj. 5.0. - CPI inflation, eop (percent): 2023 Prel. 13.0; 2024 Est. 8.9; 2025 Proj. 6.8; 2026 Proj. 7.0; 2027 Proj. 7.0; 2028 Proj. 7.0. - Overall fiscal balance (% GDP), commitment basis: 2023 Prel. -6.4; 2024 Est. -3.0; 2025 Proj. -3.8; 2026 Proj. -3.3; 2027 Proj. -4.8; 2028 Proj. -3.6. - External public debt (% GDP): 2023 Prel. 72.9; 2024 Est. 65.9; 2025 Proj. 69.2; 2026 Proj. 66.5; 2027 Proj. 63.0; 2028 Proj. 59.7. - Current account balance (% GDP): 2023 Prel. -1.8; 2024 Est. 7.1; 2025 Proj. 3.7; 2026 Proj. 5.2; 2027 Proj. 6.9; 2028 Proj. 9.0. - Gross international reserves (months of prospective imports): 2023 Prel. 3.4; 2024 Est. 4.2; 2025 Proj. 4.0; 2026 Proj. 5.0; 2027 Proj. 5.0; 2028 Proj. 5.0. ### Risks, scenarios, and risk assessment - Major downside risks: - Weather-related shocks and weaker copper revenues. - Slippages in program execution and delays in restructuring debt. - Deterioration in external environment, including commodity price volatility and global slowdown or recession. - Escalation of geopolitical conflicts (conflict in Gaza and Israel; Russia–Ukraine war) affecting trade, food and energy prices. - Prolonged subdued mining production, weather shocks, and social discontent. - Upside scenario: - Swift completion of debt restructuring and renewed mining investments could generate positive confidence effects and support stronger growth. - Annex I — Risk Assessment Matrix highlights: - Domestic risks such as delays in debt restructuring (Relative Likelihood: M; Impact if Realized: L). - External risks (Abrupt global slowdown; Commodity price volatility; Intensification of regional conflict(s); Deepening geo-economic fragmentation) with Relative Likelihood: H and impacts ranging M–H as specified. ### Fiscal consolidation, revenue mobilization, and proposed tax measures - 2023 primary balance (cash basis) projected to improve by 1.8 percent of GDP compared to 2022, largely from lower primary spending: 1.2 percent of GDP. - 2023 primary balance on a commitment basis would narrow to 0.6 percent of GDP (below envisaged 2 percent at First Review) due to accumulated VAT claims. - 2023 revenues excluding grants expected 0.5 percent of GDP lower due to a mining revenue shortfall (1.4 percent of GDP); non-mining tax revenues performed better-than-expected (by 0.6 percent of GDP). - Text Table 3: Main Proposed Tax Measures in the 2024 Draft Budget (Kwacha million; Percent of GDP): - Income Taxes: 1,618 — 0.25 - Adjusting upward PAYE bands, and lowering the rate for the top band: -640 — -0.10 - Applying withholding tax to income from discount on government bonds: 1,158 — 0.15 - Excess Profit fees for Tazama fuel pipeline*: 1,100 — 0.17 - Excises: 297 — 0.05 - Increasing excise for cigarettes (K400/'000 from K361/'000): 200 — 0.00 - Removing exemption for government cars: 190 — 0.03 - Other excise measures, net: 87 — 0.01 - Custom Duties: 235 — 0.04 - Removing exemption for government cars: 229 — 0.03 - Other custom measures, net: 6 — 0.00 - Non-tax revenue: 745 — 0.11 - Introducing a Mobile Transaction Levy: 545 — 0.08 - Adjusting Fee units: 200 — 0.03 - Total: 2,894 — 0.44 - Revenue mobilization and administration reforms: - Expand withholding tax base, rescind exemption of government cars from import duties and registration tax, introduce a modest levy on mobile money transactions, index excises for cigarettes and sugary drinks. - Concerns noted about reducing top PIT rate by 0.5 ppt to 37 percent and potential negative effects of a mobile transaction levy on financial inclusion. - Tax debt amounted to 19 percent of GDP at end-2022; K 63 billion related to principal. - Amnesty program (October 2022–June 2023) yielded 0.7 percent of GDP. ### Public financial management (PFM), arrears, and social spending - Expenditure arrears: - Expenditure arrears increased to K 77.8 billion in June-2023 from K 77.6 billion at end-2022. - Notable increases: VAT and other Recurrent Departmental Charges (RDC) due to stock revaluations and penalties; reductions in arrears for Personnel Emoluments, fuel, electricity, FISP, FRA, pensions, and capital projects. - Fuel arrears audit ongoing and expected to be concluded by end-March 2024. - Arrears clearance and VAT refunds: - Net clearance of arrears on expenditure and tax refunds reached K 4,309 million versus IT K 5,908 million (VAT refund repayments K 7,939 million offset by new VAT claims K 9,713 million). - Authorities commit to clear legacy stock of VAT refund arrears per Arrears Clearance Strategy and refund validated VAT claims timely. - Social spending and PFM measures: - Social spending scaled up to K 22,260 million, surpassing end-June 2023 IT (K 18,103 million). - Cash transfer scheme aims to reach 1.4 million households in 2024. - IFMIS rollout completed in 59 spending units (including all ministry-level spending units); action plan to rationalize banking arrangements and reduce commercial bank account balances (end-March 2024 SB). - A fiscal risk statement (FRS) will accompany the 2025 budget (end-June 2024 SB). - NAPSA paid out K 9.9 billion to about 425,000 participants following 2023 law allowing partial liquidation. ### Debt management, restructuring, and DSA findings - Stock of public and publicly guaranteed (PPG) external debt (excluding interest arrears, fuel, contractors and guarantees on ZESCO other payables) amounted to US$15.6 billion by end-September 2023 (Central government: US$14.2 billion; Guaranteed external obligations: US$1.4 billion). - Total PPG external debt increased to US$20.9 billion by end-2022 under broader memorandum coverage; Total PPG debt ended 2022 at US$33.4 billion (or 119.6 percent of GDP) under comprehensive coverage including arrears and guarantees. - Restructuring progress: - Agreement with official creditors under the G20 Common Framework reflected in an MoU agreed in October 2023. - Agreement in principle with the Steering Committee of bondholders on October 26, 2023; further adjustments needed to meet program parameters and OCC CoT. - Over the program period, approximately 74 percent (or US$7.9 billion) of the residual BOP financing gap is expected to be covered by debt restructuring. - DSA conclusions: - Staff assesses the debt restructuring process will restore debt sustainability over the medium term, supported by the MoU with the OCC. - In absence of implementation and comparable restructuring agreements, Zambia formally remains in debt distress. - Under the baseline, all four external debt burden indicators breach their thresholds; under alternative restructuring scenarios consistent with OCC-agreed treatment and comparable private creditor terms, debt would be sustainable on a forward-looking basis with moderate risk of debt distress. - Key DSA indicators and projections (selected): - PV of PPG external debt-to-exports ratio breached thresholds in baseline (e.g., 166 percent in 2023 in one table extract). - Public PPG debt (total) ended 2022 at US$33,349 million in the sourced table (end-2022 baseline figures). - NIR and reserve targets: - End-June 2023 NIR reached US$1,700.9 million (US$702.1 million lower than target of US$2,403 million). - BoZ proposed revising end-June 2024 NIR QPC target to US$2,150 million and setting end-December 2024 NIR target at US$2,235 million. ### Monetary policy, FX strategy, and financial sector reforms - Monetary policy stance and framework: - BoZ focused on price stability; tightened policy since August by raising policy rate and statutory reserve requirements. - BoZ should stand ready to further tighten policy to counter persistent inflation; policy adjustments should remain anchored around the monetary policy rate and be data dependent. - Renewed MPC (first time including external members) and inaugural Monetary Policy Report (MPR) expected to strengthen transparency and accountability; BoZ to prepare MPR in line with MCM TA recommendations. - BoZ to advance toward adopting an interest rate corridor, reserve averaging, and an open market operation framework; facilitate a functional repo market with GMRA and ISDA adoption in 2024. - FX strategy and reserve accumulation: - In 2024, BoZ will accumulate reserves and ensure exchange rate flexibility; BoZ proposes revising end-June 2024 NIR QPC to US$2,150 million and end-December 2024 NIR to US$2,235 million, supported by government commitment to transfer all FX disbursements related to budget support to BoZ. - Staff recommended less intrusive measures than requiring repatriation of all export earnings to a bank domiciled in Zambia; any such measure assessed as a capital flow measure under the IMF’s institutional view. - Financial sector and safeguards: - Banking vulnerabilities: sovereign-bank nexus, high dollarization, concentration risks (top 20 loans ratio 62 percent of total; 127 percent of total industry regulatory capital). - Share of FX loans and deposits was 39 percent of total respectively at end-September 2023. - Macroprudential toolkit developed; inter-agency Financial Stability Committee (FSC) to publish maiden FSR by end-June 2024. - Cyber and Information Risk Management Guidelines issued May 2023; BoZ to review Banking and Financial Services Act with draft bill submitted to Parliament by end-2024. - Deposit protection scheme to be implemented in 2024; institutional setup operational by end-December 2023 under Bank Supervision Department. - BoZ progressing with recommendations from 2022 safeguards assessment; internal audit providing assurance on monetary program data. - BoZ to establish dedicated AML/CFT/CPF supervisory unit by end-2023. ### Structural reforms, energy, agriculture, and governance - Agriculture: - Comprehensive Agriculture Transformation Program (CATP) to be completed by end-December 2023. - FISP reform: advance to 73 districts to e-voucher for 2024-25 (proposed end-September 2024 SB). - Energy and ZESCO: - Open grid framework operational for IPPs to sell directly. - Commit to migrating to fully cost-reflective tariffs and clearing arrears to restore ZESCO sustainability. - ZESCO tariff increases: average 37-percent increase in 2023; average retail tariff increases planned: 9 percent in 2024 and 15 percent in 2025; 10 percent and 14 percent in 2026-27 respectively. - ZESCO total outstanding debt amounted to US$2.2 billion in September 2023 (from US$2.1 billion at end-2022). - Governance and anti-corruption: - Draft Access to Information Bill submitted to Parliament (submission delayed by one week; listed as Not met in Table 2). - Progress on beneficial ownership (BO) framework and PACRA’s BO register operationalization; Anti-Corruption Act proposed end-March 2025 SB. - Statistical improvements: national accounts rebase to 2022 by end-2025; first revision to BoP statistics by end-November 2023. - Public Investment Management and PPPs: - New PIM guidelines adopted; only projects appraised per guidelines to be included in budget; MoFNP to publish inventory of projects in budget from 2025. - Government signed eight PPPs amounting to 6.4 percent of 2023 GDP; refrain from signing new PPPs until new PPP Act operational. ### TMU, monitoring, and program conditionality - TMU defines indicators, reporting, definitions, and adjustors; fiscal year January 1–December 31. - Selected continuous performance criteria include non-accumulation of new external debt arrears and ceiling on contracting new non-concessional external debt. - Key reporting and timing: - Fiscal, external, monetary, and real sector data to be reported with specified lags (daily/weekly/monthly/quarterly) to IMF staff. - Semi-annual review schedule: third review based on end-December 2023 test dates on or after April 1, 2024; fourth on or after October 1, 2024; fifth on or after April 1, 2025; sixth on or after October 1, 2025. - Monetary Policy Consultation Clause (MPCC): - Consultation bands apply to quarterly average CPI inflation (ZamStats). Board consultation triggered if quarterly average rate of CPI inflation falls outside outer bands; staff discussions required for inner band deviations. - Financing: - The program is fully financed with firm commitments for next 12 months and good prospects for remainder. - IMF quota SDR 978.2 million; total SDR availability 978.20 (100.0 percent). - Outstanding Fund credit projections and repayment capacity: with a disbursement of 100 percent of quota, outstanding credit projected to peak in 2025 at 4.1 percent of GDP or 8.7 percent of exports; annual repayments peak at 0.5 percent of GDP and 1.1 percent of exports in 2031. ### Staff appraisal and recommendations - Staff supports completing the second review under the ECF-supported arrangement, waiver on nonobservance of end-June NIR QPC, and modifications of the MPCC and QPCs. - Policy priorities include: - Continued fiscal consolidation to restore debt sustainability while protecting essential social spending. - Foster price and external stability through monetary tightening, reserve management, and FX market measures. - Strengthen financial supervision, unwind forbearance measures, and reinforce bank resilience. - Advance structural and governance reforms: PFM improvements, anti-corruption measures, beneficial ownership transparency, and statistical capacity building. - Staff assesses Zambia’s capacity to repay the Fund as adequate but subject to risk; delays in debt restructuring are the most significant risk to program success. *Italic: IMF staff report text as provided in the content unit.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The Zambian economy is showing resilience driven by non-mining and non-agricultural growth. - The government is working with external creditors to restructure debt in line with program parameters. - Policy priorities: fiscal consolidation to restore debt sustainability; increase and safeguard essential social spending; preserve financial stability; intensify structural and governance reforms to unlock growth potential. ### Program status - In August 2022, the IMF’s Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) in an amount equivalent to 100 percent of quota (SDR 978.2 million). - Approval of this review will grant access to about US$184 million, bringing the IMF financial support under the arrangement to SDR 419.6 million (about US$555.7 million). - Authorities reached a Memorandum of Understanding (MoU) with official creditors in October and announced an Agreement in Principle (AIP) with the restricted committee of bondholders in November; the AIP and a revised proposal did not meet comparability of treatment (CoT) as defined by official bilateral creditors. ### Program performance - Program performance has been satisfactory despite a challenging domestic and global environment. - All but one quantitative performance criteria (QPC) for the second review were met; the end-June net international reserves (NIR) target was missed but end-September NIR target was met after corrective measures. - All but one end-June indicative targets (ITs) were met; the IT on clearance of expenditure and VAT refund arrears was missed. - Four out of seven structural benchmarks (SBs) were met; two others completed with minor delays. - Key program numbers and developments: - External arrears on public and publicly guaranteed debt (principal and interest) amounted to US$5.3 billion as of end-September 2023, increasing by US$1.2 billion relative to end-December 2022 (increase pertains to claims under the debt restructuring perimeter). - All arrears with international financial institutions (IFIs) have been cleared. ### Recent economic developments and key statistics - Growth and sectoral dynamics: - Economy grew 6.2 percent and 5 percent in 2021 and 2022 respectively (new estimates). - Growth reached 4.7 percent (y/y) in 2023H1 despite lower mining and agriculture production. - Copper production declined 12 percent in the first semester (y/y). - Agriculture contracted by 5.8 percent in 2023H1. - Non-mining, non-agricultural growth reached 7.1 percent in 2023H1, driven by communication, education, and transportation. - Inflation and monetary policy: - Headline inflation accelerated to 12.6 percent y-o-y in October from 9.4 percent in January. - Bank of Zambia (BoZ) benchmark rate increased to 11 percent on November 22 after a 100 basis points hike; earlier increases included 50-bps in August and two 25-bps hikes in February and May. - Exchange rate and foreign exchange operations: - Kwacha depreciated by 26 percent vis-à-vis the U.S. dollar during July–October 2023. - Depreciated by 4.5 and 2.9 percent in nominal and real effective terms, respectively, by end-September 2023. - BoZ net sales amounted to US$791million in the first three quarters of 2023. - Gross reserves declined by US$300 million to US$2.7 billion (equivalent to 3.0 months of import cover) at end-June 2023; recovered to US$2.9 billion by end-September 2023. - Excess liquidity increased from 1.8 percent of banks’ assets at end-2022 to 3.9 percent at end-September 2023. - Reserve requirements on Kwacha and foreign currency deposits were increased by 5 ½ percentage points to 17 percent in November. - Inter-bank FX operations represent less than 10 percent of total FX transactions. - External sector and fiscal: - Current account recorded a deficit of 3 percent of GDP in 2023H1, compared to a surplus of 6.5 percent of GDP in 2022H1 (Text Table 1). - End-June primary fiscal surplus (cash basis) reached K 2.2 billion, in line with program performance criteria. - A mining-related revenue shortfall of 0.8 percent of GDP in 2023H1 was offset by non-mining revenues and contained primary spending. - Authorities used the remaining half of the 2021 SDR allocation for budget financing in 2023H1. - Market financing and investor sentiment: - Weighted-average spreads on Eurobonds peaked at 6,954 basis points on March 20, 2023, and narrowed to 1,957 bps on November 14, 2023. - Investors’ appetite for domestic government securities improved: average bond auction cover increased from 43 percent (January-May 2023) to 130 percent (June-October 2023). - Cumulative non-resident holders (NRHs) purchases (cost value) in the primary market during January-August 2023 amounted to K 3.2 billion. - Banking and financial sector: - Commercial bank loans grew by 27 percent between end-December 2022 and end-September 2023. - Private sector credit was 10.2 percent of GDP in 2022, down from an average of 12.1 percent during 2018-20. - Gross non-performing loans (NPLs) decreased by end-September 2023; NPL coverage ratio was above 90 percent. - BoZ announced unwinding of remaining forbearance for restructured facilities by end-2023. ### Outlook and projections - Growth and inflation projections (Text Table 2 highlights): - Growth revised to 4.3 percent for 2023. - Projected to accelerate to 4.7 percent in 2024 and to 5 percent over the medium term. - CPI inflation projected to peak at 13 percent y/y around end-2023 before moderating in 2024-25. - The 2023 current account is expected to swing to a surplus in 2024 as mining production expands over the medium term. - Selected medium-term macro framework extracts (as reported): - Real GDP (percent change): 2023 Prel. 4.3; 2024 Est. 4.7; 2025 Proj. 4.8; 2026 Proj. 4.8; 2027 Proj. 4.9; 2028 Proj. 5.0. - CPI inflation, eop (percent): 2023 Prel. 13.0; 2024 Est. 8.9; 2025 Proj. 6.8; 2026 Proj. 7.0; 2027 Proj. 7.0; 2028 Proj. 7.0. - Overall fiscal balance (% GDP), commitment basis: 2023 Prel. -6.4; 2024 Est. -3.0; 2025 Proj. -3.8; 2026 Proj. -3.3; 2027 Proj. -4.8; 2028 Proj. -3.6. - External public debt (% GDP): 2023 Prel. 72.9; 2024 Est. 65.9; 2025 Proj. 69.2; 2026 Proj. 66.5; 2027 Proj. 63.0; 2028 Proj. 59.7. - Current account balance (% GDP): 2023 Prel. -1.8; 2024 Est. 7.1; 2025 Proj. 3.7; 2026 Proj. 5.2; 2027 Proj. 6.9; 2028 Proj. 9.0. - Gross international reserves (months of prospective imports): 2023 Prel. 3.4; 2024 Est. 4.2; 2025 Proj. 4.0; 2026 Proj. 5.0; 2027 Proj. 5.0; 2028 Proj. 5.0. ### Risks and scenarios - Major downside risks: - Weather-related shocks and weaker copper revenues. - Slippages in program execution and delays in restructuring debt. - Deterioration in the external environment, including commodity price volatility and a global slowdown or recession. - Escalation of geopolitical conflicts (conflict in Gaza and Israel; Russia–Ukraine war) leading to trade disruptions, higher food and energy prices, and increased food insecurity. - Prolonged subdued mining production, weather shocks, and increasing social discontent that could worsen inequality and growth prospects. - Upside scenario: - Swift completion of debt restructuring and renewed mining investments could generate positive confidence effects and support stronger growth. ### Policy priorities and staff discussions - Continued fiscal consolidation to restore debt sustainability while protecting essential social spending. - Foster price and external stability through monetary policy tightening, reserve management, and FX market measures. - Strengthen financial policies and safeguards, including unwinding forbearance measures and reinforcing bank resilience. - Advance structural and governance reforms to build resilience and unlock growth, including public financial management improvements and anti-corruption measures. - Authorities acknowledge commodity price volatility and rising food and energy prices as major risks, expect prompt resolution of debt restructuring with private creditors, and are optimistic about mining investment prospects. _Italic: IMF staff executive summary for Zambia (Executive Summary, CR 2023)._ ### 7. Enterprise risks are limited. Financial risks to the Fund arise reflecting the stressed debt ### 7. Enterprise risks are limited. Financial risks to the Fund arise reflecting the stressed debt situation and outlook, though these are mitigated by program design and debt relief prospects ### Enterprise risks and program design - Financial risks to the Fund reflect the stressed debt situation and outlook; risks are mitigated by program design and debt relief prospects. - Not completing the review would raise IMF’s reputational and member engagement risks. - Business risks associated with data accuracy mainly relate to monetary data; the BoZ has established a working group to document procedures for compiling and reviewing program monetary data. ### A. Continued Fiscal Consolidation to Restore Debt Sustainability - 2023 primary balance (cash basis) projected to improve by 1.8 percent of GDP compared to 2022, mostly driven by: - lower primary spending: 1.2 percent of GDP (investment from foreign-financed projects: 0.8 percent of GDP; contained current spending: 0.4 percent of GDP). - Compared to 2022, improved revenues mask a sharp shortfall in mining revenue, offset by higher non-mining and one-off revenues. - Authorities ready to curtail spending in goods and services further to meet the 2023 primary surplus target. - 2023 primary balance on a commitment basis would narrow to 0.6 percent of GDP, below the envisaged 2 percent of GDP at the time of the First Review, due to accumulated VAT claims. - 2023 revenues excluding grants are expected 0.5 percent of GDP lower due to the mining revenue shortfall (1.4 percent of GDP). Non-mining tax revenues have performed better-than-expected (by 0.6 percent of GDP). - Any upside on revenues should be saved or used to clear arrears, including VAT refunds. ### Fiscal outlook and 2024 budget parameters - Fiscal consolidation will continue in 2024, but at a slower pace due to lower mining revenues. - Authorities committed to a primary balance of K 5.57 billion (0.8 percent of GDP) with a proposed revised end-June QPC of K 2.16 billion. - Compared to the First Review, the non-mining primary balance increases by 0.9 percent of GDP. - Primary expenditures will only marginally change from the level of the First Review; authorities will contain them should revenue not materialize as anticipated. - Authorities agreed to submit to Parliament a 2025 draft budget consistent with program parameters (proposed end-September 2024 SB). ### Continued revenue mobilization (MEFP, ¶11) - Widening the tax base and removing exemptions: - Expand base for withholding tax by including discounts on government bonds paid at maturity. - Rescind exemption of government cars from import duties and registration tax. - Introduce a modest levy on mobile money transactions and adjust upwards fees and fines. - Index excises for cigarettes and sugary drinks to protect tax base from inflation erosion. - Noted concerns: - Increasing threshold for personal income tax protects low-wage earners, but reducing the top rate by 0.5 ppt to 37 percent hampers tax progressivity. - Use of excises/custom duties to protect domestic manufacturing or tax incentives (reduced CIT rates or tax holidays) may create loopholes and complicate administration; cost-based measures preferred. - Levy on mobile transactions could have a negative effect on financial inclusion. - Improving tax compliance: - Narrow tax base: 0.3 percent of registered taxpayers contribute 80 percent of revenues. - Specialized mining unit established for small and medium-sized mines; progress toward unified Large Taxpayer Office (end-March 2024 SB) and merging units for direct and indirect taxes. - Modernizing and enforcing revenue collection: - Better data processing and integration among IFMIS and ZILAS. - New system developed with Ministry of Mines to track mining exports and road movements of minerals to tackle under-declaration and mis-invoicing. - VAT functioning: - New e-invoice system to be applied in 2024Q1 and new VAT control model to improve compliance. - Authorities should clear legacy VAT arrears and promptly refund all validated VAT claims (IT). - Amnesty program (October 2022–June 2023) yielded 0.7 percent of GDP. - Tax debt amounted to 19 percent of GDP at end-2022, of which K 63 billion related to principal. - Note: About 80 percent of mining revenues are collected from ten out of 2,600 licensed mines; not all report mining activity to the Ministry of Mines. ### Text Table 3: Main Proposed Tax Measures in the 2024 Draft Budget (Kwacha million; Percent of GDP) - Income Taxes: 1,618 — 0.25 - Adjusting upward PAYE bands, and lowering the rate for the top band: -640 — -0.10 - Applying withholding tax to income from discount on government bonds: 1,158 — 0.15 - Excess Profit fees for Tazama fuel pipeline*: 1,100 — 0.17 - Excises: 297 — 0.05 - Increasing excise for cigarettes (K400/'000 from K361/'000): 200 — 0.00 - Removing exemption for government cars: 190 — 0.03 - Other excise measures, net: 87 — 0.01 - Custom Duties: 235 — 0.04 - Removing exemption for government cars: 229 — 0.03 - Other custom measures, net: 6 — 0.00 - Non-tax revenue: 745 — 0.11 - Introducing a Mobile Transaction Levy: 545 — 0.08 - Adjusting Fee units: 200 — 0.03 - Total: 2,894 — 0.44 (*Energy Regulation Board price build up formula applies a higher-than-transport cost for the Tazama oil pipeline, generating excess transport cost recovery for the Tazama pipeline and the companies using it.) ### B. Carefully Calibrating Spending and PFM Reforms - Expenditure control/measures: - Three remaining institutions integrated in IFMIS, including all ministry-level spending units; further expansion needed among spending agencies and to register multi-year commitments and arrears (MEFP, ¶17). - Social spending: - Authorities upscaled social support despite fiscal consolidation; hiring of new teachers and health personnel (MEFP, ¶13). - Cash transfer scheme aims to reach 1.4 million households in 2024. - Improving cash management: - Budget implementation through quarterly releases that double as cash plans, with no active management once funds leave the TSA. - Accounts outside the TSA create limited visibility and no claw-back provisions; deposits in commercial bank accounts at end-September stood at 1.5 percent of GDP. - Authorities will prepare an action plan to rationalize banking arrangements and reduce account balances at commercial banks (end-March 2024 SB, MEFP, ¶19). - Decentralization and local governments: - Central government transferred functions to LGs with resources, but PFM capacity at LGs needs strengthening; oversight over LGs and their fiscal risks should improve. - Constituency Development Fund (CDF) well-funded at 0.8 percent of GDP in 2023; absorption low at an average 50 percent as of end-August. - Delegation to provinces to accelerate execution should not dilute PFM and reporting rules (MEFP, ¶15). - Fiscal Risks and FRS: - A fiscal risk statement (FRS) will accompany the 2025 budget, evaluating risks from SOEs, PPPs, local governments, public pension schemes, and other obligations including climate change risks (end-June 2024 SB, MEFP, ¶21). - Supervisory and performance framework adopted to enhance SOE monitoring; working toward a consolidated SOE financial report for 2021. - Government will develop an SOE policy to enhance shareholder oversight and define institutional responsibilities (proposed end-October 2024 SB, MEFP, ¶22). - Government signed eight PPPs amounting to 6.4 percent of 2023 GDP; FRS should describe financial commitments and contingent liabilities. - Refrain from signing new PPPs until new PPP Act becomes operational (MEFP, ¶18). - New public investment management guidelines standardize procedures; only projects approved consistent with guidelines will be included in the budget; MoFNP will publish an inventory of all existing projects and include this list in the budget from 2025 (MEFP, ¶18). - NAPSA: - Assets amounting to 13 percent of GDP and holdings of government domestic debt at 20 percent of total. - 2023 law allowing partial liquidation strained liquidity; as of September 2023, NAPSA paid out K 9.9 billion to about 425,000 participants (representing almost 90 percent of eligible contributions to withdraw). Withdrawals have now stabilized. - NAPSA needs improved contribution collection and a sound investment strategy to avoid quasi-fiscal activities. - Note: Out of 49 SOEs, 37 are managed by the Industrial Development Corporation; reporting lines unclear and financial results partial. ### C. Issuance framework and debt management - Issuance strategy changes: - Bond issuances currently involve an average discount of around 40 percent, especially for longer tenors. - Transition to issuing bonds at par agreed for 2024 (proposed end-March 2024 SB); staff urged adequate market consultation before switch. - Aligning 2024 issuance calendar with annual borrowing requirements recommended. - Non-resident holdings (NRHs): - Stock of NRHs increased more than expected at First Review and could pose debt sustainability risks. - In June 2023, authorities limited non-residents participation to 5 percent of total primary issuances in 2023 (in cash terms). - Further limit: non-residents participation to 5 percent of total bonds issuances (at face value) in the primary market in 2024-25. - This measure constitutes a residency-based capital inflow measure under the Fund’s institutional view and should be removed as conditions allow. - NRH access to the secondary market remains unrestricted. - Strengthening governance and transparency: - MoFNP publishes Debt Statistical Bulletin covering external and domestic debt developments on a quarterly basis (recurrent end-quarter SB). - Following 2022 Public Debt Management Act, regulations governing sinking fund, guarantees, DMO provisions, credit risk assessment, and SOE borrowing to be in place by end-June 2024. - Organization for new DMO with separated front, back, and middle office functions expected to be approved by Cabinet by end-2023 (end-December 2023 SB, MEFP, ¶30). - Authorities will adopt and publish DMO procedure manual by end-2024 (proposed end-November 2024 SB). ### B. Fostering Price and External Stability - Monetary policy stance: - BoZ focused on price stability; tightened policy since August by significantly raising policy rate and statutory reserve requirements in response to inflation at an 18-month high in October. - BoZ should stand ready to further tighten policy to counter persistent inflation; policy adjustments should remain anchored around the monetary policy rate, be data dependent, and incorporate forward-looking analysis (MEFP, ¶32). - Reserve accumulation and FX strategy: - In 2024, BoZ will accumulate reserves and ensure exchange rate flexibility as first response to external pressures, complemented by further monetary tightening as needed. - BoZ proposes revising end-June 2024 NIR QPC target to US$2,150 million and setting end-December 2024 NIR target at US$2,235 million, supported by government commitment to transfer all FX disbursements related to budget support to BoZ. - BoZ plans to review FX market rules and policies to reflect market developments and promote price discovery, transparency, and a well-functioning FX market. - In developing FX strategy, BoZ needs to consider steps toward a rule-based FX intervention policy (one option: “discretion under constraint” intervening if fluctuations exceed a threshold) and strengthen e-BOP monitoring by requiring all export proceeds to be first brought to domestic bank accounts for statistical purposes (MEFP ¶60). - As of mid-November 2023, BoZ considering a tracking framework requiring repatriation of all export earnings to a bank domiciled in Zambia; staff assessed this as a capital flow measure appropriate under the IMF’s institutional view and recommended seeking less intrusive measures going forward to reduce compliance costs to business. ### Strengthening the monetary policy framework - Renewed MPC (first time including external members) and inaugural monetary policy report (MPR) expected to strengthen transparency and accountability (BoZ to prepare MPR in line with MCM TA recommendations). - BoZ should advance toward: - adopting a well-established interest rate corridor, - reserve averaging, - an open market operation framework aligned with these tools. - Facilitation of a functional repo market planned; adoption of Global Master Repo Agreement (GMRA) and signatures of ISDA and GMRA between commercial banks in 2024 intended to eliminate counterparty risks. ### C. Strengthening Financial Policies and Safeguards - Banking sector vulnerabilities: - Sovereign-bank nexus, high dollarization, and concentration of banks’ balance sheets present systemic vulnerabilities. - Share of FX loans and deposits was 39 percent of total respectively at end-September 2023. - Concentration risk: ratio of the twenty largest loans to total loans reached 62 percent, 127 percent of total industry regulatory capital. - At end-September 2023, banks’ balances with foreign institutions accounted for 42 percent of total liquid assets while government securities comprised 37 percent. - Macroprudential measures: - BoZ developed a macro-prudential toolkit to mitigate excessive credit growth and leverage, maturity mismatches, market liquidity and concentration risks, and moral hazard. - Working on establishing an inter-agency Financial Stability Committee (FSC) and will publish maiden financial stability report by end-June 2024 (end-June 2024 SB). - Guidelines on capital and liquidity risk management to become operational by 2024. - Staff called for enhanced monitoring on banks’ balances with foreign institutions. - Microprudential measures and regulatory reform: - Cyber and Information Risk Management Guidelines issued in May 2023. - BoZ will review the Banking and Financial Services Act in 2024 to address regulatory and governance gaps, and strengthen coordination with other regulators; draft bill aligned with international standards to be submitted to Parliament by end-2024 (proposed end-December 2024 SB). - Review identified areas to improve including reviewing exemptions, strengthening banks’ disclosure and transparency, and revising definition and disclosure of beneficiary ownership; bill will also address gaps from Diagnostic Report on Governance and Corruption. *Source: IMF staff report excerpt (MEFP and SB references as provided in the source content).* ### 19. The BoZ is strengthening its crisis management and the resolution framework. ### 19. The BoZ is strengthening its crisis management and the resolution framework. ### Crisis management and resolution framework - An industry-wide crisis simulation exercise was undertaken in May 2023, with World Bank support. - The upcoming FSC will internalize the crisis management and resolution framework within its mandate. - The BoZ will implement a deposit protection scheme in 2024 (MEFP, ¶41); its institutional setup will be operational by end-December 2023 under the Bank Supervision Department. - Staff called for the scheme to be operationally independent, well-governed, transparent, accountable, and insulated from external interference. - The scheme will provide deposit protection of up to the maximum amount that will be stipulated in the regulations and conform to the International Association of Deposit Insurers (IADI) Core Principles. - In line with the Core Principles for Effective Deposit Insurance Systems (CP3). Establishing an independent board for the scheme would be advisable. ### Deposit protection governance and legal issues - A new Board Charter (approved in September 2023) now precludes the Ministry of Finance representative from being a member of the AFC, while specific Board committee charters will be revised by March 2024. - A bank-wide assessment to update the risk profile has been conducted. - The internal audit function is providing assurance on the program monetary data while reinforcing its capacity. - The legal opinion from the Attorney General on legal compliance of the statutory limit on credit to government and the rollover of government securities is still pending (MEFP, ¶45). - IMF staff recommended the BoZ obtain a legal opinion from the Attorney General on the statutory limit in Section 50 of the BoZ Act, specifically on the legal treatment of: (i) accrued interest; (ii) securitized accrued interest (i.e., Consolidated Bond No. 3); and (iii) whether roll-overs of government securities are, and under what terms, consistent with applicable laws and regulations. ### Financial inclusion and SME credit support - Mobile money transactions have increased as part of the ongoing “Go Cashless” campaign. - The Government will launch the second National Financial Inclusion Strategy 2024-28 by end-2023. - Authorities allocated K 386 million in the 2024 draft Budget to the Credit Guarantee Scheme to support access to affordable credit for micro, small and medium enterprises (MSMEs). - Complementarily, the BoZ will introduce a pilot credit guarantee fund, which will leverage private sector participation, to provide affordable credit to MSMEs (MEFP, ¶42). ### Safeguards, financial reporting, and oversight - The BoZ is progressing with implementing recommendations from the 2022 safeguards assessment (MEFP, ¶45). - Strengthened quality controls over accounting and financial reporting processes, including closer oversight by the Audit and Finance Committee (AFC) of the external auditor’s performance, and enhanced disclosures in the audited FY2022 financial statements. - The internal audit function is reinforcing capacity and providing assurance on monetary program data. ### AML/CFT/CPF supervision - The BoZ remains committed to strengthen AML/CFT/CPF supervision. - The BoZ will establish a dedicated AML/CFT/CPF supervisory unit by end-2023 to address deficiencies identified in the 2019 ESAAMLG Mutual Evaluation, 2022 Enhanced Follow-Up Report, and Zambia’s 2016 National Risk Assessment. - In the interim, risk-based AML/CFT on-site inspections have helped monitor compliance and implement remedial actions. - The unit will support the BoZ’s risk-based approach to AML/CFT/CPF supervision and the effective application of sanctions, including for identified high-risk entities and politically exposed persons. - Full implementation of the planned electronic balance of payments system will help support AML/CFT supervision (MEFP, ¶56). ### Structural reforms to build resilience and unlock growth - Agriculture: - The Comprehensive Agriculture Transformation Program (CATP), by end-December 2023 (MEFP, ¶48), is expected to cover extension service support, access to finance, irrigation development, increased value-added and logistics. - FISP reform will advance to 73 districts to the e-voucher system for the 2024-25 farming season (proposed end-September 2024 SB). - The government intends to accelerate farm blocks for large-scale commercial farming; predictable market access, free from trade restrictions, especially on staple grains, is emphasized. - Energy: - Zambia’s potential for renewable energy generation is impeded, among other factors, by ZESCO’s financial weaknesses. - The recently operationalized open grid framework provides an outlet for Independent Power Producers (IPPs) to sell electricity directly to buyers. - Migrating to fully cost-reflective tariffs and clearing arrears are key to restore ZESCO’s financial sustainability. - To safeguard the fuel subsidy reform, the authorities commit to maintaining monthly fuel pricing adjustment (MEFP, ¶24) and publish the wholesale and retail price structures in the monthly price updates (proposed end-March 2024 SB, MEFP ¶24). ### Governance, anti-corruption, and institutional reforms - Work ongoing to develop an asset management framework for recovered assets and introduce a PIM framework to appraise and fund proposed projects. - Establishing the board for the Financial Intelligence Centre is in progress. - Progressing towards submitting to Parliament a revised Anti-Corruption Act (proposed end-March 2025 SB, MEFP ¶56). - Legislative revisions include amending the asset declaration system for senior officials, revising the Public Interest Disclosure Act, and integrating the procurement system with IFMIS. - Supported by IMF technical assistance, authorities are developing a framework for collecting and disclosing beneficial ownership (BO) information and operationalizing PACRA’s BO register. - Authorities need to continually enhance independence, autonomy and resources of anti-corruption agencies and further ongoing judicial reforms. - Passage of the Access to Information bill is noted as enhancing transparency and accountability. ### Program issues, financing, and debt restructuring - The authorities requested a waiver of nonobservance for the end-June 2023 NIR QPC and modifications to quantitative targets; corrective actions included reducing FX sales and tightening monetary policy. - QPCs and ITs have been extended to December 2024 in line with latest macro-framework projections (MEFP Table 1). - Half of the ECF program financing will continue to be used for budget support. - Over the program period, approximately 74 percent (or US$7.9 billion) of the residual balance of payments (BOP) financing gap is expected to be covered by debt restructuring. - Staff assesses the debt restructuring process will restore debt sustainability over the medium term, supported by Zambia’s agreement on an MoU with the OCC in October 2023. - Once the MoU is implemented and comparable restructuring agreements are 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 while Zambia remains in arrears, Zambia formally remains in debt distress (see DSA, Text Figure 1). - In line with the Fund’s Lending into Arrears (LIA) policy, authorities are making a good faith effort to reach a restructuring agreement with external private creditors on comparable terms and consistent with program parameters. - Relevant non-confidential information has been shared with all private creditors; authorities are signing non-disclosure agreements with most non-bonded commercial creditors to allow further confidential disclosure. - There have been several rounds of discussions with Eurobond holders; two proposals were discussed in November 2023, with further adjustments needed to meet program parameters and the OCC CoT. ### IMF financing and repayment capacity - The program is fully financed, with firm commitments in place for the next 12 months and good prospects of adequate financing for the remainder of the program. - Staff assesses Zambia’s capacity to repay the Fund is adequate but subject to risk (Table 8). - With a disbursement of 100 percent of quota, outstanding credit is projected to peak in 2025 at 4.1 percent of GDP or 8.7 percent of exports. - Annual repayments are expected to peak at 0.5 percent of GDP and 1.1 percent of exports in 2031. - Risks, most significantly from delays in the debt restructuring, are mitigated by significant fiscal consolidation, progress in debt restructuring with official creditors and the catalytic role of the program. ### Staff appraisal and policy recommendations - Zambia continues to advance in correcting macroeconomic imbalances; authorities are taking steps to restore fiscal and debt sustainability, raise social spending, and strengthen governance. - Growth was revised upwards for 2022-23, to 4.3 percent in 2023 due to strong performance in non-agricultural, non-mining sectors. - The positive medium-term outlook hinges on implementation of the debt restructuring and advancement of structural reforms that promote private sector development, though subject to significant downside risks. - Program performance has remained satisfactory: all but one of the quantitative performance criteria for end-June 2023 and four out of six structural benchmarks were met, with the remaining two met with minor delays; all but two of the indicative targets for the test dates were met. - Fiscal policy: Renewed fiscal consolidation efforts should balance containing spending pressures with scaled-up revenue mobilization, including broadening the tax base; PFM reforms, especially through a well-functioning TSA, are critical to enhance budget execution and improve quality of government spending. - Monetary policy: Careful calibration is warranted to address inflationary pressures and reserve accumulation; the BoZ should remain vigilant to ensure inflation falls to within the monetary policy band. In the event of heightened pressures, maintaining exchange rate flexibility should remain the first response, with FX intervention geared toward addressing disorderly exchange rate volatility. - Financial sector: Strengthening financial supervision, upgrading macro- and micro-prudential frameworks, and continuing to strengthen the crisis management and resolution framework are crucial to limit contagion risks and minimize fiscal costs; these efforts should be accompanied by reforms to improve access to finance. - Governance and structural reforms: Continued efforts to enhance procurement, disclose beneficial ownership, combat corruption, and improve statistical capacity are essential to promote private sector development, economic diversification, and inclusive growth. *Source: IMF staff report text as provided in the content unit.* ### 42. Staff supports the authorities’ requests for completing the second review under the ### 42. Staff supports the authorities’ requests for completing the second review under the ECF-supported arrangement, for the waiver on the nonobservance of the end-June NIR QPC, and for modifications of the monetary policy consultation clause and of QPCs ### Program support and staff recommendation - Staff supports: - Completing the second review under the ECF-supported arrangement. - The waiver on the nonobservance of the end-June NIR QPC. - Modifications of the monetary policy consultation clause and of quantitative performance criteria (QPCs). - The completion of the financing assurances review. - Conditional elements emphasized: - Strong commitments to restoring fiscal and debt sustainability. - Implementing prudent macro policies. - Advancing structural reforms and continued capacity building to meet program objectives. ### Real sector developments and outlook - GDP growth (Table 1 projections): - GDP growth at constant prices (in percent): -2.8, 6.2, 5.2, 3.6, 4.3, 4.3, 4.7, 4.8, 4.8, 4.9, 5.0 (years indicated in table). - Sectoral notes: - Mining’s share in GDP has been declining. - Services share has increased, led by ICT, transport and hospitality. - Inflation and exchange rate: - Consumer prices (average): 15.7, 22.0, 11.0, 10.6, 11.0, 9.6, 11.4, 7.8, 7.0, 7.0, 7.0 (as given). - Consumer prices (end of period): 19.2, 16.4, 9.9, 11.4, 13.0, 7.9, 8.6, 7.0, 7.0, 7.0, 7.0. - Average exchange rate (kwacha per U.S. dollar): 18.3, 20.0, 17.0, 19.8, 20.0, 21.6, 22.0, 22.9, 23.6, 24.4, 25.2. - End-of-period exchange rate (kwacha per U.S. dollar): 21.2, 16.7, 18.1, 21.2, 21.5, 22.1, 22.5, 23.3, 24.0, 24.8, 25.6. ### External sector developments and outlook - Current account: - Current account balance (percent of GDP): 10.6, 9.7, 3.7, 3.8, -1.8, 7.1, 3.7, 5.2, 6.9, 9.0, 8.7 (table entries). - Current Account (millions of U.S. dollars): 1,922; 2,138; 1,067; 1,113; -506; 2,192; 1,119; 2,823; 1,691; 2,404; 3,414; 3,604 (2020–28 sequence). - Trade and exports: - Exports, f.o.b. (millions of U.S. dollars): 8,003; 11,202; 11,505; 12,304; 11,123; 13,615; 12,834; 14,832; 14,022; 15,638; 17,366; 18,740. - Copper exports (millions of U.S. dollars): 5,868; 8,396; 8,129; 8,729; 7,321; 9,746; 7,881; 10,699; 8,902; 10,308; 11,805; 12,798. - Change in copper export volume (percent): 14.4, -5.2, 2.2, 6.6, -6.5, 6.5, 10.5, 6.5, 12.0, 14.9, 14.0, 7.5. - Reserves and financial account: - Gross international reserves (millions of U.S. dollars): 1,203; 2,795; 3,054; 3,162; 3,168; 4,014; 3,877; 5,109; 5,219; 5,651; 6,119; 6,621. - Reserves in months of prospective imports: 1.9; 3.3; 3.4; 3.5; 3.4; 4.2; 4.0; 5.0; 5.0; 5.0; 5.0; 5.0. - Financial account balance (percent of GDP): -17.3; -13.4; -11.2; -19.5; -7.8; -25.2; -13.4; -10.1; -12.5; -14.0; -9.0 (as shown). ### Fiscal developments, adjustments, and projections - Central government fiscal aggregates (Table 3a, Table 3b): - Revenues (millions of kwacha): 67,437; 98,945; 100,684; 124,000; 118,902; 147,391; 139,601; 162,298; 181,684; 204,147; 234,847 (2020–28 sequence). - Revenues (percent of GDP): 20.3; 22.4; 20.4; 21.2; 20.9; 22.0; 21.2; 21.9; 21.9; 22.0; 22.6. - Expenditures (millions of kwacha): 113,227; 134,929; 139,315; 159,062; 157,518; 178,438; 179,999; 202,322; 236,563; 247,362; 274,055. - Expenditures (percent of GDP): 34.0; 30.5; 28.2; 27.2; 27.7; 26.6; 27.4; 27.3; 28.5; 26.6; 26.4. - Primary balance (cash basis, program target, percent of GDP): -7.8; -2.1; -1.6; 0.2; 0.2; 1.3; 0.8; 1.6; 0.8; 1.6; 2.0. - Net lending/borrowing (overall balance, cash basis, percent of GDP): -13.8; -8.1; -7.8; -6.0; -6.8; -4.6; -6.1; -5.4; -6.6; -4.7; -3.8. - Revenue composition highlights: - Tax revenues (millions of kwacha): 52,182; 71,151; 79,492; 102,190; 94,009; 119,521; 110,707; 126,341; 142,895; 161,972; 187,817. - Value-added tax (millions of kwacha): 14,639; 19,516; 20,816; 29,901; 31,955; 35,581; 36,199; 41,000; 46,498; 52,509; 63,479. - Mining revenues (millions of U.S. dollars, Table 3a memorandum): 575; 1,247; 1,321; 800; 930; 1,151; 1,332; 1,464; 1,643. - Arrears and VAT refunds: - Stock of VAT refunds (millions of kwacha): 8,451; 10,368; 12,209; 9,767; 17,719; 7,325; 13,289; 8,859; 4,430; 0; 0. - Stock of expenditure arrears (millions of kwacha): 42,506; 57,031; 47,659; 44,202; 48,579; 37,008; 39,348; 31,133; 23,169; 20,938; 17,576. ### Monetary and financial sector developments - Monetary aggregates (Table 4): - Reserve money (end of period, percentage change): 57.0; 8.5; 12.0; 17.2; 18.4; 12.5; 15.6; 13.0; 12.7; 12.3; 12.1. - Money supply (M3, percentage change): 46.4; 3.7; 24.5; 17.2; 18.4; 12.5; 15.6; 13.0; 12.7; 12.3; 12.1. - Credit to the private sector (percent of GDP): 12.3; 8.5; 10.2; 15.2; 11.7; 16.7; 12.8; 13.9; 14.5; 14.6; 14.6. - Reserve Money (levels, millions of kwacha): 26,777; 29,066; 32,567; 38,152; 38,561; 42,909; 44,586; 50,403; 56,788; 63,794; 71,539. - Broad Money (M3, levels, millions of kwacha): 103,829; 107,626; 133,998; 156,979; 158,662; 176,551; 183,455; 207,388; 233,659; 262,487; 294,355. - Policy rate and rates: - BoZ has raised policy rate by 100 basis points in 2023. - Transmission described as relatively weak. - Credit composition and recovery: - Bank credit growth and recovery in private sector credit attributed to relatively lower government exposures; recovery in both kwacha and FX loans noted. - Credit to private sector growth (percentage change): 8.5; -7.8; 34.4; 75.5; 31.4; 26.2; 26.8; 22.6; 16.1; 13.0; 12.3 (table entries). ### Financial sector and market developments - Government securities and market access: - Outstanding government securities (T-bills and bonds, face value, billions of kwacha) increased and remained high. - Non-resident cumulative allocation in 2023 was double the target amount of bond issuance. - Domestic yield curve remained steep with real bond yields elevated. - Sovereign spreads declined significantly in response to OCC’s agreement on debt treatment. - Financial soundness indicators (Table 5 highlights, 2022 Mar/Jun/Sep/2022): - Regulatory capital to risk-weighted assets: 20.1; 24.7; 22.8; 22.8; 25.5; 24.1. - NPLs to gross loans: 11.6; 5.8; 5.0; 5.2; 4.5; 4.4. - Return on average assets: 2.1; 5.2; 5.0; 5.2; 5.5; 5.7. - Foreign currency loans to total gross loans: 47.1; 33.7; 40.9; 41.5; 36.2; 38.8. - Liquid assets to total assets: 48.6; 46.6; 50.7; 51.2; 48.1; 46.2. ### External financing needs, financing gap, and disbursements - External financing needs and gap (Table 6, selected entries): - Total Requirement (I): 2,594; 5,619; 3,299; 3,613; 3,719; 4,436; 4,393; 4,042; 3,697; 3,829; 2,661 (millions of U.S. dollars, sequence). - Total Sources (II): 1,272; 3,389; 240; 866; 943; 917; 852; 1,176; 1,350; 1,523; 2,064. - Financing Gap (III = I - II): 1,322; 2,230; 3,059; 2,747; 2,776; 3,519; 3,541; 2,866; 2,347; 2,306; 597. - Exceptional financing (accumulation of arrears) shown as an expected source in several years: 1,322; 2,230; 2,322; 1,982; 2,164; 2,736; 2,738; 2,007; 1,819; 1,783; 343. - IMF disbursement schedule (Table 7 highlights): - Availability dates and disbursements of SDR 139.88 (14.3 percent of quota) on multiple dates: August 31, 2022; April 1, 2023; October 1, 2023; April 1, 2024; October 1, 2024; April 1, 2025. October 1, 2025 shows SDR 138.92 (14.2 percent). - Total SDR availability: 978.20 (100.0 percent). - Zambia's IMF quota is SDR 978.2 million. ### Indicators of capacity to repay and Fund obligations - Fund obligations and outstanding credit (Table 8 highlights): - Fund Obligations Based on Existing and Prospective Credit (Millions of SDRs, totals shown): Principal and charges aggregated across 2023–34 with totals reported in the table. - Outstanding Fund Credit Based on Existing and Prospective Credit (Millions of SDRs): 419.6; 699.4; 978.2; 978.2; 978.2; 950.2; 852.3; 698.4; 502.8; 307.2; 139.5; 41.8 (sequence). - Outstanding Fund Credit (Millions of U.S. dollars): 561.4; 939.7; 1,321.4; 1,324.3; 1,328.1; 1,290.1; 1,157.2; 948.3; 682.7; 417.0; 189.4; 56.7. - Net Use of Fund Credit (millions of SDRs): 279.8; 279.8; 279.8; 278.8; 0.0; 0.0; -28.0; -97.9; -153.9; -195.6; -195.6; -167.7; -97.7 (table entries). ### Key policy implications and priorities (as reflected in the text) - Restore fiscal and debt sustainability through strong commitments and implementation of prudent macro policies. - Continue structural reforms and capacity building to achieve program objectives and meet the conditions for reviews and disbursements. - Address liquidity, external financing gaps, VAT refund backlog, and expenditure arrears to improve program performance and fiscal credibility. *Source: IMF staff report excerpt and associated tables from the Zambia ECF-supported arrangement materials.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Domestic Risks - Further delays in debt restructuring negotiations. - Relative Likelihood: M - Impact if Realized: L. Exchange rate pressures could intensify while domestic yields may increase, partly due to exiting non-resident domestic debt holders. Additional external arrears could increase uncertainty in restoring debt sustainability, dampening the growth outlook. - Policy Response: Further expedite fiscal adjustment and identify extra financing sources. Further expedite PIM (Public Investment Management) reform and growth-enhancing structural reforms to boost confidence and promote FDI. Further strengthen financial sector surveillance along with contingency planning. - Social discontent. Supply shocks, high inflation (including due to electricity tariff increases), and spillovers from crises in other countries worsen inequality and trigger social unrest. - Relative Likelihood: L - Impact if Realized: M. Social unrest could weaken political impetus for economic adjustment and reform, dent investor confidence, and lead to rising financing pressures and capital flight, growth slowdown, and higher inflation. - Policy Response: Take measures to 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 pressures while keeping monetary policy focused on price stability. - Extreme climate events, damaging key infrastructure and loss of human lives and livelihoods, causing water and food shortages, and amplifying supply chain disruptions. - Relative Likelihood: M - Impact if Realized: H. Higher food prices, reduced agricultural production would require higher social spending and agricultural subsidies and could lead to higher inflationary pressures, and reduce medium-term growth. Additionally, a negative impact on hydropower generation and open-pit mining would lead to downward pressures on growth. - Policy Response: Provide effective support to vulnerable households. Diversify food crops to varieties better aligned to shortened rainy seasons. Consider medium-term strategies to help regulate water flows. Maintain exchange rate flexibility to cushion external shocks, while ensuring monetary policy remains focused on price stability. - 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. ### External Risks - Abrupt global slowdown or recession. Global and idiosyncratic factors cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and market fragmentation, causing sudden stops in EMDEs. - Relative Likelihood: H - Impact if Realized: H. Reduced global demand for commodities would adversely impact the mining sector, hinder growth, and exacerbate Zambia’s external and fiscal imbalances. - Policy Response: Expedite further fiscal adjustment while identifying additional financing sources. Continue to use the exchange rate adjustment to cushion balance-of-payment shocks. Accelerate reforms to enhance export competitiveness and diversify the economy to build resilience against external shocks. - Commodity price volatility. A succession of supply disruptions (e.g., due to conflicts, uncertainty, and export restrictions) and demand fluctuations causes recurrent commodity price volatility, external and fiscal pressures in EMDEs, contagion effects, and social and economic instability. - Relative Likelihood: H - Impact if Realized: H. Volatility in copper prices, along with higher international oil and food prices, would lead to a growth slowdown. This would further widen its balance of payment and fiscal deficits, while also exerting additional pressure on inflation. - Policy Response: Accelerate fiscal adjustment and maintain exchange rate flexibility to cushion external shocks, while continuing to focus monetary policy on price stability. Additionally, expedite structural reforms to diversify the economy and reduce its vulnerability to external shocks. - Intensification of regional conflict(s). Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, FDI and financial flows, and payment systems, and lead to refugee flows. - Relative Likelihood: H - Impact if Realized: M. Spillover through supply chains or commodity price could negatively affect growth, inflation, the balance of payment, and the vulnerability of the financial system. - 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. Broader and deeper conflict(s) and weakened international cooperation result in a more rapid reconfiguration of trade and FDI, supply disruptions, protectionism, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial systems, and lower potential growth. - 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. *Source: Annex I. Risk Assessment Matrix* ### 2022. Expenditure arrears have marginally increased to K 77.8 billion in June-2023 from ### 1zmbea2023004 - 2022. Expenditure arrears have marginally increased to K 77.8 billion in June-2023 from ### Expenditure arrears and related developments - Expenditure arrears increased to K 77.8 billion in June-2023 from K 77.6 billion at end-2022. - Notable increases in arrears: VAT and other Recurrent Departmental Charges (RDC), mostly due to stock revaluations following the ongoing audit process and accumulation of late penalties and interest. - Significant reductions in arrears recorded for: Personnel Emoluments, fuel, electricity, FISP, FRA, pensions, and capital projects. - Fuel arrears audit: ongoing (initially expected by April 2023) and expected to be concluded by end-March 2024. - External arrears composition at end-December 2022 included: - US$4.1 billion as external debt arrears - US$123.1 million as government Guaranteed loans - US$582.2 million as central Government contractor arrears - US$195.2 million as contractor arrears (SOEs) - US$139.5 million as IPP import arrears ### Financing conditions and market sentiment - Financing conditions: remain tight. - Investor sentiment: improved following agreement on the MoU with official creditors and agreement in principle on the Eurobonds restructuring; ongoing discussions and modifications with bondholders to align proposal with program requirements. - Domestic market: private domestic investors’ appetite remains strong, fueled by resumed market participation from NAPSA and heightened interest of nonresident investors. ### Banking sector metrics (end-2022 to end-September 2023) - Capital adequacy ratio: increased to 24.1 percent at end-September 2023 from 22.8 percent at end-2022. - Non-performing loans (NPL) ratio: marginally decreased to 4.4 percent at end-September 2023 from 5.0 percent at end-2022. - Credit to the private sector: grew by 21.8 percent from January to September 2023. - Loan-to-deposit ratio: increased to 40.4 percent at end-September 2023 from 35.7 percent at end-2022. - Private credit as a share of GDP: 11.1 percent at end-September 2023 (pre COVID-19 average was 12.0 percent). - Commercial banks’ lending rates: stable but elevated at 25 percent. ### Outlook and macroeconomic projections - Real GDP growth: projected at 4.3 percent in 2023. - Mining sector: anticipated contraction reduced from 8 percent to 1.1 percent over H2 2023. - Inflation: projected to remain elevated at 13 percent by year-end 2023. - Current account balance: expected deficit of 1.6 percent of GDP in 2023. - Gross international reserves (GIR): projected to reach 3.2 months of prospective imports by end-2023. - Medium-term baseline growth projections: - 2024: 4.7 percent - 2025: 4.8 percent - 2026: 4.8 percent - Inflation path: projected to peak in 2024H1 and slow to 8.6 percent by end-2024. - Current account: projected surplus of 2.1 percent of GDP in 2024. - International gross reserves: projected to reach 4.2 months of prospective imports at end-2024. - Key medium-term risks: - (i) slowdown in global growth affecting commodity prices (particularly copper), - (ii) increasing frequency of climate change events, including an evolving El Niño event, - (iii) reform fatigue from socially disruptive reform measures such as adjustments in fuel and electricity tariffs. ### Fiscal performance and near-term fiscal targets (2023) - End-June 2023 primary fiscal balance (cash basis): K 2,170 million against a floor of K 1,866 million (QPC). - Mining revenue shortfall: about K 7,182 million (compensated by non-mining revenues and spending constraint). - Non-mining revenues: reached K 47,081 billion end-September 2023, above the indicative target (IT) of K 44,099 billion. - Social spending scaled up to K 22,260 million, surpassing end-June 2023 IT (K 18,103 million). - Net clearance of arrears on expenditure and tax refunds: reached K 4,309 million versus IT K 5.908 million (VAT refund repayments K 7,939 million offset by new VAT claims K 9,713 million). - External disbursements: US$18.8 million versus expected US$200 million. - SDR allocation draw: remaining 25-percent amounting to US $524.7 million drawn in 2023H1. ### End-2023 and 2024 fiscal targets and adjustments - End-2023 primary target (QPC): K 1,058 million. - Projected improvement in primary balance (cash basis): 1.8 percent of GDP year-on-year, driven by lower spending. - Projected revenues for 2023: K 118,548 million (marginally lower than at First Review). - One-off revenue measures used to offset mining shortfalls: - Tax amnesty: about K 4 billion (0.7 percent of GDP) - Higher dividend transfers from Bank of Zambia: K 1.8 billion (0.3 percent of GDP) - Other exceptional revenue: K 2.2 billion (0.4 percent of GDP) - Higher domestic financing envisaged in 2023 compared to the first review, but within the budget allocation. - 2024 primary fiscal balance target (end-December 2024 QPC): K 5.57 billion (0.8 percent of GDP). - End-June 2024 proposed primary fiscal balance target (QPC): K 2,952 million. - 2024 fiscal envelope and revenue targets: - Non-mining domestic revenues: K 58,136 million at end-June (IT) and K 117,334 million end-2024 (IT). - Spending envelope: K 175,367 million. - Capital expenditure: projected at 3.2 percent of GDP in 2024, mostly domestically financed and focused on roads, health, education and water and sanitation. - Arrears repayment commitments: - Continue clearing expenditure and VAT refund arrears and prevent new arrears. - Commit to clear legacy stock of VAT refund arrears per Arrears Clearance Strategy and refund validated VAT claims timely. - Exploring a liability management operation for fuel arrears to reduce net present value through domestic market financing; if undertaken, request adjustor for primary balance to account for operation (budget reporting is cash-basis). - Subsidies: refrain from re-instating any fuel subsidies; use fiscal space for targeted social spending. - External arrears: refrain from generating new external arrears (continuous QPC). - Financing constraints: continue abstaining from central bank net credit to the government (QPC) and respect ceilings on new non-concessional external debt (QPC) and on disbursements of contracted but undisbursed external debt and present value of new external borrowing (ITs). ### Multi-year fiscal consolidation and targets - Cash-basis primary balance target: improve to 1.7 percent of GDP in 2025 from a deficit of 1.6 percent of GDP in 2022. - Commitment-basis primary balance target: improve to a surplus of 3.6 percent of GDP by 2025 from a surplus of 0.6 percent of GDP in 2022. - Primary balance (commitment basis) projected to reach 2.9 percent of GDP in 2024 (same as at First Review), maintaining agreed pace of arrear clearance for expenditure and tax arrears (both ITs). - Commit to submit a draft 2025 Budget consistent with program parameters (proposed end-September 2024 SB). - Use any additional revenues, in consultation with IMF, for arrears repayment in a rule-based and transparent manner while considering capacity; stand ready to adopt contingency measures and consult IMF on fiscal commitment changes. ### Fiscal structural reforms — revenue mobilization and tax administration - Revenue mobilization target: increase domestic revenue mobilization to about 21.2 percent of GDP by 2025 from 20 percent of GDP in 2022. - 2023 mineral tax reform: progressive marginal tax rates for the mineral royalty tax (MRT) and reintroduced deductibility from Corporate Income Tax (CIT); removed VAT and excise exemptions for fuel (implemented September 2022) to compensate short-term revenue losses. - 2024 draft Budget measures expected to raise revenues by 0.4 percent of GDP, including: - Increase excises for cigarettes, some alcoholic and non-alcoholic beverages - Introduce a levy for mobile transactions - Apply a 15 percent withholding tax to coupon income and discount of government securities - Increase tax-exempt threshold for personal income tax and lower upper band marginal rate by 50 basis points - Introduce limited tax and cost incentives to promote economic activity - 2025 measures: - Index fuel and alcohol excise duties to inflation - Harmonize corporate income tax rates across sectors - Review effectiveness of fiscal incentives for companies in special economic zones - Refrain from providing any new tax exemptions and estimate cost/effectiveness of tax expenditures to expand tax base - Tax administration reforms and timelines: - Establish unified and dedicated Large Taxpayer Office merging indirect and direct tax offices (end-March 2024 SB). - Implement electronic invoicing system starting in 2024 to address VAT system loopholes and reduce false VAT refund claims. - Leverage data interfaces with IFMIS and Ministry of Lands database ZILAS by end March 2024 to improve tax assessments and reduce fraud. - Zambia Revenue Authority established a dedicated small and medium size Mines Unit in January 2023; roll-out to provinces with substantial mining activity by end-March 2024 (delayed from end-March 2023). Tax debt collection: tax debt stood at K 99,94 million at end 2022. ### Enhancing expenditure efficiency and social protection - Objective: enhance economic growth and development, fiscal decentralization, strengthen public finance management, protect social spending, and prevent accumulation of expenditure arrears. - Social spending commitment: maintain social spending above K 39,670 million (December 23 - indicative target). - Social protection scale-up by end-2023: - Social Cash Transfer Program beneficiaries: scale up by 25 percent to more than 1.3 million households from 1.1 million households, with objective to extend to 1.4 million in 2024. - Transfer value: doubled. - Food Security Pack Program beneficiaries increased by 13.3 percent in 2023 to 241,000 households. - Expanded Public Welfare Assistance Scheme (PWAS) and women empowerment programs. - Education and health workforce: - Hired more than 30,600 new teachers and 10,700 health workers in 2022; workforce almost stable in 2023. - Plan to employ a total of 20,000 personnel in 2024 and 2025. - Broaden school feeding program to cover 2.9 million students in 2024, up from 2.0 million in 2023. - Students attending up to secondary education increased by 32 percent from 2021 level to 6.2 million in 2023. - Public pension scheme reform measures: - Following introduction of pre-retirement lump sum benefit, about 425 thousand members of the National Pension Scheme (NPS) withdrew part of their accrued pension wealth, totaling K 9.9 billion. ### Farmer Input Support Program (FISP) migration and transparency - Objective: migrate FISP to more cost-effective e-Voucher system and reduce spending to 0.9 percent of GDP in 2025 from 1.5 percent of GDP in 2022. - Migration path: - 2023/2024 season: fully implemented e-voucher in 17 out of planned 33 districts (end-September 2023 SB); other districts used a hybrid system with government-procured inputs redeemable via electronic payment system. - Procurement in 2023/2024 season: open international bidding for Urea fertilizer and direct bidding for D compound fertilizer (open bidding for Urea, direct bidding to local manufacturers for D compound). - 2024/2025 season: plan to bring 73 districts to full e-voucher system (proposed end-September 2024 SB). - 2025/2026 season: remaining 42 districts to be brought on electronic agricultural input support system, completing coverage to all 116 districts. - Transparency and audit: - Contracts published on the Ministry of Agriculture website in November 2023 for contracts signed in August and September. - Independent audit of the program expected to be finalized by end April 2023 will now be finalized and published by end March 2024; delay due to larger-than-envisaged scope of work. Results to improve controls and ensure value for money. *Source: 1zmbea2023004 - 2022. Expenditure arrears have marginally increased to K 77.8 billion in June-2023 from (IMF).* ### 15. We will continue to take additional resources closer to the people through the ### 15. We will continue to take additional resources closer to the people through the ### Constituency Development Fund (CDF) - A total of K 4.4 billion have been allocated for the CDF in the 2023 National Budget for community-based projects, empowerment funds for youth and women and bursaries for secondary and skills training. - Utilization rate up to August 2023 is 51 percent on average, with utilization highly uneven across constituencies. - The 2024 National Budget increased CDF funding to K 4.8 billion. - Sectoral ministries will continue to provide policy orientation and expert advice in CDF-financed activities. - Procurement and contract awarding will follow the Public Procurement Act No. 8 of 2020, with decentralized decision-making to provinces to improve absorption rates. ### Improving Public Financial Management (PFM) - Expenditure and VAT arrears: - Despite significant releases that began in 2022, the stock of arrears has marginally increased due to accumulation of penalties and late interest. - A Strategy for clearance of expenditure and VAT Arrears (to be made over 10 years) was published in August 2022; the Strategy will be updated and the updated strategy will be published by end-March 2024. - Commitment Control and IFMIS: - A Commitment Control Module in IFMIS linking procurement commitments to the approved budget became effective in July 2022. - Missed the end-August 2023 rollout target to at least 59 units due to delays in three institutions. - As of November 2023, IFMIS has been rolled out in 59 spending units, including all ministry-level spending units. - A report verifying IFMIS use (due August 2023) is pending and will be finalized and published by end-November 2023. - Public Investment Management (PIM) and PPPs: - New PIM guidelines adopted in early 2023; aligned with the National Planning and Budgeting Act of 2020. - Only appraised and viable projects per PIM regulations will be included in the Public Investment Plan. - Database of existing projects is updated annually and published by the PIPD; aim to align publication of the Public Investment Plan with the annual budget process starting from 2024. - Master Plan for the road sector is yet to be developed; National Road Fund Agency coordinates and produces annual workplans. - An amended Public Private Partnership Act submitted to Parliament in July 2023 (following IMF TA) will strengthen selection/evaluation of PPPs and fiscal risk management; key aspects include definition of PPP projects, Minister of Finance and National Planning mandate to approve/reject PPPs based on fiscal implications, and public disclosure of key risks and fiscal implications. - Cash management: - Action plan to substantially reduce idle cash balances and the number of accounts held by local authorities and lower-level government entities in commercial banks to be formulated (end-March 2024 SB). - Aim towards a full-fledged Treasury Single Account, regular receipt of account balance information from commercial banks, and a system to claw back unneeded floats. - Government will leverage cooperating partners' technical assistance to strengthen cash management practices. - Fiscal transparency and reporting: - Continue publishing Quarterly Economic Reviews with Budget performance information; financial report continues to be published annually. - Budget Execution Report scope to be expanded to include broad revenue and expenditure categories including social spending; quality will be continuously improved. - Government will migrate to IPSAS Accrual Accounting Basis in 2027 based on approved roadmap. - Fiscal risk management: - Develop a fiscal risk management framework to identify and quantify fiscal risks from expenditure pressures, revenue shocks, contingent liabilities, and strategies to mitigate them. - A first fiscal risk statement will be prepared for the 2024 Budget. - Scope of the Fiscal Risk Report to be expanded by end-June 2024 to include key risks from SOEs, Local Authorities, public pension schemes, PPPs and other obligations as well as potential consequences of climate change (end-June 2024 SB). - Standard methodologies will be applied to quantifying risks forward-looking, with IMF TA support. - State-Owned Enterprises (SOEs): - Adopt the Supervisory and Performance Monitoring Framework for SOEs by end of 2023; implementation in 2024. - Develop a State-Owned Enterprises Policy by end-September 2024 (proposed end-October 2024 SB) defining roles of line Ministries, the Industrial Development Corporation and the Ministry of Finance and National Planning; prospective State-Owned Enterprises Act to follow. - Ministry of Finance and National Planning will continue credit risk assessments on all public bodies intending to borrow. ### Energy Reforms - Fuel arrears: - Fuel arrears amounted to US$ 556 million at end-September 2023 from a verified stock of US$ 533 million at end-2022. - Increase attributable to late payment penalties on legacy debt. - Independent audit on suppliers’ claims (initially planned end-June 2023) is ongoing; expected to be completed and published by March 2024. - Government committed to adjust the oil price monthly based on international oil prices and the Kwacha/U.S. dollar exchange rate. - TAZAMA pipeline and diesel transport: - TAZAMA pipeline expected to reduce diesel transportation costs by 73 percent. - Mid-September 2023 Statutory Instrument No.41 of 2023 clarifies licensing requirements and sets conditions to transport petroleum products using the pipeline on behalf of a third party. - Guidelines for using the TAZAMA pipeline for diesel imports published in October 2023; aim to start operating the mechanism by end-March 2024. - Oil Marketing Companies (OMCs) eligible to use the pipeline will be prequalified for one year and allowed access through a quarterly competitive bidding process. - Since October 2023, a new cost equalization mechanism reimburses OMCs for effective transportation costs. - Transportation cost in the wholesale fuel price formula must fall in middle between pipeline and road import costs, at a level sufficiently high to compensate for outflows. - Plan to collect extra compensation received by OMCs transporting wholesale diesel through the pipeline (tender winners) and deposit it at the Energy Fund to compensate road users. - Commit to monthly domestic fuel price updates and enhanced pricing transparency: - Publish retail and wholesale price structures for the previous month with all line details as part of monthly fuel price announcements by the Energy Board starting in 2024 (proposed end-March 2024 SB). - Publish tender results on open access auctions for use of the TAZAMA pipeline by third parties, which will become operational by end-2024Q1. - ZESCO turnaround and tariffs: - ZESCO implementing a 10-year turnaround strategy to improve debt position, enhance revenue and reduce CAPEX and OPEX. - Tariff increases: - Average 37-percent increase in 2023. - Average retail tariff increases planned: 9 percent in 2024 and 15 percent in 2025. - In 2026-27, tariff expected to increase by 10 percent and 14 percent, respectively. - Projected net profit margin for ZESCO: - 5.2 percent in 2023 - 4.3 percent in 2024 - 7.3 percent in 2025 - 8 percent in 2026 - 13.1 percent in 2027 - ZESCO total outstanding debt amounted to US$2.2 billion in September 2023, from US$2.1 billion at end-2022. - On-lent loans from the Central Government amounted to US$406 million (it was 595.2 million in the MEFP of the First Review). - US$197(421.6) million to commercial lenders and US$1.6 billion (944.4million in R1) as Government guaranteed loans. - Balance sheet improvements: - Confirmed most disputed IPP debt; negotiating legacy IPP debt. - Mobilizing long-term domestic financing to repay IPP obligations. - Advancing conversion of on-lent public loans to equity in close consultation with the MoFNP. - Continued servicing of non-guaranteed external debt in 2023. ### Restoring Debt Sustainability and Improving Debt Management and Transparency - Debt sustainability objectives and constraints: - Commitment to refrain from contracting non-concessional debt (continuous performance criterion). - Limit new external borrowing and disbursements of contracted but undisbursed external debt to the central government and ZESCO (ITs). - Objective to return to “moderate” risk of debt distress over the medium term. - Target debt service-to-revenue ratio of 14 percent by 2025 and maintain it at this level (on average) during 2026-31. - Target PV of external PPG debt-to-exports ratio to 84 percent by 2027. - Debt restructuring progress: - Agreement with official creditors in the context of the G20 Common Framework, as reflected in the Memorandum of Understanding agreed in October 2023. - Agreement in principle with the Steering Committee of the bondholders on October 26, 2023. - Continuation of negotiations in good faith with all external creditors consistent with program parameters. - Implementation of a debt service standstill for all external creditors except multilaterals and a few creditors financing priority projects. - Commitment to refrain from any payments on any official bilateral debt under restructuring negotiation until the process is complete. - Notification to OCC that a payment from ZESCO is reflected in the agreed debt restructuring with the OCC to ensure comparability treatment. - External debt management and transparency: - Published the medium-term debt management strategy in 2023. - Prepared the annual borrowing plan presented with the 2024 Budget. - Will undertake regular debt data validation and reconciliation through engagements with creditors in a transparent and collaborative process. - Continue to publish, on a quarterly basis, the Debt Statistical Bulletin covering external and domestic debt developments including loans contracted, new disbursements, information on guaranteed loans, non-guaranteed SOEs, domestic and external arrears, and debt and any liabilities arising out of PPPs (recurrent end-quarter SB). - Institutional and legal enhancements: - 2022 Public Debt Management Act (PDMA) enhances Parliamentary oversight, strengthens public debt definition, reporting requirements and adherence to international best practices. - Working on regulatory framework for the sinking fund, clarifying guarantees and indemnities, establishing general provisions of the debt management office, defining credit risk assessment framework, and setting supervising framework for monitoring and operational supervision of SOEs. - Regulations to be in place by end-June 2024. - Debt Management Office (DMO) development: - Cabinet Office expected to approve new organization structure for the DMO by end-2023 (end-December 2023 SB). - New DMO expected to be fully operational by end-2024. - Reorganize debt department at MoF to establish front, middle and back offices at the DMO following IMF/guidelines for public debt management. - Adopt and publish the procedure manual of the DMO by end-2024 (proposed end-November 2024 SB). - Domestic government securities strategy: - Continue to rely on Government securities for domestic financing and aim at extending maturity. - Issuance program focus: domestic debt stock ratio of 40 percent to 60 percent for Treasury bills and Bonds, respectively, considering market conditions, investor appetite and cost-risk considerations. - Transition all government securities to be issued at par by end-March 2024 (proposed end-March 2024 SB). - Limit issuances of securities to non-residents in the primary market to 5 percent of the cumulative government bond with a nominal upper bound of K1.56 billion in 2024. ### Enhancing Monetary and Exchange Rate Policies - Inflation targeting and monetary policy stance: - Bank of Zambia (BoZ) remains committed to the inflation targeting (IT) framework to maintain price stability. - Inflation drivers: elevated food and fuel prices, upward adjustment in electricity tariffs and exchange rate depreciation. - MPC will continue to rely on forward-looking monetary policy anchored on the policy rate and stands ready to use all instruments to pursue the inflation objective. - Policy rate decisions guided by inflation outcomes, forecasts and identified risks, to bring inflation back to the 6-8 percent target range by 2025. - Monetary Policy Consultation Clause (MPCC) under the program: - If actual inflation deviates from the inner consultation band of ± 2 percent, BoZ will consult with IMF staff on reasons and policies to return to target. - If actual inflation deviates from the outer consultation band of ± 3 percent, a consultation with the IMF Board will be triggered. - Exchange rate policy and FX market: - Primary objective: maintain a flexible system while mitigating excessive volatility. - Mining companies to continue paying all tax obligations in U.S. dollars directly to the BoZ. - BoZ will continue to support the market through instruments such as FX swaps. - Review of foreign exchange market rules and policies by end-2023 to reflect market developments and the broader remit in the 2022 Bank of Zambia Act. - Reserve accumulation and targets: - End-June 2023 Net International Reserves (NIR) reached US$1,700.9 million, US$702.1 million lower than the target of US$2,403 million (target adjusted downwards due to lower external disbursements to US$2,262 million). - Projecting US$36 million in purchases in refined gold in 2023, against an original target of at least 659.4 kilos. - Committed to meeting end-December 2023 NIR QPC of US$1,952 million and building NIR in 2024. - Central government commits to transfer all FX related to budget support disbursements (loans and grants) to the BoZ to support reserve accumulation. - NIR targets: - US$2,150 million by end-June 2024 (QPC) - US$2,235 million by end-December 2024 (QPC) - Objective: gross international reserves reaching 4 months of import coverage by end-2024. *Source: 1zmbea2023004 - 15. We will continue to take additional resources closer to the people through the* ### 36. We are taking steps to modernize the monetary policy framework. ### 36. We are taking steps to modernize the monetary policy framework. ### Monetary policy framework modernization - Broadened membership of the MPC (first time including external members). - The inaugural Monetary Policy Report (MPR) will now be published by end-Mach 2024. The delay in the of the MPR is to allow the newly constituted MPC to adequately review and endorse the report. - Use of the MPR: - Will be used as an instrument to substantially strengthen monetary policy communication through its detailed explanation of the monetary policy decision that enhances the transparency of the monetary policy making process. - Operational tools and market development: - Deploy longer-dated open market operations instruments to manage excess liquidity. - Improve communication contents to clarify intentions in deploying these instruments. - Money market and documentation: - Strengthen the interbank money market by introducing the Global Master Repurchase Agreement (GMRA) and the ISDA documentation. - The Bank of Zambia will sign these documents with commercial banks to advance its adoption by commercial banks in 2024. - Analytical capacity and tools: - With a multi-year technical assistance program from the IMF, continue implementing the Forecasting and Policy Analysis System (FPAS) to strengthen monetary policy decision-making. - Take necessary accompanying measures to improve the BoZ’s economic analysis and forecasting capabilities, and communication. ### Strengthening financial policies and regulatory/supervisory frameworks - Micro-prudential initiatives: - Supervisory Technology Project initiated to improve analytical capabilities, timeliness of analysis and data integrity. - Project initially slated for implementation in December 2023 experienced a delay due to extended consultant engagement; matter resolved and aligned to deliverables in the BoZ’s 2024-27 strategic plan. - Project is expected to be completed by December 2026. - Cyber and Information Risk Management Guidelines were issued in May 2023 to financial service and payments systems providers to provide minimum requirements to mitigate cyber risk. - Macro-prudential architecture: - Establishing an inter-agency Financial Stability Committee (FSC) following enactment of the 2022 BoZ Act. - FSC will comprise internal members from the BoZ, MoF, PIA and SEC; as well as two other external members. - Appointment of members of the FSC is underway. - The Bank will publish its maiden Financial Stability Report (FSR) by the end of June 2024 (end-June 2024 SB). - The FSR will be published at least once a year and will assess emerging risks and vulnerabilities that pose systemic risk to the financial system. - The Report will capture results from macro stress testing exercises to determine financial sector resilience to shocks. - Macro-prudential toolkit expansion: - Drafted capital regulations providing guidelines on deploying countercyclical capital and conservation buffers; undergoing internal consultations. - Capital regulations are expected to become effective in 2024. - Plan to implement regulations on the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) by 2024 with IMF TA support to enhance liquidity risk management based on Basel III liquidity standards. - Other macro-prudential tools to be implemented gradually following establishment of the FSC. - Conduct of macro stress tests to ascertain system resilience will continue. ### Prudential relief and resolution frameworks - COVID-19 prudential relief unwind: - Most temporary COVID-19 prudential relief measures have been gradually unwound. - The remaining measure allowing commercial banks to restructure existing facilities without adverse classification was to be unwound effective from end-2023 (noted as “In September 2023, the Bank will unwind this relief measure effective from end-2023”). - Legal and regulatory review: - Review of the legal and regulatory framework of the financial sector to address emerging gaps and strengthen coordination. - Review of the Banking and Financial Services Act (2017) initiated in August 2023 with intent to have a draft bill submitted to Parliament by end-2024 (proposed end-December 2024 SB). - Stocktaking exercise identified needs including reviewing exemptions and exceptions, strengthening disclosure and transparency requirements for banks, and improving definition of ultimate beneficial owner. - Problem Bank Framework and resolution: - Problem Bank Framework developed in 2022 to establish transparent criteria and supervisory actions for designating and managing problem institutions, aiming to minimize contagion and fiscal risks. - Industry-wide crisis simulation exercise conducted in May 2023 with World Bank TA. - Implementation of a deposit protection scheme by end-December 2023 under the Bank Supervision Department. ### Access to finance for MSMEs and credit guarantee initiatives - Government and BoZ measures: - Government allocated K 386 million to the Zambia Credit Guarantee Scheme in the 2024 Budget. - BoZ committed to introducing, on a pilot basis initially, a Credit Guarantee Fund (CGF) leveraging private sector participation to support affordable credit to MSMEs. - A memorandum of understanding (MoU) with the private sector was established to design a CGF by the end of 2023. - Full implementation of the CGS is expected in 2024 with K5 billion already approved by the Bank of Zambia Board to support the project. ### Deepening financial markets and infrastructure upgrades - Government securities market: - Implemented simplified registration of accounts for investing in Government securities to broaden investor participation, particularly households. - Bloomberg E-Bond platform for secondary trading rolled out in June 2023 to contribute to pricing transparency and market liquidity. - Payment and securities systems: - Upgraded the Real Time Gross Settlement System (RTGS) and the Central Security Depository (CSD) to handle larger transaction volumes and improve cyber resilience. - In July 2023, all banks migrated to the upgraded RTGS, which is based on the ISO 2022 messaging standard. ### AML/CFT/CPF supervision and safeguards - AML/CFT/CPF unit: - Commit to establishing and resourcing a dedicated AML/CFT/CPF supervision unit by end-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 to sanction non-compliant financial service providers and require remedial measures. - The unit will support risk-based supervision and effective application of sanctions, particularly for high-risk entities and customers including politically exposed persons. - Full implementation of the planned electronic balance of payments monitoring system will help strengthen the AML/CFT regime. - BoZ safeguards and governance: - BoZ Act (2022) significantly strengthened governance arrangements at BoZ. - Since July 2023, the Audit and Finance Committee (AFC) started closer oversight of external auditor performance and enhanced disclosures in the audited FY 2022 financial statement. - A new Board charter approved in September 2023 precludes the Ministry of Finance (Secretary of Treasury) representative from being a member of the AFC; specific Board committee charters will be revised by March 2024. - Conducted a bank-wide assessment to update risk profile; internal audit function now provides assurance on monetary data and is implementing a plan to reinforce capacity. - Clarifying interpretation of the statutory limit on credit to the Government and roll-over of government securities to ascertain legal compliance is still pending. ### Structural reforms to promote higher and more inclusive growth - Broad objectives and cross-cutting reforms: - Government committed to fostering an environment conducive to robust and inclusive growth in line with the theme of the 2024 Budget. - Reforms include digitalization of public services, dismantling domestic arrears, improving the macroeconomic environment, and prioritizing infrastructure development to facilitate trade and growth. - Public Private Dialogue Forum (PPDF): - PPDF established April 2022; technical working groups established in areas including Agriculture, Energy, Financial services, ICT, digitalization and media, Manufacturing, Tourism and Mining. - Agriculture: - Comprehensive Agriculture Transformation Program (CATP) formulation, initially earmarked for 2023Q2, will now be done by end-December 2023. - Program covers service support, access to finance, irrigation development, value addition, storage and logistics. - Construction of 300 km of roads in Nansanga, Luena and Shikabeta farm blocks; 200 km of power lines in Luena, Luswishi and Shikabeta farm blocks expected completion by end-2024. - Developing the National Crop Diversification Strategy to be launched by end-2023. - Tourism: - Consolidate development of the Northern and Southern Circuits (Kasaba Bay and Liuwa National Park) over the medium term; secured $100 million from cooperating partners to develop Kasaba Bay, Liuwa National Park and the source of the Zambezi River. - Incentives in the 2023 budget include suspension of customs duty on selected fixtures, fittings, capital equipment, machinery, and safari game viewing vehicles for non-locally produced items until end-December 2025. - Industrial strategy and investment promotion: - Promote value-added priorities: processed foods, wood and wood products, textiles, leather and leather products, metallic and non-metallic mineral, pharmaceutical products, crop, livestock, and fisheries products. - Investment, Trade and Business Development Act enacted in 2022; subsidiary legislation being developed to promote joint ventures, industrial infrastructure, commercial services, and industrial research. - Rationalization of licenses and permits to operate a business to be finalized in the medium term. - Measures in the 2024 National Budget to accelerate investment into Multi-Facility Economic Zones include lowering land rates, relaxing some provisions of the Employment Code, and using a quota system for immigration and work permits. - Energy sector: - Work to increase electricity generation capacity in line with the Integrated Resource Plan; promote alternative green and renewable energy sources. - Incentives include removal of custom duty on machinery, equipment and other goods designed for geothermal energy, and increased timeline for hydro power investment eligibility for VAT refunds. - Mining sector: - Government aims to produce 3 million metric tons of copper per annum over the next 10 years. - Envisaged resolution of challenges at Mopani and Konkola Copper Mines and new mines expected to boost production from 2024. - High resolution countrywide geophysical survey planned; 2024 aerial surveys in Copperbelt, Lusaka, Northwestern, Southern, and Western Provinces and parts of Central Province through budgetary allocations and cooperating partner support. - Government to present a Bill to Parliament to operationalize the Minerals Regulation Commission by end-March 2024 to address production reporting, mineral content analysis, illegal mining and illicit trade of minerals. - Climate change: - Drafting a Climate Change Bill to establish a Climate Change Fund for mitigation, adaptation, research and related projects; public comments received. - Bill expected to be considered by Parliament by end-July 2024. - Social and inclusion programs: - Girls’ Education and Women’s Empowerment and Livelihoods Project continued; as at end-September 2023 there were 116,891 beneficiaries against the target of 129,400 beneficiaries. - Project ends in April 2024. - Financial inclusion: - Second National Financial Inclusion Strategy (2024-28) development advanced and to be finalized by end December 2023. - Strategy thematic areas: (i) MSMEs; (ii) rural areas; (iii) the underserved population; (iv) agriculture; (v) green finance and financial inclusion; and (vi) digital financial services and infrastructure. - Target to increase financial inclusion to 85 percent by 2028 from 69.4 percent achieved during the implementation of the first strategy. *Source: IMF staff summary as provided in the chapter text.* ### 56. The Government is taking steps to improve governance. We submitted the draft Access ### 56. The Government is taking steps to improve governance. ### Governance reforms: objectives and commitments - Submitted the draft Access to Information Bill to Parliament with a week delay due to internal processes (end-October 2023 SB) which "will be enacted without delay." - Government will continue to implement the recommendations contained in the Diagnostic Report on Governance and Corruption. - Cabinet Office will provide oversight on the implementation process and produce bi-annual reports. - Government will request technical assistance from the International Monetary Fund as it undertakes implementation of the recommendations in the Zambia Diagnostic Report on Governance and Corruption, and will leverage other Cooperating Partners. ### Specific governance and anti-corruption measures (selected) - Introduce necessary measures to ensure that 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. - The Anti-corruption Act will be submitted to Parliament, in line with the recommendations envisaged in the IMF Diagnostic Report on Governance and Corruption (proposed end-March 2025 Structural benchmark). - The Anti-Corruption Act will: - (i) clarify institutional arrangement and mandates of anti-corruption institutions to formulate, coordinate, monitor and evaluate anti-corruption policies and strategies; - (ii) strengthen institutional and operational autonomy of the Anti-Corruption Commission by introducing necessary measures to ensure transparent, merit-based, and participatory appointment process of top anti-corruption officials, a clear and specific term of office, adequate remuneration and resourcing, and ultimate accountability to the legislature; - (iii) bring the definition of “public official” in line with Zambia’s international obligation under UNCAC. - Prepare, with the 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 to be undertaken by end-December 2023. - Operationalize PACRA’s beneficial ownership register, including ensuring the availability of accurate, complete, and up-to-date beneficial ownership information and imposing effective sanctions on entities for non-compliance by end-March 2025. - 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 (noting that implementation of this recommendation will require a Constitutional amendment). - Submit draft Access to Information Bill to Parliament (End-October 2023 SB; listed as Not met in Table 2). - Prepare a time-bound action plan and roll-out E-Government Procurement by end-September 2023. - Strengthen the MMMD’s capacity to properly scrutinize license and transfer applications, and monitor associated commitments on safety and environment, work programs, and production by end-December 2023. - 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 (to be undertaken on an on-going basis). - Mandate the use of the IFMIS system for all transactions currently able to be undertaken through the system (Government already undertaking this measure with the roll-out of the IFMIS). - Mandate regular preparation and external publication of tax expenditure reports on measures expected to result in significant foregone revenue (implementation underway with regular updates on revenue and expenditure performance and explanations for deviations). ### Statistics, data modernization, and national accounts - Government will continue strengthening data collection and estimation of key national economic statistics such as GDP and employment, focusing on cost effective instruments and methods (including enhancement of online data collection). - This work is in line with the Second-Generation Strategy for the Development of Statistics (NSDS2). - Over the long term, all Ministries, Provinces and Agencies (MPAs) will be required to establish functional Statistics Units as well as Management Information Systems to strengthen sector capacities to produce statistics from administrative records. - The Census of Population and Housing was undertaken in August 2022. - Zambia Statistics Agency will rebase the national accounts to 2022, from the current estimates which use 2010 as the base year, by end 2025. - The Ministry of Finance and National Planning will continue timely publication of fiscal and debt statistics on its website. The Bank of Zambia will continue publishing monetary and financial statistics. ### Balance of Payments (BoP) and e-BoP enhancements - The Bank of Zambia (BoZ) will strengthen the electronic Balance of Payments (e-BoP) monitoring system by extending coverage to all BoP transactions and enhancing collaboration with other Government regulatory agencies. - In September 2023, BoZ and Zambia Revenue Authority (ZRA) developed an Export Proceeds Tracking Framework (Framework) requiring all export proceeds to be captured in the e-BoP System. - There will be 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 January 2024. - Following implementation of the Framework, BoZ and ZRA technical teams will share information regularly in line with the MoU. - A technical team comprising BoZ and ZRA has been established to facilitate information sharing and analysis. - A detailed action plan to implement the recommendations will be developed and implemented by end-December 2023. - BoZ, ZRA and the Ministry of Finance and National Planning will engage the corporate sector to improve the quality of its reporting as these measures are formulated and implemented. - Gaps related to unidentified other flows in BoP statistics were identified (largely attributed to accumulation of foreign assets by the private sector and underreported imports). Initial flow-of-funds accounts for selected mining companies were completed with IMF TA assistance. - The first revision to the balance of payments statistics will be published by end-November 2023. ### Program monitoring, technical assistance, and capacity building - Provision of technical assistance has contributed diagnostics and capacity building including: governance diagnostic, Fiscal risk management (focus on SOEs and subnational fiscal frameworks), debt sustainability analysis, Medium-Term Debt Strategy, BoP statistics engagement, advice on the new Public Debt Management Act, support on Basel II/III liquidity reforms, cyber risk regulation and supervision, and aligning with Principles for Financial Market Infrastructure. - Authorities look forward to continuing to receive technical assistance and resident experts including on cash management. - Progress will be monitored through semi-annual reviews of the quantitative performance criteria, indicative targets, and structural benchmarks in the attached Tables 1 and 2 (as defined in the TMU). - The second semi-annual review used end-June 2023 data and took place October 25 – November 8, 2023. - The third review will be based on end-December 2023 test dates and should be completed on or after April 1, 2024. - The fourth review will be based on end-June 2024 test dates and should be completed on or after October 1, 2024. - The fifth review will be based on end-December 2024 test dates and should be completed on or after April 1, 2025. - The sixth review will be based on end-June 2025 test dates and should be completed on or after October 1, 2025. - Financing intent: half of the IMF financing will be used as budget support and the other half as a buffer to boost Zambia’s international reserve position. - In August 2022, a Memorandum of Understanding between the Government and the Bank of Zambia clarifying respective roles and responsibilities for servicing associated financial obligations to the Fund was signed. ### Selected quantitative and structural benchmarks (excerpted exact figures and dates) - Anti-corruption Act submission: proposed end-March 2025 Structural benchmark. - Comprehensive reform strategy for judiciary and prosecution authorities: to be undertaken by end-December 2023. - Operationalize PACRA beneficial ownership register: by end-March 2025. - E-Government Procurement roll-out: by end-September 2023. - MMMD scrutiny capacity: by end-December 2023. - Export Proceeds Tracking Framework full operationalization: planned for January 2024. - National accounts rebase to 2022: by end 2025. - First revision to BoP statistics: publish by end-November 2023. - Semi-annual review schedule: third review on or after April 1, 2024; fourth on or after October 1, 2024; fifth on or after April 1, 2025; sixth on or after October 1, 2025. *Source: Excerpt from IMF document content provided in the content unit.* ### 1. This Technical Memorandum of Understanding (TMU) defines the indicators used to ### Technical Memorandum of Understanding (TMU) — Indicators, Definitions, Reporting, and Adjustors ### Overview and scope - The TMU defines the indicators used to monitor the program and reflects the understandings between the Zambian authorities and the IMF. - The TMU also defines the associated reporting requirements. - The fiscal year starts on January 1 and ends on December 31. - The central government for program purposes corresponds to the budgetary central government and includes Parliament, the Office of the President, the national judiciary, all ministries, departments, agencies, constitutional commissions, and independent offices. (See Annex Table 1 in source.) ### Exchange rates (Table 1) — Rates as of May 31, 2022 - Zambian Kwacha per currency unit: - US Dollar: 17.28 - GB Pound: 21.71 - Euro: 18.46 - Rand: 1.10 - SDR: 23.32 - Renminbi: 2.58 - Currency units per US Dollar: - US Dollar: 1.00 - GB Pound: 0.80 - Euro: 0.94 - Rand: 15.67 - SDR: 0.74 - Renminbi: 6.67 - Source for exchange rates: Bank of Zambia. III. QUANTITATIVE PERFORMANCE CRITERIA (selected definitions, reporting, adjustors) ### A. Floor on the Central Government’s Primary Balance (cash basis) - Definition: - Measured from the financing side (“below the line”) at current exchange rates and on a cash basis. - Primary fiscal balance = government primary revenue − primary expenditure. - Government primary revenue includes all tax and non-tax receipts, including external grants but excluding all interest revenue. - Primary expenditure = current plus capital expenditure, excluding all interest payments. - Net domestic financing (NDF) will be reconciled between the Ministry of Finance and National Planning (MoFNP) and the Bank of Zambia (BoZ). - Reporting: - 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, data should be provided with a lag of no more than 30 days after the test date. - Adjustor: - If general budget support grants expected within the fiscal year fall short of the programmed amount, the floor on the primary balance will be adjusted downward by the amount of the shortfall (kwacha value calculated at the current exchange rate). - General budget support grants exclude grants linked to externally-financed capital projects or those earmarked to fund specific activities and programs. ### B. Ceiling on New Central Bank Credit to the Central Government - Definition: - New central bank credit = change in the total stock of outstanding loans and advances by the BoZ to the central government. - Excludes: - purchases by the BoZ of government debt securities in the open market for monetary and financial stability policies; - on-lending of IMF credit; - interest accrued on the stock of outstanding loans and advances by the BoZ to the Government, its institutions, agencies, statutory bodies, and local authorities. - Reporting: - Data reconciled with the monthly monetary survey and submitted within 25 business days of the end of the month. - Submissions should include a breakdown of outstanding loans and advances, and outstanding amounts of other central bank claims on the government, including debt securities and on-lending of IMF credit. ### C. Floor on the Net Official International Reserves (NIR) of the Bank of Zambia - Definition: - NIR = gross international reserves − official reserve liabilities. - Gross international reserves consist of: - monetary gold; - foreign currency; - unencumbered foreign-currency deposits at non-resident banks; - foreign securities and deposits; - SDR holdings and Zambia’s reserve position with the IMF. - Gross international reserves exclude: - non-convertible currencies, except operational balances in Rand with the South African Reserve Bank; - any encumbered reserve assets (pledged, swapped, 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; - any foreign currency claims on Zambian residents. - Official reserve liabilities = 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). - All values not in U.S. dollars are to be converted to U.S. dollars using the program exchange rates defined in paragraph 2. - Reporting: - Daily data on net international reserves, including components, reported by the BoZ on a weekly basis, within 15 business days from the end of each week. - Adjustor: - 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. - Starting in 2024, if the amount of public sector disbursements expected to be channeled through the TSA at the BoZ is lower(higher) of the programmed amount, the NIR target will be adjusted downward (upward) by the amount of the shortfall (excess). II. CONTINUOUS PERFORMANCE CRITERIA ### D. Ceiling on New External Debt Arrears by Central Government, the BoZ, and ZESCO - Definition: - Non-accumulation of new external debt arrears is 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 = debt service (principal and interest) that is overdue (taking into account any contractually agreed grace periods) on external debt contracted or guaranteed by the central government, the BoZ, and ZESCO with non-residents. - This performance criterion does not cover arrears on debt subject to renegotiation or restructuring. - External debt is defined on a residency basis and “debt” follows the definition in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 16919-(20/103) of the Executive Board, October 28, 2020), including loans, suppliers’ credits, and leases (present value at inception). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Reporting: - Arrears monitored continuously by the MoFNP (including for ZESCO) and the BoZ. - MoFNP will immediately report to IMF staff any new accumulation of external arrears; otherwise data compiled jointly and reported by MoFNP on a quarterly basis, within 30 days from the end of each quarter. ### E. Ceiling on Contracting or Guaranteeing of New Non-Concessional External Debt - Definition: - Newly contracted or guaranteed external debt by the central government, the BoZ and ZESCO with non-residents is concessional if it includes a grant element of no less than 35 percent. - Grant element = (nominal value − NPV) / nominal value, expressed as a percentage of the nominal value of the debt. - NPV at contracting = discount future debt-service payments using a discount rate of 5 percent. - Loans by a private entity are not concessional unless accompanied by a grant element provided by a foreign official entity such that both components form an integrated financing package with combined grant element ≥ 35 percent. - For variable-rate debts of the form benchmark rate + fixed spread, PV is calculated using a program reference rate + fixed spread specified in the 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. - Spread of three-month Euro EURIBOR over three-month USD SOFR is -150 basis points. - Spread of three-month JPY Tokyo Interbank Offered Rate (TIBOR) over three-month USD SOFR is -250 basis points. - Spread of three-month U.K. Sterling Overnight Index Average (SONIA) over three-month USD SOFR is -50 basis points. - For interest rates on currencies other than Euro, JPY, and GBP, the spread over three-month USD SOFR is -50 basis points. - Where variable rate is linked to a benchmark other than three-month U.S. SOFR, a spread reflecting the difference to three-month U.S. SOFR (rounded to the nearest 50 basis points) will be added. - Note: once operationally feasible, TMU can be updated to reflect the benchmark replacement for JPY LIBOR, the Tokyo Overnight Average Rate (TONAR). - Minimum grant element applies to debt as defined in relevant Fund decisions and to commitments contracted or guaranteed for which value has not been received. - New non-concessional external debt = any new debt other than concessional debt as defined above, contracted or guaranteed by the central government, BoZ, and ZESCO with non-residents. - Exclusions from this ceiling: - (i) loans from restructuring or rescheduling of external debt; - (ii) central government securities issued in domestic currency, placed domestically and held by non-residents; - (iii) debt contracted from IMF, World Bank and AfDB; - (iv) short-term trade credits for imports, incurred since the beginning of the calendar year; - (v) central bank debt issuance for monetary policy or reserves management and foreign exchange swaps for monetary policy or reserves management. - A debt is considered contracted when all conditions for 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 to IMF staff 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 provided monthly, within 30 days from the end of each month, including: - amounts contracted or guaranteed; - currencies; - terms and conditions (interest rates, maturities, grace periods, payments per year, commissions and fees, and collaterals). ### F. Other Continuous Quantitative Performance Criteria - Continuous QPCs include non-introduction of exchange restrictions and multiple currency practices: - (i) nonimposition or intensification of restrictions on payments and transfers for current international transactions; - (ii) non-introduction or modification of multiple currency practices; - (iii) non-conclusion of bilateral payments agreements inconsistent with Article VIII; - (iv) non-imposition or intensification of import restrictions for balance of payments reasons. - These non-quantitative continuous QPCs are not listed in the QPC table annexed to the MEFP. III. MONETARY POLICY CONSULTATION CLAUSE - Consultation bands apply to the average rate of CPI inflation published by ZamStats. - If observed quarterly average rate of CPI inflation (average of the 3 monthly year-on-year inflation rates within a quarter) falls outside the outer bands for June and December test dates, the authorities will complete a consultation with the IMF Executive Board focusing on: - (i) stance of monetary policy and whether the Fund-supported program remains on track; - (ii) reasons for program deviations, taking into account compensating factors; - (iii) proposed remedial actions if necessary. - When Board consultation is triggered, access to Fund resources would be interrupted until consultation takes place and 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. IV. INDICATIVE TARGETS (selected) ### G. 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) provided to IMF staff, using current exchange rates, with lag no more than 60 days after the test date for December test dates; for other test dates, lag no more than 30 days after the test date. ### H. Ceiling on the Present Value (PV) of New External Borrowing (indicative) - Definition: - Ceiling applies to PV of all new external debt contracted or guaranteed by the central government, BoZ and ZESCO, including commitments contracted or guaranteed for which no value has been received. - PV calculated by discounting future debt-service payments (principal and interest) at a discount rate of 5 percent, accounting for maturity, grace period, payment schedule, upfront commissions, and management fees. - For loans with grant element zero or less than zero, PV is set equal to the nominal value. - Guarantee of a debt arises from any explicit legal obligation of the government to service a debt in the event of nonpayment by the debtor. - Exclusions: - (i) loans from restructuring or rescheduling of external debt; - (ii) central government securities issued in domestic currency placed domestically and held by non-residents; - (iii) debt contracted from IMF, World Bank and AfDB; - (iv) short-term trade credits for imports, incurred since the beginning of the calendar year; - (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 conditions before loans are contracted or guaranteed and will consult with staff on potential debt management operations. ### I. Ceiling on Disbursement of Contracted but Undisbursed External Debt to Central Government and ZESCO - Definition: - Applies to disbursement of contracted but undisbursed external debt to the central government and ZESCO, and contracted but undisbursed government-guaranteed external debt to ZESCO. - Ceiling set based on projected disbursements of contracted but undisbursed external debt between 2022 and 2025, after accounting for authorities’ estimates for cancellation and rescoping of such loans, and applies to this list. - Disbursements from IDA and AfDB will be excluded from this ceiling. - Reporting: - (Reporting procedures follow from sections on reporting of new external debt and monthly/quarterly submission schedules as specified above.) *Source: 1zmbea2023004 — Technical Memorandum of Understanding (TMU) defining indicators, reporting, definitions, and adjustors for the program.* ### 37. Detailed data on disbursements of contracted but undisbursed external loans of the ### 37. Detailed data on disbursements of contracted but undisbursed external loans of the central government and ZESCO ### Disbursements reporting requirement - Detailed data on disbursements of contracted but undisbursed external loans of the central government and contracted but undisbursed external loans of ZESCO (government-guaranteed or not) will be provided on a quarterly basis, within 30 days from the end of each quarter, including amounts, currencies, creditors, and project names. ### J. Floor on Social Spending by the Central Government — Definition and Reporting - Definition: - Social spending is defined as 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. - It is computed on a cash basis. - Reporting: - Data will be provided to the 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, data should be provided with a lag of no more than 30 days after the test date. ### K. Floor on the Net Clearance of Expenditure Arrears and Floor on Net Clearance of Tax Refund Arrears — Definitions - Arrears definitions: - Expenditure Arrears - For wages, salaries, and pension contributions: any payments outstanding after the agreed date for payment of staff and for payroll deductions to third parties. - For goods & services and capital spending (including contractor payments): an arrear arises when the bill has been received and delivery verified, but payment has not been made within the normal period per standard GRZ policy (30 days), or as stated in the supplier’s contract. - For utilities: if unpaid after the due date. - For subscriptions and leases: amounts outstanding after the due date. - For purposes of assessing the indicative target, changes in the stock of expenditure arrears due to ongoing audits, accumulation of penalties or interest, and exchange rate valuation effects will not affect the assessment. - The target will be considered as met, when agreed stock at the end of the previous fiscal year is reduced in an amount equal or larger than the agreed pace of rundown of arrears. - Tax (VAT) Refund Arrears - For VAT refunds: overdue if unpaid one month after the claims were validated and approved for payment. - For purposes of assessing the indicative target, the impact of newly validated claims for the previous year will be neutralized. - The target will be assessed as met if the gross clearance of VAT refunds is equal to (or more than) the sum of new claims submitted for the current year plus the agreed pace of rundown of the previous year’s arrears. - Note: "The indicative target is set on the validated stock of VAT refund arrears of the previous fiscal year and assumes no new accumulation of arrears in the current fiscal year." ### Arrears reporting - Information regarding central government arrears on expenditure and tax refunds will be compiled through quarterly audits of the accounts of the ZRA and spending ministries and agencies, conducted by the Internal Audit Department of the MoFNP. - The audits will be 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 the clearance of VAT refund arrears, the MoFNP will report separately: - clearance of the stock of audited VAT refunds accumulated up to the end of the previous fiscal year, and - accumulation of claims and clearance of newly approved VAT refund in the current fiscal year. ### V. Monitoring and reporting requirements (overview) - To facilitate monitoring of the program, information listed in Annex Table 2 will be reported to IMF staff within the timeframe indicated. - These data will be provided electronically by email to AFRZMB@IMF.ORG. - Reporting frequency and responsible agencies are specified in Table 2 (selected program categories and frequencies included in source): - Monetary and Financial Sector: daily, weekly, monthly, and quarterly items reported by BoZ. - External Sector: daily, monthly items reported by BoZ. - Fiscal: daily, monthly, and quarterly items reported by MoFNP, including: - Net domestic financing (frequency: M) - Fiscal table including revenue, expenditure, and financing (frequency: M) - Social spending (frequency: M) - Stocks of arrears on expenditure, tax refunds, and domestic debt service (frequency: M) - 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. - Real Sector: CPI and national accounts (monthly and quarterly). - External Debt: - New external loans contracted or guaranteed by the central government, BoZ, and ZESCO, or any other agency on their behalf, with detailed information (frequency: Q). - 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). - Program Monitoring: Report on program performance (frequency: Q). ### Debt sustainability and public debt coverage — Key findings and figures - 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 - Summary findings: - Zambia remains in debt distress. The stock of external arrears reached 11½ percent of GDP by end-year 2022 and continued accumulating in 2023 in the absence of a debt restructuring agreement. - Despite significant fiscal adjustment, in the absence of a signed debt restructuring agreement, Zambia is in overall and external debt distress and public debt remains unsustainable. - Under the baseline, all four external debt burden indicators would breach their indicative thresholds by large margins through the medium term. - Under an alternative scenario where 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 on a forward-looking basis. - Background on debt restructuring process: - Authorities reached an agreement with official bilateral creditors on a debt treatment under the G20 Common Framework, formalized in a Memorandum of Understanding. - Negotiations with commercial creditors (Eurobond holders) took place; adjustments were needed to meet program parameters and OCC Comparability of Treatment requirements. - Public PPG debt and related figures: - Zambia’s external PPG debt increased to US$20.9 billion by end-2022. - This increase reflected close to US$1 billion in new foreign-currency denominated external debt disbursements to the central government—principally by the IMF and World Bank—and an increase in interest arrears on central government foreign currency-denominated external debt of about US$397 million in 2022. - The stock of expenditure arrears (fuel and contractors) due to non-resident suppliers, together with the stock of ZESCO’s arrears to external IPPs, was broadly unchanged at US$1.7 billion at end-December 2022. - The stock of non-resident holdings of domestic-currency debt declined significantly to US$2.6 billion by end-2022. - Further interest arrears of US$62 million accumulated on government guaranteed external debt. - ZESCO’s non-guaranteed external debt declined by US$42.5 million as it generated sufficient revenues in 2022 to continue servicing it. - External PPG debt ended the year about US$896 million higher (relative to prior period as discussed in source). - Outstanding stock of domestically-issued government securities stood at K 210 billion at end-2022 (or 44 percent of GDP), up from K 193 billion a year ago. - Total PPG debt ended 2022 at US$33.4 billion (or 119.6 percent of GDP). - Public debt coverage and contingent liabilities included in DSA: - Coverage includes central government domestic and external debt, US$1.5 billion of arrears to external suppliers (fuel and contractors), central government guaranteed external debt, nonguaranteed external debt of ZESCO, and the domestic and external arrears of ZESCO. - ZESCO non-guaranteed external debt at end-2022: US$93 million. - ZESCO outstanding payables to domestic IPPs at end-2022: US$1.5 billion. - ZESCO outstanding payables to external IPPs at end-2022: US$139 million. - Central bank external debt outstanding government-guaranteed external loan to the Public Service Pension Fund as of end-December 2022: US$52.7 million. - The 2021 General SDR allocation was used to finance the budget over 2022-23; equivalent to about US$1.3 billion. Authorities used 50 percent of the allocation in 2022, and another 50 percent in 2023. - Nonresident holdings of domestic-currency debt: - End-September 2023 stock held by non-residents projected to reach K 54.1 billion by end-2023 (US$2.5 billion or 24 percent of the outstanding domestic-currency government securities). - At end-2022, stock was K 47.4 billion (about US$2.6 billion, 23 percent of outstanding domestic-currency government securities). - Due to projected depreciation, the dollar amounts of the stock held by non-residents are decreasing. - In 2024-25, a limit of 5 percent of the face value of gross domestic bonds issuance will be applied in line with the agreement on the restructuring perimeter reached with the OCC in June 2023. ### Tailored stress test and public debt coverage notes (selected) - The DSA is conducted on a residency basis; nonresident holdings of domestic-currency debt are treated as external debt for DSA purposes. - Default shock guidance note excerpt: "The default shock of 2 percent of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assess to be neglibible, a country team may reduce this to 0 percent." - Text Table 1 and background notes in the source detail deviations from default settings and the magnitude of contingent liabilities; key aggregate stress values noted in source: - SoE's debt (guaranteed and not guaranteed by the government) 1/2percent of GDP 12.0 - PPP 35percent of PPP stock 1.4 - Financial market (the default value of 5 percent of GDP is the minimum value) 5percent of GDP 5.0 - Total (2+3+4+5) (in percent of GDP) 18.4 *Source: Excerpt from IMF staff report chapter on Zambia — program reporting requirements, arrears definitions and reporting, and debt sustainability analysis.* ### 8. By end-September 2023, the stock of public and publicly guaranteed (PPG) ### 8. By end-September 2023, the stock of public and publicly guaranteed (PPG) external debt (excluding interest arrears, fuel, contractors and guarantees on ZESCO other payables) amounted to US$15.6 billion. ### Debt stock and creditor composition - Total PPG external debt (end-September 2023): US$15.6 billion. - Central government: US$14.2 billion. - Guaranteed external obligations: US$1.4 billion. - Non-guaranteed liabilities of ZESCO: decreased to US$0.2 million at end-September 2023 due to principal repayments by ZESCO. - Domestic debt stock increased (consistent with planned domestic financing) while external financing remained constrained. - Stock of government securities: K 221.7 billion at end-September 2023, an increase of 5.5 percent from K 210 billion as at end-December 2022. - Share held by non-residents: 25 percent of government securities at end-September 2023. ### Creditor composition and contracted debt service (as of end-2022 baseline figures quoted in text Table 2) - Total debt (end-2022): 33,349 (In US$). - External Foreign-Currency Debt: 18,324 (Percent total 54.9; Percent GDP 67.1). - Multilateral creditors: 3,563 (Percent total 10.7; Percent GDP 13.0). - IMF: 186 (Percent total 0.6; Percent GDP 0.7). - World Bank: 2,078 (Percent total 6.2; Percent GDP 7.6). - ADB/AfDB/IADB: 886 (Percent total 2.7; Percent GDP 3.2). - Other Multilaterals: 413 (Percent total 1.2; Percent GDP 1.5). - o/w EIB: 195 (Percent total 0.6; Percent GDP 0.7). - o/w IFAD: 136 (Percent total 0.4; Percent GDP 0.5). - Bilateral creditors: 6,315 (Percent total 18.9; Percent GDP 23.1). - Paris Club: 1,474 (Percent total 4.4; Percent GDP 5.4). - o/w: Israel 473 (Percent total 1.4; Percent GDP 1.7). - o/w: UK 238 (Percent total 0.7; Percent GDP 0.9). - Non-Paris Club: 4,842 (Percent total 14.5; Percent GDP 17.7). - o/w: China 4,137 (Percent total 12.4; Percent GDP 15.1). - o/w: India 331 (Percent total 1.0; Percent GDP 1.2). - Eurobonds: 3,517 (Percent total 10.5; Percent GDP 12.9). - Commercial creditors: 3,235 (Percent total 9.7; Percent GDP 11.8). - Fuel arrears: 721 (Percent total 2.2; Percent GDP 2.6). - Arrears to external contractors: 832 (Percent total 2.5; Percent GDP 3.0). - ZESCO external IPP arrears: 139 (Percent total 0.4; Percent GDP 0.5). - Domestic-Currency Debt: 15,025 (Percent total 45.1; Percent GDP 55.0). - Held by residents, total: 8,993 (Percent total 27.0; Percent GDP 32.9). - Held by non-residents, total: 2,621 (Percent total 7.9; Percent GDP 9.6). - T-Bills: 2,211 (Percent total 6.6; Percent GDP 8.1). - Bonds: 9,403 (Percent total 28.2; Percent GDP 34.4). - Domestic budget arrears and ZESCO domestic IPP arrears: 3,412 (Percent total 10.2; Percent GDP 12.5). - Memorandum items (end-2022): - Collateralized debt: 2,428 (Percent total 7.3; Percent GDP 6.9). - SOE guaranteed external debt: 1,517 (Percent total 4.5; Percent GDP 4.3). - SOE non-guaranteed external debt (ZESCO): 93 (Percent total 0.3; Percent GDP 0.3). - Total external PPG debt (memorandum definition): 20,944 (Percent total 62.8; Percent GDP 59.9). - Nominal GDP (2022): 29,122 (In US$). ### Recent market access, spreads, and non-resident participation - Zambia remains without access to international capital markets. - Weighted average spreads on Eurobonds: - Peaked at 6,954 basis points on March 20, 2023. - Narrowed to 1,959 basis points by end-October 2023. - Non-resident investors returned to the domestic debt market in 2023, notably in the bonds market, reaching 30 percent of total bonds issued by end-September 2023. - Projected share of non-resident holders of domestic debt: - Projected to increase to 24 percent at end-2023, up from about 22.5 percent at end-2022, and below a peak of around 29 percent earlier in 2022. - Return of non-residents led to increased demand at bond auctions and domestic yields began to come down since end-August 2023. - Financing risks remain elevated consistent with the DSF market-financing module; however, the module’s signal is currently less relevant given Zambia is shut-out from international markets. ### Macroeconomic assumptions and recent developments - Macroeconomic framework: consistent with the baseline of the Second Review of the ECF program. - Key changes from previous DSA: slight upward revision to real GDP growth, less fiscal adjustment in 2023, more deteriorated current account balance in the near term, and a weaker exchange rate. - Recent developments: - Real GDP growth: estimated 5.2 percent in 2022; projected 4.3 percent in 2023. - Fiscal primary balance (commitment basis): 6.6 percentage point improvement in 2022, leading to surplus of 0.8 percent of GDP in 2022; surplus decreased to 0.6 percent of GDP in 2023 due to underperformance in mining revenues. - Primary balance (cash basis): improved by 1.8 percentage points of GDP to a surplus of 0.2 percent of GDP in 2023 (including accumulation of expenditure arrears). - Growth (2023–32): expected to average around 4.8 percent (slight improvement from previous DSA). Authorities’ measures cited to support growth include: - Strategic partner selected for Mopani Copper Mines on December 1, 2023. - Investor found to resolve situation with Konkola Copper Mines. - Improved mining fiscal regime to help meet target of tripling copper production by 2030. - Implementation of WTO Investment Facilitation Agreement, AfCFTA Investment Protocol, ZESCO turnaround plan, five-year electricity tariff schedule, Ministry of Energy’s Integrated Resource Plan (approved November 2023), Comprehensive Agricultural Transformation Support Programme, reorientation of expenditure toward education/health/social protection, decentralization of public services, and reforms to increase budget credibility and fight corruption. - Inflation: - End-2022: 9.9 percent (down from 24.6 percent peak in August 2021). - Projected to increase to 13 percent by end-2023. - Bank of Zambia tightened monetary conditions (increasing monetary policy rate and statutory reserve requirements on deposits). - Medium-term inflation projected to stabilize around the mid-point of the Bank of Zambia target band. - External sector: - Current account deteriorated by US$1.6 billion in 2023, turning into a deficit of about US$505 million in 2023. - Export growth lower than projected in the ECF-request due to weaker copper production. - Imports increased by US$0.9 billion due to recovery, fiscal expansion, high fuel and energy prices. - Decline in assets held abroad by residents; decline in financial account despite return of non-residents to domestic market and slight improvement in net FDI flows. - Bank of Zambia is not expected to increase gross reserves to the level estimated at the time of the first review. - External position projected to improve following debt restructuring and program implementation; current account balance expected to register an average of 7 percent of GDP surplus for the period 2023-2032 (a slight decrease from the previous DSA). - Target: build-up of FX reserves to five months of prospective imports by the end of the program. - Fiscal projections and policies: - Primary balance (commitment basis) targeted to improve to a surplus of 3.7 percent of GDP by 2025 (an additional 3.1 percentage point adjustment relative to 2023). - Revenues (adjusted for arrears on VAT refunds) projected to increase to 22 percent of GDP by 2025 (compared to 19.6 percent of GDP in 2019), underpinned by medium-term revenue mobilization plan. - Includes eliminating tax expenditures (implicit subsidies) on fuel worth about 1.2 percent of GDP. - Further measures: broaden tax base, strengthen compliance, strengthen cash management and commitment controls, new systems for screening/approving public investment projects. - New Public-Private Partnership Law to mobilize private capital for public investment program. - Overall projected additional adjustment of 1.6 percentage points in the primary balance (cash basis). ### Financing assumptions and IFI support - Domestic borrowing will remain a key source of financing. - Concessional borrowing expected primarily from IMF, World Bank and African Development Bank. - External financing during 2022-25 assumed to come from: - US$1.4 billion disbursements on contracted but undisbursed priority project loans. - About US$1.4 billion expected new financing from the World Bank (including grants). - US$1.3bn financing from the IMF. - US$300 million from the African Development Bank. - Under the program, no non-concessional borrowing unless an exception is granted in line with the IMF’s Debt Limits Policy or World Bank Sustainable Development Finance Policy. - Access to international markets assumed to be lost through the medium term; non-resident participation in domestic debt market expected to remain limited due to authorities’ efforts to limit their participation in new issues over the program period. - Text Figure 2 (Net Financing from IFIs, 2022–30) shows annual IFI net financing flows by IMF, World Bank, AfDB for 2022–2030 in US$ million (chart not reproduced here). ### Restructuring strategy and DSA scenarios - Restructuring strategy presented as an alternative scenario; discussions with private sector creditors are ongoing. - Official creditors represented by the G20 Common Framework OCC reached agreement on a debt treatment for Zambia in line with financing assurances provided in June 2022. - Agreement entails a fully quantified two-stage approach including a state contingent treatment with a trigger linked to Zambia’s debt carrying capacity (DCC). - Base case (Zambia assessed as having a weak DCC): official creditors will significantly lengthen the maturity of their claims and reduce interest costs consistent with ECF-arrangement parameters. - State-contingent clause evaluated at end-2025. - If upgraded to a medium DCC at that stage, the upside treatment will be triggered with some acceleration of principal payments and higher interest payments to official creditors. - Treatment anchored in the LIC-DSF and aims to meet corresponding DSA thresholds at medium DCC: - PV of external debt-to-exports at “substantial space to absorb shocks” threshold at 108 percent by 2027. - Maintain external debt service-to-revenue ratio at or below the 18 percent threshold over 2026-31. *Source: Zambian authorities and IMF staff calculations as presented in the provided text.* ### 18. Private creditors are expected to deliver a treatment consistent with the DSA ### 18. Private creditors are expected to deliver a treatment consistent with the DSA ### Private creditor treatment requirement - Private creditors must deliver a treatment consistent with the DSA parameters and on comparable terms with the OCC. - Comparable treatment will be assessed by taking into account the change in debt service, the NPV loss, and the change in the duration of the claims. - Treatment provided by private creditors must also remain anchored in the LIC-DSF and meet the corresponding DSA thresholds. ### Operational measures and projected borrowing program - Debt sustainability will be supported by: - Debt conditionality under the IMF program. - The IDA Sustainable Development Finance Policy, which stipulates a zero ceiling on new nonconcessional external borrowing during the program period. - The program sets a ceiling on the PV of new concessional external borrowing. - The Indicative Target (IT) on the present value of new external borrowing is set in line with the expected borrowing plan for 2023-24, with envisaged new borrowing from IFIs to be signed in 2024 rather than in the second half of 2023. - In 2025, no other new external borrowing is expected, except financing from the IMF, World Bank, AfDB, and issuances on the domestic market. - Projected new financing: - Expected new financing of around US$3 billion from the IMF, World Bank (including grants), and the African Development Bank together over 2022-25. - Total financing from the World Bank (including projected disbursements from existing commitments) amounts to about US$2.2 billion over 2022-25. - New financing from new operations that were approved after the SLA and which contribute to reducing the BoP financing gap amounts to US$1.4 billion out of which about US$292 million will be provided in grants. ### Downside and upside risks to the outlook - Downside risks: - Uncertainties around the outlook for copper prices and production are a key source of risk. - Rainfall variability remains a key risk to sustainable growth, affecting agriculture, electricity and mining, and likely to aggravate external vulnerabilities. - Materialization of these risks would increase debt vulnerabilities. - Upside risks: - Faster global and domestic growth. - A speedy resolution of remaining aspects of the debt restructuring. - Greater confidence effects from stronger and broader reform momentum. - Higher copper prices and realization of announcements to invest in mineral development. ### Realism tools and baseline assessment - The DSA realism tools highlight: - The large size of the programmed fiscal adjustment relative to outcomes in other LIC programs. - The likelihood of a diminished growth contribution from public investment over the forecast period. - Mitigant: - The authorities’ demonstrated track record to take needed measures reduces the risk that the adjustment proves infeasible. - Baseline commodity assumption: - The baseline is based on futures market prices, which suggest prices will remain at recent elevated levels, and are consistent with the assumptions underpinning the April 2023 IMF World Economic Outlook. ### Country classification and stress-test framework - Debt-carrying capacity: - Zambia’s Composite Indicator (CI) rating is assessed as weak, unchanged from the previous DSA. - Latest CI score: 2.57. - Cut-off for medium debt-carrying capacity: 2.69. - Assessment of debt sustainability is therefore based on thresholds for a weak debt-carrying capacity country. - Stress tests included standardized and tailored settings: - Standardized stress tests indicate breaches of all debt thresholds for an extended period. - Commodity price shock applies due to significant reliance on commodity exports. - Natural disasters shock does not apply. - Market financing tool applies given significant past Eurobond issuance. - Contingent liabilities shock calibrated to Zambia includes an additional 10 percent of GDP added to the standard SOE shock to account for SOE debt risks and potential contingent risks from the 2020 Mopani acquisition by ZCCM-IH. - The rest of the components under the contingent liability shock are at default settings. ### External DSA assessment — baseline and stress outcomes - Under the baseline, all four external debt burden indicators breach their respective thresholds: - Debt service-to-revenue ratio: - Peaks at 65.4 percent in 2024. - Remains above the 14 percent threshold until 2033. - Averages about 35.7 percent in 2023-32. - Debt service-to-exports ratio: - Peaks at around 29.2 percent in 2024. - Falls to the 10 percent threshold in 2029 and breaches again in 2031. - Averages about 16½ percent over 2023-32. - PV of PPG external debt-to-GDP: - Averages about 58 percent from 20232-32. - Falls below the prudent threshold of 30 percent only in 2039. - PV of PPG external debt-to-exports: - Breaches the threshold at about 166 percent in 2023. - Averages about 123½ percent over 2023-32. - Under stress tests: - Thresholds for all four external debt indicators are breached by large margins. - Standardized exports shock is the most extreme for all external debt indicators: - PV of PPG external debt-to-exports ratio peaks at 354 percent in 2025 and remains well above the threshold throughout the medium and long term. - Market financing tool signals significant vulnerabilities, though its relevance is reduced given current lack of access to international capital markets. ### Public DSA assessment - Under the baseline, PV of total PPG debt-to-GDP benchmark is breached throughout medium and long term: - Peaks at 118 percent in 2023. - Averages about 86 percent from 2023-32. - Falls below the threshold in 2038. - Most extreme shock for this indicator is the exports shock, peaking at 126 percent in 2025. - Combined contingent liabilities shock (SOE debt, PPPs, financial sector) peaks at 113 percent in 2025 and remains above the threshold throughout the long-term forecast horizon. ### Restructuring scenarios and debt sustainability outcomes - Current assessment: - Zambia remains in debt distress, and debt is deemed unsustainable in the absence of a debt treatment in line with program parameters. - Large financing gaps remain over 2022-25 and need to be filled through a debt restructuring operation in line with the DSA and IMF program parameters. - Alternative restructuring scenario that accounts for OCC-agreed treatment: - Zambia would remain in debt distress due to arrears to private creditors. - Taking into account authorities’ continuing good faith negotiations with private creditors on a treatment on comparable terms, Zambia would be assessed as sustainable on a forward-looking basis. - Two alternative baselines under the restructuring scenario that incorporates delivery of state-contingent debt relief agreed within the G20 Common Framework: - Base Case Treatment (if Zambia remains assessed as weak DCC): - 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 reaches the 14 percent threshold by 2025, and remains at 14 percent on average over 2026-31. - Targets under the IMF-supported program are met and Zambia’s debt would be assessed as sustainable with a moderate risk of debt distress over the medium term. - PV of PPG external debt-to-GDP indicator averages about 40½ percent from 2023-32, and only falls below the threshold of 30 percent in 2032. - External debt service-to-exports indicator would average 6½ percent over 2026-31. - Upside Treatment (if Zambia’s debt-carrying capacity is upgraded to medium): - 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 remains at about 18 percent on average over 2026-31. - PV of PPG external debt-to-GDP indicator averages about 47 percent from 2023-32, and only falls below the threshold of 40 percent in 2030. - External debt service-to-exports indicator averages 8½ percent over 2026-31. - All external debt burden indicators decline to levels consistent with Zambia reaching a moderate risk of external debt distress over the medium term. ### Overall risks, mitigation, and institutional reforms - Key risk drivers: - Delays or slippages in fiscal policy adjustment. - External shocks that affect the macroeconomic framework. - Mitigants: - Authorities’ track record of implementing robust policy reforms since coming to power in August 2021. - Ongoing reforms to strengthen institutional framework and debt management. - Institutional reforms: - Adoption of a new Public Debt Management Act in August 2022 to provide greater oversight on contracting of debt. - Ongoing efforts to strengthen public financial management, debt transparency, and to modernize and strengthen capacity of the debt management unit. *Source: IMF staff DSA update chapter on Zambia (text as provided).* ### 32. The authorities shared staff’s assessment of their debt sustainability and emphasized ### 1zmbea2023004 - 32. The authorities shared staff’s assessment of their debt sustainability and emphasized ### Authorities’ assessment and commitments - The authorities shared staff’s assessment that debt sustainability would be restored once external debt restructuring agreements are implemented. - The authorities emphasized commitment to restore debt sustainability by seeking a restructuring of their external debt. - An agreement has been reached with the OCC on a debt treatment consistent with the parameters of the IMF-supported program, and work on signing the MOU is advancing well. - The authorities committed to reach restructuring agreements with other external creditors on comparable terms and consistent with IMF-program parameters. - The adoption of the Public Debt Management Act was supported under the IMF program and IDA’s Sustainable Debt Financing Policy. ### External debt and PPG metrics (selected figures from the External DSA, baseline) - External debt (nominal): 150.0 (2020), 113.5 (2021), 105.8 (2022), 112.1 (2023), 104.6 (2024), 98.0 (2025), 90.0 (2038) - Of which: public and publicly guaranteed (PPG): 102.9 (2020), 75.9 (2021), 76.7 (2022), 82.7 (2023), 77.4 (2024), 73.8 (2025), 65.1 (2038) - Change in external debt: 56.8 (2020), -36.5 (2021), -7.7 (2022), 6.3 (2023), -7.5 (2024), -6.6 (2025), -7.9 (2026), -5.9 (2027), -5.3 (2028), -4.4 (2029), -0.6 (2030) - Identified net debt-creating flows (2020–2030 examples): 14.2 (2020), -40.0 (2021), -30.4 (2022), -4.2 (2023), -10.8 (2024), -12.8 (2025), -15.0 (2026), -15.7 (2027), -15.3 (2028), -14.3 (2029), -12.8 (2030) - Non-interest current account deficit: -14.9 (2020), -19.1 (2021), -7.2 (2022), -0.4 (2023), -6.7 (2024), -8.1 (2025), -9.6 (2026), -11.6 (2027), -11.3 (2028), -10.8 (2029), -10.6 (2030) - Exports (percent of GDP): 47.2 (2020), 53.1 (2021), 42.7 (2022), 42.7 (2023), 46.5 (2024), 46.6 (2025), 48.0 (2026), 49.0 (2027), 48.8 (2028), 47.8 (2029), 40.8 (2030) - PV of PPG external debt-to-GDP ratio (selected years): 64.7, 70.8, 69.5, 66.5, 61.9, 59.0, 56.3, 42.9, 31.2 (dates not individually labeled in excerpt) ### Public sector debt metrics (selected figures from the Public Sector DSA, baseline) - Public sector debt: 157.6 (2020), 128.4 (2021), 122.1 (2022), 124.7 (2023), 113.6 (2024), 103.9 (2025), 97.7 (2026), 91.8 (2027), 86.3 (2028), 61.3 (2033), 42.1 (2038) - Of which external debt (public sector): 102.9 (2020), 75.9 (2021), 76.7 (2022), 82.7 (2023), 77.4 (2024), 73.8 (2025), 65.1 (2038) - Change in public sector debt: 75.3 (2020), -29.2 (2021), -6.4 (2022), 2.6 (2023), -11.1 (2024), -9.7 (2025), -6.2 (2026), -5.9 (2027), -5.5 (2028), -4.5 (2029), -3.4 (2030) - Identified debt-creating flows (public): 32.0 (2020), -44.2 (2021), -0.7 (2022), -1.3 (2023), -7.8 (2024), -5.7 (2025), -3.6 (2026), -4.5 (2027), -4.6 (2028), -4.0 (2029), -3.4 (2030) - Primary deficit (cash basis): 3.6 (2020), 2.1 (2021), 1.6 (2022), -0.5 (2023), -0.8 (2024), -2.2 (2025), -1.4 (2026), -2.2 (2027), -2.5 (2028), -2.2 (2029), -1.6 (2030) - Revenue and grants (percent of GDP): 20.3 (2020), 22.4 (2021), 20.4 (2022), 20.9 (2023), 21.2 (2024), 21.9 (2025), 21.9 (selected projection years) - PV of public debt-to-GDP ratio (selected): 114.4, 118.1, 107.3, 97.7, 92.1, 86.7, 81.5, 56.8, 38.3 (dates not individually labeled in excerpt) - Gross financing need (percent of GDP): 33.0 (2020), 30.4 (2021), 19.6 (2022), 13.6 (2023), 24.4 (2024), 19.9 (2025), 20.0 (2026), 17.2 (2027), 11.4 (2028), 5.9 (2029), 3.0 (2030) ### Key macroeconomic assumptions (selected) - Real GDP growth (percent): -2.8 (2020), 6.2 (2021), 5.2 (2022), 4.3 (2023), 4.7 (2024), 4.8 (2025), 4.8 (2026), 4.9 (2027), 5.0 (2028), 4.8 (2029), 4.9 (2030), 3.4 (2031), 4.8 (2038) - GDP deflator in US dollar terms (change in percent): -20.0 (2020), 14.7 (2021), 25.2 (2022), -6.5 (2023), 0.4 (2024), 3.5 (2025), 3.3 (2026), 3.4 (2027), 3.3 (2028), 3.1 (2029), 3.3 (2030), -0.7 (2031), 2.1 (2038) - Effective interest rate (percent): 3.6 (2020), 7.7 (2021), 4.1 (2022), 2.0 (2023), 2.8 (2024), 3.0 (2025), 3.1 (2026), 3.2 (2027), 3.3 (2028), 3.4 (2029), 5.0 (2030), 2.9 (2031), 3.1 (2038) - Nominal dollar GDP growth: -22.2 (2020), 21.8 (2021), 31.8 (2022), -2.5 (2023), 5.2 (2024), 8.5 (2025), 8.2 (2026), 8.5 (2027), 8.4 (2028), 8.1 (2029), 8.3 (2030), 2.9 (2031), 7.0 (2038) ### Select sustainability indicators and stress-test signals - PV of PPG external debt-to-exports ratio (selected): 151.5, 165.9, 149.3, 142.6, 129.0, 120.3, 115.4, 89.8, 76.5 - PPG debt service-to-exports ratio (selected): 26.6, 25.9, 13.1, 23.8, 29.2, 22.2, 22.2, 17.5, 10.4, 7.3, 5.1 - PPG debt service-to-revenue ratio (selected): 63.5, 63.1, 28.0, 49.3, 65.4, 48.1, 48.7, 39.1, 22.4, 15.3, 9.2 - Gross external financing need (Million of U.S. dollars): -3.9 (2020), -205.7 (2021), -152.4 (2022), 105.4 (2023), 228.3 (2024), 667.6 (2025), -17.0 (2026), -1124.2 (2027), -2576.7 (2028), -4525.5 (2029), -10232.0 (2030) - Market-financing risk indicators excerpt: EMBI = 570; Potential heightened liquidity needs = High; GFN benchmarks signaled breaches (values and thresholds shown in figures) ### Sensitivity analysis (selected results) - PV of PPG external debt (% of GDP), baseline and scenarios (selected years): baseline 71 (2023), 66 (2024), 69 (2025), 66 (2026), 62 (2027), 59 (2028), 56 (2029), 54 (2030), 52 (2031), 48 (2032), 46 (2033) - Alternative scenario A1 (key variables at historical averages): PV values rising to 124 (2033) in the presented series. - Bound and tailored test results included multiple scenarios (B1–B6, C1–C4) with threshold comparisons; one tailored test (C2 Natural disaster) marked "n.a." in the excerpt. *Source: Country authorities; and staff estimates and projections (excerpts from the DSA tables and figures contained in the provided chapter).* ### 2. Primary balance242923231911111113108 ### 1zmbea2023004 - 2. Primary balance242923231911111113108 ### Program performance and arrears - All quantitative performance criteria (QPCs) for end-June 2023 were met except for the net international reserves (NIR) target, which was missed due to lower-than-expected mining tax revenues and once-off foreign exchange (FX) pressures. - Corrective measures taken: reducing FX sales to the market and tightening monetary policy, which led to attainment of the NIR target for end-September 2023. - All end-June 2023 Indicative Targets (IT) were met except clearance of expenditure and VAT refund arrears, missed due to faster VAT claims; this IT was missed again in September. Authorities commit to timely clearance of arrears upon validation of VAT claims and in line with the Arrears Clearance Strategy. - Structural Benchmarks (SBs): four out of seven met; two completed with minor delays. - Access to Information Bill submitted to Parliament on November 7, 2023 (instead of end-October 2023). - IFMIS rollout due end-August 2023 faced delays in 3 out of the 59 institutions but was completed in November 2023. - Full e-voucher migration for the Farmer Input Support Program (FISP) implemented in 17 out of the 33 planned districts by end-September 2023; an additional 10 high-production districts use a hybrid system. It is envisaged that 73 districts will utilize the e-voucher system during the 2024/2025 farming season. - New SBs introduced on anti-corruption and state-owned enterprise (SOEs) transparency. - Authorities request Executive Directors to support completion of the Second Review under the ECF arrangement and proposed decisions. ### Recent economic developments and outlook - Growth: - Growth moderated from 5.0 percent in 2022 to 4.3 percent recorded in the first quarter of 2023 before rebounding to 5.0 percent in the second quarter. - Annual growth: 4.3 percent expected in 2023 (preliminary outturn of 5.2 percent in 2022). - Growth projections: 4.7 percent in 2024 and 4.8 percent in 2025. - Downside risks: increasing frequency of climate change events, weaker copper revenues amid slower global growth, and delays in debt restructuring. - Inflation: - Headline inflation rose from 9.4 percent in January 2023 to 12.9 percent in November 2023, driven by higher food, fuel, and electricity prices and depreciation of the Kwacha. - Inflation forecasts: average 11 percent in 2023, 11.4 percent in 2024, and 7.8 percent in 2025. - External sector: - Current account balance switched from a surplus of 3.7 percent of GDP in 2022 to a deficit of 2.8 percent in the first half of 2023. - Gross official reserves decreased from US$3.1 billion (equivalent to 3.4 months of import cover) at end-December 2022 to US$2.7 billion (3.0 months of import cover) at end-June 2023. ### Fiscal policy, revenue mobilization, and debt management - Fiscal stance: - Authorities committed to a multi-year fiscal consolidation plan through 2023 and the medium term, focusing on revenue mobilization, curtailing current spending, and clearing arrears while preserving social and human capital. - Primary fiscal balance (cash basis) improved by 1.8 percent of GDP in 2023 compared to 2022, reaching K2.2 million at end-June 2023. - Revenue and tax administration reforms: - Mineral tax regime reformed in 2022 to attract investment and improve tax predictability. - Plans to rescind tax exemption on government cars and impose inflation-indexed excise duty on cigarettes and alcohol. - Specialized mining unit for small and medium-sized mines established; progress toward a unified Large Taxpayer Office. - Plans to implement Electronic Invoicing System and a new operating model for the Zambia Revenue Authority, using data analytics and artificial intelligence to improve compliance and efficiency. - Public finance management (PFM) and cash management: - 59 institutions integrated on IFMIS to better control expenditure. - Upscaled social support beyond the indicative target. - Progress in migrating FISP to a cost-effective e-voucher system. - Cash management strategy to reduce idle cash balances and number of accounts held by local authorities in commercial banks. - Debt strategy and restructuring: - Authorities determined to refrain from contracting non-concessional debt and limit new external borrowing to restore debt sustainability and return to a moderate risk of debt distress over the medium term. - Medium-term debt management strategy published; establishment of the Debt Office Management expected to be approved by Cabinet by end-December 2023 and fully operational by end-2024. - Plan to transition government securities issuance strategy to par from discount. - Debt restructuring progress: - Memorandum of Understanding (MoU) with official creditors agreed in October 2023. - Agreement in principle (AIP) with the Steering Committee of the Ad Hoc Group of Bondholders announced in early October 2023. - Consultations with Official Creditor Committee (OCC) indicated comparability of treatment would not be achieved in the base case but would be in the upside case; IMF staff noted that, as presented, the AIP would breach DSA targets. - Authorities announced in November 2023 that further discussions on amendments to the AIP would be held with OCC, IMF, and Steering Committee; subsequent meetings held and authorities remain confident a suitable solution consistent with program parameters and Comparability of Treatment will be reached. ### Monetary and financial sector policies - Monetary policy and exchange rate: - Authorities remain committed to the inflation targeting (IT) framework. - Bank of Zambia (BoZ) tightened monetary policy in August and November 2023 and increased the statutory reserve requirement to address inflationary pressures. - Authorities will continue to rely on forward-looking monetary policy and stand ready to act promptly to fight inflation; they will maintain exchange rate flexibility while stepping up reserves accumulation in 2024 and plan to review FX market rules to promote price discovery and market efficiency. - Banking sector and financial stability: - Banking sector remains resilient; income on government securities boosted regulatory capital. - Gross non-performing loans (NPLs) ratio stood at 4.4 percent at end-September 2023 from 4.9 percent at the beginning of the year. - BoZ has developed a macroprudential toolkit to mitigate excessive credit growth, concentrated risks, and moral hazard. - An inter-agency Financial Stability Committee (FSC) is being established, with the first Financial Stability Report envisaged for publication by end-June 2024. - Micro-prudential and inclusion measures: - Cyber and Information Risk Management Guidelines issued in May 2023. - Implementation of the Supervisory Technology Project underway. - Industry-wide crisis simulation exercise undertaken in May 2023 to strengthen crisis management and resolution. - Plans to launch the National Financial Inclusion Strategy 2024-28 by end-2023 and increase the 2024/25 budget allocation to the Credit Guarantee Scheme to support micro, small and medium enterprises (MSMEs). - Authorities committed to establishing a dedicated AML/CFT supervision unit by end-2023 to address deficiencies identified in the 2019 FATF Mutual Evaluation. ### Structural reforms and governance - Private sector and diversification: - Authorities initiating Public-Private Dialogue Forum chaired by the President to identify incentives for private sector development in manufacturing, mining, and tourism. - Comprehensive Agriculture Transformation Program (CATP) formulation to be completed by end-December 2023 to increase agricultural productivity. - Energy and climate: - Open grid operationalized to allow Independent Power Producers (IPPs) to directly sell electricity to buyers. - Investments in additional power generation infrastructure and promotion of alternative green and renewable energy sources. - Plan to introduce a Climate Change Bill to provide a legal framework for mitigation and adaptation; further Fund support under the RST viewed as important. - Governance and anti-corruption: - Commitment to implement recommendations from the Diagnostic Report on Governance and Corruption. - Draft Access to Information Bill submitted to Parliament in November 2023. - Priorities include: reform strategy to strengthen judicial and prosecution independence by end-December 2025; mandate IFMIS for transactions; regular external publication of tax expenditure reports; submission of the Anti-Corruption Act to Parliament by March 2025. ### Conclusion and authorities’ request - Authorities reiterate commitment to the objectives of the ECF arrangement and the timely completion of the debt restructuring process. - Request for continued Fund technical support to address constraints to growth and unlock the country’s growth and development potential. *Source: Statement by Mr. Willie Nakunyada, Executive Director for Zambia, and Ms. Linda Motsumi, Senior Advisor to the Executive Director; December 20, 2023.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1zmbea2023004.pdf_