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### Major shock and policy request
- Severe drought impacts:
  - reportedly destroyed 40 percent of the cultivated maize.
  - affected over 9 million people, or 43 percent (preliminary estimates elsewhere report 9.8 million, 48 percent).
  - reduced hydropower generation, producing an energy sector deficit of nearly MW500 this year (as 90 percent of generated electricity is sourced from hydropower).
- Authorities’ IMF request:
  - Augmentation of access under the ECF arrangement: 30 percent of quota (SDR 293.46 million), to be disbursed upon completion of the third ECF review.
  - Allocation: half of the augmentation to be allocated for budget support.
  - Approval of the augmentation will bring total IMF access to 130 percent of quota (SDR 1,271.66 million).
  - Total IMF disbursements after completion of this review would amount to 87.2 percent of quota (SDR 852.98 million, about $1,130.4 million).
  - Authorities requested modifications to QPCs: changes to end-June 2024 and end-December 2024 NIR targets, change to primary fiscal balance QPC and a primary-balance adjustor for the liability management operation to clear fuel arrears, change to the Monetary Policy Consultation Clause (MPCC), and a symmetric NIR adjustor for deviations in central government debt service.

### Recent macroeconomic developments (key statistics)
- Growth and sectoral performance:
  - 2023 real GDP growth: 5.4 percent.
  - 2023 agricultural output: down 16 percent.
  - 2023 mining production: down 6 percent.
  - 2024 real GDP growth (projected): 2.3 percent.
  - Agriculture in 2024 expected to contract by 19 percent (Annex I).
  - Medium-term growth projection: 6.2 percent in 2025-26.
- External sector and reserves:
  - 2023 current account deficit: 1.9 percent of GDP.
  - 2023 export decline: 8 percent; import growth: 8.4 percent.
  - Financial account deficit narrowed to 1.6 percent of GDP in 2023 (from 11.2 percent in 2022).
  - Gross international reserves (GIR) in 2023: $3.3 billion (3.7 months of imports); another figure notes GIR: 3,328 (millions of U.S. dollars) in 2023.
  - Bank of Zambia net FX sales in 2023: $1.0 billion (of which $868 million from FX mining receipts).
  - 2024Q1 preliminary current account deficit: 0.3 percent of GDP.
- Exchange rate and inflation:
  - Kwacha depreciation in 2023: 25.9 percent (nominal) and 23.6 percent (real effective terms).
  - Kwacha depreciation in 2024Q1 vis-à-vis the U.S. dollar relative to 2023Q4: 10.1 percent.
  - CPI inflation: 13.8 percent (y-o-y) in April 2024; May 2024 cited as 14.7 percent; inflation expected to peak around 15 percent in 2024.
  - Bank of Zambia policy rate: raised by 100 basis points to 13.5 percent on May 15, 2024; earlier increases included 150 bps and a 9-percentage point increase in reserve requirements in February.
- Fiscal outturn and liquidity:
  - Primary fiscal balance (cash basis) in 2023: 0.6 percent of GDP; (commitment basis) in 2023: 1.5 percent of GDP.
  - Higher-than-budgeted grants: by 0.4 percent of GDP; higher non-mining tax revenues: by 0.6 percent of GDP; lower mining receipts: 0.5 percent of GDP below projections.
  - Deposit transfers to BoZ: about K 2 billion by April 2024.
  - Net financing from government securities Jan–Apr 2024: turned negative (0.5 percent of GDP); T-bills net outflows: 0.8 percent of GDP.
  - Average subscription rate for T-bills declined to 53 percent.
  - Banks’ share of government securities: 24 percent of stock at end-2023 → 19 percent by end-April 2024.
- Banking sector:
  - Regulatory capital: 24 percent of risk-weighted assets at end-March 2024.
  - NPLs: 3.7 percent of total loans.
  - Two out of 17 commercial banks (2 percent of total bank deposits) fell short of prudential regulatory capital and loan quality ratios.
  - Banks’ exposure to government: 26 percent of assets by end-March 2024.

### Outlook, projections, and scenarios
- Short and medium term:
  - 2024 real GDP growth projected: 2.3 percent.
  - Agriculture: expected contraction by 19 percent (Annex I).
  - Copper production will recover more gradually than previously projected.
  - Current account deficit projected in 2024: 0.2 percent of GDP.
  - Financial account projected to improve supported by FDI inflows.
  - Growth projected to rise to 6.2 percent in 2025-26.
  - Annual average CPI inflation series presented: 11.0 11.0 10.9 11.4 14.6 12.1 7.0 7.0 7.0 7.0 (selected frame).
  - Medium-term trade balance and reserves in key excerpts:
    - Trade Balance (% of GDP) series: 11.6 7.1 4.9 12.0 9.7 15.9 14.4 14.0 13.8 13.6.
    - Gross international reserves (months): 3.4 3.4 3.6 4.0 4.3 5.0 5.2 5.6 6.0 6.0.
- Downside risks:
  - Adverse commodity price shocks; subdued mining production; climate events (including drought); rising social discontent; delays in debt restructuring.
- Upside scenarios:
  - Swift debt restructuring, sustained copper price increase, and renewed mining investment could boost confidence and support growth.

### Revised 2024 Budget and fiscal measures (selected figures)
- Revised 2024 Budget targets (Text Table 2):
  - Total Revenue: 139,601 Kwacha m 21.2%GDP (2nd Review) → 149,647 Kwacha m 21.4%GDP (Revised Draft Budget).
  - Revenue excluding grants: 136,395 Kwacha m 20.7%GDP → 141,257 Kwacha m 20.2%GDP.
  - Grants: 3,207 Kwacha m 0.5%GDP → 8,390 Kwacha m 1.2%GDP.
  - Expenditure: 179,999 Kwacha m 27.1%GDP → 192,315 Kwacha m 27.5%GDP.
  - Primary Expenditure: 134,027 Kwacha m 20.4%GDP → 154,345 Kwacha m 22.1%GDP.
  - Drought response: n/a → 6,334 Kwacha m 0.9%GDP.
  - Fuel arrears clearance (liability management operation): 1,032 Kwacha m 0.2%GDP → 16,202 Kwacha m 2.3%GDP.
  - Recapitalization & unexpected spending: 935 Kwacha m 0.1%GDP → 13,298 Kwacha m 0.5%GDP.
  - Spending reprioritization: n/a → -5,903 Kwacha m -0.8%GDP.
  - Overall Balance (cash basis): -40,397 Kwacha m -5.9%GDP → -42,668 Kwacha m -6.1%GDP.
  - Primary Balance: 557 Kwacha m 0.8%GDP → -4,698 Kwacha m -0.7%GDP.
  - Adjusted Primary Balance (without fuel operation): 11,504 Kwacha m 1.6%GDP.
  - Net Domestic Financing: 16,300 Kwacha m 2.5%GDP → 17,450 Kwacha m 2.5%GDP (Fuel arrears loan net of amortization: 0 → 15,392 Kwacha m 2.2%GDP).
  - Net External Financing (including exceptional financing): 16,779 Kwacha m 2.3%GDP → 23,396 Kwacha m 3.3%GDP.
  - Memo: Nominal GDP (K billion): 658 → 700; Average Exchange Rate (Kwacha/US$): 22 → 27; Change in GDP deflator (percent): 10.6 → 20.0; Copper production (metric tonnes): 796.994 → 727,000.
- Social and humanitarian measures:
  - Expand the social cash transfer to one million households and double the transfer value for existing beneficiaries for 13 months starting June 2024; enumeration later referenced to extend to 2.5 million affected households and additional 1.2 million households in other passages.
  - Expand school feeding program in affected districts.
  - Additional grant financing (0.7 percent of GDP) and frontloading of other disbursements—mainly from the World Bank—will cover most humanitarian relief (0.9 percent of GDP).
- Financing changes:
  - Net financing from government securities scaled down to 0.3 percent in 2024 (revised) from original 2.5 percent of GDP.
  - Authorities will mobilize part of idle government balances transferred to BoZ (0.3 percent of GDP).
  - Repayment of fuel arrears (2.3 percent of GDP) to be financed through a domestic loan in foreign currency.

### Arrears dynamics and liability management
- Stock of budgetary expenditure arrears (Kwacha, excluding VAT refunds):
  - 2021: 57,031
  - 2022: 47,659
  - 2023: 61,421
- Arrears in percent of GDP:
  - 2021: 12.9
  - 2022: 9.6
  - 2023: 10.8
- Major arrears categories (Kwacha levels):
  - Fuel: 9,954 (2021), 13,044 (2022), 23,062 (2023).
  - External contractors: 9,389 (2021), 10,528 (2022), 12,655 (2023).
  - Goods, services & compensation to employees: 11,214 (2021), 7,283 (2022), 6,546 (2023).
- Fuel arrears (USD):
  - At end-2023, authorities report fuel arrears reached $897 million (of which $437 million principal; remainder interest and penalties).
  - Fuel arrears amounted to $597 million in 2021.
- Liability management operation plan:
  - Borrow from domestic banks (USD-denominated loan) to repay validated fuel arrears via reverse auction seeking NPV savings.
  - Banks expected to secure funding from assets held abroad to avoid squeezing domestic forex market.
  - Operation shifts external debt liabilities to domestic FX liabilities; authorities request a primary-balance adjustor for this operation (Primary Balance Adjustor: 600600 as presented).
  - Contingency if discounts not secured: prioritize most expensive arrears; lower-than-expected NPV savings translate into additional pressures on net domestic financing.

### Debt restructuring, DSA and financing assurances
- Debt restructuring status:
  - Consent solicitation for the Eurobonds exchange launched May 13; more than 90 percent of bondholders voted in favor; authorities envisage finalizing bond exchange in June 2024; exchange implemented June 11, 2024 in one passage (three outstanding Eurobonds exchanged for two new amortizing bonds: $1.72 billion maturing 2033 and $1.36 billion maturing 2053).
  - External arrears on restructuring perimeter claims: $5.7 billion by end-2023 (of which $3.4 billion with private creditors).
  - MoU signed with all OCC members; agreed treatment with official creditors included in baseline.
- DSA key assessments:
  - Staff assesses debt restructuring process will restore debt sustainability over the medium term conditional on completion of Eurobond exchange and comparable treatment with private creditors.
  - In absence of agreements with private creditors Zambia remains formally in debt distress.
  - External PPG debt: US$21.6 billion by end-2023; total PPG debt about US$31.2 billion (141 percent of GDP) at end-2023.
  - Public debt (gross, end-of-period) 2023: 133.4 (percent of GDP) in one passage.
  - DSA indicators and stress tests show baseline breaches of thresholds without restructuring; alternative restructuring scenario leads to sustainable forward-looking paths.
- Financing package (Text Table 3 $ million):
  - Financing Gap: 2022: 3,059; 2023: 2,033; 2024: 2,692; 2025: 1,644; Total: 9,429.
  - Official financing: 2022: 737; 2023: 538; 2024: 1,382; 2025: 849; Total: 3,506.
  - IMF ECF: 2022: 187; 2023: 373; 2024: 760; 2025: 370; Total: 1,690.
  - World Bank 1/: 2022: 550; 2023: 165; 2024: 522; 2025: 329; Total: 1,566.
  - AfDB: 2024: 100; 2025: 150; Total: 250.
  - Financing from external debt restructuring 2/: 2022: 2,322; 2023: 1,495; 2024: 1,310; 2025: 795; Total: 5,922.

### Monetary policy, FX management, and reserve targets
- Monetary stance and transmission:
  - BoZ should stand ready to further tighten monetary policy given higher inflation (MEFP, ¶35).
  - Suspension of OMOs resulted in a substantial spread between policy and interbank rates; recommendation to resume OMOs as accompanying liquidity tool and adopt an interest rate corridor and reserve averaging.
  - BoZ renewed MPC, launched Monetary Policy Report (MPR).
- FX and reserves:
  - Drought estimated to generate additional $420 million in drought-related import needs (electricity and maize) financed by BoZ, directly impacting reserve accumulation.
  - Mining tax receipts projected to decline by 24.2 percent in 2024 relative to second review projection.
  - Staff supports authorities’ request to lower reserve accumulation in 2024 and proposes revised NIR targets:
    - end-June 2024 NIR target: $1,400 million.
    - end-2024 NIR target: $1,750 million.
    - end-June 2025 NIR target: $2,100 million (conditions normalize in 2025 in proposal elsewhere $2,250 million end-June 2025 in some passages).
  - BoZ maintains a managed float policy; renewed forex market guidelines effective May 24, 2024; IFEM rules under review.

### Financial sector resilience and macroprudential measures
- Macroprudential and supervision:
  - Inter-agency Financial Stability Committee (FSC) held its first meeting in April 2024.
  - BoZ to publish maiden Financial Stability Report (FSR) in June 2024 (end-June 2024 SB).
  - Regulations for countercyclical capital and conservation buffers by end-June 2024; phased-in LCR and NSFR implementation by end-2024.
  - Given banking dollarization, separate LCR rules for foreign currency liquidity recommended.
- Safeguards and legal frameworks:
  - BoZ reviewing Banking and Financial Services Act (2017); draft bill expected to be submitted to Parliament end-December 2024.
  - Remaining safeguards: outstanding legal opinion from Office of the Attorney General; update August 2022 Memorandum of Understanding with Government to reflect augmentation.
- Deposit insurance and crisis resolution:
  - Problem bank framework (2022) used as internal guidance.
  - Deposit Protection Fund unit established; deposit insurance framework adoption proposed end-April 2025 SB.
- Financial inclusion and credit guarantee:
  - National Financial Inclusion Strategy 2024-28 launched with 85 percent adult inclusion target.
  - BoZ considering Credit Guarantee Fund (K 5 billion, 0.7 percent of GDP) to be implemented June 2024; governance and safeguards emphasized.

### Public financial management, procurement, and SOEs
- IFMIS and cash management:
  - All 61 central government budgetary institutions using IFMIS; rollout to provinces for Ministry of Education and to Agriculture, Fisheries and Livestock by 2024Q4.
  - Budgetary institutions to input expenditure arrears in IFMIS by end-June 2024; multi-year commitments recorded by end-2024.
  - Action plan and roadmap adopted in April to strengthen TSA and expand coverage; survey of government bank accounts to mobilize idle balances to BoZ to be finalized by June.
  - Establish Cash Management Unit and Cash Management Technical Committee by end-July 2024; cash-flow forecasting implementation by end-December 2024.
- SOE governance:
  - New performance monitoring framework for SOEs; performance management contracts starting 2025.
  - Industrial Development Corporation (IDC) to publish audited financial statements (proposed end-October 2024 SB).
  - First Fiscal Risk Statement (FRS) to include SOEs, NAPSA, PPPs and climate (end-June 2024 SB).
- Procurement and transparency:
  - E-Government Procurement (e-GP) mandatory; procurement contracts related to drought response and FRA/DMMU maize imports to be published (continuous SB).
  - Controller of Internal Audit to publish report on government drought response procurement (proposed end-September 2025 SB).

### Tax policy and revenue mobilization
- Tax administration reforms and measures:
  - Large Taxpayer Office established January 1, 2024.
  - ZRA launched e-invoice system in March; expansion to all VAT taxpayer transactions by July; refunds claimable only on invoices generated in system.
  - Cross-Border Electronic Services Taxation implemented April 2024.
- Performance of 2024 tax measures:
  - New mobile transaction levy mobilized little due to exemptions.
  - Withholding tax not applied on discount bonds issued before 2024.
  - Mining taxes projected 0.5 percent of GDP lower than 2024 Budget.
- Staff recommendations:
  - Strengthen VAT audit processes via risk-based audits and corporate governance.
  - Adjust VAT refund allocation based on audited and validated claims.
  - Introduce excise indexation; unify corporate income tax rate across sectors by 2025; refrain from granting new tax incentives; consider property and rental income taxes.

### Structural reforms, climate policy, and sectoral measures
- Agriculture and food security:
  - Comprehensive Agriculture Transformation Program (CATP/CATSP) approved March 2024.
  - Cabinet approved migrating 74 districts to e-voucher with flexible inputs for 2024/25 (end-September 2024 SB); independent audit proposed end-December 2024.
  - Announced FRA/DMMU maize import plan up to MT650,000 subject to review.
- Energy sector reforms:
  - Fuel pricing formula published; statutory instrument to define elements proposed end-August 2024.
  - TAZAMA pipeline open access tender delays; independent consultant to revise tender procedures (proposed end-August 2024 SB); publication commitments for tender results.
  - ZESCO turnaround: average retail tariff increases: 2024: 9 percent; 2025: 15 percent; 2026: 10 percent; 2027: 14 percent.
  - ZESCO total outstanding debt: US$2.6 billion in March 2024.
- Mining and investment:
  - Measures to boost copper production; national geophysical survey procurement underway.
  - Mining cadaster portal (SSOMCS) launched December 2023 enabling online license applications.

### Program performance, conditionality, and monitoring
- Program performance:
  - Overall broadly satisfactory.
  - All end-2023 QPCs and ITs met except IT on net clearance of VAT refund arrears.
  - End-March 2024 ITs: primary balance and non-mining revenue floor met; NIR, social spending, and arrears clearance missed (social spending disbursed in April and subsequently recovered).
  - Structural benchmarks: all but one met; examples met: publishing domestic fuel price structure, issuing bonds at par, establishing LTO, publishing 2024Q1 Quarterly Debt Statistics Bulletin, approving cash management roadmap.
- Prior actions and structural benchmarks for review completion:
  - Prior actions: submit revised 2024 Budget consistent with program parameters; publish revised domestic arrears strategy integrating liability management operation.
  - New SBs: publish audited IDC financial statements; publish procurement summaries for drought interventions; publish Tazama pipeline tender results; establish Cash Management Unit and Committee; implement full-year cash flow forecasting.
- Monitoring and TMU:
  - TMU defines QPCs, ITs, continuous performance criteria and adjustors (including NIR and primary-balance adjustors for budget support shortfalls and liability operations).
  - Program test dates and review schedule: third review (end-December 2023 test dates) conducted April 24–May 7, 2024; fourth review end-June 2024 test dates (on/after October 1, 2024); fifth review end-December 2024 test dates (on/after April 1, 2025); sixth review end-June 2025 test dates (on/after October 1, 2025).

### Staff appraisal and recommendations (selected)
- Staff supports:
  - Completion of the third ECF review, modifications to QPCs and MPCC, and the augmentation of access under the ECF arrangement.
  - Completion of the financing assurances review.
- Policy priorities and recommendations:
  - Coordinated macroeconomic response: exchange rate flexibility as first line of defense, fiscal consolidation (with emphasis on revenue mobilization), and monetary tightening until inflation returns to 6–8 percent target range.
  - Structural reforms: improve governance, strengthen financial oversight, deepen financial inclusion, and enhance PFM and public investment management.
  - Arrears management: implement transparent liability management operation to clear fuel arrears aiming for NPV savings; publish revised arrears clearance strategy.
  - Protect social spending temporarily (SCT and school feeding) while minimizing long-term expansion absent permanent revenue measures.

*Source: EXECUTIVE SUMMARY and selected chapters and annexes — 1zmbea2024001-print-pdf*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Zambia faces a severe drought that has:
  - reportedly destroyed 40 percent of the cultivated maize;
  - impacted electricity generation, leading to power outages and an energy sector deficit of nearly MW500 this year (as 90 percent of generated electricity is sourced from hydropower);
  - affected over 9 million people, or 43 percent of the population.
- The President declared the drought a national disaster emergency in February and announced plans to revisit the 2024 Budget.
- The government remains focused on:
  - supporting macroeconomic stability;
  - restoring fiscal and debt sustainability;
  - addressing humanitarian needs;
  - working with external creditors to restructure debt in line with program parameters;
  - mobilizing external financing while using exchange rate flexibility to manage balance-of-payment pressures;
  - enhancing regulatory frameworks and financial oversight to support financial stability and inclusion, improving governance, and advancing structural reforms to enhance growth.

### Augmentation of access under the ECF arrangement
- Authorities request an augmentation of access under the ECF arrangement of 30 percent of quota (SDR 293.46 million), to be disbursed upon completion of the third ECF review.
- Allocation of the augmentation: half of the disbursement will be allocated for budget support.
- Additional financing: authorities have secured additional multilateral and bilateral assistance to fully close the financing gap.
- Impact on IMF access and disbursements:
  - Approval of the augmentation will bring total access to 130 percent of quota (SDR 1,271.66 million).
  - Total IMF disbursements after completion of this review would amount to 87.2 percent of quota (SDR 852.98 million, about $1,130.4 million).
- The program augmentation aligns with the DSA parameters.

### Recent economic developments and key statistics
- 2023 real GDP growth: 5.4 percent (one percentage point above projections at the second ECF review), driven by non-mining, non-agricultural expansion; agricultural output down 16 percent; mining production down 6 percent.
- 2023 current account deficit: 1.9 percent of GDP (1.8 percent at the second review).
- 2023 export decline: 8 percent; import growth: 8.4 percent.
- Financial account deficit narrowed to 1.6 percent of GDP in 2023 (from 11.2 percent in 2022).
- Gross international reserves (GIR): $3.3 billion (3.7 months of imports) in 2023.
- Bank of Zambia net FX sales: $1.0 billion in 2023, of which $868 million came from FX mining receipts.
- 2024Q1 preliminary current account deficit: 0.3 percent of GDP.
- Exchange rate and inflation:
  - Kwacha depreciation in 2023: 25.9 percent (nominal) and 23.6 percent (real effective terms).
  - Further Kwacha depreciation in 2024Q1: 10.1 percent vis-à-vis the U.S. dollar relative to 2023Q4.
  - CPI inflation: 13.8 percent (y-o-y) in April 2024.
  - Bank of Zambia policy rate: raised by 100 basis points to 13.5 percent on May 15, 2024; earlier increases included 150 bps and a 9-percentage point increase in reserve requirements in February.
- Fiscal performance and public finances:
  - Primary fiscal balance (cash basis) in 2023: 0.6 percent of GDP (target 0.2 percent).
  - Primary balance (commitment basis) in 2023: 1.5 percent of GDP (about 0.9 percent of GDP higher than projected).
  - Higher-than-budgeted grants: by 0.4 percent of GDP; higher non-mining tax revenues: by 0.6 percent of GDP; lower mining receipts: 0.5 percent of GDP below projections.
  - Deposit transfers to BoZ: about K 2 billion by April 2024.
- Government securities and liquidity:
  - Net financing from government securities turned negative (0.5 percent of GDP) in January–April 2024; T-bills experienced net outflows of 0.8 percent of GDP.
  - Average subscription rate for T-bills declined to 53 percent (compared to above 100 percent in 2023).
  - Banks’ share of government securities declined from 24 percent of stock at end-2023 to 19 percent by end-April 2024; non-bank investors (mainly NAPSA) increased holdings.
- Banking sector health:
  - Regulatory capital: 24 percent of risk-weighted assets at end-March 2024; retained earnings contributed more than one-half of regulatory capital.
  - Non-performing loans (NPLs): 3.7 percent of total loans (historic low).
  - Two out of 17 commercial banks (2 percent of total bank deposits) fell short of prudential regulatory capital and loan quality ratios.
  - Banks’ exposure to government: 26 percent of assets by end-March 2024.
  - Ongoing drought may worsen loan quality, particularly in agriculture and firms with high electricity needs.
- Debt restructuring and arrears:
  - Consent solicitation for the Eurobonds exchange launched on May 13; more than 90 percent of bondholders voted in favor.
  - Authorities envisage finalizing the bond exchange in June 2024.
  - External arrears on the restructuring perimeter claims: $5.7 billion by end-2023, of which $3.4 billion with private creditors.
  - Authorities committed to agree with all private creditors on a debt treatment consistent with IMF program parameters and comparability of treatment (CoT) as defined by the OCC, aiming to reach an agreement by end-2024.

### Program performance and conditionality
- Overall program performance remains broadly satisfactory despite headwinds.
- End-2023 results:
  - All end-2023 quantitative performance criteria (QPCs) and indicative targets (ITs) were met, except the IT on net clearance of VAT refund arrears.
  - VAT refund arrears stock increased due to validated audits, despite efforts to raise VAT refunds in early 2024.
- End-March 2024 ITs:
  - Met: primary balance and non-mining fiscal revenue floor.
  - Missed: net international reserves (NIR), social spending (disbursed in April and subsequently recovered in following months), and arrears clearance (on spending).
  - End-March 2024 NIR IT missed partly because mining tax receipts were 22.7 percent lower than projected.
- Structural conditionality:
  - All but one structural benchmark met.
  - Achievements include: publishing the domestic fuel price structure, issuing bonds at par, establishing a Large Taxpayer Office (LTO) at Zambia’s Revenue Agency (ZRA), publishing the 2024Q1 Quarterly Debt Statistics Bulletin, and approving a roadmap for strengthening cash management and an action plan (approved in April 2024).

### Authorities' requests and proposed modifications
- Requests submitted by the authorities:
  - Augmentation of access under the ECF arrangement: 30 percent of quota (SDR 293.46 million).
  - Modifications to the end-June and end-December 2024 QPCs: changes to the NIR target, the primary fiscal balance, and the monetary policy consultation clause.
  - An adjustor to the primary balance for a liability management operation to clear arrears.
  - An adjustor to the NIR target to account for central government debt service payments.
  - Adjustment of the ceiling on contracted but undisbursed debt for end-2024 to align with lower-than-expected project disbursements.

### Outlook and risks
- Medium-term outlook: positive, supported by increasing mining production, restored debt sustainability, and effective reforms.
- Main downside risks:
  - Adverse commodity price shocks;
  - Subdued mining production;
  - Climate events (including the current drought);
  - Rising social discontent, which could create fiscal pressures and slow reforms;
  - Delays in debt restructuring that could dampen investment.
- Upside possibilities:
  - Swift debt restructuring and higher copper prices could boost confidence and support growth.

*Source: EXECUTIVE SUMMARY — 1zmbea2024001-print-pdf*

### 11.      The 2024 outlook has deteriorated due to the drought. Agriculture is expected to

### 11.      The 2024 outlook has deteriorated due to the drought. Agriculture is expected to 

### Outlook and projections
- Real GDP growth is now projected at 2.3   percent.
- Agriculture is expected to contract by 19 percent (Annex I).
- Electricity blackouts are anticipated to reduce productivity (Annex II).
- Copper production will recover more gradually than projected.
- Inflation is expected to remain elevated due to continued fuel and food inflation and exchange rate depreciation.
- Lower non-mining exports due to the drought, lower-than-expected copper exports, and drought-related imports of maize and electricity will worsen the trade balance.
- The current account deficit is now projected at 0.2 percent of GDP.
- The financial account is projected to improve supported by FDI inflows.
- The deteriorated outlook is expected to weigh on the kwacha, inflation, and reserve accumulation in  2024, with limited impact over the medium term.

### Medium-term outlook
- Growth is projected to rise to 6.2  percent in 2025-26, boosted by mining production and agricultural output, as the drought is not expected to persist beyond the 2023/24 agricultural season.
- Annual average inflation would remain elevated, converging to the inflation target band by end-2025.
- Zambia’s external position is expected to strengthen as the debt restructuring is implemented and exports improve, partly supported by copper prices.
- Risk premium is projected to decline once debt sustainability is restored.

Key medium-term macroeconomic framework excerpts (selected figures as presented)
- Real GDP (percent change) series: 5.2 4.3 5.4 4.7 2.3 6.6 5.9 5.6 5.1 4.9
- CPI inflation, average (percent): 11.0 11.0 10.9 11.4 14.6 12.1 7.0 7.0 7.0 7.0
- Primary fiscal balance (% GDP), commitment basis: 0.8 -6.4 1.5 3.2 2.9 3.3 3.0 2.6 2.1 1.8
- Trade Balance (% of GDP): 11.6 7.1 4.9 12.0 9.7 15.9 14.4 14.0 13.8 13.6
- Gross international reserves (months of prospective imports): 3.4 3.4 3.6 4.0 4.3 5.0 5.2 5.6 6.0 6.0

Sources listed for the Table: Zambian authorities and IMF staff estimates and projections. (* IMF CR No. 23/439)

### Downside and upside risks
- Dominant downside risks (Annex III):
  - Adverse commodity price shocks and an abrupt global slowdown or recession could lead to external and fiscal imbalances and undermine investment.
  - Intensifying regional conflicts could result in trade disruptions, increasing food and energy prices, and deteriorating food insecurity.
  - Internal risks: subdued mining production, climate events, and increasing social discontent could generate fiscal and external pressures, increase political pressures, and slow reform momentum, threatening the recovery and exacerbating inequality.
  - Delays in completing the debt restructuring could intensify financing pressures and dampen investment.
- Upside scenarios:
  - Swift completion of the debt restructuring, a sustained increase in copper prices, and renewed mining investments could lead to positive confidence effects supporting growth.

### Authorities' perspective and agreed risks
- Authorities highlighted recurrent adverse climate events as an economic threat and the need to build resilience.
- Major risk: commodity price volatility, especially of copper, fuel, and food, which could intensify exchange rate pressures and inflation.
- Concern that higher inflation could entrench inflation expectations and deepen inequality.
- Authorities committed to enhancing agricultural productivity to curb food inflation and insecurity, and to maximizing the use of the oil pipeline to reduce fuel costs.
- Authorities optimistic about resolution of the debt restructuring and potential for mining investment.

### Policy discussions (overview)
- Coordinated macroeconomic policy response recommended: exchange rate flexibility, fiscal consolidation, and monetary policy tightening.
- Structural reforms to improve governance and enhance financial policies and inclusion to facilitate private-sector-led growth.

### Ensuring Fiscal and Debt Sustainability — 2024 Budget revision and measures
- Revised 2024 Budget will reprioritize spending to accommodate drought needs and repayment of fuel arrears, while considering tighter domestic financing conditions (MEFP, ¶9–10).
- Authorities will submit to Parliament a revised budget consistent with IMF program parameters (prior action) targeting a primary fiscal deficit of K 4.7 billion (0.7 percent of GDP, prior action, Text Table 2).

Budget revision highlights (figures as presented in Text Table 2)
- Total Revenue: 139,601 Kwacha m 21.2%GDP (2nd Review) → 149,647 Kwacha m 21.4%GDP (Revised Draft Budget)
- Revenue excluding grants: 136,395 Kwacha m 20.7%GDP → 141,257 Kwacha m 20.2%GDP
- Grants: 3,207 Kwacha m 0.5%GDP → 8,390 Kwacha m 1.2%GDP
- Expenditure: 179,999 Kwacha m 27.1%GDP → 192,315 Kwacha m 27.5%GDP
- Primary Expenditure: 134,027 Kwacha m 20.4%GDP → 154,345 Kwacha m 22.1%GDP
- Drought response: n/a n/a → 6,334 Kwacha m 0.9%GDP
- Fuel arrears clearance (liability management operation): 1,032 Kwacha m 0.2%GDP → 16,202 Kwacha m 2.3%GDP
- Recapitalization & unexpected spending: 935 Kwacha m 0.1%GDP → 13,298 Kwacha m 0.5%GDP
- Spending reprioritization: n/a n/a → -5,903 Kwacha m -0.8%GDP
- Overall Balance (cash basis): -40,397 Kwacha m -5.9%GDP → -42,668 Kwacha m -6.1%GDP
- Primary Balance: 557 Kwacha m 0.8%GDP → -4,698 Kwacha m -0.7%GDP
- Adjusted Primary Balance (without fuel operation): 11,504 Kwacha m 1.6%GDP
- Financing total: 40,397 Kwacha m 5.9%GDP → 42,668 Kwacha m 6.1%GDP
- Net acquisition of financial assets (+ use, - accumulation): 7,318 Kwacha m 1.1%GDP → 1,822 Kwacha m 0.3%GDP
- Net Domestic Financing: 16,300 Kwacha m 2.5%GDP → 17,450 Kwacha m 2.5%GDP
  - of which Fuel arrears loan (net of amortization): 0 Kwacha m 0.0%GDP → 15,392 Kwacha m 2.2%GDP
- Net External Financing (including exceptional financing): 16,779 Kwacha m 2.3%GDP → 23,396 Kwacha m 3.3%GDP
- Memo Items:
  - Nominal GDP (K billion): 658 → 700
  - Average Exchange Rate (Kwacha/US$): 22 → 27
  - Change in GDP deflator (percent): 10.6 → 20.0
  - Copper production (metric tonnes): 796.994 → 727,000

Revised budget specifics and measures
- Expand the social cash transfer to one million households and double the value of the transfer for existing beneficiaries, for 13 months starting in June 2024.
- Expand the school feeding program in affected districts.
- Additional grant financing (0.7 percent of GDP) and frontloading of other disbursements—mainly from the World Bank—will cover most of the humanitarian relief to the drought (0.9 percent of GDP).
- The budget incorporates unexpected spending of 0.5 percent of GDP arising from:
  - deposit compensation at Investrust Bank,
  - settlement of some legacy obligations on behalf of Mopani,
  - a cash advance to ZESCO for electricity imports.
- Net financing from government securities is being scaled down to 0.3 percent in 2024 compared to original budget’s 2.5 percent of GDP.
- Due to lower net domestic financing, the revised budget reprioritizes spending across all categories (except social spending) by 0.8 percent of GDP, including by delaying recruitment.
- Authorities will mobilize part of the idle government balances transferred to the BoZ (0.3 percent of GDP).
- Repayment of fuel arrears (2.3 percent of GDP, embedded in the publication of the revised arrears clearance strategy as discussed under the IMF program parameters (prior action) (MEFP, ¶18)) will be financed through a domestic loan in foreign currency (see Box 1).
  - When adjusting for this operation, the underlying primary balance in 2024 would be 1.6 percent of GDP.
  - Staff urged adequate structuring of the FX loan to avoid fiscal risks and to possibly benefit from any decline in FX borrowing rates at a future date through prepayments.

### Revenue mobilization and tax policy
- Some 2024 budget tax measures underperformed:
  - New mobile transaction levy mobilized little due to exemptions (it only applies to person-to-person transactions).
  - Withholding tax has not been applied on discount bonds issued before 2024.
  - No exceptional profit transfer from Tazama due to delays in its open access.
  - Mining taxes are projected 0.5 percent of GDP lower than in the 2024 Budget.
- While revenue shortfalls were mitigated by higher BoZ profit transfers and grants, spending compression has driven fiscal consolidation.
- Staff proposals and priorities:
  - Renewed efforts to mobilize revenues and additional government balances.
  - Easing administrative hurdles to mobilize idle balances.
  - Consider additional revenue measures for the 2025 budget.

Tax administration and policy actions
- Large Taxpayer Office established on January 1, 2024, with a specialized mining and non-mining unit.
- ZRA launched the e-invoice system in March, with plans to expand to all VAT taxpayer transactions by July.
  - Taxpayers eligible to claim refunds only based on invoices generated in the system.
  - Staff recommendations:
    - Strengthen VAT audit processes via risk-based audits and enhanced corporate governance to avoid clearing fraudulent claims.
    - Adjust allocation for VAT refunds based on audited and validated claims (instead of current practice acting as a de-facto ceiling on refunds).
  - ZRA is considering transferring responsibility for clearing legacy stock to MoFNP under the revised arrears clearing strategy and reducing arrears through offsets with other tax arrears.
- Tax policy recommendations:
  - Introduce excise indexation to protect the narrow tax base from erosion by inflation and kwacha depreciation.
  - Unify the corporate income tax rate across all sectors and companies by 2025 (as in Domestic Revenue Mobilization plan).
  - Refrain from granting new tax incentives to attract investment; instead rely on better targeted cost incentives.
  - Streamline tax expenditures and consider property and rental income taxes to support decentralization.

### Public financial management (PFM) and fiscal governance reforms
- IFMIS usage:
  - All 61 central government budgetary institutions using IFMIS to record spending and transactions.
  - Expansion to provinces for Ministry of Education; rollout to Agriculture and Fisheries and Livestock by 2024Q4.
  - Budgetary institutions to input expenditure arrears in IFMIS by end-June 2024; MoFNP will require recording all multi-year commitments by end-2024.
- Expenditure arrears:
  - Stock continues to increase; fuel arrears are the costliest and continue to accumulate interest and penalties.
  - Authorities considering borrowing from domestic banks to pay fuel arrears (MEFP 18).
  - Staff note clearance operation should be transparent, publicly communicated, and limited to audited arrears.
  - If operation yields NPV savings, authorities could consider clearing other arrears in 2025.
- SOE governance:
  - New performance monitoring framework for all SOEs to set KPIs and performance management contracts with SOEs starting in 2025.
  - Stakeholder consultations on new SOE policy to be adopted by Cabinet (end-October 2024 SB).
  - Fiscal risks statement will incorporate fiscal risks from largest SOEs.
  - Industrial Development Corporation (IDC) to publish audited financial statements (proposed end-October 2024 SB).
- Decentralization and CDF:
  - The Constituency Development Fund (CDF) receives four times the funding that goes to local authorities despite low absorption capacity.
  - Authorities amending legislation to expedite provincial decision-making and procurement processes.
  - Staff called to restrict automatic carry over of unspent amounts and consider equalization elements and specific needs rather than equal allocations.
  - MoFNP announced an audit on the CDF to ensure PFM rules adhered to.
- Cash management:
  - Action plan and roadmap adopted in April to strengthen Treasury Single Account and expand coverage.
  - Survey of government bank accounts to mobilize idle balances to BOZ to be finalized by June.
  - Timeline: Cash Management Unit and Cash Management Technical Committee proposed end-July 2024 SB; cash-flow forecasting implementation proposed end-December 2024 SB.
- PIM and PPP:
  - Authorities expect to finalize bylaws for new PPP law by end-2024.
  - PIM unit working to resolve data gaps; project module in IFMIS not operational.
  - Authorities intend to align 2025 Public Investment Plan in 2025 budget.
  - Staff suggested updating PIMA assessment, including a Climate PIMA.
- Fiscal Risks:
  - First Fiscal Risk Statement (FRS) to cover SOEs, NAPSA, PPPs and climate (end-June 2024 SB).
  - Staff noted fiscal risk unit should be fully equipped and empowered.

### Public debt management and bond market actions
- Regulatory framework for public debt management, based on the Public Debt Management Act (2022), expected to be adopted by end-June 2024.
- New organization for the Debt Management Office (DMO) to become fully operational by end-2024; DMO procedure manual to be adopted and published (end-December 2024 SB).
- DMO organized into front, middle and back offices; DMO to develop internal expertise on front office activities related to bond market issuances and transactions.
- Issuance strategy updates to improve liquidity and rebalance investor preferences:
  - Staff suggested developing benchmark bonds by reopening existing bonds and a framework for market-making activities.
  - Authorities should prepare for spike in domestic debt redemptions in 2026 (4 percent of GDP).
  - Priority to reduce sovereign-bank nexus over medium term and develop institutional investor base in government bonds.
  - Need to upgrade monitoring tools to identify active NRHs and support external debt sustainability.

Box 1 summary (selected figures and facts)
- The stock of budgetary arrears reached 10.8 percent of GDP in 2023.
- Arrears clearance strategy envisaged different horizons: three years for utilities, five years for pension/personnel/VAT refund arrears, and 10 years for fuel and external contractor arrears.
- The strategy assumed proportional clearance with the annual amount gradually falling as a share of GDP—from 2.8 percent in 2022 to a projected (text truncated in source).

*Source: IMF staff and Zambian authorities as presented in the supplied content.*

### 0.2 percent of GDP by 2033. However, despite the ongoing clearance process and no accumulation,

### 1zmbea2024001-print-pdf - 0.2 percent of GDP by 2033. However, despite the ongoing clearance process and no accumulation,

### Arrears dynamics and liability management
- Stock of arrears increased in 2023 due to valuation effects for forex denominated arrears, late interest, and penalties despite ongoing clearance and no accumulation.
- Fuel arrears:
  - Increased by 50 percent over 2022-23 with penalties and interest now overtaking principal.
  - At end-2023, the authorities report fuel arrears reached $897 million, of which $437 million is principal and the rest consisted of interest and penalties.
  - These arrears amounted to $597 million in 2021.
- External contractors arrears:
  - $492 million at end-2023.
- Authorities are considering a liability management operation to seek net present value (NPV) savings:
  - Plan: borrow from domestic banks to repay validated fuel arrears via a reverse auction mechanism, seeking NPV savings.
  - Banks expected to secure funding from assets held abroad to avoid squeezing the domestic forex market.
  - Operation would create NPV savings if fuel suppliers accept discounts in exchange for immediate payment versus current installment payments.
  - Would shift external debt liabilities to domestic FX liabilities for the government, mitigating the drought shock’s impact on external debt sustainability.
- Authorities may consider a similar operation to clear external contractors arrears in 2025.
- Contingency planning recommended if significant discounts are not secured:
  - Prioritize most expensive arrears within the current budget.
  - Lower-than-expected NPV savings would translate into additional pressures on net domestic financing going forward relative to the baseline.
- Fiscal and program implications:
  - Zambia uses cash basis accounting; arrears’ payments are recorded above the line and hence impact the primary fiscal balance, a program target.
  - Authorities are requesting an adjustor to the primary balance that considers the repayment of the fuel arrears operation.
  - Future debt amortization is a below-the-line operation and will not impact the primary balance.
  - Overall, authorities are expected to remain within the envelope for arrears clearance; hence they will not impact medium-term financing needs.
  - This operation, together with external debt restructuring, will help support debt sustainability.

### Stock of Budgetary Expenditure Arrears (In Millions of Kwacha) — key figures
- Stock of arrears, excluding VAT refunds:
  - 2021: 57,031
  - 2022: 47,659
  - 2023: 61,421
- In percent of GDP:
  - 2021: 12.9
  - 2022: 9.6
  - 2023: 10.8
- Major categories (levels in Kwacha):
  - Goods, services & compensation to employees: 11,214 (2021), 7,283 (2022), 6,546 (2023)
  - Fuel: 9,954 (2021), 13,044 (2022), 23,062 (2023)
  - External contractors: 9,389 (2021), 10,528 (2022), 12,655 (2023)
  - Personnel emoluments: 9,211 (2021), 4,788 (2022), 4,014 (2023)
  - Road contracts: 8,982 (2021), 9,643 (2022), 9,396 (2023)
  - Other public investments: 3,237 (2021), 1,804 (2022), 3,595 (2023)
  - Food Reserve Agency: 2,060 (2021), 267 (2022), 147 (2023)
  - Farmer Input Support Program: 1,666 (2021), 431 (2022), 1,743 (2023)
  - Pension system: 1,318 (2021), 258 (2022), 264 (2023)
- Source for the table: MoFNP

### Monetary policy, liquidity, and interbank markets (BoZ)
- Monetary stance and policy readiness:
  - The BoZ should stand ready to further tighten monetary policy in view of higher inflation (MEFP, ¶35).
  - Despite negative real policy rates, the monetary stance (as reflected in interbank interest rates) remains tighter than implied by the policy rate as liquidity has declined significantly.
  - Suspension of OMOs has resulted in a substantial spread between the policy and interbank rates, causing tighter monetary conditions amid limited policy rate transmission.
  - With inflation diverging from the target band, BoZ stands ready to increase the policy rate to anchor inflation expectations and limit second-round effects.
  - Recommendation: continue using the policy rate as the main instrument and resume OMOs as accompanying liquidity tool when conditions allow to realign policy and interbank rates.
- Liquidity management:
  - Careful calibration needed when transferring government deposits to BoZ alongside government securities redemptions to allow a phased RRs adjustment.
  - FX selling interventions will need sterilization.
- Improving monetary transmission and interbank market development (MEFP, ¶39):
  - BoZ renewed its monetary policy committee (including external members) and launched the Monetary Policy Report (MPR).
  - Current setup—daily RR compliance and fixed-rate full allotment in OMOs—limits banks’ liquidity management horizon to one day, causing excessive resort to OMOs (or OLF in its absence).
  - Staff highlighted need to adopt an established interest rate corridor, implement reserve averaging, and align an OMO framework with these measures.
  - Progress in establishing a functional repo market is a positive step.
- Charted rates (as presented):
  - Overnight Interbank Rate and Policy Rate dynamics shown for Sep-23 through May-24 with values referenced (chart labels include 21.5, 15.0, 19.5).

### FX management, drought impact, and reserves
- Drought and BoP impact:
  - Drought estimated to generate an additional $420 million in drought-related import needs (electricity and maize), to be financed by the BoZ, directly impacting BoZ’s ability to build reserves.
  - Due to subdued recovery in copper production, BoZ’s mining tax receipts are projected to decline by 24.2 percent in 2024 compared to the projection in the second review.
- Reserve policy under the ECF arrangement:
  - Staff supports authorities’ request to lower reserve accumulation in 2024.
  - Proposed NIR targets:
    - end-June 2024 NIR target: $1,400 million
    - end-2024 NIR target: $1,750 million
    - end-June 2025 NIR target (proposed as conditions normalize in 2025): $2,100 million
- External position assessment:
  - Zambia's external position in 2023 is assessed as moderately weaker than the level implied by fundamentals and desirable policies (Annex IV).
  - Proposed reforms, policy adjustments, and debt restructuring are expected to boost FX reserves to cover five months of prospective imports over the medium-term.
- FX market reforms:
  - Renewed forex market guidelines (effective May 24, 2024) aim to enhance transparency and traceability by requiring authorized dealers’ involvement and to reduce exchange rate volatility by setting limits on authorized dealers' board rates.
  - FX market rules under review should map a transition to an inter-bank FX market and policies that promote price discovery.
  - Staff recommended a rules-based FX intervention policy to counter disorderly market conditions.

### Financial sector resilience and macroprudential measures
- Macroprudential framework (MEFP, ¶40):
  - BoZ strengthened macro-prudential framework; an inter-agency Financial Stability Committee (FSC) held its first meeting in April 2024.
  - BoZ to publish its maiden Financial Stability Report (FSR) in June 2024 (end-June 2024 SB).
  - Regulations to deploy countercyclical capital and conservation buffers by end-June 2024.
  - Implement regulations on LCR and NSFR using a “phased-in” approach by end-2024.
  - Given banking dollarization, authorities should supplement with separate LCR regulations for foreign currency liquidity.
- Financial services framework and safeguards:
  - BoZ reviewing the Banking and Financial Services Act (2017); a draft bill aligned with IMF recommendations expected to be submitted to Parliament (end-December 2024 SB).
  - Remaining safeguards issues: obtain outstanding legal opinion from Office of the Attorney General to clarify statutory limit on credit to government and roll-over of government securities; update August 2022 Memorandum of Understanding with Government to reflect proposed augmentation of access.
- Crisis resolution and deposit insurance:
  - Problem bank framework developed in 2022 as internal guidance.
  - Authorities preparing regulatory framework for an effective deposit insurance scheme; BoZ established a dedicated unit to administer it.
  - BoZ will adopt new deposit insurance framework consistent with Core Principles for Effective Deposit Insurance Systems (proposed end-April 2025 SB).
- Financial inclusion and Credit Guarantee Fund:
  - Authorities launched National Financial Inclusion Strategy 2024-28, aiming to increase financial inclusion to 85 percent of adult population.
  - BoZ considering credit support through BoZ’s Credit Guarantee Fund (K 5 billion, 0.7 percent of GDP) to be implemented June 2024; governance and safeguards needed to protect BoZ autonomy and credibility.
- AML/CFT/CPF supervision:
  - BoZ implemented a dedicated AML/CFT/CPF supervision unit in 2023 (MEFP, ¶44).
  - Risk-based on-site examinations and enhanced due diligence measures being conducted.
  - Full implementation of electronic balance of payments and Export Proceeds Tracking Framework will help strengthen AML/CFT regime.

### Structural reforms, climate policy, and governance
- Agriculture:
  - Comprehensive Agriculture Transformation Program (CATP) approved by Cabinet in March 2024 to expand agricultural sector support from the current FISP.
  - Cabinet approved migrating 74 districts to the e-voucher with flexible inputs in the 2024/25 season (end-September 2024 SB).
  - 2024-25 e-voucher roll out subject to an independent audit for the 74 districts (proposed end-December 2024 SB).
- Energy:
  - Fuel price adjustments to allow full cost recovery to Oil Marketing Companies (OMCs) have been inconsistent.
  - Authorities published fuel pricing formula and adjusted prices since January (end-March 2024 SB); modification of the formula’s parameters needs regulation via statutory instrument to avoid subsidies (proposed end-August 2024 SB).
  - Competitive tenders for open access to the Tazama pipeline faced delays; independent consultant to revise tender procedures (proposed end-August 2024 SB); publication of tender results committed (proposed continuous SB).
  - Power outages due to drought highlight need to unlock new investment, particularly in renewable energy; Zesco’s pipeline grid investments expected to progressively enable generation investment when open grid framework is implemented.
- Business climate and investment:
  - Authorities committed to ongoing dialogue with private sector via Public-Private Dialogue Forum.
  - December 2023 launch of mining cadaster portal (SSOMCS) enables online applications for mining licenses; information about mining licenses and contracts is not public.
  - Plans for national aerial geographical survey advancing.
- Climate policy:
  - Government drafting a Climate Change Bill to support climate adaptation projects to be integrated into the national budget.
  - Bill expected to be considered by Parliament by end-2024.
- Governance and transparency:
  - Statutory instrument for Access to Information Act to be issued by end-June 2024.
  - Food Reserve Agency to publish summary information on procurement contracts related to maize imports as part of 2024 drought response (proposed continuous SB).
  - Controller of Internal Audit at MoFNP to publish a report on government drought response with procurement and price details (proposed end-September 2025 SB).
  - Authorities working to amend Anti-Corruption Act (plans to submit to Parliament end-March 2025 SB), develop asset management framework, reform asset declaration, and revise Public Interest Disclosure Act.
  - MoFNP to enact Public Audit Act of 2016 and State Audit Commission Act of 2016 (proposed end-September 2024 SB).

### Program modalities and augmentation request
- Authorities requested an augmentation of access under the ECF arrangement to support adjustment efforts in response to the drought:
  - Requested augmentation: 30 percent of quota, SDR 293.46 million, to be made available after completing the third ECF review.
  - In line with the ECF arrangement, half of the augmentation will be used for budget support.
  - Program augmentation is consistent with the DSA parameters.

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1zmbea2024001-print-pdf.pdf*

### 37.      The authorities request modifications to QPCs (MEFP, Table 1). Consistent with the

### 1zmbea2024001-print-pdf - 37.      The authorities request modifications to QPCs (MEFP, Table 1). Consistent with the

### Program adjustments and quantitative performance criteria (QPCs) requests
- Authorities request modifications to QPCs (MEFP, Table 1) consistent with the updated macroeconomic outlook.
- Specific requested changes:
  - Changes to the end-June 2024 and end-December 2024 QPC on NIR.
  - Change to the QPC associated with the primary fiscal balance and an adjustor to the primary balance to conduct the liability management operation aimed at clearing fuel arrears.
  - Change to the MPCC.
  - A symmetric adjustor to the NIR target to account for deviations in central government debt service (TMU, ¶19).
- QPCs and ITs are proposed for end-June 2025.
- Request to adjust the ceiling on contracted but undisbursed debt (IT) for end-2024 in line with projected project disbursements (which were lower than expected in 2023), while keeping the pace of debt accumulation on these projects unchanged over the program period.

### Structural measures, prior actions, and fiduciary reforms
- Two prior actions and proposed new structural benchmarks support the ECF-supported program (MEFP, Table 2).
  - Prior to this review, authorities will:
    - Submit to Parliament a revised 2024 Budget consistent with IMF program parameters.
    - Publish the revised domestic arrears strategy integrating the liability management operation as discussed under the IMF program parameters.
  - New structural benchmarks include:
    - Publishing externally audited financial statements of the Industrial Development Corporation (IDC).
    - Publishing summary information on procurement contracts related to public sector interventions in response to the drought.
    - Publishing the Tazama pipeline tender results.
    - The Energy Board to continue publishing detailed retail and wholesale price structures in monthly fuel price announcements.
    - Establishing a Cash Management Unit tasked with producing a cash flow forecast.
    - Establishing a Cash Management Committee tasked with reviewing cash flow forecasts and making informed decisions to ensure cash adequacy.
    - Implementing a cash flow forecasting plan for the entire fiscal year.

### Financing assurances and proposed financing package
- "Adequate financing assurances are in place." Under the proposed augmentation, the program remains fully financed, with firm commitments in place for the next 12 months and good prospects for the remainder of the program.
- Text Table 3. Proposed Financing ($ million) — baseline financing and gap by year (values preserved as in source):
  - Financing Gap: 2022: 3,059; 2023: 2,033; 2024: 2,692; 2025: 1,644; Total: 9,429
  - Official financing: 2022: 737; 2023: 538; 2024: 1,382; 2025: 849; Total: 3,506
  - IMF ECF: 2022: 187; 2023: 373; 2024: 760; 2025: 370; Total: 1,690
  - World Bank 1/: 2022: 550; 2023: 165; 2024: 522; 2025: 329; Total: 1,566
  - AfDB: 2022: -; 2023: -; 2024: 100; 2025: 150; Total: 250
  - Financing from external debt restructuring 2/: 2022: 2,322; 2023: 1,495; 2024: 1,310; 2025: 795; Total: 5,922
  - Source note: IMF staff estimates and projections.
  - Footnotes preserved exactly:
    - 1/ Includes new financing from the World Bank that will support budget implementation, including grants.
    - 2/ In 2022 and 2023, the arrears accummulated on restructurable debt covered the financing gap. The baseline includes a working assumption that the debt arrears would be cleared over 5 years. This was not applied here to the arrears accumulated in 2022 and 2023 on restructurable debt to avoid double counting.

### Debt restructuring, arrears, and debt sustainability assessment
- Staff assesses that the debt restructuring process will restore debt sustainability over the medium term.
- MoU has been signed with all OCC members; the agreed treatment with official creditors has been included in the baseline.
- Conditional on completion of the Eurobond exchange and restructuring agreements on comparable terms with all other private creditors in the restructuring perimeter, Zambia’s debt would be sustainable on a forward-looking basis (see DSA, Text Figure 3 and 4).
- In the absence of agreements with private creditors, Zambia remains formally in debt distress as it continues to remain in arrears with private creditors.
- Authorities are making good-faith efforts toward restructuring agreements with private creditors on comparable terms and consistent with program parameters (Lending into Arrears policy considerations).
  - Consent solicitation for the Eurobonds exchange initiated on May 13, with more than 90 percent of bondholders approving the restructuring.
  - The bond exchange is expected to be completed by June 2024.
  - Authorities aim to reach agreements with other commercial lenders by the end of 2024.

### Zambia’s capacity to repay the Fund and related risks
- Zambia's stock of debt to the Fund as a share of GDP, based on existing and prospective drawings, is projected to peak at 5.3 percent in 2025, remaining at elevated levels thereafter.
  - This 5.3 percent peak is above the 75th percentile of past PRGT arrangements and ranks among the PRGT’s top exposures in the last decade.
- Annual repayments to the Fund are expected to peak at 0.7 percent of GDP and 1.5 percent of exports in 2031 (Table 8).
- Zambia's debt to the Fund as a share of total Public and Publicly Guaranteed (PPG) external debt and debt service as a share of PPG external debt service are not elevated; indicators of debt service to the Fund are close to or below the median for the comparator group.
- Debt service to the Fund as a share of exports falls below the 75th percentile.
- Capacity-to-repay risks:
  - Significant downside risks include delays in debt restructuring, commodity price and weather shocks, and policy slippages that could reduce government debt service capacity.
  - Mitigating factors: authorities’ strong track record of servicing Fund obligations, significant fiscal consolidation, progress in debt restructuring with official and private creditors, and the catalytic role of the IMF program.

### Enterprise, safeguard, and composition of debt considerations
- Enterprise risks to the Fund are assessed as moderate, reflecting the stressed debt situation and macro-financial downside risks; mitigants include program design and credible prospects for debt relief.
- PRGT enhanced safeguard requirement on debt composition is met:
  - Share of multilaterals and other IFIs in Zambia’s FX-denominated external debt expected to increase to about 28 percent over the program period (from 21½ percent at end-2023).
  - FX-denominated external debt with some form of security or escrow arrangement that could be considered as collateralized debt stood at about 11 percent of GDP at end-2023 and is expected to decline under program as it is included in the authorities’ restructuring request.

### Use of SDR allocation and fiscal implications
- The use of the 2021 general SDR allocation for budget support did not entail withdrawing SDR holdings; modality: central government sold SDRs to the BoZ in exchange for kwacha (91.5 percent) and U.S. dollars (8.5 percent).
- These transactions shifted ownership of SDRs within Zambia but did not change Zambia’s SDR position against IMF’s SDR Department; the SDRs at the BoZ became part of GIR.
- The government sold 64 percent of its SDR allocation for budget financing in 2022 and 36 percent in 2023.

### Staff appraisal: macroeconomic performance and policy priorities
- Economic outcomes and projections:
  - Growth in 2023 reached 5.4 percent, exceeding projections by one percentage point, driven by robust non-mining, non-agricultural sector performance.
  - Ongoing drought expected to suppress growth to 2.3 percent in 2024 (compared to 4.7 percent during the second review).
  - Economy anticipated to rebound in 2025 followed by a positive medium-term outlook.
  - Inflation projected to remain above the BoZ’s target range until end-2025; BoZ target range: 6 to 8 percent.
  - Current account balance projected to turn into a surplus as copper production ramps up.
- Program performance:
  - Program performance broadly satisfactory.
  - All end-2023 QPCs and ITs met except for the IT for net clearance of VAT refund arrears (missed); authorities committed to corrective measures.
- Policy priorities and recommendations:
  - Coordinated macroeconomic policies remain essential to address drought impact.
  - Fiscal policy: focus on restoring fiscal and debt sustainability while supporting vulnerable households through spending reprioritization and additional external financing mobilization.
  - Exchange rate flexibility should be first line of defense to alleviate balance of payments pressures.
  - Monetary policy: BoZ should maintain a tightening bias until inflation returns to the 6 to 8 percent target range.
  - Fiscal consolidation should rely on revenue measures given significant spending compression; focus on revenue mobilization strategies and continuing public finance management reforms to enhance transparency and efficiency.
  - In absence of permanent revenue measures, expand social programs temporarily while minimizing long-term interventions; contain non-essential spending and mobilize idle balances from government institutions.
  - To manage mounting fuel arrears, implement a liability management strategy aiming for net present value savings.
  - Financial sector: enhance regulatory framework and macro-prudential toolkit; revise the Banking and Financial Services Act; apply the Problem Bank Framework effectively; deepen financial inclusion by increasing MSME credit access and expanding digital payment participation.
  - Governance and structural reforms: timely amendment and implementation of the Anti-Corruption Act and various regulatory frameworks; safeguard structural reforms including fuel subsidy reforms and the Farmer Input Support Program (FISP).

*Source: 1zmbea2024001-print-pdf - 37.      The authorities request modifications to QPCs (MEFP, Table 1).*

### 53.      Staff supports the authorities' requests for the completion of the third review,

### Staff support for Zambia ECF requests and program outlook

### Program requests and staff stance
- Staff supports the authorities' requests for the completion of the third review, modifications of QPCs and of the monetary policy consultation clause, and the augmentation of access under the ECF arrangement.
- Staff supports the completion of the financing assurances review.
- The augmentation of access under the ECF arrangement is noted to help Zambia cope with the drought while sustaining macroeconomic stability.
- Continued commitments to fiscal and debt sustainability, sound macro policies, and structural reforms, as presented in the LOI and MEFP, will support the authorities in meeting program objectives.

*Sources: Zambian authorities; IMF staff estimates and projections.*

### Real sector developments
- Growth in 2023 stabilized, but mining production continued to face challenges.
- Services sector expansion remained robust and broad-based in 2023.
- Inflation has kept drifting away from the target band, driven by exchange rate depreciation and food prices.

### External sector developments
- The current account turned into a deficit in 2023, led by a decline in copper exports while imports remained robust.
- Financial account deficits declined with positive portfolio and commercial bank flows.
- Reserves increased, supported by a higher FX statutory reserve requirement.
- External debt remained at elevated levels.
- Gross international reserves: 3,328 (millions of U.S. dollars) in 2023.

### Fiscal developments
- The 2023 primary balance exceeded the program target.
- A sharp decline in mining revenue in 2023 was compensated by other taxes.
- Lower capital and other primary spending contributed to the improved primary balance outturn.
- Overall and primary commitment balances improved as arrear clearance continued.
- Deficit financing in 2023 came mostly from external sources.
- Kwacha depreciation led to an increase of external debt.
- Public debt (gross, end-of-period) was 133.4 (percent of GDP) for 2023.

### Monetary and financial developments
- Exchange-rate-adjusted M3 growth rate declined significantly since June 2023.
- Credit growth remained elevated despite tighter liquidity conditions.
- Tight liquidity conditions caused a step increase in the interbank rate.
- Deposit and lending rates remained steady.
- Reliance on bond financing in 2023 resulted in outstanding bonds swelling relatively more than T-bills.
- Non-resident holdings supported rising demand for bonds in 2023, but this source waned in early 2024; non-resident holdings continue to remain concentrated in bonds.
- Spreads on Zambian Eurobonds recovered significantly but remain elevated compared to other SSA issuers.
- Rising bond yields resulted in higher spreads with T-bills in 2023, but these spreads narrowed significantly by early 2024.
- Banks remained net purchasers of FX due to an FX shortage in the system and recent tightening of FX liquidity.

### Program performance, projections, and implications
- Copper production has been lower than expected, leading to lower-than-anticipated export earnings and making reserve accumulation challenging.
- Lower copper-related revenues necessitated expenditure-based consolidation under the program.
- The non-mining, non-agricultural sector performed better than expected, supporting growth outcomes despite mining underperformance.
- Key program metrics illustrated in staff projections and program revisions include:
  - Copper export dynamics and lower export receipts that affected gross international reserves accumulation.
  - The need for expenditure-based consolidation to maintain fiscal targets given commodity shocks.

### Capacity to repay and financing considerations
- Staff supported augmentation of access under the ECF and completion of the financing assurances review to address near-term balance-of-payments needs and drought-related shocks.
- External financing flows in recent years included significant exceptional financing formed by accumulation of arrears; financing gaps have been addressed in part through expected official financing and arrears-related adjustments under the program.
- Indicators of capacity to repay and Fund obligations were presented in the staff assessment as part of the ECF program documentation.

*Italicized source: IMF staff estimates and Zambian authorities as presented in the IMF staff report and supporting tables and figures.*

### Annex I.  Rainfall Variability and Agricultural Output in Zambia

### Annex I.  Rainfall Variability and Agricultural Output in Zambia

### Rainfall exposure and historical patterns
- Zambia's agriculture is mostly rain-fed and highly exposed to rainfall variabilities.
- Zambia is prone to periodic droughts, irregular rainfall distribution, and increasing rainfall variability.
- Despite several large rivers, uneven temporal and spatial rainfall distribution affects the predominantly rain-fed agricultural sector.
- The ND-Gain Index positions Zambia at the middle of the pack, noting its moderate standing in terms of vulnerability and adaptability to climate challenges.
- Figures referenced: Figure 1. Rainfall 1950–2023; Figure 2. Rainfall Standard Deviation (sources: World Bank Climate Knowledge Portal and IMF Staff Calculations).

### Empirical links between rainfall and agricultural output
- Time series on crop output from the period 1961-2022 show that the Zambian agricultural sector has been negatively affected by both dry spells and excessive rainfall.
- Fluctuating patterns of dry spells and excessive rainfall have continuously disrupted crop production and can deplete productive assets beyond critical levels needed for maintaining agricultural activities, thereby entrapping households in cycles of poverty.
- Figure referenced: Figure 3. Rainfall and Crop Output Growth: Binscatter (source: FAO Database, World Bank Climate Knowledge Portal, and IMF Staff Calculations).

### Current drought conditions and geographic concentration
- The drought is currently affecting major agricultural producing regions in the Central, Eastern, and Southern provinces.
- These three provinces account, on average, for 60 percent of the total cultivated land.
- Provincial roles and shares:
  - Central province: includes a significant portion of the country's commercial farms; contributes 16.5 percent to the total cultivated land.
  - Eastern province: pivotal for maize production (33 percent of total); contributes 21.4 percent to the total cultivated land.
  - Southern province: accounts for about 16.5 percent and 55 percent of the country’s total maize and sorghum output, respectively, in 2021/22; contributes 24.3 percent to the total cultivated land.
- As of mid-March 2024, drought-stressed cropped land shares in these provinces are:
  - Central: 50 percent
  - Eastern: 65 percent (reported also as 65.4 percent in detailed calculation footnote)
  - Southern: 52 percent
- Figure referenced: Figure 4. Agricultural Stress Index (source: FAO and IMF Staff Calculations).

### Quantitative impact on agricultural output
- Approximately 35 percent of land is currently drought-stressed (reported more precisely as a weighted average of 34.9 percent in model calculations).
- Crop-level panel fixed-effect model results indicate:
  - Land utilization, rainfall, and temperature variability significantly influence crop output growth.
  - Agricultural output has been primarily driven by land area expansion, with minimal advancements in technology.
  - The elasticity of crop output growth to land expansion is estimated to be between 0.85 and 0.89, depending on model specification.
- Considering the land affected in the three provinces—approximately 34.9 percent—the projected output decline is estimated to be around 30 percent.
- Drought stress measurement note: FAO’s agricultural stress index uses the Vegetation Health Index (VHI), averaging VHI over the crop cycle and assessing drought's spatial reach by the percentage of VHI-below-35 percent pixels.

### Policy implications and adaptation needs (implied by findings)
- Critical need for adaptive strategies in response to environmental challenges due to high reliance on rain-fed agriculture and land expansion-driven growth.
- Emphasis on strategies that reduce vulnerability from limited technological advances and dependence on effective land use.

*Source: Annex I. Rainfall Variability and Agricultural Output in Zambia — IMF country document content provided.*

### Annex IV. External Sector Assessment

### Annex IV. External Sector Assessment

### Overall assessment
- The external position of Zambia in 2023 was moderately weaker than the level implied by fundamentals and desirable policies.
- The weaker external position is driven by the current account deficit, stemming from a decline in copper prices and production.
- Given the large negative net international investment position (NIIP) and that the level of reserves is less than adequate, Zambia's current account norm should remain positive.
- Potential policy responses:
  - Continue implementing policies in line with the ECF-supported program.
  - Improve the fiscal balance, attract FDI, and diversify exports to alleviate pressure on the external balance.
  - Implement broader structural reforms to enhance governance and boost growth to build resilience to external shocks.
  - Continue accumulating foreign reserves in line with the ECF-program target and monitor risks associated with portfolio flows.

### Foreign assets and liabilities: position and trajectory
- Background and levels (Q3 2023):
  - NIIP: -95 (% GDP)
  - Gross Assets: 24 (% GDP)
  - Debt Assets: 2 (% GDP)
  - Gross Liabilities: 118 (% GDP)
  - Debt Liabilities: 80 (% GDP)
- Composition:
  - Assets primarily composed of overseas deposits by resident mining companies and the reserve assets of the Bank of Zambia.
  - Foreign liabilities significant components: government debt at 53 percent of GDP and FDI at 42.4 percent of GDP.
- Trajectory and assessment:
  - NIIP improved from -104 percent of GDP at end-2022 to -95 percent of GDP by Q3 2023, reversing part of the downward trajectory since 2015.
  - The fiscal efforts under the ECF program and debt relief under the G20 Common Framework are expected to:
    - Sharply reduce foreign liabilities,
    - Increase foreign reserves,
    - Stabilize the NIIP at -55 to -60 percent of GDP over the medium term.
  - The target NIIP range (-55 to -60 percent of GDP) is in line with the median value among low-income countries as of 2022.

### Current account
- Background:
  - Current account balance deteriorated to a deficit of 1.9 percent of GDP in 2023, compared with the 2018-2022 average surplus of 4.6 percent of GDP.
  - Drivers: declining copper exports amid strong imports; challenges at major copper mines (KCM and Mopani), lower copper grades, floods, and falling global prices.
  - Medium-term outlook: exports expected to recover as copper production challenges are addressed, additional investments flow in, international copper prices recover, and post-debt restructuring public interest payments decline.
- EBA-lite estimates and adjustments:
  - EBA-lite methodology estimates a current account norm for Zambia at -6.6 percent of GDP.
  - Adjustment for temporary decline in copper production due to flooding and operational challenges: -2.2 percent of GDP.
  - After adjusting for temporary factors, the adjusted current account is -0.6 percent of GDP.
  - Staff adjusted the norm upward to target an NIIP of -58 percent of GDP over the next three years; following this adjustment, the adjusted CA Norm is 1.1 percent of GDP.
  - Resulting CA Gap: -1.8 percent of GDP (i.e., the external position is moderately weaker than implied by fundamentals).
- Table 1 key figures (2023, percent of GDP):
  - CA-Actual: -1.9
  - Cyclical contributions (from model): (-)0.9
  - Additional temporary/statistical factors: (-)2.2
  - Adjusted CA: -0.6
  - CA Norm (from model): -6.6
  - Adjustments to the norm: (+)7.8
  - Adjusted CA Norm: 1.1
  - CA Gap: -1.8
  - o/w Relative policy gap: 2.5
  - Elasticity: -0.3
  - REER Gap (in percent): 6.3 / -42.6
- Staff judgment: After NIIP-consistent adjustments the external position is assessed as moderately weaker than fundamentals and desirable policies imply.

### Real exchange rate (REER)
- Background:
  - REER depreciated by 9.4 percent in 2023, partly reversing the 30 percent appreciation in 2022.
  - Nominal exchange rate depreciation in 2023: 19.2 percent.
  - Real exchange rate ended 2023 with a 24.4 percent depreciation relative to the 2022 average.
  - Drivers: declining copper prices and production, modest portfolio inflows, and FX pressure through 2023.
- Assessment:
  - EBA-lite REER model suggests a REER gap of -42.6 percent with a corresponding current account gap of 11.8 percent.
  - This model-based result implies an external position stronger than fundamentals, but it contrasts with Zambia’s large negative NIIP and less-than-adequate reserves.
  - Staff places greater emphasis on stock indicators (NIIP and reserves) in the overall assessment.

### Capital and financial accounts: flows and policy measures
- Background and flows:
  - Capital and financial account experienced significant outflows from 2020 to 2023, averaging -10.9 percent of GDP, with -2.9 percent in 2023.
  - Outflows mainly from the non-financial sector, notably mining, and scheduled public sector loan repayments.
  - Offsetting factors: new public debt disbursements, portfolio inflows, net FDI inflows (except in 2023), and an SDR allocation in 2021.
  - Portfolio inflows reversed in 2022 amid debt restructuring uncertainties but resumed in 2023 after clarifications that domestic debt would not be included in the restructuring perimeter.
- Assessment and policy guidance:
  - Zambia remains excluded from international capital markets due to the debt default and ongoing restructuring.
  - Return of portfolio flows is positive but authorities should closely monitor portfolio inflows (classified as external debt for external debt sustainability analysis) throughout the program to safeguard external debt sustainability.

### FX intervention and reserve level
- Background and levels:
  - Bank of Zambia gross reserves rose to $3.3 billion in 2023 (3.6 months of imports), up from $3.05 billion in 2022.
  - Reserve accumulation supported by multilateral disbursements and increased FX statutory reserve requirements.
  - Observed despite depressed forex flows from lower copper prices and production, subdued portfolio inflows, and significant FX interventions totaling $1 billion.
  - The Bank of Zambia maintains a managed float policy.
- Assessment:
  - At 3.6 months of imports, reserves are assessed as below the adequate level compared to the optimal level of 5 to 5.5 months of prospective imports implied by a cost-benefit analysis for credit-constrained economies.
  - To reach the target reserve level, authorities should continue fiscal adjustment strategy, supported by debt restructuring and disbursements from IFIs.
- Note on the copper production adjustor:
  - The adjustor is calculated as the difference between copper export to GDP ratio projected in the 2023 Article IV Staff Report (29.6 percent) and the realized copper export to GDP ratio (25.2 percent), using the same price as in the 2023 AIV projection.
  - About half of the decline in copper production is explained by temporary factors; the adjustor is set at 2.2 percent of GDP (50 percent of the 4.4 percent difference).

*International Monetary Fund — Annex IV. External Sector Assessment (from the provided PDF content).*

### 2022. Notable increases in arrears were recorded for VAT and other Recurrent Departmental

### 1zmbea2024001-print-pdf - 2022. Notable increases in arrears were recorded for VAT and other Recurrent Departmental

### Arrears and composition (2022–end-2023)
- Notable increases in arrears were recorded for VAT and other Recurrent Departmental Charges (RDC) due to stock revaluations following the ongoing audit process and late penalties and interest.  
- Significant reductions were recorded in Personnel Emoluments, fuel, electricity, FISP, FRA, pensions, and capital projects.  
- Despite scaling up social spending and achieving a primary balance (commitment basis) of 1.5 percent of GDP (0.9 percent higher than projected), the stock of arrears at end-2023 grew due to exchange rate valuation effects along with accrued interest and financial penalties.  
- We continued to clear expenditure and VAT refund arrears, and commit to clear the legacy stock of VAT refund arrears as laid out in the Arrears Clearance Strategy and to refund on a timely manner all new validated VAT refund claims.

### Financing conditions and debt restructuring
- Financing conditions remain tight despite progress in the debt restructuring.  
- On March 25, we announced an agreement in principle with the Steering Committee of the Eurobond holders in line with the IMF program parameters taking into account the OCC confirmation of comparable treatment.  
- Spreads on our sovereign bonds have decreased by 14 percent y-o-y in May and by about 6 percent from mid-February this year.  
- On the domestic market, tight liquidity conditions have weakened private domestic investors’ appetite in 2024.  
- We refrained from contracting new external borrowing (IT) and met the ceiling on disbursements on external contracted debt (IT). External disbursements fell short of expectations (US$18.8 million versus US$200 million).  
- We drew the remaining 50-percent of the SDR allocation amounting to K9,317 million in 2023.

### Banking sector performance and resolution of Investrust Bank
- The banking sector remained stable in 2023.  
- Capital adequacy ratio reached 23.5 percent at end-December 2023 from 22.8 percent at end-December 2022.  
- Non-performing loans ratio marginally decreased to 4.2 percent at end-2023 from 5.0 percent at end-December 2022.  
- Credit to the private sector (at constant exchange rate) grew by 24.5 percent in 2023 as banks’ sovereign exposure decreased. However, at 11.4 percent of GDP, private credit remains below the pre COVID-19 average (12 percent of GDP).  
- Tighter liquidity conditions since February 2024, following the increase in the SRR, resulted in some banks accessing the overnight liquidity facility at 29 percent.  
- Resolution of Investrust Bank: The BoZ took possession of Investrust Bank Plc on April 2, 2024, due to insolvency and unwillingness by the major shareholder to recapitalize the bank. With fiscal support (K 1 billion), the BoZ facilitated the first payments, which are expected to cover over 90 percent of depositors with balances of up to K500,000. The BoZ has commenced preparing the Statement of Affairs.

### Drought impact and humanitarian needs (2024)
- The drought has reportedly destroyed 40 percent of the cultivated maize and impacted electricity generation, leading to power outages.  
- Preliminary estimates indicate the drought has affected 9.8 million people, (48 percent of Zambia’s population), requiring significant maize and electricity imports.  
- In February 2024, the President declared the drought a national disaster and emergency and announced plans to revisit the 2024 Budget. The government has requested support from the international community.

### Outlook and macro projections (2024–2026)
- The 2024 outlook has deteriorated. Growth revised to 2.3 percent in 2024 considering a slower-than-envisaged rebound in mining production and the impact of the drought.  
- Mining sector performance is expected to modestly surpass 2023 production, but growth will be affected by power shortages, notably in the manufacturing sector.  
- Inflation is projected to remain elevated, at an average of 14 percent due to exchange rate passthrough and increasing food and fuel prices.  
- The current account deficit is expected at 0.2 percent of GDP in 2024 by relatively higher imports amid a decline in exports. Additional imports to address the humanitarian impact of the drought will be compensated by lower imports in other categories.  
- Additional external financing needs are expected to increase by US$579 million, for which support has been requested from cooperating partners.  
- Medium-term: Growth is projected to rise to 6.2 percent in 2025-26 as mining production expands and agricultural output fully recovers.  
- Inflation is projected to peak in 2024 and slow to 7.9 percent by end-2025.  
- The current account surplus is projected at 6.9 percent of GDP in 2025.  
- International gross reserves are set to reach 5.0 months of prospective imports at end-2025.

### Risks to the outlook
- Downside risks: commodity price volatility, abrupt global slowdown or recession, intensifying regional conflicts, subdued mining production, climate events, increasing social discontent, delays in debt restructuring, and deterioration in loan quality of the banking sector due to the drought.  
- Upside: swift completion of the debt restructuring and renewed mining investments could lead to positive confidence effects that support growth.

### Fiscal policy response for 2024 and medium term
- Primary fiscal outcomes and targets: The December 2023 primary fiscal balance reached K3,405 million against a floor of K 1,058 million (QPC). Non-mining revenues reached K98,769 billion at end-December 2023, above the indicative target (IT) of K 90,188 billion. Social spending scaled up to K 45,084 million, surpassing the end-2023 IT (K 39,670 million).  
- Revised 2024 Budget and humanitarian response: The drought is expected to increase spending by K 6.3 billion in 2024, of which K 5.2 billion will be due to higher social transfers. The government plans to reprioritize spending to create fiscal space to increase social transfers temporarily while sustaining domestically financed net acquisition of nonfinancial assets. The revised Budget envisages a primary fiscal deficit of K 4.7 billion (end-December 2024 QPC, 0.7 percent of GDP). The end-June primary fiscal balance target is revised to K 0.6 billion (end-June 2024 QPC).  
- Revenues (IT): The expected yield of the tax policy measures adopted in the 2024 Budget has been revised to 0.2 percent of GDP, from 0.4 percent of GDP. Continued efforts to improve tax administration to reduce the compliance gap and improve service delivery.  
- Spending priorities and protection (IT): Protect social spending and contain non-priority areas; enhance Social Cash Transfer (SCT) for 13 months starting in June. Until June 2025, eligible households will receive an additional K 200 per month on top of the current K 200 per month. After an enumeration exercise concluded in May 2024, intend to cover an additional 1.2 million households with emergency cash transfers. Scale up the school feeding program to include additional 37 districts; increase spending on water resources development and management and on surveillance and mitigation of livestock diseases. Combined drought response estimated at an additional spending of K 6.3 billion in 2024 (0.9 percent of GDP), largely financed by the World Bank.  
- Reprioritizations: Capital expenditure projected at 3 percent of GDP in 2024. Reduce other domestically financed primary expenditure by containing personnel spending, reducing intragovernmental transfers and other operational spending for a combined K 5.9 billion (0.8 percent of GDP).  
- Arrears repayment: Undertake a liability management operation financed domestically in 2024 to address fuel arrears; request an adjustor for the primary fiscal balance to account for this operation since budget reporting is on a cash-basis. Publish revised arrears clearance strategy and continue publishing summary quarterly survey of budgetary expenditure arrears. Commit to prevent the generation of new arrears and to refund validated VAT refund claims timely.  
- Subsidies and energy pricing: Remain committed to refrain from fuel subsidies; lower-than-recovery transportation costs were partially absorbed by the energy fund in April 2024 and by fuel suppliers in May 2024. Will review the current model to establish clear rules for full-cost recovery in fuel prices (continuous QPC). Refrain from generating new external arrears (continuous QPC).  
- Financing adjustments: Authorities mobilized US$230 million in new budget support financing and frontloaded planned World Bank disbursements by about US$140 million in 2024. Lowered financing from Government securities from K 16 billion to K 5.1 billion and added domestic financing for the fuel arrears liability management operation. Propose to channel half of the ECF program augmentation for budget support. Continue to abstain from central bank net credit to the government (QPC) while respecting ceilings on contracting/guaranteeing new non-concessional external debt (QPC) and ceilings on disbursements of contracted but undisbursed external debt and on the present value of new external borrowing (ITs).

### Food security interventions and transparency measures
- FRA/DMMU maize imports: Plan to import up to MT650,000 of maize subject to review when the food balance sheet has been finalized; imports will be gradual and limited to shortfalls not addressed by the private sector. FRA/DMMU imports will be mobilized with government-to-government agreements to be made known to the public after signature. FRA/DMMU will conduct interventions at cost recovery and without generating a food subsidy. No additional budgetary support will be provided to the FRA/DMMU.  
- Transparency and procurement: All procurement contracts for importation of cereal and logistics contracts shall be published with summary information, including beneficiary ownership, on the websites of FRA and DMMU as contracts are allocated (proposed continuous SB). The UN relief program will provide relief food packages distributed with DMMU support where markets are not available. Commit to publish an audit report by the controller of internal audit detailing price and service details for all FRA and Government activities and DMMU procurement contracts (proposed end-September 2025 SB). Publish FRA 2024 audited financial statements by end-September 2025.

### Fiscal consolidation targets and commitments
- Multi-year objective: Improve the primary balance on a cash basis to 2.2 percent of GDP in 2025 from a deficit of 1.6 percent of GDP in 2022. Committed to an end-June 2025 primary balance (cash basis) of K 7,636 million.  
- Commitment-basis targets: Improve the primary balance to a surplus of 3.3 percent of GDP by 2025 from a surplus of 0.8 percent of GDP in 2022. Project the primary balance (commitment basis) to reach 2.9 percent of GDP in 2024, same as at the time of the First Review, maintaining the agreed pace of arrears clearance (both ITs, see TMU). Commit to submit the draft 2025 Budget to Parliament consistent with program parameters (end-September 2024 SB). Pledged to adopt contingency measures if needed and consult IMF staff on any changes to fiscal commitments. Commit to use any additional revenues, in consultation with the IMF, for arrears repayment in a rule-based and transparent manner while considering capacity.

### Fiscal structural reforms — mobilizing revenues
- Revenue target: Increase domestic revenue mobilization to about 21.2 percent of GDP by 2025 from 20 percent of GDP in 2022. Achieve this by strengthening tax policies and leveraging technology to enhance tax administration and improve tax compliance.  
- Tax policy measures: Increased excises for cigarettes, some alcoholic and non-alcoholic beverages and introduced a levy for mobile transactions in 2024. Applied a 15-percent withholding tax to interest income. Increased the income exempt threshold for PAYE. Introduced several tax incentives to promote investment. In 2025 plan to harmonize corporate income tax rates across sectors, review effectiveness of fiscal incentives for special economic zones, refrain from granting any new tax exemptions (except for custom duty related to maize imports this year), and publish a report with description and costing of all tax expenditures (proposed end December 2024 SB).  
- Tax administration modernization (ZRA): ZRA is modernizing internal organization and expanding data analytics; commenced transitioning to the new operating model by end-2024Q1.  
  - The Large Taxpayer Office (non-mining) and the Specialized Taxpayer Office (Mining) were created and operationalized in January 2024 (end-March 2024 SB).  
  - All VAT registered taxpayers will be required to issue electronic invoices using the Smart Invoice system effective July 1st, 2024, to better monitor taxpayers’ supply chains and reduce false VAT refund claims.  
  - The Cross-Border Electronic Services Taxation Project was implemented in April 2024, levying VAT on digital commerce-related services provided by non-resident companies in Zambia.  
  - Interfaced government systems such as IFMIS and the Ministry of Lands database Zambia Integrated Land Administration System (ZILAS) to improve accuracy and reduce fraud in tax assessments.  
  - Launched a digital Tax Clearance Certificate (eTCC) enabling third parties to verify taxpayer compliance.  
  - Rolled out dedicated small and medium size mines units to provinces with substantial mining activity. Step-up efforts to collect tax debt which stood at K 73.14 million in March 2024.

*Source: IMF country document content provided in the input.*

### 14.      We will carefully calibrate spending to the available fiscal space while enhancing

### 14.      We will carefully calibrate spending to the available fiscal space while enhancing economic growth and development,  by strengthening public finance management and protecting social spending.

### Fiscal calibration, public expenditure, and social protection
- Total expenditure is projected to come down, largely on account of the reduction of expenses related to inefficient subsidies, while preventing the accumulation of expenditure arrears.
- Public expenditure will remain transparent and accountable to improve efficiency and channel resources to programs and projects that have a direct impact on the lives of the Zambian people.
- The Government scaled up social protection programs with improved targeting and selection mechanisms, providing regular and predictable cash transfers to vulnerable households.
- Social spending: K 45.1 billion spent in 2023, above K 39.7 billion (end-December 2023 indicative target).
- In response to the drought:
  - Expanded the SCT and the school feeding program.
  - Humanitarian in kind support coordinated by Disaster Management and Mitigation Unit (DMMU) to address market failures in remote areas.
  - Government-to-Government maize contracts will be limited to only address import shortfall not addressed by the private sector and will be published.
  - All procurement contracts (including logistics and maize purchase contracts) committed to tender through the E-Government Procurement platform (E-GP).
- Social registry: The enumeration exercise will form the basis for a social registry, expected by 2025, to allow effective scaling up of social programs during crises.
- Education and school feeding:
  - Hired 39,250 more teachers since 2021, of which more than 7,000 were in 2024.
  - Enrolment increased by 31 percent over this period to 6.2 million students.
  - School feeding program broadened to cover 2.9 million students in 2024 across 70 districts, up from 2.0 million in 2023.
  - In response to drought, school feeding will be temporarily expanded to additional 37 districts for 14 months.
- Pensions: Evaluating options to reform public pension schemes guided by recommendations in an IMF technical report on the Pension System Assessment (2023).

### Farmer Input Support Program (FISP) migration to e-Voucher
- Commitment: Make FISP more effective with spending declining to 0.9 percent of GDP in 2025 from 1.4 percent of GDP in 2023.
- Migration path:
  - For 2024/2025 season, Cabinet approved migrating 74 districts to the e-voucher with flexible inputs and 42 districts on direct input supply (end-September 2024 SB).
  - Ministry of Agriculture preparatory work to ensure DIS procurement tender reflects revised list of districts.
  - No restriction on number of suppliers and retailers; full flexibility of inputs for farmers in the 74 e-voucher districts to support competition.
  - Selection criteria for input manufacturers, distributors and retailer/agro-dealers will be conducted through an online portal restricted to essential documents: certificate of incorporation, tax payer identification number, VAT number and tax clearance certificate.
  - Portal will upload/verify documents and automatically publish lists of selected suppliers and retailers, and rejected applications with justifications.
  - Government will continue to publish summary information on all procurement contracts related to FISP, including beneficial ownership on its website (continuous SB).
  - Contracts for seeds and fertilizers were published on the Ministry of Agriculture website in March 2024 for contracts signed in January and February; contracts awarded in March and April 2024 will be published by end-May 2024.
  - An audit of the program concluded in April 2024 to improve controls and ensure value for money.
  - All FISP beneficiaries currently enrolled will be verified and the security of the ZIAMIS system will be improved to support proper audit trail.
  - The 2024 E-voucher roll out will be subject to an independent audit by December 2024 for all the 74 districts (proposed end-December 2024 SB).

### Constituency Development Fund (CDF) reconfiguration and arrears strategy
- 2024 revised budget reduced the CDF allocation by K   2.4 billion.
- Average utilization rates at 57 percent at the end of 2024Q1.
- Decentralized approval process for community projects and contract approval to provinces to improve absorption where use of funds is uneven.
- Procurement and awarding of contracts aligned with the Public Procurement Act No. 17 of 2023.
- Domestic arrears:
  - Despite efforts, stock marginally increased.
  - Updated domestic arrears repayment strategy to ensure cost-effective liability management to clear fuel arrears while adhering to a rule-based and transparent clearance process; operation financed domestically and seek some NPV savings.
  - Will publish the updated domestic arrears strategy on the MoFNP website, including financing strategy details.

### Public financial management (PFM) systems and commitment control
- IFMIS usage:
  - Government produced a verification report in early December 2023.
  - All 61 MPAs are now using IFMIS; extended use for the Ministry of Education to provincial level (in 2023Q3).
  - Plan to extend IFMIS to Ministry of Agriculture and Ministry of Livestock and Fisheries by end-2024.
  - Budgetary institutions will record the stock of 2023 arrears in IFMIS by the end of July 2024.
  - Multi-year commitments to be recorded in IFMIS by end-2024.
- Navision adopted as the Public Finance Management System for all Local Authorities with full roll out by end 2025; will be integrated into IFMIS through ZamConnet.
- ZamConnet (Government Service Bus) integrated 31 departments and agencies, including ZRA, PACRA, and Lands. Integration activities of Navision and IFMIS via the GSB have commenced with the Ministry of Health.

### Public investment management (PIM) and PPP frameworks
- 2024 Public Investment Policy published on MoFNP website aligned with the National Budget.
- Treasury circular in April 2024 guiding MPAs on avoidance of contingent liabilities regarding PPPs.
- Policy: No new PPPs until the regulatory framework is adopted by end-October 2024.
- Requested updated IMF Public Investment Management Assessment (PIMA) incorporating the climate module.
- Develop Road Sector Investment Programme III (ROADSIP III) through the Road Development Agency (RDA) by December 2024.

### Cash management improvements
- New action plan approved by Secretary to the Treasury in April to improve cash management and forecasting, reduce idle cash balances and number of central government and lower-level government bank accounts.
- Explore rationalizing banking arrangements of local authorities (end-March 2024 SB).
- Finalize survey of government accounts in commercial banks by end-June 2024.
- Monitor daily compliance with sweeping arrangements with the BoZ and commercial banks; implement procedures to reduce government bank accounts by end-2024.
- Establish a Cash Management Unit and a Cash Management Committee (proposed end-July 2024 SB).
- Implement a cash flow forecasting plan for 2025 (proposed end-December 2024 SB).

### Fiscal transparency, reporting, and fiscal risk management
- Budget execution and financial reports:
  - Continue publishing quarterly economic reviews reporting on budget performance.
  - Financial report to be published annually.
  - Budget Execution Report scope to be expanded to include performance on broad revenue and expenditure categories including social spending.
  - Migration to IPSAS Accrual Accounting Basis originally planned for 2027 may be delayed pending additional support to review the 2023 Financial report.
- Fiscal risk management framework (FRMF):
  - FRMF aimed at identifying and quantifying fiscal risks from expenditure pressures, revenue shocks and contingent liabilities; strategies to mitigate risks.
  - FRMF to be completed by July 2024 and presented in the 2025 Budget.
  - Expanded Fiscal Risk Report to establish methodologies for assessing risks from climatic change.
  - By end-June 2024, Fiscal Risk Report will be expanded to include key risks from SOEs, local authorities, public pension schemes, PPPs and other obligations and potential consequences of climate change (end-June 2024 SB).
  - Report to become part of 2025 budget documentation submitted to Parliament; standard methodologies to quantify risks with IMF TA support.

### State-Owned Enterprises (SOEs) governance and transparency
- Industrial Development Corporation to publish audited financial statements for 2019-22 by end-October (proposed end-October 2024 SB).
- Government adopted the Supervisory and Performance Monitoring Framework for SOEs in January 2024.
- MoFNP to sign performance contracts with SOEs by end-2024 to become effective in 2025.
- State-Owned Enterprises policy to be adopted by Cabinet by end-September 2024 and published by end-October (end-October 2024 SB), leading to a prospective SOE Act.
- MoFNP will continue credit risk assessment on public bodies intending to borrow through the supervisory and monitoring framework.

### Energy reforms: fuel arrears, TAZAMA pipeline, and fuel pricing
- Fuel arrears:
  - Independent audit on suppliers’ claims finalized in April 2024.
  - Fuel arrears at end-2023 after audit verification amounted to US$864.47 million from a verified stock of US$532 million at end-2022.
  - As at end March 2024 fuel arrears stood at US$877.2 million. Increase attributable to late payment penalties on legacy debt.
- TAZAMA pipeline open access:
  - TAZAMA expected to reduce diesel transportation costs by 73 percent.
  - Open access auctions originally planned by end-2024Q1 experienced delays due to misalignment with Public Procurement Act and security clearance requirements.
  - Plan to request assistance from an independent international consultant to review the open access framework and issue an SI by August 1st, 2024 (proposed End August 2024 SB).
  - Clarifications to be provided to OMCs on (i) foreign exchange exposure and credit risks before bidding, and (ii) the role of Tazama on securing berthing slots in Dar Es Salaam.
  - Reassess tender review process to shorten award time and improve transparency; allow ERB to preselect OMCs for 12 months by July 1, 2024 and implement for the July auction for supply and delivery starting August 1, 2024.
  - Publish Tazama open access tender results on Ministry of Energy website within one month of contract award, including winning bidder with price, type and quantities of inputs, total contract amounts and their beneficial owners, and all unsuccessful bids with price, type and quantities of inputs (proposed continuous SB).
  - Single-sourcing under direct bidding to remain an exception; direct bidding contracts to be published within a month on MOE website including volume, price and beneficial ownership information.
  - Ministry of Energy to conduct a cost-benefit analysis to assess feasibility of adding an anti-dragging agent to the pipeline to increase flow speed by end July 2024.
- Fuel pricing and transparency:
  - Strengthen monthly updates on domestic fuel prices to ensure full cost recovery.
  - Cost equalization mechanism originally planned to start in October 2023 has yet to be implemented to reimburse OMCs for effective transportation costs.
  - ERB publishing price build-ups for wholesale and retail since February 2024 (end-March 2024 SB); commits to continue publishing retail and wholesale price structures simultaneously with fuel price adjustments (proposed continuous SB).
  - Transport cost line for diesel to be set as a weighted average of real cost estimates between road and pipeline.
  - TAZAMA will collect extra compensation from selling wholesale diesel products through the pipeline deposited at the Energy Fund by August 1st 2024 to compensate OMCs using roads to import Diesel.
  - In May 2024, a slate mechanism in the fuel price formula started to compensate for exchange rate fluctuations, incorporating a compensation factor for the difference between the current and previous month’s exchange rates; will maintain transparent adjustment of the compensation factor per the agreed slate mechanism formula.
  - All components of the fuel price formula expected to be finalized for the July 2024 ERB price review.
  - Commit to reintroduce the BPS premium for all fuels (road and pipeline) in July; BPS is a competitive and published cost estimate calculated as a simple average of the lowest bids for delivery in Dar es salaam for a given month.
  - Statutory instrument to be issued by August 1st, 2024 detailing legal and approval procedures for revising each element in the fuel price formula (proposed end-August 2024 SB).
  - Going forward the exchange rate and Platt price are the only elements expected to vary on a monthly basis.

### ZESCO turnaround, tariffs, and debt
- Tariff increases:
  - After an average 37-percent increase in 2023, ZESCO will increase the average retail tariff by 9 percent in 2024, and 15 percent in 2025.
  - In 2026-27, the tariff is expected to increase by 10 percent and 14 percent, respectively.
- Projected net profit margins 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: US$2.6 billion in March 2024, from US$2.1 billion at end-2022.
  - On-lent loans from the Central Government: US$384 million.
  - Commercial lenders: US$207 million.
  - Government guaranteed loans: US$1.9 billion.
- Balance sheet measures:
  - Confirming and negotiating remaining disputed IPP debt.
  - Mobilizing long-term domestic financing to repay IPP obligations.
  - Advancing conversion of on-lent public loans to equity in close consultation with MoFNP.
  - ZESCO continued to service its non-guaranteed external debt in 2023.

### Restoring debt sustainability and debt management commitments
- Commitment to refrain from contracting non-concessional debt (continuous performance criterion) and limit new external borrowing and disbursements of contracted but undisbursed external debt to the central government and ZESCO (ITs).
- Objective: return to “moderate” risk of debt distress over the medium term.
- Target metrics:
  - Bring the debt service-to-revenue ratio to 14 percent by 2025 and maintain it at this level (on average) during 2026-31.
  - Bring the PV of external PPG debt-to-exports ratio to 84 percent by 2027.
- Strategy: seek debt relief from external creditors and implement reforms to achieve higher economic growth to improve revenue mobilization and debt carrying capacity.

*Source: 1zmbea2024001-print-pdf (IMF).*

### 30.      We have reached an agreement in principle on a debt restructuring operation in line

### We have reached an agreement in principle on a debt restructuring operation in line with program parameters with most of our creditors

### Debt restructuring and debt management
- Agreement in principle reached with most creditors; bilateral agreements advancing under the OCC MoU.
- Government reached agreement in principle with the Steering Committee of the bondholders on March 25, 2024; consent solicitation initiated on May 13, 2024.
- Government committed to continue negotiating debt treatment with other commercial creditors in good faith, consistent with program parameters and CoT as defined by the OCC.
- Government to refrain from any payments on any external debt under the restructuring negotiation before a debt treatment agreement is reached on terms comparable with those provided by official creditors.
- Enhancements to transparency:
  - Annual borrowing plan updated consistent with the 2024 Revised Budget.
  - 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 external SOEs debt, domestic and external arrears, and debt and any liabilities arising out of public private partnerships (continuous end-quarter SB).
  - The 2024Q1 debt bulletin was published on the MoFNP website end May 2024.
- Institutional strengthening:
  - Regulatory framework for the sinking fund, guarantees and indemnities, general provisions of the debt management office, credit risk assessment framework, and supervising framework for SOE monitoring and operational supervision to be approved by end-June 2024 (in context of the new PDM).
  - Cabinet Office approved new organization structure for the Debt Management Office (DMO) aligning mandate and structure with best practices and the PDMA (end-December 2023 SB).
  - New DMO expected to become fully operational by end-2024; debt department at MoFNP to be reorganized into DMO with front, middle and back offices following IMF/World Bank guidelines for public debt management.
  - Procedure manual of the DMO to be adopted and published (end-December 2024 SB).
- Domestic financing strategy:
  - Net domestic financing from the securities market for 2024 revised down to K 5.1 billion due to challenging domestic financing conditions and near-nominal limit non-resident holdings.
  - Limit issuances of securities to non-residents in the primary market to 5 percent of the cumulative government bonds, with a nominal upper bound of K1.56 billion in 2024.
  - Effective January 2024, all government securities issued at par (end-March 2024 SB).
  - Plan to re-open issuances to develop benchmark bonds for key tenors to build liquidity.
  - Continued efforts to develop domestic bond market with IMF technical assistance.

*Italic: Source — 1zmbea2024001-print-pdf (excerpts).* 

### Monetary and exchange rate policy
- BoZ commitment to the inflation targeting (IT) framework to maintain price stability.
- Inflation drivers: elevated food and fuel prices, higher electricity tariffs and exchange rate depreciation; largely caused by external shocks.
- Policy actions: tightened monetary policy through hikes in the policy rate and statutory reserve requirements.
- Inflation projection and objective:
  - Expect inflation to converge to the inflation band by end-2025.
  - Aim to bring inflation back to the 6-8 percent target range by 2025.
- Monetary Policy Consultation Clause (MPCC):
  - If actual inflation deviates from the inner consultation band of ±2 percent (Table 1), BoZ will consult with IMF staff on reasons and policy response.
  - If actual inflation deviates from the outer consultation band of ±3 percent (Table 1), consultation with the IMF Board will be triggered.
- Exchange rate regime and FX market measures:
  - Maintain a flexible exchange rate regime while mitigating excessive volatility.
  - Mining companies to continue paying all tax obligations in U.S. dollars directly to the BoZ.
  - BoZ to support the FX market through instruments such as FX swaps and FX intervention.
  - Review of FX market rules and policies ongoing; IFEM rules under preparation and FX market guidelines issued; market participant and IMF staff feedback to be sought in 2024Q2.
- Reserves and drought impact:
  - Met adjusted end-December 2023 NIR QPC of US$1,894 million; missed end-March 2024 IT due to high FX demand and limited FX availability.
  - Original 2024 NIR QPC targets: US$2,150 million (end-June 2024) and US$2,235 million (end-December 2024) considered not reachable given drought-driven FX needs.
  - Proposed revised NIR QPC targets: US$1,400 million (end-June 2024) and US$1,750 million (end-December 2024).
  - Target to reach gross international reserves (GIR) of 4.3 months of import coverage by end-2024 contingent on higher multilateral disbursements.
  - Central government to transfer all FX-related budget support disbursements (loans and grants) to BoZ to support reserves.
  - Proposed end-June 2025 NIR QPC of US$2,250 million, with GIR projected at 5.0 months of imports.
- Modernizing monetary policy framework:
  - Inaugural Monetary Policy Report (MPR) published in February 2024; MPR to be published after each Monetary Policy Committee meeting.
  - Deployed longer-dated open market operations when necessary and revised communication contents.
  - Updated Master Repurchase Agreement to align with the 2011 Global Master Repurchase Agreement; engagement with banks to adopt revised Master Repurchase Agreement and ISDA documentation expected finalized by end-December 2024; seven banks have signed the ISDA with BoZ so far.
  - Implementing Forecasting and Policy Analysis System (FPAS) with multi-year IMF technical assistance; in 2024 Bank intends to recalibrate parameters of the Quarterly Projection Model (QPM).

### Strengthening financial policies and safeguarding financial stability
- Banking supervision and cyber resilience:
  - BoZ conducted four on-site examinations to enhance cyber resilience during the review period.
- Macroprudential and financial stability architecture:
  - Inter-agency Financial Stability Committee (FSC) established under the 2022 BoZ Act; first meeting in April 2024 (attendance all members except those to be appointed by the Board); outstanding members expected to be appointed by end-June 2024.
  - Second FSC meeting in May 2024 approved the maiden Financial Stability Report (FSR), to be published in June 2024 (end-June 2024 SB); FSR to be published at least once a year and will include macro stress testing results.
  - Financial Sector Stability Review (FSSR) planned in 2025 with IMF technical assistance to strengthen identification, analysis, and mitigation of risks.
- Macroprudential toolkit and liquidity standards:
  - Capital regulations providing guidelines for countercyclical capital and conservation buffers to be issued by end-June 2024.
  - Regulations on liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) developed with IMF TA and undergoing internal consultations; interim quarterly quantitative impact analysis on banks’ preparedness continues.
  - LCR and NSFR regulations expected to be implemented through a “phased-in” approach by end-2024 after SPC and Board approval; other macroprudential tools to be implemented gradually.
  - Ongoing macro and micro stress testing, including stress tests conducted by banks under ICAAP.
- Legal and regulatory framework review:
  - Scoping review of the 2017 Banking and Financial Services Act (BFSA) completed in September 2023; IMF Governance Diagnostic Assessment 2022 and IMF comments on FSAP recommendations scoped into BFSA review.
  - Review to cover ownership changes, auditing, prudential requirements, and consolidated supervision; consultations with stakeholders including the IMF to be held.
  - Draft bill expected to be submitted to Parliament by end-2024 (end-December 2024 SB).
- Deposit insurance and AML/CFT/CPF:
  - Deposit Protection Fund (DPF) Unit within BoZ established and drafting regulatory framework for effective deposit insurance based on international standards; deposit protection scheme details under 2017 BFSA Section 132 (5) to be finalized after consultations; proposed end-April 2025 SB for adoption consistent with Core Principles and Basel Supervision Principles.
  - Dedicated AML/CFT/CPF supervision unit implemented end-2023 to address deficiencies from the 2019 ESAAMLG Mutual Evaluation, 2022 Enhanced Follow-Up Report, and Zambia’s 2016 National Risk Assessment.
  - Continued risk-based AML/CFT focused on-site examinations and application of sanctions and remedial measures for non-compliant entities.
- Support for MSMEs and credit access:
  - Government allocated K 386 million to the Zambia Credit Guarantee Scheme in the 2024 Budget.
  - BoZ piloting a Credit Guarantee Fund (CGF) to be implemented in June 2024; consultants proposed CGF design options to Management in December 2023; workshop planned for May 2024 before final report to Management.

### Structural reforms to promote higher and more inclusive growth
- Investment and industrial policy:
  - Investment, Trade and Business Development (Amendment) Act no. 3 of 2024 assented in April 2024; amendment provides investors eligibility for incentives if they invest in a new project or expansion project in a special economic zone, priority sector, rural area or farm block.
- Agriculture and food security:
  - Cabinet approved the Comprehensive Agriculture Transformation Support Program (CATSP) in March 2024; program covers service support, access to finance, irrigation development, and support to increase value-added, storage and logistics.
  - Investments in farm blocks (including FDI) to increase arable area and production; resources to be used for road and energy infrastructure in Nansanga, Luena, Luswishi and Shikabeta farm blocks.
  - National Crop Diversification Strategy to be launched in 2024 to promote agro-business and ease food security.
- Tourism and energy:
  - Government secured US$100 million from cooperating partners to develop Kasaba Bay, Liuwa National Park and the source of the Zambezi River; Project Implementing Unit at Ministry of Tourism in place and project initiation activities commenced.
  - Plans to diversify tourism products and promote MICE to boost tourism receipts.
  - Energy sector: promote investments in additional power generation infrastructure such as phase II of the MW300 Maamba Thermal Powered Plant and alternative green and renewable energy sources in line with the Integrated Resource Plan.
- Mining sector:
  - Measures to increase copper production noted: resolution of Mopani and Konkola Copper Mines; new mines such as Mumbulu began production in 2023; developments at Luanshya Mine Shaft 28 to boost medium-term production.
  - Government procuring firm to undertake countrywide geophysical survey in Copperbelt, Lusaka, Northwestern, Southern, and Western Provinces and parts of Central Province in 2024.
  - Bill presented to Parliament to operationalize Minerals Regulation Commission through project approach to address production reporting, mineral content analysis, illegal mining, and illicit trade of minerals.
- Climate change and social programs:
  - Climate Change Bill drafting underway to establish Climate Change Fund; Bill undergoing final internal consultations prior to submission to Cabinet and Parliament by end-2024.
  - Girls’ Education and Women’s Empowerment and Livelihoods Project: as at end-March 2024 there were 139,351 beneficiaries against target of 129,400 beneficiaries by April 2024; midterm results show increased household income and savings, food security and asset ownership among beneficiaries.
- Financial inclusion:
  - Second National Financial Inclusion Strategy (2024-28) launched in March 2024 aims to increase financial inclusion to 85 percent by 2028 from 69.4 percent achieved during the first strategy (2017-22).
  - Strategy to be implemented by MoFNP, BoZ, Securities and Exchange Commission, Pensions and Insurance Authority, Bankers Association of Zambia, among others.

*Italic: Source — 1zmbea2024001-print-pdf (excerpts).*

### 49.      The Government is taking steps to improve governance, in line with the

### The Government is taking steps to improve governance, in line with the recommendations contained in the IMF Diagnostic Report and Governance and Corruption.

### Governance and anti-corruption reforms
- The Access to Information (ATI) Act no. 24 of 2023 was assented to in December 2023 aimed at providing for the right to access information. The Statutory Instrument to commence the ATI Act will be issued by end-June 2024.
- Work is ongoing to amend the Anti-Corruption Act to strengthen provisions such as applicable penalties and sentences. The Act will be submitted to Parliament by March 31, 2025 (end-March 2025 SB).
- The amended Anti-Corruption Act will:
  - clarify institutional arrangement and mandates of anti-corruption institutions to formulate, coordinate, monitor and evaluate anti-corruption policies and strategies;
  - 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;
  - bring the definition of “public official” in line with Zambia’s international obligation under UNCAC.
- The Ministry of Justice, PACRA, Anti-Corruption Commission and National Prosecution Authority have been receiving technical assistance from the IMF to implement recommendations in the Zambia Diagnostic Report on Governance and Corruption. The Cabinet Office provides oversight on implementation.

### Beneficial ownership, procurement, and audit measures
- The Government has made using the e-GP system mandatory; E-Government Procurement was rolled out by end-September 2023.
- Government will amend the Companies Act with respect to the beneficial ownership (BO) requirement aimed at ensuring BO forms are simplified and accurately capture BO related information.
- To 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, we will finalize the preparation and implementation of the necessary legal and regulatory amendments by end-March 2025.
- We will bring the 2016 Public Audit Act and the 2016 State Audit Commission Act into force by issuing the statutory instrument by the MoFNP (proposed end-January 2025 SB). Bringing the State Audit Commission Act into force will create a Board to provide oversight of the Auditor General’s office.

### Natural resources licensing and monitoring
- Transitioned from manual to online application of mining licenses under the Mining Cadaster System to properly scrutinize license and transfer applications, and monitor associated commitments on safety and environment, work programs, and production.

### Fiscal transparency and tax reporting
- The Government will continue to regularly prepare and externally publish tax expenditure reports on measures expected to result in significant foregone revenues. Implementation of the recommendation is already underway as the Government prepares and publishes regular updates on revenue and expenditure performance as well as explanations for deviations.

### Statistics strengthening and balance of payments
- Government will continue strengthening data collection and estimation of key national economic statistics such as GDP and employment, focusing on developing cost effective instruments and methods for data collection, including enhancement of online data collection. This 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 Zambia Statistics Agency will rebase the national accounts to 2022, from the current estimates which use 2010 as the base year, by end-2025. In 2024, the key activity will be updating the Business Register.
- The BoZ has implemented the electronic Balance of Payments (e-BoP) monitoring system by extending its coverage to all BoP transactions and enhancing collaboration with other Government regulatory agencies.
- The BoZ, in collaboration with Zambia Revenue Authority, launched on January 1, 2024, the Export Proceeds Tracking Framework that requires all export proceeds to be captured in the e-BoP System. Following implementation, exporters are receiving export proceeds through local banks and total receipts on the e-BoP monitoring system have risen. Compliance reconciliation has commenced, albeit with some challenges, mostly technical.
- Gaps related to unidentified other flows were identified in the compilation of balance of payments statistics, largely attributed to the accumulation of foreign assets by the private sector as well as underreported imports.
- Initial flow-of-funds accounts for selected mining companies were completed with IMF TA assistance. The BoZ revised the balance of payments statistics for 2020-22 to address identified gaps related to other flows and private sector accumulation of foreign assets. In 2024, BoZ is undertaking additional work on flow of funds accounts for the manufacturing sector with preliminary results expected by end-December.

### Program monitoring, technical assistance, and use of IMF resources
- The Government will continue to strengthen institutional capacities with partner support to strengthen internal monitoring mechanisms and support program implementation.
- Technical assistance has contributed to in-depth diagnostics essential for reform plans including enhancing cash management, carbon taxation, administration of local excise (especially alcoholic and other taxable beverages), incorporating the TADAT framework and other IMF tools into corporate strategy, the VAT control model, and enhancing the operation of the national pension scheme in investments and risk management.
- Progress will be monitored through semi-annual reviews of quantitative performance criteria, indicative targets, and structural benchmarks defined in the Technical Memorandum of Understanding (TMU).
- Review schedule:
  - Third review based on end-December 2023 test dates, conducted April 24 to May 7, 2024.
  - Fourth review based on end-June 2024 test dates and should be completed on or after October 1, 2024.
  - Fifth review based on end-December 2024 test dates and should be completed on or after April 1, 2025.
  - Sixth review based on end-June 2025 test dates and should be completed on or after October 1, 2025.
- We intend to use half of the IMF financing as budget support and the other half as a buffer to boost Zambia’s international reserve position. The Memorandum of Understanding signed in August 2022 between the Government and the BoZ will be updated to reflect the augmentation of access.

### Key quantitative figures and targets (as presented)
- Quantitative Performance Criteria (Millions of Kwacha; cumulative from the beginning of each year; except where otherwise indicated) — selected entries as shown:
  - I.1 Floor on the central government's primary balance (cash basis): 1,058 1,058 3,405 Met 682 4,953 Met 2,163 663 3,251 -1,579 5,574 -4,698 1,829 7,604
  - I.2 Ceiling on new central bank credit to the central government: 0 00 Met 00 Met 000 000 00
  - I.3 Floor on the net official international reserves of the Bank of Zambia (millions of US dollars): 1,952 1,894 1,894 Met 2,000 1,824 Not Met 2,150 1,400 2,200 1,700 2,235 1,750 2,100 2,250
- Continuous Performance Criteria:
  - IV.4 Ceiling on new external debt arrears by central government, the Bank of Zambia, and ZESCO (millions of US dollars): 0 0 Met 0 0 Met 000 0 0000
  - IV.5 Ceiling on the contracting or guaranteeing of new non-concessional external debt by central government, the Bank of Zambia, and ZESCO (millions of US dollars): 0 0 Met 0 0 Met 00000000
- Monetary Policy Consultation / Average CPI inflation bands and mid-point entries shown (values preserved exactly as presented): 1.0-12.9 1.0-13.5 1.5 2.0 1.5 2.0 1.5 2.0; Average CPI inflation 2.0-12.9 2.0-13.5 2.5 3.0 2.5 3.0 2.5 3.0; Upper outer band 15.1 15.1 15.1 14.9 17.7 13.6 18.2 11.5 17.8 17.6 16.9; Upper inner band 14.1 14.1 14.1 13.9 16.7 12.6 17.2 10.5 16.8 16.6 15.9; Mid-point 13.1 13.1 12.9 Met 13.1 13.5 Met 12.4 14.7 11.1 15.2 9.0 14.8 14.6 13.9; Lower inner band 9.5 9.5 9.5 9.1 12.7 8.1 13.2 7.0 12.8 12.6 11.9; Lower outer band 8.5 8.5 8.5 8.1 11.7 7.1 12.2 5.5 11.8 11.6 10.9; and the sequence -4.6 -12.9 -4.6 -13.5 -4.3 -3.0 -4.3 -3.0 -4.3 -3.0
- Indicative Targets:
  - IV.7 Floor on the fiscal revenue of central government excluding grants and mining revenue: 90,188 90,188 102,994 Met 24,494 27,932 Met 54,786 57,259 83,440 87,289 113,428 118,954 32,220 71,579
  - IV.8 Ceiling on the present value of new external borrowing (millions of US dollars): 0.0 0.0 0.0 Met 750 Met 7575 7575 75 7500
  - IV.9 Ceiling on the disbursement of contracted but undisbursed external debt to central government and ZESCO (millions of US dollars): 181 181 64 Met 1000 Met 100 100 100 145 100 145 100 100
  - IV.10 Floor on social spending by the central government: 39,670 39,670 45,084 Met 11,984 10,768 Not met 25,227 25,227 39,058 42,468 46,070 50,000 13,618 27,291
  - IV.11a Floor on the net clearance of expenditure arrears (+clearance/-accumulation): 8,039 8,039 12,118 Met 1,800 883 Not met 3,800 1,500 6,655 3,000 6,800 4,800 147 132 42
  - IV.12 Floor on the net clearance of arrears of tax refunds (+clearance/-accumulation): 2,442 2,442 -4,225 Not met 1,107 4,024 Met 1,215 1,215 3,122 3,122 4,430 4,430 102 720 54
- Memorandum Items:
  - 13. Expected budget grant disbursments (millions of US dollars): 125 125 125 290 578 6114 n.an.a
  - 14. Expected public sector loan disbursements into the Treasury Single Account at the Bank of Zambia (millions of US dollars): 5800 80431 60240320 87174
  - 15. Expected public sector disbursements, including budget support grants and loans, expected to be channeled into the Treasury Single Account at the Bank of Zambia (millions of U.S. dollars) NIR Adjustor: 43217217326390434564 87174
  - 16. Government Debt Service (millions of U.S. dollars) NIR Adjustor: 32452551844 37347

*Source: Excerpt from the IMF staff report chapter on Zambia governance, statistics, and program monitoring.*

### 17. Expected liability management operation to clear fuel arrears (millions of US dollars). If the size of this operatio

### 1zmbea2024001-print-pdf - 17. Expected liability management operation to clear fuel arrears (millions of US dollars). If the size of this operatio

### Expected liability management operation and fiscal adjustor
- Primary Balance Adjustor: 600600
- If the size of this operation is higher (lower), the primary balance will be adjusted downwards (upwards) by the difference expressed in the equivalent kwacha amount.

### Data sources and document references
- Sources: Zambian authorities; and Fund staff estimates and projections.
- *IMF CR No. 23/439*
- Attachment referenced: Technical Memorandum of Understanding (TMU) — "All definitions and adjustors are available in the Technical Memorandum of Understanding (TMU)."

### Related program design notes and operational footnotes (as presented)
- 1 All definitions and adjustors are available in the Technical Memorandum of Understanding (TMU).
- 2 Indicative targets for March and September.
- 3 Without prejudice to the relevant provisions in the BoZ Act.
- 4 Cumulative from the date of program approval.
- 5 Excludes borrowing from the IMF, IDA, and the AfDB.
- 6 Excludes disbursements from IDA and AfDB.
- 7 From June 2023, the indicative target on the floor of revenue will drop the adjustment for VAT backlog, since this is a separate IT.
- 8 From June 2023, the indicative targets on the clearance of arrears are split into separate ITs on expenditure arrears and tax refund arrears to better capture progress in each category.

### Structural benchmarks summary (selected entries, status and timing as presented)
- FISP. Migration to e-voucher system in at least 33 districts. Rationale: Ensure sustainability of the fiscal consolidation. Date: End-September 2023. Status: Not Met.
- FISP contracts — Publish summary information on all procurement contracts related to FISP or its successor. Rationale: Ensure ongoing transparency. Date: Ongoing - within 3 months of contract award. Status: Met.
- Debt Management — Publish a quarterly debt statistics bulletin. Rationale: Improve debt management and transparency. Date: Quarterly (ongoing). Status: Met.
- PFM – Ensure that at least 59 ministries, provinces, and spending agencies (MPSAs) register all purchase orders and other financial commitments in the IFMIS. Rationale: Strengthen fiscal governance, reduce corruption risks, and prevent the accumulation of arrears. Date: End-August 2023. Status: Not met. Completed in November 2023.
- Publish the revised arrears clearance strategy integrating the repayment of the fuel arrears on the MoFNP website. Rationale: Ensure NPV savings and prevent buildup of penalties. Status indicated among Prior Actions under Third ECF Review.
- Fuel prices transparency — Publish the retail and wholesale price structures for the previous month, with all line details, in the monthly fuel price announcements by the Energy Regulatory Board. Date: End-March 2024 / Monthly (Ongoing). Status: Met / Wholesale and retail price buildups (full detail) published when monthly price adjustment is announced.
- Complete the transition to issue government bonds at par in the domestic securities market. Date: End March 2024. Status: Met.
- Cash Management — Prepare an action plan to rationalize banking arrangements of local authorities, provinces- and district-level government entities to discuss options for eventual inclusion in TSA. Date: End-March 2024. Status: Not Met. Action plan approved in April 2024.
- Revenue Mobilization — Establish a unified Large Taxpayer Office (LTO). Date: End March-2024. Status: Met.
- Adopt and publish a statutory instrument to define elements of the fuel price formula and institutionalize the review process. Date: End-August 2024. Status: The statutory instrument is published in the MoE website.
- Submit to Parliament a 2025 draft budget consistent with program parameters. Date: End-September 2024. Status: Draft 2025 Budget submitted to parliament is in line with ECF program parameters.
- FISP—Migration to full e-voucher system in at least 73 districts. Date: End-September 2024. Status: Publish the list of at least 73 districts migrated to full e-voucher system on Ministry of Agriculture website by September 2024.
- Publish quarterly debt statistics bulletin and financing agreements for newly contracted external loans — ongoing, quarterly; status: Report is published online.

### Additional governance, transparency, and financial sector benchmarks (selected)
- Publish Tazama open access tender results on the Ministry of Energy website within one month of contract award, including winning bidder and unsuccessful bids with price, type, quantities, total contract amounts and beneficial owners. Status: Full results published on a Quarterly basis on MoE website.
- Financial Stability — Produce and publish the inaugural annual financial stability report. Date: End-June 2024. Status: Report is published online.
- Fiscal Risks — Expand scope of Fiscal Risk Report to include SOEs, local authorities, public pension schemes, PPPs and climate change; establish methodologies and forward-looking assessment. Date: End-June 2024. Status: Prepare and submit to IMF staff an expanded FRR by end-June 2024 (prior to publishing no later than end-September 2024).
- Cash Management Unit established and staffed to provide a cash flow forecasting plan for 2025. Date: End-July 2024. Status: Cash management Unit established and staffed to provide a cash flow forecasting plan for 2025.
- State-Owned Enterprises Policy and audited IDC financial statements publication targeted by End-October 2024. Status: Audited financial statements published on the IDC website; policy paper submitted for Cabinet approval.
- Adopt the deposit insurance framework consistent with Core Principles. Date: End-April 2025. Status: The BoZ adopts a deposit insurance scheme and published it on the BoZ website.
- Publish audit report by controller of Internal Audit on government's drought response procurement and logistics. Date: End-September 2025. Status: Final audit report published on the MoF website.

*Attachment II. Technical Memorandum of Understanding*

### 1. This Technical Memorandum of Understanding (TMU) defines the indicators used to

### 1. This Technical Memorandum of Understanding (TMU) defines the indicators used to

### Overview
- 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.
- For the purposes of the program, the central government of Zambia corresponds to the budgetary central government encompassed by the national budget (Parliament, Office of the President, national judiciary, all ministries, departments, agencies, constitutional commissions, and independent offices). See Annex Table 1.

### Program 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: Bank of Zambia.

### I. Quantitative Performance Criteria — A. Floor on the Central Government’s Primary Balance (Cash Basis)
- Definition:
  - Measured from revenue and expenditure (“above 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) data 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, lag no more than 30 days after the test date.
- Adjustors:
  - Shortfall in general budget support grants: primary balance floor adjusted downward by the kwacha value of the shortfall (calculated at current exchange rate). General budget support grants exclude grants linked to externally financed capital projects or earmarked grants.
  - Fuel arrears repaid via liability management operation: if repaid amount is lower (higher) than baseline, primary fiscal balance adjusted upwards (downwards) by the difference; kwacha value calculated at the current exchange rate at loan disbursement.

### I. Quantitative Performance Criteria — B. Ceiling on New Central Bank Credit to the Central Government
- Definition:
  - New central bank credit = change in total stock of outstanding loans and advances by the BoZ to the central government.
  - Excludes:
    - Purchases by the BoZ of government debt securities in 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 end of the month.
  - Submissions to include breakdown of outstanding loans and advances and other central bank claims on the government (including debt securities and on-lending of IMF credit).

### I. Quantitative Performance Criteria — 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;
    - Encumbered reserve assets (pledged, swapped, or collateral/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 defined as short-term (one year or less in original maturity) liabilities of the BoZ to non-residents, plus any outstanding use of IMF credit, 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.
  - All non-U.S. dollar values converted to U.S. dollars using 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.
- Adjustors:
  - Shortfall in public sector disbursements channeled through the Treasury Single Account (TSA) at the BoZ: NIR target adjusted downward by the amount of the shortfall. Starting in 2024, if TSA disbursements are lower(higher) than programmed, the NIR target will be adjusted downward (upward) by the amount of the shortfall (excess).
  - Shortfall in central government external debt service payment relative to agreed projections: NIR target adjusted upward by the amount of the shortfall; if actual payments exceed projections, NIR target adjusted downward by equivalent amount.

### II. Continuous Performance Criteria — External Debt and Definitions
- External debt defined on a residency basis; “debt” follows Guidelines on Public Debt Conditionality (Decision No. 16919-(20/103), October 28, 2020).
- Debt definition highlights:
  - Debt = current liability under contractual arrangement requiring future payments of assets or services to discharge principal and/or interest.
  - Forms of debt include:
    - Loans (advances, deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
    - Suppliers’ credits (deferred payments for delivered goods/services);
    - Leases (present value at inception of lease payments, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages from failure to pay contractual obligations that constitute debt are considered debt.
- Continuous QPCs also include non-introduction of exchange restrictions and multiple currency practices (non-quantitative obligations: (i) no new or intensified restrictions on payments and transfers for current international transactions; (ii) no introduction/modification of multiple currency practices; (iii) no bilateral payments agreements inconsistent with Article VIII; (iv) no imposition/intensification of import restrictions for balance of payments reasons).

### II. Continuous Performance Criteria — D. Ceiling on New External Debt Arrears (Central Government, BoZ, ZESCO)
- Definition:
  - Non-accumulation of new external debt arrears measured as cumulative gross flow from program approval date (August 31, 2022) on a continuous basis.
  - External debt arrears = debt service (principal and interest) overdue (considering contractually agreed grace periods) on external debt contracted or guaranteed by central government, BoZ, and ZESCO with non-residents.
  - Excludes arrears on debt subject to renegotiation or restructuring.
- Reporting:
  - MoFNP and BoZ continuously monitor; MoFNP will immediately report any new accumulation of external arrears to IMF staff; otherwise, data compiled jointly and reported quarterly by MoFNP within 30 days from end of each quarter.

### II. Continuous Performance Criteria — E. Ceiling on Contracting or Guaranteeing of New Non-Concessional External Debt
- Definition:
  - Newly contracted or guaranteed external debt by central government, BoZ, and ZESCO is concessional if grant element ≥ 35 percent.
  - Grant element = (nominal value − NPV) / nominal value, with NPV of debt calculated by discounting future payments using discount rate of 5 percent.
  - Loans from private entities not considered concessional unless accompanied by grant/grant element from foreign official entity forming integrated financing package with combined grant element ≥ 35 percent.
  - For variable-rate debt (benchmark + fixed spread), PV calculated using program reference rate plus fixed spread specified in contract.
    - Program reference rate for three-month U.S. SOFR: 2.38 percent (fixed for program duration).
    - Spread of three-month Euro EURIBOR over three-month USD SOFR: -150 basis points.
    - Spread of three-month JPY TIBOR over three-month USD SOFR: -250 basis points.
    - Spread of three-month U.K. SONIA over three-month USD SOFR: -50 basis points.
    - For currencies other than Euro, JPY, and GBP, spread over three-month USD SOFR: -50 basis points.
  - Where variable rate linked to benchmark other than three-month U.S. SOFR, add spread reflecting difference between benchmark rate and three-month U.S. SOFR (rounded to nearest 50 basis points).
  - TMU may be updated to reflect benchmark replacement for JPY LIBOR (TONAR) when operationally feasible.
- Scope and exclusions:
  - Minimum grant element requirement applies to debt and to commitments contracted or guaranteed for which value has not been received.
  - New non-concessional external debt = any new debt other than concessional debt contracted or guaranteed by central government, BoZ, and ZESCO with non-residents.
  - Excludes:
    - Loans from restructuring/rescheduling of external debt;
    - Central government securities issued in domestic currency placed in domestic markets and held by non-residents;
    - Debt contracted from IMF, World Bank, and AfDB;
    - Short-term trade credits for imports incurred since beginning of calendar year;
    - Central bank debt issuance and FX swaps for monetary policy or reserves management.
  - Contracting occurs when all conditions for entry into effect are met per contract and national legislation; contracting of credit lines with no predetermined disbursement schedules or multiple disbursements is considered contracting of debt.
- Reporting:
  - MoFNP will immediately report details of any new external loans contracted or guarantees issued to IMF staff.
  - Detailed data on all new external debt contracted or guaranteed by central government, BoZ, and ZESCO provided monthly by MoFNP within 30 days from end of each month, including amounts contracted/guaranteed, currencies, and terms and conditions (interest rates, maturities, grace periods, payments per year, commissions and fees, collaterals).

### III. Monetary Policy Consultation Clause
- Consultation bands apply to average CPI inflation measured by ZamStats.
- If observed quarterly average CPI inflation (average of the 3 monthly year-on-year inflation rates within a quarter) falls outside outer bands for June and December test dates:
  - Authorities complete a consultation with the IMF Executive Board focusing on: (i) stance of monetary policy and program alignment; (ii) reasons for deviations, considering compensating factors; (iii) proposed remedial actions if necessary.
  - When such consultation is triggered, access to Fund resources would be interrupted until consultation and relevant program review are completed.
- If observed quarterly average CPI inflation falls outside inner bands for any test date, authorities will conduct discussions with Fund staff.

### IV. Indicative Targets — G. Floor on Fiscal Revenues of 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 mineral royalty tax.
- Reporting:
  - Data on fiscal revenues (cash basis) provided to IMF staff using current exchange rates with a lag of no more than 60 days after the test date for December test dates; for all other test dates, lag no more than 30 days after the test date.

### IV. Indicative Targets — H. Ceiling on Present Value (PV) of New External Borrowing
- Definition:
  - Ceiling on PV of all new external debt contracted or guaranteed by central government, BoZ, and ZESCO, including commitments contracted/guaranteed for which no value received.
  - PV calculated by discounting future debt service (principal and interest) using discount rate of 5 percent and accounting for maturity, grace period, payment schedule, upfront commissions, and management fees.
  - For loans with grant element zero or less than zero, PV set equal to nominal value.
  - Guarantee defined as any explicit legal obligation of the government to service a debt in event of nonpayment by the debtor (in cash or kind).

*Source: Technical Memorandum of Understanding (TMU) text as provided.*

### 36. For the purposes of this indicative target, the ceiling excludes: (i) loans stemming from

### 36. For the purposes of this indicative target, the ceiling excludes: (i) loans stemming from

### Exclusions to the indicative ceiling
- The ceiling excludes:
  - (i) loans stemming from the restructuring or rescheduling of external debt;
  - (ii) central government securities issued in domestic currency, placed in the domestic primary or secondary markets, 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.; and
  - (v) central bank debt issuance and FX swaps for the purposes of monetary policy or reserves management.

### Reporting requirements for planned external borrowing
- Authorities will inform IMF staff of any planned external borrowing and the conditions on such borrowing before the loans are either contracted or guaranteed by the government and will consult with staff on any potential debt management operations.

### Ceiling on the Disbursement of Contracted but Undisbursed External Debt to Central Government and ZESCO — Definition and scope
- 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 between 2022 and 2025 as shared by authorities, after considering authorities’ estimates for cancellation and rescoping of contracted but undisbursed external loans and applies to this list.
- Disbursements from IDA and AfDB will be excluded from this ceiling.
- External debt defined as in paragraph 18 of the source document.

### Reporting on contracted but undisbursed external loans
- Detailed data on disbursements of contracted but undisbursed external loans (central government and ZESCO, government-guaranteed or not) to be provided quarterly, within 30 days from the end of each quarter, including amounts, currencies, creditors, and project names.

### Floor on Social Spending by the Central Government — Definition and reporting
- Social spending defined as central government expenditure on:
  - Social Cash Transfer;
  - Food Security Pack;
  - Empowerment Fund (Women and Youth);
  - Public Welfare Assistance Scheme;
  - Water and Sanitation;
  - budget transfers to the Public Service Pensions Fund;
  - the Health Sector; and
  - the Education Sector.
- Social spending is computed on a cash basis.
- Reporting lags:
  - For December test dates: data provided with a lag of no more than 60 days after the test date.
  - For all other test dates: data provided with a lag of no more than 30 days after the test date.

### Floor on Net Clearance of Expenditure Arrears and Net Clearance of Tax Refund Arrears — Definitions and reporting
- Expenditure arrears:
  - Wages, salaries, and pension contributions: any payments outstanding after the agreed date for payment of staff and for payroll deductions to third parties.
  - Goods & services and capital spending (including contractor payments): arrear arises when the bill has been received and delivery verified, but payment has not been made within the normal period per standard GRZ policy (30 days), or as stated in the supplier’s contract.
  - Utilities: if unpaid after the due date.
  - Subscriptions and leases: amounts outstanding after the due date.
- Assessment rules:
  - 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 is met when the 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:
  - VAT refunds: overdue if unpaid one month after the claims were validated and approved for payment.
  - For assessment, the impact of newly validated claims for the previous year will be neutralized: the target is met if 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.
- Reporting:
  - Central government arrears data compiled through quarterly audits of the accounts of the ZRA and spending ministries and agencies, conducted by the Internal Audit Department of the MoFNP.
  - Audits to 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 clearance of VAT refund arrears, MoFNP will report separately:
    - clearance of the stock of audited VAT refunds accumulated up to the end of the previous fiscal year; and
    - accumulation of claims and clearance of newly approved VAT refund in the current fiscal year.

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

### Public debt coverage and tailored inclusions in the DSA
- DSA coverage includes:
  - central government domestic and external debt, including US$1.6 billion of arrears to external suppliers (fuel and contractors) and central government guaranteed external debt;
  - nonguaranteed external debt of ZESCO (fiscally important SOE) and its domestic and external arrears;
  - central bank external debt (including outstanding Fund credit), together with the debt of social security funds guaranteed by the central government.
- Rationale and specific inclusions:
  - ZESCO’s non-guaranteed external debt and outstanding payables to independent power producers (IPPs) included given significant fiscal risks: domestic payables US$1.2 billion at end-2023 and external payables US$100 million at end-2023.
  - Inclusion of non-guaranteed SOE debt in DSA baseline; inclusion will be reassessed as ZESCO’s financial viability is restored.
  - Local governments cannot borrow externally without central government guarantee; authorities confirmed no extrabudgetary funds with outstanding external debt currently exist.
- SDR treatment:
  - 2021 General SDR allocation incorporated into DSA.
  - Treasury owned the SDR allocation; used 50 percent of the allocation in 2022 and 2023, respectively, for budget support.
  - Authorities transferred SDR holdings to BoZ in exchange for kwacha; SDR holdings are now part of BoZ’s unencumbered reserves.
  - Equivalent to about US$1.3 billion.
- Residency basis and non-resident holdings:
  - Nonresident holdings of domestic-currency debt are treated as external debt for the DSA.
  - End-December 2023 stock held by non-residents: K 56.4billion by end-2023, (US$2.2 billion or 24 percent of the outstanding domestic-currency government securities).
  - End-2022 stock: K 47.4 billion (about US$2.6 billion, 22.5 percent of outstanding domestic-currency government securities).
  - Projected depreciation of the exchange rate reduces dollar amounts of this stock.
  - Authorities restricting non-resident participation in primary market due to debt sustainability risks.
  - In 2024–25, a limit of 5 percent of the face value of gross domestic bonds issuance will be applied in line with agreement on restructuring perimeter reached with the OCC in June 2023.
  - By the end of the first quarter in 2024, the 5 percent limit on non-residents participation in the bonds primary market has already been reached.

### Background on debt and risk assessment highlights
- Debt distress status and arrears:
  - Zambia remains in debt distress.
  - The stock of external arrears (principal and interest) reached 26 percent of GDP by end-year 2023.
  - Despite significant fiscal adjustment, absent settlement on the Eurobonds exchange and debt restructuring agreements with non-bonded commercial creditors, 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.
- Debt treatment developments and scenarios:
  - Authorities signed a Memorandum of Understanding with official bilateral creditors on a debt treatment under the G20 Common Framework and have a credible strategy to treat commercial creditors on comparable terms.
  - An agreement in principle (AIP) consistent with program parameters and OCC Comparability of Treatment requirements was reached with the Steering Committee of the Ad-Hoc Creditor Committee of Zambia’s Eurobonds holders on March 25, 2024.
  - Under an alternative scenario where agreed treatments are applied to the baseline and other non-bonded commercial claims are treated on comparable terms, debt would be assessed to be sustainable on a forward-looking basis.
- Debt-carrying capacity:
  - Zambia’s debt-carrying capacity is rated as weak based on the composite indicator (CI) using data from the April 2024 WEO and the 2022 CPIA.
- Other specific items:
  - As of end-December 2022, government-guaranteed debt to the Public Service Pension Fund: US$52.7 million.
  - ZESCO generated sufficient revenues in 2023 to continue servicing its nonguaranteed external debt, which has been completely amortized by end-December 2023.

*Source: 1zmbea2024001-print-pdf*

### 6. The Official Creditor Committee (OCC) under the CF, formed in June 2022,

### 6. The Official Creditor Committee (OCC) under the CF, formed in June 2022,

### Debt-restructuring process and creditor engagement
- OCC formed in June 2022; MoU on terms of the debt restructuring reached in October 2023 and signed by all OCC members.
- Authorities negotiated with Eurobond holders, facilitated by a bondholder committee established in July 2020.
- Agreement in principle for restructuring Zambia’s Eurobonds, consistent with program parameters and Comparability of Treatment (CoT) requirements as set by the OCC, announced on 25 March 2024; consent solicitation launched on May 13, 2024.
- Some official creditor representatives requested classification of their export-credit-agency-backed claims as commercial claims; China requested classification of all Sinosure-backed commercial claims as private claims. These claims are included as commercial creditors’ claims for the purpose of Fund policy application.

### External and public debt stocks (key figures as of end-2023)
- External PPG debt: increased to US$21.6 billion by end-2023.
  - New foreign-currency external disbursements to the central government in 2023: close to US$710 million (principally IMF and World Bank).
  - Increase in interest arrears on central government foreign-currency-denominated external debt in 2023: about US$439 million.
  - Further interest arrears on government-guaranteed external debt accumulated: US$90 million (in 2023); a payment of US$1.5 million was made by ZESCO on government-guaranteed debt in January 2024.
  - ZESCO non-guaranteed external debt: fully amortized in 2023 as it generated sufficient revenues to continue servicing it.
- Stock of expenditure arrears (fuel and contractors) plus ZESCO arrears to external IPPs: broadly unchanged at US$1.75 billion at end-December 2023.
- Stock of non-resident holdings of domestic-currency debt declined in dollar terms to US$2.2 billion by end-2023 due to exchange rate depreciation.
- As a result, external PPG debt ended the year about US$639 million higher.
- Outstanding stock of domestically-issued government securities: K 232 billion at end-2023 (or 41 percent of GDP), up from K 210 billion a year earlier.
- Total PPG debt ended 2023 at about US$31.2 billion (or 141 percent of GDP).

### Debt composition and market access
- Commercial creditors’ share in total external debt reached 32 ½ percent in this DSA update given the stated classifications.
- Eurobonds outstanding (end-2023): US$3,715 million.
- Domestic-currency debt (end-2023): US$11,854 million (37.9 percent of total debt); held by non-residents: US$2,192 million (7.0 percent of total debt).
- Non-resident share of domestically-issued securities increased to 24 percent at end-2023, up from about 22.5 percent at end-2022 (peak around 29 percent earlier in 2022).
- Zambia remained without access to international capital markets; weighted average spreads on Eurobonds peaked at 6,954 basis points on March 20, 2023, and narrowed to 1,359 basis points by May 22, 2024.

### Macroeconomic developments and baseline assumptions
- Real GDP: estimated at 5.4 percent in 2023 (upward revision); 2024 outlook deteriorated due to drought shock with GDP growth projected at 2.3 percent.
- Medium-term growth (2024–33): expected to average around 5 percent, supported by mining developments (Mopani Copper Mines strategic partner selected December 1, 2023; investor to resolve Konkola Copper Mines), structural reforms, and sectoral plans (mining fiscal regime, WTO Investment Facilitation Agreement, AfCFTA Investment Protocol, ZESCO turnaround plan, five-year electricity tariff schedule, Integrated Resource Plan approved November 2023, Comprehensive Agricultural Transformation Support Programme).
- Inflation: end-2023 inflation reached 13.1 percent; Bank of Zambia tightened monetary conditions. Inflation expected to peak at 15 percent by end-2024, then stabilize around the mid-point of the Bank of Zambia target band by end-2025.
- External sector:
  - Current account: deficit of about US$545 million in 2023 (deteriorated by US$1.6 billion in 2023); projected to be -0.2 percent of GDP in 2024.
  - Non-interest current account balance projected to average a surplus of 10½ percent of GDP for 2024–2033.
  - Bank of Zambia increased gross reserves and met the end-December 2023 NIR target.
- Nominal GDP (mention in table): 28,163 (US$ million).

### Fiscal performance and policy
- Primary fiscal surplus (on a commitment basis) in 2023: 1.5 percent of GDP (0.9 percentage points higher than previous DSA update), driven by higher non-mining tax revenues (+0.6 percent of GDP) and grants (+0.4 percent of GDP).
- Primary balance (cash basis) in 2023: surplus of 0.6 percent of GDP (improved by 2.2 percentage points of GDP, including accumulation of expenditure arrears).
- 2024 primary balance (cash basis): expected to turn negative to 0.7 percent of GDP; this includes a liability management operation to clear fuel arrears of 2.3 percent of GDP. Primary balance on commitment basis in 2024: 2.9 percent of GDP.
- Fiscal targets: primary balance (commitment basis) targeted to improve to a surplus of 3.3 percent of GDP by 2025 (an additional 1.4 percentage point adjustment in 2024 and 0.4 percentage point in 2025).
- Revenues (adjusted for VAT refund arrears) projected to increase to 21.6 percent of GDP by 2025, compared to 19.3 percent of GDP in 2019; measures include eliminating fuel implicit subsidies worth about 1.2 percent of GDP and broadening the tax base.
- Policy measures to improve spending efficiency: strengthen cash management and commitment controls, new systems for screening and approving public investment, implementation of a new Public-Private Partnership Law.

### Financing assumptions and conditionality
- Domestic borrowing remains a key financing source; concessional borrowing from IMF, World Bank and AfDB is an important part of the mix.
- External financing during 2022–25 assumptions:
  - Disbursements on contracted but undisbursed priority project loans: US$1.8 billion.
  - Expected new financing from the World Bank (including grants): about US$1.6 billion.
  - IMF financing: US$1.7 billion.
  - African Development Bank: US$250 million.
- Under the program, Zambia will not undertake non-concessional borrowing unless an exception is granted per the IMF’s Debt Limit Policy or World Bank Sustainable Development Finance Policy.
- Access to international markets is assumed lost through the medium term; non-resident participation in domestic debt market expected to remain limited and authorities will limit non-resident participation in new issuances during the program.

### Risks, expected impacts, and outlook
- Drought shock in early 2024 materially lowered near-term growth and exports (notably maize and electricity), contributing to imports and worsening trade balance in 2024 relative to the previous update.
- Debt restructuring and program implementation are expected to improve external position, reduce the deficit, improve business confidence, attract FDI, and support FX reserve build-up to the targeted five months of prospective imports by the end of the program.
- Financing risks remain elevated consistent with the DSF market-financing module, though that module’s signal is less relevant given Zambia’s shutdown from international markets.

*Source: IMF staff report (chapter text).*

### 16. Relative to the previous DSA update, the agreement with the official creditors under

### 1zmbea2024001-print-pdf - 16. Relative to the previous DSA update, the agreement with the official creditors under

### Creditor agreements and state-contingent treatment
- Official creditors represented by the G20 Common Framework OCC reached an agreement on a debt treatment for Zambia consistent with the financing assurances provided in June 2022 and embedded in a signed Memorandum of Understanding.
- The 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 their interest costs consistent with the parameters of the ECF-arrangement.
  - The state-contingent clause will be evaluated at end-2025.
- Upside case (if DCC upgraded to medium at evaluation):
  - Upside treatment triggered with some acceleration of principal payments and higher interest payments to official creditors.
  - This treatment remains anchored in the LIC-DSF and meets 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.

### Private creditor restructuring and comparability
- Restructuring strategy for private claims remains presented as an alternative DSA scenario; discussions with non-bonded commercial creditors are ongoing.
- Private creditors are expected to deliver treatment consistent with DSA parameters and on comparable terms with the OCC.
- Comparable treatment assessment will take into account:
  - Change in debt service.
  - NPV loss.
  - Change in duration of the claims.
- Status and terms:
  - A debt treatment in line with program parameters has been agreed for about half of the private claims’ perimeter, expected to be implemented by the second half of June; residual private creditor discussions expected to finalize by end of the year.
  - On March 25, 2024, authorities reached an agreement in principle (AIP) with the Steering Committee of the Ad Hoc Creditor Committee of Zambia’s Eurobond holders; staff assessed this AIP as consistent with program parameters and OCC confirmed CoT requirements are met.
  - Bondholder AIP includes an upside scenario activated by a dual trigger linked to Zambia’s DCC and/or the performance of:
    - The 3-year moving average of exports (in US$), and
    - The US$-equivalent of fiscal revenues relative to IMF staff projections as released at the time of the second review of the ECF arrangement.
  - The state-contingent clause for bondholders will be evaluated over a three-year period, from January 2026 to December 2028.
  - Base case with weak DCC for bondholders:
    - Bondholders offered two new notes in exchange for the Eurobonds implying a nominal haircut of about 20 percent and significant cash debt relief over the program period.
    - One note includes the state-contingent clause which, if triggered, would lead to an acceleration of payments and higher coupon payments.
  - Authorities launched a consent solicitation on May 13, 2024; in June they announced participation reached more than 90 percent of the face value of the claims.

### Arrears clearance strategy (fuel arrears)
- Baseline includes revised strategy for clearance of arrears, notably fuel arrears to external suppliers.
- Stock of fuel arrears:
  - Reached $897 million at end-2023 (a 50-percent increase over 2022).
  - Only 48 percent represented principal; the rest due to accrued interest and penalties.
- Financing and structure:
  - Operation financed through a loan denominated in U.S. dollars from domestic banks that will secure funding by drawing on assets held abroad.
  - Operation aims to achieve net present value gains and shifts external liabilities to domestic FX liabilities, mitigating external debt sustainability risks caused by the drought shock.

### Program conditionality, borrowing program, and ceilings
- Debt sustainability supported by:
  - Debt conditionality under the IMF program and the IDA Sustainable Development Finance Policy.
  - A zero ceiling on new non-concessional external borrowing during the program period.
  - A ceiling on the PV of new concessional external borrowing.
- Indicative Target (IT) on PV of new external borrowing set in line with expected borrowing plan for 2024-25.
- 2024 borrowing program includes loans in the pipeline likely part of the 2025 budget and expected to be signed by end-2024; delays could revise projections at next review.
- 2025: No other new external borrowing expected except financing from IMF, World Bank, AfDB, and issuances on domestic market.

### Risks, realism, and tools
- Downside risks:
  - Uncertainties around copper prices and production.
  - Rainfall variability affecting agriculture, electricity, and mining; could aggravate external vulnerabilities.
  - Materialization of these risks would increase debt vulnerabilities.
- Upside risks:
  - Faster global and domestic growth.
  - Speedy resolution of remaining debt restructuring aspects.
  - Greater confidence effects, stronger reform momentum, higher copper prices, and realization of mineral development investments.
- DSA realism tools:
  - Highlight the large size of the programmed fiscal adjustment relative to outcomes in other LIC programs.
  - Likelihood of diminished growth contribution from public investment over the forecast period.
  - Risk that adjustment proves infeasible is mitigated by authorities’ demonstrated track record to take needed measures.
  - Unusual relation between fiscal adjustment and growth projections in 2024 and 2025 driven by drought shock and expected rebound in 2025.

### Borrowing program summary (selected numeric items)
- Stock of fuel arrears: $897 million at end-2023.
- Participation in bond consent solicitation: more than 90 percent of face value of claims.
- Expected new financing over 2022-25 from IMF, World Bank (including grants), and AfDB: around US$3.5 billion.
- World Bank total financing over 2022-25 (including projected disbursements from existing commitments): about US$2.6 billion.
- New financing from operations approved after the SLA contributing to BoP gap reduction: US$1.6 billion, of which about US$575 million will be provided in grants.

### Debt-carrying capacity and DSA stress tests
- Composite Indicator (CI) score and classification:
  - Latest CI score: 2.62.
  - Cut-off for medium DCC: 2.69.
  - Classification: Weak (unchanged from previous DSA).
- Standardized stress tests:
  - Indicate breaches of all debt thresholds for an extended period.
  - Standardized exports shock is the most extreme for all external debt indicators except debt service-to-revenue ratio (most extreme under the combination shock).
  - Market financing tool points to significant vulnerabilities, though relevance reduced given current lack of access to international capital markets.
  - 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 mine acquisition.

### External DSA assessment (baseline and stress outcomes)
- Baseline: All four external debt burden indicators breach thresholds.
  - Debt service-to-revenue ratio:
    - Soars to a peak of 69 percent in 2024.
    - Remains well above 14 percent threshold until 2031.
    - Averages about 25 percent in 2024-33.
  - Debt service-to-exports ratio:
    - Peaks at around 28 percent in 2024.
    - Falls to the 10 percent threshold in 2029.
    - Averages about 12 percent over 2024-33.
  - PV of PPG external debt-to-GDP:
    - Averages about 44½ percent from 2024-33.
    - Falls below prudent threshold of 30 percent only in 2035.
  - PV of PPG external debt-to-exports:
    - Breaches threshold at about 146 percent in 2023.
    - Averages about 95½ percent over 2024-33.
- Stress tests:
  - Thresholds for all four external debt indicators are breached by large margins under stress.
  - Under standardized exports shock:
    - PV of PPG external debt-to-exports peaks at 349 percent in 2026 and remains well above threshold in medium and long term.

### Public DSA assessment
- PV of total PPG debt-to-GDP benchmark:
  - Breached throughout medium and long term.
  - Peaked at 119 percent in 2023.
  - Averages about 67 percent from 2024-33.
  - Falls below threshold in 2038.
- Most extreme shock for this indicator: exports shock, peaking at 108 percent in 2026.
- Combined contingent liabilities shock:
  - Most extreme for total debt service-to-revenues indicator, peaking at 103 percent in 2026.

### Risk rating, sustainability, and alternative restructuring scenario
- Current assessment:
  - Zambia remains in debt distress.
  - Debt is deemed unsustainable in the absence of a debt treatment in line with program parameters for all commercial claims in the restructuring perimeter.
  - DSA update based on macroeconomic framework under third review, incorporating significant fiscal adjustment and expected new financing around US$3.5 billion over 2022-25.
  - Large financing gaps remain and need to be filled through completion of debt restructuring in line with DSA and IMF program parameters.
- Alternative restructuring scenario (agreements with all private creditors on comparable terms):
  - Zambia would be assessed as sustainable on a forward-looking basis.
  - Two alternative baselines depending on DCC evaluation at program end:
    - If Zambia remains at weak DCC (Base Case Treatment):
      - PV of external debt-to-exports falls below “substantial space to absorb shocks” threshold of 84 percent by 2027.
      - Debt service-to-revenue ratio falls below 14 percent by 2025 and remains below 14 percent on average over 2026-31.
      - PV of PPG external debt-to-GDP averages about 36 percent from 2024-33 and falls below 30 percent in 2031.
      - External debt service-to-exports averages 6½ percent over 2026-31.
    - If DCC upgraded to medium (Upside Treatment triggered):
      - PV of external debt-to-exports falls below “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 averages about 43½ percent from 2024-33 and falls below 40 percent in 2030.
      - External debt service-to-exports averages 8½ percent over 2026-31.
  - Under the restructuring scenario with state-contingent debt relief, all external debt burden indicators decline to levels consistent with a moderate risk of external debt distress over the medium term.

*Source: IMF staff projections and analysis as presented in the supplied DSA update content.*

### 31. Risks to the debt outlook are significant. This DSA is predicated on the Zambian

### 31. Risks to the debt outlook are significant.

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

### Mitigating reforms and institutional strengthening
- Other reforms to support debt sustainability following the debt restructuring are in train and further mitigate risks.
- To strengthen the institutional framework, the authorities adopted a new Public Debt Management Act in August 2022.
- The Public Debt Management Act provides greater oversight on the contracting of debt.
- Ongoing efforts include:
  - Strengthening public financial management more broadly.
  - Strengthening debt transparency.
  - Plans to modernize and strengthen capacity of the debt management unit.
- The adoption of the Public Debt Management Act was supported under the IMF program and IDA’s Sustainable Debt Financing Policy.

### Projections, scenarios, and indicators (Text Figure 4: Zambia: Alternative baseline, Upside Case Treatment – Indicators of PPG External Debt, 2024-2034)
- Time horizon shown: 2024-2034.
- Indicators displayed:
  - Debt service-to-revenue ratio.
  - PV of debt-to-exports ratio.
  - PV of debt-to-GDP ratio.
  - Debt service-to-exports ratio.
- Scenario labels appearing in the figure text:
  - Most extreme shock 1/Historical scenarioBaselineThreshold
  - Most extreme shock: Exports
- Axis/value markers shown in the figure text for respective indicators (as presented):
  - Debt service-to-revenue ratio: 0 10 20 30 40 50 60 70 80 90 (years 2024–2034 on horizontal axis).
  - PV of debt-to-exports ratio: 0 50 100 150 200 250 300 350 400 450 (years 2024–2034 on horizontal axis).
  - PV of debt-to-GDP ratio: 0 20 40 60 80 100 120 140 160 180 (years 2024–2034; 2027 callout in figure).
  - PV of debt-to-GDP ratio (alternate axis labeling): 0 5 10 15 20 25 30 35 40 45 50 (years 2024–2033/2034 as shown).
- Figure note:
  - "1/ Includes the agreed treatments and the authorities’ strategy for the other commercial creditors."
  - "Sources: IMF staff projections based on the main elements of the agreed treatments and the authorities’ restructuring strategy."

*Source: IMF staff projections based on the main elements of the agreed treatments and the authorities’ restructuring strategy.*

### 33.  The authorities shared staff’s assessment of their debt sustainability and emphasized their

### 33.  The authorities shared staff’s assessment of their debt sustainability and emphasized their 

### Debt-restructuring commitments and status
- Authorities committed to completing the debt restructuring operation of their external debt in line with DSA and IMF program parameters.
- Agreement in principle reached with the Eurobonds’ holders on March 25, 2024, which is expected to be implemented by end-June.
- Work on signing the bilateral agreements with official creditors was advancing well.
- Authorities committed to reach restructuring agreements with other external creditors on comparable terms and consistent with IMF-program parameters.
- Authorities and staff agreed that once these agreements were implemented debt sustainability would be restored.

### DSA indicators and stress-test framework (selected highlights from figures and tables)
- Figures present indicators of Public and Publicly Guaranteed (PPG) External Debt and Public Debt under alternative scenarios, 2024–34, with stress tests including Historical scenario, Market financing, Combined contingent liabilities, Natural disaster, Commodity price, and others.
- Stress-test customization notes:
  - "Yes" indicates any change to the size or interactions of the default settings for the stress tests. "n.a." indicates that the stress test does not apply.
  - 1/ The most extreme stress test is the test that yields the highest ratio in or before 2034.
  - 2/ Commodity price shocks use magnitudes based on IMF research department commodity price outlook.
- Market-financing risk indicators (Figure 5): 
  - EMBI value reported as 570.
  - GFN breach of benchmark: Yes.
  - Potential heightened liquidity needs: High.

### Key external DSA baseline figures (Table 1, External Debt Sustainability Framework, Baseline Scenario, 2021–39)
- External debt (nominal): 113.5 (2021); 105.8 (2022); 127.1 (2023); 108.1 (2024); 88.6 (2025); 76.0 (2026); 69.7 (2027); 63.9 (2028); 61.8 (2029); 43.0 (2030); 44.2 (2034); 94.4 (2039); 65.7 (listed among series).
- PPG external debt (of which): 75.9 (2021); 76.7 (2022); 97.5 (2023); 76.7 (2024); 63.9 (2025); 55.4 (2026); 52.1 (2027); 48.3 (2028); 46.3 (2029); 44.3 (2030); 24.4 (2034); 60.5 (2039); 48.9 (series).
- Change in external debt: -36.5 (2021); -7.7 (2022); 21.4 (2023); -19.1 (2024); -19.5 (2025); -12.6 (2026); -6.3 (2027); -5.8 (2028); -2.1 (2029); -3.1 (2030); -0.6 (2034).
- Identified net debt-creating flows: -42.2 (2021); -29.9 (2022); 4.0 (2023); -6.7 (2024); -16.5 (2025); -14.7 (2026); -14.4 (2027); -13.8 (2028); -13.4 (2029); -12.4 (2030); -10.6 (2034); -6.9 (2039); -12.9 (series).
- Non-interest current account deficit: -19.1 (2021); -8.7 (2022); -1.4 (2023); -2.4 (2024); -9.0 (2025); -7.7 (2026); -8.0 (2027); -7.9 (2028); -7.8 (2029); -7.1 (2030); -6.2 (2034); -4.6 (2039); -7.1 (series).
- Exports: 53.1 (2021); 42.7 (2022); 40.7 (2023); 49.6 (2024); 49.6 (2025); 46.7 (2026); 45.6 (2027); 45.3 (2028); 45.1 (2029); 44.3 (2030); 35.1 (2034).
- Imports: 34.8 (2021); 34.4 (2022); 38.6 (2023); 42.7 (2024); 35.9 (2025); 34.2 (2026); 33.4 (2027); 33.4 (2028); 33.4 (2029); 33.1 (2030); 26.1 (2034).
- Endogenous debt dynamics contribution: -20.0 (2021); -20.6 (2022); 5.3 (2023); -0.5 (2024); -3.7 (2025); -2.5 (2026); -2.1 (2027); -1.6 (2028); -1.3 (2029); -1.0 (2030); -0.9 (2034).
- Contribution from nominal interest rate: 7.2 (2021); 4.9 (2022); 3.3 (2023); 2.7 (2024); 2.2 (2025); 1.9 (2026); 1.7 (2027); 1.7 (2028); 1.6 (2029); 1.0 (2030); 1.1 (2034).
- Contribution from real GDP growth: -7.7 (2021); -4.5 (2022); -5.9 (2023); -3.2 (2024); -5.8 (2025); -4.5 (2026); -3.8 (2027); -3.3 (2028); -2.9 (2029); -2.0 (2030); -2.0 (2034).
- Residual: 5.7 (2021); 22.2 (2022); 17.4 (2023); -12.3 (2024); -3.0 (2025); 2.1 (2026); 8.1 (2027); 8.0 (2028); 11.3 (2029); 9.3 (2030); 10.0 (2034); 17.5 (2039); 5.3 (series).
- Sustainability indicators:
  - PV of PPG external debt-to-GDP ratio: 59.4, 65.3, 65.7, 49.3, 45.2, 42.5, 41.1, 30.8, 22.0 (selected points across series).
  - PV of PPG external debt-to-exports ratio: 146.1, 131.7, 114.4, 105.6, 99.2, 93.8, 91.2, 69.5, 62.6 (selected).
  - PPG debt service-to-exports ratio: 25.9, 28.8, 19.3, 28.1, 14.7, 16.1, 12.4, 10.0, 6.4, 4.8, 6.4 (series).
  - PPG debt service-to-revenue ratio: 63.1, 61.6, 38.4, 69.0, 34.2, 34.6, 25.9, 20.2, 12.8, 9.4, 10.0 (series).
- Gross external financing need (Million of U.S. dollars): -697.6, 1348.8, 2571.6, 2757.4, -853.4, -734.3, -1727.4, -2325.0, -4084.4, -4776.0, -8727.6 (selected).

### Key macroeconomic assumptions (Table 1)
- Real GDP growth (in percent): 6.2 (2021); 5.2 (2022); 5.4 (2023); 2.3 (2024); 6.6 (2025); 5.9 (2026); 5.6 (2027); 5.1 (2028); 4.9 (2029); 4.8 (2030); 4.9 (2034); 3.4 (2039).
- GDP deflator in US dollar terms (change in percent): 14.7 (2021); 25.2 (2022); -8.2 (2023); -10.1 (2024); 15.2 (2025); 9.2 (2026); 5.9 (2027); 2.9 (2028); 2.5 (2029); 2.8 (2030); 2.9 (2034); -2.0 (2039); 3.6 (series).
- Effective interest rate (percent): 5.9 (2021); 5.7 (2022); 3.1 (2023); 1.9 (2024); 2.5 (2025); 2.5 (2026); 2.5 (2027); 2.6 (2028); 2.8 (2029); 2.4 (2030); 2.6 (2034); 3.1 (2039); 2.5 (series).
- Growth of exports of G&S (US dollar terms, in percent): 37.0 (2021); 6.1 (2022); -8.0 (2023); 12.2 (2024); 22.8 (2025); 8.9 (2026); 9.1 (2027); 7.5 (2028); 7.0 (2029); 7.3 (2030); 0.0 (2034); 1.4 (2039); 9.4 (series).
- Growth of imports of G&S (US dollar terms, in percent): -4.3 (2021); 30.3 (2022); 8.3 (2023); 1.9 (2024); 3.3 (2025); 10.2 (2026); 9.1 (2027); 8.1 (2028); 7.6 (2029); 7.2 (2030); 0.0 (2034); 2.9 (2039); 7.0 (series).
- Grant element of new public sector borrowing (in percent): 16.3, 18.0, 11.6, 11.1, 7.2, 18.6, 24.5, 25.2 (selected).
- Government revenues (excluding grants, in percent of GDP): 21.8 (2021); 20.0 (2022); 20.4 (2023); 20.2 (2024); 21.4 (2025); 21.7 (2026); 21.8 (2027); 22.3 (2028); 22.4 (2029); 22.5 (2030); 22.5 (2034).
- Aid flows (Million of US dollars): 262.5 (2021); 226.4 (2022); 373.2 (2023); 753.3 (2024); 910.3 (2025); 581.6 (2026); 570.1 (2027); 341.5 (2028); 607.0 (2029); 712.8 (2030); 798.7 (2034).

### Public sector DSA baseline figures (Table 2)
- Public sector debt: 128.4 (2021); 122.1 (2022); 141.1 (2023); 112.1 (2024); 90.8 (2025); 81.0 (2026); 75.7 (2027); 70.9 (2028); 66.9 (2029); 47.5 (2030); 35.5 (2034); 85.6 (2039); 70.1 (series).
- Change in public sector debt: -29.2 (2021); -6.4 (2022); 19.0 (2023); -29.0 (2024); -21.3 (2025); -9.8 (2026); -5.3 (2027); -4.8 (2028); -4.1 (2029); -3.3 (2030); -2.0 (2034).
- Identified debt-creating flows: -42.7 (2021); 0.6 (2022); 16.5 (2023); -16.1 (2024); -20.6 (2025); -9.3 (2026); -4.3 (2027); -4.3 (2028); -3.7 (2029); -3.1 (2030); -2.0 (2034); 3.0 (2039); -6.8 (series).
- Primary deficit (cash basis): 3.6 (2021); 1.6 (2022); -0.6 (2023); 0.7 (2024); -2.5 (2025); -2.3 (2026); -2.0 (2027); -1.9 (2028); -1.9 (2029); -1.3 (2030); -0.6 (2034); 1.1 (2039); -1.6 (series).
- Automatic debt dynamics: -46.3 (2021); -1.0 (2022); 17.1 (2023); -16.7 (2024); -18.0 (2025); -7.1 (2026); -2.4 (2027); -2.4 (2028); -1.8 (2029); -1.8 (2030); -1.4 (2034).
- Contribution from interest rate/growth differential: -11.6 (2021); -3.7 (2022); -4.3 (2023); -8.6 (2024); -5.7 (2025); -2.9 (2026); -2.2 (2027); -1.9 (2028); -1.6 (2029); -1.5 (2030); -1.2 (2034).
- Residual: 13.5 (2021); -6.9 (2022); 2.5 (2023); -21.1 (2024); -13.1 (2025); -4.7 (2026); -1.1 (2027); -0.9 (2028); -0.6 (2029); -0.4 (2030); -0.2 (2034); 9.1 (2039); -4.1 (series).
- PV of public debt-to-GDP ratio: 119.2, 102.0, 82.4, 74.0, 69.6, 65.9, 62.4, 44.4, 33.4 (selected).

### Sensitivity analysis highlights (Tables 3 and 4)
- Table 3 (Sensitivity Analysis for Key Indicators and PPG External Debt, 2024–34) shows baseline and alternative scenarios for:
  - PV of debt-to-exports ratio, debt service-to-revenue ratio, PV of debt-to-GDP ratio, debt service-to-exports ratio with baseline and scenario-specific time series (examples: Baseline PV of debt-to-exports ratio series: 65 57 49 45 43 41 40 37 34 32 31).
  - Tailored tests include Combined contingent liabilities, Commodity price, Market Financing; Natural disaster marked n.a.
  - Thresholds listed for indicators: e.g., PV of debt-to-exports ratio threshold 30; PV of debt-to-GDP ratio threshold 140; Debt service-to-exports ratio threshold 10; Debt service-to-revenue ratio threshold 14.
- Table 4 (Sensitivity Analysis for Key Indicators of Public Debt, 2024–34) provides baseline and scenario series for:
  - PV of Debt-to-GDP Ratio, PV of Debt-to-Revenue Ratio, Debt Service-to-Revenue Ratio with baseline and scenario-specific projections (examples: Baseline PV of Debt-to-GDP Ratio series: 102 82 71 66 60 56 54 51 47 44 44).
  - TOTAL public debt benchmark: 35 across series.
  - Baseline projections for Debt Service-to-Revenue Ratio: 117 79 73 66 54 48 42 42 37 35 31.

### Realism tools and drivers of debt dynamics (Figures 3–4)
- Figures decompose debt dynamics under the baseline into contributions from:
  - Price and exchange rate, Real GDP growth, Nominal interest rate, Current account + FDI, Change in PPG debt, Other debt-creating flows, Real exchange rate depreciation, Primary deficit.
- Realism tools show contributions to Real GDP growth from public and private investment under previous and current DSA vintages and the distribution of 3-year adjustment in primary balance across LIC programs.

*Source: Country authorities; and staff estimates and projections, as presented in the supplement.*

### 1.      The authorities approved a revised 2024 budget in line with the program

### 1.      The authorities approved a revised 2024 budget in line with the program parameters

### Revised 2024 budget and humanitarian response
- Revised budget submitted to Parliament on June 21, 2024.
- Includes provisions for the humanitarian drought response and the liability management operation to clear fuel arrears.
- Social protection adjustments:
  - Government will double the cash transfers to households already in its social cash transfer scheme.
  - Coverage extended to an additional 1.2 million households for a period of a year, reaching a total of 2.5 million affected households.
  - Cash for work scheme approved equivalent to 0.3 percent of GDP to extend reach in urban areas.
- Implementation financing gap for drought response:
  - Measures estimated to require more than US$900 million financing.
  - Only US$512 million is readily available.
  - Authorities request an augmentation of access amounting to 30 percent of quota under the ECF arrangement.

### Arrears clearance strategy and liability management
- Revised arrears clearance strategy approved and published on June 19, 2024.
- Strategy includes a liability management operation for fuel arrears aimed to secure net present value savings and arrest buildup of liabilities from penalties and interest.
- Strategy emphasizes transparency and strengthening of PFM processes to monitor and prevent arrear accumulation.
- Program-related debt actions:
  - Agreement in principle between Government and the Steering Committee of Bondholders reached on March 25, 2024.
  - Consent solicitation initiated on May 13, 2024.
  - On June 11, 2024, government exchanged three outstanding Eurobonds (due 2022, 2024, and 2027) for two new amortizing bonds: $1.72 billion with final maturity in 2033 and $1.36 billion with final maturity in 2053 (base case scenario).
- Authorities seek adjustors to the primary balance for the liability management operation and to NIR target to account for central government debt service payments.

### Program performance and requests to Fund
- End-2023: All quantitative performance criteria (QPC) and indicative targets (IT) met, except IT on net clearance of VAT refund arrears.
- End-March 2024: ITs for primary balance and non-mining fiscal revenue met; ITs for net international reserves (NIR), social spending and arrears clearance missed.
- Structural benchmarks: All but one met; migration of Farmer Input Support Program in at least 33 districts not met, but Cabinet approval of migration of 74 districts expected by end-September 2024.
- Requests to IMF:
  - Modifications to end-June and end-December 2024 QPCs to the NIR targets to reflect additional FX required for priority imports.
  - Modifications for QPCs for the primary fiscal balance and the monetary policy consultation clause to reflect drought impact.
  - Adjustment to ceiling on contracted but undisbursed debt for end-2024 to align with lower-than-expected project disbursement.
  - Executive Directors’ support sought for completion of the 3rd ECF Review and of the financing assurances review.

### Recent economic developments and outlook
- Real GDP growth:
  - 2022: 5.2 percent.
  - 2023: 5.4 percent.
  - 2024 (projected): 2.3 percent (decline due to slower-than-expected rebound in mining production, contraction in agricultural output, and power shortages).
  - 2025-26 (projected average): 6.2 percent as drought effects dissipate.
- Drought impact:
  - Preliminary estimates indicate about 48 percent of Zambia’s population has been affected by the drought.
  - National disaster and emergency declared in February 2024.
- Inflation:
  - End-2022: 9.9 percent.
  - 2023: 13.1 percent.
  - May 2024: 14.7 percent.
  - Expected to peak around 15 percent in 2024.
  - Projected to moderate to 9.8 percent in 2025.
- External sector:
  - Current account balance deteriorated to a deficit of 1.9 percent of GDP in 2023.
  - Gross international reserves increased from 3.4 to 3.7 months of prospective import cover between 2022 and 2023, supported by multilateral disbursements.

### Fiscal policy, revenue mobilization, and public finance management
- Fiscal stance:
  - Authorities committed to a multi-year fiscal consolidation path to ensure debt sustainability through revenue mobilization and reprioritized spending, while preserving priority social and investment expenditures.
  - Stronger than projected primary fiscal surplus in 2023 expected to deteriorate into a deficit in 2024 due to drought-related external and fiscal financing needs.
- Revenue administration reforms and measures:
  - Large Taxpayer Office (LTO) for non-mining and Specialized Tax Office (STO) for mining established in January 2024.
  - Electronic invoicing system launched in March 2024; full implementation for all VAT and Company Income Tax (CIT) registered taxpayers scheduled for July 1, 2024. VAT refunds will only be claimable based on invoices generated within the new system.
  - Taxation of VAT on Cross-Border Electronic Services launched on April 1, 2024.
  - Digital Tax Clearance Certificate introduced.
  - ZRA interfaced IFMIS and Ministry of Lands database to improve tax assessment accuracy and reduce fraud.
- Expenditure measures in 2024 budget:
  - Further spending reprioritization to increase social cash transfer and school feeding programme.
  - Reduced other domestic primary expenditures, scaled down intergovernmental transfers, prevented increase in stock of fuel arrears, continuous clearing of expenditure and VAT refund arrears, and refrained from introducing fuel subsidies.
- PFM strengthening:
  - IFMIS rolled out to all 61 central government budgetary institutions and expanded to other ministries; requirement to record expenditure arrears and multi-year commitments by end-July 2024.
  - Supervisory and Performance Monitoring Framework for SOEs adopted in January 2024.
  - Ministry of Finance and National Planning performance contracts with SOEs expected to be effective in 2024.
  - Commitment to establish a Cash Management Unit and a Cash Management Technical Committee by end-July 2024.
  - Secretary to the Treasury approved an action plan to improve cash management and forecasting, reduce idle cash balances and number of accounts held by central government institutions in commercial banks.

### Debt strategy and management
- Commitment to restore debt sustainability and return risk of debt distress to “moderate” over the medium-term.
- Undertake to refrain from contracting non-concessional debt and to limit new external borrowing and disbursement of contracted but undisbursed external debt to central government and ZESCO.
- Debt Management Office (DMO) establishment approved by Cabinet as at end-December 2023; expected to be operational by end-2024.
- Progress in reaching bilateral agreements under the OCC MOU and in seeking debt relief from other commercial external creditors in good faith and in line with program parameters and comparable terms of treatment as defined by the OCC.

### Monetary policy and exchange rate framework
- Bank of Zambia (BoZ) remains committed to the inflation targeting (IT) framework and has adopted a more restrictive monetary policy stance by hiking the Policy Rate and increasing statutory reserve requirements.
- BoZ governance and transparency improvements:
  - Two external members appointed to the Monetary Policy Committee (MPC).
  - Inaugural Monetary Policy Report (MPR) published in February 2024; MPR to be published on the BoZ website soon after each MPC meeting.
- Exchange rate policy:
  - Central bank maintains a flexible exchange rate as primary shock absorber while mitigating excessive volatility and accumulating international reserves.
  - Foreign exchange market guidelines issued on May 24, 2024 to enhance transparency, efficiency, and effectiveness of the foreign exchange market.
  - Revised rules for the Interbank Foreign Exchange Market (IFEM) issued on June 14, 2024 to better promote price discovery.

### Financial sector resilience and inclusion
- Banking sector metrics:
  - Sector remains broadly sound and stable with strong capital adequacy, high liquidity buffers, and low non-performing loan ratio.
  - Banks’ exposure to government declined to 26 percent of total assets, from around 37 percent at end-December 2021.
  - Credit to private sector has increased markedly.
- Regulatory and supervisory progress:
  - Inter-agency Financial Stability Committee held first meeting in April 2024.
  - Maiden Financial Stability Report approved in May 2024 for publication by end of June 2024.
  - Expected issuance, by end-June 2024, of regulations to guide countercyclical capital and conservation buffers.
  - Gradual implementation of regulations on liquidity coverage ratios (LCR) and net stable funding ratio (NSFR) to enhance liquidity risk management in line with Basel III standards (with Fund Technical Assistance support).
- Deposit insurance and consumer protection:
  - Deposit Protection Fund (DPF) Unit established to draft regulatory framework for effective deposit insurance in line with Core effective Principles of Deposit Insurance System and Basel Supervisory Principles.
  - Details of DPF and review of Banking and Financial Services Act (BFSA) to be finalized following consultations with stakeholders including the IMF.
- Financial inclusion:
  - Efforts to facilitate access to affordable credit for MSMEs; establishment of a Credit Guarantee Fund (CGF) expected by end-June 2024.
  - Second National Financial Inclusion Strategy (2024-28) launched in March 2024 with target to provide sustainable financial products and services to, at least, 85 percent of the population.

### Structural and governance reforms
- Governance measures and legal reforms:
  - Access to Information Act (ATI) assented to in December 2023; Statutory Instrument to commence the Act to be issued by end June 2024.
  - Amended Anti-Corruption Act to strengthen penalties and sentences to be submitted to Parliament by end March 2025.
  - Online application for mining licenses migrated to improve scrutiny of issuance and transfers and to ensure environmental safety, work programs and production commitments.
- Climate resilience and energy sector:
  - Authorities enhancing efforts to build a climate-resilient energy sector, promoting investment in power generation infrastructure and alternative green and renewable energy sources.
  - Climate Change Bill is being drafted and envisaged to be submitted to Cabinet and then Parliament by end-2024.
  - Authorities view future support under the Resilience and Sustainability Facility (RSF) in a new program as instrumental in supporting policies to enhance climate resilience.
- Agriculture and investment policy:
  - Cabinet approved the Comprehensive Agriculture Transformation Support Program (CATSP) to provide service support, access to finance for irrigation development, and increase value-added, storage and logistics support to farmers.
  - Investment, Trade and Business Development (Amendment) Act approved in April 2024 to provide incentives to investors in special economic zones, priority sectors, rural areas, and farm blocks.
- AML/CFT:
  - At end-2023, an AML/CFT/CPF supervisory unit established to focus on risk-based on-site examinations and sanctioning of non-compliant financial services providers.
  - Implementation of the 2022 safeguards assessments recommendations is well underway.

### Conclusion and authorities’ stance
- Authorities reiterate commitment to objectives of the ECF arrangement despite severe drought shocks from the El Nino Phenomenon.
- View the policy anchor provided by the Fund-supported ECF arrangement as instrumental in stabilizing macroeconomic conditions and realizing objectives of the Eighth National Development Plan (8NDP).
- Authorities look forward to further Fund technical support to help address drought impacts and other constraints to unlock growth and development potential.

*Prepared by the African Department in consultation with the Strategy, Policy, and Review Department. June 25, 2024. Statement by Mr. Willie Nakunyada, Executive Director for Zambia, and Ms. Linda Motsumi, Senior Advisor to the Executive Director. June 26, 2024.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1zmbea2024001-print-pdf.pdf_