## _cr08187

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---

### Program request and objectives
- Request: low-access, three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 48.91 million (10 percent of quota).
- Purpose: succeed PRGF arrangement completed in September 2007 and support efforts to raise economic growth and reduce poverty while safeguarding macroeconomic stability.
- Authorities set out program in attached Memorandum of Economic and Financial Policies (MEFP).

### Recent macroeconomic performance (highlights)
- Real GDP growth:
  - Real GDP grew by an estimated 6 percent in 2007.
  - Medium-term program assumption: annual real GDP growth of 6–7 percent.
- Inflation:
  - 12-month rate fell to 8.9 percent in December 2007; seasonal food price increases boosted inflation to 9.8 percent in March 2008.
  - Program targets: 7 percent in 2008 and 5 percent in 2009 and beyond.
- Fiscal developments:
  - Fiscal deficit (excluding grants) was 4.9 percent of GDP in 2007, about 2.5 percentage points of GDP less than budgeted.
  - Revenues exceeded target in 2007, mainly from large income tax payments by mining companies; capital spending fell short.
  - Government deposits at the Bank of Zambia accumulated through much of 2007 and were drawn down substantially in the last two months as spending increased.
- Monetary and financial sector:
  - Monetary expansion slowed in 2007 but still substantially exceeded the target; statutory reserve ratio reduced from 14 percent to 8 percent in October 2007.
  - Average real yield on T-bills rose to 3 percent at year-end 2007.
  - Banking sector: generally well capitalized, profitable, liquid, with improved loan portfolio quality.
- External sector:
  - Copper export volume flat in 2007; value rose with prices.
  - Foreign direct investment in mining rose to 8.6 percent of GDP in 2007.
  - Gross international reserves rose to the equivalent of 2.5 months of imports in 2007.
- Exchange rate:
  - Effective exchange rate ended 2007 up 2.1 percent nominally and 5.5 percent in real terms.

### New mining fiscal regime (effective April 1, 2008)
- Key changes:
  - Mineral royalty increased to 3 percent (from 0.6 percent).
  - Corporate income tax increased to 30 percent (from 25 percent).
  - Introduction of either a variable profit tax when the profit ratio is above 8 percent or a graduated windfall tax (levied on production value) when world copper prices exceed $2.50 a pound.
- Windfall tax schedule:
  - 25 percent when $2.50/lb ≤ P* < $3.00/lb;
  - 50 percent when $3.00/lb ≤ P* < $3.50/lb;
  - 75 percent when P* ≥ $3.50/lb,
  - where P* is the international price of copper.
- Operational rule:
  - The variable profit tax and the windfall tax will not apply simultaneously. When the windfall tax applies the corporate income tax will be 30 percent.
- Staff cautions and recommendations:
  - Marginal effective tax rate is very high at very high prices.
  - Suggested lowering marginal rate by making windfall tax deductible for taxable profits.
  - Staff suggested a progressive profit-based variable tax to account for different mine cost structures.
- Authorities’ position:
  - Windfall tax viewed as more effective to capture rent at exceptionally high prices.
  - Authorities contend current income tax provisions do not allow taxpayers to deduct other tax payments.
- Timing and budget impact:
  - Only two quarters of the mining windfall and income tax under the new regime will be collected in 2008—the full-year equivalent increase would be twice as high.

### Medium-term macroeconomic framework and fiscal implications
- Revenue projections:
  - Revenues projected to rise from 18.7 percent of GDP in 2007 to 21 percent in 2008-10, mainly from the new mining fiscal regime.
  - Revenues projected to rise by 2.5 percentage points of GDP in 2008.
- Mining Resource Account (MRA/MRF):
  - In 2008, additional mining revenue will be saved in a separate Mining Resource Account (MRA) at the Bank of Zambia.
  - Starting 2009, net inflow to the MRA will be based on the medium-term expenditure framework (MTEF).
  - All revenues and expenditures, including those via the MRA, fully integrated into the annual budget and fiscal accounts.
- Expenditure and budget dynamics:
  - Composition to shift toward capital spending; resources to hire more teachers and health workers; fully clear current domestic arrears by 2009.
  - Allocations for constitutional review of 0.6 percent of GDP in 2008 and 2009 will not be necessary in 2010.
  - Net savings from accumulated mining taxes projected to be 5 percent of GDP at the end of 2010.
  - Budget deficit excluding grants: projected at 6.5 percent of GDP in 2008, declining to 4.5–5 percent in 2009–10.
  - Including grants, budget expected to be in (small) surplus during 2009–10, obviating the need for domestic financing.
- Fiscal levels (selected percent of GDP projections):
  - Revenue (percent of GDP): 21.2 (2008 proj.), 22.1 (2009 proj.), 21.5 (2010 proj.).
  - Grants (percent of GDP): 5.3 (2008 proj.), 5.4 (2009 proj.), 5.3 (2010 proj.).
  - Total expenditure (percent of GDP): 27.6 (2008 proj.), 26.7 (2009 proj.), 26.4 (2010 proj.).

### External sector projections and risks
- Current account and reserves:
  - Current account deficit projected to widen in 2008 but narrow considerably in 2009 as major mining projects complete and imports of investment goods decline.
  - Thereafter the current account deficit projected to widen again as the terms of trade are expected to deteriorate sharply.
  - International reserves projected to increase steadily to 5.5 months of imports in 2010, assuming a sizable share of mining revenue is saved.
  - Annual net external support in the form of grants and concessional loans projected to remain at 5–6 percent of GDP.
  - Zambia’s external debt ratios expected to stay well below standard debt-distress thresholds.
- Key risks:
  - Sharper drop in copper prices than expected could undermine growth prospects.
  - Continued or prolonged electricity outages would constrain economic activity broadly.
- External sector projections (selected figures):
  - Gross international reserves (millions of US$): 947 (2007), 1,329 (2008 proj.), 1,810 (2009 proj.), 2,231 (2010 proj.).
  - Gross international reserves (months of imports): 2.5 (2007), 3.2 (2008 proj.), 4.7 (2009 proj.), 5.5 (2010 proj.).
  - Copper export price (US$ per pound): 3.1 (2007), 3.1 (2008 proj.), 2.6 (2009 proj.), 2.0 (2010 proj.).
  - Copper export volume (thousands of metric tons): 491 (2007), 556 (2008 proj.), 626 (2009 proj.), 727 (2010 proj.).

### Macroeconomic stance for 2008
- Fiscal stance:
  - More expansionary in 2008 but planned so there should be no need for net domestic financing.
  - Revenues projected to rise by 2.5 percentage points of GDP, based on a marked increase in mining taxes (to 3.2 percent of GDP) and nontax revenue.
  - Grants expected to increase by 0.6 percentage points to 5.3 percent of GDP.
  - Expenditures budgeted to rise by 2.8 percentage points due to rebound in capital spending, wage bill increases from social sector hiring and a 2–3 percent real wage increase, and allocations to constitutional review and arrears clearance (increasing spending by 1.1 percent of GDP compared to 2007).
  - Fiscal deficit excluding grants measured from below-the-line projected to rise by 1½ percentage points of GDP to 6.5 percent of GDP in 2008; measured from above-the-line the deficit widens by only 0.3 percent of GDP reflecting an unusually high check float in 2007.
- Monetary stance:
  - Monetary policy will aim to lower inflation to 7 percent in 2008 and 5 percent in 2009 and beyond.
- Exchange rate and reserves:
  - Flexible exchange rate regime will be maintained.
  - International reserves projected to increase to levels that would allow Zambia to better weather external shocks.
- Money and reserve projections:
  - Reserve and broad money are projected to grow by 11½ percent in 2008.
  - Gross international reserves projected to increase to 3.2 months of imports in 2008 (from 2.5 months in 2007), reflecting saving of additional mining revenue.

### Monetary and exchange rate policies (operations)
- Foreign exchange operations:
  - Given large inflows, BoZ will undertake regular sales of foreign exchange during the year if aid and other government FX inflows are to be spent and absorbed; these sales could amount to about 5 percent of total foreign exchange market turnover.
  - Sterilization through open market operations expected to be relatively small to avoid upward pressure on domestic interest rates.
- Credit and liquidity:
  - Credit to the private sector programmed to expand by 22 percent.
  - MoFNP and BoZ to establish a formal mechanism for coordination with key line ministries on liquidity management (MEFP, ¶19).
- Exchange rate stance:
  - Authorities committed to a flexible exchange rate regime.
  - Staff analysis indicates exchange rate broadly aligned with fundamentals, including improved terms of trade.

### Structural policies and program focus
- Program priorities:
  - Maintain macroeconomic stability and debt sustainability while increasing fiscal space for investment in infrastructure, energy, and human resources.
  - Diversify the economy to lessen dependence on mining and improve conditions for private sector-led growth.
- Structural reforms and measures:
  - Improve expenditure management and budget execution:
    - Establish treasury single account (TSA).
    - Create a Treasury Department.
    - Continue roll-out of Integrated Financial Management Information System (IFMIS).
    - Reform public procurement.
  - Modernize Zambia Revenue Authority (ZRA):
    - Establish headquarters functional structure by end-September 2008 (benchmark).
    - Establish large taxpayer office by end-December 2008 (benchmark) with specialized mining team.
  - Strengthen monetary operations and deepen financial sector:
    - Improve liquidity management; reduce need for banks to hold excess reserves.
    - Restructure BoZ rediscount window by reducing penal element and broadening eligible securities.
    - Develop supervisory regime for secondary market in government securities.
    - Introduce risk-based bank supervision by end-December 2008.
  - Implement debt management strategy:
    - Submit debt management strategy to Cabinet by end-September 2008 (benchmark).
  - Energy sector reforms (performance criterion end-June 2008):
    - Gradually adjust electricity tariffs to cost of service.
    - Attract private investment and competition.
    - Increase operational efficiency of ZESCO and strengthen governance.
    - Ensure ZESCO has sufficient resources for rehabilitation and new generation projects.
    - Government to ensure all its arrears to ZESCO are paid by year-end.
- Public expenditure management:
  - TSA proposal and Treasury Department proposal to Cabinet by end-June 2008 (TSA is a performance criterion; Treasury Department a benchmark).
  - IFMIS pilots and FMS enhancements planned; pilot sites expected fully functional by mid-2008.
  - Procurement Act amendments to Cabinet by end-September 2008.
- Pension and public sector management:
  - PSPF actuarial deficit estimated at about 10 percent of GDP.
  - Annual cash-flow deficit estimated at ½ percent of GDP over the next few years.
  - Government committed to allocate sufficient resources to meet pension obligations while pursuing constitutional amendments to redesign scheme.
- Tax administration:
  - ZRA modernization to adopt integrated and taxpayer-segmented structure; large taxpayer office and headquarters restructuring milestones in 2008.
- Financial sector development:
  - Licensing of credit reference bureau (2006); enabling legislation expected in 2008.
  - Sovereign credit rating sought.
  - Measures to encourage money and capital markets development and reduce excess bank reserves.
- Trade, debt, and aid:
  - Tariff on sensitive products to be eliminated by 2012 per SADC commitments.
  - Continue to rely on grants and concessional borrowing for central government projects where possible; generally not provide guarantees to public enterprises.
  - ZESCO seeking nonconcessional financing for three projects amounting to $450 million.
  - Arrears to commercial enterprises about US$160 million (payment terms offered); arrears to private individuals about US$10 million (verification ongoing).
  - Aid efficiency efforts: build ministry capacity to assess projects, improve reporting and monitoring.

### Electricity sector (critical constraints and actions)
- Importance:
  - Electricity sector development vital for sustained high growth and poverty reduction.
- Current shortfall:
  - Average tariff remains well below cost recovery despite increases on January 1, 2008.
  - Tariffs paid by major mining companies are well below cost despite a 35 percent increase in early 2008.
- Government strategy by June 2008:
  - (i) Gradually adjust electricity tariffs to reflect cost of service.
  - (ii) Attract private investment and competition.
  - (iii) Increase operational efficiency of ZESCO and strengthen governance.
  - (iv) Ensure ZESCO has sufficient resources for rehabilitation and new generation projects.
- Immediate action:
  - Government will ensure all its arrears to ZESCO are paid by year-end.
- Financing needs:
  - ZESCO seeking $450 million for three projects (Kariba North Power Station Extension, Itezhy-Tezhy Power Station, completion of rehabilitation project); given limited concessional financing, borrowing may be nonconcessional in 2008.

### Program monitoring, access, and conditionality
- Monitoring and reviews:
  - Program monitored semiannually.
  - Quantitative and structural performance criteria and benchmarks set for June and December 2008, with indicative targets for September 2008.
- Quantitative performance criteria (selected):
  - Net domestic assets (NDA) ceilings (kwacha millions): 2007 Dec: -1243; 2008 Jun: -208; 2008 Sep: -512; 2008 Dec: -776.
  - Net domestic financing (NDF) ceilings: 2007 Dec: 4,638; 2008 Jun: 567; 2008 Sep: 534; 2008 Dec: -64.
  - Floor on gross international reserves (millions of US$): 2007 Dec: 947; 2008 Jun: 154; 2008 Sep: 267; 2008 Dec: 382.
  - Continuous performance criteria on non-accumulation of new external payment arrears and limits on contracting/guaranteeing external debt.
- PRGF access and disbursement:
  - Total access: SDR 48.91 million (10 percent of quota).
  - Semiannual disbursements evenly distributed over three years: seven disbursements of 6.987 million SDR (last is 6.988 million SDR) tied to Board reviews and performance criteria on specified dates between June 4, 2008 and May 30, 2011.
- Adjusters:
  - Ceilings/floors adjusted for deviations in general budget support, changes in reserve requirements, mining revenue, IMF disbursements, and BoZ short-term debt, with specified limits (e.g., total adjustment for GBS shortfalls limited to US$30 million for Jan–Jun and US$35 million for Jan–Dec 2008; mining revenue shortfall limits K75 billion (US$19 million) Jan–Jun and K917 billion (US$231.7 million) Jan–Dec 2008).

### Staff appraisal — key findings and recommendations
- Macroeconomic overview:
  - Zambia performed well with robust growth and declining poverty; prudent fiscal policy reduced domestic financing need; inflation single-digit aided by strong kwacha; external position markedly better due to high copper prices and debt relief.
- Challenges and priorities:
  - Create fiscal space for infrastructure and social spending; enhance capacity for public investments; manage large FX inflows; improve conditions for private sector growth; secure and efficient energy supply.
- Specific recommendations:
  - Consider making the windfall tax deductible in determining taxable profits to preserve attractiveness for mining investment.
  - Implement public financial management reforms: establish TSA and complete IFMIS.
  - Finalize and implement debt management strategy and strengthen oversight of nonfinancial public corporations.
  - Continue financial sector reforms to deepen markets and strengthen supervision.
  - Urgently implement policies to gradually raise electricity tariffs to reflect cost of service, reform ZESCO, and ensure resources to complete hydropower projects.
  - Engage World Bank and development partners on electricity sector problems.

### Staff recommendation and outlook
- Staff recommends approval of authorities’ request for a new three-year PRGF arrangement.
- Macroeconomic projections (selected):
  - Real GDP growth (percent): 6.2 (2008 proj.), 6.3 (2009 proj.), 6.5 (2010 proj.).
  - Consumer prices (end of period): 7.0 (2008 proj.), 5.0 (2009 proj.), 5.0 (2010 proj.).
  - Overall balance (including grants, percent of GDP): -1.1 (2008 proj.), 0.9 (2009 proj.), 0.4 (2010 proj.).
  - Current account balance (millions of US$): -608 (2008 proj.), -100 (2009 proj.), -526 (2010 proj.).
  - Gross international reserves (millions of US$): 1,329 (2008 proj.), 1,810 (2009 proj.), 2,231 (2010 proj.).
  - Exports, f.o.b. (millions of US$): 5,084 (2008 proj.), 4,996 (2009 proj.), 4,564 (2010 proj.).
  - Copper export price (US$ per pound): 3.1 (2008 proj.), 2.6 (2009 proj.), 2.0 (2010 proj.).

### Data, statistics, and technical initiatives
- National accounts and CPI rebasing:
  - CSO undertaking economic census; key results expected in late 2008 to rebase national accounts.
  - New rebased CPI to be published starting in June 2008; current CPI base year 1994.
- Monetary and fiscal data reporting:
  - BoZ to report reserve money and gross international reserves weekly and end-month; NDA defined using kwacha 3,844.8 per US$ for 2008.
  - Definitions and reporting obligations detailed in Technical Memorandum of Understanding (TMU).
- Safeguards and TA:
  - BoZ subject to update safeguards assessment; previous recommendations include adopting IFRS, auditor rotation policy, revising accounting policies, strengthening BoZ operational independence, and quarterly reconciliations of GIR and NDA.

*Italic: IMF Country Report: _cr08187 (extracted content as provided)*

### Executive Summary ......................................................................................................

### Executive Summary

### Program request and objectives
- The Zambian authorities request a low-access, three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 48.91 million (10 percent of quota).
- The arrangement would succeed the PRGF arrangement completed in September 2007 and support efforts to further raise economic growth and reduce poverty while safeguarding macroeconomic stability.
- The authorities set out their program in the attached Memorandum of Economic and Financial Policies (MEFP).

### Recent macroeconomic performance (highlights)
- Real GDP growth:
  - Real GDP grew by an estimated 6 percent in 2007, led by construction, telecommunication, and services.
  - Medium-term program assumption: annual real GDP growth of 6–7 percent.
- Inflation:
  - 12-month rate fell to 8.9 percent in December 2007; seasonal food price increases boosted inflation to 9.8 percent in March 2008.
  - Program target: lower inflation to 7 percent in 2008 and 5 percent in 2009 and beyond.
- Fiscal developments:
  - Fiscal deficit (excluding grants) was 4.9 percent of GDP in 2007, about 2.5 percentage points of GDP less than budgeted.
  - Revenues exceeded target in 2007, mainly from large income tax payments by mining companies; capital spending fell short.
  - Government deposits at the Bank of Zambia accumulated through much of 2007 and were drawn down substantially in the last two months as spending increased.
- Monetary and financial sector:
  - Monetary expansion slowed in 2007 but still substantially exceeded the target; statutory reserve ratio reduced from 14 percent to 8 percent in October 2007.
  - Average real yield on T-bills rose to 3 percent at year-end 2007 (from slightly negative at the beginning of the year).
  - Banking sector: generally well capitalized, profitable, liquid, with improved loan portfolio quality.
- External sector:
  - Volume of copper exports was flat in 2007 due to flooding and power shortages; value of copper exports rose with prices.
  - Foreign direct investment in mining rose to 8.6 percent of GDP in 2007.
  - Gross international reserves rose to the equivalent of 2.5 months of imports in 2007.
- Exchange rate: effective exchange rate ended 2007 up 2.1 percent nominally and 5.5 percent in real terms.

### New mining fiscal regime (effective April 1, 2008)
- Key changes:
  - Mineral royalty increased to 3 percent (from 0.6 percent).
  - Corporate income tax increased to 30 percent (from 25 percent).
  - Introduction of either a variable profit tax when the profit ratio is above 8 percent or a graduated windfall tax (levied on production value) when world copper prices exceed $2.50 a pound.
- Windfall tax schedule:
  - 25 percent when $2.50/lb ≤ P* < $3.00/lb;
  - 50 percent when $3.00/lb ≤ P* < $3.50/lb;
  - 75 percent when P* ≥ $3.50/lb,
  - where P* is the international price of copper.
- The variable profit tax and the windfall tax will not apply simultaneously. When the windfall tax applies the corporate income tax will be 30 percent.

### Medium-term macroeconomic framework and fiscal implications
- Revenue projections:
  - Revenues projected to rise from 18.7 percent of GDP in 2007 to 21 percent in 2008-10, mainly from the new mining fiscal regime.
- Mining Resource Account (MRA):
  - In 2008, additional mining revenue will be saved in a separate Mining Resource Account (MRA) at the Bank of Zambia.
  - Starting 2009, net inflow to the MRA will be based on the medium-term expenditure framework (MTEF).
  - All revenues and expenditures, including those via the MRA, will be fully integrated into the annual budget and fiscal accounts.
- Expenditure and budget dynamics:
  - The composition of government expenditure will shift gradually toward capital spending.
  - Resources will be used to hire more teachers and health workers and to fully clear current domestic arrears by 2009.
  - Spending on goods and services will decline in the medium term as allocations for the constitutional review (0.6 percent of GDP in 2008 and 2009) will not be necessary in 2010, and donor-financed current spending tapers off.
  - Net savings from accumulated mining taxes are projected to be 5 percent of GDP at the end of 2010.
  - Budget deficit excluding grants: projected at 6.5 percent of GDP in 2008, declining to 4.5–5 percent in 2009–10.
  - Including grants, the budget is expected to be in (small) surplus during 2009–10, obviating the need for domestic financing.

### External sector projections and risks
- Current account and reserves:
  - Current account deficit projected to widen in 2008 but narrow considerably in 2009 as major mining projects complete and imports of investment goods decline.
  - Thereafter the current account deficit is projected to widen again as the terms of trade are expected to deteriorate sharply.
  - International reserves projected to increase steadily to 5.5 months of imports in 2010, assuming a sizable share of mining revenue is saved.
  - Annual net external support in the form of grants and concessional loans projected to remain at 5–6 percent of GDP.
  - Zambia’s external debt ratios are expected to stay well below standard debt-distress thresholds.
- Key risks:
  - A sharper drop in copper prices than expected could undermine growth prospects.
  - Continued or prolonged electricity outages would constrain economic activity broadly.

### Program focus and structural policies
- Program priorities:
  - Maintain macroeconomic stability and debt sustainability while increasing fiscal space for investment in infrastructure, energy, and human resources.
  - Diversify the economy to lessen dependence on mining and improve conditions for private sector-led growth.
- Structural reforms and policy measures:
  - Improve expenditure management and budget execution, and strengthen revenue collection.
  - Strengthen monetary operations and deepen the financial sector, especially by developing the secondary market for government securities.
  - Introduce measures to ensure an adequate and reliable supply of electricity, including raising electricity tariffs to cover the cost of service and increasing the operational efficiency of the public electric power utility company.

### Macroeconomic stance for 2008
- Fiscal stance:
  - More expansionary in 2008 but planned so there should be no need for net domestic financing.
  - Revenues projected to rise by 2.5 percentage points of GDP, based on a marked increase in mining taxes (to 3.2 percent of GDP) and nontax revenue.
  - Grants expected to increase by 0.6 percentage points to 5.3 percent of GDP.
  - Expenditures budgeted to rise by 2.8 percentage points due to rebound in capital spending, an increase in the wage bill from social sector hiring and a 2–3 percent real wage increase, and allocations to the constitutional review process and arrears clearance (increasing spending by 1.1 percent of GDP compared to 2007).
  - Measured from below-the-line, the fiscal deficit excluding grants is projected to rise by 1½ percentage points of GDP to 6.5 percent of GDP in 2008; measured from above-the-line the deficit widens by only 0.3 percent of GDP reflecting an unusually high check float in 2007.
- Monetary stance:
  - Monetary policy will aim to lower inflation to 7 percent in 2008 and 5 percent in 2009 and beyond.
- Exchange rate and reserves:
  - A flexible exchange rate regime will be maintained.
  - International reserves projected to increase to levels that would allow Zambia to better weather external shocks.

*IMF Country Report: Executive Summary (Zambia) — PRGF request and program overview*

### 12.      The new fiscal regime for mining increases the average effective tax rate from a

### _cr08187 - 12.      The new fiscal regime for mining increases the average effective tax rate from a

### New fiscal regime for mining
- The new fiscal regime raises the average effective tax rate from a level that was significantly below that in other mining countries.
- When the international price of copper is at around the historical average:
  - The windfall tax will not apply.
  - The average effective tax rate would be comparable to that in other countries.
- When the price of copper is well above the historical average:
  - Specifically, above $2.50 per pound, the windfall tax will come into effect and rise progressively with the price of copper.
- Staff cautions and recommendations:
  - While progressivity is desirable, the marginal effective tax rate is very high at very high prices.
  - The marginal effective tax rate could be lowered by making the windfall tax, like royalties, deductible for the purpose of calculating taxable profits.
  - Instead of the price-based windfall tax, staff suggested a progressive profit-based variable tax that would take into consideration the different cost structures across mines.
- Authorities’ position:
  - The authorities argue the windfall tax is a more effective way to capture a sizable share of the rent when prices are exceptionally high.
  - They contend current income tax provisions do not allow taxpayers to deduct other tax payments.
- Timing and budget impact:
  - Only two quarters of the mining windfall and income tax under the new regime will be collected in 2008—the full-year equivalent increase from the new regime would be twice as high.

### Monetary and exchange rate policies
- Monetary program objective:
  - Aims to reduce annual inflation to 7 percent in 2008.
  - Risks include possible increases in fuel and food prices and increases in electricity tariffs in January 2008.
- Money and reserve projections:
  - Reserve and broad money are projected to grow by 11½ percent in 2008.
  - Gross international reserves are projected to increase to 3.2 months of imports, from 2.5 months in 2007, reflecting the saving of the additional mining revenue.
- Foreign exchange operations:
  - Given large inflows of foreign exchange, the BoZ will undertake a program of regular sales of foreign exchange during the year if aid and other government foreign exchange inflows are to be spent and absorbed.
  - These sales could amount to about 5 percent of total foreign exchange market turnover.
  - Sterilization through open market operations is expected to be relatively small, avoiding upward pressure on domestic interest rates.
- Credit and liquidity:
  - In view of the limited government financing requirement, credit to the private sector is programmed to expand by a robust 22 percent.
  - The Ministry of Finance and National Planning (MoFNP) and the BoZ will establish a formal mechanism for coordination with key line ministries on liquidity management (MEFP, ¶19).
- Exchange rate stance:
  - The authorities remain committed to a flexible exchange rate regime.
  - Staff analysis indicates the exchange rate is broadly aligned with macroeconomic fundamentals, including the major improvement in the terms of trade in recent years.

### Structural policies
- Focus of PRGF program:
  - Improving expenditure management and budget execution, including:
    - Establishing a treasury single account (TSA).
    - Creating a Treasury Department.
    - Continuing to roll-out the Integrated Financial Management Information System (IFMIS).
    - Reform of public procurement.
  - Making revenue collection more efficient and effective, including implementing the modernization of the Zambia Revenue Authority (ZRA).
  - Strengthening monetary operations and deepening the financial sector, including:
    - Improving liquidity management.
    - Reducing the need for banks to hold excess reserves at the BoZ.
    - Developing an appropriate supervisory regime for the secondary market in government securities.
  - Implementing a debt management strategy.
  - Strengthening policies in the energy sector to ensure an adequate and reliable supply of electricity, including:
    - Raising electricity tariffs to cost of service.
    - Promoting private investment and competition.
    - Making ZESCO more efficient.

#### Public expenditure management
- Key reforms and progress:
  - Introducing a treasury single account (TSA) and rolling out IFMIS; TSA is not expected to be fully in place before 2009.
  - Preparatory work: use of real-time-gross-settlement instead of checks for large transactions and initiating IFMIS pilots.
  - Establishing a Treasury Department within the MoFNP to harmonize treasury functions and improve coordination with the BoZ.
  - Improving capital project execution by amending procurement framework and increasing training; allowing earlier start of tender procedures.

#### Pension and public sector management
- Pension reform:
  - Making the public service pension fund (PSPF) financially sound over the long-term will require constitutional amendments to better align benefits with contributions.
  - Government committed to allocating sufficient resources to the PSPF to ensure pension obligations are met in full.
- Public sector management:
  - A consultant has begun work on a new pay policy, with aim of submitting a draft policy to the Cabinet by year-end (MEFP, ¶16).

#### Tax administration
- Zambia Revenue Authority modernization:
  - Adoption of an integrated and taxpayer-segmented organizational structure.
  - Major 2008 milestones: establishment of a more capable headquarters and large taxpayer office.
  - Within the large taxpayer office, a specialized team will be created to effectively administer the new fiscal regime for mining.

#### Financial sector development
- Supervision and regulation:
  - BoZ working on a program for risk-based supervision of commercial banks to go into effect by year-end.
  - Legislation being harmonized to minimize regulatory arbitrage.
- Credit information and markets:
  - Licensing of a credit reference bureau in 2006 addressed a weak credit culture.
  - Legislation on credit bureau services expected to be enacted this year to facilitate operations and legal basis for banks to obtain personal information.
  - Reforms to encourage development of money and capital markets:
    - Restructuring the BoZ’s rediscount window facility, including reducing the penal element in its price setting, to encourage use and reduce banks’ need to hold excess reserves.
    - Introducing a coherent regulatory framework for government debt securities to stimulate the secondary market.
- Sovereign credit rating:
  - Government’s efforts to obtain a sovereign credit rating could enhance Zambia’s attractiveness as an investment destination.

#### Electricity sector
- Importance and current shortfall:
  - Development of the electricity sector is vital for sustained high growth and poverty reduction.
  - Increase in generation capacity is needed to support expansion of mining, private sector growth, and rural electrification.
  - Average tariff remains well below cost recovery levels despite increases on January 1, 2008.
  - Tariffs paid by major mining companies (consuming more than half of electricity generated) are well below cost, despite a 35 percent increase in early 2008; these tariffs were established several years ago in long-term power agreements.
- Government strategy by June 2008:
  - (i) Gradually adjust electricity tariffs to reflect the cost of service.
  - (ii) Attract private investment and competition in the sector.
  - (iii) Increase operational efficiency of ZESCO and strengthen its governance.
  - (iv) Ensure ZESCO has sufficient resources to implement ongoing rehabilitation and new generation projects.
- Immediate action:
  - Government will ensure that all its arrears to ZESCO are paid by year-end.
- Donor engagement:
  - The World Bank and bilateral donors have indicated willingness to extend engagement, including additional financing.

### Trade, debt, and aid
- Trade liberalization:
  - Zambia will eliminate its tariff on sensitive products by 2012 in keeping with SADC commitments.
  - Government will continue to harmonize SADC and COMESA trade-related agendas.
- External debt management:
  - Government will continue to rely on grants and concessional external borrowing for central government projects where possible and will not provide guarantees to public enterprises.
  - Public enterprises are generally incorporated under the Companies Act as limited liability companies with independent boards charged to operate on commercial principles.
  - Currently, ZESCO is seeking nonconcessional financing for three projects to augment generation capacity (MEFP, ¶24).
  - Only two other public enterprises, ZAMTEL and Zambia Railways, may need to borrow externally in later years.
  - Authorities will closely monitor public sector borrowing needs; a subject of future reviews.
  - Authorities will continue efforts to reach agreements with two non-Paris Club creditors (Bulgaria and Iraq) that have not yet provided debt relief under the enhanced HIPC Initiative.
  - Authorities are making good faith efforts to resolve external arrears to private creditors stemming from past exchange controls:
    - Arrears to commercial enterprises: about US$160 million; authorities have offered payment terms on par with Paris Club and earlier IDA-supported buy-back.
    - Arrears to private individuals: about US$10 million; authorities are still seeking to verify the claims.
- Aid efficiency:
  - New Aid Policy and Strategy identifies weaknesses and proposes measures to enhance aid efficiency.
  - First steps: build ministry capacity to assess viability of investment projects and absorb aid inflows; improve reporting and monitoring to increase transparency.

### Program monitoring, access, and appraisal
- Program monitoring:
  - The program will be monitored semiannually.
  - Quantitative and structural performance criteria and benchmarks set for June and December 2008, with indicative targets for September 2008.
  - Quantitative performance criteria proposed on:
    - net domestic assets;
    - net domestic financing of the central government;
    - gross international reserves;
    - new external arrears;
    - short-term external debt; and
    - contracting or guaranteeing of external nonconcessional debt by the public sector (MEFP, Table 1).
  - Indicative targets on payment of domestic arrears and reserve money.
  - Structural conditionality focuses on reforms in public expenditure and debt management, tax administration, financial sector development, and electricity sector performance.
- IMF access and disbursement:
  - Proposed access for the new PRGF arrangement is 10 percent of quota.
  - Justification: strength of Zambia’s program, significant external vulnerabilities, low current outstanding use of Fund resources (11.2 percent of quota as of end-2007), and demonstrable capacity to repay the Fund (Table 9).
  - Semiannual disbursements are evenly distributed over the three years (Table 10).

### Staff appraisal — key findings and recommendations
- Macroeconomic overview:
  - The Zambian economy has been performing well: robust economic growth for several years and declining poverty.
  - Prudent fiscal policy reduced government domestic financing need and supported a firm monetary policy.
  - Inflation brought down to single digits, aided by a strong kwacha.
  - External position markedly better due to exceptionally high copper prices and debt relief; international reserves gradually built up.
- Challenges and policy priorities:
  - To foster economic diversification and boost growth, authorities need to:
    - Create fiscal space for infrastructure and social spending.
    - Enhance capacity to undertake public investments.
    - Manage large foreign exchange inflows.
    - Ameliorate conditions for private sector growth.
  - Requires better budget planning and execution, closer fiscal–monetary coordination, and enhancing competitiveness of nontraditional trade sectors.
  - Secure and efficient energy supply is critical to avoid growth constraints from energy shortages and high costs.
- Specific recommendations:
  - Consider making the windfall tax deductible in determining taxable profits to preserve Zambia’s attractiveness for mining investment.
  - Steadfastly implement public financial management reforms, especially establishing a treasury single account and completing IFMIS.
  - Finalize and implement the debt management strategy and strengthen oversight of nonfinancial public corporations.
  - Continue financial sector reforms to deepen the sector, including tighter regulation and supervision and building money and capital markets.
  - Urgently implement policies to gradually raise electricity tariffs to reflect cost of service, reform ZESCO, and ensure sufficient resources to complete planned hydropower projects.
  - Engage the World Bank and other development partners in addressing electricity sector problems.

*Italic: IMF Country Report No. _cr08187 - extracted content as provided*

### 38.      Based on these considerations, staff recommends approval of the authorities request

### _cr08187 - 38.      Based on these considerations, staff recommends approval of the authorities request

### Staff Recommendation
- Based on these considerations, staff recommends approval of the authorities request for a new three-year PRGF arrangement.

### Macroeconomic Outlook and Key Projections
- GDP at constant prices: 5.2 (2005), 6.2 (2006), 6.0 (2007), 6.2 (2008 proj.), 6.3 (2009 proj.), 6.5 (2010 proj.)
- GDP deflator: 18.6 (2005), 13.8 (2006), 9.4 (2007), 5.0 (2008 proj.), 4.0 (2009 proj.), 2.9 (2010 proj.)
- GDP at market prices (in billions of kwacha): 32,456 (2005), 39,223 (2006), 45,482 (2007), 50,716 (2008 proj.), 56,051 (2009 proj.), 61,432 (2010 proj.)
- Consumer prices (average headline): 18.3 (2005), 9.0 (2006), 10.7 (2007), 8.2 (2008 proj.), 4.4 (2009 proj.), 5.0 (2010 proj.)
- Consumer prices (underlying, excluding food): 18.1 (2005), 13.6 (2006), 16.3 (2007), 9.2 (2008 proj.), 5.2 (2009 proj.), 5.0 (2010 proj.)
- Consumer prices (end of period): 15.9 (2005), 8.2 (2006), 8.9 (2007), 7.0 (2008 proj.), 5.0 (2009 proj.), 5.0 (2010 proj.)

### Fiscal Framework (Central Government)
- Overall balance (including grants): -2.6 (2005), 18.6 (2006), -0.2 (2007), -1.1 (2008 proj.), 0.9 (2009 proj.), 0.4 (2010 proj.)
- Overall balance (excluding grants): -8.3 (2005), -7.4 (2006), -4.9 (2007), -6.5 (2008 proj.), -4.5 (2009 proj.), -5.0 (2010 proj.)
- Revenue and grants (in percent of GDP): 23.0 (2005), 42.9 (2006), 23.4 (2007), 26.5 (2008 proj.), 27.6 (2009 proj.), 26.8 (2010 proj.)
- Revenue (in percent of GDP): 17.4 (2005), 16.9 (2006), 18.7 (2007), 21.2 (2008 proj.), 22.1 (2009 proj.), 21.5 (2010 proj.)
- Grants (in percent of GDP): 5.6 (2005), 26.0 (2006), 4.6 (2007), 5.3 (2008 proj.), 5.4 (2009 proj.), 5.3 (2010 proj.)
- Total expenditure (in percent of GDP): 25.7 (2005), 24.3 (2006), 24.6 (2007), 27.6 (2008 proj.), 26.7 (2009 proj.), 26.4 (2010 proj.)
- Primary balance, including grants (percent of GDP): 0.0 (2005), 20.5 (2006), 1.5 (2007), 0.2 (2008 proj.), 2.2 (2009 proj.), 1.5 (2010 proj.)

- Fiscal levels (in billions of kwacha), 2005–2010 (selected):
  - Revenue and grants: 7,467 (2005), 16,825 (2006), 10,626 (2007), 13,444 (2008 proj.), 15,452 (2009 proj.), 16,476 (2010 proj.)
  - Revenue: 5,642 (2005), 6,618 (2006), 8,522 (2007), 10,746 (2008 proj.), 12,411 (2009 proj.), 13,205 (2010 proj.)
  - Grants: 1,825 (2005), 10,207 (2006), 2,104 (2007), 2,698 (2008 proj.), 3,040 (2009 proj.), 3,272 (2010 proj.)
  - Expenditures: 8,350 (2005), 9,051 (2006), 11,209 (2007), 13,906 (2008 proj.), 14,957 (2009 proj.), 16,249 (2010 proj.)
  - Current expenditures: 5,828 (2005), 7,203 (2006), 9,045 (2007), 10,575 (2008 proj.), 11,579 (2009 proj.), 12,089 (2010 proj.)
  - Capital expenditure: 2,267 (2005), 1,601 (2006), 1,842 (2007), 2,662 (2008 proj.), 3,276 (2009 proj.), 4,160 (2010 proj.)

### Monetary and Financial Sector
- Money and credit (end of period):
  - Domestic credit to the private sector (12-month percent change): 18.7 (2005), 54.3 (2006), 43.0 (2007), 22.2 (2008 proj.)
  - Reserve money (12-month percent change): 16.4 (2005), 22.6 (2006), 1.6 (2007), 11.5 (2008 proj.)
  - Broad money (M3) (12-month percent change): 0.4 (2005), 45.1 (2006), 25.9 (2007), 11.6 (2008 proj.)
- Monetary stock (in billions of kwacha):
  - Money and quasi-money (M3): 5,841 (2005), 8,477 (2006), 10,675 (2007), 11,908 (2008 proj.)
  - Reserve money: 2,006 (2005), 2,460 (2006), 2,500 (2007), 2,789 (2008 proj.)
- Financial soundness indicators (selected; percent):
  - Regulatory capital to risk-weighted assets: 22.2 (Dec 2004), 28.4 (Dec 2005), 20.4 (Dec 2006), 18.6 (Dec 2007)
  - Past due advances (NPL) to total advances: 7.6 (Dec 2004), 8.9 (Dec 2005), 11.3 (Dec 2006), 8.8 (Dec 2007)
  - Return on average assets: 3.1 (Dec 2004), 6.5 (Dec 2005), 5.1 (Dec 2006), 4.7 (Dec 2007)
  - Liquid assets to total assets: 66.6 (Dec 2004), 41.0 (Dec 2005), 41.3 (Dec 2006), 37.6 (Dec 2007)

### External Sector and Balance of Payments
- Current account balance (in millions of U.S. dollars): -606 (2005), 128 (2006), -507 (2007), -608 (2008 proj.), -100 (2009 proj.), -526 (2010 proj.)
- Trade balance (in millions of U.S. dollars): 118 (2005), 1,293 (2006), 983 (2007), 1,030 (2008 proj.), 1,114 (2009 proj.), 459 (2010 proj.)
- Exports, f.o.b. (in millions of U.S. dollars): 2,278 (2005), 3,929 (2006), 4,594 (2007), 5,084 (2008 proj.), 4,996 (2009 proj.), 4,564 (2010 proj.)
  - Of which copper (in millions of U.S. dollars): 1,516 (2005), 3,029 (2006), 3,407 (2007), 3,785 (2008 proj.), 3,653 (2009 proj.), 3,182 (2010 proj.)
- Imports, f.o.b. (in millions of U.S. dollars): -2,161 (2005), -2,636 (2006), -3,611 (2007), -4,055 (2008 proj.), -3,882 (2009 proj.), -4,105 (2010 proj.)
  - Of which oil (in millions of U.S. dollars): -312 (2005), -454 (2006), -493 (2007), -703 (2008 proj.), -739 (2009 proj.), -777 (2010 proj.)
- Gross international reserves (in millions of U.S. dollars): 331 (2005), 595 (2006), 947 (2007), 1,329 (2008 proj.), 1,810 (2009 proj.), 2,231 (2010 proj.)
  - In months of imports: 1.5 (2005), 2.2 (2006), 2.5 (2007), 3.2 (2008 proj.), 4.7 (2009 proj.), 5.5 (2010 proj.)
- Copper export volume (thousands of metric tons): 450 (2005), 492 (2006), 491 (2007), 556 (2008 proj.), 626 (2009 proj.), 727 (2010 proj.)
- Copper export price (U.S. dollars per pound): 1.5 (2005), 2.8 (2006), 3.1 (2007), 3.1 (2008 proj.), 2.6 (2009 proj.), 2.0 (2010 proj.)

### PRGF Arrangement, Access, and Disbursement Schedule
- Total access under the PRGF: SDR 48.91 million (10 percent of quota).
- Proposed schedule of disbursements under the PRGF arrangement (in millions of SDRs; in percent of quota):
  - 6.987 (1.43 percent of quota) — June 4, 2008 — Board approval of the three-year PRGF arrangement
  - 6.987 (1.43 percent of quota) — November 30, 2008 — Board completion of the first review based on observance of performance criteria for June 30, 2008
  - 6.987 (1.43 percent of quota) — May 30, 2009 — Board completion of the second review based on observance of performance criteria for December 31, 2008
  - 6.987 (1.43 percent of quota) — November 30, 2009 — Board completion of the third review based on observance of performance criteria for June 30, 2009
  - 6.987 (1.43 percent of quota) — May 30, 2010 — Board completion of the fourth review based on observance of performance criteria for December 31, 2009
  - 6.987 (1.43 percent of quota) — November 30, 2010 — Board completion of the fifth review based on observance of performance criteria for June 30, 2010
  - 6.988 (1.43 percent of quota) — May 30, 2011 — Board completion of the sixth review based on observance of performance criteria for December 31, 2010

### Capacity to Repay the Fund (Indicators)
- Assumes prospective PRGF disbursements of SDR 48.91 during 2008-11.
- Fund obligations based on existing and prospective credit (selected indicators):
  - Fund obligations (principal) and charges/interest projections (in millions of SDRs and US$) provided for 2007–2015.
  - Net use of Fund credit (in millions of SDRs): 27.5 (2008), 14.0 (2009), 14.0 (2010), 14.0 (2011), 7.0 (2012), 0 (2013 onward implied)
- Memorandum items:
  - Exports of goods and services (in millions of US$): 4,873 (2007), 5,380 (2008 proj.), 5,310 (2009 proj.), 4,902 (2010 proj.), 4,327 (2011 proj.), 4,359 (2012 proj.)
  - Gross International Reserves (in millions of US$): 947 (2007), 1,329 (2008 proj.), 1,810 (2009 proj.), 2,231 (2010 proj.), 2,461 (2011 proj.), 2,684 (2012 proj.)
  - Nominal GDP (in millions of US$): 11,364 (2007), 12,807 (2008 proj.), 13,315 (2009 proj.), 13,853 (2010 proj.), 14,247 (2011 proj.), 15,071 (2012 proj.)
  - Quota (millions of SDRs): 489.10 (constant)

### Structural Conditionality for 2008 (Selected Measures, Timing, and Rationale)
- Public Financial Management:
  - Submit to Cabinet a proposal to establish a treasury single account. — End-June 2008 — Performance criterion
  - Submit to Cabinet a proposal to establish a Treasury Department. — End-June 2008 — Benchmark
  - Macro rationale: To strengthen public expenditure management and budget execution; improve cash flow management and forecasts; improve fiscal and monetary policy coordination.
- Tax Administration:
  - Establish a headquarters functional structure at the Zambia Revenue Authority. — End-September 2008 — Benchmark
  - Establish a single large-taxpayer office at the Zambia Revenue Authority. — End-December 2008 — Benchmark
  - Macro rationale: To modernize the Zambia Revenue Authority and increase tax administration efficiency.
- Financial Sector:
  - Ministry of Finance and National Planning and the Bank of Zambia to establish a formal mechanism for coordination with key line ministries on liquidity management. — End-June 2008 — Benchmark
  - The Bank of Zambia will restructure the operations of its rediscount window. — End-June 2008 — Benchmark
  - Set up a supervisory regime for the secondary market in government securities. — End-September 2008 — Benchmark
  - Introduce risk based bank supervision. — End-December 2008 — Benchmark
  - Macro rationale: Strengthen liquidity management, reduce volatility in the money market, enhance effectiveness of monetary policy, and maintain a healthy banking system during rapid credit expansion.
- Debt Management:
  - Submit to Cabinet a debt management strategy. — End-September 2008 — Benchmark
  - Macro rationale: To facilitate cost effective public sector borrowing and maintain a sound debt structure.
- Energy Sector:
  - Submit to Cabinet a policy for the electricity sector with strategies to (i) gradually adjust electricity tariffs to the cost of service; (ii) attract private investment and competition in the sector; (iii) increase the operational efficiency of ZESCO; and (iv) ensure that ZESCO has sufficient resources to implement the planned rehabilitation and new generation projects. — End-June 2008 — Performance criterion
  - Macro rationale: To ensure an efficient and sustainable power supply. Solving current energy sector problems is essential to achieving the growth objectives of the program.

### Millennium Development Goals (Selected Indicators)
- Goal 1: Population below US$1 a day (percent): 64.6 (1990), 73.6 (1994), 66.0 (1997), .... (2000), 76.0 (2003), 64.0 (2005)
- Goal 2: Net primary enrollment ratio (percent of relevant age group): 79.1 (1990), ... (1994), 64.9 (1997), 62.6 (2000), 79.8 (2003), 88.9 (2005)
- Goal 4: Under 5 mortality rate (per 1,000): 180.0 (1990), 182.0 (1994), ... (1997), 182.0 (2000), 182.0 (2003), 182.0 (2005)
- Goal 6: Prevalence of HIV, total (percent of population ages 15-49): ... (1990), ... (1994), 16.7 (1997), 16.9 (2000), 17.0 (2003)
- Goal 7: Access to an improved water source (percent of population): 50.0 (1990), ... (1994), ... (1997), ... (2000), ... (2003), 58.0 (2005)

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

### Appendix I—Letter of Intent

### Appendix I—Letter of Intent

### Recent economic developments
- The Government of the Republic of Zambia completed a three year economic program under the PRGF in September 2007 and requests a new three-year PRGF arrangement equivalent to SDR 48.91 million (10 percent of quota), with a first disbursement of SDR 6.987 million after Executive Board approval.  
- Economic performance has improved markedly since the early 2000s due to strengthened macroeconomic policies, privatization and higher world copper prices, HIPC and MDRI debt relief, and rising international reserves.  
- Poverty: overall incidence fell from 73 percent in 1998 to 64 percent in 2006; urban poverty fell to 34 percent in 2006 from 53 percent in 2004; rural poverty remains about 80 percent.  
- 2007 macro outcomes:
  - Real GDP growth: estimated 6.0 percent.
  - Annual inflation: 8.9 percent.
  - Overall deficit (excluding grants): 4.9 percent of GDP (about 2.5 percentage points of GDP lower than budgeted).
  - Current account deficit (excluding grants): widened sharply to an estimated 7.1 percent of GDP.
  - Export proceeds grew by 17 percent (mostly due to higher copper prices).
  - Foreign direct investment in the mining sector: estimated about US$1 billion (about double 2006).
  - International reserves: rose to 2.5 months of imports at year-end.
- Monetary expansion exceeded projections in 2007 due to BoZ’s difficulties sterilizing foreign exchange inflows and a reduction in the cash reserve requirement from 14 to 8 percent in October, injecting additional liquidity.

### Medium-term challenges and policies
- Program objectives (FNDP 2006–10):
  - (i) maintain macroeconomic stability and debt sustainability;
  - (ii) increase fiscal space for investment in infrastructure, energy, and human resources;
  - (iii) diversify the economy to lessen dependence on mining and improve conditions for private sector-led growth.
- Medium-term outlook and risks:
  - Real GDP growth projected at 6–7 percent per year over the medium-term, premised on continued mining investment, modest agricultural recovery, and buoyant construction and telecommunication sectors.
  - Risks: continued electricity shortages and a sharper-than-assumed drop in copper prices.
  - Inflation target: lower to about 5 percent over the next two years.
  - External sector: current account deficit projected to narrow as export volume grows and import growth slows; international reserves projected to increase to 5.5 months of imports by 2010.
  - Annual net external support (grants and concessional loans to central government): projected to remain at around 6 percent of GDP during 2008–10.
  - External debt: expected to remain sustainable over the long-term owing to past debt relief, rising export earnings, and conservative external borrowing.
- Fiscal strategy to create fiscal space:
  - Introduce a new fiscal regime for the mining sector.
  - Improve revenue administration.
  - Restrain non-priority spending and raise public expenditure efficiency.
  - Consider external nonconcessional borrowing for large projects (especially energy) if concessional financing is unavailable.
- Revenue and expenditure projections:
  - Revenues estimated to increase from 18.7 percent of GDP in 2007 to 21 percent of GDP in 2008–10, mainly reflecting the new mining fiscal regime.
  - Capital spending projected to increase to 6¾ percent of GDP in 2010.
  - Primary deficit of the central government (excluding mining revenues and grants): projected at 7–8 percent of GDP in 2008–10.
  - Net savings from accumulated mining taxes: projected at 5 percent of GDP at end-2010.
- Structural reform agenda (multiyear programs):
  - Focus areas: (i) expenditure management and budget execution; (ii) revenue collection efficiency; (iii) monetary operations and financial sector deepening; (iv) debt management strategy; (v) energy sector policies to ensure adequate and reliable electricity supply.
  - First-year reforms are specified in Table 2 (in source).
  - 2009–10 focus: implement treasury single account, continued IFMIS roll-out, procurement reforms, strengthen financial regulation and supervision, improve pension and insurance regulatory agencies, harmonize financial legislation, increase rural and small enterprise access to financial services, and continue electricity sector reforms (including tariff adjustments, private sector participation, ZESCO reform).

### Policies for 2008

A. Fiscal policies
- Primary fiscal deficit (excluding grants and mining revenue): projected to increase to 8.3 percent of GDP in 2008.  
- Revenues:
  - Projected to increase by 2.5 percentage points to 21.2 percent of GDP in 2008, reflecting changes to the mining fiscal regime.
  - Mining revenue estimated at 2.8 percent of GDP in 2008 (with international copper prices projected to decline by about 12 percent in 2008), about 1.4 percent of GDP higher than estimated under the old regime.
  - In 2008, all mining revenue in excess of what would have been collected under the old regime K 722 billion will be saved in a separate Mining Resource Account (MRA) at BoZ as a stabilization fund. In 2009 and subsequent years, net inflow to the MRA will be based on the MTEF; funds to finance high priority FNDP projects.
  - Grants expected to increase from 4.6 percent of GDP in 2007 to 5.3 percent of GDP in 2008.
- Expenditures:
  - Budgeted to rise from 24.6 percent of GDP in 2007 to 27.4 percent of GDP in 2008, reflecting continued hiring in education and health, clearance of domestic arrears, higher capital spending, and short-term allocations to the constitutional review process.
  - Overall financing need: 1.1 percent of GDP; net domestic financing: negative 0.1 percent of GDP.
- Mining fiscal regime (effective April 1, 2008):
  - Introduces a windfall tax, a variable profit tax, and an increase in mineral royalty.
  - Windfall tax and variable profit tax will not apply at the same time; when windfall tax applies, profit tax rate will be the standard 30 percent.
  - All revenues, including those channeled through the MRA, and expenditures will be fully integrated in the budget and fiscal accounts.
- Transparency and administration:
  - Government working toward formally adopting EITI in a participatory process, in line with EITI guidelines.
  - Zambia Revenue Authority (ZRA) modernization project to adopt integrated and taxpayer-segmented organizational structure with major elements to be implemented:
    - Establishment of a headquarters functional structure by September 2008 (structural benchmark).
    - Establishment of a large taxpayer office by December 2008 (structural benchmark) with a specialized team to audit mining companies and administer the new fiscal regime.
- Public Service Pension Fund (PSPF):
  - Actuarial deficit estimated at about 10 percent of GDP.
  - Annual cash-flow deficit projected to increase in the medium-term before falling; deficit estimated at ½ percent of GDP over the next few years.
  - Budget will allocate sufficient resources to ensure pension obligations are met in full while constitutional amendments required to redesign the defined benefit scheme are pursued.

B. Public expenditure management
- Treasury single account (TSA):
  - Proposal on establishment of TSA to be submitted to Cabinet by end-June 2008 (structural performance criterion); intention to make TSA effective in 2009.
  - Preparatory steps: use of real-time-gross-settlement for large transactions, consolidation of government accounts in commercial banks into a limited number of BoZ accounts, and roll-out of IFMIS.
  - MoFNP to submit to Cabinet by end-June 2008 a proposal to establish a Treasury Department within MoFNP (structural benchmark).
- IFMIS and procurement:
  - First pilot sites for IFMIS expected fully functional by mid-2008.
  - Enhancements to existing Financial Management System (FMS) to be completed by end-April 2008 to enable budget execution reports to be published within 60 days of quarter-end.
  - Proposed amendments to the Procurement Act to be submitted to Cabinet by end-September 2008 to facilitate accelerated execution of capital projects; procurement planning improvements through training.
- Public Sector Management (PSM):
  - Development of a pay policy for the public service; draft policy expected to be submitted to Cabinet for approval by end-2008.

C. Monetary and exchange rate policies
- Inflation targets:
  - Reduce annual inflation to 7 percent in 2008 and 5 percent in 2009.
  - Reserve money growth targeted at 11½ percent in 2008.
- Credit and reserves:
  - Policy to accommodate private sector credit expansion of about 20 percent in 2008.
  - Buildup of international reserves targeted to 3.2 months of imports by end-2008.
- Liquidity management:
  - BoZ to undertake appropriate measures to contain excess liquidity arising from government spending financed by significant foreign exchange inflows.
  - To achieve liquidity containment without undue exchange rate volatility, BoZ will adopt a program of regular foreign exchange sales for the remainder of 2008.

*Appendix I—Letter of Intent and attached memoranda (May 7, 2008).*

### 19.      The government is very aware that fiscal and monetary policies need to be better

### _cr08187 - 19.      The government is very aware that fiscal and monetary policies need to be better

### Fiscal and monetary coordination
- Uneven and unpredictable budget execution often cause difficulties for liquidity management.
- The MoFNP and the BoZ intend to establish a formal mechanism for coordination with key line ministries on liquidity management by June 2008 (structural benchmark).
  - This will involve setting up meeting and data submission procedures, including for key line ministries’ expenditure plans to the MoFNP and the BoZ.

### Exchange rate and foreign exchange market policy
- The government remains committed to a flexible exchange rate regime.
- The BoZ will confine interventions in the foreign exchange market to smoothening fluctuations in the exchange rate while allowing a gradual build-up of international reserves.
- The BoZ will seek to continue to improve the operation of the foreign exchange market and encourage the development of hedging instruments, in particular forward market transactions.

### Financial sector development
- Reforms will build on progress made under the first phase of the FSDP.
- A credit reference bureau launched in 2007 has made progress in building the necessary database and is expected to begin providing credit information to facilitate lending.
- The government will seek a sovereign rating over the coming months to enhance attractiveness and provide a benchmark for the domestic capital market.
- To encourage a stable interbank money market and a benchmark short-term interest rate, the BoZ will strengthen liquidity management by restructuring its rediscount window operations:
  - Reduce the penal element in the pricing of securities and increase the range of securities eligible for rediscounting to encourage its use by banks (June 2008 structural benchmark).
- To stimulate the growth of the secondary market, the government will set up a supervisory regime for the secondary market in government securities by September 2008 (structural benchmark), entailing issuance of harmonized trading regulations.
- The BoZ is developing a framework for risk-based supervision to be implemented by December 2008 (structural benchmark).
- The government is committed to undertake legislative changes to strengthen the independence of BoZ.

### Energy sector: electricity generation and ZESCO
- The government recognizes the gravity of the current shortage of electric power and the risk it poses to sustained growth.
- Policies to ensure sufficient electricity generation capacity will include strategies to:
  - (i) gradually adjust electricity tariffs to reflect the cost of service;
  - (ii) attract private investments and competition in the sector;
  - (iii) increase the operational efficiency of ZESCO and strengthen its governance;
  - (iv) ensure that ZESCO has sufficient resources to implement planned rehabilitation and new generation projects.
- The government intends to complete this action plan no later than June 2008 (structural performance criterion).
- As a first step to improve ZESCO’s financial footing, the government will ensure that all arrears to ZESCO from ministries, provinces, and spending agencies (MPSAs) are paid by end-December 2008.
- The MoFNP will issue a circular instructing all MPSAs that:
  - (i) all utility bills for each quarter are to be paid from the quarterly budget funding; and
  - (ii) all funds released for payment of utility bills should not be reallocated by MPSAs.
- Implementation of new projects to expand electricity generation will likely require borrowing on nonconcessional terms:
  - ZESCO is looking for financing to carry out three investment projects (the Kariba North Power Station Extension, the Itezhy-Tezhy Power Station, and completion of the rehabilitation project) in the amount of $450 million.
  - Given limited availability of grants or concessional financing, the Government and/or ZESCO may likely need to contract new nonconcessional external borrowing for these three projects in 2008.

### Trade, debt, and aid
- The government will continue to pursue an open trade regime.
  - Zambia has fully implemented the tariff phase down commitment under the SADC Protocol.
  - About 85 percent of intra-merchandise trade has been liberalized, as tariffs were further reduced in January 2008.
  - The tariff phase down is scheduled to continue during 2008–12, when Zambia is expected to eliminate its tariff on sensitive products.
  - The government is actively participating in harmonization of trade-related agendas under SADC and COMESA.
- Public debt management:
  - The MoFNP is finalizing Zambia’s debt management strategy, to be submitted to Cabinet by end-September 2008 (structural benchmark).
  - The strategy will provide a framework for borrowing and principles for currency composition, maturity, interest rates, and other risks of the debt portfolio.
  - The government will continue work on:
    - (i) enhancing and unifying the legal framework of public sector debt contracting and guaranteeing;
    - (ii) strengthening the institutional capacity of IDM so that debt operations are assessed and audited;
    - (iii) monitoring total public sector debt, including debt to be contracted by public enterprises.
- Aid management:
  - In line with the Aid Policy and Strategy, the government will develop an action plan for aid management.
  - A database on disbursements from traditional donors and creditors has already been established; disbursements from emerging creditors will be captured in the near future.

### Economic statistics
- The government is strengthening capacity to collect and disseminate economic data.
  - The Central Statistics Office (CSO) is undertaking an economic census; key results are expected in the latter part of 2008 and will be used to rebase the national accounts.
  - The CSO is testing a new, rebased CPI, which will be published starting in June 2008.
  - Balance of payments statistics will be strengthened, drawing on IMF technical assistance.

### Program monitoring: PRGF arrangement and conditionality
- Semi-annual disbursements under the PRGF program arrangement will be based on observance of quantitative and structural performance criteria.
- Completion of the first and second review of the arrangement will be based on observance of criteria through end-June 2008 and end-December 2008, respectively.

Key quantitative performance criteria and indicative targets (from Table 1)
- Performance criteria:
  - Ceiling on the cumulative increase in net domestic assets (NDA) of the Bank of Zambia 2, 3 :
    - 2007 Dec: -1243
    - 2008 Jun: -208
    - 2008 Sep: -512
    - 2008 Dec: -776
  - Ceiling on the cumulative increase in net domestic financing (NDF) 2 4:
    - 2007 Dec: 4,638
    - 2008 Jun: 567
    - 2008 Sep: 534
    - 2008 Dec: -64
  - Floor on the cumulative increase in gross international reserves (GIR) of the Bank of Zambia (Millions of U.S. dollars) 2:
    - 2007 Dec: 947
    - 2008 Jun: 154
    - 2008 Sep: 267
    - 2008 Dec: 382
  - Ceiling on new external payment arrears 4: 000 (continuous performance criteria)
  - Ceiling on contracting or guaranteeing short-term external debt by the central government, BOZ, ZESCO, ZAMTEL and Zambia Railways Limited 4: 000
  - Ceiling on contracting or guaranteeing medium- and long-term nonconcessional external debt by the central government, BOZ, ZESCO, ZAMTEL and Zambia Railways Limited (millions of U.S. dollars) 5:
    - Electricity sector projects 6: 450 450 450
    - Other sectors 000
- Indicative targets:
  - Floor on the cumulative payment of domestic arrears of the government: 297 527 669
  - Cumulative increase in reserve money: 250022155289
- Memorandum items:
  - Cumulative net budget support (millions of U.S. dollars): 73.7 100.7 154.5 141.2
  - General budget support: 135.7 115.2 200.0 200.0
  - Central Government debt service obligations (excluding IMF): -62.0 -14.5 -45.5 -58.8
  - Cumulative revenue from mining: 351 1055 1640

Notes related to the quantitative definitions
- Definitions of items are contained in the Technical Memorandum of Understanding (TMU).
- Adjustors, including for general budget support, are defined in the TMU.
- The ceiling will be adjusted for changes in the legal reserve requirements as specified in the TMU.
- Continuous performance criteria are indicated for arrears and short-term external debt ceilings.
- Nonconcessional loans are those having a grant element of less than 35 percent.
- The electricity projects are Kariba North Extension, Itezhy-tezhy, and the rehabilitation of Kafue Gorge and Kariba power stations.

### Structural program for 2008 (selected measures and timing)
- Performance Criteria:
  - Submit to Cabinet a proposal to establish a treasury single account. End-June 2008
  - Submit to Cabinet a policy for the electricity sector with specific strategies to (i) gradually adjust electricity tariffs to the cost of service; (ii) attract private investment and competition in the sector; (iii) increase the operational efficiency of ZESCO; and (iv) ensure that ZESCO has sufficient resources to implement the planned rehabilitation and new generation projects. End-June 2008
- Benchmarks:
  - Submit to Cabinet a proposal to establish a Treasury Department. End-June 2008
  - Establish a headquarters functional structure at the Zambia Revenue Authority. End-September 2008
  - Establish a single large-taxpayer office at the Zambia Revenue Authority. End-December 2008
  - The Ministry of Finance and National Planning and the Bank of Zambia will establish a formal mechanism for coordination with key line ministries on liquidity management. End-June 2008
  - The Bank of Zambia will restructure the operations of its rediscount window. End-June 2008
  - Set up a supervisory regime for the secondary market in government securities. End-December 2008
  - Introduce risk based bank supervision. End-December 2008
  - Submit to Cabinet a debt management strategy. End-September 2008

### Technical Memorandum of Understanding (selected definitional points)
- Net Domestic Assets (NDA) of the BoZ:
  - Defined as the monthly average (based on daily data) of reserve money (as defined below) less net foreign assets of the BoZ calculated at kwacha 3,844.8 per U.S. dollar for 2008.
  - Net foreign assets include gross international reserves plus any other foreign assets, including the US$25 million blocked reserves at the former Meridien Bank (MBZ), minus foreign reserve liabilities.
- Foreign reserve liabilities:
  - Defined as short term (one year or less in original maturity) foreign currency-denominated liabilities of the BoZ to nonresidents and outstanding use of IMF credit.
- Reserve money:
  - (Monthly average based on daily data) consists of currency issued, required reserves on kwacha deposits, required reserves on foreign currency deposits (at the program exchange rate), positive current account balances of banks with the BoZ, and deposits in the BoZ of non-central government institutions.
  - Data on reserve money, including components, will be reported by the BoZ on weekly and end-month basis.
- Net Domestic Financing (NDF):
  - Defined as the Central Government’s net borrowing from the banking and non-banking sectors.
  - Components include central government position with commercial banks, BoZ holdings of government securities, nonbank holdings of Treasury bills and government bonds, with specified inclusions and deductions.
  - The data source is the “Net Domestic Financing” Table produced by the Economics Department of the BoZ, submitted weekly and reconciled with the monthly monetary survey.
- Gross international reserves (GIR) of the BoZ:
  - Defined as reserve assets of the BoZ (IMF BOP manual definition), excluding foreign assets not readily available or controlled by monetary authorities and foreign currency claims on Zambian residents.
  - Components: (i) monetary gold; (ii) foreign currency in cash; (iii) unencumbered foreign-currency deposits at non-resident banks; (iv) foreign securities and deposits; (v) SDR holdings and Zambia’s reserve position with the IMF.
  - Gross reserves exclude non-convertible currencies, encumbered reserve assets, commercial bank reserve requirements on foreign currency deposits, and the US$25 million deposit in MBZ (in liquidation).
  - Valuation for targets is in U.S. dollars at actual end-period exchange rates.
  - Data on gross international reserves will be reported by the BoZ on weekly and end-month basis.
- External payment arrears:
  - Performance criterion on non-accumulation of new external payment arrears is continuous.
  - Official external payment arrears are unpaid debt service by the central Government and BoZ 30 days beyond the due date and/or the grace period (excludes rescheduled arrears).
  - Data compiled jointly by MoFNP and BoZ; reported quarterly by MoFNP.
- Official external debt:
  - Concessional defined as official debt with original maturity > one year contracted or guaranteed by central Government, BoZ, ZESCO, ZAMTEL and Zambia Railways Limited having a grant element of no less than 35 percent, calculated using CIRRs as specified.
  - Non-concessional defined as external debt other than concessional debt.
  - Ceiling on contracting or guaranteeing medium- and long-term nonconcessional external debt excludes specified items.
  - Official external short-term debt defined as external debt with original maturity < one year and includes forward commodity sales but excludes normal trade credit for imports.
  - Detailed data on all new external debt contracted or guaranteed by central government, BoZ, ZESCO, ZAMTEL and Zambia Railways Limited will be provided monthly by MoFNP and include amounts, currencies, and full terms and conditions.
- Domestic arrears of central government:
  - Defined as:
    - (i) bills from suppliers for goods and services delivered (and verified) unpaid within 30 days after due date;
    - (ii) wage, salary, and other payments to government employees, including pension contributions and housing allowances, due in a given month but unpaid on the 15th of the following month;
    - (iii) interest or principal obligations unpaid 30 days after due date.

*Source: _cr08187 - 19.      The government is very aware that fiscal and monetary policies need to be better (IMF PDF chapter).*

### 22.      Information regarding domestic arrears is to be compiled through audits of the

### 22.      Information regarding domestic arrears is to be compiled through audits of the

### Domestic arrears audits
- Information on domestic arrears is to be compiled through audits of the accounts of spending Ministries and agencies, conducted by the Internal Audit division of the MoFNP.
- The audits will be completed and data submitted to IMF staff by the Secretary of the Treasury within six weeks of the end of each quarter.

### Adjusters: overview
- The quantitative performance criteria under the program are subject to specific adjusters that modify ceilings and floors on monetary and reserve aggregates based on deviations in several external and domestic flows.

### Adjusters: General budget support (GBS) net of debt service
- Ceilings on NDA and NDF will be adjusted downward (upward) by the full amount of the excess (shortfall) in GBS net of debt service relative to the programmed levels specified in Table 1 of the MEFP.
- Floors on GIR will be adjusted upward (downward) by the full amount of the excess (shortfall) in GBS net of debt service relative to the programmed levels (Table 1 of the MEFP).
- The total adjustment for shortfalls will be limited to US$30 million for January-June and US$35 million for January-December 2008.
- Notes:
  - General budget support consists of grants and loans received by the central Government for financing its overall policy and budget priorities following Zambian budget procedures.
  - For adjusting the NDA ceiling, external disbursements will be treated as if received the first day of the month. The targeted NDA will be increased by the amount of the disbursement divided by the number of business days in the month multiplied by the number of business days from the beginning of the month to the day prior to the disbursement.
  - For adjusting the NDF ceiling, the cumulative excess/shortfall will be converted to kwacha value using the program exchange rate.

### Adjusters: Change in reserve requirements
- The ceiling on NDA will be adjusted downward/upward to reflect decreases/increases in the legal reserve requirements on deposits in commercial banks.
- The adjuster is calculated as the percent change in the reserve requirement multiplied by the actual amount of required reserves (kwacha and foreign-currency denominated) at the end of the previous calendar month.

### Adjusters: Revenue from mining
- Ceilings on NDA and NDF will be adjusted downward (upward) by the full amount of the excess (shortfall) in revenues from the mining sector relative to the programmed levels (Table 1 of the MEFP).
- Floors on GIR will be adjusted upward (downward) by the full amount of the excess (shortfall) in revenues from the mining sector relative to the programmed levels (Table 1 of the MEFP).
- The total adjustment for shortfalls will be limited to K75 billion (US$19 million) for January-June and K917 billion (US$231.7 million) for January-December 2008.

### Adjusters: IMF disbursement and BoZ short-term debt
- Floors on GIR will be adjusted upward (downward) for any excess (shortfall) in the disbursements from the IMF (US dollar value) relative to the programmed levels.
- The floor on GIR will be adjusted upward for any increase in BoZ short-term debt denominated in foreign currency (see definition of short-term debt above).

### Guidelines on Performance Criteria with Respect to Foreign Debt (excerpt)
- Definition of “debt”:
  - Current liability created under a contractual arrangement requiring future payments in assets or services; includes loans, suppliers’ credits, and leases (present value at inception excluding payments covering operation, repair or maintenance).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Key fiscal and monetary aggregates (selected items from tables and annexes)
- Table 1. Zambia: Net Domestic Financing (2008, End-Dec. Program Base)
  - Total domestic financing (program): 4,638
  - Bank financing: 2,002
    - Commercial banks: 2,087
      - Treasury bills: 1,394
      - Bonds: 1,070
      - Loans and advances: 118
    - less: Support to MBZ: -8
    - less: Deposits: -486
  - Bank of Zambia: -85
    - Treasury bills: 557
    - Bonds: 189
    - Kwacha bridging loan: 0
    - GRZ position: -1,951
    - Donor suspense balance: -0.3
    - GRZ long-term security IFO BoZ: 1,121
    - Other: 0.0
  - Nonbank financing: 2,636
    - Treasury bills: 1,111
    - Bonds: 1,525
  - Source: BoZ net domestic financing table.
  - Note: Measured at cost (face value less discount) starting from end-December 2003.

- Table 2. Zambia: Gross International Reserves (As defined in the TMU or IMF; corresponds to gross international reserves for program monitoring).
  - The table structure includes Official reserve assets, Foreign Currency Reserves, Securities (In U.S. dollars, In U.K. pounds, In Euro, Other currencies), Deposits (In U.S. dollars, In U.K. pounds, In Euro, In South African Rand, Other currencies), IMF reserve position, SDR (excludes IMF interim assistance under the HIPC Initiative), Monetary gold, Other reserve assets, and memo items including Other foreign currency assets and Predetermined short-term net drains.
  - The program target for gross international reserves will be adjusted as described in the TMU.

### Annex I — Zambia: Relations with the Fund (as of March 31, 2008)
- Membership Status:
  - Joined: September 23, 1965; Article VIII
- General Resources Account (SDR Million Percent):
  - Quota: Quota 489.10 100.0
  - Fund holdings of currency: 489.10 100.0
  - Reserve position in Fund: 0.02 0.0
- SDR Department (SDR Million Percent):
  - Net cumulative allocation: 68.30 100.0
  - Holdings: 8.45 12.73
- Outstanding Purchases and Loans (SDR Million Percent Quota):
  - PRGF arrangements: 55.02 11.25
- Latest Financial Arrangements (Approval, Expiration, Amount Approved, Amount Drawn; SDR Million):
  - PRGF 06/16/2004 09/30/2007 220.10 220.10
  - PRGF 03/25/1999 03/28/2003 278.90 237.52
  - PRGF 12/06/1995 12/05/1998 701.68 661.68
- Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Principal and Charges/interest by year with totals:
    - 2008, 2009, 2010, 2011, 2012: Principal ... ... 0.55 3.30 7.70; Charges/interest 1.51 1.89 1.89 1.88 1.86; Total 1.51 1.89 2.44 5.19 9.56

### HIPC and MDRI implementation (Annex I)
- HIPC Initiative:
  - Decision point date: Dec. 2000
  - Assistance committed (1999 NPV terms) by all creditors (US$ million): 2,499.20
  - Of which: Fund assistance (US$ million): 602.00
  - (SDR equivalent in million): 468.80
  - Completion point date: April 2005
  - Disbursement of IMF assistance (SDR million):
    - Assistance disbursed to Zambia: 468.80
    - Interim assistance: 351.60
    - Completion point balance: 117.20
    - Additional disbursements of interest income: 39.47
    - Total disbursements: 508.27
- MDRI Assistance:
  - Total debt relief (SDR million): 402.59
    - Of which: MDRI 398.47; HIPC 4.12
  - Debt relief by facility:
    - Delivery Date January 2006: GRA N/A 402.59 402.59

### Safeguards assessment (BoZ)
- Under the Fund's safeguards assessment policy, BoZ is subject to an update assessment with respect to the expected arrangement; information has been requested from authorities.
- Previous assessment (October 20, 2004) found adequate safeguards in several areas but identified vulnerabilities and recommended:
  - (i) adopt International Financial Reporting Standards (IFRS) as the basis for financial reporting;
  - (ii) adopt a formal rotation policy for the appointment of the external auditor;
  - (iii) amend accounting policies to ensure that unrealized gains are excluded from profits available for distribution to government;
  - (iv) as part of a current review of the central bank Act, revise provisions to strengthen the bank’s operational independence and accounting practices;
  - (v) conduct quarterly reconciliations of GIR and NDA data reported to the Fund with the underlying source accounting data.

### Exchange rate arrangement
- Currency: kwacha.
- Exchange rate regime: managed float with no predetermined path for the exchange rate; determined in the interbank market with BoZ buying rate as the simple average of primary dealers’ low bid rates and BoZ selling rate as the simple average of primary dealers’ high offer rates.
- On April 19, 2002, Zambia accepted the obligations of Article VIII, Section 2, 3, and 4 of the Articles of Agreement.
- The Fund urged elimination of the exchange restriction evidenced by the accumulation of external payments arrears as soon as possible.

### Article IV consultations and FSAP/ROSC
- Article IV: standard 24-month cycle; last Article IV consultation concluded on December 7, 2007.
- FSAP participation: FSAP mission conducted April 30-May 15 and July 15–26, 2002.
- ROSC:
  - Fiscal transparency module issued October 31, 2001.
  - ROSC-data module issued January 18, 2005.

### Technical assistance (since 2003) and Resident Representative
- Resident advisors:
  - FAD 2002–03 Advisor on public expenditure management
- Technical assistance missions (selected):
  - MFD: January and May 2003; September 2003; April–October 2004; April–May 2005; March 2006 (areas include foreign exchange interbank market, monetary operations, reform of the financial system, resolution of nonbank financial institutions, liquidity management).
  - MCM: September 2007; November 2007 (foreign exchange market, risk-based supervision).
  - STA: June 2004 (Data ROSC); April–May 2005 (Monetary Statistics (GDDS)); May 2005 (Government Finance Statistics (GDDS)); February 2006 (Real Sector (GDDS)); July 2006 (Real Sector (GDDS)).
  - FAD: July–August 2005 (Regulations for the Public Finance Act); November 2005 (Fiscal regime for copper mining); July 2006 (Revenue administration); August 2006 (Follow up on fiscal arrangements for the mining sector); October 2006 (Review of tax policy).
  - LEG: August 2004–February 2005 (Assistance on amending legislation on nonbank financial institutions); May 2005 (Strengthening the regulatory framework for nonbank financial institutions).
- Resident Representative:
  - A Fund Resident Representative first took up the position in Lusaka in June 1990.
  - Mr. Birgir Arnason has been the Resident Representative since November 2006.

### Annex II — Zambia: Relations with the World Bank Group
- Poverty reduction strategy:
  - World Bank support to Zambia is based upon the country’s PRSP.
  - Zambia’s Fifth National Development Plan 2006-10 (FNDP) serves as the PRSP and was officially launched by the President in early 2007.
- Debt relief:
  - After the HIPC completion point, Zambia was granted additional debt relief under the MDRI.
  - Effective July 1, 2006 IDA credits that had been disbursed prior to 2004 were cancelled.
- World Bank Group Strategy:
  - In March 2004, the Bank’s executive Board discussed the Country Assistance Strategy (CAS) for 2004-2007 anchored in a result-based framework.
  - Strategic priorities:
    1. Strategic Priority 1:  Sustained Economic Growth Anchored in a Diversified and Export-Oriented Economy;
    2. Strategic Priority 2:  Improved Lives and Protection of the Vulnerable;
    3. Strategic Priority 3:  Efficiently and Effectively Managed Public Sector.
  - The Bank’s new CAS is scheduled for discussion with its executive Board in May 2008 and will be aligned with the FNDP.
  - A Joint Assistance Strategy for Zambia (JASZ) has been prepared by Cooperating Partners.
- Lending operations:
  - Ongoing operations in public sector reform, HIV/AIDS, malaria, education, agriculture, infrastructure, diversification (tourism), environment.
  - Development policy lending: second EMGC/DPO for US$10 million appraised in June 2007; DPO scheduled for approval by Bank’s executive Board in May 2008.
  - Increased access to electricity services project: US$33 million with a GEF Trust Fund grant of US$4.5 million; scheduled for approval in May 2008.
- Country diagnostics:
  - Combined PER, CPAR, and CFAA completed in 2003.
  - Main economic sector works: Country Economic Memorandum (CEM), pro-poor growth study, Investment Climate Assessment (ICA), Administrative Barriers study (AB), Poverty and Vulnerability Assessment (PVA), integrated framework study for trade (DTIS), Strategic Country Gender Assessment (SCGA).
  - PER for education (FY07) completed; PER for health sector being finalized; assessment of competition and regulation in infrastructure initiated.
  - In FY08: PER for agricultural sector to be initiated and a Public Expenditure Tracking Survey for secondary education; update of the Investment Climate Assessment under way.

*Source: _cr08187 - 22.      Information regarding domestic arrears is to be compiled through audits of the (IMF PDF).*

### 6.      Projects under Supervision. IDA’s active portfolio as of April 2008 contains 12

### 6.      Projects under Supervision. IDA’s active portfolio as of April 2008 contains 12

### IDA portfolio and recent approvals
- IDA’s active portfolio as of April 2008 contains 12 credits and grants for a total initial commitment of US$382.1 million.
- In FY06 three projects were approved by IDA’s Board: the Malaria Booster Project, Public Sector Management Project and Agricultural Development Support Program.
- In FY07, the Board approved a water and sanitation project and additional financing for the Road rehabilitation and maintenance project in the amount of US$25 million.
- In FY08 (this fiscal year) the following are to be approved by IDA’s Board in May 2008:
  - a DPO in the amount of US$10 million
  - an increased access to electricity project in the amount of US$37.5 million

### IFC portfolio and notable transaction
- The International Finance Corporation (IFC) currently has a small portfolio of 12 projects totaling US$15 million outstanding.
- Sector mix: financial sector, agribusiness, telecommunications (mobile telephone), and tourism projects.
- IFC’s most prominent project was for US$30 million in the equity of Konkola Copper Mines (KCM) with Anglo-American in 2000; the IFC exited in 2002 along with Anglo, in accordance with the terms of the investment agreement.

### MIGA portfolio
- MIGA’s outstanding portfolio in Zambia consists of four contracts of guarantee in the agribusiness and manufacturing services sector with a US$36.1 million gross exposure and a US$35.7 million net exposure as of December 2003.
- Project purposes: privatization, modernization, and expansion of a foundry, and for cobalt and copper facilities.
- Estimated total amount of foreign direct investment facilitated to date is US$155.5 million.

### Table 1: Projects under Supervision (As of April 2008) — key project figures (in US$ Millions)
- ZM-SEED SIL (FY05) Credit Pillar 1 — Approval FY 07/29/2004 — Net Comm Amt 31.0 — Tot Disb 13.5 — Undisbursed 16.6
- ZM-GEF SEED Biodiversity Grant Pillar 2 — Approval FY 07/29/2004 — Net Comm Amt 4.0 — Tot Disb 2.4 — Undisbursed 1.6
- Mngt. of Miombo Woodland Ecosystem Grant Pillar 2 — Approval FY 05/14/2002 — Net Comm Amt 0.8 — Tot Disb 0.6 — Undisbursed 0.1
- 3A Southern Africa Power Market Credit Pillar 1 — Approval FY 07/09/2004 — Net Comm Amt 1.1 — Tot Disb 0.8 — Undisbursed 0.4
- ZM-Road Rehab Maintenance Prj (FY04) Credit Pillar 1 — Approval FY 03/09/2004 — Net Comm Amt 80.5 — Tot Disb 37.6 — Undisbursed 40.7
- Copperbelt Environment Credit Pillar 1 — Approval FY 03/20/2003 — Net Comm Amt 47.4 — Tot Disb 19.0 — Undisbursed 27.0
- HIV/AIDS (ZANARA) (IDA GRANT) Credit Pillar 2 — Approval FY 12/30/2002 — Net Comm Amt 54.0 — Tot Disb 47.8 — Undisbursed 2.6
- ZM-TEVET SIM (FY01) Credit Pillar 2 — Approval FY 06/14/2001 — Net Comm Amt 26.7 — Tot Disb 18.6 — Undisbursed 7.0
- Regional Trade Fac. Proj. - Zambia Credit Pillar 1 — Approval FY 04/03/2001 — Net Comm Amt 18.3 — Tot Disb 10.6 — Undisbursed 6.6
- Malaria Booster program Credit Pillar 2 — Approval FY 11/15/2005 — Net Comm Amt 21.0 — Tot Disb 15.8 — Undisbursed 5.3
- Public Sector Management Program Support Proj. Credit Pillar 3 — Approval FY 01/05/2006 — Net Comm Amt 31.8 — Tot Disb 11.9 — Undisbursed 19.9
- Agricultural Development Support Program Grant Pillar 1 — Approval FY 05/16/2006 — Net Comm Amt 40.7 — Tot Disb 5.9 — Undisbursed 34.5
- Note: Total disbursements plus Undisbursed amounts do not necessarily add up to total commitments due to exchange rate fluctuations.

### IMF-World Bank collaboration — overview
- The Fund leads in areas where its analysis serves as input into World Bank policy: macroeconomic stability, fiscal, monetary, and exchange rate policies.
- The Fund and the Bank share responsibility and coordinate closely in: trade, financial sector, public expenditure management including debt management, and economic governance.
- The Bank leads in the social sectors (health, education, social protection, water and sanitation), agriculture and rural development, private sector development including regulatory issues, and the environment.
- Both institutions share joint responsibility supporting the Government in preparation of the PRSP and its annual progress reports, evaluation for Enhanced HIPC Initiative Completion Point, and assistance to improve debt and cash management practices.

### Areas in which the World Bank leads (no direct IMF involvement)
- Social sectors, agriculture and rural development, economic diversification, infrastructure, and environment—aimed at informing Zambia’s next poverty-reduction strategy.
- Specific focuses and actions:
  - HIV/AIDS and Malaria: IDA assisting Ministry of Health with US$42 million (multi-sectoral AIDS program ZANARA) and US$20 million under Malaria Booster project; ESW on human resources in health (FY04); health sector PER to be completed in FY07; support (not necessarily financial) for Health Sector Support Program (SWAP) beginning in FY07; Mine Township Services Project to improve water supplies.
  - Education: support for technical education, vocational, and entrepreneurship training (TEVET); reforms to improve quality, labor-market responsiveness, financial sustainability; increase female and disadvantaged participation.
  - Agriculture and rural development: improve productivity and food security; Agricultural Development Support Project approved in FY06.
  - Economic diversification: SEED project supports tourism, agribusiness, and gemstones; focus on policy/legal frameworks and tourism infrastructure (Livingstone as flagship destination).
  - Private sector development: Investment Climate Assessment and FIAS-led Administrative Barriers to Investment study; a private sector development strategy prepared with Bank and IFC support.
  - Infrastructure: commercialization of ZESCO; Road Rehabilitation and Maintenance Project; Water Sector Reform Project; Southern African Power Pool Project participation.
  - Environment: addressed via Bank safeguard policies, Copperbelt environmental cleanup project, SEED project support for environmentally sustainable tourism.

### Areas where Bank leads and its analysis inputs the IMF program
- Institutional dimensions of public expenditure management and financial accountability; public sector reform and restructuring; privatization.
- Bank supports through lending and analytical work to improve budget management, procurement systems, accountability for public funds, and public service productivity and efficiency.

### Areas of shared responsibility
- Five jointly worked areas: (i) trade policy; (ii) financial sector reform; (iii) debt management and domestic debt market development; (iv) PRSP monitoring and evaluation; and preparation of a LIC debt sustainability analysis.
- Specific joint activities and instruments:
  - Trade policy: Bank-led integrated framework exercise with partners.
  - Financial sector: joint review of Financial Sector Development Plan (FSDP); follow-ups on FSAP and FSDP; FSAP update planned for 2008.
  - Debt management: government debt management performance assessment report (FY08); joint assistance to put recommended institutional changes in place.
  - PRSP: joint preparation of Joint Staff Assessment Note (JSAN) on new PRSP in August 2007; joint LIC DSA in fall 2007. Zambia reached HIPC completion in April 2005.

### Areas in which the Fund leads and its analysis serves as input into the World Bank program
- The Fund leads dialogue on macroeconomic framework: fiscal policy (overall envelope for public expenditures, tax policy), monetary and exchange rate policy.
- The Bank ensures its policy advice, including the Economic Management and Growth Credit (EMGC), is consistent with Fund recommendations.

### Table 2 highlights (IMF-World Bank Collaboration in Zambia FY03-FY08) — selected program instruments and initiatives
- IMF instruments and roles:
  - PRGF performance criteria and benchmarks on key monetary and fiscal targets and structural reforms.
  - PRGF measures to put in place the IFMIS and to ensure timely reporting on budget execution.
- World Bank portfolio and ESW examples:
  - Ongoing portfolio items cited across CAS components include: PSMP (FY06), Regional Trade Facilitation Project (FY00), TEVET (FY00), South Africa Power Pool (FY04), SEED (FY05), ASDP (FY06), Water Sector Improvement Project (FY07), ZANARA (FY03), Malaria Booster Project (FY06).
  - New lending cited: EMGC II (DPL) (FY08), Increased Access to Electricity (FY08), Local Development Project (FY08).
  - ESW examples: Debt Management Assessment, Country Economic Memorandum (FY04), Investment Climate Assessment (FY04), Health Sector PER (FY07), Poverty and Vulnerability Assessment.
- Joint activities cited: JSAN on PRSP progress and new PRSP; FSAP (FY02) and FSAP update (FY07/08); HIPC AAP expenditure tracking assessment (FY04).

### Contact
- Questions may be referred to Jos Verbeek (202-473-5539).

*Source: _cr08187 - 6.      Projects under Supervision. IDA’s active portfolio as of April 2008 contains 12*

### 4.      The national accounts estimates are compiled according to the conceptual

### _cr08187 - 4.      The national accounts estimates are compiled according to the conceptual

### National accounts compilation and rebasing
- Compilation follows the conceptual guidelines of the 1968 SNA; a phased approach to the introduction of the 1993 SNA is ongoing.
- For the production approach, 1994 is the latest benchmark year for value-added ratios.
- Benchmarking and source-data gaps:
  - For many important industry areas (wholesale and retail trade, construction, business services, and many other service industries consisting mainly of small-scale private service providers) there are no appropriate indicators.
  - Data on total production and intermediate consumption of establishments are not available.
  - On the expenditure side, there are no reliable indicators of household consumption; private final consumption expenditure is derived residually.
  - Source data for estimating gross fixed capital formation and changes in stocks are incomplete.
- Rebasement efforts:
  - An IMF/DFID GDDS mission (February 2006) noted CSO had data sufficient to produce a new benchmark for 2003; a July 2006 follow-up found little progress.
  - The authorities launched a comprehensive economic census to complete the rebasing of the national accounts in 2007.

### Price indices and deflation practices
- Current price estimates for production and expenditure have been derived from constant price indicators using wholesale price indices (WPIs) and consumer price indices (CPIs) as deflators.
- For the most recent period covered, WPI were not available and CPI components were used throughout the system.

### Consumer Price Index (CPI)
- The CPI broadly adheres to international methodological standards.
- The classification system for compilation closely follows the Classification of Individual Consumption by Purpose.
- Frequency of household budget surveys has been insufficient to capture timely changes in consumer expenditure structure.
- The current CPI base year is 1994 with weights derived from the 1993/1994 household budget survey.
- The authorities plan to launch a new rebased CPI in 2008.

### Government finance statistics (GFS)
- In 2007, authorities submitted a consistent time series of GFS data covering only the budgetary central government for 2001 through 2007, based on the GFSM 2001 framework.
- Transactional coverage is limited to government operations and transactions in nonfinancial assets; data on transactions in financial assets and liabilities are unavailable.
- No monthly or quarterly fiscal data are reported for publication in International Financial Statistics (IFS).
- Authorities report monthly budget data to AFR for operational use in a timely manner, but:
  - These monthly data are often subject to substantial revisions.
  - Data on extra-budgetary institutions and local governments are not available.
- Historical TA and coverage shortfalls:
  - IMF/DFID GDDS mission (March 2003) provided TA on GFS and on migration to GFSM2001.
  - IMF/GDDS mission (May 2005) found that decentralization had created numerous extra-budgetary institutions, most following international accounting practices but not obliged to report to MFNP.
  - An estimated 35 percent of government activities are not captured in the data.
  - Implementation of IFMIS is a long-term project with expected completion date of 2009.

### Monetary and financial statistics
- April–May 2005 monetary statistics mission findings:
  - Most previous STA recommendations implemented except overdrafts were still being netted against deposits.
  - Institutional coverage of other depository corporations expanded to include commercial banks (including three banks in liquidation), building societies, and the National Savings and Credit Bank.
  - Data reported by commercial banks are generally adequate, but issues exist in sectorization of public sector deposits (some central government deposits in national and foreign currencies are included in broad money).
  - Some depository corporations record repurchase agreements as outright securities trades rather than collateralized loans.
  - Deposits of three banks in liquidation are classified as restricted deposits and excluded from broad money.
- Monetary data reporting:
  - Monetary data are reported to STA using standardized report forms; published in the IFS since September 2006.

### External sector statistics and balance of payments (BoP)
- Balance of payments statistics are compiled and disseminated by the BoZ in accordance with the fifth edition of the Balance of Payments Manual.
- The CSO is legally responsible for compiling all macroeconomic statistics; reporting of BoP statistics for IMF publication remains problematic.
- The most recent balance of payments data reported to STA were for 2000.
- A technical assistance mission in January 2008 found little progress since the 2004 ROSC mission:
  - Data sources remain poor; some items are estimated without reference to current source data.
  - Compilation methods are inadequate.
  - Resources for BoP compilation increased but remain inadequate.
  - Coordination between BoZ and CSO had improved.
- Remaining gaps and estimation practices:
  - Significant gaps remain in reinvested earnings, trade in services, and the financial account (including export proceeds held abroad by mining and nontraditional exporters).
  - Source data are generally timely but fall short on coverage; indirect estimation methods are used, some unchanged for many years and out of date.
  - Source data on private sector foreign assets and liabilities are insufficient to compile an IIP statement.

### Table of Common Indicators Required for Surveillance (selected notes)
- As of April 14, 2008: the table lists indicator observation dates, reporting frequencies, publication frequencies, and qualitative data-quality assessments for many datasets (exchange rates, international reserve assets, reserve/base money, broad money, central bank balance sheet, consolidated banking system balance sheet, interest rates, CPI, revenue/expenditure/central government data, external sector items, GDP/GNP, gross external debt).
- Footnotes include definitions and data-quality assessment legends:
  - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).
  - Quality assessment codes: fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO).

### Recent macroeconomic developments and PRGF program highlights (Statement by IMF Staff Representative; Press Release No. 08/134)
- Inflation developments:
  - Twelve-month rate of inflation rose from 8.9 percent in December 2007 to 10.9 percent in May 2008.
  - Food prices rose from 6.9 percent to 11.7 percent over the same period.
  - Nonfood price inflation declined from 11.7 percent to 10.1 percent.
  - End-year inflation target placed at risk; higher inflation largely reflects food price increases.
- External price shocks and BoP impact (2008 staff assessment and May revision):
  - Based on WEO oil price projection for 2008 and assuming unchanged import volumes, balance of payments projected to deteriorate by 0.9 percent of GDP.
  - Based on recent increases in copper prices and futures, and assuming unchanged export volumes, balance of payments expected to improve by 2.9 percent of GDP.
  - Overall the balance of payments expected to improve by about 2 percent of GDP.
- Specific BOP impact figures (Staff Report vs May Revision):
  - Oil price assumption (US$/barrel): 95.51 (Staff Report) and 112.0 (May Revision).
  - Oil imports (US$ millions): 7038 (Staff Report) and 3824 (May Revision); BOP impact -121 (In percent of GDP) 5.5 and 6.4 with -0.9 change.
  - Copper price assumption (US$/lb): 3.20 (Staff Report) and 3.49 (May Revision).
  - Copper export (US$ millions): 3,785 (Staff Report) and 4,161 (May Revision); BOP impact 376 (In percent of GDP) 29.5 and 32.4 with 2.9 change.
  - Total impact (US$ millions): 255 (May Revision); (In percent of GDP): 2.0.
- Food security and agriculture:
  - Zambia usually self-sufficient in staple food crops. Crop forecast survey for 2007/08 indicates overall food supplies will remain adequate.
  - Maize harvest expected smaller due to flood damages in late 2007 and early 2008, but including carryover stocks total maize supply projected to exceed total national requirements.
  - Import/export permits for agricultural commodities have required permits since 1994; permits generally granted except for maize exports which are only granted when adequate supplies are available.
  - In early May 2008, authorities announced export licenses for maize will not be granted until food security situation fully assessed; likely by the end of June.
- Monetary and fiscal developments:
  - Reserve money growth lower than envisaged; at end-April 2008 reserve money about 6 percent below end-December 2007 level.
  - Revenue performance strong through April: total revenue about 1 percent of GDP greater than projected (income taxes, VAT, and nontax revenue strong); expenditures broadly as budgeted.
  - Kwacha movements: since the beginning of the year kwacha appreciated by about 10 percent against the U.S. dollar; broadly unchanged against the euro.
  - Official foreign exchange reserves at mid-May stood at 2.8 months of imports.
- PRGF arrangement approved June 4, 2008:
  - Three-year PRGF arrangement for Zambia equivalent to SDR 48.91 million (about US$79.2 million).
  - First disbursement enabled in amount equivalent to SDR 6.987 million (about US$11.3 million).
  - PRGF terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5½-year grace period on principal payments.
- Program objectives and policy emphasis:
  - Support for alleviating poverty and sustaining growth while maintaining macroeconomic stability and debt sustainability.
  - Program is "low-access" (10 percent of quota), reflecting limited BoP needs.
  - Medium-term focus: (i) maintain macroeconomic stability and debt sustainability while increasing fiscal space for investment in infrastructure, energy, and human resources; (ii) diversify the economy to lessen dependence on mining via private sector-led growth.
  - Structural priorities: improve expenditure management and budget execution; make revenue collection more efficient and effective; strengthen monetary operations and deepen financial sector (develop secondary market for government securities); adopt comprehensive debt management strategy; address supply shortages and inefficiencies in the energy sector (including raising electricity tariffs to cover cost of service and increasing operational efficiency of the public electric power utility company).
  - Cautious foreign borrowing policy emphasizing concessional loans and close monitoring of external borrowing by public enterprises.

### Annex — Selected economic indicators (highlights and projections)
- Real GDP growth at constant prices:
  - 2005: 5.2
  - 2006: 6.2
  - 2007: 6.0
  - 2008 (Proj.): 6.2
  - 2009 (Proj.): 6.3
  - 2010 (Proj.): 6.5
- GDP deflator:
  - 2005: 18.6
  - 2006: 13.8
  - 2007: 9.4
  - 2008 (Proj.): 5.0
  - 2009 (Proj.): 4.0
  - 2010 (Proj.): 2.9
- GDP at market prices (In billions of kwacha):
  - 2005: 32,456
  - 2006: 39,223
  - 2007: 45,482
  - 2008 (Proj.): 50,716
  - 2009 (Proj.): 56,051
  - 2010 (Proj.): 61,432
- Consumer prices (average headline):
  - 2005: 18.3
  - 2006: 9.0
  - 2007: 10.7
  - 2008 (Proj.): 8.6
  - 2009 (Proj.): 4.0
  - 2010 (Proj.): 5.0
- Terms of trade (deterioration -):
  - 2005: 10.4
  - 2006: 55.2
  - 2007: 7.9
  - 2008 (Proj.): -8.7
  - 2009 (Proj.): -13.8
  - 2010 (Proj.): -20.1
- External sector and reserves:
  - Current account balance (including official grants):
    - 2005: -4.4
    - 2006: 3.0
    - 2007: -2.5
    - 2008 (Proj.): -2.1
    - 2009 (Proj.): 2.0
    - 2010 (Proj.): -1.0
  - Gross international reserves (months of imports):
    - 2005: 2.2
    - 2006: 2.5
    - 2007: 3.2
    - 2008 (Proj.): 4.7
    - 2009 (Proj.): 5.5
- Central government budget (percent of GDP):
  - Revenue: 2005: 17.4; 2006: 16.9; 2007: 18.7; 2008 (Proj.): 21.2; 2009 (Proj.): 22.1; 2010 (Proj.): 21.5
  - Overall balance: 2005: -2.6; 2006: 18.6; 2007: -0.2; 2008 (Proj.): -1.1; 2009 (Proj.): 0.9; 2010 (Proj.): 0.4
  - Grants: 2005: 5.6; 2006: 26.0; 2007: 4.6; 2008 (Proj.): 5.3; 2009 (Proj.): 5.4; 2010 (Proj.): 5.3
  - Total expenditure: 2005: 25.7; 2006: 24.3; 2007: 23.6; 2008 (Proj.): 27.6; 2009 (Proj.): 26.7; 2010 (Proj.): 26.4
- Investment and savings (percent of GDP):
  - Gross investments: 2005: 22.5; 2006: 22.6; 2007: 24.1; 2008 (Proj.): 22.7; 2009 (Proj.): 22.1; 2010 (Proj.): 22.5
  - National savings: 2005: 18.1; 2006: 25.6; 2007: 21.6; 2008 (Proj.): 20.6; 2009 (Proj.): 24.1; 2010 (Proj.): 21.5
- Money and credit (end of period percent changes / percent of GDP where indicated):
  - Domestic credit to the private sector: 2005: 18.7; 2006: 54.3; 2007: 43.0; 2008 (Proj.): 22.2
  - Reserve money: 2005: 16.4; 2006: 22.6; 2007: 1.6; 2008 (Proj.): 11.5
  - M3: 2005: 0.4; 2006: 45.1; 2007: 25.9; 2008 (Proj.): 11.6
- NPV of central government and BoZ external debt (percent of exports of goods and services):
  - 2005: 78.3
  - 2006: 15.7
  - 2007: 11.8
  - 2008 (Proj.): 12.8
  - 2009 (Proj.): 14.1
  - 2010 (Proj.): 16.3

*Source: IMF staff report and related materials as contained in the supplied content unit.*

### Introduction

### Introduction

### Recent Economic Developments
- Macroeconomic stability strengthened and growth accelerated; Real GDP growth was estimated at 6 percent in 2007 and is expected to continue expanding by an annual average of 6-7 percent over the medium-term.
- Inflation:
  - Contained at single digit since 2006.
  - End-year annual inflation stood at 8.9 percent in 2007.
  - Edged marginally above double digits since April 2008 due to high oil and food prices.
- Social indicators:
  - Increased enrolments in education and improved human development index.
  - Poverty level was reduced by about 10 percent between 1998 and 2006 but remains unacceptably high and widespread, particularly in rural areas.
- Fiscal 2007 performance:
  - Overall deficit excluding grants was 2.5 percent of GDP lower than planned, due to over-performance of revenue (notably unexpected large income tax payments from the mining sector) and lower-than-planned expenditures because of shortfall in capital spending execution.
  - Resulted in accumulation of government deposits at the Bank of Zambia (BoZ).
- Monetary conditions:
  - Money growth exceeded target due to a reduction in cash reserve requirement in October 2007 and difficulties faced by the BoZ to fully sterilize its net purchases of foreign exchange.
  - Authorities initiated corrective measures through open market operations and auctions of government securities to slow down reserve money growth.
  - Financial sector: capital and reserves were in compliance with prudential requirements; the banking sector was well capitalized; asset quality, earnings and liquidity ratios remained at sound levels.
- External sector:
  - Trade surplus narrowed despite higher copper export prices because flooding and electricity shortages adversely affected copper production.
  - The current account deficit, excluding grants, deteriorated by 7 percent of GDP from 1 percent.
  - Foreign direct investment increased to 8.6 percent of GDP, contributing to an overall balance of payments surplus, strengthened accumulation of international reserves, and an appreciation in the exchange rate.
- Exchange rate remained aligned with macroeconomic fundamentals; domestic and financial policies are consistent with external stability.

### Economic Challenges and Policy Framework
- Key development gaps and vulnerabilities:
  - Growth still falls short of the level required to substantially reduce poverty.
  - Need to sustain macroeconomic stability.
  - Increase fiscal space for upgrading infrastructure.
  - Expand supply capacity in energy.
  - Improve human capital development.
  - Diversify sources of growth and exports to lessen dependence on mining by improving conditions for private sector-led growth.
- Authorities’ commitment:
  - Resolute implementation of the fifth national development plan (FNDP) to reach development objectives in the Zambia Vision 2030.
  - Continued implementation of multiyear programs: Public Expenditure Management and Financial Accountability (PEMFA), Public Sector Management (PSM) reform program, Financial Sector Development Plan (FSDP), and Private Sector Development Initiative (PSDI).
- Key policy focus areas:
  - Improving expenditure management and budget execution.
  - Making revenue collection more efficient and effective.
  - Strengthening monetary operations and deepening the financial sector.
  - Implementing debt management strategy.
  - Strengthening policies in the energy sector.

### Fiscal policy
- Fiscal stance described as expansionary to meet authorities’ objectives.
- Revenue projections:
  - Revenues projected to increase from 18.7 percent in 2007 to 20.8 percent of GDP in 2008.
  - New fiscal regime for the mining sector (effective April 2008) estimated to increase mining revenue by 2.8 percent of GDP in 2008.
  - Expected to substantially improve revenue collection to more than 21 percent in the medium-term.
- Mining Resource Fund (MRF):
  - All mining revenue in excess of what should have been collected under the old regime (1.4 percent of GDP) would be saved in a separate MRF to be used as a stabilization fund to even out expenditures and finance high priority projects in the FNDP.
- Authorities’ view on tax design:
  - New tax regime considered competitive, reasonable and balanced.
  - Authorities do not anticipate mining companies’ profit to be less than what they had expected when the investment was made.
  - Authorities appreciative of staff’s formula using a progressive profit-based variable tax but skeptical of its appropriateness for countries like Zambia given structural rigidities and institutional weaknesses (tax evasion, offshore accounts).
  - Authorities request time to explore alternative ways of broadening the tax base that may suit the country’s circumstances better.

### Monetary and exchange rate policies
- Inflation targets:
  - Monetary policy aims at reducing inflation to the target of 7 percent in 2008 and 5 percent in the medium-term.
  - Acknowledged challenge from oil price increases and upward adjustment in electricity tariffs.
- BoZ operational stance:
  - BoZ will confine itself to smoothening wide fluctuations in the exchange rate while allowing a gradual build up of international reserves.
  - Authorities agreeable to making NDA a binding performance criterion and reserve money an indicative target.
  - Rationale: NDA arrangement had served them well compared to targeting reserve money; recent years show no strong and clear empirical relationship between reserve money and inflation due to shifts in the money multiplier and velocity.

### Structural reforms and issues
- Commitments and implementation:
  - Continued implementation of ambitious structural reform program to complement medium-term macroeconomic framework and support the new program.
  - Steady progress assisting modernization of the Zambia Revenue Authority.
  - Continued implementation of PEMFA reform programs, including establishing a single treasury account system and completion of IFIMIS project.
  - Second phase of the Financial Sector Development Plan reforms to be implemented in 2008, aiming at tightening financial regulations and supervision, and deepening the money and capital markets.
- Infrastructure bottlenecks:
  - Executive Directors’ visit in February highlighted formidable infrastructure bottlenecks, mainly in energy and transportation.
  - Electricity supply shortages impose a serious threat to achieving program objectives.
  - Authorities committed to support and ensure adequate availability of resources for completion of ongoing rehabilitation projects and expansion of hydropower capacity.
  - Authorities stand ready to support initiatives aimed at improving the regulatory framework to enhance efficiency and cost effectiveness of operations through established channels.

### Conclusion
- The Zambian authorities view engagement with the Fund as crucial to help ease developmental challenges.
- A new PRGF-supported program is expected to:
  - Continue enhancing a conducive environment for private sector investment.
  - Sustain macroeconomic stability, public sector efficiency and accountability.
  - Create necessary fiscal space and ensure debt sustainability.
- Authorities seek the Board’s support of their request for a new three-year PRGF arrangement.

*Source: _cr08187 - Introduction*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08187.pdf_