## 1. Zambia: Cross Country Comparison, 2000–10 ## Source details **Canonical URL:** [1. Zambia: Cross Country Comparison, 2000–10](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11197.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11197.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11197.pdf.json) --- ### I. Introduction — program context and scope - Since the 2004 EPA (IMF Country Report No. 04/214), Zambia had two Extended Credit Facility (ECF) arrangements under the IMF’s Poverty Reduction and Growth Trust (PRGT): ECF-1 from June 2004 to September 2007 and ECF-2 approved in June 2008 and scheduled to expire in June 2011. - Zambia received debt relief of about US$3½ billion under the HIPC Initiative, reaching the completion point in 2005, and additional relief of US$3 billion under the MDRI in 2006. - This report covers: - Zambia’s macroeconomic performance under Fund-supported programs, - Whether and how staff drew on lessons identified in the first EPA, and - Priority areas for any future program. ### II. Drawing on 2004 EPA priorities — outcomes and constraints Findings on program design and outcomes - The 2004 EPA identified priority areas: fiscal consolidation to reduce real interest rates and promote private domestic investment; limiting the wage bill; upgrading public expenditure management; attracting more donor support; stronger budget processes; a consistent policy for mining and tax exemptions; completing privatization; and financial sector development. - The medium-term programs launched in 2004 and 2008 (ECF-1 and ECF-2) closely reflected the EPA lessons and drew on these priority areas, supported by IMF technical assistance. - Program reviews were concluded on schedule or with only minor delays despite occasional implementation problems, including misreporting episodes during ECF-2 (see paragraph 3 footnote). - Program conditionality was largely adhered to during ECF-1 (Appendix Tables 1 and 3). Macroeconomic performance (2004–10) - ECF-1 (2004–7): - Fiscal consolidation aimed to contain domestic debt and interest payments and protect social spending. - Reduced resort to domestic financing fostered price stability; authorities improved sterilization of inflows associated with high copper prices. - Growth and international reserves improved more quickly than anticipated; inflation declined; government spending (including wages and salaries) was contained. - Government capital spending fell sharply, largely because of a sharp drop in project aid. - ECF-2 (2008–11): - Emphasized medium-term growth and diversification, with macro policies geared to create space for increased infrastructure and human resource spending by strengthening revenues and reforming mining fiscal regime and tax exemptions. - Macroeconomic outcomes were particularly strong: growth increased further; reserves increased markedly supported by very strong copper prices. - The wage bill and total expenditures were lower than initially projected; grants and revenues were also well below projections (in part due to import compression following the global financial crisis); capital expenditures declined further. - Inflation was higher than initially targeted (in part due to surges in food and fuel prices), and higher than in other African LICs, reflecting higher-than-targeted money growth and a high inflation legacy. - Financial sector reforms enhanced stability by addressing insolvent non-bank financial institutions and strengthening the Bank of Zambia’s regulatory and supervisory functions. Selected numeric program performance indicators - Broad Money Forecasts and Outturns for Zambia, 2005–10 (Forecast vs Outturn figures shown in source chart: Forecast 18.2, 14.3, 13.6, 12.4, 15.6, 19.3; Outturn 3.3, 44.0, 25.3, 23.2, 7.7, 29.9). - Zambia: Per Capita GDP Volume Growth (period averages) - 2000-03: GDP at market prices 2.2; GDP excluding mining sector 1.9 - 2004-07: GDP at market prices 3.8; GDP excluding mining sector 3.6 - 2008-10: GDP at market prices 4.6; GDP excluding mining sector 4.0 - Sector growth examples (percentage change, period aggregates): Mining and quarrying 6.4 (2000-03), 6.2 (2004-07), 10.5 (2008-10); Agriculture, forestry, and fishing -1.4 (2000-03), -0.3 (2004-07), 3.5 (2008-10). - Selected poverty and income indicators (years in source: 2000, 2005, 2009): - Incidence of extreme poverty 58 (2000), 51 (2005) - Rural 71 (2000), 67 (2005) - Urban 36 (2000), 20 (2005) - Primary school enrollment 69 (2000), 94 (2005), 97 (2009) - Mortality rate, under-5 (per 1,000) 166 (2000), 155 (2005), 141 (2009) - Real income per capita (US$, 2010 prices): GDP 845 (2000), 992 (2006), 1,027 (2009), 1,221 (2010); GNI 791 (2000), 884 (2006), 994 (2009), 1,079 (2010). - Program target/outturn snapshots (selected lines): - Real GDP (percent change) examples: Int. target 3.5 / Act. 5.4; Int. target 4.5 / Act. 5.3; Int. target 5.0 / Act. 6.2; Int. target 5.0 / Act. 6.2. - CPI, eop (percent change) examples: Int. target 2.0 / Act. 17.5; Int. target 15.0 / Act. 15.9; Int. target 10.0 / Act. 8.2; Int. target 5.0 / Act. 8.9. - Reserves (months of imports) examples: Int. target 1.0 / Act. 1.1; Int. target 1.5 / Act. 1.5; Int. target 1.7 / Act. 2.2; Int. target 1.9 / Act. 2.5. - Revenues (percent of GDP) examples: 18.7, 18.2, 18.6, 17.6, 18.6, 17.1, 18.6, 18.4. - Overall balance (excluding grants) examples: -8.6 / -8.4; -9.8 / -3.4; -9.3 / -5.4; -9.3 / -4.8. - Grants (excl. debt relief) examples: 5.4, 5.5, 6.6, 2.0, 6.9, 4.3, 7.0, 4.6. - Total expenditure (percent of GDP) examples: 27.3, 26.6, 28.4, 21.0, 27.9, 22.5, 28.0, 23.2. - Capital expenditure (percent of GDP) examples: 9.2, 8.7, 10.0, 2.4, 10.5, 3.8, 11.5, 4.4. - Wages and salaries (percent of GDP) examples: 7.9, 7.7, 7.9, 7.9, 7.9, 7.4, 7.7, 7.8. - Domestic financing (net) examples: 2.2, -0.1, 1.2, 1.4, 0.9, 2.0, 0.5, -0.1. - The global financial crisis caused a sharp but relatively brief fall in copper prices; exchange rate appreciation partially offset surges in food and fuel prices in 2008. The program adjusted by increasing access and targets and loosening monetary and fiscal policies during 2009 to stimulate activity. Constraints and distributional outcomes - Despite strong growth and program success, extreme poverty remains high; urban poverty declined markedly but rural poverty appears to have declined only modestly. - Concentration of growth in capital-intensive or urban-based sectors (mining, construction, services) contributed to uneven benefits; per capita agricultural growth lagged, though agriculture growth picked up in 2008–10. - Policies that kept maize prices artificially high disadvantaged the urban poor and the one third of smallholders who are net buyers of maize. - Episodes of misreporting: nonconcessional debt at end-2009 was slightly larger than reported originally (treated under the Fund’s de minimis procedures — IMF Country Report No. 10/383); government net domestic financing at end-2009 was larger than reported originally, leading to a breach of that ceiling (being addressed). The need for improved debt management is cited in Section III. ### III. Priority areas for any future program engagement — four themes and policy actions Principal challenges identified - Four key challenges for future program engagement: 1. Sustain the recently achieved low to moderate levels of inflation. 2. Reverse declines in capital spending and strengthen public infrastructure. 3. Mobilize domestic revenues (Zambia has begun to lag comparator countries). 4. Build on progress to further develop the financial sector. - The agenda for public financial management and the tax regime can draw from IMF and other TA already delivered. A. Laying the groundwork to sustain low inflation — considerations and actions Findings and considerations - Zambia’s current regime is based on monetary targeting and exchange rate flexibility; this framework successfully reduced inflation. - With single-digit inflation, exogenous shocks become more important and short-term trade-offs between price, output, and exchange rate stability become more difficult. - The authorities plan to reform their monetary policy framework, considering a gradual shift from strict monetary targets to a framework using interest rates to anchor inflationary expectations, possibly eventually to an explicit inflation targeting (IT) regime. - Structural characteristics that make some degree of money targeting desirable include: - (i) relatively larger fiscal and real economy shocks, including volatile terms of trade, - (ii) a remaining risk of fiscal dominance, - (iii) still-developing central bank capacity, and - (iv) thin financial markets and a relatively weak role for interest rates in the transmission channel. Policy actions recommended to prepare for more flexible monetary arrangements - Ensure high central bank credibility and avoid conflicting monetary policy goals (e.g., low lending rates vs price stability). - Strengthen liquidity management, fiscal-monetary coordination, and data sharing. - Improve interbank money markets to reduce interest rate volatility and the holding of excess reserves. - Promote financial sector development to strengthen interest rate and credit channels of monetary transmission. - Increase central bank capacity for modeling and inflation monitoring; enhance central bank communications. - Produce high frequency economic statistics. - Avoid central bank financing of the budget and unplanned unsterilized reserve accumulations that lead to volatile and excessive money growth and weaken control over the money supply. B. Infrastructure development — efficient investment and sustainable financing Findings - Enhanced public infrastructure is required to achieve sustained faster economic growth with resilience; raising infrastructure quality to Mauritius levels could raise annual per capita income growth by 2 percentage points in Sub-Saharan LICs (Calderon, 2009, cited). - Foreign-financed infrastructure spending in Zambia has declined sharply, and domestic capital spending has consistently fallen short of plans. - Scaling up infrastructure presents twin challenges: investing efficiently and financing investment without undermining debt sustainability. - Public investment management weaknesses are a key constraint: strategic guidance, independent project feasibility review, transparent processes for project selection, budgeting, implementation, project evaluation, and audit are needed. - A recent index of public investment management (PIM) indicates significant scope to improve the PIM process for Zambia (Dabla-Norris and others, 2011); project appraisal capacity has been a particular concern. - Implementation of broader public financial management (PFM) reforms promoted by Fund-supported programs has lagged; weaknesses inhibit spending efficiency. - Episodes of misappropriation of donor funds at the Ministry of Health and discrepancies at the Road Development Agency have discouraged some donors; governance reforms are underway in those areas. Policy implications (areas of emphasis) - Strengthen PIM and PFM systems: strategic guidance, independent project appraisal, transparent selection and procurement, rigorous project evaluation and audit. - Restore and expand donor confidence by addressing governance weaknesses and completing ongoing governance reforms in affected agencies. - Design financing strategies that scale up infrastructure while preserving debt sustainability. Sustainable financing and debt management - Although strong macroeconomic performance and debt relief have returned Zambia’s external debt to sustainable levels, Zambia faces huge financing requirements and a need for large-scale grants and highly concessional loans. - With only low debt vulnerabilities, Zambia can finance productive investments on market terms, within the limits of a sound debt management strategy. - Further developing that strategy and supporting it with improved debt management is critical to infrastructure development. C. Mobilizing Domestic Revenues Context and rationale - Many LICs face continued needs for social spending, the possibility of reduced aid, and large financing needs for infrastructure and to address climate change (IMF staff, 2010). - Tax system reform to mobilize domestic revenues is critical to meeting these needs. - Reform design should consider tax fairness, effects on efficiency and growth, and diversification of revenue sources to reduce revenue volatility. - Effective tax reform can support institutional development and formal sector activity. Cross-country evidence and lessons - Despite reduced trade taxes, over the past decade the median LIC tax revenue/GDP ratio has increased by 3 to 4 percentage points, with improvements in both resource-rich and non-resource countries. - Tanzania raised its TR/GDP ratio by 6 points in nine years, illustrating the payoff of sustained political support for reform. Zambia’s performance and issues - Zambia’s revenue performance contrasts sharply with comparator countries: it has not enhanced non-mineral fiscal revenue collections and, until perhaps very recently, has not received consistently higher mineral revenues (IMF, 2011). - Reasons include narrow tax bases due to incentives, exclusions, and exemptions—a lesson emphasized in the 2004 EPA. - Generous terms for new mining investment, locked in by fiscal stability agreements, translated into relatively little revenue when copper prices rose sharply (Hogan and Goldsworthy, 2010). - Litigation and uncertainty followed attempts to scrap those fiscal stability terms. - Mining tax receipts reached only 2 percent of GDP by 2010, compared to 4 percent projected at the start of ECF-2. - Recent reforms and voluntary progress toward validation under the Extractive Industries Transparency Initiative (http://eiti.org) should increase public interest and confidence in minerals revenues. Priority reform areas for the next several years - Gradual withdrawal of widespread existing tax incentives and the introduction of a tax expenditure budget. - More attention to consumption taxes. - Substituting non-tax revenues with property taxes—accompanied by strengthened fiscal decentralization legislation. Elements of Tax Reform in Developing Countries (as listed in source) - Build effective revenue administrations - Dedicate offices for large taxpayers and key sectors - Pursue forceful, efficient strategies against non-compliance - Levy VAT on a broad base, with a high threshold - Avoid exemptions that jeopardize revenue and governance, are hard to reverse, or lack clear social benefits - Enhance transparency and analysis of tax expenditures - Employ a simple, broad-based corporate tax with effective tax rates that are low and uniform across investments - Extend coverage of personal income taxes to professionals and smaller businesses; tax capital income coherently - Balance natural resource (NR) royalties, auctions, and profit-related charges; manage NR revenues transparently - Improve capacity to deal with multinationals’ profit shifting - Develop real property taxation to finance local services Zambia: Revenues (Percent of GDP) - Tax: 17.4 17.1 18.1 15.0 16.9 - Income: 7.8 7.9 9.0 7.9 9.4 - VAT: 5.1 4.9 4.0 3.8 4.1 - Excise: 2.4 2.4 2.6 1.6 1.8 - Customs: 2.1 2.0 2.4 1.7 1.6 - Non tax: 0.6 0.6 0.8 1.0 0.9 - (Sources: Zambian authorities; and IMF staff estimates.) D. Financial Sector Development Current status and challenges - Having improved financial sector stability, Zambia should now extend the focus of reforms to include financial sector development to enhance growth and resilience. - Gradual liberalization of the banking sector has facilitated competition and entry of foreign banks, but the banking sector remains shallow and concentrated. - Real lending rates are among the highest in the region and levels of financial access are low. - The home-grown Financial Sector Development Plan (FSDP) encouraged under the ECFs fostered stability, but less progress has been made on financial development. Benefits of deeper financial development - More developed financial markets could strengthen resilience and stability and improve monetary policy effectiveness by strengthening the interest rate and credit channels of monetary transmission and reducing the relative role of exchange rate movements. - Reduced operating costs—overhead, holdings of excess reserves, and collection of nonperforming loans—are key to reducing lending rates. - Financial development fosters growth by improving resource allocation and productivity, relaxing firms’ financing constraints, and facilitating expansion—especially for small firms. - These effects are important for Zambia’s highly-concentrated economy, which requires diversification to strengthen resilience and support broader-based growth. Strategies and reforms - Regional financial integration may expand market size, exploit economies of scale, and foster competition to reduce margins and broaden services, but harmonizing regulatory frameworks while ensuring stability is complex. - Phase II of the Financial Sector Development Plan (FSDP-II) identifies reforms where the Fund has an active role, including increasing competition and stability through a stronger regulatory framework, orderly exit of failing institutions, and a sound crisis management framework. - Other channels include innovative technologies (e.g., mobile banking) to enhance market access, strengthened contractual frameworks and property rights to reduce costs and spreads, and development of non-bank financial institutions suited to Zambia’s legal and institutional setting. - The IMF and development partners can provide policy advice and technical assistance; the Fund can play a direct role in areas most closely related to stability. Future Fund Engagement - A well-articulated medium-term economic program would help Zambia strengthen resilience and raise growth rates. - Authorities should anchor their program on policies to promote continued macroeconomic stability while emphasizing sustained medium-term reforms in the areas discussed above. - Possible IMF instruments and roles: - A successor arrangement could be prepared under the Extended Credit Facility (ECF), which could provide further concessional financing. - If qualification criteria for a Policy Support Instrument (PSI) are met, including on institutional capacity, a PSI (a non-financial arrangement) could be appropriate. - A PSI could be complemented by financial support under the Standby Credit Facility (SCF) in case of an actual or potential balance of payments need. - A Fund-supported program would provide a strong framework for policy support and frequent assessments—serving an important signaling role for donors, creditors, and the general public. ### Implementation record on structural measures (selected highlights from Appendix Tables) Public Expenditure Management - Submission of quarterly reports on compliance with the commitment control system by ministry, province, and spending agency — Type: SB — Implementation deadline: within 60 days of the end of each quarter. - Treasury single account proposals and phased implementation strategy: several SBs/PCs set End-June 2008 to End-December 2010 deadlines; some completed as planned, some delayed (Adoption of Treasury Single Account by six ministries, provinces, and spending agencies — Not met. Expected to be met by end-June 2011). Debt Management - Issue an annual report on external debt management operations during 2005 — Type: SB — Implementation deadline: End-June 2006 — Implementation: Completed as planned. - Submit a comprehensive debt management strategy — Type: PC — Implementation deadline: End-June 2007 — Implementation: No information on implementation. Financial Sector Reform - Actions included resolution plans for Zambia National Building Society, credit reference bureau legal framework (completed as planned), incorporation of NSCB and DBZ under the Companies Act (postponed), restructuring Bank of Zambia rediscount window (completed with delay), risk-based bank supervision (completed as planned), and establishment of a Lender-of-Last-Resort Framework (Partially Met). Annex: Response of the Zambian Authorities - The draft EPA Update was discussed with authorities of the Ministry of Finance and the Bank of Zambia on May 26-27. The authorities considered the EPA report timely and useful and broadly agreed with the conclusions. - Authorities emphasized disciplined economic policies in Zambia’s strong performance since 2004, including strong disinflation, but noted concern that market interest rates remained high. - They agreed the four forward-looking themes represented key issues and noted steps underway in most areas, including regional financial integration involving SADC and reforms to improve agricultural productivity, social sector investment, and statistics quality. - Authorities appreciated the Fund’s flexibility in shifting monitoring of non-concessional debt from a project-by-project basis to a sectoral basis. *Source: _cr11197 - 16. Sustainable financing is the second key challenge in infrastructure development.* ### 1. Zambia: Cross Country Comparison, 2000–10 .....................................................................6 ### 1. Zambia: Cross Country Comparison, 2000–10 ### I. Introduction — program context and scope - Since the 2004 EPA (IMF Country Report No. 04/214), Zambia had two Extended Credit Facility (ECF) arrangements under the IMF’s Poverty Reduction and Growth Trust (PRGT): ECF-1 from June 2004 to September 2007 and ECF-2 approved in June 2008 and scheduled to expire in June 2011. - Zambia received debt relief of about US$3½ billion under the HIPC Initiative, reaching the completion point in 2005, and additional relief of US$3 billion under the MDRI in 2006. - This report covers: - Zambia’s macroeconomic performance under Fund-supported programs, - Whether and how staff drew on lessons identified in the first EPA, and - Priority areas for any future program. ### II. Drawing on 2004 EPA priorities — outcomes and constraints Findings on program design and outcomes - The 2004 EPA identified priority areas: fiscal consolidation to reduce real interest rates and promote private domestic investment; limiting the wage bill; upgrading public expenditure management; attracting more donor support; stronger budget processes; a consistent policy for mining and tax exemptions; completing privatization; and financial sector development. - The medium-term programs launched in 2004 and 2008 (ECF-1 and ECF-2) closely reflected the EPA lessons and drew on these priority areas, supported by IMF technical assistance. - Program reviews were concluded on schedule or with only minor delays despite occasional implementation problems, including misreporting episodes during ECF-2 (see paragraph 3 footnote). - Program conditionality was largely adhered to during ECF-1 (Appendix Tables 1 and 3). Macroeconomic performance (2004–10) - ECF-1 (2004–7): - Fiscal consolidation aimed to contain domestic debt and interest payments and protect social spending. - Reduced resort to domestic financing fostered price stability; authorities improved sterilization of inflows associated with high copper prices. - Growth and international reserves improved more quickly than anticipated; inflation declined; government spending (including wages and salaries) was contained. - Government capital spending fell sharply, largely because of a sharp drop in project aid. - ECF-2 (2008–11): - Emphasized medium-term growth and diversification, with macro policies geared to create space for increased infrastructure and human resource spending by strengthening revenues and reforming mining fiscal regime and tax exemptions. - Macroeconomic outcomes were particularly strong: growth increased further; reserves increased markedly supported by very strong copper prices. - The wage bill and total expenditures were lower than initially projected; grants and revenues were also well below projections (in part due to import compression following the global financial crisis); capital expenditures declined further. - Inflation was higher than initially targeted (in part due to surges in food and fuel prices), and higher than in other African LICs, reflecting higher-than-targeted money growth and a high inflation legacy. - Financial sector reforms enhanced stability by addressing insolvent non-bank financial institutions and strengthening the Bank of Zambia’s regulatory and supervisory functions. Selected numeric program performance indicators (as presented) - Broad Money Forecasts and Outturns for Zambia, 2005–10 (Forecast vs Outturn figures shown in source chart: Forecast 18.2, 14.3, 13.6, 12.4, 15.6, 19.3; Outturn 3.3, 44.0, 25.3, 23.2, 7.7, 29.9 — source: IMF staff estimates; one-year-ahead projections based on September/October WEO). - Zambia: Per Capita GDP Volume Growth (period averages) - 2000-03: GDP at market prices 2.2; GDP excluding mining sector 1.9 - 2004-07: GDP at market prices 3.8; GDP excluding mining sector 3.6 - 2008-10: GDP at market prices 4.6; GDP excluding mining sector 4.0 - Sector growth examples (percentage change, period aggregates shown): Mining and quarrying 6.4 (2000-03), 6.2 (2004-07), 10.5 (2008-10); Agriculture, forestry, and fishing -1.4 (2000-03), -0.3 (2004-07), 3.5 (2008-10). - Selected poverty and income indicators (years in source: 2000, 2005, 2009): - Incidence of extreme poverty 58 (2000), 51 (2005) - Rural 71 (2000), 67 (2005) - Urban 36 (2000), 20 (2005) - Primary school enrollment 69 (2000), 94 (2005), 97 (2009) - Mortality rate, under-5 (per 1,000) 166 (2000), 155 (2005), 141 (2009) - Real income per capita (US$, 2010 prices): GDP 845 (2000), 992 (2006), 1,027 (2009), 1,221 (2010); GNI 791 (2000), 884 (2006), 994 (2009), 1,079 (2010). - Program target/outturn snapshots (selected lines from program tables): - Real GDP (percent change) examples: Int. target 3.5 / Act. 5.4; Int. target 4.5 / Act. 5.3; Int. target 5.0 / Act. 6.2; Int. target 5.0 / Act. 6.2. - CPI, eop (percent change) examples: Int. target 2.0 / Act. 17.5; Int. target 15.0 / Act. 15.9; Int. target 10.0 / Act. 8.2; Int. target 5.0 / Act. 8.9. - Reserves (months of imports) examples: Int. target 1.0 / Act. 1.1; Int. target 1.5 / Act. 1.5; Int. target 1.7 / Act. 2.2; Int. target 1.9 / Act. 2.5. - Revenues (percent of GDP) examples: 18.7, 18.2, 18.6, 17.6, 18.6, 17.1, 18.6, 18.4 (table rows). - Overall balance (excluding grants) examples: -8.6 / -8.4; -9.8 / -3.4; -9.3 / -5.4; -9.3 / -4.8 (table rows). - Grants (excl. debt relief) examples: 5.4, 5.5, 6.6, 2.0, 6.9, 4.3, 7.0, 4.6 (table rows). - Total expenditure (percent of GDP) examples: 27.3, 26.6, 28.4, 21.0, 27.9, 22.5, 28.0, 23.2 (table rows). - Capital expenditure (percent of GDP) examples: 9.2, 8.7, 10.0, 2.4, 10.5, 3.8, 11.5, 4.4 (table rows). - Wages and salaries (percent of GDP) examples: 7.9, 7.7, 7.9, 7.9, 7.9, 7.4, 7.7, 7.8 (table rows). - Domestic financing (net) examples: 2.2, -0.1, 1.2, 1.4, 0.9, 2.0, 0.5, -0.1 (table rows). - The global financial crisis caused a sharp but relatively brief fall in copper prices; exchange rate appreciation partially offset surges in food and fuel prices in 2008. The program adjusted by increasing access and targets and loosening monetary and fiscal policies during 2009 to stimulate activity. Constraints and distributional outcomes - Despite strong growth and program success, extreme poverty remains high; urban poverty declined markedly but rural poverty appears to have declined only modestly. - Concentration of growth in capital-intensive or urban-based sectors (mining, construction, services) contributed to uneven benefits; per capita agricultural growth lagged, though agriculture growth picked up in 2008–10. - Policies that kept maize prices artificially high disadvantaged the urban poor and the one third of smallholders who are net buyers of maize. - Episodes of misreporting: nonconcessional debt at end-2009 was slightly larger than reported originally (treated under the Fund’s de minimis procedures — IMF Country Report No. 10/383); government net domestic financing at end-2009 was larger than reported originally, leading to a breach of that ceiling (being addressed). The need for improved debt management is cited in Section III. ### III. Priority areas for any future program engagement — four themes and policy actions Principal challenges identified - Four key challenges for future program engagement: 1. Sustain the recently achieved low to moderate levels of inflation. 2. Reverse declines in capital spending and strengthen public infrastructure. 3. Mobilize domestic revenues (Zambia has begun to lag comparator countries). 4. Build on progress to further develop the financial sector. - The agenda for public financial management and the tax regime can draw from IMF and other TA already delivered. A. Laying the groundwork to sustain low inflation — considerations and actions Findings and considerations - Zambia’s current regime is based on monetary targeting and exchange rate flexibility; this framework successfully reduced inflation. - With single-digit inflation, exogenous shocks become more important and short-term trade-offs between price, output, and exchange rate stability become more difficult. - The authorities plan to reform their monetary policy framework, considering a gradual shift from strict monetary targets to a framework using interest rates to anchor inflationary expectations, possibly eventually to an explicit inflation targeting (IT) regime. - Structural characteristics that make some degree of money targeting desirable include: - (i) relatively larger fiscal and real economy shocks, including volatile terms of trade, - (ii) a remaining risk of fiscal dominance, - (iii) still-developing central bank capacity, and - (iv) thin financial markets and a relatively weak role for interest rates in the transmission channel. Policy actions recommended to prepare for more flexible monetary arrangements - Ensure high central bank credibility and avoid conflicting monetary policy goals (e.g., low lending rates vs price stability). - Strengthen liquidity management, fiscal-monetary coordination, and data sharing. - Improve interbank money markets to reduce interest rate volatility and the holding of excess reserves. - Promote financial sector development to strengthen interest rate and credit channels of monetary transmission. - Increase central bank capacity for modeling and inflation monitoring; enhance central bank communications. - Produce high frequency economic statistics. - Avoid central bank financing of the budget and unplanned unsterilized reserve accumulations that lead to volatile and excessive money growth and weaken control over the money supply. B. Infrastructure development — efficient investment and sustainable financing Findings - Enhanced public infrastructure is required to achieve sustained faster economic growth with resilience; raising infrastructure quality to Mauritius levels could raise annual per capita income growth by 2 percentage points in Sub-Saharan LICs (Calderon, 2009, cited). - Foreign-financed infrastructure spending in Zambia has declined sharply, and domestic capital spending has consistently fallen short of plans. - Scaling up infrastructure presents twin challenges: investing efficiently and financing investment without undermining debt sustainability. - Public investment management weaknesses are a key constraint: strategic guidance, independent project feasibility review, transparent processes for project selection, budgeting, implementation, project evaluation, and audit are needed. - A recent index of public investment management (PIM) indicates significant scope to improve the PIM process for Zambia (Dabla-Norris and others, 2011); project appraisal capacity has been a particular concern. - Implementation of broader public financial management (PFM) reforms promoted by Fund-supported programs has lagged; weaknesses inhibit spending efficiency. - Episodes of misappropriation of donor funds at the Ministry of Health and discrepancies at the Road Development Agency have discouraged some donors; governance reforms are underway in those areas. Policy implications (areas of emphasis) - Strengthen PIM and PFM systems: strategic guidance, independent project appraisal, transparent selection and procurement, rigorous project evaluation and audit. - Restore and expand donor confidence by addressing governance weaknesses and completing ongoing governance reforms in affected agencies. - Design financing strategies that scale up infrastructure while preserving debt sustainability. *IMF staff report content unit: 1. Zambia: Cross Country Comparison, 2000–10 (excerpts from the cited chapter).* ### 16. Sustainable financing is the second key challenge in infrastructure development. ### _cr11197 - 16. Sustainable financing is the second key challenge in infrastructure development. ### Sustainable financing and debt management - Although strong macroeconomic performance and debt relief have returned Zambia’s external debt to sustainable levels, Zambia faces huge financing requirements and a need for large-scale grants and highly concessional loans. - With only low debt vulnerabilities, Zambia can finance productive investments on market terms, within the limits of a sound debt management strategy. - Further developing that strategy and supporting it with improved debt management is critical to infrastructure development. ### Mobilizing Domestic Revenues - Context and rationale: - Many LICs face continued needs for social spending, the possibility of reduced aid, and large financing needs for infrastructure and to address climate change (IMF staff, 2010). - Tax system reform to mobilize domestic revenues is critical to meeting these needs. - Reform design should consider tax fairness, effects on efficiency and growth, and diversification of revenue sources to reduce revenue volatility. - Effective tax reform can support institutional development and formal sector activity. - Cross-country evidence and lessons: - Despite reduced trade taxes, over the past decade the median LIC tax revenue/GDP ratio has increased by 3 to 4 percentage points, with improvements in both resource-rich and non-resource countries. - Tanzania raised its TR/GDP ratio by 6 points in nine years, illustrating the payoff of sustained political support for reform. - Zambia’s performance and issues: - Zambia’s revenue performance contrasts sharply with comparator countries: it has not enhanced non-mineral fiscal revenue collections and, until perhaps very recently, has not received consistently higher mineral revenues (IMF, 2011). - Reasons include narrow tax bases due to incentives, exclusions, and exemptions—a lesson emphasized in the 2004 EPA. - Generous terms for new mining investment, locked in by fiscal stability agreements, translated into relatively little revenue when copper prices rose sharply (Hogan and Goldsworthy, 2010). - Litigation and uncertainty followed attempts to scrap those fiscal stability terms. - Mining tax receipts reached only 2 percent of GDP by 2010, compared to 4 percent projected at the start of ECF-2. - Recent reforms and voluntary progress toward validation under the Extractive Industries Transparency Initiative (http://eiti.org) should increase public interest and confidence in minerals revenues. - Priority reform areas for the next several years: - Gradual withdrawal of widespread existing tax incentives and the introduction of a tax expenditure budget. - More attention to consumption taxes. - Substituting non-tax revenues with property taxes—accompanied by strengthened fiscal decentralization legislation. - Elements of Tax Reform in Developing Countries (as listed in source): - Build effective revenue administrations - Dedicate offices for large taxpayers and key sectors - Pursue forceful, efficient strategies against non-compliance - Levy VAT on a broad base, with a high threshold - Avoid exemptions that jeopardize revenue and governance, are hard to reverse, or lack clear social benefits - Enhance transparency and analysis of tax expenditures - Employ a simple, broad-based corporate tax with effective tax rates that are low and uniform across investments - Extend coverage of personal income taxes to professionals and smaller businesses; tax capital income coherently - Balance natural resource (NR) royalties, auctions, and profit-related charges; manage NR revenues transparently - Improve capacity to deal with multinationals’ profit shifting - Develop real property taxation to finance local services - Zambia: Revenues (Percent of GDP) - Tax: 17.4 17.1 18.1 15.0 16.9 - Income: 7.8 7.9 9.0 7.9 9.4 - VAT: 5.1 4.9 4.0 3.8 4.1 - Excise: 2.4 2.4 2.6 1.6 1.8 - Customs: 2.1 2.0 2.4 1.7 1.6 - Non tax: 0.6 0.6 0.8 1.0 0.9 - (Sources: Zambian authorities; and IMF staff estimates.) ### Financial Sector Development - Current status and challenges: - Having improved financial sector stability, Zambia should now extend the focus of reforms to include financial sector development to enhance growth and resilience. - Gradual liberalization of the banking sector has facilitated competition and entry of foreign banks, but the banking sector remains shallow and concentrated. - Real lending rates are among the highest in the region and levels of financial access are low. - The home-grown Financial Sector Development Plan (FSDP) encouraged under the ECFs fostered stability, but less progress has been made on financial development. - Benefits of deeper financial development: - More developed financial markets could strengthen resilience and stability and improve monetary policy effectiveness by strengthening the interest rate and credit channels of monetary transmission and reducing the relative role of exchange rate movements. - Reduced operating costs—overhead, holdings of excess reserves, and collection of nonperforming loans—are key to reducing lending rates. - Financial development fosters growth by improving resource allocation and productivity, relaxing firms’ financing constraints, and facilitating expansion—especially for small firms. - These effects are important for Zambia’s highly-concentrated economy, which requires diversification to strengthen resilience and support broader-based growth. - Strategies and reforms: - Regional financial integration may expand market size, exploit economies of scale, and foster competition to reduce margins and broaden services, but harmonizing regulatory frameworks while ensuring stability is complex. - Phase II of the Financial Sector Development Plan (FSDP-II) identifies reforms where the Fund has an active role, including increasing competition and stability through a stronger regulatory framework, orderly exit of failing institutions, and a sound crisis management framework. - Other channels include innovative technologies (e.g., mobile banking) to enhance market access, strengthened contractual frameworks and property rights to reduce costs and spreads, and development of non-bank financial institutions suited to Zambia’s legal and institutional setting. - The IMF and development partners can provide policy advice and technical assistance; the Fund can play a direct role in areas most closely related to stability. ### Future Fund Engagement - A well-articulated medium-term economic program would help Zambia strengthen resilience and raise growth rates. - Authorities should anchor their program on policies to promote continued macroeconomic stability while emphasizing sustained medium-term reforms in the areas discussed above. - Possible IMF instruments and roles: - A successor arrangement could be prepared under the Extended Credit Facility (ECF), which could provide further concessional financing. - If qualification criteria for a Policy Support Instrument (PSI) are met, including on institutional capacity, a PSI (a non-financial arrangement) could be appropriate. - A PSI could be complemented by financial support under the Standby Credit Facility (SCF) in case of an actual or potential balance of payments need. - A Fund-supported program would provide a strong framework for policy support and frequent assessments—serving an important signaling role for donors, creditors, and the general public. *Source: _cr11197 - 16. Sustainable financing is the second key challenge in infrastructure development.* ### Appendix Table 3. Zambia: Performance on Structural Performance Criteria and Structural ### Appendix Table 3. Zambia: Performance on Structural Performance Criteria and Structural Benchmarks Under the 2004–07 ECF (Continued) ### Public Expenditure Management - The Accountant General will, within 60 days of the end of each quarter, submit to the Secretary of the Treasury quarterly reports on compliance with the commitment control system by ministry, province, and spending agency — Type: SB — Implementation deadline: within 60 days of the end of each quarter — Area: ContinuousPublic Expenditure Management. ### Debt Management - The MoFNP will issue an annual report on external debt management operations during 2005 — Type: SB — Implementation deadline: End-June 2006 — Implementation: Completed as planned. - Submit to the Minister of Finance a comprehensive debt management strategy — Type: PC — Implementation deadline: End-June 2007 — Implementation: No information on implementation — Area: Debt Management. ### Financial Sector Reform - Execute the action plan adopted by the Government on the resolution of the Zambia National Building Society — Type: SB — Implementation deadline: End-June 2006 — Implementation: Postponed to 2007. Impl unclear. - Submit to cabinet a proposal for the legal framework establishing a credit reference bureau, including the necessary amendments to privacy laws — Type: SB — Implementation deadline: End-June 2006 — Implementation: Completed as planned. - Incorporate the National Savings and Credit Bank (NSCB) and the Development Bank of Zambia (DBZ) under the Companies Act — Type: SB — Implementation deadline: End-December 2006 — Implementation: Posponed until the finances of the institutions are sounder. Impl unclear. ### Private Sector Development - ZESCO's management will provide all the necessary financial, technical, and managerial information to the World Bank and the IMF for an assessment of Zesco's performance in line with the conditions for reaching the evaluation point under the commercialization process — Type: SB — Implementation deadline: End-April 2006 — Implementation: Reset to end-July 2006, observed with delay. ### Statistics - The Central Statistics Office will complete a comprehensive economic census for the full rebasing of the national accounts — Type: SB — Implementation deadline: End-May 2007 — Implementation: No information on implementation available in staff report. *Source: IMF staff reports.* --- ### Appendix Table 4. Zambia: Performance on Structural Performance Criteria and Structural Benchmarks Under the 2008–11 ECF ### Public Expenditure Management - Submit to Cabinet a proposal to establish a treasury single account — Type: PC — Implementation deadline: End-June 2008 — Implementation: Completed as planned. - Submit to Cabinet a proposal to establish a Treasury Department — Type: SB — Implementation deadline: End-June 2008 — Implementation: Completed as planned. - Prepare a comprehensive strategy for phased implementation of the establishment of the treasury single account system — Type: SB — Implementation deadline: End-June 2009 — Implementation: Completed as planned. - Approval by Cabinet of all necessary amendments to the Public Finance Management Act specifying the general principles of the treasury single account system — Type: SB — Implementation deadline: End-September 2009 — Implementation: Completed as planned. - Adoption of Treasury Single Account by six ministries, provinces, and spending agencies — Type: SB — Implementation deadline: End-December 2010 — Implementation: Not met. Expected to be met by end-June 2011. - Adoption of Treasury Single Account so as to cover 60 percent of budgetary expenditures — Type: SB — Implementation deadline: End-December 2010 — Implementation: Delayed. - Establish a headquarters functional structure at the Zambia Revenue Authority — Type: SB — Implementation deadline: End-September 2008 — Implementation: Completed as planned. - Establish a single large-taxpayer office at the Zambia Revenue Authority — Type: SB — Implementation deadline: End-December 2008 — Implementation: Completed as planned. - Submit to parliament the Planning and Budgeting Act — Type: SB — Implementation deadline: End-June 2010 — Implementation: Reset to end-December 2010 then end-January 2011. Delayed further. - Prepare a review of tax administration and policy — Type: SB — Implementation deadline: End-September 2010 — Implementation: Completed as planned. ### Private Sector Legal and Regulatory Environment Reform - Submit to Cabinet a policy for the electricity sector with specific startegies 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; has sufficient resources to implement the planned rehabilitation and new generation projectsand (iv) ensure that ZESCO — Type: PC — Implementation deadline: End-June 2008 — Implementation: Completed as planned. - Raise the average electricity tariff in 2009 and publicly announce indicative tariffs for 2010-11 consistent with the policy to reach cost-reflective levels by 2011 — Type: SB — Implementation deadline: End-June 2009 — Implementation: Completed as planned. - Raise the average electricity tariff in 2010 and publicly announce indicative tariffs for 2011 consistent with the policy to reach cost-reflective levels by 2011 — Type: SB — Implementation deadline: End-June 2010 — Implementation: Completed with delay (July 2010). - Submit to Cabinet a report on maize pricing policy — Type: SB — Implementation deadline: End-March 2011 — Implementation: Completed as planned. ### Financial Sector Reform - The Bank of Zambia will restructure the operations of its rediscount window — Type: SB — Implementation deadline: End-June 2008 — Implementation: Completed with delay. - Set up a supervisory regime for the secondary market in government securities — Type: SB — Implementation deadline: End-December 2008 — Implementation: Completed with delay (March 2010). - Introduce risk based bank supervision — Type: SB — Implementation deadline: End-September 2008 — Implementation: Completed as planned. - Bank of Zambia will introduce a new standing overnight lending facility — Type: SB — Implementation deadline: End-September 2009 — Implementation: Completed with delay (December 2009). - Establish a Lender-of-Last Resort Framework and draft legislation and procedures for a financial sector contingency plan in the event of a crisis — Type: SB — Implementation deadline: End-June 2010 — Implementation: Partially Met. Draft legislation expected by end-May 2011. ### Public Expenditure Management / Liquidity Coordination - 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 — Type: SB — Implementation deadline: End-June 2008 — Implementation: Completed as planned. *Source: IMF staff reports.* --- ### Annex 1. Response of the Zambian Authorities ### Summary of authorities' views and priorities - The draft EPA Update was discussed with authorities of the Ministry of Finance and the Bank of Zambia in Lusaka on May 26-27. The authorities considered the EPA report timely and useful; they welcomed the presentation of Zambia’s key economic issues in a cross-country context and broadly agreed with the conclusions of the report. - The authorities emphasized the role of disciplined economic policies in Zambia’s strong economic performance since 2004, including strong disinflation, but also expressed concern that market interest rates remained high. Looking ahead, they saw their overarching objective as translating sustained rapid growth into faster rates of poverty reduction. - The authorities agreed that the report’s four forward-looking themes represented key economic issues for Zambia. They noted that steps were already underway in most of these areas, including an agenda for regional financial integration involving SADC. In addition, they emphasized the importance of reforms that would improve agricultural productivity and investment in the social sector to develop human capital. They highlighted that they also intend to focus on improving the quality of statistics produced in Zambia. - The authorities felt that the very positive relationship with the Fund and Fund staff had contributed to Zambia’s improved economic policymaking. They highlighted the special role of the Fund’s Resident Representatives in providing on-the-ground advice and “wise counsel.” Regarding program design, they appreciated the flexibility of staff and the Fund in shifting the monitoring of non-concessional debt from a project-by-project basis (which the authorities characterized as micro-managing) to a sectoral basis. *Source: IMF staff reports.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11197.pdf_