## _cr12200 ## Source details **Canonical URL:** [_cr12200](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12200.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12200.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12200.pdf.json) --- ### Background and key indicators (2000s–2011) - Growth and macro stability: - Real GDP growth averaged 5.2 percent in 2000–10 (or 3.1 percent per capita). - Real GDP growth estimated at 6½ percent in 2011. - Prices, reserves, debt: - Inflation declined from 30 percent to single digits; end-2011 inflation 7.2 percent; February 2012 inflation 6.0 percent. - Gross international reserves rose above $2 billion for the first time, equivalent to 3 months of prospective imports. - Debt (percent of GDP): 20.2; 22.3; 20.2 (periods as presented); external: 19.2; 10.3; 9.2; domestic: 10.5; 12.0; 11.1. - Poverty and social indicators: - Incidence of poverty: 1998: 72; 2006: 63; 2009: 61; rural: 83; 80; 78; urban: 49; 30; 28. - Primary school enrollment (%): 1999: 69; 2005: 94; 2007: 97. - Mortality rate, under-5 (per 1,000): 2000; 2005; 2009: 166; 155; 141. - Sectoral growth patterns: - Growth concentrated in mining, construction, services; per capita agricultural growth lagged for most of the period. - Government maize purchase prices set above market clearing levels, disadvantaging urban poor and many smallholders who were net buyers of maize in 2008–10. ### Recent developments and 2012 outlook - 2011 performance and policy moves: - Bank credit growth about 30 percent in 2011. - Kwacha depreciated by 7 percent against the U.S. dollar since September 2011. - Monetary policy eased in late 2011 with a reduction in reserve requirement and liquid asset ratios. - Preliminary central government fiscal deficit around 3 percent of GDP in 2011. - Authorities’ 2012 program projections: - Real GDP projected to rise by 7.7 percent in 2012. - 2012 budget targets a deficit of 4.1 percent of GDP and significant increase in investment. - More than half of budget financing expected from a sovereign bond issue; net domestic financing targeted at about 1 percent of GDP. - With slight tightening of monetary policy, inflation projected to remain around 6 percent in 2012. ### Risks, scenarios, and staff policy advice - Near-term downside risks: - Global economic uncertainty could lower copper prices, squeeze trade credit, and reduce demand for Zambian exports. - Domestic risks include perception of a less favorable investment climate and delays in maize sector reforms. - Staff estimate fiscal measures of about 0.8 percent of GDP may be needed to ensure fiscal, inflation, and reserve targets are met, especially if maize sector reforms are delayed. - Financial sector reforms need careful implementation to safeguard stability. - Staff scenarios: - Baseline: meet targets → GDP growth rises and stabilizes at 8 percent over the medium term; low and stable inflation; build-up of reserves; increased public capital expenditure backed by additional revenue measures. - No-adjustment: low non-mining revenues and rising transfers for maize support and public pensions → growth reverts to 5–6 percent; rising domestic debt; lower-than-recommended reserve accumulation; crowding out of private credit. - Staff recommendation on Article IV cycle: - Next Article IV Consultation on the standard 12-month cycle. ### Creating fiscal space and 2012 budget assessment - Fiscal challenge: build buffers, prioritize growth-enhancing expenditures, maintain macro stability amid declining aid and volatile copper revenues. - Staff estimates and budget gaps: - Fiscal measures of about 0.8 percent of GDP would be needed to meet the budget target. - Budget underestimates: maize marketing support by 0.2 percent of GDP; fertilizer support by 0.3 percent of GDP; transfers for public pension benefits by 0.4 percent of GDP. - Higher revenues of 0.1 percent of GDP partly offset underestimations. - April government increases in basic salaries to government employees cost 0.9 percent of GDP, to be offset by eliminating allowances and cuts elsewhere. - Policy priority: - Implement measures to secure the budget deficit target and reorient spending toward growth-enhancing capital investment. ### Maize marketing, fertilizer support, and agriculture policy - Program costs and concerns: - Combined costs of maize marketing and fertilizer support programs rose from 1.2 percent of GDP in 2009 to 2.7 percent in 2011. - Programs have become too costly and hampered agricultural diversification. - Staff urged implementation of reforms before the 2012 season (May). - Authorities’ intended reforms: - Improve targeting of the fertilizer program to the neediest farmers and broaden scope to non-maize farmers. - Scale back government’s role in maize marketing; limit government maize purchases to food security stocks. - Introduce electronic voucher pilot in 10 districts in 2012/13 to improve FISP targeting and diversify crops. - Staff medium-term advice: - Formulate a broad-based agriculture reform strategy with private sector participation, commodity-neutral policy, and prioritized spending on irrigation, roads, research, and extension services. ### Petroleum, electricity pricing, and public pension risks - Petroleum and electricity pricing: - Reinstate the automatic petroleum price adjustment mechanism as soon as possible. - Risk of accumulating subsidy costs since prices appear below full cost recovery since October 2011. - Risk of contingent liabilities from electricity PPPs with guaranteed purchase agreements based on break-even tariffs more than 30 percent above current tariffs. - Staff recommended accelerating multi-year electricity tariff framework to reach full cost-recovery and introducing lifeline tariffs for vulnerable customers. - Public Service Pension Fund (PSPF): - Staff estimates budget transfers to fill PSPF funding gap plus government contributions would reach 0.9 percent of GDP in 2012 and could rise to 2 percent of GDP by 2015 absent reforms. - One reason for PSPF cash flow deficits: no new entrants; new entrants participate in National Pension Scheme (started 2000) which runs large cash surpluses. - Authorities contemplating reduction in lump-sum benefits and accepting new entrants without jeopardizing solvency of other funds. ### Revenue mobilization and tax policy (mining and non-mining) - Room to raise revenues: - Non-mining revenues have declined; tax composition is unbalanced (overreliance on direct income taxes). - Authorities increased ZRA resources in the 2012 budget, including mining unit. - Additional steps: increase technical capacity and audit functions, especially for mining companies. - Tax policy recommendations: - Doubled royalty rate for copper in 2012 budget; authorities prefer no further changes to copper fiscal regime to avoid investment climate impact. - Staff suggests average effective tax rate relatively high but scope to improve progressivity. - On VAT: substantially reduce exemptions. - On corporate income taxes: streamline incentives to align with inclusive growth objectives. - Staff encourages revenue administration reforms and better targeting of exemptions/incentives. ### Public financial management, debt strategy, and contingent liabilities - Capital expenditure and investment management: - Gradual scaling up of capital expenditures recommended to build project appraisal and implementation capacity. - Shift from decentralized to centralized framework for appraising and prioritizing capital projects. - Debt management and access to markets: - Authorities plan a sovereign bond issue (first external bond). - Staff DSA finds bond issue should have no material impact on debt dynamics; debt indicators remain below critical thresholds; risk of debt distress remains small. - Need for comprehensive debt management strategy as non-concessional borrowing increases. - Contingent liabilities and SOEs: - Government interest in 39 state-owned enterprises; majority not profitable; some borrow with government guarantees and/or have large tax arrears. - Planned measures: complete IFMIS and Treasury Single Account by 2013; implement new Public Expenditure Management and Financial Accountability strategy; restructure International Debt Management department; prepare coherent state ownership policy. ### Monetary policy, exchange rate, and reserves - Monetary framework: - BOZ introduced a policy rate effective April 2, 2012—initially set at 9 percent centered within a 400 basis point band for the interbank rate; to be reviewed monthly. - BOZ set policy rate 200 basis points above prevailing interbank rate to signal tightening. - Staff: welcome shift to rate-based framework but concerned 400 basis point trading band is wide; recommend improvements to daily liquidity management and vigilance on tightening if needed. - Inflation targets and stance: - Official target: keep inflation below 7 percent in 2012 and decline to 5 percent in medium term. - Operational aim: keep inflation around 6 percent in 2012. Headline inflation around 6 percent at time of report. - Exchange rate and reserves: - Flexible exchange rate regime retained; REER broadly in line with fundamentals. - Gross official reserves about US$2.2 billion (3 months of imports) as of December 2011. - Staff recommends building reserves further; IMF low-income country reserve adequacy framework suggests increasing coverage to around 4–4½ months of imports over the medium term. - New reserve adequacy model (Dabla-Norris et al. / IMF) and calibration suggest optimal reserves between 4 and 8 months depending on opportunity cost; given infrastructure needs, model suggests optimal reserves between 4 and 4.5 months. ### Financial sector development and regulatory measures - Banking sector status and risks: - Banking sector generally sound and profitable; lending to private sector recovered and exceeded pre-crisis levels. - Personal loans increased by 43 percent in 2011 and account for about 30 percent of total loans and advances—could elevate asset quality risks. - Regulatory and structural changes: - Minimum capital requirement increased from $2.4 million to $20 million for majority domestically-owned banks and to $100 million for majority foreign-owned banks; compliance required by January 1, 2013. - Top 5 foreign banks average capitalization close to US$60 million; remaining 12 foreign-owned banks average below US$10 million. - Authorities will rebase the local currency by removing three zeros; staff notes significant lead time and public education required. - Staff concerns and recommendations: - Rapid capital increases could encourage risky lending and deteriorate asset quality (citing Nigeria 2004–2006 experience). - BOZ capacity to supervise expanding banks is a concern. - Possible withdrawal of foreign banks serving niche markets could reduce competition and access. - Recommended reforms: improve credit reference bureau coverage, streamline collateral enforcement, extend payment services and saving facilities, review legal/regulatory framework to enable innovative products for the informal sector. ### Diversification, informal sector, and competitiveness - Major constraints: - Overreliance on copper exports; high cost of doing business; below cost-recovery electricity tariffs; unbalanced agriculture policies skewed to maize; large informal economy; governance concerns. - Informal sector: - Around 90 percent of workforce in informal sector or informal labor arrangements. - Drivers include difficult business environment, high entry costs to formal sector, restrictive labor regulations, excessive taxes, limited SME services. - Staff recommendations to promote diversification: - Broad-based strategy aligned with Sixth National Development Plan (2011–15). - Improve business climate to promote private investment, especially labor-intensive formal sector activities. - Improve infrastructure, skills, and productivity to translate favorable external positions into inclusive growth. ### Debt sustainability and stress test findings - External debt sustainability: - External debt sustainability maintained under stress tests; standard sensitivity analysis indicates low risk of debt distress; debt burden indicators remain below thresholds. - CPIA average 2008–10: 3.46 → thresholds: PV debt-to-GDP 40 percent; PV debt-to-exports 150 percent; PV debt-to-revenue 250 percent; debt service-to-exports 20 percent; debt service-to-revenue 30 percent. - Stress scenarios: - Most extreme bound test: export value growth shock doubles PV debt-to-GDP by 2014 but remains below threshold, illustrating vulnerability to copper price volatility. - High investment–low growth scenario: additional external borrowing rises to about 2 percent of GDP in medium term; PV debt-to-GDP increases by around 13 percentage points by 2022 compared to baseline but remains below threshold. - Public debt baseline: - PV of public debt to GDP projected to reach 24 percent in 2015 and decline to about 16 percent by 2032 under baseline. - Policy implications: - Improved fiscal position, strengthened debt management, and project appraisal capacity are necessary to maintain sustainability as access to international capital markets increases. ### Selected macro and fiscal projections (highlights from tables) - GDP growth (constant prices, percent): 2009: 6.4; 2010: 7.6; 2011: 6.8; 2012: 6.6 (CR No. 11/196 Act.); 2013: 7.4 (Proj.); 2014: 7.7 (Proj.); 2015: 8.3 (Proj.); 2016: 7.8 (Proj.). - Mining growth (percent): 2009: 20.3; 2010: 15.2; 2011: 6.3; 2012: -5.2; 2013: 13.4; 2014: 23.0; 2015: 14.5; 2016: 12.9. - Consumer prices (average, percent): 2009: 13.4; 2010: 8.5; 2011: 9.0; 2012: 8.7; 2013: 6.5; 2014: 5.6; 2015: 5.2; 2016: 5.0. - Central government revenue (Billions of Kwacha): 2010: 15,198; 2011: 19,242; 2012 Est.: 20,969; 2013 Proj.: 21,913; 2016 Proj.: 27,116. - Central government expenditure (Billions of Kwacha): 2010: 17,584; 2011: 21,777; 2012: 23,765; 2013: 27,665; 2016: 30,139. - Net lending/borrowing (Billions of Kwacha): 2010: -2,373; 2011: -2,535; 2012: -2,797; 2013: -5,753; 2016: -3,022. - Gross international reserves (Millions of U.S. dollars): 2010: 1,896; 2011: 2,378; 2012: 2,167; 2013: 2,815; later projections up to 5,681. - Gross international reserves (months of prospective imports): 2009: 3.7; 2010: 3.0; 2011: 3.0; 2012 (Proj.): 3.3; recommended medium-term coverage around 4–4½ months. ### Data, technical assistance, and implementation timeline - Data adequacy: broadly adequate for surveillance but with notable shortcomings (national accounts benchmarking dated to 1994; gaps in household consumption, GFCF, balance of payments coverage especially mining-related flows). - IMF technical assistance and missions planned/undertaken: - Tax administration resident advisor to ZRA — January 2011. - Central bank capacity building resident advisor, Bank of Zambia — September 2011. - Staff visit for budget discussions — August 2012. - 2013 Article IV mission — March 2013. - Implementation and reforms timeline highlights: - IFMIS and Treasury Single Account completion by 2013. - Pilot and studies: cattle/tourism/mining competitiveness pilot (July 2011); transport sector review (July 2011); Zambia Poverty assessment (December 2011); Social Safety Net Review (March 2012); Agricultural Competitiveness study (May 2012). *Source: Zambia 2012 Article IV Report and associated annexes (selected sections).* ### 1. Selected Economic Indicators, 2009–16 _______________________________________________________ 25 ### 1. Selected Economic Indicators, 2009–16 ### Background - Zambia achieved high and sustained growth and macroeconomic stability over the past decade, but poverty remained high. - Real GDP growth averaged 5.2 percent in 2000–10 (or 3.1 percent per capita). - Inflation declined from 30 percent to single digits. - Debt declined sharply and international reserves increased markedly. - The 2011 Ex-Post Assessment (EPA) found about 60 percent of the population still lived below the poverty line in 2010. - Growth concentrated in capital-intensive or urban-based sectors (mining, construction, services); per capita agricultural growth lagged for most of the period. - Government maize purchase prices were set consistently above market clearing levels, disadvantaging urban poor and many poor smallholders who are net buyers of maize in 2008–10 when agriculture growth was strong. Key baseline indicators (averages and end-of-period as presented): - GDP volume: 2000–01–07: 3.5; 2008–10: 5.2; 6.6 (format in source). - Excluding mining: 3.8; 4.9; 6.0. - Agriculture: 1.0; -0.3; 9.3. - GDP volume per capita: 1.4; 3.2; 4.6. - Consumer prices (percent change): 30.1; 8.9; 7.9. - Gross reserves (months of prospective imports): 0.8; 2.1; 3.0. - Debt (percent of GDP): 20.2; 22.3; 20.2. - External: 19.2; 10.3; 9.2. - Domestic: 10.5; 12.0; 11.1. Poverty and social indicators (selected): - Incidence of poverty: 1998: 72; 2006: 63; 2009: 61. - Rural: 83; 80; 78. - Urban: 49; 30; 28. - Primary school enrollment (%): 1999: 69; 2005: 94; 2007: 97 (source formatting). - Mortality rate, under-5 (per 1,000): 2000, 2005, 2009: 166; 155; 141. - Unemployment (% of labor force): 14.0; 13.2 (rural 5.0; urban 32.3; 29.2). - Informal sector employment (% of total): 88; 89 (rural 96; urban 71). - Real income per capita (US$, 2010 prices): GDP: 847; 995; 1,031; 1,221. Gross national income: 794; 886; 997; 1,111. ### Recent developments and outlook (2011–2012) - 2011 macroeconomic performance: - Real GDP estimated growth: 6½ percent, driven by a record maize harvest and bank credit growth of about 30 percent. - Inflation: declined to 7.2 percent at end-2011; 6.0 percent in February 2012. - Monetary policy: eased in late 2011 with a reduction in reserve requirement and liquid asset ratios. - Kwacha depreciated by 7 percent against the U.S. dollar since September 2011. - External current account surplus narrowed from 7.1 percent to 1.3 percent of GDP (reflecting strong import expansion and a decline in grants). - Gross international reserves rose above $2 billion for the first time ever, equivalent to 3 months of prospective imports. - Preliminary central government fiscal deficit remained around 3 percent of GDP in 2011, reflecting large expansion in election-related current spending and public investment offset by one-off payment of mining tax arrears. - Authorities’ 2012 economic program projections: - Real GDP projected to rise by 7.7 percent (reflecting strong growth in copper production and non-maize agriculture, and an expansionary fiscal policy). - 2012 budget targets a deficit of 4.1 percent of GDP and a significant increase in investment. - More than half of budget financing expected from a sovereign bond issue; net domestic financing targeted at about 1 percent of GDP. - With slight tightening of monetary policy, inflation projected to remain around 6 percent in 2012. ### Risks and authorities’ views - Near-term downside risks: - Global economic uncertainty could lower copper prices, squeeze trade credit lines, reduce demand for Zambian exports. - Domestic policy risks: perception of a less favorable investment climate and delays in maize sector reforms. - Staff estimate that fiscal measures of about 0.8 percent of GDP could be needed to ensure fiscal, inflation, and reserve targets are met, especially if maize sector reforms are delayed. - Careful implementation of financial sector reforms necessary to safeguard financial stability. - Authorities’ stance: - Broad agreement on need to build buffers against a possible sharp decline in copper prices. - Measures taken to stop unauthorized statements by government officials; restated intention to maintain policies promoting private sector development under secure property rights and rule of law. ### Promoting inclusive growth and reducing vulnerabilities (medium term) - Authorities’ medium-term targets: - Growth: around 8 percent a year. - Inflation: around 5 percent. - Net domestic financing: around 1 percent. - Fiscal deficit: around 2½ percent of GDP. - Public debt: remain below 25 percent of GDP. - Required reforms and policy priorities: - Fiscal discipline to complement monetary policy and avoid crowding out the private sector. - Fiscal reforms to create space for increased capital spending, improve public financial management, and strengthen incentives for formal sector development. - Financial sector reforms to improve the sector’s role in facilitating development. - Agriculture sector reforms to reduce dependence on maize and promote poverty reduction. - Reforms to improve the business climate and promote private investment, especially in labor-intensive formal sector activities. - Staff scenarios: - Baseline scenario where targets are met: projected GDP growth rising and stabilizing at 8 percent over the medium term; low and stable inflation; build-up of reserves; increased public capital expenditure backed by additional revenue measures to safeguard fiscal consolidation. - No-adjustment scenario: low non-mining revenues and rising transfers for maize support and public pensions limit ability to scale up public capital spending; growing fiscal deficits crowd out private sector credit; growth reverts to 5–6 percent; rising domestic debt and lower-than-recommended reserve accumulation increase vulnerabilities. ### Creating fiscal space - Fiscal policy challenge: balance building buffers, prioritizing growth-enhancing expenditures, and maintaining macroeconomic stability amid declining aid and volatile copper revenues. - 2012 budget assessment: - Staff estimate that fiscal measures of about 0.8 percent of GDP would be needed to meet the budget target. - Budget underestimated costs of: - Maize marketing support program by 0.2 percent of GDP. - Fertilizer support program by 0.3 percent of GDP. - Transfers to fund public pension benefits by 0.4 percent of GDP. - These underestimations would be partly offset by higher revenues of 0.1 percent of GDP. - In April, government granted higher-than-budgeted increases in basic salaries to government employees (0.9 percent of GDP), which will be offset by eliminating a number of allowances for civil servants and cuts in other recurrent expenditures. - Staff emphasis: maintaining macroeconomic stability requires implementing measures to secure the budget deficit target and reorient spending to support growth-enhancing capital investment. *Source: Zambia 2012 Article IV Report (selected sections).* ### 12. The marketing and fertilizer support ### 12. The marketing and fertilizer support ### Costs and impact of maize marketing and fertilizer support programs - The combined costs of these programs grew from 1.2 percent of GDP in 2009 to 2.7 percent in 2011. - These programs have become too costly and hampered diversification of the agricultural sector. - Staff noted that reforms envisaged during the recent ECF to reduce fiscal costs and the government’s involvement in maize marketing had not yet been taken and urged that reforms be implemented before the 2012 season starts in May. - Authorities’ reform intentions: - Improve targeting of the fertilizer program to the neediest farmers while broadening the scope to include non-maize farmers. - Scale back government’s role in maize marketing to allow the private sector to take the lead. - Limit government maize purchases to that required to maintain food security stocks. ### Petroleum and electricity pricing policies — fiscal risks - Staff warned of the need to minimize fiscal risks arising from the current petroleum and electricity pricing policies. - Recommendation to reinstate the automatic petroleum price adjustment mechanism as soon as possible. - Concern that substantial subsidy costs may be accumulating as prices appear to have been below full cost recovery since October 2011 when prices were last adjusted. - Risk of a future build-up of contingent liabilities from electricity generation public-private-partnerships with guaranteed purchase agreements based on break-even tariffs that are more than 30 percent above current tariffs. - Staff recommended: - Accelerating the implementation of the multi-year electricity tariff framework aimed at raising tariffs to full cost-recovery levels (implementation has been slower than originally planned). - Introducing lifeline tariffs to protect the most vulnerable customers. ### Public Service Pension Fund (PSPF) — fiscal sustainability - Staff estimates that budget transfers to fill the funding gap for pension benefits payable from this fund together with the normal pension contributions of the government would reach 0.9 percent of GDP in 2012 and, in the absence of reforms, could rise to 2 percent of GDP by 2015. - One reason for the cash flow deficit of the PSPF is that no new entrants are being admitted to the scheme. New entrants take part in the National Pension Scheme, which was started in 2000 and currently runs large cash surpluses. - Authorities’ contemplated measures: - Reduction in the lump-sum benefits paid up front. - Accepting new entrants into the pension scheme without jeopardizing the solvency of the other main public pension fund. - Authorities noted securing Cabinet-level support could be challenging. ### Mobilizing revenues — mining and non-mining - There is room to significantly raise revenues to help create fiscal space; Zambia does not compare favorably with its comparators on mining and non-mining revenues. - The authorities increased resources allocated to the Zambia Revenue Authority (ZRA) in the 2012 budget, including to the mining unit. - Additional steps needed: increase technical capacity, including information management and audit functions (especially of mining companies). - On tax policy: - The authorities doubled the royalty rate for copper production in the 2012 budget. - Staff analysis suggests the average effective tax rate is relatively high, but there is scope to improve the progressivity of the regime. - On the VAT, staff argued for substantially reducing exemptions. - On corporate income taxes, staff recommended streamlining the use of incentives to ensure alignment with the government’s objective of promoting inclusive growth. - Authorities indicated they did not want to implement any further changes to the copper fiscal regime following the royalty increase to avoid negative impact on the investment climate. - No specific contingency plans were indicated if tax administration or expenditure reforms failed to yield expected savings. ### Public financial management and debt management reforms - Staff recommended: - Gradual scaling up of capital expenditures to allow time to build technical expertise to evaluate and implement projects. - Shift from the current decentralized process for appraising and prioritizing capital expenditure projects to a centralized framework. - With Zambia set to access international capital markets, development of a comprehensive debt management strategy is important; as part of their 2012 funding strategy, the authorities plan to issue a sovereign bond—Zambia’s first external bond issue. - Staff’s debt sustainability analysis (DSA) suggests the bond issue should have no material impact on debt dynamics: all debt indicators remain below the critical thresholds and the risk of debt distress should remain small. - Contingent liabilities of the public sector, especially operations of state-owned enterprises, need closer monitoring: government has interest in 39 state-owned enterprises, the majority of which are not profitable; some borrow with government guarantees and/or have large outstanding tax arrears. - Authorities’ planned measures: - Complete implementation of IFMIS and Treasury Single Account by 2013. - Implement a new Public Expenditure Management and Financial Accountability strategy. - Restructure International Debt Management department and planned restructuring of the Ministry of Finance and Planning. - Prepare a coherent state ownership policy to enhance performance monitoring, disclosures, and governance. ### Monetary policy framework and inflation - The Bank of Zambia (BOZ) changed its monetary policy framework effective April 2, 2012: - Introduced the BOZ policy rate—initially set at 9 percent centered within a 400 basis point band for the interbank rate, to be reviewed monthly—to replace reserve money as BOZ’s main monetary policy tool. - Staff observations and recommendations: - Welcome for emphasis on stabilizing short-term interest rates, but concern that the 400 basis point trading band is wide. - Improvements to BOZ’s daily liquidity management operations needed to keep overnight interbank rates close to the policy rate. - Staff noted authorities should remain vigilant and stand ready to tighten monetary policy further as needed. - Authorities’ inflation targets and stance: - Official target: keep inflation below 7 percent in 2012 and declining further to 5 percent in the medium term. - Operational aim: keep inflation around 6 percent in 2012. - Headline inflation is currently around 6 percent. - BOZ set the new policy rate 200 basis points above the prevailing interbank rate to signal tightening. - Authorities argued expected slow-down in domestic food inflation and the new policy rate should help anchor expectations; monetary aggregates will continue to play a key role. ### Exchange rate policy and international reserves - The flexible exchange rate regime has served Zambia well during several large external shocks. - Staff’s updated exchange rate assessment suggests the real effective exchange rate remains broadly in line with macroeconomic fundamentals. - International reserves: - Although at record levels, import coverage is lower than in many comparable countries. - Staff recommended continuing to strategically aim to build reserves further over the medium term as favorable conditions present themselves. - Preliminary estimates using the new IMF low-income country reserve adequacy framework suggest increasing reserve coverage to around 4–4½ months of imports over the medium term would be appropriate given Zambia’s vulnerabilities to external shocks. - Authorities reiterated commitment to the floating exchange rate and concurred on strategy to increase reserve coverage. ### Financial sector development and banking sector measures - Banking sector status: - Generally remains sound and profitable. - Lending to the private sector has recovered and exceeded pre-crisis (2008–09) levels. - Sharp increase in credit to the private sector in 2011, especially personal loans, which increased by 43 percent and account for about 30 percent of total loans and advances, could elevate risks of renewed deterioration. - Authorities’ measures to address high lending rates and low access: - In late 2011, lowered the upper corporate tax rate for banks by 5 percentage points, aligning the tax rate with the 35 percent paid by other non-agriculture firms. - Plan to recapitalize the Zambia Development Bank to be more active in credit delivery to under-served sectors. - Structural impediments to credit delivery: lack of information on potential borrowers, high transactions costs for creditors to deal with non-performing loans, and high cost of doing business. - Recommended reforms: - Improve coverage and effectiveness of credit reference bureaus. - Streamline procedures for collateral enforcement. - Extend payment services and saving facilities to those without bank accounts. - Review legal and regulatory framework to allow development of innovative products and institutions for the informal sector. - Capital requirements changes: - Minimum capital requirement increased from $2.4 million to $20 million for majority domestically-owned banks and to $100 million for majority foreign-owned banks. - Banks must be in compliance by January 1, 2013. - Top 5 foreign banks have an average capitalization of close to US$60 million; the average for the remaining 12 foreign-owned banks is below US$10 million. - Staff concerns about the rapid capital increase: - Risk of encouraging risky lending and deterioration in asset quality (citing Nigeria 2004–2006 experience). - BOZ capacity challenges to effectively supervise banks as they expand loan books. - Possible withdrawal of some foreign banks serving small, niche markets, potentially reducing competition and the scope of financial services. - Currency rebasing: - Authorities will rebase the local currency and take off three zeros to ease payments system burden, reduce transaction costs, and simplify accounting processes. - Staff noted rebasing requires significant lead time for planning, technical work, and extensive public education to ensure a smooth transition and minimum risks. - Authorities’ views: - BOZ will work closely with commercial banks to avoid negative impacts from higher capital requirements. - Many banks had accumulated sufficient reserves that could be converted into required capital. - Rebasing preparations have been underway and a broad public education campaign would soon be launched. *Italic source: IMF staff report excerpt — 12. The marketing and fertilizer support* ### 34. Achieving economic diversification ### 34. Achieving economic diversification ### Major challenges to diversification and inclusive growth - Zambia remains overly dependent on copper exports. - The cost of doing business remains high. - Unbalanced agriculture policies have caused an over-production of maize and hampered the development of other segments of the agriculture sector. - Below cost recovery electricity tariffs impede tapping Zambia’s hydro power potential. - The large informal economy negatively impacts productivity and poverty. - Economic governance remains a concern. - Staff highlighted the importance of a broad-based strategy that included the key reforms identified in the Sixth National Development Plan (covering 2011–15) and the fiscal and financial sector reforms discussed earlier. ### Informal sector, productivity, and formalization - Currently, around 90 percent of the total workforce is in the informal sector or through informal labor arrangements (casual workers) in the formal sector. - Continued efforts to achieve the Millennium Development Goals targets (e.g., in health and education, Table 8) and scale up infrastructure spending should improve informal sector productivity and inclusive growth. - A recent IMF study of the drivers of the informal economy in oil-importing countries in the Middle East and North Africa found that a large informal economy is often the consequence of: - a difficult business environment and high costs and burdens of entering the formal economy, - restrictive labor market regulations, - excessive taxes, - limited benefits (weak financial and public service delivery to SMEs) that reduce incentives to operate in the formal sector. - Staff urged that better information on the key Zambia-related obstacles to formal sector development is needed to inform policies in this area. ### Agriculture and rural development - More than 70 percent of the employed population is in the agriculture sector; agriculture development is critical for achieving inclusive growth and poverty reduction. - Staff recommended the government to formulate a broad-based reform strategy for the agriculture sector, with the help of development partners. - The strategy should include: - strong participation of the private sector, - commodity-neutral agricultural policy, - prioritizing government spending on raising productivity, including through provision of irrigation, roads, research, and extension services. - Measures to reduce the dependence on maize and promote rural development would also be critical. ### Authorities’ views - The authorities agreed with the staff’s assessment and noted that they already are preparing reforms in line with the staff’s recommendation to their agriculture policies. ### Staff appraisal — macroeconomic stance, risks, and policy priorities - Commendation: - Zambia is to be commended for its strong macroeconomic performance in recent years, reflecting sound macroeconomic management. - Near-term outlook: - Economic growth is projected to remain strong and inflation moderate in 2012. - The real effective exchange rate is broadly in line with macroeconomic fundamentals and the risks to external stability appear low. - Downside and medium-term risks: - Risks related mainly to uncertainties in the global economic outlook and possible delays in implementing fiscal measures needed to meet the authorities’ budget deficit target. - Large deficits in a government pension fund, below cost recovery energy pricing, and contingent liabilities pose medium-term risks. - Fiscal framework and targets: - The government’s fiscal targets for 2012 and the medium term are consistent with achieving the authorities’ macroeconomic objectives. - Plans to keep net domestic financing at around 1 percent of GDP and the medium-term fiscal deficit at 2–3 percent would keep debt stable as a percent of GDP, ensure that the risk of debt distress remains low, and provide room for solid private sector credit growth and support a further reserve accumulation. - Required fiscal measures: - Sizable fiscal measures are needed to achieve these targets, while providing room for higher growth-enhancing and poverty-reducing spending. - Failure to take measures to secure the 2012 fiscal targets would likely put significant pressure on inflation and the balance of payments and raise concerns about the authorities’ commitment to macroeconomic stability. - Authorities are urged to quickly implement reforms currently being considered to maize marketing and pricing, fertilizer subsidies, and public sector pension funds. These reforms should: - provide sizable fiscal savings both in 2012 and over the medium term, - restore sustainability, - in the case of the agricultural programs, correct serious market distortions that have contributed to an overdependence on maize production. - Revenue mobilization and tax policy: - Enhanced revenue mobilization has an important role to play in achieving the medium-term fiscal targets. - Staff encourages the authorities to continue to implement tax administration reforms recommended by Fund technical assistance. - In tax policy, there is room to substantially reduce the number of exemptions and incentives in non-mining taxes, while ensuring that those that remain are closely linked to facilitating productivity and employment growth in the formal sector. - In the mining area, Staff agrees with the authorities’ decision not to make any further changes to the mining fiscal regime at this time. - Energy pricing and electricity tariffs: - The fiscal risks associated with below cost-recovery energy pricing must be addressed. - The automatic petroleum price adjustment mechanism should be reinstated as soon as possible to ensure that prices are kept in line with supply costs. - The implementation of the multi-year electricity tariff framework aimed at raising tariffs to full cost-recovery levels should be accelerated to ensure the economic viability of the large private and public investment in electricity generation currently being undertaken. - At the same time, lifeline tariffs should be considered to protect the most vulnerable customers. - Public financial management and debt management: - Further public financial management reforms are needed to improve spending efficiency and transparency and debt management. - Strengthen investment management capacity—the targeted scaling up of capital expenditures should be gradual to provide adequate time to build the needed technical expertise. - Existing procedures for debt recording and monitoring, especially of contingent liabilities, should be strengthened. - Staff welcomes plans for enhanced monitoring of the state-owned enterprises. - As the authorities move to tap the international capital markets, it will be important to develop a comprehensive debt management strategy. - Monetary policy and inflation: - Staff believes that the authorities’ 2012 monetary program is consistent with achieving their goal of keeping inflation below 7 percent. - It will be important for the authorities to be ready to tighten monetary policy further in the event of elevated inflationary pressures from the recent months’ currency depreciation or any delays in implementation of fiscal measures. - Staff welcomes Bank of Zambia plans to enhance the monetary policy framework, including: - the introduction of the monetary policy rate, - use of a broad set of economic indicators—including monetary aggregates—to assess the monetary policy stance. - These changes should make monetary policy more flexible and forward looking, enhance liquidity management, and better shape the transmission mechanism. - Authorities are encouraged to continue to develop all the key structures necessary for the effective functioning of the policy rate as the main monetary policy tool. - Financial sector and access to finance: - Staff supports the authorities’ efforts to strengthen the financial sector and improve access to financial services. - Staff is concerned that current plans to raise minimum capital requirements for banks may have unintended results by encouraging risky lending practices or the withdrawal of some specialized foreign banks. - Staff welcomes the authorities’ intention to work closely with the commercial banks to ensure that these risks do not materialize. - To broaden access to financial services, reforms should focus on: - improving information on potential borrowers, - lowering transactions costs for creditors to deal with non-performing loans, - facilitating the development of innovative products and institutions tailored to the needs of small and medium enterprises. *Source: ZAMBIA 2012 ARTICLE IV REPORT, Section 34.* ### 48. Staff recommends that the next Article ### _cr12200 - 48. Staff recommends that the next Article ### Staff recommendation - Staff recommends that the next Article IV Consultation takes place on the standard 12-month cycle. ### Macroeconomic outlook and projections (National account and prices) - GDP growth at constant prices: - 2009: 6.4 - 2010: 7.6 - 2011: 6.8 - 2012 (CR No. 11/196 Act.): 6.6 - 2013 (CR No. 11/196 Proj.): 7.4 - 2014 (Proj.): 7.7 - 2015 (Proj.): 8.3 - 2016 (Proj.): 7.8 - Subsequent projections: 8.0, 7.9 - Mining growth: - 2009: 20.3 - 2010: 15.2 - 2011: 6.3 - 2012: -5.2 - 2013: 13.4 - 2014: 23.0 - 2015: 14.5 - 2016: 12.9 - Later projections: 15.5, 8.0 - Non-mining growth: - 2009: 5.2 - 2010: 6.8 - 2011: 6.9 - 2012: 7.9 - 2013: 6.7 - 2014: 6.2 - 2015: 7.6 - 2016: 7.2 - Later projections: 7.0, 7.9 - GDP deflator: - 2009: 10.7 - 2010: 11.7 - 2011: 9.8 - 2012: 12.8 - 2013: 5.7 - 2014: 4.8 - 2015: 4.8 - 2016: 4.6 - Later projection: 4.7 - GDP at market prices (Billions of kwacha): - 2009: 64,616 - 2010: 77,667 - 2011: 91,055 - 2012: 93,354 - 2013: 103,368 - 2014: 105,383 - 2015: 119,551 - 2016: 134,815 - Later projections: 152,224; 171,899 - GDP per capita (US$): - 2009: 990 - 2010: 1,221 - 2012: 1,414 - 2014: 1,457 - Consumer prices (average): - 2009: 13.4 - 2010: 8.5 - 2011: 9.0 - 2012: 8.7 - 2013: 6.5 - 2014: 5.6 - 2015: 5.2 - 2016 and later: 5.0 - Consumer prices (end of period): - 2009: 9.9 - 2010: 7.9 - 2011: 7.0 - 2012: 7.2 - 2013: 6.0 - 2014 onward: 5.0 ### Fiscal developments and projections (Central government) - Revenue (Billions of Kwacha): - 2010: 15,198 - 2011: 19,242 - 2012 (CR No. 11/196 Est.): 20,969 - 2013 (CR No. 11/196 Proj.): 21,913 - 2014 (Budget): 21,870 - 2015 (Proj.): 22,047 - 2016 (Proj.): 27,116 - Later projections: 31,660; 36,962; 42,777 - Tax revenue (Billions of Kwacha): - 2010: 12,700 - 2011: 15,979 - 2012: 18,018 - 2013: 17,683 - 2014: 17,386 - 2015: 17,481 - 2016: 21,260 - Later projections: 25,400; 30,090; 35,181 - Grants (Billions of Kwacha): - 2010: 1,389 - 2011: 1,638 - 2012: 1,450 - 2013: 2,093 - 2014: 1,894 - 2015: 1,840 - 2016: 2,219 - Later projections: 2,120; 2,160; 2,226 - Expenditure (Billions of Kwacha): - 2010: 17,584 - 2011: 21,777 - 2012: 23,765 - 2013: 27,665 - 2014: 26,186 - 2015: 26,350 - 2016: 30,139 - Later projections: 34,875; 40,729; 46,895 - Expense breakdown highlights (Billions of Kwacha): - Compensation of employees: - 2010: 6,325 - 2011: 7,204 - 2012: 7,402 - 2013: 8,122 - 2014: 8,648 - 2015: 9,600 - 2016: 10,955 - Later projections: 12,096; 13,552; 15,304 - Interest (total): - 2010: 1,370 - 2011: 1,422 - 2012: 1,082 - 2013: 1,605 - 2014: 1,708 - 2015: 1,664 - 2016: 2,143 - Later projections: 2,365; 2,417; 2,662 - Subsidies: - 2010: 1,897 - 2011: 1,588 - 2012: 2,837 - 2013: 600 - 2014: 800 - 2015: 1,393 - 2016: 1,133 - Net acquisition of nonfinancial assets (Billions of Kwacha): - 2010: 2,512 - 2011: 5,751 - 2012: 5,085 - 2013: 10,982 - 2014: 7,823 - 2015: 7,811 - 2016: 8,601 - Later projections: 10,804; 13,448; 16,096 - Net lending/borrowing (Billions of Kwacha): - 2010: -2,373 - 2011: -2,535 - 2012: -2,797 - 2013: -5,753 - 2014: -4,316 - 2015: -4,302 - 2016: -3,022 - Later projections: -3,216; -3,767; -4,118 - Excluding grants (Net lending/borrowing, Billions of Kwacha): - 2010: -3,762 - 2011: -4,174 - 2012: -4,246 - 2013: -7,845 - 2014: -6,210 - 2015: -6,142 - 2016: -5,241 - Later projections: -5,336; -5,926; -6,344 - Memorandum items: - Net Domestic Financing: - 2010: 2,205 - 2011: 1,220 - 2012: 1,355 - 2013: 1,240 - 2014: 1,324 - 2015: 1,128 - 2016: 1,645 - Later projections: 1,600; 1,791; 1,882 - Stock of domestic debt, net (Billions of Kwacha): - 2010: 10,025 - 2011: 10,375 - 2012: 11,297 - 2013: 11,616 - 2014: 12,534 - 2015: 12,272 - 2016: 13,751 - Later projections: 15,182; 16,799; 18,485 - Primary balance (Billions of Kwacha): - 2010: -1,003 - 2011: -1,113 - 2012: -1,714 - 2013: -4,148 - 2014: -2,608 - 2015: -2,638 - 2016: -879 - Later projections: -850; -1,349; -1,456 - Mining taxes (Billions of Kwacha): - 2010: 1,500 - 2011: 2,927 - 2012: 5,095 - 2013: 2,773 - 2014: 3,851 - 2015: 4,267 - 2016: 6,014 - Later projections: 7,115; 8,526; 9,701 ### Fiscal operations in percent of GDP (selected) - Revenue as percent of GDP: - 2009: 18.9 - 2010: 19.6 - 2011: 21.1 - 2012 (CR No. 11/196): 22.5 - 2013 (Proj.): 21.2 - 2014 (Proj.): 20.9 - 2015 (Proj.): 20.9 - 2016 (Proj.): 22.7 - Later projections: 23.5; 24.3; 24.9 - Expenditure as percent of GDP: - 2009: 21.3 - 2010: 22.6 - 2011: 23.9 - 2012: 25.5 - 2013: 26.8 - 2014: 25.0 - 2015: 25.2 - 2016: 25.9 - Later projections: 26.8; 27.3 - Net lending/borrowing as percent of GDP: - 2009: -2.4 - 2010: -3.1 - 2011: -2.8 - 2012: -3.0 - 2013: -5.6 - 2014: -4.1 - 2015: -4.1 - 2016: -2.5 - Later projections: -2.4; -2.5; -2.4 - Overall balance, excluding budget grants and mining taxes (percent of GDP): - 2010: -4.7 - 2011: -5.9 - 2012: -8.5 - 2013: -8.5 (budget case) - 2014 onward: large deficits up to -14,440 (billions kwacha figure in table memo) ### Integrated balance sheet (Central government, 2009–11) - Net financial worth: - Opening 2009: -10,444 - Closing/Opening 2009–2011 progression: -13,387; -16,260; -19,057 (transactions/other economic flows shown) - Financial assets (Domestic currency and deposits examples): - Currency and deposits: - Opening 2009: 1,953 - Transactions show movement to closing balances: 3,138; 2,865; 2,865 (illustrative entries in table) - Liabilities: - Total liabilities movement: - Opening 2009: 12,406 - Closing 2009: 16,533 - Closing 2010: 19,134 - Closing 2011: 22,014 - Domestic debt securities: - Opening 2009: 7,223 - Transactions to closing 2009: 8,418 - Foreign loans: - Opening 2009: 5,180 - Closing 2011: 8,630 - Nominal GDP (billions of kwacha) used in balance sheet: - 2009: 64,616 - 2010: 77,667 - 2011: 93,354 - Net financial worth (% of GDP): - -20.72, -20.94, -20.41 (for the three-year sequence shown) ### Monetary account and credit (Banking sector) - Monetary Survey (Billions of Kwacha): - Net foreign assets: - 2010: 6,690 - 2011: 7,534 - 2012 (Est.): 9,281 - 2013 (CR No. 11/196): 7,534 - 2014 (Proj.): 11,146 - 2015 (Proj.): 14,108 - 2016 (Proj.): 18,127 - Later projections: 22,869; 28,179 - Net domestic assets: - 2010: 11,226 - 2011: 12,049 - 2012: 12,523 - 2013: 12,049 - 2014: 14,361 - 2015: 15,600 - 2016: 16,189 - Later projections: 16,588; 17,183 - Broad Money (M3): - 2010: 17,917 - 2011: 19,583 - 2012: 21,805 - 2013: 19,583 - 2014: 25,508 - 2015: 29,708 - 2016: 34,316 - Later projections: 39,457; 45,362 - Monetary authorities (Net foreign assets and reserve developments): - Net foreign assets (Billions of Kwacha): - 2010: 4,641 - 2011: 6,258 - 2012: 6,029 - 2013: 6,258 - 2014: 7,443 - 2015: 9,888 - 2016: 13,285 - Later projections: 17,510; 22,303 - Reserve money (end-of-period): - 2010: 5,181 - 2011: 4,891 - 2012: 5,531 - 2013: 4,891 - 2014: 6,009 - 2015: 6,636 - 2016: 7,666 - Later projections: 8,814; 10,133 - Memorandum items and ratios: - Reserve money (end-of-period, annual percent change): 27.8; -5.6; 6.8; -5.6; 8.6; 10.4; 15.5; 15.0; 15.0 - Broad Money (M3) (annual percent change): 29.9; 9.3; 21.7; 9.3; 17.0; 16.5; 16.5; 15.5; 15.0 - Credit to the private sector (annual percent change): 15.4; 18.2; 27.9; 18.2; 17.2; 17.0; 17.5; 18.2; 18.3 - Credit to the private sector (percent of GDP): 11.5; 11.6; 12.2; 10.2; 12.7; 13.1; 13.7; 14.3; 15.0 - Gross foreign exchange reserves of the Bank of Zambia (millions of U.S. dollars): 1,896; 2,378; 2,167; 2,815; 2,583; 3,092; 3,801; 4,682; 5,681 ### External sector – Balance of payments and reserves - Current account (Millions of U.S. dollars): - 2010: 1,144 - 2011: 1,120 - 2012 (Est.): 238 - 2013 (CR No. 11/196): 638 - 2014 (Proj.): 237 - 2015 (Proj.): 577 - 2016 (Proj.): 716 - Later projections: 827; 1,024 - Trade balance (Millions of U.S. dollars): - 2010: 2,704 - 2011: 4,294 - 2012: 2,226 - 2013: 4,314 - 2014: 2,283 - 2015: 2,770 - 2016: 3,099 - Later projections: 3,425; 3,852 - Exports, f.o.b. (Millions of U.S. dollars): - 2010: 7,414 - 2011: 10,411 - 2012: 8,680 - 2013: 11,461 - 2014: 9,545 - 2015: 10,885 - 2016: 12,160 - Later projections: 13,590; 15,362 - Copper exports (of total exports, Millions of U.S. dollars): - 2010: 5,768 - 2011: 8,393 - 2012: 6,660 - 2013: 9,256 - 2014: 7,160 - 2015: 8,218 - 2016: 9,167 - Later projections: 10,230; 11,433 - Imports, f.o.b. (Millions of U.S. dollars): - 2010: -4,710 - 2011: -6,117 - 2012: -6,454 - 2013: -7,147 - 2014: -7,262 - 2015: -8,114 - 2016: -9,061 - Later projections: -10,165; -11,509 - Services (net) and Income (net): - Services (net): negative and deteriorating from -628 (2010) to -1,112 (later projection) - Income (net): -1,363 (2010); -2,793 (2011); -1,562 (2012); projections to -2,167 - Interest on public debt (component of income): - -9; -14; -13.9; -28; -28; -73; -82; -90; -99 (time series listed) - Current transfers (net): - 2010: 432 - 2011: 397 - 2012: 382 - 2013: 415 - 2014: 369 - 2015: 425 - 2016: 429 - Later: 438; 450 - Capital and financial accounts: - Capital account (project grants): 150; 181; 151; 265; 223; 249; 221; 217; 214 - Financial account (Millions of U.S. dollars): -1,302; -917; -693; -455; -31; -298; -193; -96; -162 - Foreign direct and portfolio investments: 708; 1,283; 889; 1,485; 1,016; 1,204; 1,349; 1,515; 1,710 - Other investments: -2,010; -2,200; -1,582; -1,939; -1,407; -1,502; -1,542; -1,611; -1,872 - Gross international reserves (Millions of U.S. dollars and months of imports): - Gross international reserves (millions): 1,896; 2,378; 2,167; 2,815; 2,583; 3,092; 3,801; 4,682; 5,681 - In months of prospective imports: 3.0; 3.4; 3.0; 3.7; 3.3; 3.5; 3.9; 4.2; 4.6 - Copper-related memoranda: - Change in copper export volume (percent): 23.1; 11.0; 0.3; 10.8; 10.8; 14.5; 12.9; 13.3; 13.6 - Copper export price (U.S. dollars per tonne): 6,951; 9,017; 8,018; 8,976; 7,767; 7,785; 7,693; 7,577; 7,454 ### Financial soundness indicators (2006–11) - Capital adequacy: - Regulatory capital to risk-weighted assets: 20.4; 18.6; 18.6; 22.3; 22.1; 19.2 (2006–2011) - Tier 1 regulatory capital to risk-weighted assets: 18.0; 15.9; 15.7; 18.9; 19.1; 16.8 - Asset quality: - Past due advances (NPL) to total advances: 11.3; 8.8; 7.2; 12.6; 14.8; 10.4 - Loan loss provisions to nonperforming loans: 83.3; 73.2; 104.6; 86.6; 80.3; 76.7 - Earnings and profitability: - Return on average assets: 5.1; 4.7; 3.6; 2.1; 2.9; 3.7 - Return on equity: 30.6; 35.1; 20.8; 9.4; 12.1; 25.5 - Net interest margin: 12.8; 11.5; 10.4; 10.4; 9.0; 8.1 - Liquidity: - Liquid assets to total assets: 41.3; 37.6; 35.5; 38.0; 43.8; 40.3 - Liquid assets to total deposits: 49.6; 46.0; 49.9; 52.6; 58.5; 53.3 - Foreign currency exposure: - Foreign currency loans to total gross loans: 34.0; 32.5; 42.1; 36.4; 32.8; 39.1 - Foreign currency liabilities to total liabilities: 61.2; 27.1; 35.8; 38.0; 39.6; 39.0 - Net open position in foreign exchange to capital: 9.4; 7.1; 6.9; 2.5; 4.1; 5.5 - Source: Bank of Zambia. ### Social indicators — Millennium Development Goals (selected) - Goal 1 (poverty and hunger): - Population below US$1 a day (percent): 2003: 76.0; 2005: 64.0; Target for 2015: 29.0 - Prevalence of underweight children (percent of children under 5): 2000: 23.0; 2010: 14.9; Target for 2015: 11.0 - Goal 2 (education): - Net primary enrollment ratio (percent): 2000: 62.6; 2003: 79.8; 2005: 88.9; 2007: 95.4; 2010: 97.5; Target for 2015: 100.0 - Primary completion rate, total (percent): 2000: 56.3; 2003: 66.2; 2005: 77.5; 2007: 88.1; 2010: 92.6 - Goal 4 (child mortality): - Under 5 mortality rate (per 1,000): 2000: 182.0; 2007: 149.6; 2008: 145.1; 2009: 141.3; Target for 2015: 56.0 - Infant mortality rate (per 1,000 live births): 2000: 102.0; 2004: 93.8; 2007: 90.8; 2008: 87.9; Target for 2015: 30.0 - Goal 5 (maternal health): - Maternal mortality ratio (modeled estimate, per 100,000 live births): 2000: 750.0; 2005: 560.0; 2007: 470.0; 2010: 162.0 - Goal 6 (HIV/AIDS and diseases): - Prevalence of HIV, total (percent of population ages 15–49): 2000: 16.7; 2003: 16.9; 2005: 17.0; 2007: 13.7; 2008: 13.6; 2009: 13.5; Target for 2015: 16 or less - Goal 7 (environment and access): - Forest area (percent of total land area): 2000: 60.1; 2005: 67.7; 2010: 66.5 - Access to an improved water source (percent of population): 2009: 58.0; Target for 2015: 75.5 - Access to improved sanitation (percent of population): 2009: 55.0; Target for 2015: 87.0 - Source: World Development Indicators Database, April 2008. - Notes included in table: data timing variations; target definitions for Goals 1–8 as specified. *Source: Zambian authorities; and IMF staff estimates and projections (tables and text as provided).* ### Annex I. Revenue Mobilization and Growth Friendly Tax Reforms in Zambia ### Annex I. Revenue Mobilization and Growth Friendly Tax Reforms in Zambia ### Revenue mobilization: overview and need - Non-mining revenues have displayed a worrying decline in recent years and the composition of tax revenues is unbalanced; relying more on direct income taxes while consumption and property taxes are underexploited. - Growth-friendly non-mining tax policy reforms are necessary to ensure a stable and permanent revenue base, improve economic efficiency, and support employment and growth. ### Preference for indirect taxes - Revenue mobilization should target indirect taxes which are less distortive and better capture informal activity. - Rationale: - Taxes on consumption, such as VAT and excises, are less distortive than taxes on income and capital since they do not alter labor supply and investment incentives. - Income taxes only capture formal sector activity; consumption-based taxes indirectly also capture income originating from informal activities. - Indirect taxes account for most of the deterioration in tax yields over the recent years; reversing this trend can generate considerable revenues. - Policy levers: - Improve performance of value added and excise taxes through revenue administration measures. - Eliminate exemptions and zero-rating of products to improve yields. ### Property taxes - More effective use of property taxes would help increase revenue mobilization and ensure a stable revenue base. - Current problem: the property rating system is inadequate and outdated. - If designed properly, property taxes can provide a stable revenue base with a progressive tax burden. ### Shift away from labor taxes - There is scope to shift the burden of taxation away from labor taxes, which could support employment growth. - Evidence: The 2012 Doing Business Report finds that labor taxes (pension and workman compensation contributions) in Zambia constitute 10.4 percent of profits. - Comparators: countries like South Africa and Mozambique have much lower labor taxes relative to profits. - Possible adjustment: lower labor taxes in a revenue-neutral way by reducing tax holidays and other incentives on corporate income taxes. *Prepared by Elif Arbatli.* ### Annex II. Mining Revenues and the Mining Fiscal Regime in Zambia ### Mining revenues: status and drivers - Although copper exports constitute about 30 percent of GDP in Zambia, mining revenues have remained relatively low. - Causes: - Generous development agreements signed in the late 1990s at privatization. - Most mining companies undertook large capital expenditures to revive production and therefore had losses carried forward. ### Reforms undertaken - During 2007–08, Zambia made significant changes to the mining fiscal regime designed to increase revenues. - Major changes included an increase in the corporate income tax and royalty rates, and the introduction of a variable income tax schedule. - The 2012 budget introduced additional changes such as a further increase in the royalty rate for base metals. ### Expected medium-term outcomes and risks - Mining related revenues should increase in the medium-term due to: - More companies reaching tax-paying status. - The current fiscal regime having a considerably higher average effective tax rate. - An authorities’ program, backed by Fund technical assistance, to improve mining revenue administration. - Investment and production depend on: - Investor burden imposed by the fiscal regime. - Investment environment, infrastructure, and the costs of doing business. - Comparative assessment: - The current fiscal regime in Zambia has a relatively large government take, especially for high cost projects. - The fiscal regime is not very progressive with respect to changes in international copper prices, which can deter investment in periods of low price expectations. - Policy implication: maintaining a positive investment environment will depend on offering a stable fiscal regime and improving infrastructure and cost of doing business. ### Tabled historical fiscal regime elements (2006–12) — selected items (as presented) - Royalty: 0.6% (2006), 3% (2007–2011), 6% (2012) - Corporate Income Tax: 25% (2006), 30% (2007–12) - Variable Income Tax: No (2006), Yes (2008–11) - Capital Expenditure Allowance: 100% for all capital expenditure (multiple years; varied in 2008) - Loss Carry Forward: 10 years (2006–12) - Withholding Taxes (non-treaty rate) on income of foreign subcontractors and interest: 0% (2006–07), 15% (2008–10) - Custom Duties: Exports are zero rated (2006–07); 15% for unprocessed copper (2008–09); 10% for unprocessed copper (2010) *Prepared by Elif Arbatli.* ### Annex III. Optimal Level of International Reserves for Zambia ### Recent reserve evolution and authorities' target - Gross official reserves reached about US$2.2 billion (3 months of prospective imports) as of December 2011, from about US$180 million (1 month of prospective imports) in 2001. - The authorities consider 3 months of import coverage, the “rule of thumb,” to be the goal for the medium term. ### Key external shock exposures - Terms of trade: - Zambia’s exports are about 38 percent of GDP and are highly concentrated in copper (around 75 percent of total export receipts). - The standard deviation of international copper price variations in 2001–10 was five times the standard deviation in 1980 and 2000. - Capital inflows (2000–10 averages and projections): - Annual average net foreign direct investment (FDI): about US$500 million (5¾ percent of GDP); projected US$953 million in 2012 (4.7 percent of GDP). - Annual average grant inflows, including current transfers: about US$380 million (almost 5 percent of GDP). - Annual average loan disbursements: around US$140 million (around 2.6 percent of GDP). - Foreign portfolio investment: foreigners’ holding of Zambian government securities was around US$110 million (around 4 percent of the total stock) in February (year as provided). ### Traditional reserve adequacy indicators — comparisons - Reserve-to-imports: - The 3 months of prospective imports rule of thumb is commonly used; Zambia’s coverage has climbed above 3 months but is still well below the average coverage of considered PSI countries. - Reserves-to-short-term external debt: - Both Zambia and the comparator PSI countries comfortably exceed the Guidotti-Greenspan rule (reserves at least equal to stock of short-term debt). - Reserves-to-broad money: - Usual benchmark range: between 5 percent and 20 percent. - For both Zambia and comparator PSI countries, the reserve-to-broad money ratio is above the suggested threshold; comparator PSI countries’ average has been higher than Zambia’s during most of the last decade. - Reserves-to-GDP: - Zambia’s reserves-to-GDP reached 12 percent of GDP in 2010, below the comparator PSI average of 19 percent. ### Reserve coverage required to absorb one-standard deviation shocks (1990–2010) - Zambia exhibits higher volatility; reserve needs (months of prospective imports) to fully absorb a one-standard deviation shock: - Current account shock: 1.9 months - Exports shock: 1.4 months - Copper price shock: 2.4 months - Observation: A one standard deviation copper price shock would almost exhaust Zambia’s 2011 level of reserves. ### New methodology and optimal reserve estimates - Methodology: the Dabla-Norris et al. (2011) / IMF (2011) cost-benefit framework defines crises as sharp drops in domestic absorption; optimal reserves balance crisis prevention/mitigation benefits against net financial cost (foregone investment returns). - Calibration: - Shock variables set at bottom 10 percentile of country-specific distribution over 2001–10. - Fundamentals: CPIA and fiscal balance set at their 2010 levels. - Baseline assumptions: fiscal deficit 3.1 percent of GDP; CPIA 3.3. - Optimal reserve ranges: - Under baseline assumptions, optimal reserves vary from 4 to 8 months of imports, depending on the unit cost of holding reserves. - If CPIA is higher (3.8, median of PSI countries), optimal reserves are smaller. - If fiscal deficit improves to 2 percent of GDP and CPIA improves, optimal reserves become even smaller. - Considering opportunity costs: - Average return of FDI in the last two years is estimated to be between 4.5 and 5 percent. - Given large infrastructure investment needs and higher opportunity costs, the model suggests optimal reserve holdings for Zambia would be between 4 and 4.5 months of imports. ### Variables used for Zambia (as presented) - Government balance, percent of GDP: -3.1 - CPIA: 3.3 - External demand growth, percent: 2.7 - Terms of trade growth, percent: -16 - Change in FDI to GDP: -3.3 - Change in aid to GDP: -3.2 *Source: Zambia 2012 Article IV Report (Annexes I–III).* ### Annex IV. External Stability Analysis ### Annex IV. External Stability Analysis ### Real effective exchange rate (REER) dynamics - The REER has appreciated steadily since the early 2000s, mostly because of the improvement in Zambia’s terms of trade. - High copper prices were a major driver of the terms of trade; copper contributed about three-fourths of export earnings. - The subsequent depreciation in 2008–09 was mainly driven by a plunge in copper prices and outflows of portfolio capital associated with the global financial crisis. - In 2011, the level of the REER was similar to the one observed in 2010. ### Methodology and current account adjustment - IMF CGER tools were used to assess the Zambian exchange rate. - Official Balance of Payments were adjusted for mining-related flows: mining companies (mostly foreign owned) were retaining a large share of mining export proceeds as rapidly increasing deposits abroad. For the exercise, these outflows were reclassified to the current account as additional dividends to better reflect their impact on the foreign currency market, the exchange rate, and international reserves. ### Exchange rate assessment results (CGER approaches) - The REER is close to its estimated equilibrium level; there is no evidence of misalignment. - Approach — REER — Norm — Underlying — Gap (Table AIV.1) - External sustainability: -8.6 — -4.7 — -11.5 - Macroeconomic balance: -7.1 — -4.7 — -7.1 - Equilibrium real exchange rate: 0 — 2 — Medium-term adjusted current account ratio to GDP. - Estimates based on the external sustainability and macroeconomic balance approaches suggest the exchange rate currently could be moderately undervalued, while the equilibrium REER estimate suggests the exchange rate is close to its equilibrium value. - The steady appreciation of the REER since the early 2000s was largely driven by changes in fundamentals, particularly the rise in copper prices. - Note: Estimates are complicated by data weaknesses and structural breaks, limiting the scope for precise point estimates. ### Competitiveness and non-price factors - Even though the exchange rate appears broadly in line with fundamentals, Zambia still has room to improve competitiveness in non-price areas. - World Bank Doing Business 2012: Zambia ranks 84th out of 183 countries. - Comparative strengths (relative to regional comparators and SSA average): starting a business, getting credit, paying taxes, enforcing contracts. - Areas requiring improvement: resolving insolvency, protecting investors, trading across borders. - Global Competitiveness Index (World Economic Forum, 2012): Zambia ranks 112th out of 142 countries. - Highlighted areas for improvement: infrastructure, health and primary education, higher education and training, labor market efficiency. - In these areas Zambia ranks between position 105 and 125. - Private sector dialogue (including mining sector) confirms issues identified by competitiveness studies: - Low productivity levels - Higher cost of transport and factor inputs - Inadequate transport infrastructure - Shortage of skilled labor ### Key implications - REER appreciation largely reflects fundamentals (not persistent overvaluation) driven by copper price increases. - Structural and institutional reforms in non-price areas are essential to complement exchange rate considerations and improve competitiveness. - Addressing transport, skills, and productivity constraints would help translate favorable external positions into broader, sustainable growth gains. *Source: Annex IV. External Stability Analysis* ### 8. External debt sustainability is ### _cr12200 - 8. External debt sustainability is ### External debt sustainability — overall finding - External debt sustainability is maintained under an array of stress tests. - The standard sensitivity analysis points to a low risk of debt distress, where debt burden indicators remain below their thresholds. - The World Bank’s Country Policy and Institutions Assessment (CPIA) ranks Zambia as a medium performer (the average 2008–10 CPIA is 3.46). Thus, the external debt burden thresholds for Zambia are: - PV of debt-to-GDP at: 40 percent - PV of debt-to-exports at: 150 percent - PV of debt-to-revenue at: 250 percent - debt service-to-exports at: 20 percent - debt service-to-revenue at: 30 percent ### Historical and bound stress scenarios - Historical scenario (uses historical average of the non-interest current account, FDI flows, real GDP growth, and the GDP deflator for the complete period): - The ratio of the PV of debt-to-GDP would increase significantly after the shocks, but would still remain below the threshold. - Most extreme bound test: - Defined as the test that yields the highest ratio in 2022. - The most extreme stress test for the debt burden indicators assumes an export value growth equivalent to its historical average minus one standard deviation in 2013–14. - This shock scenario illustrates Zambia’s vulnerability to copper price volatility and the need to diversify its export base. - Under this scenario, the ratio of the PV of debt-to-GDP doubles by 2014, but would still remain below the threshold. ### Alternative high investment–low growth scenario (stress test) - Scenario assumptions: - Constraints in appraisal, selection and project implementation capacity of public investment projects in the medium term, not mitigated through the implementation of PFM reforms. - Real GDP growth would remain about 1 percentage point below the baseline in the medium term (around 7 percent) and about ½ percentage points in the longer term (around 6 percent). - The calculated decline in GDP growth is assumed to reduce the exports-to-GDP ratio by two percentage points in the medium term and one percentage point in the long term. - The decline in GDP growth would result in lower domestic revenues and a higher financing requirement assumed to be met by additional external borrowing on commercial terms. - The additional financing would rise to about 2 percent of GDP in the medium term. - By the end of the forecast period, the domestic primary balance would deteriorate by about 1 percent of GDP compared to the baseline. - Outcome: - Under this scenario, the ratio of the PV of debt-to-GDP increases by around 13 percentage points by 2022 compared to the baseline, but would still be below the threshold. ### Public debt sustainability — baseline - Zambia’s public debt rises slightly in the medium term, but declines gradually over time. - Under the baseline assumptions: - The PV of public debt to GDP ratio would reach 24 percent in 2015 and comes down thereafter to about 16 percent by 2032. ### Public debt stress tests and risks - Risks to public debt dynamics would mainly come from: - A deterioration of the fiscal position. - Negative shocks to GDP growth. - Fixed primary balance scenario (fixing the primary balance unchanged from 2012): - Underscores the negative effects of not continuing to maintain fiscal discipline over the medium term to maintain public debt sustainability. - Under this scenario, PV of debt-to-GDP ratio and PV of debt-to-revenue ratio keep rising over time. - Bound tests: - Risk would mainly come from lower GDP growth. - Highlights the need for Zambia to diversify its production structure to mitigate vulnerabilities related to potential declines in mining production in the long term and to improve public investment management in order to ensure productivity-enhancing investments. *Source: 2012 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS ZAMBIA* ### 12. Zambia is considered at low risk of ### _cr12200 - 12. Zambia is considered at low risk of ### Debt risk assessment - Zambia is considered at low risk of debt distress. - The external debt indicators remain below their thresholds in the baseline scenario and bound tests. - The public debt DSA suggests that Zambia’s overall public sector debt dynamics is sustainable in light of the current size and the evolution of the domestic debt stock in the baseline scenario. - The fixed primary balance scenario demonstrates the need for an improved fiscal position. ### Macroeconomic and fiscal context (selected assumptions and outcomes) - Real GDP growth (in percent): 6.4; 7.6; 6.6; 5.8; 1.1; 7.7; 8.3; 7.8; 8.0; 7.9; 7.7; 7.9; 6.9; 6.7; 6.9 (presented across periods). - GDP deflator in US dollar terms (change in percent): -17.8; 17.5; 9.2; 12.5; 16.3; -0.1; 2.2; 2.5; 2.6; 2.7; 2.8; 2.1; 3.0; 3.1; 3.0. - Effective interest rate (percent) 5/: 1.6; 1.1; 1.4; 1.4; 0.5; 1.8; 2.8; 2.9; 3.5; 3.5; 3.4; 3.0; 3.1; 3.1; 3.1. - Grant element of new public sector borrowing (in percent): 2.0; 31.5; 31.3; 31.1; 30.9; 30.7; 26.3; 2.9; 3.8; 21.5 (reported across periods). - Government revenues (excluding grants, in percent of GDP): 16.0; 17.8; 21.3; 19.3; 20.9; 22.0; 22.9; 23.7; 24.0; 24.7; 25.5; 25.0. - Aid flows (in Billions of US dollars) 7/: 0.4; 0.3; 0.3; 0.7; 0.7; 0.7; 0.7; 0.7; 0.7; 0.9; 1.3. - o/w Grants: 0.4; 0.3; 0.3; 0.4; 0.4; 0.4; 0.4; 0.4; 0.4; 0.5; 0.7. - o/w Concessional loans: 0.0; 0.0; 0.0; 0.3; 0.3; 0.3; 0.3; 0.3; 0.3; 0.4; 0.7. - Grant-equivalent financing (in percent of GDP) 8/: 1.8; 2.3; 2.0; 1.8; 1.7; 1.6; 1.0; 0.5; 1.0. - Nominal GDP (Billions of US dollars): 12.8; 16.2; 18.8; 20.3; 22.4; 24.8; 27.5; 30.4; 33.7; 55.3; 143.1 (presented across periods). ### Public and external debt indicators (selected levels and ratios) - External debt (nominal) 1/: 11.7; 10.5; 12.1; 14.8; 14.6; 14.5; 14.1; 13.5; 13.0; 10.8; 8.2. - o/w public and publicly guaranteed (PPG): 11.1; 10.0; 11.6; 14.4; 14.2; 14.0; 13.6; 13.1; 12.5; 10.4; 7.9. - PV of external debt (selected values across projections): 9.6; 12.7; 12.3; 12.0; 11.5; 10.9; 10.3; 8.3; 6.4. - In percent of exports: 19.9; 25.9; 24.4; 23.5; 22.3; 20.7; 19.4; 15.6; 14.3. - PV of PPG external debt (selected values): 9.1; 12.3; 11.9; 11.6; 11.1; 10.5; 9.9; 8.0; 6.1. - In percent of exports: 19.0; 25.0; 23.5; 22.7; 21.5; 19.9; 18.6; 14.9; 13.7. - In percent of government revenues: 42.9; 63.9; 57.0; 52.7; 48.3; 44.2; 41.1; 32.2; 24.0. - Debt service-to-exports ratio (in percent): 11.4; 2.5; 1.8; 4.4; 3.7; 3.3; 3.4; 2.8; 3.3; 4.3; 2.7. - PPG debt service-to-exports ratio (in percent): 1.2; 0.6; 0.4; 1.1; 1.4; 1.2; 1.4; 1.6; 1.5; 2.7; 1.7. - PPG debt service-to-revenue ratio (in percent): 2.7; 1.7; 1.0; 2.9; 3.4; 2.8; 3.2; 3.5; 3.2; 5.8; 3.0. - Total gross financing need (Billions of U.S. dollars): -0.5; -1.6; -0.9; -0.8; -1.4; -1.7; -1.9; -2.4; -2.6; -2.2; -2.9. - Non-interest current account deficit that stabilizes debt ratio: -4.5; -6.0; -2.9; -4.2; -2.7; -3.1; -3.1; -3.2; -3.5; -1.2; 0.1. ### Public sector debt dynamics (Table 2 highlights) - Public sector debt (in percent of GDP): 28.1; 26.6; 27.7; 29.5; 28.4; 27.2; 26.0; 24.5; 23.4; 21.0; 16.8. - o/w foreign-currency denominated: 11.1; 10.0; 11.6; 14.4; 14.2; 14.0; 13.6; 13.1; 12.5; 10.4; 7.9. - Change in public sector debt: 2.9; -1.4; 1.1; 1.8; -1.1; -1.1; -1.3; -1.4; -1.2; -0.4; -0.3. - Identified debt-creating flows (selected): Primary deficit: 0.9; 1.4; 2.4; -0.2; 1.5; 2.5; 0.5; 0.5; 0.8; 0.7; 0.6. - Revenues and grants (in percent of GDP): 18.9; 19.6; 22.7; 21.0; 22.7; 23.5; 24.3; 25.0; 25.2; 25.6; 26.0. - of which: grants: 2.9; 1.8; 1.4; 1.7; 1.8; 1.6; 1.4; 1.3; 1.2; 0.9; 0.5. - Automatic debt dynamics: -2.6; -2.7; -2.3; -1.7; -1.4; -1.2; -1.3; -1.2; -1.1; -0.8; -0.6. - Contribution from interest rate/growth differential: -1.3; -2.0; -2.1; -1.4; -1.2; -1.0; -1.1; -1.0; -0.9; -0.6; -0.4. - PV of public sector debt (selected): 25.2; 27.4; 26.1; 24.8; 23.4; 21.9; 20.7; 18.5; 15.0. - o/w foreign-currency denominated (selected): 9.1; 12.3; 11.9; 11.6; 11.1; 10.5; 9.9; 8.0; 6.1. - Gross financing need 2/: 8.3; 9.6; 9.7; 10.4; 8.3; 7.9; 7.7; 7.4; 6.9; 6.9; 5.3. - PV of public sector debt-to-revenue and grants ratio (in percent): 111.2; 130.3; 115.0; 105.4; 96.2; 87.8; 82.2; 72.4; 57.6. ### Stress tests and sensitivity analysis (selected findings) - For bound tests, the most extreme stress test that yields the highest ratio in 2022 corresponds to an export shock. - Sensitivity analysis tables present alternative scenarios including: - A1. Key variables at their historical averages in 2012-2032. - A2. New public sector loans on less favorable terms in 2012-2032. - A3. Alternative Scenario: High investment-low growth. - Bound tests include shocks such as: - B1. Real GDP growth at historical average minus one standard deviation in 2013-2014. - B2. Export value growth at historical average minus one standard deviation in 2013-2014. - B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014. - B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014. - B5. Combination of B1-B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2013. ### Policy implications and recommendations - An improved fiscal position is needed under the fixed primary balance scenario. - In addition to sound macroeconomic policies, the DSA highlights the need for: - Strengthening debt management. - Developing project appraisal capacity. - These measures are necessary to maintain debt sustainability and productivity-enhancing investments in the face of access to international markets and a gradual increase in non-concessional borrowing. *Sources: Country authorities; and staff estimates and projections. (ZAMBIA 2012 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS)* ### 1. Pilot to implement small scale solutions to improve ### _cr12200 - 1. Pilot to implement small scale solutions to improve ### IMF technical and joint work program (timing and items) - Pilot to implement small scale solutions to improve competitiveness in the cattle, tourism and mining industries. — July 2011 - Institutional review of the transport sector — July 2011 - Study on construction industry unit rates (road sector) — September 2011 - Zambia Poverty assessment — December 2011 - Social Safety Net Review — March 2012 - Study on Agricultural Competitiveness in Zambia — May 2012 - IMF technical assistance and missions in next 12 months: - Technical assistance: tax administration resident advisor, Zambia revenue authority — January 2011 - Technical assistance: Central bank capacity building resident advisor, Bank of Zambia — September 2011 - Staff visit, Budget discussions — August 2012 - 2013 Article IV mission — March 2013 - Fund/Bank coordination: - Fund request to Bank: Medium-term macroeconomic framework - Joint product in next 12 months: DSA — March 2013 ### Assessment of data adequacy for surveillance (summary of main shortcomings) - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - National accounts: - High degree of uncertainty attached to estimates of the level and growth rate of real GDP due to 1994 being the latest benchmark year for value-added ratios under the production approach. - No appropriate indicators exist for many important industry areas (wholesale and retail trade, construction, business services, many other service industries consisting mainly of small-scale private service providers). - Data on total production and intermediate consumption of establishments are not available. - On the expenditure side, no reliable indicators of household consumption exist; private final consumption expenditure is derived as a residual. - Source data for estimating gross fixed capital formation and changes in stocks are incomplete. - Lack of high frequency real sector data to support more flexible monetary management. - Causes: resource constraints and organizational weakness within the Central Statistical Office affecting timely production of economic statistics. - Price statistics: - CPI broadly adheres to international methodological standards and classification follows the Classification of Individual Consumption by Purpose. - With STA technical assistance, a new CPI series with updated weights based on the latest household budget survey was released in February 2012. - Government finance statistics: - Data provision broadly adequate for surveillance but transactional coverage limited to government operations and transactions in nonfinancial assets. - Data on transactions in financial assets and liabilities are unavailable. - Authorities report monthly budget releases data to AFR in a timely manner, but data are often subject to substantial revisions and data on extra-budgetary institutions and local governments are not available. - STA is providing technical assistance in this area. - Monetary statistics: - Data provision broadly adequate for surveillance. - Since the 2005 monetary and financial statistics mission, noticeable improvement in the quality of monetary accounts compiled and reported in accordance with the SRFs for the BoZ and other depository corporations (ODCs). - Balance of payments statistics: - Little progress since the 2004 Data ROSC mission. - Data sources remain poor; some items are estimated without reference to current source data and compilation methods are inadequate. - Resources for balance of payments compilation increased but still inadequate; coordination between BoZ and CSO had improved. - 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 generally adequate for timeliness but fall short in coverage; indirect estimation methods used, some unchanged for many years and out of date. - Source data on private sector foreign assets and liabilities are insufficient to compile an International Investment Position statement. - External and domestic debt statistics: - Data provision broadly adequate for surveillance. - Recent technical assistance facilitated improvements in consolidation of debt databases for both external and domestic debt; further work underway. ### Data standards and quality - Zambia has participated in the General Data Dissemination System (GDDS) since November 2002. - A Data ROSC Assessment was published in February 2005. ### Table of Common Indicators Required for Surveillance — selected entries (as of April 30, 2012) - Exchange rates: - Date of Latest Observation: April 6, 2012 - Date Received: April 10, 2012 - Frequency of Data: D - Frequency of Reporting: D - Frequency of Publication: D - International reserve assets and reserve liabilities of the monetary authorities: - Date of Latest Observation: April 6, 2012 - Date Received: April 10, 2012 - Frequency of Data: W - Frequency of Reporting: W - Frequency of Publication: M - Reserve/base money: - Date of Latest Observation: April 6, 2012 - Date Received: April 10, 2012 - Frequency of Data: W - Frequency of Reporting: W - Frequency of Publication: F - Memo Items: Data Quality – Methodological soundness: LO, LO, LO, LO - Data Quality – Accuracy and Reliability: LO, O, O, O, O - Broad money: - Date of Latest Observation: February 2012 - Date Received: April 16 2012 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Central bank balance sheet: - Date of Latest Observation: February 2012 - Date Received: April 16 2012 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Consumer Price Index: - Date of Latest Observation: February. 2012 - Date Received: March 30, 2012 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - Memo Items: Data Quality – Methodological soundness: O, LO, O, LO - Data Quality – Accuracy and Reliability: LNO, LO, LO, LNO, LO - Revenue, expenditure, balance and composition of financing — general government: NA (not available) - Memo Items: Data Quality – Methodological soundness: LO, LNO, LNO, LO - Data Quality – Accuracy and Reliability: LNO, LO, O, O, LNO - Stocks of central government and central government–guaranteed debt: - Date of Latest Observation: Dec. 31, 2011 - Date Received: April 10 2012 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: A (Note: table includes coding conventions D = Daily; W = Weekly; M = Monthly; Q = Quarterly; A = Annually; I = Irregular; NA = Not Available. Data quality codes: O = fully observed; LO = largely observed; LNO = largely not observed; NO = not observed.) ### Public Information Notice (PIN) — Executive Board conclusions (July 19, 2012) - Background and recent performance: - Real GDP growth averaged 5.2 percent in 2000–10 (or 3.1 percent per capita). - Inflation declined from 30 percent to single digits. - Debt declined sharply; international reserves increased to comfortable levels. - Real GDP growth estimated to have been strong in 2011, driven by a record maize harvest and strong expansion in bank credit. - Inflation continued to decline, broadly in line with the authorities’ target of 7 percent. - Despite copper prices rising to record highs, the external current account surplus narrowed significantly, reflecting strong expansion in imports and a decline in grants. - Gross international reserves rose above $2 billion for the first time, equivalent to 3 months of prospective imports. - Preliminary data suggest the fiscal deficit of the central government remained flat at around 3 percent of GDP in 2011, as election-related spending was offset by a one-off payment of mining tax arrears. - 2012 projections and policy settings: - Real GDP in 2012 projected to rise by 7.7 percent, reflecting strong growth in copper production and non-maize agriculture, and an expansionary fiscal policy. - The 2012 budget targets a deficit of 4.1 percent of GDP and a significant increase in investment. - More than half of budget financing is expected to come from a US$500 million sovereign bond issue; net domestic financing targeted to remain low at about 1 percent of GDP. - Inflation projected to remain close to around 6 percent in 2012. - Bank of Zambia changed monetary policy framework from reserve money targeting to use of a policy rate as the main monetary policy tool. - Executive Directors’ assessment and recommendations: - Commended authorities for sound macroeconomic management and strong recent performance. - Noted risks from volatility of copper prices and delays in implementing measures needed to meet the 2012 budget deficit target. - Stressed need for continued commitment to strong policies and implementation of structural reforms to safeguard macroeconomic stability and make growth more inclusive. - Fiscal policy should prioritize growth-enhancing expenditures and mobilize revenues to create space to achieve fiscal objectives. - Emphasized reforms to maize marketing and pricing, fertilizer subsidies, and public sector pension funds to restore fiscal sustainability and correct market distortions. - Recommended revenue-enhancing measures including strengthening tax administration and reducing subsidies and incentives. - Called for reinstatement of the automatic petroleum price adjustment mechanism and implementation of the multi year electricity tariff framework to minimize fiscal risks from pricing below cost recovery. - Urged public financial management reforms to improve budgetary planning and execution and prioritizing spending; welcomed plan to complete implementation of the Treasury Single Account. - Encouraged strengthening investment and debt management capacity to support scaling up infrastructure spending and increased use of non-concessional financing. - Endorsed enhancements to the monetary policy framework to support a low inflation objective; encouraged vigilance to inflationary pressures and tightening policy if needed. - Noted flexible exchange rate regime helped weather external shocks and highlighted that increasing reserve coverage would provide an added buffer. - Welcomed efforts to strengthen the financial sector and improve access to financial services; urged minimizing risks from implementation of new minimum capital requirement for commercial banks and redenomination of the local currency. - Emphasized structural reforms to achieve economic diversification and more inclusive growth; encouraged a broad-based reform strategy for the agriculture sector and strengthened formal sector development, in particular improving the business climate. ### Zambia: Selected Economic Indicators, 2009–12 (key figures) - GDP growth at constant prices: - 2009: 6.4 - 2010: 7.6 - 2011: 6.6 - 2012 (Proj.): 7.7 - Mining growth: - 2009: 20.3 - 2010: 15.2 - 2011: -5.2 - 2012 (Proj.): 23.0 - Non-mining growth: - 2009: 5.2 - 2010: 6.8 - 2011: 7.9 - 2012 (Proj.): 6.2 - GDP deflator: - 2009: 10.7 - 2010: 11.7 - 2011: 12.8 - 2012 (Proj.): 4.8 - GDP at market prices (Billions of kwacha): - 2009: 64,616 - 2010: 77,667 - 2011: 93,354 - 2012 (Proj.): 105,383 - GDP per capita (US$): - 2009: 990 - 2010: 1,221 - 2011: 1,414 - 2012 (Proj.): 1,457 - Consumer prices (average): - 2009: 13.4 - 2010: 8.5 - 2011: 8.7 - 2012 (Proj.): 5.6 - Consumer prices (end of period): - 2009: 9.9 - 2010: 7.9 - 2011: 7.2 - 2012 (Proj.): 6.0 - Terms of trade (deterioration -): - 2009: -16.6 - 2010: 35.2 - 2011: 4.1 - 2012 (Proj.): -3.0 - Average exchange rate (kwacha per US$): - 2009: 5,046 - 2010: 4,797 - 2011: 4,861 - 2012: ... - Domestic credit to the private sector (end of period): - 2009: -5.7 - 2010: 15.4 - 2011: 27.9 - 2012 (Proj.): 17.5 - Reserve money (end of period): - 2009: 19.3 - 2010: 27.8 - 2011: 6.8 - 2012 (Proj.): 8.6 - Broad Money (M3): - 2009: 7.7 - 2010: 29.9 - 2011: 21.7 - 2012 (Proj.): 17.0 - Gross investment: - 2009: 19.6 - 2010: 21.1 - 2011: 23.4 - 2012 (Proj.): 23.6 - Government investment: - 2009: 3.4 - 2010: 3.2 - 2011: 5.4 - 2012 (Proj.): 7.4 - National savings: - 2009: 23.8 - 2010: 28.1 - 2011: 24.7 - 2012 (Proj.): 24.7 - Central government revenue (percent of GDP): - 2009: 18.9 - 2010: 19.6 - 2011: 22.5 - 2012 (Proj.): 20.9 - Central government expenditure (percent of GDP): - 2009: 21.3 - 2010: 22.6 - 2011: 25.5 - 2012 (Proj.): 25.0 - Net lending/borrowing (central government, percent of GDP): - 2009: -2.4 - 2010: -3.1 - 2011: -3.0 - 2012 (Proj.): -4.1 - Excluding grants: 2009: -5.3; 2010: -4.8; 2011: -4.5; 2012 (Proj.): -5.8 - External current account balance (percent of GDP): - 2009: 4.2 - 2010: 7.1 - 2011: 1.2 - 2012 (Proj.): 1.2 - Gross international reserves (months of prospective imports): - 2009: 3.7 - 2010: 3.0 - 2011: 3.0 - 2012 (Proj.): 3.3 - Total central government debt (end-period, percent of GDP): - 2009: 22.0 - 2010: 22.1 - 2011: 22.3 - 2012 (Proj.): 24.1 - External: 2009: 10.0; 2010: 9.1; 2011: 10.2; 2012 (Proj.): 12.5 - Stock of domestic debt, net: 2009: 12.1; 2010: 12.9; 2011: 12.1; 2012 (Proj.): 11.6 ### Statement by Moeketsi Majoro, Executive Director for Zambia (June 13, 2012) — highlights - Supported staff report and authorities’ macroeconomic policy stance and structural reform agenda anchored on the Sixth National Development Plan (SNDP) covering 2011-2015. - SNDP pillars: improving infrastructure and human development to accelerate diversified economic growth, attain the Millennium Development Goals, lower inflation and strengthen resilience to external shocks. - Noted that macroeconomic policy stance and structural reforms remain valid despite change in administration on September 23, 2011. - Reported economic performance: economic growth robust at 6.5 percent in 2011 driven by a record maize harvest and expanding bank credit; inflation recorded at 7.2 percent at end- (text truncated in source). *IMF staff report and associated materials, Zambia — Article IV consultation and informational annex (as in source content).* ### 2011. The fiscal deficit was low, at 3.5 percent of GDP. The external current account surplus ### _cr12200 - 2011. The fiscal deficit was low, at 3.5 percent of GDP. The external current account surplus ### Economic performance and outlook - 2011: - The fiscal deficit was low, at 3.5 percent of GDP. - Gross international reserves stood at 3 months of prospective imports. - The external current account surplus narrowed. - 2012 projections: - Growth is expected to be even higher, at 7.7 percent, on account of strong growth in the mining sector and non-maize agriculture as well as expansionary fiscal policy. - Inflation is to be contained at around 6 percent. - The budget deficit is targeted at 4.1 percent of GDP as a consequence of a ramp up in infrastructure capital spending. - Net domestic financing is targeted at 1 percent of GDP. - Medium-term: - Growth is expected to remain strong, propelled by the mining and manufacturing sectors. ### Key challenges and strategic objectives - Key challenges identified: - Enhancing revenue performance in the medium term. - Containing spending. - Reducing unemployment and high rural poverty. - Enhancing diversification. - Authorities’ commitments and objectives: - Ensure sustainable and high growth to create employment and reduce poverty while maintaining macroeconomic stability. - Create fiscal space for growth-enhancing expenditures. - Target low inflation and gradual migration to inflation targeting. - Enhance structural reforms aimed at deepening the financial sector, over-hauling maize marketing and pricing. - Continue public financial management reforms, including better budgetary planning and execution. ### Investment climate - Credit ratings and market signals: - Fitch Ratings revised Zambia’s long-term foreign and local currency issuer default rating from stable to negative on account of reversal of fraudulent/corrupt transactions and unauthorized statements. - Standard & Poor’s maintained the Country’s B+ rating. - Authorities’ position: - The fight against corruption and the handling of unauthorized statements should not be interpreted as reflecting policy reversal. - Evidence indicates mining companies are moving forward with ambitious plans to expand operations. - Comment on reporting: - Expectation expressed for a balanced staff report on these issues. ### Fiscal policy (detailed) - Fiscal objective: - Fiscal consolidation while creating space for priority infrastructure and social spending. - Revenue measures: - Improve collection of taxes including enhancement of mining tax through technical assistance from cooperating partners and the IMF. - The IMF has stationed a Resident Advisor aimed at improving the collection of mining taxes, which are currently under performing (Figure 6, page 15) compared to comparators. - Continued implementation of a comprehensive reform of tax policy. - Expenditure measures: - Control the growth of the wage bill. - Enhance domestically financed priority infrastructure and social spending. - If revenues do not match projections, authorities are ready to undertake expenditure re-prioritization particularly in current expenditure. - Only slow moving capital expenditure will be reprioritized within the capital budget. ### Monetary and financial policies - Monetary objective: - Maintain low and stable inflation at single digits without constraining growth and private sector credit expansion. - Policy stance and instruments: - Monetary policy was accommodative towards the end of 2011 with both the reserve requirements and liquid assets ratios reduced in an attempt to lower high lending ratios. - Authorities continue to monitor closely developments in the financial sector to ensure stability and stand ready to tighten monetary policy should circumstances warrant. - Current practice: base the monetary framework on reserve money targeting. - Ongoing efforts to shift to interest rates as the main instrument to anchor inflation expectations—as evidenced by the recent introduction of the policy rate. - Staff support noted for the shift toward interest-rate-based framework. ### Structural reforms - Ongoing reform areas: - Rolling out the implementation of the treasury single account. - The second phase of the Financial Sector Development Plan, including lender of last resort arrangements. - Addressing inadequacies in maize marketing. - Ensuring cost recovery in energy pricing. - Improving debt management capacity and project appraisal. - Capacity building: - Authorities intend to improve project and debt management capacity at sectoral and central level to enhance project/debt selection, effective implementation and oversight. - Staff support noted, with caution that these improvements cannot be achieved overnight. ### Agriculture, food policy, and social programs - Maize pricing and the Food Reserve Agency: - Agreement with staff analysis that “keeping maize prices high disadvantaged the urban poor and many poor smallholders that are the net buyers of maize”, page 4. - Authorities committed to reforming the program by refocusing the role of the Food Reserve Agency and attaining a more market based pricing system. - Farmer Input Support Program (FISP): - Authorities addressing poor targeting of FISP, which has a bias towards maize production, by introduction of the electronic voucher system that will better target beneficiaries and allow for a more diversified crop range. - Electronic voucher pilot: - Piloting in 10 districts in the 2012/13 agricultural season with the aim of up-scaling the program in later years. - Expected to diversify the agriculture sector, allow for growing of cash crops, and have a considerable impact on reducing high poverty levels. ### Inclusive growth and social dialogue - Comments on inclusive growth: - Staff commended for informative annexes. - Expectation of outcomes from the recent tripartite conference on inclusive growth in Zambia organized by the authorities, the International Labor Organization and the IMF. - Anticipation of the conference findings in the near future. *Source: _cr12200 - 2011. The fiscal deficit was low, at 3.5 percent of GDP. The external current account surplus* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12200.pdf_