## _cr15152

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### Recent developments: growth, inflation, and exchange rate
- Real GDP growth: 5.6 percent in 2014 (down from 6.7 percent in 2013).
- Mining sector: change in 2014 was -7.2 percent; mining contraction drove the 2014 slowdown.
- Non-mining sector growth: 7.1 percent in 2014.
- Consumer prices (average): 7.8 percent in 2014; Consumer prices (end of period): 7.9 percent in 2014.
- Year-on-year inflation fell from a peak of 8.1 percent in November 2014 to 7.2 percent in March 2015, largely driven by lower fuel prices.
- Kwacha exchange rate:
  - Average exchange rate: 6.2 kwacha per U.S. dollar in 2014 (depreciation +: 14.0 percent in 2014).
  - Depreciated by about 20 percent in the first half of 2014; depreciated by about 20 percent Jan–Mar 2015.
- Reserve indicators:
  - Gross International Reserves: 3.8 months of prospective imports in 2014.
  - Excluding FDI-financed imports: 4.4 months in 2014.
- Monetary policy responses:
  - Feb–May 2014: policy rate from 9.75 to 12 percent; reserve requirements from 8 to 14 percent; FX intervention $500 million.
  - Nov 2014 MPC: policy rate increased by 50 basis points to 12.5 percent; rate kept at 12.5 percent at Feb 2015 MPC.
  - Jan–Mar 2015: policy rate unchanged at 12.5 percent; reserve requirements from 14 to 18 percent; FX intervention $150 million.
  - BoZ tightened monetary policy to contain inflation and counter depreciation pressures.

### Fiscal developments and vulnerabilities
- Central government cash fiscal deficit: 6.5 percent of GDP in 2013; 6.0 percent of GDP in 2014.
- Central government budget (percent of GDP, 2014):
  - Revenue: 19.3 percent
    - Taxes: 15.8 percent
    - Grants: 0.8 percent
    - Other revenue: 2.7 percent
  - Expenditure: 24.8 percent
    - Expense: 19.4 percent
    - Net acquisition of nonfinancial assets: 5.4 percent
  - Net lending/borrowing: -6.0 percent (excluding grants: -6.8 percent)
  - Net incurrence of liabilities: 6.2 percent
    - Domestic: 1.0 percent
    - Foreign: 5.3 percent
  - Government deposits: 2.8 percent of GDP in 2014 (down from 3.3 percent in 2013 and 5.5 percent in 2012).
- Outstanding VAT refund claims of exporters: 1 percent of GDP at end-2013 → 3 percent of GDP at end-2014.
- Domestic arrears: 2.5 percent of GDP in 2014 (including PSPF, contractors, agricultural subsidy obligations).
- Public debt (percent of GDP, end-period): Total central government debt, gross 35.1 percent in 2014 (External 18.4 percent; Domestic 16.7 percent).
- Underlying deficit (adjusted for accumulation of VAT refund claims and expenditure arrears): rose from 7.5 percent of GDP in 2013 to 10.6 percent of GDP in 2014.

### Fiscal measures, 2015 budget and staff estimates
- 2015 budget target (cash deficit): -4.6 percent of GDP.
- Staff estimates without further measures:
  - Shocks and unbudgeted expenditures would likely add about 4.0 percent of GDP to the deficit.
  - Clearance of expenditure arrears (not budgeted) would add 1.5 percent of GDP, taking the cash deficit to 10.1 percent of GDP.
- Authorities proposed measures to reduce prospective cash deficit to -7.7 percent of GDP.
- Fiscal adjustment package (total effect): 4,407 Millions of kwacha; 2.4 percent of GDP.
  - Revenue measures: 1,050 Millions of kwacha; 0.6 percent of GDP.
    - Extra sales of maize: 700 Millions of kwacha; 0.4 percent of GDP.
    - Administrative reforms: 350 Millions of kwacha; 0.2 percent of GDP.
  - Expenditure measures: 3,357 Millions of kwacha; 1.8 percent of GDP.
    - Goods and services: 1,007 Millions of kwacha; 0.5 percent of GDP.
    - Compensation of public employees: 250 Millions of kwacha; 0.1 percent of GDP.
    - Efficiency gains on agriculture subsidies: 400 Millions of kwacha; 0.2 percent of GDP (FISP: 200; FRA: 200).
    - Capital spending: 1,700 Millions of kwacha; 0.9 percent of GDP.

### External sector and reserves
- Current account balance: -1.7 percent of GDP in 2014 (5.5 percent in 2012; -0.6 percent in 2013).
- Eurobond issuance and reserves:
  - $1 billion Eurobond issued in April 2014; helped gross international reserves rise to $3,078 million (3.8 months of imports) in 2014 from $2,684 million (3.1 months) in 2013.
  - Reserves later fell back to end-2013 level partly due to FX intervention.
- Sovereign bond yields:
  - 2014 Eurobond yield at issuance: 8.625 percent; 3 percentage points higher than 2012 Eurobond at issuance.

### Mining sector, taxation changes and actions
- Mining accounts for three quarters of Zambia’s export earnings.
- Change to royalty-based regime introduced January 2015 (royalty-only: 8 percent underground; 20 percent open cast) adversely impacted mining outlook; mining revenue in Jan–Feb 2015 was about 40 percent lower than projected.
- Cabinet approved return to a mining fiscal regime similar to 2014 (corporate income tax and uniform royalty) on April 20, expected to become effective from July 1 pending parliamentary approval.
- Authorities partially addressed VAT refund documentation requirements in February 2015; outstanding refund claims unresolved as of report.

### Outlook and projections (selected)
- Growth projection: average 5.5–7 percent a year over the medium term (staff projects medium-term growth at 6–7 percent a year in various passages).
- 2015 growth: expected to be 5.6 percent (2014 level) in staff baseline; medium-term projection 6–7 percent a year.
- Inflation projection: projected to stay in single digits and decline gradually to 5 percent over the medium term; staff projects inflation to reach 8 percent in 2015 and decline to 5 percent in the medium term.
- Gross international reserves (US$ billions, Text Table 1): 2.7 (2013), 3.1 (2014), 3.2 (2015), 3.5 (2016), 3.9 (2017), 4.3 (2018), 4.8 (2019), 5.2 (2020).
- Months of prospective imports (Text Table 1): 3.1 (2013), 3.8 (2014), 3.7 (2015), 3.8 (2016), 3.8 (2017), 3.8 (2018), 3.9 (2019), 4.0 (2020).
- Copper price (US$/tonne, Text Table 1): 7,331 (2013), 6,863 (2014), 5,825 (2015), 5,810 (2016), 5,785 (2017), 5,763 (2018), 5,744 (2019), 5,734 (2020).
- Oil price (US$/barrel): 104 / 96 / 58 / 66 / 70 / 72 / 73 / 74 (years correspond to 2013–2020).

### Risks and scenarios
- Key downside risks:
  - Delayed fiscal adjustment in the lead-up to general elections in 2016.
  - Persistent low copper prices.
  - Policy uncertainties undermining investment and mining operations.
- External risks (Box 2 highlights):
  - Surge in global financial market volatility: Likelihood High; Expected Impact Medium.
  - Protracted slower growth in advanced/emerging economies: Likelihood High; Expected Impact High.
  - Geopolitical risks (Middle East, Russia/Ukraine): Likelihood Medium; Expected Impact Medium.
- Domestic risks:
  - Delayed fiscal adjustment: Likelihood Medium; Expected Impact High.
  - Loss of investor confidence: Likelihood Medium; Expected Impact Medium to High.
- Upside scenario:
  - Reversal of royalty-only mining fiscal regime could lead to higher copper production and growth than baseline.

### Debt sustainability and medium-term assumptions
- Public debt (percent of GDP, total central government debt gross): 35.1 percent in 2014; projected 39.6 percent in 2015; peak PV of total public debt projected to reach about 39 percent of GDP in 2017 under baseline, declining thereafter.
- DSA assumptions and highlights:
  - Real GDP growth projected strong at 6–7 percent over the medium term; long-run growth around 5 percent.
  - Copper production expected to reach over 1.4 million tons by 2020.
  - FDI expected to stabilize at 6.6 percent of GDP.
  - Fiscal deficit (cash basis) projected to temporarily increase in 2015 then reduce to 4 percent of GDP by 2018 and to 3 percent of GDP by 2020.
  - Net external financing need estimated at almost 6 percent of GDP in 2015 even after measures; staff recommended limiting domestic financing to less than 2 percent of GDP in 2015.
- Stress-test findings:
  - Debt service-to-revenue ratio breaches threshold under several shocks (exports, U.S. dollar GDP deflator, one-time depreciation), especially if external funding on commercial terms.
  - Most extreme stress test often corresponds to an Exports shock.

### Policy recommendations and priorities (Executive Board and staff)
- Fiscal policy:
  - Significant fiscal consolidation in 2015 and over the medium term to reduce the deficit and stabilize debt.
  - Reduce overall fiscal deficit to 3 percent of GDP over the medium term to stabilize the debt-to-GDP ratio at around 40 percent.
  - Contain the wage bill; limit domestic financing to less than 2 percent of GDP in 2015.
  - Target social spending through cash transfers; scale up social cash transfer program by reallocating resources from inefficient subsidies.
  - Swift action to resolve outstanding VAT refund claims to exporters.
  - Prioritize capital spending and strengthen project selection; prudence in commercial borrowing; develop comprehensive debt management strategy (consider sinking fund for Eurobonds).
- Public financial management:
  - Continue implementation of IFMIS and Treasury Single Account; roll out TSA beyond MoF; resolve IFMIS implementation issues (44 out of 51 institutions reached).
  - Improve cash-flow and deposit management to avoid arrears accumulation; strengthen cash flow forecasting.
- Monetary and exchange rate policy:
  - Support BoZ’s commitment to maintain a tight monetary policy stance to contain inflationary pressures.
  - Maintain exchange rate flexibility and rebuild reserves toward a 4-month import cover target.
  - Consider raising policy rate temporarily if further tightening is needed.
  - Remove interest rate caps as they restrict access to credit.
- Mining sector and revenue:
  - Resolve mining fiscal regime uncertainty quickly; preferably restore a regime combining royalty and CIT while undertaking consultative review.
  - Avoid mine-by-mine agreements; settle outstanding VAT refund claims.
- Financial sector and inclusion:
  - Strengthen banking supervision; continue stress testing and financial stability monitoring.
  - Encourage financial inclusion via Credit Reference Bureau expansion, agent banking, unified collateral registry; remove lending rate ceilings.
- Competitiveness and inclusive growth:
  - Improve business climate by restraining labor costs, ensure regulatory stability, address infrastructure and electricity supply constraints, develop skills.
  - Rationalize farm subsidies (FISP, FRA) and reallocate savings to social cash transfers; limit FRA stock to no more than 500,000 metric tons of maize.
  - Revisit fuel procurement and pricing to ensure full cost recovery and transparency.

### Financial sector soundness (selected indicators)
- Banking sector:
  - NPLs: 15 percent of total loans in 2010 → 6 percent in December 2014 (also reported as 6.1 percent in 2014 in FSI).
  - Banks’ total credit to private sector: 14 percent of GDP in 2014 (regional average 21 percent).
  - Exposure to foreign currency loans: 25 percent of total loans (other series report 29.0 percent foreign currency loans to total gross loans in 2014).
  - Loan-to-deposit ratios: 60-65 percent.
  - Tier 1 and total capital adequacy ratios: 25 and 27 percent, respectively (FSI shows regulatory capital to RWA 27.0 percent in 2014; tier 1 24.6 percent).
  - Credit to private sector (percent of GDP): 13.6 percent in 2014.
- Financial soundness indicators (2008–14, selected):
  - Past due advances (NPL) to total advances (percent): 6.1 in 2014.
  - Return on average assets (percent): 3.7 in 2014.
  - Liquid assets to total assets (percent): 35.8 in 2014.

### Social and development context
- Poverty:
  - Over 60 percent of the population in extreme poverty (above sub-Saharan Africa average 48 percent).
  - Urban poverty about 30 percent; rural poverty over 70 percent.
- Education and health targets and indicators cited (selected):
  - Proportion of population living in extreme poverty (%): historical entries and 2015 Target: 29.
  - Under-5 mortality, maternal mortality, HIV prevalence, ITN coverage: detailed historical and target figures presented in source tables.

### Statistics, data adequacy and program workplan
- Data provision: "some shortcomings, but is broadly adequate for surveillance"; fiscal reporting source data and compilation issues particularly problematic.
- National accounts: GDP rebased to 2010; quarterly GDP estimates planned.
- Monetary and BOP: BoZ compiles BOP and IIP according to BPM6; improvements from new surveys.
- IMF near-term work program (selected timing from source): Analytical work on mining taxation (June/July 2015), DPO focused on PFM reforms ($50 million) — June 2015, TA programs (PFM, e-procurement, pay policy reform, financial inclusion) with various start dates in 2015–2016.
- Recommendation on consultation cycle: staff recommends next Article IV on standard 12-month cycle.

*Italic: IMF staff report for the 2015 Article IV consultation (ZAMBIA), May 5, 2015.*

### 5.6 percent in 2014, driven by a contraction in copper production. Year-on-year inflation fell

### 5.6 percent in 2014, driven by a contraction in copper production. Year-on-year inflation fell

### Recent developments: growth, inflation, and exchange rate
- Real GDP growth: 5.6 percent in 2014 (down from 6.7 percent in 2013).
- Mining sector: Mining contracted, contributing to the 5.6 percent overall growth; mining sector change in 2014 was -7.2 percent.
- Non-mining sector: 7.1 percent in 2014.
- Year-on-year inflation fell from a peak of 8.1 percent in November 2014 to 7.2 percent in March 2015, largely driven by lower fuel prices.
- Consumer prices (average): 7.8 percent in 2014; Consumer prices (end of period): 7.9 percent in 2014.
- The Zambian kwacha: depreciated by about 20 percent in the first half of 2014; average exchange rate 6.2 kwacha per U.S. dollar in 2014 (percentage change; depreciation +: 14.0 percent in 2014).
- Downward pressures re-emerged in Q1 2015 due to U.S. dollar strength, lower copper prices, growing fiscal deficit, depleting government deposits, and a change in the fiscal regime affecting the mining sector outlook.
- Monetary policy: tightened to contain inflation and counter depreciation pressures; monetary policy has carried the burden of containing inflation and countering depreciation pressures on the Kwacha.
- Reserve indicators: Gross International Reserves (months of prospective imports) 3.8 in 2014; excluding FDI-financed imports 4.4 in 2014.

### Fiscal developments and vulnerabilities
- Central government cash fiscal deficit: rose sharply to 6.5 percent of GDP in 2013 and remained elevated at 6 percent in 2014.
- Central government budget (percent of GDP, 2014):
  - Revenue: 19.3 percent
    - Taxes: 15.8 percent
    - Grants: 0.8 percent
    - Other revenue: 2.7 percent
  - Expenditure: 24.8 percent
    - Expense: 19.4 percent
    - Net acquisition of nonfinancial assets: 5.4 percent
  - Net lending/borrowing: -6.0 percent (excluding grants: -6.8 percent)
  - Net incurrence of liabilities: 6.2 percent
    - Domestic: 1.0 percent
    - Foreign: 5.3 percent
  - Government deposits: 2.8 percent of GDP in 2014 (down from 3.3 percent in 2013 and 5.5 percent in 2012).
- Outstanding VAT refund claims of exporters grew from 1 percent of GDP at end-2013 to 3 percent of GDP at end-2014.
- Domestic arrears: accumulated to 2.5 percent of GDP in 2014 (including to the public pension system, contractors for road projects, and agricultural subsidy obligations).
- Public debt (percent of GDP, end-period): Total central government debt, gross 35.1 percent in 2014 (External 18.4 percent; Domestic 16.7 percent).

### External sector and reserves
- Current account balance: -1.7 percent of GDP in 2014 (5.5 percent in 2012; -0.6 percent in 2013).
- External vulnerability: deteriorating current account, falling international reserves, and exchange rate pressures.
- Total reserves including encumbered and unencumbered reserves: Gross International Reserves 3.8 months of prospective imports in 2014.

### Outlook and projections
- Growth projection: average 5.5–7 percent a year over the medium term, reflecting impact of investments in mining and electricity.
- Inflation projection: projected to stay in single digits and decline gradually to 5 percent.
- Key downside risks:
  - Delayed fiscal adjustment in the lead-up to general elections in 2016.
  - Persistent low copper prices.
  - Policy uncertainties that could undermine investment and mining operations.
- Upside factors:
  - Government actions to ease documentation for VAT refund claims by exporters.
  - Decision to rescind the new fiscal regime for mining introduced in January 2015, which could lead to higher copper production and growth.

### Mining sector and policy actions
- Mining accounts for three quarters of Zambia’s export earnings.
- A change to a royalty-based mining fiscal regime introduced in January 2015 adversely impacted mining sector outlook and investment; cabinet approved return to a mining fiscal regime similar to 2014 (corporate income tax and uniform royalty) on April 20, expected to become effective from July 1, pending parliamentary approval.
- Authorities partially addressed VAT refund documentation requirements in February 2015, but no progress had been made on resolving outstanding refund claims as of the report.

### Executive Board and staff policy recommendations
- Executive Directors emphasized the need for steadfast and strong efforts to ensure macroeconomic stability and foster inclusive growth.
- Fiscal policy recommendations:
  - Significant fiscal consolidation in 2015 and over the medium term to reduce the deficit and stabilize debt.
  - Contain the wage bill, target social spending through cash transfers, broaden the tax base, and put the pension system on a sustainable footing.
  - Swift action to resolve outstanding VAT refund claims to exporters.
- Public financial management:
  - Continue implementation of Integrated Financial Management Information System and Treasury Single Account to strengthen budget controls, avoid accumulation of arrears, and enhance fiscal reporting transparency.
- Debt and capital spending:
  - Prudence in borrowing on commercial terms given moderate risk of external debt distress.
  - Strengthen project selection and prioritize capital spending.
  - Develop a comprehensive debt management strategy.
- Monetary and exchange rate policy:
  - Support for Bank of Zambia’s commitment to maintain a tight monetary policy stance to contain inflationary pressures.
  - Continued exchange rate flexibility and rebuilding reserves to provide adequate buffers.
- Financial sector and inclusion:
  - Financial sector remains well capitalized and stable; strengthen banking supervision.
  - Encourage enhancing financial inclusion and access to financial services in rural areas.
  - Recommendation to eliminate interest rate ceilings as they restrict access to credit.
- Competitiveness and inclusive growth:
  - Improve business climate by restraining labor costs and ensuring regulatory stability.
  - Address infrastructure and electricity supply constraints, develop skills, and rationalize farm subsidies with reallocation to the social cash transfer program.

*IMF staff report for the 2015 Article IV consultation (ZAMBIA), May 5, 2015.*

### 5.6 percent in 2014. The slowdown was

### _cr15152 - 5.6 percent in 2014. The slowdown was

### Recent economic performance
- Real GDP growth: 5.6 percent in 2014. The slowdown was driven by a significant contraction in copper production arising from technical problems at some mines; this was partially offset by a bumper harvest in agriculture.
- Inflation:
  - Annual rate rose from 7.1 percent in 2013 to 7.9 percent in 2014.
  - Inflation fell from a peak of 8.1 percent in November 2014 to 7.2 percent in March 2015, largely driven by lower fuel prices.
- Copper and agriculture: decline in copper production; bumper agricultural harvest in 2014.

### Monetary policy and exchange rate
- Kwacha depreciation:
  - Depreciated by about 20 percent against the U.S. dollar during Feb–May 2014 and again by about 20 percent Jan–Mar 2015.
  - Drivers: lower copper price, dollar strength (first quarter of 2015), loose fiscal policy, and uncertainty about mining taxation in early 2015.
- Bank of Zambia (BoZ) response:
  - BoZ tightened monetary policy, including increasing the policy rate and reserve requirements.
  - Feb–May 2014 actions: policy rate from 9.75 to 12 percent; reserve requirements from 8 to 14 percent; FX intervention $500 million.
  - Jan–Mar 2015 actions: policy rate no change at 12.5 percent; reserve requirements from 14 to 18 percent; FX intervention $150 million.
  - At the November 2014 MPC meeting BoZ increased the policy rate by 50 basis points to 12.5 percent, with the objective of lowering inflation to 7 percent by end-2015; rate kept at 12.5 percent at the February 2015 MPC meeting.
  - In light of renewed exchange rate pressure, reserve requirements were increased from 14 to 18 percent from early April 2015.
- FX intervention and reserves:
  - $500 million sold in first half of 2014; $150 million in Jan–Mar 2015.
  - Gross international reserves: $2.7 billion (3.1 months of imports) in 2013; $3 billion (3.8 months of imports) in 2014; reserves subsequently fell back to end-2013 level partly due to FX intervention.

### Fiscal position and public finances
- Fiscal deficits:
  - Cash basis: deficit declined from 6.5 percent of GDP in 2013 to 6.0 percent in 2014.
  - Underlying deficit (adjusted for accumulation of VAT refund claims and expenditure arrears): rose from 7.5 percent of GDP in 2013 to 10.6 percent in 2014.
- Fiscal developments in 2015:
  - 2015 budget targets a cash deficit of 4.6 percent of GDP.
  - Staff estimates that shocks and unbudgeted expenditures would likely add about 4.0 percent of GDP to the deficit.
  - Clearance of expenditure arrears (not provided for in the budget) would add another 1.5 percent of GDP, taking the cash deficit to 10.1 percent of GDP.
  - Authorities proposed measures to reduce the prospective cash deficit to 7.7 percent of GDP.
- Fiscal adjustment measures (Text Table 2 totals and components in Millions of kwacha and percent of GDP):
  - Total effect on fiscal balance: 4,407 Millions of kwacha; 2.4 percent of GDP.
  - Revenue measures: 1,050 Millions of kwacha; 0.6 percent of GDP.
    - Extra sales of maize: 700 Millions of kwacha; 0.4 percent of GDP.
    - Administrative reforms: 350 Millions of kwacha; 0.2 percent of GDP.
  - Expenditure measures: 3,357 Millions of kwacha; 1.8 percent of GDP.
    - Goods and services: 1,007 Millions of kwacha; 0.5 percent of GDP.
    - Compensation of public employees: 250 Millions of kwacha; 0.1 percent of GDP.
    - Efficiency gains on agriculture subsidies: 400 Millions of kwacha; 0.2 percent of GDP.
      - Farmer Input Support Program (FISP): 200 Millions of kwacha; 0.1 percent of GDP.
      - Food Reserve Agency (FRA): 200 Millions of kwacha; 0.1 percent of GDP.
    - Capital spending: 1,700 Millions of kwacha; 0.9 percent of GDP.
- Summary fiscal operations (Text Table 3; Percent of GDP):
  - 2014 Prel. / 2015 Budget / Approved Projection (selected lines)
    - Revenue and grants: 19.3 / 18.8 / 18.0
    - Revenue excluding grants (A): 18.5 / 18.1 / 17.3
    - Accumulation of VAT refunds (B): 2.1 / -0.5 / -0.5
    - Revenue net of backlog of VAT refunds (A - B): 16.4 / 18.7 / 17.8
    - Income tax: 7.0 / 6.2 / 6.4
    - Non-tax revenue (includes royalties): 2.7 / 4.7 / 4.4
    - Expenditure: 24.8 / 23.4 / 25.8
      - Compensation of employees: 9.6 / 8.8 / 8.7
      - Goods and services: 3.1 / 3.5 / 3.0
      - Subsidies (fuel, FRA, FSIP): 2.0 / 1.2 / 2.6
      - Capital spending: 5.4 / 5.6 / 5.9
    - Overall balance (cash basis): -6.0 / -4.6 / -7.7
    - Accumulation of VAT refund claims (+): 2.1 / 0.0 / 0.0
    - Accumulation of arrears (+): 2.5 / 0.0 / 0.0
    - Clearance of VAT refund claims (-): 0.0 / -0.5 / -0.5
    - Clearance of arrears (-): 0.0 / 0.0 / -1.5
    - Underlying balance (adjusted): -10.6 / -4.0 / -5.7
    - Memo: Outstanding VAT refunds: 3.0 / 1.7 / 2.1
- Public debt and financing:
  - Given the small size of the domestic financial market, staff recommended limiting recourse to domestic financing to less than 2 percent of GDP to avoid crowding out private sector credit.
  - Even after measures, staff estimated a need for almost 6 percent of GDP of external financing in 2015.
  - Staff recommended reducing the overall fiscal deficit to 3 percent of GDP over the medium term to stabilize the debt-to-GDP ratio at around 40 percent.

### Mining sector and taxation
- Change in mining fiscal regime:
  - Shift from dual (royalties and CIT) to royalty-only regime: 8 percent for underground mines and 20 percent for open cast mining operations as final taxes.
  - Staff noted Zambia’s royalty rate at 6 percent in 2014 was already high by international standards and that much higher rates could significantly reduce future production.
  - January–February 2015: mining revenue was about 40 percent lower than projected.
  - Staff recommendation: resolve mining fiscal regime impasse quickly; avoid mine-by-mine agreements; consider reinstating the 2014 regime while undertaking a fresh review in consultation with stakeholders; settle outstanding stock of VAT refund claims.
- Government announcement (April 20, 2015):
  - Regime will revert to a system similar to 2014.
  - Main changes that came into effect in January 2015 (require parliamentary approval): (i) single royalty rate of 9 percent for all mines; (ii) 30 percent CIT on mining operations; and (iii) variable profit tax.
  - Government plans to submit a bill to the next session of parliament (scheduled for June) and expects it to take effect from July 1.

### External position and sovereign spreads
- Current account:
  - Estimated to have widened to 1¾ percent of GDP in 2014 due to decline in imports being more than offset by reduction in non-copper exports.
- Financing inflows and reserves:
  - $1 billion Eurobond issued in April 2014 helped international reserves rise to $3 billion (3.8 months of imports) in 2014 from $2.7 billion (3.1 months) in 2013.
  - Reserves later fell back to end-2013 level, partly reflecting FX intervention.
- Sovereign bond yields:
  - Yield for 2014 Eurobond: 8.625 percent at issuance, 3 percentage points higher than on the 2012 Eurobond at issuance.
  - Zambia’s Eurobond yields moved broadly in line with those of other sub-Saharan African countries.

### Outlook and risks
- Growth outlook:
  - Growth in 2015 expected to be maintained at 5.6 percent (2014 level) as increased mining output (major new mine coming on stream) is offset by a decline in agricultural output due to unfavorable weather.
  - Medium-term growth projected at 6–7 percent a year on the back of expected further increase in mining production due to large FDI in the sector.
- Inflation outlook:
  - Given kwacha depreciation and expected increases in fuel prices, inflation projected to reach 8 percent in 2015.
  - Assuming fiscal adjustment measures are implemented and monetary policy remains tight, staff projects inflation to decline gradually to 5 percent in the medium term.
- Current account and reserves:
  - Increased copper production and non-copper exports together with proposed fiscal adjustment expected to improve the current account to a small surplus over the medium term.
  - Gross international reserves projected (Text Table 1): US$ billions: 2.7 (2013), 3.1 (2014), 3.2 (2015), 3.5 (2016), 3.9 (2017), 4.3 (2018), 4.8 (2019), 5.2 (2020).
  - Months of prospective imports: 3.1 (2013), 3.8 (2014), 3.7 (2015), 3.8 (2016), 3.8 (2017), 3.8 (2018), 3.9 (2019), 4.0 (2020).
- Commodity price projections (Text Table 1):
  - Copper price (US$/tonne): 7,331 (2013), 6,863 (2014), 5,825 (2015), 5,810 (2016), 5,785 (2017), 5,763 (2018), 5,744 (2019), 5,734 (2020).
  - Oil price (US$/barrel): 104 / 96 / 58 / 66 / 70 / 72 / 73 / 74 (years correspond to 2013–2020 as in Text Table 1).
- Risks (Box 2): lingering vulnerabilities pose downside risks.
  - Key external risks:
    - A surge in global financial market volatility (possibly linked to U.S. monetary policy normalization): Likelihood High; Expected Impact Medium. Recommendations: maintain exchange rate flexibility, increase policy rate, undertake fiscal consolidation.
    - Protracted period of slower growth in advanced and emerging economies: Likelihood High; Expected Impact High. Recommendation: maintain exchange rate flexibility and diversify the economy.
    - Geopolitical risks (Middle East, Russia/Ukraine): Likelihood Medium; Expected Impact Medium. Recommendation: adjust fuel prices to reflect full cost recovery while strengthening social benefits programs.
  - Key domestic risks:
    - Delayed fiscal adjustment: Likelihood Medium; Expected Impact High. Recommendation: contain the 2015 budget deficit and continue fiscal adjustment over the medium term.
    - Loss of investor confidence: Likelihood Medium; Expected Impact Medium to High. Recommendation: improve dialogue with stakeholders before introducing policy and regulatory changes.
  - Upside scenario: reversal of royalty-only mining fiscal regime could lead to higher copper production and growth than baseline.

### Policy recommendations and priorities
- Fiscal policy:
  - Implement strong and credible fiscal adjustment to stabilize exchange rate and contain inflation pressures.
  - Reduce the overall fiscal deficit to 3 percent of GDP over the medium term to stabilize debt around 40 percent of GDP.
  - Limit domestic financing to less than 2 percent of GDP in 2015 to avoid crowding out private credit.
  - Improve cash-flow and deposit management to avoid accumulation of new arrears and VAT refund claims.
  - Prioritize capital spending to critical public infrastructure and limit debt-financed spending given limited absorptive and debt management capacity.
- Monetary and exchange rate policy:
  - Maintain tight monetary policy and exchange rate flexibility to manage depreciation and inflation.
  - Use policy rate and reserve requirement tools as needed to contain inflation and stabilize exchange rate.
- Mining sector and revenue:
  - Resolve mining fiscal regime uncertainty quickly, preferably restoring a regime combining royalty and CIT while undertaking a comprehensive, consultative review.
  - Settle outstanding VAT refund claims.
- Structural and external resilience:
  - Strengthen efforts to diversify the economy away from heavy reliance on mining.
  - Improve dialogue with investors and stakeholders to reduce policy uncertainty.

*Italic: Source: IMF staff report content provided in the supplied PDF excerpt.*

### 23.      Possible measures to achieve projected medium-term fiscal consolidation include:

### _cr15152 - 23.      Possible measures to achieve projected medium-term fiscal consolidation include:

### Fiscal consolidation measures
- Raise the VAT rate.
- Harmonize corporate income tax rates (by raising rates on low-tax sectors).
- Reduce tax expenditures.
- Restrain growth in the wage bill (including through a comprehensive civil service reform).
- Eliminate fuel subsidies by enforcing the policy of full cost recovery in the pricing of petroleum products.
- Enhance efficiency of FISP (including by moving to an e-voucher system).
- Move to cost-reflective electricity pricing to ease pressure on the budget and attract much needed investments into the energy sector.

### Subsidies and social benefits
- Current government subsidies are costly: "2 percent of GDP in 2014".
- Subsidies are not well targeted towards the poor; World Bank and other development partners find scope for reducing poverty by shifting resources from subsidizing FRA operations and FISP to the better targeted social cash transfer program.
- Staff recommendations:
  - Scale up the social cash transfer program by re-allocating resources.
  - Limit FRA operations to its mandate of maintaining a strategic reserve (understood as requiring no more than 500,000 metric tons of maize) and leave the bulk of maize distribution to the private sector.

### Pension reforms
- Public Service Pension Fund (PSPF) had arrears of "1.6 percent of GDP at end-2014", which the government intends to clear by 2018, including about "0.4 percent of GDP in 2015".
- Government intends to modify the decision to increase retirement age for civil servants from 55 to 65 by lowering to 60 and introducing option for early retirement at age 55.
- Staff highlighted the need to continue pension reforms to ensure financial sustainability, including:
  - Revising the formula for calculating benefits.
  - Reviewing commutation factors.

### Managing fiscal risks and authorities’ views on fiscal adjustment
- Zambia has limited scope to respond fiscally to a significant downside scenario; limited space for additional domestic financing if external financing is disrupted or fiscal adjustment delayed.
- Any revenue over-performance, including from higher-than-projected copper prices, should be used to reduce the fiscal deficit rather than increase spending.
- Authorities:
  - Determined to implement adjustment measures to be reflected in a mid-year budget presented to Parliament in June.
  - Agreed fiscal deficit reduction would help rebuild fiscal space and rebalance macroeconomic policy mix to facilitate lowering interest rates.
  - Noted government debt increase has been rapid and needs to be arrested despite being modest by international standards.
  - Indicated no decision on nature of external financing; considering borrowing from non-concessional window of the African Development Bank for investment projects.
  - Strongly against mine-by-mine agreements to resolve mining tax impasse.

### Fiscal structural reforms: Revenue administration and PFM
- Revenue administration:
  - Support for strengthening Zambia Revenue Authority (ZRA) capacity to monitor mining company tax returns.
  - Progress in cross-checking taxpayers’ information between customs and domestic revenue services and introduction of electronic filing and payment.
  - Encouraged early implementation of the Mineral Value Chain Monitoring framework.
- Public Financial Management (PFM):
  - Rollout of IFMIS has reached "44 out of 51 institutions"; authorities should resolve remaining implementation issues including generation of in-year cash based financial reports reconciled with banking data.
  - Importance of maintaining appropriate government deposits to prevent arrears accumulation and strengthening government cash flow forecasting framework emphasized.
  - Launch of pilot phase of the Treasury Single Account (TSA) at the Ministry of Finance (MoF) in January 2015 is welcome; TSA needs extension to other line ministries.
  - Internal information sharing remains weak, with inconsistent figures between the BoZ and the MoF (Budget Office, and Investment and Debt Management Unit).
- Investment planning:
  - Need to strengthen public investment cycle: vet projects, align to development strategy, improve project appraisal capacity.
  - Debt management needs improvement in light of projected rises in commercial borrowing.
- Authorities’ PFM views:
  - With TA from IMF and other donors, authorities are stepping up PFM reforms.
  - Plan to speed up TSA implementation to improve liquidity management and reduce borrowing by utilizing line ministries’ idle bank balances.
  - Plan to improve collaboration across ministry units and with the BoZ to produce more reliable data.

### Monetary and exchange rate policies
- Exchange rate regime:
  - Zambia has a floating exchange rate regime; authorities commit to intervening mainly to smooth excessive volatility.
  - Authorities committed to rebuilding international reserves to provide at least "four months of import cover".
- Monetary policy stance:
  - BoZ intends to maintain a tight monetary policy stance in line with inflation target of "7 percent for end-2015" and "5 percent over the medium term".
  - Risks to inflation are on the upside due to recent large depreciation of the kwacha and need to increase retail fuel prices.
  - Staff supported recent tightening of monetary policy which reduced banking system liquidity and helped stabilize the kwacha.
  - If further tightening needed, BoZ should consider raising the policy rate on a temporary basis.
- Monetary policy framework:
  - Policy rate introduced in 2012.
  - Staff supported keeping reserve money and bank liquidity in check during transition from reserve money targeting to policy rate-based conduct.
  - TSA implementation starting early 2015 will help improve liquidity forecasting.
- Interest rate caps:
  - Caps impede access to finance, particularly for small- and medium-scale enterprises.
  - Caps on commercial bank lending rates have become increasingly binding as treasury bill rates have risen.
  - Lending rate cap for microfinance institutions appears lower than minimum needed to compensate for credit risk and high administration costs, limiting micro-enterprise credit access.
  - Staff urged authorities to remove the caps.
- Authorities’ monetary views:
  - Commitment to flexible exchange rate and tight monetary stance.
  - With Norway/MCM TA, BoZ will continue developing structures for effective functioning of policy rate.
  - BoZ plans a credit market monitoring program with support from a foreign NGO to study impact of lending rate ceilings.

### Financial sector stability
- Banking sector overview:
  - Banking sector is dominant, has grown steadily, remains well-capitalized.
  - Credit growth moderated since mid-2013; average lending rate increased substantially.
  - Nonperforming loans (NPL) declined from "15 percent of total loans in 2010" to "6 percent in December 2014".
  - One medium-sized bank restructured; BoZ working to strengthen two small banks’ balance sheets.
  - Banks’ total credit to private sector: "14 percent of GDP in 2014" (below sub-Saharan regional average "21 percent").
  - Exposure to foreign currency denominated loans: "25 percent of total loans".
  - Loan-to-deposit ratios: "60-65 percent".
  - Tier 1 and total capital adequacy ratios: "25 and 27 percent, respectively".
  - Basel II framework expected to be implemented later in 2015.
  - Most banks have met new minimum capital requirements; minimum capital requirements for nonbank financial institutions increased in 2014.
- Banking supervision:
  - Staff supported BoZ’s intensive supervision, monitoring of banks’ net open foreign currency positions.
  - BoZ conducting stress testing and producing financial stability report; future stress tests should be more stringent than ones based on historical events.
- Financial inclusion:
  - Authorities expanding Credit Reference Bureau, bank branches and agent banking in rural areas, improving credit culture.
  - Planned introduction of unified collateral registry, agency banking guidelines, and an Insolvency Bill.
  - Staff analysis: relaxing constraints on collateral offers greatest benefits for economic growth; inclusion of firms better tackled via measures lowering financial participation cost.

### Reducing external vulnerability
- External position pressures:
  - Current account balance deteriorated by "about 7 percent of GDP between 2012 and 2014", despite increase in copper exports by "about 3½ percent of GDP".
  - Reducing exchange rate pressure and improving current account in lasting way requires large reductions in fiscal deficits over the medium term.
  - Increased copper exports and planned fiscal adjustment projected to improve current account balance.
  - Resolution of mining taxation and fiscal adjustment uncertainties likely to attract FDI and portfolio inflows, creating balance of payments surplus and allowing BoZ to accumulate reserves toward target of "4 months of imports".
- Reserves guidance:
  - Staff advised BoZ to rebuild reserves to medium-term target of "4 months of import cover" given fast pace of reserve depletion and external vulnerability.
- Exchange rate assessment:
  - Two model-based approaches (EBA-lite and ERER) provided divergent assessments.
  - EBA-lite indicated current account deficit was larger than level consistent with fundamentals by "almost 5 percent of GDP in 2014", partly reflecting loose fiscal policy.
  - ERER suggested real exchange rate was slightly undervalued.
  - Staff conclusion: kwacha was moderately over-valued in 2014, taking into account data uncertainties, terms of trade deterioration, flat real effective exchange rate, and loose fiscal policy.
  - Planned fiscal deficit reduction and improved policy stability (particularly in mining sector) should ease exchange rate pressure.
- Terms of trade shocks:
  - Copper exports represented "three quarters of total exports in 2014", making Zambia vulnerable to terms of trade shocks.
  - Need to diversify export base; floating exchange rate aids adjustment.
- Debt sustainability analysis (DSA):
  - External debt remains relatively low but vulnerabilities have increased.
  - Current DSA indicates moderate risk of external debt distress and heightened public debt vulnerabilities.
  - Under baseline and alternative scenarios, external debt sustainability indicators remain below thresholds, but debt service-to-revenue ratio breaches threshold under a number of shocks.
  - Need for comprehensive debt management strategy and close monitoring of contingent liabilities, particularly SOE operations.
- Authorities’ external views:
  - Authorities broadly agreed with staff’s external balance and exchange rate assessment.
  - BoZ will start building up reserves once the foreign exchange market stabilizes.
  - MoF prepared its own DSA in 2014 with donor assistance; results similar to staff’s.
  - Authorities do not intend to rely on international capital markets to extent assumed under staff’s baseline.
  - Ongoing MoF work on a debt management strategy aimed at lowering refinancing risks; specific actions under consideration include establishment of a sinking fund to facilitate Eurobond repayment.

### Enhancing competitiveness and inclusive growth
- Poverty and growth constraints:
  - Poverty remains high at "over 60 percent of the population" (above sub-Saharan Africa average "48 percent").
  - Urban poverty has fallen to "about 30 percent"; rural poverty remains "over 70 percent".
  - High youth underemployment persists.
  - Constraints to inclusive growth: bottlenecks in infrastructure services, low quality of human capital, low agricultural productivity, weak business environment.
  - Zambia’s Doing Business ranking slipped slightly; needs improvements in getting electricity, trading across borders, and registering property.
  - Zambia’s revised Sixth National Development Plan (2013–16) focuses on infrastructure, human capacities, promoting employment, and rural development; better prioritization of projects needed given fiscal difficulties.
- Agriculture:
  - Rationalizing farm subsidies and other distortive interventions can support diversification, trade competitiveness, and rural income growth.
  - Periodic trade bans (e.g., on maize exports and wheat imports), FRA pricing/procurement distortions, and FISP inefficiencies discourage private investment in agriculture and food processing.
  - Savings from eliminating inefficiencies can support scaling up the targeted cash transfer program to reduce poverty more effectively.
- Fuel supply:
  - Ensuring cost-recovery fuel pricing will reduce budget pressures, but cutting underlying cost of supplying fuels is needed to enhance competitiveness.
  - Need to increase transparency in national fuel procurement.
  - In light of global transition toward larger-scale and more efficient refineries, reevaluate benefits of continuing to operate a national refinery.

*Source: _cr15152 - 23.      Possible measures to achieve projected medium-term fiscal consolidation include:*

### 50.      Minimum wage policies are hindering job creation. The public sector minimum wage is

### Minimum wage policies are hindering job creation. The public sector minimum wage is

### Minimum wage and labor markets
- The public sector minimum wage is about three times the private sector minimum wage, which is already higher than in many neighboring and peer countries.
- Pressuring private companies to adopt the public sector minimum wage will hamper the country’s competitiveness and job creation.
- To encourage job creation, the government needs to strike an appropriate balance between protecting the welfare of workers and adding to the costs of doing business.
- Staff recommended promoting labor-intensive employment through improving skills development and the business climate.

### Authorities’ views
- The government’s priority is to maintain high capital spending on roads and electricity to address key bottlenecks to inclusive growth and competitiveness, but better prioritization can deliver results more efficiently.
- The government is reviewing fuel procurement policies to reduce pressures on the budget and facilitate reliable supply, against the backdrop of recent fuel shortages.
- The authorities noted that extending the government minimum wage to the private sector is not official policy.

### Outlook and risks
- The Zambian economy is facing strong headwinds: large fiscal imbalances, lower copper prices, and policy uncertainty are dampening economic activity and putting pressures on the exchange rate.
- Key risks: persistent low copper prices, delayed fiscal adjustment, and domestic policy uncertainties that threaten to lower investment and current production in the mining sector.
- Zambia’s risk of external debt distress is moderate but the overall risk of debt distress is heightened by public debt vulnerabilities.

### Macro policy mix
- The current policy mix combines tight monetary policy and a loose fiscal stance.
- Monetary policy has carried the burden of fighting depreciation; the Zambian kwacha depreciated by about 20 percent in the first quarter of 2015.
- There is an urgent need to ensure macroeconomic stability by implementing a credible fiscal deficit reduction plan.
- Fiscal adjustment and maintaining the current tight monetary policy stance will help stabilize the exchange rate and contain inflation.

### Fiscal deficit reduction
- Staff estimates that the 2015 deficit is likely to reach 10 percent of GDP, on a cash basis, in the absence of further measures.
- Revenue is projected to be lower than budgeted by about 1 percent of GDP.
- Unbudgeted spending is projected to amount to about 4 percent of GDP, including on fuel and agricultural subsidies and clearance of arrears on road projects.
- To maintain macro stability, it will be important to reduce the 2015 deficit by about 2½ percent of GDP and to continue to reduce the deficit to 3 percent of GDP over the medium term through revenue and expenditure measures.
- Recommendations: eliminate fuel subsidies and contain the wage bill to create fiscal space for needed capital and social spending.
- In the event of revenue over-performance, the authorities should reduce the deficit rather than increase spending.
- Deficit reduction will help cope with shocks and alleviate domestic financing pressures that are keeping interest rates high.
- Staff urges resolution of outstanding issues regarding VAT refunds to exporters and fostering policy consistency and stability to boost investor confidence.

### Public financial management (PFM) reforms
- Staff welcomes recent progress in implementing the TSA and IFMIS.
- Authorities are encouraged to attach high priority to PFM reforms, including on fiscal reporting and budgetary controls.
- Investment planning and implementation need to be improved.

### External vulnerability
- Reducing pressure on the exchange rate and improving the current account balance in a lasting way will require addressing the large fiscal deficit.
- Exchange rate flexibility provides an important buffer for the economy.
- Given Zambia’s susceptibility to external shocks, staff supports the BoZ’s plan to start rebuilding reserves once the foreign exchange market has stabilized.
- The export base needs to be diversified to reduce dependence on copper.
- Strong debt management capacity is needed to maintain debt sustainability in light of increasing reliance on non-concessional borrowing.

### Financial sector issues
- The banking sector remains well-capitalized and profitable.
- The BoZ’s intensive banking supervision to assess potential build-up in vulnerability and risks to financial stability is welcome, given the large exchange rate depreciation and volatility.
- Planned measures, including agency banking guidelines, will improve access to financial services particularly in rural areas.
- Staff recommends the elimination of the lending rate ceilings introduced in early 2013, which restrict access to credit, particularly by SMEs, and have become binding as treasury bill rates have increased.

### Inclusive growth and competitiveness
- Despite strong growth over the past decade, poverty remains high, particularly in rural areas.
- Rationalizing farm subsidies and other government interventions in agriculture and reallocating resources to social cash transfers can contribute to rural income growth and greater diversification.
- Staff recommends that the current fuel supply policy be revisited to reduce the cost of supplying fuels and to ensure a proper supply of fuels.
- Staff strongly advises against pressuring private companies to adopt the government’s minimum wage, which would hamper competitiveness and job creation.
- To maintain Zambia as an attractive investment destination, frequent regulatory changes and uncertainty about policy direction should be avoided.
- Improving the business environment would also help promote inclusive jobs-creating growth.

### Statistics
- Data provision has some shortcomings, but is broadly adequate for surveillance.
- Issues with source data and compilation affect most datasets, but are particularly problematic in fiscal reporting.

*Source: IMF staff report excerpt.*

### 60.      Staff recommends that the next Article IV consultation be held on the standard

### 60.      Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

### Recommendation
- Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

### Macroeconomic outlook and key real-sector indicators (selected)
- GDP growth at constant prices: 2012: 6.8; 2013: 6.7; 2014: 5.6; 2015: 5.6; 2016: 6.2; 2017: 6.9; 2018 (Proj.): 7.0; 2019 (Proj.): 6.8; 2020 (Proj.): 6.8.
- Mining growth (percent): 2012: -2.7; 2013: 5.9; 2014: -7.2; 2015: 7.7; 2016: 12.0; 2017: 15.0; 2018 (Proj.): 13.1; 2019 (Proj.): 11.0; 2020 (Proj.): 10.0.
- Non-mining growth (percent): 2012: 8.0; 2013: 6.8; 2014: 7.1; 2015: 5.4; 2016: 5.6; 2017: 6.1; 2018 (Proj.): 6.3; 2019 (Proj.): 6.3; 2020 (Proj.): 6.4.
- GDP deflator (percent): 2012: 4.2; 2013: 5.7; 2014: 7.1; 2015: 7.5; 2016: 7.3; 2017: 6.3; 2018 (Proj.): 5.2; 2019 (Proj.): 4.8; 2020 (Proj.): 4.8.
- GDP at market prices (millions of kwacha): 2012: 128,370; 2013: 144,775; 2014: 163,736; 2015: 186,015; 2016: 211,983; 2017: 241,017; 2018 (Proj.): 271,536; 2019 (Proj.): 303,996; 2020 (Proj.): 340,357.
- Consumer prices (average): 2012: 6.6; 2013: 7.0; 2014: 7.8; 2015: 8.0; 2016: 7.5; 2017: 6.5; 2018 (Proj.): 5.5; 2019 (Proj.): 5.0; 2020 (Proj.): 5.0.
- Terms of trade (deterioration -): 2012: -14.2; 2013: -6.6; 2014: -2.9; 2015: -6.0; 2016: -1.1; 2017: -1.0; 2018 (Proj.): -1.2; 2019 (Proj.): -1.5; 2020 (Proj.): -2.6.
- Average exchange rate (kwacha per U.S. dollar): 2012: 5.1; 2013: 5.4; 2014: 6.2. (Other years shown as dots in source.)
- Real effective exchange rate: 2012: 4.0; 2013: 4.2; 2014: -4.0. (Other years shown as dots in source.)

### External sector and reserves
- Current account balance (percent of GDP): 2012: 5.5; 2013: -0.6; 2014: -1.7; 2015: -0.6; 2016: 1.4; 2017: 2.5; 2018 (Proj.): 3.0; 2019 (Proj.): 3.3; 2020 (Proj.): 3.4.
- Gross International Reserves (months of prospective imports): 2012: 3.3; 2013: 3.1; 2014: 3.8; 2015: 3.7; 2016: 3.8; 2017: 3.8; 2018 (Proj.): 3.8; 2019 (Proj.): 3.9; 2020 (Proj.): 4.0.
- Gross international reserves (U.S. dollars, millions): 2012: 3,044; 2013: 2,684; 2014: 3,078; 2015: 3,182; 2016: 3,503; 2017: 3,883; 2018 (Proj.): 4,262; 2019 (Proj.): 4,778; 2020 (Proj.): 5,179.
- Excluding FDI-financed imports (months): 2012: 3.8; 2013: 3.5; 2014: 4.4; 2015: 4.4; 2016: 4.4; 2017: 4.4; 2018 (Proj.): 4.4; 2019 (Proj.): 4.5; 2020 (Proj.): 4.7.
- Exports, f.o.b. (U.S.$ millions): 2012: 9,521; 2013: 10,843; 2014: 10,220; 2015: 9,679; 2016: 10,801; 2017: 12,290; 2018 (Proj.): 13,802; 2019 (Proj.): 15,284; 2020 (Proj.): 16,831.
- Copper exports (U.S.$ millions): 2012: 6,295; 2013: 6,911; 2014: 7,619; 2015: 6,967; 2016: 7,786; 2017: 8,915; 2018 (Proj.): 10,046; 2019 (Proj.): 11,114; 2020 (Proj.): 12,205.
- Change in copper export volume (percent): 2012: 4.8; 2013: 19.2; 2014: 17.7; 2015: 7.7; 2016: 12.0; 2017: 15.0; 2018 (Proj.): 13.1; 2019 (Proj.): 11.0; 2020 (Proj.): 10.0.
- Copper export price (U.S. dollars per tonne): 2012: 7,959; 2013: 7,331; 2014: 6,863; 2015: 5,825; 2016: 5,810; 2017: 5,785; 2018 (Proj.): 5,763; 2019 (Proj.): 5,744; 2020 (Proj.): 5,734.
- Crude oil price: 2012: 105; 2013: 104; 2014: 96; 2015: 58; 2016: 66; 2017: 70; 2018 (Proj.): 72; 2019 (Proj.): 73; 2020 (Proj.): 74.

### Fiscal developments and central government operations (selected)
- Central government revenue (percent of GDP): 2012: 19.1; 2013: 18.4; 2014: 19.3; 2015: 18.0; 2016: 17.4; 2017: 18.2; 2018 (Proj.): 18.8; 2019 (Proj.): 19.3; 2020 (Proj.): 19.8.
- Taxes (percent of GDP): 2012: 15.0; 2013: 14.7; 2014: 15.8; 2015: 12.9; 2016: 12.5; 2017: 13.3; 2018 (Proj.): 13.3; 2019 (Proj.): 13.8; 2020 (Proj.): 14.3.
- Grants (percent of GDP): 2012: 1.7; 2013: 1.5; 2014: 0.8; 2015: 0.8; 2016: 0.8; 2017: 0.8; 2018 (Proj.): 0.8; 2019 (Proj.): 0.8; 2020 (Proj.): 0.8.
- Expenditure (percent of GDP): 2012: 22.3; 2013: 25.1; 2014: 24.8; 2015: 25.8; 2016: 23.4; 2017: 23.2; 2018 (Proj.): 22.8; 2019 (Proj.): 22.7; 2020 (Proj.): 22.7.
- Expense (percent of GDP): 2012: 16.2; 2013: 18.8; 2014: 19.4; 2015: 19.9; 2016: 18.6; 2017: 18.4; 2018 (Proj.): 18.0; 2019 (Proj.): 17.9; 2020 (Proj.): 17.9.
- Net acquisition of nonfinancial assets (percent of GDP): 2012: 6.2; 2013: 6.3; 2014: 5.9; 2015: 5.4; 2016: 5.6; 2017: 5.9; 2018 (Proj.): 4.8; 2019 (Proj.): 4.8; 2020 (Proj.): 4.8.
- Net lending/borrowing (overall fiscal balance, percent of GDP): 2012: -2.9; 2013: -6.5; 2014: -5.2; 2015: -6.0; 2016: -4.6; 2017: -7.7; 2018 (Proj.): -6.0; 2019 (Proj.): -5.0; 2020 (Proj.): -4.0.
- Excluding grants (percent of GDP): 2012: -4.6; 2013: -8.0; 2014: -6.4; 2015: -6.8; 2016: -5.2; 2017: -8.5; 2018 (Proj.): -6.8; 2019 (Proj.): -5.7; 2020 (Proj.): -4.8.
- Revenue (millions of kwacha): 2012: 24,541; 2013: 26,678; 2014: 31,614; 2015: 31,564; 2016: 35,495; 2017: 33,559; 2018 (Proj.): 36,809; 2019 (Proj.): 43,869; 2020 (Proj.): 51,061.
- Expenditure (millions of kwacha): 2012: 28,685; 2013: 36,356; 2014: 40,206; 2015: 40,640; 2016: 44,202; 2017: 47,975; 2018 (Proj.): 49,599; 2019 (Proj.): 55,871; 2020 (Proj.): 61,942.
- Net lending/borrowing (millions of kwacha): 2012: -3,717; 2013: -9,394; 2014: -8,591; 2015: -9,787; 2016: -8,706; 2017: -14,415; 2018 (Proj.): -12,790; 2019 (Proj.): -12,002; 2020 (Proj.): -10,881.

### Public debt and financing
- Total central government debt, gross (end-period, percent of GDP): 2012: 25.5; 2013: 28.5; 2014: 35.1; 2015: 39.6; 2016: 41.1; 2017: 41.0; 2018 (Proj.): 40.6; 2019 (Proj.): 40.2; 2020 (Proj.): 39.4.
- External debt (percent of GDP): 2012: 13.5; 2013: 13.1; 2014: 18.4; 2015: 25.3; 2016: 27.4; 2017: 27.7; 2018 (Proj.): 27.6; 2019 (Proj.): 27.1; 2020 (Proj.): 26.3.
- Domestic debt (percent of GDP): 2012: 12.0; 2013: 15.4; 2014: 16.7; 2015: 14.3; 2016: 13.8; 2017: 13.3; 2018 (Proj.): 13.0; 2019 (Proj.): 13.1; 2020 (Proj.): 13.1.
- Memorandum: Nominal GDP (millions of kwacha): 2012: 128,370; 2013: 144,775; 2014: 166,474; 2015: 163,736; 2016: 186,015; 2017: 211,983; 2018 (Proj.): 241,017; 2019 (Proj.): 271,536; 2020 (Proj.): 303,996; 2020 (Proj. in another table): 340,357.

### Government cash flow and debt stock (selected)
- Deposits, beginning of period (millions of kwacha): 2013: 7,032; 2014: 4,754; 2015 (Prel.): 4,615; 2016 (Projection): 3,385; 2017: 3,255; 2018: 3,650; 2019 (Proj.): 4,051; 2020 (Proj.): 4,459.
- Gross inflows (millions of kwacha): 2013: 17,866; 2014: 23,696; 2015 (Prel.): 30,157; 2016 (Projection): 29,350; 2017: 33,027; 2018: 35,856; 2019 (Proj.): 39,510; 2020 (Proj.): 45,396.
- Gross outflows (millions of kwacha): 2013: 20,143; 2014: 23,835; 2015 (Prel.): 31,387; 2016 (Projection): 29,480; 2017: 32,632; 2018: 35,455; 2019 (Proj.): 39,102; 2020 (Proj.): 44,981.
- Net inflows: 2013: -2,278; 2014: -140; 2015 (Prel.): -1,230; 2016 (Projection): -130; 2017: 395; 2018: 401; 2019 (Proj.): 408; 2020 (Proj.): 415.
- Debt (millions of kwacha, memorandum): 2013: 41,286; 2014: 57,465; 2015 (Prel.): 73,624; 2016 (Projection): 87,180; 2017: 98,909; 2018: 110,232; 2019 (Proj.): 122,103; 2020 (Proj.): 134,012.

### Monetary sector (selected)
- Broad money (M3, millions of kwacha): 2012: 25,699; 2013: 31,042; 2014: 34,959; 2015: 40,462; 2016: 47,434; 2017: 55,281; 2018 (Proj.): 64,765; 2019 (Proj.): 77,278; 2020 (Proj.): 91,504.
- Reserve money (end-of-period, millions of kwacha): 2012: 8,375; 2013: 8,339; 2014: 13,301; 2015: 15,723; 2016: 18,302; 2017: 21,135; 2018 (Proj.): 24,533; 2019 (Proj.): 29,115; 2020 (Proj.): 34,263.
- Reserve money (end-of-period, annual percent change): 2012: 51.4; 2013: -0.4; 2014: 59.5; 2015: 18.2; 2016: 16.4; 2017: 15.5; 2018 (Proj.): 16.1; 2019 (Proj.): 18.7; 2020 (Proj.): 17.7.
- Broad money (M3) (annual percent change): 2012: 17.9; 2013: 20.8; 2014: 12.6; 2015: 15.7; 2016: 17.2; 2017: 16.5; 2018 (Proj.): 17.2; 2019 (Proj.): 19.3; 2020 (Proj.): 18.4.
- Credit to the private sector (annual percent change): 2012: 37.0; 2013: 12.6; 2014: 26.4; 2015: 12.2; 2016: 15.2; 2017: 17.1; 2018 (Proj.): 18.0; 2019 (Proj.): 19.7; 2020 (Proj.): 22.3.
- Credit to the private sector (percent of GDP): 2012: 12.2; 2013: 12.2; 2014: 13.6; 2015: 13.5; 2016: 13.6; 2017: 14.0; 2018 (Proj.): 14.7; 2019 (Proj.): 15.7; 2020 (Proj.): 17.2.
- Gross foreign exchange reserves of the Bank of Zambia (U.S.$ millions): 2012: 3,044; 2013: 2,684; 2014: 3,078; 2015: 3,182; 2016: 3,503; 2017: 3,883; 2018 (Proj.): 4,262; 2019 (Proj.): 4,778; 2020 (Proj.): 5,179.

### Balance of payments (selected)
- Current account (U.S.$ millions): 2012: 1,372; 2013: -161; 2014: -463; 2015: -148; 2016: 373; 2017: 760; 2018 (Proj.): 1,000; 2019 (Proj.): 1,217; 2020 (Proj.): 1,393.
- Trade balance (U.S.$ millions): 2012: 1,595; 2013: 1,648; 2014: 1,523; 2015: 1,551; 2016: 2,275; 2017: 2,950; 2018 (Proj.): 3,489; 2019 (Proj.): 3,991; 2020 (Proj.): 4,471.
- Income (net, U.S.$ millions): 2012: -333; 2013: -1,153; 2014: -1,517; 2015: -1,365; 2016: -1,582; 2017: -1,830; 2018 (Proj.): -2,088; 2019 (Proj.): -2,332; 2020 (Proj.): -2,574.
- Foreign direct investment (net, U.S.$ millions): 2012: 2,433; 2013: 1,691; 2014: 2,484; 2015: 1,653; 2016: 1,803; 2017: 1,998; 2018 (Proj.): 2,217; 2019 (Proj.): 2,441; 2020 (Proj.): 2,687.
- Other investments (net, U.S.$ millions): 2012: -4,158; 2013: -2,222; 2014: -2,940; 2015: -2,614; 2016: -2,803; 2017: -3,351; 2018 (Proj.): -3,696; 2019 (Proj.): -3,906; 2020 (Proj.): -4,422.
- Overall balance (U.S.$ millions): 2012: 727; 2013: -345; 2014: 470; 2015: 166; 2016: 391; 2017: 447; 2018 (Proj.): 442; 2019 (Proj.): 562; 2020 (Proj.): 417.

### Financial soundness indicators (2008–14, selected)
- Regulatory capital to risk-weighted assets: 2008: 18.6; 2009: 22.3; 2010: 22.1; 2011: 19.2; 2012: 21.3; 2013: 26.8; 2014: 27.0.
- Tier 1 regulatory capital to risk-weighted assets: 2008: 15.7; 2009: 18.9; 2010: 19.1; 2011: 16.8; 2012: 19.4; 2013: 24.5; 2014: 24.6.
- Past due advances (NPL) to total advances (percent): 2008: 7.2; 2009: 12.6; 2010: 14.8; 2011: 10.4; 2012: 8.1; 2013: 7.0; 2014: 6.1.
- Loan loss provisions to nonperforming loans (percent): 2008: 104.6; 2009: 86.6; 2010: 80.3; 2011: 76.7; 2012: 73.5; 2013: 83.2; 2014: 76.5.
- Return on average assets (percent): 2008: 3.6; 2009: 2.1; 2010: 2.9; 2011: 3.7; 2012: 3.9; 2013: 3.4; 2014: 3.7.
- Liquid assets to total assets (percent): 2008: 35.5; 2009: 38.0; 2010: 43.8; 2011: 40.3; 2012: 36.0; 2013: 38.9; 2014: 35.8.
- Foreign currency loans to total gross loans (percent): 2008: 42.1; 2009: 36.4; 2010: 32.8; 2011: 39.1; 2012: 28.7; 2013: 25.6; 2014: 29.0.

### Social and development indicators (Millennium Development Goals, selected)
- Proportion of population living in extreme poverty (%): 1990: 58; 1996: 53; 2002: 46; 2004: 53; 2006: 51; 2010: 42; 2013: ...; 2015 Target: 29.
- Primary net enrollment ratio (%): 1990: 80; 2002: 78; 2007: 97; 2010: 94; 2015 Target: 100.
- Under-5 mortality rate (per 1,000): 1996: 197; 2002: 168; 2010: 119; 2013: 138; 2015 Target: 63.6.
- Maternal mortality ratio (deaths per 100,000 live births): 1996: 649; 2002: 729; 2010: 591; 2013: 483; 2015 Target: 162.3.
- HIV prevalence rate (%): (selected) 2010: 16; 2013: 14; 2015 Target: 16 or less.
- Proportion of households with ITNs (pre- or post-treated, %): 2010: 53; 2013: 64; 2015 Target: 73.

### Charts and qualitative observations (from figures)
- Real GDP growth: growth remains strong but is down from 2010 high.
- Inflation: reduced to single digits but has risen from its low in 2012.
- Average income and poverty: average income level has risen rapidly; poverty has declined but remains high.
- 2014 growth slowed due to lower mining activity.
- Fiscal: 2014 cash deficit narrowed slightly, but arrears accumulation and VAT refund backlog mask fiscal performance. Wage bill and public investment dominate spending.
- External: Total exports fell in 2014 due to lower non-traditional exports; reserve import coverage improved thanks to Eurobond proceeds.
- Banking sector: system is well capitalized; asset quality improved; credit growth modest; bank concentration declined; access to financial services in rural areas is a government priority.

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

### Appendix I. External Stability Assessment

### Appendix I. External Stability Assessment

### REER and NEER dynamics in 2014
- Real effective exchange rate (REER) depreciated by 4 percent in 2014, reversing a similar size appreciation in 2013.
- Depreciation drivers:
  - Continued deterioration in terms of trade reflecting an ongoing decline in copper prices of almost 40 percent between the peak in early 2011 and late 2014–early 2015.
  - An 8 percent depreciation of the nominal effective exchange rate (NEER), mainly reflecting stress in the local foreign exchange market in the first half of 2014.
  - Partly offset by inflation differential against Zambia’s trade partners.
- Despite deteriorating terms of trade since 2011, the REER has remained broadly flat over this period, suggesting a build-up of a REER gap.
- Intra-year variability in 2014:
  - Between January and May 2014, NEER and REER depreciated by some 17 percent.
  - In the second half of 2014, NEER appreciated by 14 percent nominally and REER appreciated by 19 percent in real terms.
  - The kwacha has been depreciating against the U.S. dollar since August 2014, but this depreciation only manifested in effective exchange rates from February 2015 because many of Zambia’s trading partners’ currencies also depreciated against the U.S. dollar.

### External position assessment (methods and current account)
- Methodologies used:
  - ERER approach of the CGER methodology linking the real exchange rate to fundamentals.
  - EBA (EBA-lite) methodology linking the current account balance to fundamentals.
- Historical/current account pattern:
  - In 2009–12, reported current account surpluses of some 6 percent of GDP on average, combined with sizeable outflows recorded in the financial account.
  - Notable shocks: a 25 percent import contraction in 2009 and an 80 percent increase in copper export proceeds in 2010.
  - Reported current account balance deteriorated to -0.6 percent in 2013 and further to -1.7 percent in 2014.
  - Reported outflows in the period were in the range of 8–20 percent of GDP.
- Adjustment for mining-related outflows:
  - Part of financial-account outflows (mining companies keeping export proceeds abroad) is reclassified to the current account to better reflect impact on domestic FX market, exchange rate, and international reserves.
  - The reclassified share is estimated as a linear function of exporting industries’ FX cash flow (approximated by export proceeds + new FDI inflows + net borrowing − imports of equipment − dividend outflows − private sector interest payments) and is highly correlated (0.88) with those outflows.
  - Reclassification yields an adjusted current account deficit of almost 13 percent of GDP in 2014 (contrast to headline deficit of -1.7 percent of GDP).
- Implications from EBA-lite on adjusted current account:
  - Suggests a sizeable deviation from the value consistent with fundamentals, indicating an overvaluation of the kwacha.
  - Deviation of about 1.5 percentage points reflects fiscal policy being looser than trading partners; the remainder is an unexplained residual.
  - Estimate subject to uncertainty due to imprecise nature of adjustment and preliminary components of the 2014 current account.
- Divergence of valuation methods and staff view:
  - ERER (CGER) approach suggests the REER was undervalued by a few percent in 2014.
  - Adjusted current account gap implies sizeable overvaluation in 2014.
  - Given the divergence and uncertainties, staff assesses the kwacha as moderately overvalued.

### Reserve adequacy and policy implications
- Reserve trajectory and levels:
  - Gross international reserves peaked in 2009 at 5.7 months of current imports.
  - Reserve coverage fell to 2.9 months in 2013, bounced back to 3.6 months at end-2014, and as of March fell again to 3.3 months, below the authorities’ target of 4.0 months.
  - Reserves were boosted in 2014 as the Bank of Zambia purchased the Eurobond proceeds from the government, but a significant part was spent to stabilize the kwacha; reserve loss would have been higher without currency depreciation.
- Reserve adequacy benchmark analysis:
  - Fund staff cost-benefit approach used, weighing benefits of smoothing domestic absorption against opportunity cost of holding reserves.
  - Opportunity cost measured via MPK, sterilization costs, and external financing costs; for Zambia only the external financing costs metric (relevant to LICs with market access) is deemed appropriate.
  - Caveat: Zambia’s two Eurobonds had very different yields: 5.625 percent (September 2012) and 8.625 percent (April 2014), complicating the metric.
  - Analysis suggests benchmarks in the range between 2.0 and 3.6 months of imports.
- Policy recommendation:
  - Given rapid depletion in the last two years and the need to boost confidence, staff recommends the Bank of Zambia aim at accumulating reserves over the medium term and target a 4-month import coverage.
  - Recent BoZ interventions to stabilize the kwacha are consistent with the purposes for which reserves were accumulated, provided the stock does not fall much further.

*Prepared by Robert Tchaidze. Appendix I. External Stability Assessment.*

### 3.      The medium-term scenario underlying the debt sustainability calculations assumes

### _cr15152 - 3.      The medium-term scenario underlying the debt sustainability calculations assumes

### Medium-term macroeconomic assumptions
- Real GDP growth:
  - 2015 projected to remain at the 2014 level (estimated at 5.6 percent).
  - Projected to remain strong at 6–7 percent over the medium term; Box 1 projects averaging about 6½ percent over the medium term (down from 7¾ percent in the previous DSA).
  - Long-run growth supported by diversification expected to be around 5 percent annually.
  - Copper production expected to reach over 1.4 million tons by 2020, almost twice the 2014 level.
- Inflation:
  - Projected to reach 8 percent in 2015 and then gradually decrease to 5 percent in the medium term.
  - Projection underpinned by continued tight monetary policy and a credible fiscal consolidation plan.
- External sector:
  - Mining export volumes expected to show an average annual increase of 11.5 percent over 2015–20.
  - Copper price assumed to remain around US$2.6 per pound.
  - Copper accounts for around 75 percent of total exports of goods.
  - Nontraditional exports projected to grow over the medium term at 12 percent a year.
  - FDI expected to stabilize at 6.6 percent of GDP (compared to 7¾ percent of GDP in the previous DSA).
  - Current account balance projected to increase to above 3 percent of GDP by 2020.
- Fiscal sector:
  - Fiscal deficit (cash basis) projected to temporarily increase in 2015 as authorities clear arrears, then reduce to 4 percent of GDP by 2018 and to 3 percent of GDP by 2020.
  - Domestic revenues projected to rise from 16.4 percent of GDP in 2014 (net of outstanding VAT refunds) to 19.0 percent by 2020.
  - Primary expenditures projected to decline from 22.5 percent of GDP in 2014 to 19.2 percent of GDP in 2020.
  - Capital spending maintained at about 5 percent of GDP during 2015–20.
- Government financing:
  - Net external financing expected to decline from near 6 percent of GDP in 2015 to 2 percent of GDP by 2020 and stabilize at 1.5 percent of GDP over the long term.
  - Net domestic financing maintained at 1.5 percent of GDP.

### Evolution and composition of debt (selected indicators)
- Total public debt and composition (Text Table 1 highlights; percentages are percent of GDP):
  - Total Public debt: 20.6 (2011), 25.5 (2012), 28.5 (2013), 35.1 (2014) [values reported in Text Table 1].
  - Domestic debt: 12.3 (2011), 12.0 (2012), 15.4 (2013), 16.7 (2014).
  - External debt: 8.3 (2011), 13.5 (2012), 13.1 (2013), 18.4 (2014).
- Central numerical highlights from debt sustainability analysis:
  - Stock of external debt expected to peak at 35 percent of GDP in 2017 and decrease to 24 percent by 2035.
  - PV of PPG debt relative to GDP increases from about 16 percent in 2014 to 26 percent in 2017, then declines afterwards.
  - PV of PPG debt relative to exports peaks at 58 percent in 2016 (threshold 150 percent).
  - PV of PPG debt relative to revenue increases from 84 percent in 2014 to 151 percent in 2016 (threshold 250 percent).
  - Under the baseline, PV of total public debt would peak at 39 percent of GDP in 2017, declining to 34 percent of GDP by 2035.

### External debt sustainability, stress tests, and vulnerabilities
- Overall external debt burden indicators rise in the medium term but remain below indicative policy thresholds in the baseline.
- Debt service and stress test outcomes:
  - The debt service-to-revenue ratio breaches the indicative threshold in 2024–28 under a number of shocks (to exports, U.S. dollar GDP deflator, non-debt creating flows, one-time depreciation in 2016), under the assumption that external funding is secured under commercial terms.
  - If external funding were split equally between official bilateral/multilateral sources and sovereign debt issuance, stress tests would show breaches in 2022 and 2024 when the Eurobonds mature.
  - The most extreme shock in those circumstances is a one-time depreciation shock rather than an export shock.
- Sources of vulnerability emphasized:
  - Zambia’s vulnerability to swings in the copper price.
  - Several stress-test breaches are related to the country’s ability to generate export earnings.
  - A sizeable decline in copper prices can exert significant pressures on the exchange rate and constrain the government’s ability to substitute FX flows with external borrowing.
- Authorities’ stance and risk mitigation:
  - Authorities indicated they do not intend to tap international bond markets to the extent assumed in the baseline and are exploring multilateral and bilateral financing on more favorable terms.
  - Ongoing work to strengthen public debt management, including development of a debt management strategy and consideration of a sinking fund for the Eurobonds.
  - Authorities suggested fiscal adjustment pace could be faster than the baseline projection.

### Public debt sustainability and downside scenarios
- Baseline outcome:
  - Total public debt projected to rise gradually over the medium term but remain manageable over the long term (PV peak 39 percent of GDP in 2017; 34 percent of GDP by 2035).
- Key risks under standard shock scenarios:
  - Deterioration of the fiscal stance and negative shocks to GDP growth are the main sources of risk to public debt dynamics.
  - Fixed-primary-balance scenario (primary balance fixed at 2014 level) shows PV of debt-to-GDP and PV of debt-to-revenue rising over time, underscoring the need for strengthened fiscal consolidation.
  - Bound tests indicate main risk comes from lower GDP growth, highlighting the need to diversify production and strengthen public investment management to ensure productivity-enhancing investment.

### Policy implications and recommendations (from the text)
- Strengthen fiscal consolidation to improve the fiscal position and reduce risk from the fixed-primary-balance scenario.
- Diversify the export base to reduce vulnerability to copper price swings and support export earnings growth.
- Strengthen external and public debt management, including:
  - Development and implementation of a debt management strategy to lower refinancing risks.
  - Exploring multilateral and bilateral financing on favorable terms rather than heavy reliance on commercial sovereign debt issuance.
  - Consideration of a sinking fund for Eurobonds.
- Improve public investment management and project appraisal capacity to ensure investments are productivity-enhancing and support broad-based growth.
- Prioritize expenditure to social (education, health, social safety nets) and capital investment spending to promote broad-based economic growth.
- Implement tax and customs administration reforms, reduce exemptions, and other revenue-mobilization reforms to raise domestic revenues (target 19.0 percent of GDP by 2020).

*Source: _cr15152 - 3.      The medium-term scenario underlying the debt sustainability calculations assumes (IMF staff report excerpt).*

### 12.      The authorities’ assessment of debt sustainability is somewhat more favorable.

### 12.      The authorities’ assessment of debt sustainability is somewhat more favorable.

### Authorities’ Debt Sustainability Assessment (DSA)
- In 2014 the Ministry of Finance of Zambia prepared its own DSA with donor assistance.
- The authorities’ DSA results are similar to the alternative scenario described in the staff text, where:
  - the debt service-to-revenue ratio briefly breaches the threshold under a one-time depreciation shock in years when the Eurobonds mature.
- The authorities indicated they are looking into ways to facilitate repayments of the Eurobonds.
  - Considered options include establishment of a sinking fund.
  - Specific plans are still to be laid out.

### Staff and Charted Indicators (as reported)
- Figure 1 and Figure 2 present indicators of public and publicly guaranteed external debt and public debt under alternative scenarios, 2015–2035.
  - The charts show baseline, historical scenario, and the most extreme shock (the most extreme stress test is the test that yields the highest ratio on or before 2025; in multiple panels this corresponds to an Exports shock).
- Table 1 and Table 2 report detailed baseline projections and key ratios for 2012–2035, including:
  - External debt (nominal) series (percent of GDP): 17.2, 20.1, 23.9, 32.4, 35.1, 35.2, 34.8, 34.1, 33.1, 27.2, 24.2
  - Of which: public and publicly guaranteed (PPG) (percent of GDP): 13.5, 13.2, 18.2, 26.0, 29.0, 29.3, 29.2, 28.7, 27.9, 22.4, 19.8
  - Change in external debt (percent of GDP): 1.8, 2.9, 3.8, 8.5, 2.7, 0.1, -0.3, -0.7, -1.0, -0.6, -1.0
  - Identified net debt-creating flows (percent of GDP): -16.0, -6.9, -7.4, -7.3, -9.7, -11.2, -11.7, -12.0, -12.0, -10.6, -9.5
  - Non-interest current account deficit (percent of GDP): -5.8, 0.2, 1.1, -2.4, 4.0, -0.7, -2.8, -4.0, -4.5, -4.8, -4.8
  - Exports (percent of GDP): 42.1, 43.2, 41.6, 42.1, 43.1, 44.1, 44.6, 44.8, 44.8, 42.8, 42.1
  - Imports (percent of GDP): 37.1, 41.0, 38.9, 38.4, 37.0, 36.7, 36.5, 36.4, 36.3, 34.5, 34.5
  - Net FDI (negative = inflow, percent of GDP): -9.8, -6.3, -9.3, -6.0, 2.6, -6.6, -6.6, -6.6, -6.6, -6.6, -6.6
  - Endogenous debt dynamics (percent of GDP): -0.4, -0.8, 0.8, -0.1, -0.3, -0.6, -0.7, -0.6, -0.7, -0.1, 0.1
  - Contribution from nominal interest rate (percent of GDP): 0.3, 0.4, 0.7, 1.3, 1.5, 1.6, 1.6, 1.5, 1.4, 1.2, 1.3
  - Contribution from real GDP growth (percent of GDP): -1.0, -1.1, -1.1, -1.4, -1.8, -2.2, -2.2, -2.2, -2.1, -1.3, -1.2
  - PV of external debt (percent of GDP, selected entries): 21.3, 29.1, 31.3, 31.5, 31.2, 30.5, 29.6, 24.7, 23.0
  - PV of PPG external debt (percent of GDP, selected entries): 15.6, 22.7, 25.1, 25.6, 25.6, 25.1, 24.4, 19.9, 18.6
  - PV of PPG external debt (in percent of government revenues, selected entries): 84.4, 131.6, 151.3, 147.0, 141.8, 135.4, 128.1, 109.9, 102.9
  - Debt service-to-exports ratio (in percent): 5.3, 2.6, 3.0, 4.6, 5.2, 5.0, 4.9, 4.8, 4.6, 8.5, 7.3
  - PPG debt service-to-exports ratio (in percent): 2.7, 1.5, 1.8, 3.4, 4.0, 3.8, 3.8, 3.7, 3.4, 7.4, 6.2
  - PPG debt service-to-revenue ratio (in percent): 6.4, 3.9, 4.1, 8.2, 10.4, 9.7, 9.3, 8.9, 8.0, 17.4, 14.4
  - Total gross financing need (Billions of U.S. dollars): -3.2, -1.2, -1.7, -1.2, -1.8, -2.4, -2.8, -3.3, -3.7, -4.1, -8.8
  - Non-interest current account deficit that stabilizes debt ratio (percent of GDP): -7.6, -2.7, -2.7, -9.2, -5.5, -4.1, -4.2, -4.1, -3.8, -3.6, -2.4
  - Key macro assumptions—Real GDP growth (in percent): 6.8, 6.7, 5.6, 7.6, 1.4, 5.6, 6.2, 6.9, 7.0, 6.8, 6.8, 6.6, 5.0, 5.0, 5.2
  - Effective interest rate (percent): 2.1, 2.6, 3.2, 2.6, 1.7, 5.2, 5.1, 5.0, 5.0, 4.9, 4.6, 5.0, 4.5, 5.4, 4.8
  - Growth of exports of G&S (US dollar terms, in percent): 11.6, 10.4, -4.6, 19.1, 25.1, -4.0, 11.4, 13.4, 12.2, 10.7, 10.2, 9.0, 8.2, 6.0, 7.9
  - Growth of imports of G&S (US dollar terms, in percent): 22.7, 18.9, -6.1, 18.7, 20.0, -6.4, 5.2, 9.7, 10.6, 9.7, 9.8, 6.4, 8.2, 8.2, 8.0
  - Grant-equivalent financing (in percent of GDP, selected entries): 1.3, 1.3, 0.8, 0.9, 0.9, 0.9, 0.3, 0.0, 0.3
  - Government revenues (excluding grants, in percent of GDP): 17.4, 16.9, 18.5, 17.3, 16.6, 17.4, 18.0, 18.5, 19.0, 18.1, 18.1, 18.1
  - Aid flows (in Billions of US dollars): 0.8, 0.6, 0.6, 0.9, 0.9, 0.6, 0.6, 0.6, 0.7, 0.7, 0.6

### Sensitivity and Stress Tests
- Table 3 and Table 4 present sensitivity analyses and bound tests for key indicators of public and PPG external debt, 2015–2035.
  - The most extreme stress test is the test that yields the highest ratio on or before 2025; in multiple panels this corresponds to an Exports shock.
  - Bound tests include shocks such as:
    - Real GDP growth at historical average minus one standard deviation.
    - Export value growth at historical average minus one standard deviation.
    - US dollar GDP deflator at historical average minus one standard deviation.
    - One-time 30 percent nominal depreciation relative to the baseline in 2016.
  - Alternative scenarios include: key variables at their historical averages in 2015-2035 and new public sector loans on less favorable terms in 2015-2035.

### Policy Implication Highlighted by Authorities
- The authorities view the debt outlook as somewhat more favorable relative to staff alternative scenario results, but recognize repayment risks associated with Eurobond maturities under depreciation shocks.
- Possible policy response under consideration:
  - Establishment of a sinking fund to facilitate Eurobond repayments.

*Source: IMF staff and Zambian authorities (excerpts from the DSA and staff report tables and figures as presented in the chapter).*

### 1. Analytical work – Economic Briefs focused on mining

### _cr15152 - 1. Analytical work – Economic Briefs focused on mining

### IMF program and near-term work program
- IMF activities listed (timing as in source):
  - Analytical work – Managing copper resources for poverty reduction and lasting prosperity (3 policy notes) — June 2015
  - Lending – DPO focused on PFM reforms ($50 million) — June 2015
  - TA – PFM reform program and dialogue — Continuous
  - TA – Setting up a project appraisal system in MoF — Continuous
  - TA – E-procurement support — Continuous
  - TA – Pay Policy Reform — June 2015
  - TA – Zambia Mining Sector Governance Reform including EITI — June 2015
  - Analytical work – Zambia investment climate assessment — June 2015
  - TA – Follow-up project with BoZ on risk-based supervision — June 2015
  - TA – Financial Inclusion Support Framework (2-3 year program) — Start August 2015
  - TA – Financial Consumer Protection/Financial Literacy — Start June 2015
  - TA – Development Bank of Zambia on shadow credit rating — June 2016
  - Analytical work – Education Public Expenditure Review — June 2016
  - Analytical work – Economic analysis for the benefit of girls — Start Oct. 2015

- IMF work program in next 12 months (selected items and timing):
  - Technical assistance: tax administration peripatetic advisor to the Zambia Revenue Authority — Ongoing
  - Technical assistance: Central bank capacity building resident advisor to the Bank of Zambia — Ongoing
  - Staff visit to discuss mid-term 2015 budget and 2016 budget — July 2015
  - 2016 Article IV mission — March 2016

- Fund/Bank coordination and requests:
  - Fund request to Bank:
    - Analytical work on mining taxation issues — July 2015
    - Analytical work on poverty maps — June 2015
    - Pay Policy Reform Report — July 2015
  - Bank request to Fund:
    - Medium-term macroeconomic framework — Continuous
  - Joint products in next 12 months:
    - DSA for Article IV and for WB DPO — April 2015
    - Regular meetings with the Bank of Zambia — Continuous

### Statistical issues and data adequacy (as of March 31, 2015)
- General assessment:
  - "Data provision has some shortcomings, but is broadly adequate for surveillance."
  - Fiscal reporting: source data and compilation issues are particularly problematic.

- National accounts:
  - GDP rebased to 2010 (from 1994) published in 2014.
  - Broadened coverage of the informal sector improved national accounts quality.
  - Rebasing has only been extended beyond 2010 using old industry growth rates; figures for 2011–13 may be subject to considerable revisions once ongoing establishment surveys are completed and methodological enhancements applied.
  - Central Statistics Office planning to release quarterly GDP estimates.

- Price statistics:
  - CPI broadly adheres to international methodological standards.
  - New CPI series with updated weights based on latest household budget survey started in February 2012.
  - STA (AFS) ongoing project on introduction of producer price index (PPI).

- Government finance statistics:
  - Coverage limited to budgetary central government.
  - Intergovernmental transfers of about 2 percent of GDP to extra-budgetary, social security, and local government units are included, but the economic nature of these expenses is not known and own revenue sources of these entities are excluded.
  - Authorities report monthly budget releases data to AFR in a timely manner, but data are often subject to substantial revisions.
  - Zambia last reported data to STA in GFSM 2001 format for fiscal year 2011, including transactions in financial assets and liabilities.

- Monetary and balance of payments statistics:
  - Noticeable improvements in monetary accounts compiled using SRFs for BoZ, ODCs and OFC.
  - BoZ compiles BOP and IIP according to BPM6; BOP quarterly, IIP annually.
  - New services surveys and investment survey have contributed to improvements and revisions (including fob valuation of exports and imports of goods).

- External and domestic debt statistics:
  - Data provision broadly adequate for surveillance; technical assistance has improved consolidation of debt databases.

- Data Standards and Quality:
  - Zambia has participated in the GDDS since November 2002.
  - A Data ROSC Assessment was published in February 2005.

- Selected entries from Table of Common Indicators Required for Surveillance (as of April 27, 2015):
  - Exchange rates — Date of Latest Observation: April 24, 2015; Date Received: April 24, 2015; Frequency of Data/Reporting/Publication: D / D / D
  - International reserve assets and reserve liabilities of the monetary authorities — Date of Latest Observation: April 22, 2015; Date Received: April 22, 2015; Frequency: D / W / M
  - Reserve/base money — Date of Latest Observation: April 24, 2015; Date Received: April 27, 2015; Frequency: D / W / I
  - Broad money — Date of Latest Observation: Feb. 2015; Date Received: March 25, 2015; Frequency: M / M / M
  - Consumer Price Index — Date of Latest Observation: March 2015; Date Received: March 25, 2015; Frequency: M / M / M
  - GDP/GNP — Date of Latest Observation: 2013; Date Received: April 2014; Frequency: A / A / A
  - Gross external debt — Date of Latest Observation: Dec. 2014; Date Received: March 2015; Frequency: I / I / I
  - International investment position — Date of Latest Observation: 2013; Date Received: April 2015; Frequency: A

### Authorities' statement: recent developments, risks, and outlook (Statement by Ms. Chileshe Mpundu Kapwepwe and Ms. Gillian Nkhata, May 20, 2015)
- Macro context:
  - After almost a decade of robust growth and macroeconomic stability, Zambia faces increased challenges driven by global developments.
  - External factors cited: declining international commodity prices and a strengthening dollar affecting FDI, debt sustainability, inflation, mining production, and fiscal consolidation.

- Fiscal stance and policy mix:
  - Authorities committed to fiscal sustainability and measures to contain the fiscal deficit in 2015.
  - Specific measures to close the K18.0 billion deficit include:
    - sale of maize stocks by FRA,
    - reduction of spending on goods and services (approved by Cabinet),
    - deferral of capital spending,
    - full cost recovery in fuel pump prices (to be achieved by July 2015, following a first increase on May 13, 2015).
  - On taxation: limited scope to raise taxes in the near-term; challenges of doing so midway through the year.
  - VAT refunds: authorities working to eliminate backlogs caused by tightened documentation requirements through streamlining administrative procedures.
  - Policy response has relied more on monetary policy recently to avoid excessive kwacha volatility after rapid depreciation in Q1 2015.
  - Authorities committed to implementing fiscal adjustment measures and rebuilding fiscal buffers.

- Financing stance:
  - Authorities view external financing as needing to remain among financing options given:
    - the limited size of the domestic capital market,
    - the higher cost of domestic borrowing,
    - the need to crowd-in the private sector.

- Mining tax regime:
  - Mining sector contribution to government revenues remains low, "just over 2 percent of GDP to government revenue," while the sector accounts for "30 percent of GDP."
  - Previous regime: uniform royalty rate (6 percent), corporate income tax and a variable income tax.
  - 2015 budget changed regime to royalty only with differentiated rates:
    - underground mines — 8 percent
    - open cast mines — 20 percent
  - Expected impact: the change would have raised total revenue by an estimated 1 percent of GDP and provided more predictable income.
  - Actual context: introduction coincided with falling commodity prices, increasing burden on mining sector and prompting suspension of investment plans and some mines moving to “care and maintenance.”
  - Authorities recognize negative implications for the 2015 budget but expect medium-term gains in investment and copper production; a decision in April to readjust the regime was approved by Cabinet and the Income Tax Act will be amended.

- Monetary policy and interest rate caps:
  - Authorities committed to maintaining exchange rate flexibility.
  - Target to rebuild international reserves to reach at least four months of import coverage in the medium term.
  - Bank of Zambia tightened monetary policy to reduce banking system liquidity constraints and stabilize the currency; will tighten further if warranted.
  - Transitioning from reserve money targeting to using the policy rate for monetary purposes is ongoing (policy rate introduced in 2012).
  - Authorities agree interest rate caps on commercial bank lending may have become a binding constraint on credit to SMEs given rising treasury bill rates; analytical work with the World Bank is underway.

- Reducing external vulnerabilities:
  - Need to strengthen buffers against external shocks due to declining copper prices and production.
  - Planned fiscal adjustment and exchange rate flexibility expected to relieve pressure on the current account.
  - Clarity on mining tax regime expected to attract FDI and portfolio inflows and support reserve build-up.
  - Need to diversify the export base and alleviate supply-side constraints (infrastructure, quality of goods, other factors); scope for further collaboration with the Fund and Bank.

- Exchange rate assessment:
  - Staff report concludes the kwacha is over-valued and further depreciation would be needed.
  - Authorities urge caution in interpreting EBA-Lite results given divergence with ERER assessment and uncertainties about data quality and methodology.

- Conclusion:
  - Authorities reiterate commitment to prudent fiscal and monetary policies, sustained debt management practices, deeper structural reforms to boost competitiveness, promote inclusive growth and accelerate poverty reduction.

* _cr15152 - 1. Analytical work – Economic Briefs focused on mining_

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15152.pdf_