- What are the goals of Zambia’s Extended Credit Facility (ECF) program?
- How will the program protect society’s most vulnerable? Will the delivery of key social programs like free education be impacted?
- How will the program help Authorities raise more revenues?
- How will the program promote transparency and help fight corruption?
- What is the status of the debt restructuring process?
- Why could the IMF executive Board complete the second review without a deal with bondholders?
- Why did IMF staff assess that the revised bondholders’ proposal was compatible with the DSA, but ultimately it was rejected by the OCC?
- What is driving inflation in Zambia?
What are the goals of Zambia’s Extended Credit Facility (ECF) program?
The 38-month, $1.3 billion ECF-supported program is based on the Zambian authorities’ homegrown economic national development plan. It aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth by addressing Zambia’s most pressing macroeconomic challenges, namely:
- Restoring sustainability through fiscal adjustment and debt restructuring.
- Creating room in the budget for much-needed social spending.
- Strengthening governance and reducing the risk of corruption, including by improving public financial management.
The completion of the second review on December 20, 2023, by the IMF Executive Board gave Zambia access to about US$187 million additional, bringing the total IMF financial support disbursed under the arrangement to about US$555.7 million (See press release)
How will the program protect society’s most vulnerable? Will the delivery of key social programs like free education be impacted?
A key objective of the authorities’ reform program supported by the IMF is to gradually increase the level and improve the quality of social spending in order to reduce poverty and inequality, as well as to improve access to basic social services, especially in rural areas.
Spending on social protection is projected to more than double from 0.7 percent of GDP in 2020 to 1.5 percent by 2025. With the World Bank’s support, the number of beneficiaries of the social cash transfer program is envisaged to increase to 1.4 million, and the amount of cash benefits received by each beneficiary to double in 2023. Other social protection programs are also being expanded, including programs to mitigate food insecurity, keep girls in school, and help provide meals for students.
The Fund-supported program also accommodates the much-needed increase in spending in education and health, including extending free education to all and hiring over 41,000 additional health and education workers.
How will the program help Authorities raise more revenues?
The program supports the authorities’ own Revenue Mobilization Plan adopted in 2022, focusing on tax policies and tax administration to enhance revenue collection.
Authorities have already implemented important reforms such as the removal of costly VAT and excise exemptions for fuel and a new and more predictable tax regime for the mining sector. In parallel, the Zambia Revenue Authority is working to improve its service delivery and reduce the compliance gap by relying more on data analytics, the establishment of a large taxpayer office and introducing an e-invoicing system. To ensure a fair burden sharing and increase tax compliance, the authorities will also establish a specialized mining unit focused on small and medium-sized mines.
Continued revenue mobilization remains a pillar to preserve fiscal sustainability while providing the space needed for social and development spending. In the 2024 budget, the authorities proposed measures that widen the tax base: i.e, applying the withholding tax on all income from government bonds and removing exemptions from import duties and registration tax for government cars. To protect the tax base from inflation erosion, the authorities also intend to increase fees and fines as well as index excises with inflation.
How will the program promote transparency and help fight corruption?
Strengthening governance and fighting corruption are critical to attracting investment and generating growth. The authorities have emphasized a zero-tolerance approach to corruption. At their request, a comprehensive IMF-staff supported governance diagnostic assessment was published in December 2022 to identify the main governance weaknesses and risks of corruption, as well as specific measures to address them. The government is committed to implementing the report‘s recommendations.
At the same time, with support from the Fund, the authorities are strengthening accountability and transparency, particularly around the use of public resources. This includes a new debt management bill, new public procurement regulations, strengthened commitment controls of budget resources, and additional transparency requirements around the country’s agricultural input subsidy program.
What is the status of the debt restructuring process?
On June 22, 2023, the Zambian authorities reached an agreement with the Official Creditor Committee (OCC) on a debt treatment that is in line with Fund program parameters, and agreed on an MoU in October 2023.
In parallel, the authorities have been seeking agreements with their private creditors, including Eurobond holders, consistent with the program parameters and on comparable terms, as defined by the official bilateral creditors.
Why could the IMF executive Board complete the second review without a deal with bondholders?
The agreed MoU reached by Zambia with their official creditors on a debt treatment in October is consistent with the parameters of the IMF-supported program and the objective of restoring Zambia’s debt sustainability over the medium term. The authorities are pursuing appropriate policies that are consistent with restoring macroeconomic stability and promoting durable and inclusive growth.
In addition, in line with the Fund’s Lending into Arrears (LIA) policy, Zambia is making a good faith effort to reach a restructuring agreement with external private creditors on comparable terms and consistent with program parameters. There have been several rounds of discussions with Eurobond holders, with two proposals discussed in November 2023.While significant progress has been achieved, some adjustments still need to be made until both program parameters and comparability of treatment, as required by official bilateral creditors, are met.
Why did IMF staff assess that the revised bondholders’ proposal was compatible with the DSA, but ultimately it was rejected by the OCC?
IMF staff assessed that the (revised) proposal as of mid-November negotiated with bondholders would be consistent with the DSA and program parameters, provided that the MoU with the OCC would remain valid.
The latter included the requirement that the OCC would assess that the bondholder proposal would meet comparability of treatment (CoT), or, in the opposite case, the authorities would further revise the proposal until the OCC assesses that the CoT requirements are met.
The IMF-supported program determines the overall financing envelope needed to restore debt sustainability, but does not assess comparability of treatment, which is defined by the OCC. The authorities announced on November 20 that the OCC assessed that comparability of treatment was not met.
As planned in the MOU, the authorities are now further revising the proposal to meet CoT requirements as defined by the bilateral official creditors.
What is driving inflation in Zambia?
Inflation reached 12.9 percent y-o-y in November, rising from 9.4 percent in January 2023. The increase in inflation is broad-based, increasing both in food and non-food categories. Food inflation is driven by the higher cereal and fuel prices, and mostly by the maize prices that have surged significantly, not only in Zambia but in the region. We also have the impact of the Kwacha depreciation, which results in higher prices in domestic currency. Higher inflation has eroded the purchasing power of families, with a higher impact to those with lower income as they usually spend a higher income share on consumption.
To reduce inflation, the Bank of Zambia has increased its policy rate by 100 basis points to 11 percent in November, after a cumulative 100 basis points increase earlier in the year. The Bank of Zambia has also increased the reserve requirement, to better manage excess liquidity in the economy.