Frequently Asked Questions on Zambia

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Frequently Asked Questions on Zambia

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IMF-supported program and objectives

• The 38-month ECF-supported arrangement is based on the Zambian’s homegrown Eighth National Development plan.
• Program objectives:
  • Restore macroeconomic stability and foster higher, more resilient, and more inclusive growth to improve the livelihood of the Zambian people.
  • Restore debt and fiscal sustainability through fiscal adjustment and debt restructuring.
  • Create room in the budget for much-needed social spending.
  • Advance structural reforms, including strengthening governance and reducing the risk of corruption, and improving public financial management.

IMF financial support and augmentation

• On June 26, 2024, the IMF Executive Board concluded the third review and approved augmentation of the arrangement by 30 percent of quota, raising the envelope from $1.3 billion to $1.7 billion.
• The augmentation gave Zambia access to an additional SDR 433.34 million (about US$569.6 million).
• Total IMF financial support disbursed under the arrangement reached SDR 852.98 million (about US$1.1 billion).
• The augmentation increased approved support from SDR 978.2 million (about $1.3 billion) to SDR 1,271.66 million (about $1.7 billion).

Drought impact and growth outlook

• Zambia is grappling with a severe drought that has significantly impacted agriculture production and electricity generation.
• Growth projections for 2024 were revised down to 2.3 percent, from 4.7 percent.
• The drought is expected to cause:
  • Significant crop losses and a shortfall in electricity production.
  • Pressure on the current account due to lower exports and the need to import maize and electricity.
  • Pressures on the budget due to humanitarian needs associated with the drought.

Fiscal response and revised 2024 Budget measures

• The revised 2024 Budget reprioritizes spending to accommodate emergency relief for 1.2 million additional households.
• Additional external support will help finance a temporary expansion of emergency social cash transfers, with existing beneficiaries temporarily receiving double the current transfer value.
• The Government has proposed to initiate a limited Cash for Work Programme in the revised budget to enhance purchasing power in drought-affected districts, restore community infrastructure, and improve access to key services.

Social spending, public services, and labor hiring

• A key objective of the authorities’ reform program is to gradually increase the level and improve the quality of social spending to reduce poverty and inequality and improve access to basic public services, especially in rural areas.
• The Fund-supported program accommodates increased spending in education and health, including extending free education to all.
• Since 2021, over 41,000 additional health and education workers have been hired.
• Spending on social protection is projected to more than triple from 0.7 percent of GDP in 2020 to 2.3 percent in 2024.
• Other social protection expansions include programs to mitigate food insecurity, keep girls in school, and scaling up the school feeding program from Early Childhood Education to Secondary Education in about thirty-seven affected districts.

Governance, anti-corruption, and transparency measures

• Strengthening governance and fighting corruption are emphasized as critical to attracting investment and generating growth, with the authorities adopting a zero-tolerance approach to corruption.
• At the authorities’ request, an IMF-staff supported governance diagnostic assessment was published in January 2023 to identify governance weaknesses, corruption risks, and specific measures to address them.
• The government is advancing implementation of the assessment’s recommendations; for instance, the commencement order was recently issued for the implementation of the Access to information bill, under which every citizen can request unclassified information from the government on any issue of public interest.
• Technical assistance from the IMF and international partners supports use-of-public-resources reforms.
• The IFMIS system, rolled out to all sixty-one central government budgetary institutions, has been expanded to other ministries, which will be required to record their expenditure arrears and multi-year commitments by end-July 2024.
• Ongoing reforms include a new debt management bill, new public procurement regulations, and additional transparency requirements around the country’s agricultural input subsidy program.

Fiscal consolidation, debt sustainability, and revenue mobilization

• The authorities have undertaken significant fiscal consolidation under the program that, together with the debt restructuring, aims to restore fiscal and debt sustainability over the medium term.
• The program supports the authorities’ Revenue Mobilization Plan adopted in 2022, focusing on tax policies and tax administration to enhance revenue collection.
• Implemented measures include:
  • Removing costly VAT and excise exemptions for fuel.
  • Implementing a more predictable tax regime for the mining sector.
• Zambia Revenue Authority reforms:
  • The Large Taxpayer Office (LTO) for non-mining and the Specialized Tax Office (STO) for mining were both established in January 2024 to better serve taxpayers through taxpayer education and enhanced data analytics.
• 2024 budget tax measures:
  • Widen the tax base and remove exemptions from import duties and registration tax for government cars.
  • Electronic invoicing system launched in March 2024 will allow for VAT refunds based on invoices generated within this new system.
  • A new VAT on Cross-Border Electronic Services, established in April 2024, aims to tax digital services.
• To prevent erosion of the tax base, the authorities intend to increase fees and fines and index excises with inflation.

Debt restructuring and Eurobond exchange

• On March 25, Zambia announced an agreement in principle with the ad hoc steering committee of the Eurobond holders consistent with the IMF-supported program objectives and comparability of treatment criteria defined by the official creditor committee.
• The Eurobond debt exchange operation was launched on May 13.
• On May 28, the authorities announced that an overwhelming majority of Bondholders (above 90 percent of them) voted in favor of the proposed restructuring deal.
• The successful implementation of the bond exchange in June 2024 provides significant external debt service relief and further contributes to restoring debt sustainability.
• Going forward, under the G20 Common Framework, the authorities will need to finalize bilateral agreements with official creditors and reach an agreement with other commercial private lenders in line with program parameters and comparability of treatment.

Inflation dynamics and monetary policy response

• Inflation is eroding household purchasing power, with a higher impact on lower-income households.
• In May, inflation rose to 14.7% from 13.8% in April due to higher food and fuel prices and a weakening currency.
• Food inflation rose to 16.2 percent from 15.7 percent, driven by higher prices for maize, mealie meal, bread, fish, and vegetables, largely due to drought.
• Non-food inflation increased to 12.7 percent from 11.2 percent, mainly because of fuel price hikes and rising costs for motor vehicles and household appliances.
• To reduce inflation, the Bank of Zambia has hiked the policy rate by a total of 450bps since February 2023 and has increased the reserve requirement to better manage excess liquidity in the economy.

References

• Zambia and the IMF
• Resident Representative for Zambia
• Extended Credit Facility (ECF)
• Questions and Answers on Sovereign Debt Issues
• IMF Executive Board Completes Second Review Under the Extended Credit Facility for Zambia and Approves US$187 Million Disbursement, December 20, 2023
• Zambia: Request for an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; Staff Supplement; Staff Statement; and Statement by the Executive Director for Zambia, September 6, 2022
• Zambia: Second Review Under the Arrangement Under the Extended Credit Facility, Requests for a Waiver of Nonobservance of a Quantitative Performance Criterion, Modifications of the Monetary Policy Consultation Clause and of Quantitative Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Zambia
• Zambia: IMF Executive Board Completes Third Review Under the Extended Credit Facility and Approves Augmentation of the Arrangement, June 26, 2024
• published in January 2023to identify the main governance weaknesses and risks of corruption, as well as specific measures to address them. The government is advancing in implementing the report ‘s recommendations. For instance, the commencement order was recently issued for the implementation of the Access to information bill. Under the new law, every citizen can request unclassified information from the government on any issue of public interest fostering transparency and accountability of the Zambian government.