Key Questions on Zambia

Last Updated: September 12, 2022

Read answers to key questions regarding Zambia and the IMF

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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 reform 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:

(i) restoring sustainability through fiscal adjustment and debt restructuring;

(ii) creating room in the budget for much-needed social spending; and

(iii) strengthening governance and reducing the risk of corruption, including by improving public financial management.

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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 Fund, is to gradually increase the level and quality of social spending to reduce poverty and inequality, as well as 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 1.6 percent by 2025 (around the average for sub-Saharan African countries). Measures to support the most vulnerable include increasing the number of recipients of the Social Cash Transfer to 994,000—an almost 50 percent increase over 2019 recipients—and the monthly benefit increased from 90 to 110 kwacha, with World Bank support. Other social protection programs are also being expanded:  including programs to mitigate food security risks, keep girls in school, and help provide meals for students in schools.

The Fund-supported program incorporates providing access to free education for all and a much-needed increase in spending on health and education, including hiring over 41,000 additional health and education workers.

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How will the program promote transparency and help fight corruption?

Strengthening governance and reducing the risk of corruption, including by improving public financial management are critical to addressing the root causes of the debt crisis faced by Zambia. The authorities have emphasized a zero-tolerance approach to corruption. At their request, a comprehensive IMF-staff supported governance diagnostic assessment was launched in January 2022 to identify the main governance weaknesses and risks of corruption, as well as specific measures to address them. A final report will be published by the end of the year.

At the same time, with support from Fund capacity development, 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 in the agricultural input subsidy program.

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What actions are being taken to restore debt sustainability?

The authorities are undertaking a sustained fiscal adjustment by reducing inefficient spending and raising domestic revenues. It is anchored on cutting back inefficient public investment, eliminating regressive fuel subsidies, and reforming the agricultural subsidy program by reducing  procurement costs. The domestic revenue mobilization strategy is anchored on policy changes to increase revenues from corporate income tax, VAT, and excises as well as improvements in tax administration.

Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt treatment under the G20 Common Framework to place public debt on a sustainable path in the medium-term. Significant improvements in debt management and transparency are also being implemented.

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What are the next steps in the debt restructuring process?

The next step is for the Official Creditor Committee for Zambia, under the G20 Common Framework, to agree with the authorities the specific modalities of how official creditors intend to deliver debt relief consistent with Fund-program parameters in the form of a Memorandum of Understanding (MoU).

The MoU will include the following key parameters; “at least (i) the changes in nominal debt service over the IMF program period; (ii) where applicable, the debt reduction in net present value terms; and (iii) the extension of the duration of the treated claims.”

In parallel, Zambia will initiate specific discussions with private creditors on how comparability of treatment, a requirement of the Common Framework that will be further described in the MoU, might be achieved. Official bilateral creditors will then implement the MoU through bilateral agreements signed with Zambia while agreements in principle reached with private creditors will also be implemented through various modalities.

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How much debt relief does Zambia need? Is another debt restructuring needed after the program ends?

The overall objective of the debt restructuring is to:

i)Bring the risk of debt distress to moderate over the medium term. This requires bringing the debt service-to-revenue ratio to 14 percent by 2025, (from 61 percent now) and maintaining it at this level (on average) for the remainder of the 10-year horizon (2026-2031). Achieving this goal also implies the restructuring would need to bring the present value of external debt-to-exports ratio to a level consistent with “substantial space” to absorb shocks by 2027. For countries with weak debt-carrying capacity like Zambia, this level is 84 percent. Once an agreement that meets these goals is in place, Zambia would have secured cash flow relief through 2031, as well as seeing a significant cut in the economic burden (or present value) of its debt, debt sustainability would be restored and no additional rounds of restructuring would be needed.

ii)Ensure the Fund-program is fully financed. To close the balance of payments financing gap, the authorities are seeking cash flow relief from the debt restructuring amounting to $8.4 billion during the program period (2022-25).