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Frequently Asked Questions on Zambia
Last Updated: June 28, 2024
Read answers to key questions regarding Zambia and the IMF
Frequently Asked Questions On Zambia
Last Updated: June 28, 2024
Read answers to key questions regarding Zambia and the IMF
The 38-monthECF-supported arrangement is based on the Zambian’s homegrown Eighth National Development plan. The program supports the authorities’ policies and reforms to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth with the aim to improve the livelihood of the Zambian people. Specifically, it helps address Zambia’s most pressing macroeconomic challenges:
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 envelop from $1.3 billion to $1.7 billion). This decision gave Zambia access to an additional SDR 433.34 million (about US$569.6 million), bringing the total IMF financial support disbursed under the arrangement to SDR 852.98 million (about US$1.1 billion).
Zambia is grappling with a severe drought that has significantly impacted agriculture production and electricity generation, affecting a substantial share of the population. Consequently, growth projections for 2024 have been revised down to 2.3 percent, from 4.7 percent.
Significant crop losses and a shortfall in electricity production will also put pressure on the current account due to lower exports and the need to import maize and electricity. And the drought will impose pressures on the budget, as the humanitarian needs associated with the drought need to be addressed. The augmentation of the IMF’s financial support to Zambia from the approved SDR 978.2 million (about $1.3 billion) to SDR 1,271.66 million (about $1.7 billion) will help support authorities’ response to the drought.
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.
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 to reduce poverty and inequality. It also aims to improve access to basic public services, especially in rural areas. The Fund-supported program 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 since 2021.
Spending on social protection is projected to more than triple from 0.7 percent of GDP in 2020 to 2.3 percent in 2024. Additional external support will help finance a temporary expansion of emergency social cash transfers, with existing beneficiaries temporarily receiving double the current transfer value.
Other social protection programs are also being expanded, including programs to mitigate food insecurity, keep girls in school, and the scaling up of the school feeding program from Early Childhood Education to Secondary Education in about thirty-seven affected districts. The Government has also proposed to initiate a limited Cash for Work Programme in the revised budget to enhance the purchasing power of households in districts impacted by the drought, in addition to restoring community infrastructure and improving access to key services.
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 January 2023 to 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.
At the same time, the authorities are supported with technical assistance from the Fund and international partners, particularly around the use of public resources. To control spending, the IFMIS system that was rolled out to all sixty-one central government budgetary institutions has been expanded to other ministries, and they will be required to record their expenditure arrears and multi-year commitments by end-July 2024. Other ongoing reforms also include a new debt management bill, new public procurement regulations, and additional transparency requirements around the country’s agricultural input subsidy program.
The authorities have undertaken a significant fiscal consolidation under the program that, together with the debt restructuring, will restore fiscal and debt sustainability over the medium term. As a significant spending compression has already taken place, and to address development needs and improve access to public service, the program supports the authorities’ own Revenue Mobilization Plan adopted in 2022, focusing on tax policies and tax administration to enhance revenue collection.
The authorities have already implemented important reforms such as removing costly VAT and excise exemptions for fuel and implementing a more predictable tax regime for the mining sector. In parallel, the Zambia Revenue Authority is working to improve its service delivery and tax compliance. The Large Taxpayer Office (LTO) for non-mining, and the Specialized Tax Office (STO) for mining, both established in January 2024, will better serve the taxpayers through taxpayer education and enhanced data analytics. The 2024 budget included measures to widen the tax base and remove exemptions from import duties and registration tax for government cars. The 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, complements other initiatives aimed at effectively taxing digital services.
Continued revenue mobilization remains a pillar to preserve fiscal sustainability while providing the space needed for social and development spending. Efforts to broaden the tax base, rationalize tax exemptions, and improve tax administration will help mobilize revenues in the future. To prevent eroding the tax base, the authorities also intend to increase fees and fines as well as index excises with inflation.
On March 25, Zambian announced an agreement in principle with the ad hoc steering committee of the Eurobond holders. This agreement was consistent with the objectives and parameters of the IMF-supported program and meets the comparability of treatment criteria, as defined by the official creditor committee.
The Eurobond debt exchange operation was launched on May 13, and 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 contribute to Zambia’s efforts to restore 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 is eroding the purchasing power of households, with a higher impact to those with lower income as they usually spend a higher income share on consumption.
In May, inflation rose to 14.7% from 13.8% in April due to higher food and fuel prices and a weakening currency which results in higher prices in domestic currency. Food inflation jumped 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 total of 450bps since February 2023. It has also increased the reserve requirement, to better manage excess liquidity in the economy.
