Press Release: IMF Executive Board Approves US$79.2 Million PRGF Arrangement with Zambia

June 4, 2008

Press Release No. 08/134

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, Poverty Reduction and Growth Facility (PRGF) arrangement for Zambia in an amount equivalent to SDR 48.91 million (about US$79.2 million) in support of the country's economic policies aimed at alleviating poverty and sustaining growth. The decision enables Zambia to request the first disbursement in an amount equivalent to SDR 6.987 million (about US$11.3 million).

The new PRGF arrangement succeeds a previous arrangement that was successfully completed in September 2007 (see Press Release No. 07/124).

Following the Executive Board's discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Zambian authorities are to be commended for implementing prudent macroeconomic policies, which, in the context of high copper prices and debt relief, contributed to robust economic growth, markedly lower inflation, a reduction of poverty, and a build-up of international reserves.

"The authorities remain committed to maintaining prudent macroeconomic policies and pursuing structural reforms to sustain high economic growth, further reduce poverty, diversify the economy, and preserve macroeconomic stability and debt sustainability. Their new medium-term economic program is a sound basis for achieving these objectives.

"The new tax regime for the mining sector will provide substantial resources to accommodate an increase in high-priority infrastructure and social spending that is compatible with macroeconomic stability and Zambia's absorptive capacity. In "implementing the new regime, the authorities are encouraged to ensure that the attractiveness of investment in the mining sector is preserved.

"The prudent conduct of monetary policy has helped to maintain low inflation. To strengthen liquidity management, a formal mechanism to coordinate monetary and fiscal policies will be established. The flexible exchange rate has served Zambia well in enhancing the effectiveness of monetary policy and facilitating the economy's adjustment to shocks.

"The program envisages a cautious policy on foreign borrowing, emphasizing concessional loans and close monitoring of external borrowing by public enterprises. To preserve the recent gains in external debt sustainability, the authorities will give priority to developing and implementing a comprehensive debt management strategy.

"The program's structural policies complement the macroeconomic framework. They appropriately focus on improving expenditure management and budget execution, making revenue collection more efficient and effective, strengthening monetary operations and deepening the financial sector, adopting a debt management strategy to help ensure debt sustainability, and addressing supply shortages and inefficiencies in the energy sector," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

Recent Economic Developments

The Zambian economy has performed well in recent years and the medium-term outlook is favorable, with real GDP expected to grow at 6-7 percent annually. However, this projection could be undermined by a sharper drop in copper prices than expected and continued electricity outages.

The fiscal position is expected to strengthen as revenues increase substantially over the medium term following the introduction of a new fiscal regime for mining. The increased resources will be used over time to finance high-priority projects identified in the Fifth National Development Plan, taking into consideration project implementation capacity and the economic impact of additional spending.

The structural reform program will complement the medium-term macroeconomic framework. Efforts to improve expenditure management and budget execution, and revenue collection, will continue. Reforms will also strengthen monetary operations and deepen the financial sector, especially through developing the secondary market for government securities. The authorities will adopt a strategy to ensure an adequate and reliable supply of electricity, including raising electricity tariffs to cover the cost of service and increasing the operational efficiency of the public electric power utility company.

Program Summary

The new three-year PRGF arrangement will support the government's objectives of boosting economic growth and enhance employment and income opportunities, especially for the poor, while maintaining macroeconomic stability. It is a "low-access" program (10 percent of quota), reflecting Zambia's limited balance-of-payments needs.

The Fifth National Development Plan 2006-10 (FNDP), Zambia's Poverty Reduction Strategy Paper (PRSP), sets out the policy framework to meet these objectives (see IMF Country Report No. 07/277). The FNDP underscores the need to create an environment conducive to private sector growth through sustained macroeconomic stability, public sector efficiency and accountability, and investments in infrastructure and the social sectors.

Consistent with these principles and objectives, the program will focus on: (i) maintaining macroeconomic stability and debt sustainability, while increasing fiscal space for investment in infrastructure, energy, and human resources; and (ii) diversifying the economy to lessen dependence on mining by improving the conditions for private sector-led growth.

A flexible exchange rate regime will be maintained and international reserves are projected to increase to levels that would allow Zambia to better weather external shocks.

Zambia: Selected Economic Indicators
  2005 2006 2007 2008 2009 2010
        Proj. Proj. Proj.
  (In percent changes; unless otherwise indicated)

National account and prices


GDP at constant prices

5.2 6.2 6.0 6.2 6.3 6.5

GDP deflator

18.6 13.8 9.4 5.0 4.0 2.9

GDP at market prices

32,456 39,223 45,482 50,716 56,051 61,432

(In billions of kwacha)


Consumer prices (average)



18.3 9.0 10.7 8.6 4.0 5.0

Underlying (excluding food)

18.1 13.6 16.3 9.2 5.2 5.0

Consumer prices (end of period)

15.9 8.2 8.9 7.0 5.0 5.0

External sector


Terms of trade (deterioration -)

10.4 55.2 7.9 -8.7 -13.8 -20.1

Average exchange rate (kwacha per U.S. dollar)

4,464 3,601 4,002 ... ... ...

(in percentage change; depreciation -)

6.6 19.3 -11.1 ... ... ...

Real effective exchange rate (depreciation -)1

24.1 32.3 -7.1 ... ... ...

Money and credit (end of period)


Domestic credit to the private sector

18.7 54.3 43.0 22.2 ... ...

Reserve money2

16.4 22.6 1.6 11.5 ... ...


0.4 45.1 25.9 11.6 ... ...
  (In percent of GDP; unless otherwise indicated)

National accounts


Gross investments

22.5 22.6 24.1 22.7 22.1 22.5


7.0 4.1 4.1 5.2 5.8 6.8


15.5 18.5 20.0 17.5 16.3 15.7

National savings

18.1 25.6 21.6 20.6 24.1 21.5

Gross foreign savings

4.4 -3.0 2.5 2.1 -2.0 1.0

Central government budget3


Overall balance

-2.6 18.6 -0.2 -1.1 0.9 0.4

(excluding grants)

-8.3 -7.4 -4.9 -6.5 -4.5 -5.0


17.4 16.9 18.7 21.2 22.1 21.5


5.6 26.0 4.6 5.3 5.4 5.3

Total expenditure4

25.7 24.3 23.6 27.6 26.7 26.4

External sector


Current account balance


(including official grants)

-4.4 3.0 -2.5 -2.1 2.0 -1.0

(excluding official grants)

-10.1 -0.7 -7.1 -7.4 -3.4 -6.3

Gross international reserves (months of imports)

2.2 2.5 3.2 4.7 5.5
  (In percent of export of goods and services)

NPV of central government and BoZ external debt

78.3 15.7 11.8 12.8 14.1 16.3

Sources: Zambian authorities; and IMF staff estimates and projections.

1Excludes Zimbabwe.

2The projected reduction in reserve money for December 2007 reflects the lowering of statutory reserve requirements

from 14 to 8 percent on October 1, 2007.

3Grants in 2006 include MDRI debt cancellation amounting to 21.4 percent of GDP.

4Including discrepancy between the above-the-line balance and below-the-line financing.


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