Press Release No. 12/414

Press Release No. 12/414
November 5, 2012

An International Monetary Fund (IMF) mission visited Lusaka October 25-November 5, 2012 to review economic developments and prospects. The mission had fruitful discussions with Hon. Alexander Chikwanda, Minister of Finance and National Planning; Dr. Michael Gondwe, Governor of the Bank of Zambia, and other senior officials as well as representatives from the private sector.

At the conclusion of the visit in Lusaka today, Mr. John Wakeman-Linn, mission chief for Zambia, released the following statement:

“The Zambian economy has performed well so far in 2012. Real gross domestic product (GDP) growth is likely to be around 7.3 percent, which is particularly impressive in the current uncertain global economic environment. Inflation is likely to slightly exceed the Bank of Zambia target of 7 percent for end-2012 as a result of food price rises, but remains well under control. The mission welcomes the fact that the budget deficit for 2012 is likely to be close to the targeted level of 4.1 percent of GDP. Revenue performance has been better than expected, a result of improved revenue administration. Total expenditures have been somewhat larger than budgeted, with spending overruns on wages and goods and services partially offset by a shortfall in capital spending.

“While aggregate budget figures are thus generally encouraging, there were some expenditure areas that indicate challenges. While recorded expenditures on maize purchases were as budgeted (K300 billion), roughly K1.4 trillion was needed to pay for the purchase of the 2012 maize harvest. To finance these purchases, it was necessary for the government to guarantee commercial bank loans to the Food Reserve Agency of over K900 billion. In addition, the budget allocation for the pension fund was insufficient to prevent the accumulation of new pension arrears.

“The mission welcomes the introduction, by the Bank of Zambia, of the policy rate, as a first step toward modernizing the implementation of monetary policy in Zambia, and commends the central bank for keeping inflation in check. In addition, the accumulation of gross international reserves in 2012 is likely to be broadly in line with the Bank of Zambia’s target of just over $425 million. Imports, however, have grown significantly more than expected, with the result that—on current trends—reserve coverage is likely to be only 3.0 months of imports at end-2012, unchanged from end-2011 and well below the Bank of Zambia’s medium-term goal for reserve cover of four months of imports.

“The mission congratulates the authorities on the successful launch of Zambia’s first Eurobond. The mission also welcomes the decisions the authorities have taken for the use of these funds in 2012 and 2013. Using this commercial financing to finance high priority capital spending including the repayment of a short-term debt to finance roads infrastructure development reflects prudent fiscal management.

“Prospects again look good for Zambia’s economy in 2013. Barring further deterioration in the global economy, real GDP growth should be close to 8 percent. Under the current monetary policy stance, the mission projects that inflation will be 6 percent. The mission supports the aggregate targets in the government’s 2013 budget. Given spending and projected tax revenues and grants, the fiscal deficit is likely to be close to 4 percent of GDP, in part due to one-time capital expenditures financed from the recent Eurobond issuance.

“It will be important to keep civil servant wages in line with the budget. Further increases in civil service wages, beyond what has been budgeted, would make it extremely difficult for the government to finance the planned—and necessary—increases in capital spending, as well as spending on health and education, in 2013 and beyond. It would also intensify existing pressures on private sector wages, with potentially adverse consequences for employment creation and inflation. Finally, the budget allocation for the pension fund is again insufficient to prevent the accumulation of new pension arrears.

“There are near-term downside risks for the Zambian economy, arising from the uncertain prospects for the global economy. The IMF’s most recent World Economic Outlook baseline projection projects 2013global growth 3.6 percent—½ percent lower than projected in April. In addition, more pessimistic scenarios are presented in which global growth could be as much as 2 percentage points lower still. While the Zambian economy has fared well so far, further deterioration in global economic conditions could squeeze trade credit lines, reduce demand for Zambian exports, and lower copper prices. It will be important for the Zambian authorities to prepare contingency plans, in the event that one or more of these pessimistic scenarios materialize.”

The mission thanks the authorities for their hospitality, cooperation, and constructive discussions.