Press Release: IMF Concludes Staff Mission to Zambia
IMF News, November 5, 2012
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- Published: November 5, 2012
Economic performance in 2012
- Real gross domestic product (GDP) growth is likely to be around 7.3 percent.
- Inflation is likely to slightly exceed the Bank of Zambia target of 7 percent for end-2012 due to food price rises, but “remains well under control.”
- Imports have grown significantly more than expected.
Fiscal developments and public finances
- 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, attributed to 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.
- Maize purchases:
- 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, the government guaranteed commercial bank loans to the Food Reserve Agency of over K900 billion.
- Pension fund:
- The budget allocation for the pension fund was insufficient to prevent the accumulation of new pension arrears (noted for 2012 and again highlighted for 2013).
Monetary policy, reserves, and external position
- The mission welcomes the introduction, by the Bank of Zambia, of the policy rate as a first step toward modernizing monetary policy implementation.
- The Bank of Zambia is commended for keeping inflation in check.
- Gross international reserves in 2012 are likely to be broadly in line with the Bank of Zambia’s target of just over $425 million.
- 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.
Eurobond issuance and use of proceeds
- The mission congratulates the authorities on the successful launch of Zambia’s first Eurobond.
- The mission welcomes the authorities’ decisions for the use of these funds in 2012 and 2013.
- The authorities used commercial financing to finance high priority capital spending including the repayment of a short-term debt to finance roads infrastructure development; the mission describes this as reflecting prudent fiscal management.
Outlook for 2013 and risks
- Prospects for 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.
- Wages and spending risks:
- 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 planned increases in capital spending, and spending on health and education, in 2013 and beyond.
- Further wage increases would also intensify pressures on private sector wages, with potentially adverse consequences for employment creation and inflation.
- The budget allocation for the pension fund is again insufficient to prevent the accumulation of new pension arrears.
- Global downside risks:
- The IMF’s most recent World Economic Outlook baseline projection projects 2013 global growth 3.6 percent—½ percent lower than projected in April.
- More pessimistic scenarios are presented in which global growth could be as much as 2 percentage points lower still.
- Further deterioration in global economic conditions could squeeze trade credit lines, reduce demand for Zambian exports, and lower copper prices.
- The mission recommends that the Zambian authorities prepare contingency plans in case one or more pessimistic scenarios materialize.
Mission engagement
- The mission visited Lusaka October 25-November 5, 2012 to review economic developments and prospects.
- The mission held discussions with Hon. Alexander Chikwanda, Minister of Finance and National Planning; Dr. Michael Gondwe, Governor of the Bank of Zambia; other senior officials; and representatives from the private sector.
- The mission thanks the authorities for their hospitality, cooperation, and constructive discussions.
Press Release No. 12/414 — IMF Concludes Staff Mission to Zambia