Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Zambia

February 1, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the Article IV consultation with Zambia may be made available at a later stage if the authorities consent.

Public Information Notice (PIN) No. 06/08
February 1, 2006

On January 11, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zambia.1


The Zambian economy has achieved sustained robust growth in recent years, a marked turnaround after more than two decades of economic stagnation and falling per capita income. During 2000-05, real GDP growth averaged 4½ percent a year, as the mining sector recovered substantially in response to privatization and rising copper prices, while the construction sector performed particularly well, driven by strong demand for housing. Inflation has been reduced in recent years, but remains high. In addition, Zambia's external position has strengthened, owing to both a rebound in copper export receipts and relatively strong growth of nontraditional exports; nevertheless, international reserves remain low. Notwithstanding the improvements in economic performance, poverty is still widespread and the economy continues to be vulnerable to climatic and terms of trade shocks.

In 2005, real GDP growth is estimated to have moderated to 4.3 percent from 5.4 percent in the previous year, owing to a drought-related shortfall in maize production and temporary disruptions to mining activity associated with labor disputes and mining accidents. Fuel shortages in the second half of the year, arising from unanticipated shutdowns of the country's oil refinery, also contributed to the economy's slowdown. Inflation remained in the high teens during most of 2005, partly reflecting drought-induced increases in food prices and rising world oil prices, before dropping to 15.9 percent at end-year, as the tightening of monetary policy and a sharp appreciation of the Zambian kwacha restrained inflation pressures.

A substantial fiscal adjustment in 2004 has helped put the public finances on a sustainable course. Spending restraint allowed the overall deficit (including grants) to be reduced to 1.7 percent of GDP from 6.6 percent in the previous year, while still allowing for increased spending on poverty-reducing programs (PRPs), including the hiring of a significant number of new teachers and health workers. As a result, government domestic borrowing was greatly reduced (to less than 1 percent of GDP), thus easing the crowding out of private sector credit, which expanded rapidly while interest rates declined. In 2005, the overall fiscal deficit is expected to be broadly in line with the target for the year of 2.5 percent of GDP, notwithstanding a temporary reduction in import and excise duties on petroleum products during the final quarter, to encourage greater imports in order to alleviate fuel shortages.

The attainment of debt relief under the HIPC Initiative coupled with the favorable trend in exports has improved markedly Zambia's debt sustainability. Including additional bilateral debt relief agreed by Paris Club creditors in May 2005, the ratio of Zambia's external public sector debt to exports is estimated to have fallen to 66 percent at end-2005. Implementation of the Multilateral Debt Relief Initiative, approved by the Fund's Board in December, would result in the cancellation of the bulk of the remaining external debt.

The government's lower domestic financing need has facilitated a firmer monetary policy stance by the Bank of Zambia, after years of excessive monetary expansion. Together with a more consistent implementation of liquidity management in recent months, growth of both reserve and broad money has been reduced and is expected to have remained well within target through the end of the year.

After having remained fairly stable in real effective terms during 2000-04, the Zambian kwacha appreciated strongly in 2005. Against the U.S. dollar, the kwacha appreciated by 26 percent during the year, driven by a marked strengthening of market sentiment stemming from record high world prices for copper, a perceived commitment to prudent fiscal and monetary policies, and the substantial improvement in Zambia's debt sustainability outlook.

In addition to the rebound in copper export earnings, a steady expansion of nontraditional exports have contributed to the strengthening of Zambia's external sector. Despite strong growth in imports, arising partly from high levels of investment in the mining sector and, more recently, high world oil prices, the current account deficit (excluding grants) narrowed sharply, from about 20 percent to about 12 percent of GDP during 2000-05. Still, international reserves have remained low, building up to only about 1½ months of imports by end-2005.

While there have been a number of delays, there has also been important progress in implementing the structural reform agenda, aimed at increasing the efficiency and effectiveness of the public sector, improving debt management, deepening the financial sector, and enabling private sector development. There has been an overall improvement in public expenditure management systems, including the introduction of a medium-term expenditure framework in the budget making process, even though the long planned for piloting of an integrated financial management and information system (IFMIS) has yet to be realized. Again, with some delays, progress has been made implementing the authorities' Financial Sector Development Plan—notably, toward the resolution of troubled state-owned nonbank financial institutions and the privatization of the Zambia National Commercial Bank. Progress to date under the Private Sector Development Initiative has been more limited.

Executive Board Assessment

Directors commended the authorities for maintaining a macroeconomic policy framework that has enabled the economy to sustain robust growth in 2005, despite a number of adverse supply shocks. They welcomed the sustained efforts to strengthen the public finances, which have contributed to improved macroeconomic stability and strong growth. Directors noted the favorable performance of nontraditional exports, and the recent strong recovery of the mining sector following privatization of mining companies. Directors were concerned, however, that poverty, though declining, is still widespread in Zambia. They were encouraged by the authorities' commitment to increase further spending on poverty-reducing programs (PRPs) and implement a structural reform agenda aimed at increasing productivity and raising incomes.

Directors agreed that prospects are favorable for achieving higher economic growth and lower inflation in the years ahead. They noted that attaining single-digit inflation by 2007 would be a historic accomplishment that would further investment, financial intermediation, and good labor relations. Noting the potential pressures on policies during an election year, Directors urged the authorities to maintain disciplined economic and financial policies to safeguard the gains achieved. Directors further observed that the authorities must maintain clear objectives for monetary policy and closely coordinate fiscal and monetary policies to help break expectations of high inflation.

Directors agreed that strengthening public expenditure management and financial accountability (PEMFA) is critical for increasing the efficiency and effectiveness of the public sector. They welcomed the progress achieved thus far under the comprehensive PEMFA reform program, and noted that it has encouraged some donors to increase their direct support for the budget. Directors, however, expressed concern over delays to the contracting for the installation of an integrated financial management and information system (IFMIS) and urged the authorities to ensure that existing public expenditure management systems are appropriately strengthened.

Directors welcomed the authorities' efforts to resolve domestic arrears and fund contingent liabilities. They agreed that clearing arrears to contractors should be a high priority. Directors urged the authorities to proceed expeditiously with a reform of the pension system. They welcomed the initial steps taken by the authorities to provide budgetary resources over the medium term to meet projected obligations to the public sector pension fund, but emphasized that a fundamental reform is necessary to avert a major risk to the public finances.

Directors observed that expansion and deepening of financial intermediation is critical for private sector-led growth. In this regard, they welcomed the expansion in bank credit to the private sector facilitated by reduced government borrowing. Directors cautioned, however, that this credit expansion is not without risks and urged enhanced financial sector supervision and regulation as an essential step to maintain confidence in the system. Directors advised the authorities to follow through with planned measures to resolve financially troubled nonbank financial institutions and finalize privatization of the Zambia National Commercial Bank.

Directors agreed that a flexible exchange rate policy has served Zambia well. They remarked that the rapid growth of nontraditional exports in recent years suggests that Zambia has maintained its international competitiveness. However, the recent appreciation of the kwacha, supported by the improvement in Zambia's longer-term prospects, points to the importance of increasing productivity in order to maintain competitiveness. Directors noted that appreciation pressures may provide an opportunity to accumulate international reserves more rapidly than planned, and recommended that a close watch be kept on the impact of foreign exchange market developments on the economy.

Directors urged the authorities to step up implementation of the structural reform agenda to remove impediments to business activity, expand access to credit, and improve infrastructure. They highlighted the importance of donor coordination, welcomed the Fund's good work in coordinating and consulting productively, and encouraged the Fund and the Bank to continue to strengthen their efforts in this regard.

Directors remarked that debt relief under the enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) have greatly improved Zambia's external debt sustainability position. They welcomed the authorities' commitment to avoid a renewed build up of external debt by adopting a prudent borrowing policy and further strengthening their debt management capacity. In this regard, investment plans by state-owned enterprises, such as the electricity and telephone companies, should be thoroughly scrutinized to ensure that Zambia reaps the maximum benefits.

Directors noted that debt relief and the prospect of increased donor support provided a significant opportunity for directing greater resources to increasing economic growth and reducing poverty. In particular, Directors looked forward to the timely revision of the Zambian National Development Plan to map out a comprehensive agenda to achieve strong progress toward meeting the Millennium Development Goals (MDGs).

Zambia: Selected Economic and Financial Indicators, 2001-05


2001 2002 2003 2004 2005

  (Annual percentage change)

National income and prices


Real GDP

4.9 3.3 5.1 5.4 4.3

GDP deflator

24.3 19.9 19.8 20.1 18.9

Consumer prices (annual average)

21.4 22.2 21.4 18.0 18.3

Consumer prices (end of period)

18.7 26.7 17.2 17.5 15.9
  (In percent of GDP)

Investment and savings


Gross national savings

5.1 12.8 16.0 18.9 17.5

Gross foreign savings

13.9 9.2 9.6 5.4 6.0

Gross domestic investment

19.0 22.0 25.6 24.3 23.5

Of which: Public investment

11.9 11.8 11.4 8.7 7.4

Central government budget


Revenue and grants

24.8 26.2 24.9 23.8 23.9


19.1 17.9 18.0 18.3 17.8


5.7 8.3 7.0 5.5 6.0


32.2 31.3 30.9 26.7 26.5

Current expenditures

19.7 19.4 19.5 18.0 19.2

Of which:


Wages and salaries

6.8 8.0 8.4 7.8 7.9

Interest 1/

2.5 4.1 3.9 3.5 2.7

Capital expenditures

11.9 11.8 11.4 8.7 7.4

Change in balances and statistical discrepancy

-0.8 -1.3 -0.6 1.2 0.0

Overall balance, cash basis

-8.1 -6.3 -6.6 -1.7 -2.7

Domestic financing (net)

4.5 2.1 5.1 0.8 1.9

External financing (net)

3.6 4.3 1.5 0.9 0.7
  (Annual percentage change)

Money and credit


Broad money (end of period)

10.8 31.5 23.4 30.2 8.6

Claims on the private sector (end of period)

9.7 7.8 36.4 48.1 34.0

External sector


U.S. dollar value of exports of goods and services

19.4 2.4 15.4 63.7 16.3

U.S. dollar value of imports of goods and services

23.3 -2.5 13.3 21.1 18.6

Export volume (goods)

26.2 11.2 1.8 16.6 5.5

Import volume (goods)

34.3 -3.9 6.9 4.3 9.4

Real effective exchange rate (annual average) 2/

8.5 -5.8 -1.7 8.1 12.2

Terms of trade

-1.7 -6.7 4.2 21.9 2.1
  (In percent of GDP)

Current account balance, excluding grants

-20.8 -17.3 -16.2 -10.7 -11.9

Current account balance, including grants

-13.9 -9.2 -9.6 -5.4 -6.0

Overall balance of payments

-8.0 -11.0 -7.4 -6.1 -4.0

External official debt service 1/ 3/

13.4 11.4 15.2 18.2 7.0
  (In millions of U.S. dollars)

Gross official reserves (end of period)

114 283 194 222 312

In months of imports of goods and services

0.8 2.1 1.3 1.2 1.4

Sources: Zambian authorities; and IMF staff estimates.
1/ After debt relief.
2/ Estimate for 2005 reflects data for January-August.
3/ In percent of exports of goods and services.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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