Press Release: IMF Staff Concludes Visit to Zambia

IMF News, March 18, 2016

Source details

Mission period: March 9-18.
Statement date: March 18, 2016.
Team leader: Tsidi Tsikata.
Purpose: to review recent macroeconomic developments and discuss with the authorities how best to address the current economic challenges facing the country.
Note: The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

The Zambian economy is "under intense pressure."
Contributing factors: lower copper prices, electricity shortages, and poor rainfall have dampened the pace of economic activity.
Inflation has increased; expenditure pressures have risen; financing conditions have tightened substantially.
The mission estimated that economic growth declined to about 3 percent in 2015.
The mission is confident that Zambia’s current economic challenges can be overcome with resolute policy action, allowing a resumption of growth in line with the country’s abundant potential.
Warning: Delays in implementing corrective measures "will only worsen the situation, increase the adjustment cost and postpone the recovery."

Government finances are "under immense stress."
Primary contributors to higher-than-budgeted expenditure: fuel subsidies and contracted emergency electricity imports.
Estimated cost of fuel subsidies and contracted emergency electricity imports: US$660 million a year at the current pace (equivalent to 3.2 percent of GDP).
Domestic and external financing options have become more limited along with rising interest rates.
Mounting domestic arrears are adding to concerns about debt sustainability.

Tightening of monetary policy has been effective in stabilizing the exchange rate.
Tight liquidity conditions have contributed to persistent under-subscription of treasury bills and bonds.
There is "little scope to loosen monetary policy as long as fiscal imbalances are not addressed."
Key challenge: normalize activity in the interbank foreign exchange market while avoiding a return of last year’s extreme volatility in the exchange rate.

Authorities stressed that, notwithstanding the upcoming general elections, they are committed to:
- addressing the budgetary pressures,
- moving to cost-reflective energy pricing,
- scaling back on discretionary spending,
- safeguarding social protection programs.
Authorities indicated that strong near-term measures are being evaluated.
At the IMF/World Bank Spring Meetings in mid-April, authorities would provide further guidance on:
- the policy direction and reforms,
- their plans for an IMF-supported program.
The mission emphasized that a package of measures demonstrating that fiscal pressures are being tackled would boost market confidence and pave the way for increased investment and growth.

The team met with:
- Finance Minister Alexander Chikwanda,
- Bank of Zambia (BoZ) Governor Denny Kalyalya,
- other senior government and BoZ officials,
- members of parliament,
- leaders of political parties,
- representatives of the private sector, labor unions, civil society organizations, and Zambia’s development partners.
The mission thanked the authorities and stakeholders for their openness and constructive spirit.

Press Release No. 16/120, March 18, 2016 — IMF Communications Department