Public Information Notice

Public Information Notice (PIN) No. 12/82
July 19, 2012

On June 13, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zambia.¹

Background

Zambia has achieved high and sustained growth and macroeconomic stability over the past decade, but poverty remains high. Real gross domestic product (GDP) growth averaged 5.2 percent in 2000–10 (or 3.1 percent per capita); inflation declined from 30 percent to single digits; debt declined sharply; and international reserves increased to comfortable levels.

Economic conditions remain favorable and there has been little impact to date from the European crisis. Real GDP growth is estimated to have been strong in 2011, driven by a record maize harvest and strong expansion in bank credit, which has surpassed pre-crisis (2008–09) levels. Inflation continued to decline, broadly in line with the authorities’ target of 7 percent. Despite copper prices rising to record highs, the external current account surplus narrowed significantly, mainly reflecting a strong expansion in imports and a decline in grants. However, gross international reserves rose above $2 billion for the first time, equivalent to 3 months of prospective imports. Preliminary data suggest that the fiscal deficit of the central government remained flat at around 3 percent of GDP in 2011, as a large expansion in election-related spending was offset by a one-off payment of mining tax arrears.

In 2012, real GDP is projected to rise by 7.7 percent, reflecting strong growth in copper production and non-maize agriculture, and an expansionary fiscal policy. The 2012 budget targets a deficit of 4.1 percent of GDP and a significant increase in investment. More than half of budget financing is expected to come from a US$500 million sovereign bond issue, and net domestic financing is targeted to remain low at about 1 percent of GDP. Inflation is projected to remain close to its current level of around 6 percent in 2012. The Bank of Zambia (BOZ) recently changed its monetary policy framework from reserve money targeting to the use of a policy rate as the main monetary policy tool.

Executive Board Assessment

Executive Directors commended the authorities for their sound macroeconomic management and welcomed Zambia’s strong economic performance in recent years. Directors noted that while the outlook for the economy is favorable, it is subject to risks arising from volatility of copper prices and delays in implementing measures needed to meet the 2012 budget deficit target. To safeguard macroeconomic stability and to make growth more inclusive, they stressed the need for continued commitment to strong policies and implementation of structural reforms.

Directors agreed that fiscal policy should aim at prioritizing growth enhancing expenditures and mobilizing revenues to create the space needed to achieve the fiscal objectives. They emphasized the importance of implementing reforms to maize marketing and pricing, fertilizer subsidies, and public sector pension funds. These measures should help restore fiscal sustainability and correct market distortions that have created overdependence on maize production. Directors noted that revenue enhancing measures, including strengthening tax administration and reducing subsidies and incentives will also be critical for achieving the fiscal targets. In addition, the reinstatement of the automatic petroleum price adjustment mechanism and the implementation of the multi year electricity tariff framework are needed to minimize fiscal risks associated with the current pricing below cost recovery.

Directors underscored that public financial management reforms are essential to improve budgetary planning and execution and prioritizing spending. They welcomed the plan to complete the implementation of the Treasury Single Account and urged the authorities to continue to strengthen their investment and debt management capacity. These measures would support the planned scaling up of infrastructure spending and increased use of non-concessional financing.

Directors endorsed the plans to further enhance the monetary policy framework in support of a low inflation objective. They encouraged the authorities to remain vigilant to inflationary pressures and tighten policy if needed. Directors agreed that the introduction of the monetary policy rate, combined with use of a broad set of economic indicators to assess the monetary policy stance, should make monetary policy more flexible and forward looking and enhance liquidity management. Directors noted that the flexible exchange rate regime has helped Zambia weather external shocks. They highlighted that increasing the reserve coverage would also provide an added buffer.

Directors welcomed the authorities’ efforts to strengthen the financial sector and improve access to financial services. They urged the authorities, however, to work closely with key stakeholders to minimize any risks to the financial sector stemming from the implementation of the new minimum capital requirement for commercial banks and the redenomination of the local currency.

Directors emphasized that structural reforms will be critical to achieve economic diversification and make growth more inclusive, in order to tackle the high rate of poverty and unemployment. In this context, they encouraged the authorities to formulate a broad based reform strategy for the agriculture sector, and to strengthen formal sector development, in particular by improving the business climate.

Zambia: Selected Economic Indicators, 2009–12
(Percent of GDP, unless otherwise indicated)
	2009	2010	2011	2012
			Act.	Proj.
Adjustment scenario
National account and prices
GDP growth at constant prices	6.4	7.6	6.6	7.7
Mining	20.3	15.2	-5.2	23.0
Non-mining	5.2	6.8	7.9	6.2
GDP deflator	10.7	11.7	12.8	4.8
GDP at market prices (Billions of kwacha)	64,616	77,667	93,354	105,383
GDP per capita (US$)	990	1,221	1,414	1,457
Gross national income per capita (US$)	958	1,118	1,299	1,347
Consumer prices
Consumer prices (average)	13.4	8.5	8.7	5.6
Consumer prices (end of period)	9.9	7.9	7.2	6.0
External sector
Terms of trade (deterioration -)	-16.6	35.2	4.1	-3.0
Average exchange rate (kwacha per US$)	5,046	4,797	4,861
(percentage change; depreciation -)	-34.7	4.9	-1.3
Real effective exchange rate (depreciation -)1	-14.2	5.8	-0.4	…
Money and credit (end of period, unless otherwise specified)
Domestic credit to the private sector	-5.7	15.4	27.9	17.5
Reserve money (end of period)	19.3	27.8	6.8	8.6
Broad Money (M3)	7.7	29.9	21.7	17.0
National accounts
Gross investment	19.6	21.1	23.4	23.6
Government	3.4	3.2	5.4	7.4
Private	16.1	17.8	18.0	16.2
National savings	23.8	28.1	24.7	24.7
Net lending(+)/net borrowing(-)	4.2	7.1	1.2	1.2
Central government budget
Revenue	18.9	19.6	22.5	20.9
Taxes	14.6	16.4	19.3	16.6
Social contributions	…	…	…	…
Grants	2.9	1.8	1.6	1.7
Other revenue	1.4	1.4	1.6	2.6
Expenditure	21.3	22.6	25.5	25.0
Expense	17.9	19.4	20.0	18.4
Of which: Wages and salaries	8.2	8.1	7.9	9.1
Of which: Arrears payments	0.4	0.3	0.4	0.3
Net acquisition of nonfinancial assets	3.4	3.2	5.4	7.4
Net lending/borrowing2	-2.4	-3.1	-3.0	-4.1
Excluding grants	-5.3	-4.8	-4.5	-5.8
Net acquisition of financial assets	1.9	-0.3	0.1	0.1
Domestic	1.9	-0.3	0.1	0.1
Foreign	0.0	0.0	0.0	0.0
Net incurrence of liabilities	4.4	2.8	3.1	4.2
Domestic	4.4	2.5	1.5	1.1
Foreign	-0.1	0.3	1.6	3.2
External sector
Current account balance	4.2	7.1	1.2	1.2
(excluding grants)	1.8	5.6	0.5	0.5
Gross international reserves (months of prospective imports)	3.7	3.0	3.0	3.3
Public debt
Total central government debt (end-period)	22.0	22.1	22.3	24.1
External	10.0	9.1	10.2	12.5
Stock of domestic debt, net	12.1	12.9	12.1	11.6
Sources: Zambian authorities; and IMF staff estimates and projections. 1 Excludes Zimbabwe. 2 Including discrepancy between the above-the-line balance and below-the-line financing.

Zambia: Selected Economic Indicators, 2009–12 (Percent of GDP, unless otherwise indicated)     2009 2010 2011 2012       Act. Proj. Adjustment scenario           National account and prices           GDP growth at constant prices 6.4 7.6 6.6 7.7     Mining 20.3 15.2 -5.2 23.0     Non-mining 5.2 6.8 7.9 6.2   GDP deflator 10.7 11.7 12.8 4.8   GDP at market prices (Billions of kwacha) 64,616 77,667 93,354 105,383   GDP per capita (US$) 990 1,221 1,414 1,457   Gross national income per capita (US$) 958 1,118 1,299 1,347   Consumer prices             Consumer prices (average) 13.4 8.5 8.7 5.6     Consumer prices (end of period) 9.9 7.9 7.2 6.0 External sector           Terms of trade (deterioration -) -16.6 35.2 4.1 -3.0   Average exchange rate (kwacha per US$) 5,046 4,797 4,861       (percentage change; depreciation -) -34.7 4.9 -1.3     Real effective exchange rate (depreciation -)1 -14.2 5.8 -0.4 … Money and credit (end of period, unless otherwise specified)           Domestic credit to the private sector -5.7 15.4 27.9 17.5   Reserve money (end of period) 19.3 27.8 6.8 8.6   Broad Money (M3) 7.7 29.9 21.7 17.0 National accounts           Gross investment 19.6 21.1 23.4 23.6     Government 3.4 3.2 5.4 7.4     Private 16.1 17.8 18.0 16.2   National savings 23.8 28.1 24.7 24.7   Net lending(+)/net borrowing(-) 4.2 7.1 1.2 1.2 Central government budget           Revenue 18.9 19.6 22.5 20.9     Taxes 14.6 16.4 19.3 16.6     Social contributions … … … …     Grants 2.9 1.8 1.6 1.7     Other revenue 1.4 1.4 1.6 2.6   Expenditure 21.3 22.6 25.5 25.0     Expense 17.9 19.4 20.0 18.4     Of which: Wages and salaries 8.2 8.1 7.9 9.1     Of which: Arrears payments 0.4 0.3 0.4 0.3     Net acquisition of nonfinancial assets 3.4 3.2 5.4 7.4   Net lending/borrowing2 -2.4 -3.1 -3.0 -4.1     Excluding grants -5.3 -4.8 -4.5 -5.8   Net acquisition of financial assets 1.9 -0.3 0.1 0.1     Domestic 1.9 -0.3 0.1 0.1     Foreign 0.0 0.0 0.0 0.0   Net incurrence of liabilities 4.4 2.8 3.1 4.2     Domestic 4.4 2.5 1.5 1.1     Foreign -0.1 0.3 1.6 3.2 External sector           Current account balance 4.2 7.1 1.2 1.2     (excluding grants) 1.8 5.6 0.5 0.5   Gross international reserves (months of prospective imports) 3.7 3.0 3.0 3.3 Public debt           Total central government debt (end-period) 22.0 22.1 22.3 24.1     External 10.0 9.1 10.2 12.5     Stock of domestic debt, net 12.1 12.9 12.1 11.6             Sources: Zambian authorities; and IMF staff estimates and projections. 1 Excludes Zimbabwe. 2 Including discrepancy between the above-the-line balance and below-the-line financing. 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. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.