## IMF Executive Board Concludes 2017 Article IV Consultation with Zambia

_IMF News, October 10, 2017_

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## Bibliographic details
- Published: October 10, 2017

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### Near-term economic outlook and recent developments
- Economy improved in recent months driven by good rains and rising world copper price.
- Economy was in near-crisis from Q4 2015 through most of 2016 due to exogenous shocks and lax fiscal policy.
- Copper price shock and poor rainfall reduced export earnings, government revenues, and electricity generation; severe power rationing occurred.
- Kwacha depreciation fueled inflation from an annual rate of 7 percent in mid-2015 to nearly 23 percent in February 2016.
- Tight monetary policy stabilized the exchange rate and slowed inflation to 6.3 percent in August 2017, but contributed to:
  - a sharp rise in nonperforming loans,
  - a plunge in the growth of credit to the private sector.
- Stress tests indicate banks are resilient to credit and liquidity pressures, but financial system faces considerable risks from high dependence on copper exports, rising public debt, and funding pressures.

### Fiscal imbalances and public debt
- Fiscal deficits:
  - Cash-basis fiscal deficit reached 9.3 percent of GDP in 2015, twice the budgeted level.
  - Commitment-basis deficit exceeded 12 percent of GDP in 2015, remained about 9 percent of GDP in 2016.
  - Commitment-basis deficit projected to decline significantly in 2017; cash deficit will remain elevated as the government clears arrears.
- Public and publicly guaranteed debt:
  - Rose from 36 percent of GDP at end-2014 to 60 percent at end-2016, driven largely by external borrowing and exchange rate depreciation.
  - Increased foreign investor participation in government securities eased financing but raised vulnerability to market sentiment and capital flow reversals.
- Executive Directors noted that public debt, especially external debt, has increased at a pace that puts Zambia at high risk of debt distress.

### Medium-term outlook and risks
- Real GDP growth trajectory:
  - 7.6 percent in 2012 down to 2.9 percent in 2015; growth has picked up subsequently.
  - Growth projected to reach 4 percent in 2017.
- Achieving sustained high and inclusive growth requires stable macroeconomic environment and reforms to:
  - increase productivity,
  - enhance competitiveness,
  - strengthen human capital,
  - support financial inclusion for SMEs.
- Domestic risks:
  - Delayed fiscal adjustment crowding out private credit and entrenching unsustainable debt.
  - Unfavorable weather affecting hydro power and agriculture.
- External risks:
  - Tighter global financial conditions.
  - Volatility in world copper price.

### Executive Board assessment and policy recommendations
- Directors welcomed improved outlook but highlighted significant domestic and external risks.
- Advised authorities to use current favorable conditions to implement decisive and prudent macroeconomic policies and reforms to:
  - place public finances and debt on a sustainable path,
  - build international reserves,
  - increase resilience to shocks,
  - achieve higher and inclusive growth.
- Commended measures to phase-out regressive fuel and electricity subsidies and to scale up social protection spending.
- Fiscal consolidation recommendations:
  - Increase domestic revenues by addressing widespread exemptions and broadening the VAT and income tax bases.
  - Contain recurrent spending, improve commitment controls, phase out subsidies, and strengthen public financial management.
- Debt management recommendations:
  - Slow on contracting new debt, especially non-concessional loans.
  - Strengthen debt management capacity.
  - Improve project appraisal and selection processes.
- Monetary and financial sector recommendations:
  - Greater reliance on interest rates and market mechanisms to enhance transparency and effectiveness of monetary policy.
  - Credible fiscal consolidation necessary to sustain monetary policy stance.
  - Safeguard financial stability by implementing FSAP recommendations, strengthen supervision capacity, and improve crisis preparedness.
  - Bank of Zambia (BoZ) plans welcomed: complete on-site inspection of all banks within 12–18 months; act on weaknesses identified.
  - Accelerate revamping the BoZ Act to provide more operational autonomy while enhancing transparency and accountability.
- Structural recommendations:
  - Address policy uncertainties clouding the investment climate, including clarifying roles of the state and private sector in the energy and agriculture sectors.
  - Emphasize macroeconomic stability, policy consistency, and investment in human capital to address high poverty and income inequality.

### Key statistics and projections (selected, as presented)
- Inflation and exchange:
  - Inflation: 7 percent (mid-2015), nearly 23 percent (February 2016), 6.3 percent (August 2017).
- Growth:
  - GDP growth at constant prices: 4.7 (2014), 2.9 (2015), 3.4 (2016), 4.0 (2017), 4.5 (2018), 4.3 (2020).
  - Mining growth: -2.3 (2014), 0.2 (2015), 7.0 (2016), 5.0 (2017), 6.0 (2018).
  - Non-mining growth: 5.6 (2014), 3.2 (2015), 3.0 (2016), 3.6 (2017), 4.4 (2018).
- GDP at market prices (millions of kwacha): 167,052 (2014), 183,381 (2015), 216,826 (2016), 243,284 (2017), 274,845 (2018), 310,305 (2019), 349,546 (2020), 394,301 (2021), 444,362 (2022).
- GDP at market prices (USD): 27,151 (2014), 21,243 (2015), 21,012 (2016), 25,576 (2017), 27,328 (2018), 28,242 (2019), 29,521 (2020), 31,267 (2021), 33,345 (2022).
- Prices:
  - GDP deflator: 5.4 (2014), 6.7 (2015), 14.3 (2016), 7.9 (2017), 8.1 (2018), 7.8 (2019), 8.0 (2020).
  - Consumer prices (average): 10.1 (2014), 17.9 (2015), 6.8 (2016), 7.4 (2017).
  - Consumer prices (end of period): 21.1 (2015), 7.5 (2016), 5.8 (2017).
- Money and credit:
  - Domestic credit to the private sector (percent change): 26.4 (2014), 29.3 (2015), -9.4 (2016), 13.0 (2017), 12.9 (2018), 14.4 (2019), 14.7 (2020), 14.2 (2021), 14.8 (2022).
  - Reserve money (end of period): 31.1 (2014), 22.2 (2015), 12.8 (2016), 5.9 (2017), 23.4 (2018), 21.3 (2019), 16.1 (2020), 15.1 (2021), 15.5 (2022).
  - Broad Money (M3): 12.6 (2014), 35.2 (2015), -5.7 (2016), 14.0 (2017), 27.0 (2018), 20.6 (2019), 15.4 (2020), 15.6 (2021).
  - Credit to the private sector (percent of GDP): 13.4 (2014), 15.7 (2015), 12.1 (2016), 12.3 (2017), 12.5 (2018), 12.7 (2019).
- National accounts (percent of GDP):
  - Gross investment: 33.6 (2014), 42.1 (2015), 41.7 (2016), 41.9 (2017), 43.6 (2018), 42.7 (2019), 41.1 (2020), 39.2 (2021), 38.2 (2022).
  - Government investment: 4.8 (2014), 3.8 (2015), 5.3 (2016), 7.2 (2017), 7.3 (2018).
  - Private investment: 28.7 (2014), 36.1 (2015), 38.0 (2016), 36.6 (2017), 36.4 (2018), 35.4 (2019), 33.9 (2020), 32.5 (2021), 32.2 (2022).
  - National savings: 35.7 (2014), 37.3 (2015), 38.3 (2016), 40.8 (2017), 41.2 (2018), 39.0 (2019), 37.8 (2020).
- External and fiscal balances:
  - External current account balance: 2.1 (2014), -4.4 (2015), -3.6 (2016), -2.8 (2017), -1.5 (2018), 0.0 (2019), -0.2 (2020).
  - Central government revenue: 18.9 (2014), 18.8 (2015), 18.2 (2016), 17.3 (2017), 18.4 (2018), 19.4 (2019), 19.6 (2020).
  - Central government expenditure: 24.3 (2014), 27.6 (2015), 23.8 (2016), 25.3 (2017), 26.2 (2018), 25.6 (2019), 25.5 (2020), 24.7 (2021), 23.9 (2022).
  - Net lending/borrowing (cash basis): -9.3 (2015), -5.8 (2016), -8.0 (2017), -7.8 (2018), -7.2 (2019), -6.5 (2020), -5.3 (2021), -4.3 (2022).
  - Net lending/borrowing (commitment basis): -9.8 (2015), -12.1 (2016), -8.6 (2017), -5.6 (2018), -6.8 (2019), -5.5 (2020), -5.1 (2021).
- Public debt (percent of GDP, end-period):
  - Total central government debt, gross: 35.6 (2014), 61.4 (2015), 60.5 (2016), 55.6 (2017), 60.0 (2018), 62.4 (2019), 63.3 (2020), 64.0 (2021), 63.1 (2022).
  - External: 43.1 (2014), 36.5 (2015), 32.9 (2016), 40.4 (2017), 42.4 (2018), 42.6 (2019), 41.4 (2020).
  - Domestic (including arrears): 24.0 (2014), 22.7 (2015), 22.0 (2016), 21.4 (2017), 21.7 (2018).
  - PV of Public External Debt: 46.2 (2014), 37.0 (2015), 34.5 (2016), 39.1 (2017), 44.3 (2018), 43.3 (2019).

*IMF Executive Board Concludes 2017 Article IV Consultation with Zambia, October 10, 2017.*

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## References

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