IMF Staff Completes 2019 Article IV Visit to Zambia

IMF News, April 30, 2019

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Press Release No. 19/130, April 30, 2019.
An International Monetary Fund (IMF) staff team led by Ms. Mary Goodman visited Zambia during April 16-30, 2019 to conduct the 2019 Article IV consultation.
End-of-Mission press release: views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Staff will prepare a report for the IMF's Executive Board in the coming months.

Growth projections and drivers:
- Growth is projected to slow from 3.7 percent in 2018 to 2.3 percent in 2019, lower than earlier envisaged due to the impact of the drought on agricultural production.
- With a diminished impact of the drought over time, and progress in addressing arrears, there is potential for growth to accelerate over the medium term.
Inflation and reserves:
- Inflation is close to the Bank of Zambia’s upper band and is projected to rise over the course of 2019.
- Reserves stood at 1.7 months of imports at end-March 2019.

Fiscal outcomes and financing:
- Zambia’s development strategy targeting a rapid scaling up in infrastructure spending has resulted in large fiscal deficits, financed by nonconcessional debt.
- The 2018 budget deficit (commitment basis) reached 10 percent of GDP (7.5 percent on a cash basis).
Debt stock:
- Total public and publicly-guaranteed debt including domestic arrears at end-2018 was 73.1 percent of GDP.
Effects of fiscal pressures:
- Recent increase in yields on government paper and higher interest costs on foreign debt due to the depreciation of the kwacha are squeezing government spending in other areas, including on social programs and transfers to local governments.
- The significant buildup in domestic expenditure arrears is weighing on households and businesses and presents a risk for the financial sector.

Main vulnerabilities: large fiscal deficits, rising debt service, domestic expenditure arrears, higher yields and interest costs, inflationary pressures, and the drought’s impact on agriculture.
Staff recommended policy actions to reduce risks:
- Avoid contracting any new non-concessional debt.
- Steps to raise revenues.
- Halting the buildup of new arrears.
- Aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space.
Conditional prospects:
- Progress in addressing arrears and the waning drought effect could support medium-term acceleration in growth.

The mission welcomed the enactment of the Public Finance Management Act in 2018, which should strengthen management of public resources once the accompanying legislation has been enacted.
Specific legislation highlighted as important:
- Passage of the Planning and Budgeting Bill to enhance the project selection/appraisal process.
- The revised Loans and Guarantees Act to provide the necessary framework for medium-term debt management.

Meetings:
- The team met with Minister of Finance, Ms Mwanakatwe, Bank of Zambia Governor, Dr. Kalyalya, other senior officials, representatives of the Parliamentary Committees on budget and on trade and national economy, as well as financial market, business, and trade union representatives, civil society organizations, and development partners.
Follow-up:
- The mission will prepare a report of the Article IV consultation which will be discussed by the IMF’s Executive Board in the coming months.

Press Release No. 19/130, April 30, 2019 — IMF