November 11, 2024
PRESS OFFICER: Wafa Amr
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: An International Monetary Fund staff team, led by Mercedes Vera Martin, engaged in discussions with the Zambian authorities in Lusaka during October 2-15, focusing on reforms and policy priorities underpinning the fourth review of the IMF-supported program under the Extended Credit Facility (ECF). Discussions continued during the IMF/WB Annual Meetings in Washington. This staff-level agreement is subject to IMF Management approval and Executive Board consideration. Upon completion of the review, Zambia will have access to about $185.5 million in financing (SDR 139.9 million).
At the conclusion of the discussions, Ms. Vera Martin issued the following statement:
“We are pleased to announce that the Zambian authorities and the IMF team have reached a staff-level agreement on economic policies and reforms for the fourth review of Zambia’s ECF arrangement.”
“The outlook for 2024 has deteriorated; Real GDP growth is now projected at 1.2 percent, from 2.3 percent projected in June, as extensive electricity shortfalls have impacted economic activity significantly. Contractions in agriculture (20.6 percent y/y) and electricity (9.6 percent y/y) and a deceleration in non-mining non-agriculture activity (from 7.7 percent y/y in 2023H1 to 3.5 percent y/y in 2024H1) amid intensifying power shortages dragged growth to 1.9 percent (y/y) in the first half of 2024. Inflation accelerated to 15.7 percent in October 2024, driven by food prices and past kwacha depreciation, drifting further from the inflation target band (6–8 percent). Subdued imports, increased grants and an anticipated increase in copper exports should shift the current account to a small surplus in 2024.”
“Fiscal performance in 2024 has been marked by constrained domestic financing and spending compression. The end-June primary surplus reached 3.4 percent of GDP, well above the program target. The primary balance (cash basis) in 2024, is projected at a surplus of 0.9 percent of GDP, much stronger than the program deficit target of 0.7 percent. Despite the consolidation, the authorities have upscaled social spending to support the most vulnerable through the drought.”
“The medium-term outlook remains favorable, but with significant downside risks. Growth in 2025 is projected at 6.2 percent (revised from 6.6 percent) as electricity output is not expected to fully recover. This outlook is bolstered by a recovery in agricultural and mining production and the completion of the debt restructuring and is underpinned by prudent policies and ongoing reforms. Inflation is expected to converge to the target band by end-2025, given strong base effects. The external position is projected to strengthen on account of higher exports and FDI, supporting reserve accumulation.”
“The authorities have reiterated their strong commitment to prudent macroeconomic policies and ambitious reforms to sustain economic stability and boost medium-term growth. Discussions revolved around four key pillars. First, the 2025 Budget will preserve social spending while maintaining fiscal consolidation over the program period. The authorities have committed to additional domestic revenues—such as rationalizing tax exemptions, harmonizing the CIT, and indexing excises to inflation—and identify contingent spending measures to sustain fiscal consolidation efforts and support debt sustainability.”
“Second, building buffers against economic and climate-related shocks is paramount to restore and safeguard debt sustainability. Improving tax compliance, broadening the tax base, and enhancing tax policy remain top priorities. Meanwhile, public financial management reforms will help improve the transparency and efficiency of public spending, notably through enhanced cash management and SOEs oversight.
“Third, monetary policy must remain agile to combat inflation while preserving exchange rate flexibility. With a negative real policy rate, looser liquidity conditions, and strong growth in monetary aggregates, the Bank of Zambia should focus on driving inflation toward the target band. Efforts to promote the use of the domestic currency in domestic transactions should be accompanied by market-driven incentives once macroeconomic stability is consolidated, hedging instruments to manage exchange rate risks are available to the private sector, and prudential regulation is in place to help internalize financial risks associated with dollarization. The Bank of Zambia will continue strengthening banking supervision, including by developing an effective deposit insurance scheme and reviewing the financial services framework.
“Finally, faster progress in structural reforms to reduce distortions for the private sector remains key for economic recovery and diversification. This includes enhancing transparency in the energy sector to foster competitive open access to the pipeline and reduce fuel costs for all. Improving the business climate by reducing regulatory distortions will also help create a more even-leveled playfield. Enhanced State-Owned Enterprises' transparency, along with the implementation of the anti-corruption legislation, would bolster governance and public accountability.”
“The IMF staff team expresses gratitude to the Zambian authorities for their constructive dialogue, warm hospitality, and strong cooperation. A Board meeting is anticipated by mid-December.”
