IMF Executive Board Concludes 2007 Article IV Consultation with Zambia

Public Information Notice (PIN) No. 07/144
December 21, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 7, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zambia.1


The Zambian economy has performed well in recent years because of stronger macroeconomic policies, a favorable external environment, and extensive debt relief. The economic expansion has been broad-based and has benefited greatly from the revival of the mining sector and high copper prices. Public finances have improved markedly and inflation has been brought under control. The external position has strengthened significantly, mainly due to booming copper export receipts and debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI), which have contributed to a substantial real appreciation of the exchange rate and a buildup in international reserves. Poverty has been reduced, but remains high; and while progress has been made in some areas, the achievement of the Millennium Development Goals remains a challenge.

The positive economic performance of recent years continued in 2006 and the first half of 2007. Real GDP accelerated to 6.2 percent in 2006, driven by a vigorous expansion in mining, construction and telecommunications. Inflation, after falling to single digits in 2006, picked up in early 2007, but tighter monetary conditions and a turnaround in the kwacha brought it back to single digits (8.7 percent in November).

Fiscal consolidation has continued. Revenue outperformed projections through September 2007, reflecting higher income tax payments from mining companies. Expenditures, however, were below projections owing to a large shortfall in releases for capital projects and because the released funds were not fully spent due to delays in tender procedures. The overall balance (including grants) was 0.8 percent of GDP through September—about 2½ percentage points of GDP higher than projected.

The rate of monetary expansion has fluctuated widely, in part due to difficulties in managing the monetary and exchange rate consequences of variations in capital inflows. On October 1, the statutory reserve requirement was reduced to 8 percent from 14 percent, injecting additional liquidity into the banking system and necessitating offsetting measures to contain monetary growth. Nominal interest rates on government securities have trended upward since late 2006, while real rates have risen moderately since inflation peaked earlier in the year.

The external position has strengthened considerably. The current account deficit (excluding grants) declined markedly to 1.3 percent of GDP in 2006, as copper export receipts doubled and nontraditional exports increased by 30 percent. Export receipts remained strong in the first half of 2007. The strong external position and the tight fiscal conditions contributed to a build up of international reserves to about 2.4 months of imports at end-June 2007.

Executive Board Assessment

Directors commended the Zambian authorities for pursuing sound macroeconomic policies, which, together with high copper export prices and debt relief, have contributed to a strong economic performance. Economic growth is robust, inflation has been brought under control, and public finances and the external position have both improved markedly.

Directors encouraged the authorities to take advantage of the favorable outlook to step up their efforts to further strengthen growth and reduce poverty in the context of the Fifth National Development Plan. The focus should be on improving budget execution and creating fiscal space for increased spending on infrastructure and social sectors; strengthening project evaluation and implementation capacity; diversifying the economy to reduce the vulnerability to fluctuations in copper prices; and further improving the conditions for private sector growth. Managing the effects of high foreign exchange inflows will be key to maintaining macroeconomic stability.

Directors commended the reduction of inflation to single-digit levels, and recommended a continued tight monetary policy in the period ahead. Directors noted the complications for liquidity management that could arise from weaknesses in budget execution and the recent lowering of statutory reserve requirements. In this respect, they welcomed the authorities' decision to postpone some nonpriority project spending in the last quarter of the year, and the transfer of government deposits from commercial banks to the central bank. Foreign exchange sales to mop up excess liquidity could also be considered, although Directors recognized that this should be balanced against the need for a further modest build-up of international reserves to enhance the country's ability to weather external shocks. Going forward, strengthened coordination between fiscal and monetary policy, and the further development of the financial system, would be important steps to improve liquidity management.

Directors believed that the authorities' managed float exchange rate policy continues to serve Zambia well. They welcomed the assessment that the current exchange rate is consistent with external stability and aligned with economic fundamentals, including a significant improvement in the terms of trade.

Directors commended the authorities' disciplined fiscal stance, and welcomed the targeted increase in revenues and shift towards capital spending and arrears reduction in the preliminary 2008 budget. They noted that the projected growth in the government wage bill heightens the need to accelerate civil service and pay reform. Directors emphasized the importance of strengthening tax administration and widening the tax base, and welcomed the efforts underway to increase revenue by aligning the fiscal regime for mining companies with international standards.

Directors saw further progress on strengthening public expenditure management as crucial to enhancing the effective use of public resources. They encouraged the authorities to step up implementation of the public expenditure management and financial accountability reform program, including establishing a treasury single account and implementing the integrated financial management and information system. Directors stressed the importance of aligning the budget cycle with the fiscal year and finalizing the new procurement act in order to improve budget execution.

Directors were encouraged that the risk of external debt distress in Zambia is currently low. They commended the authorities' efforts to strengthen debt management, and their cautious approach to external borrowing, which focuses on concessional loans. While acknowledging that, in the absence of concessional resources, some nonconcessional external borrowing could be considered for projects that are economically viable, Directors cautioned that such borrowing should not jeopardize debt sustainability. In particular, it would be important to complement the debt strategy with measures to improve capacity to evaluate investment projects.

Directors welcomed the progress made on financial sector reform, and supported further efforts to deepen the financial sector and lower intermediation costs. They encouraged the authorities to develop an active secondary market in government securities, further improve the legal and regulatory framework for financial activity, and broaden the availability of financial services.

Directors called for accelerated implementation of reforms to improve the business environment and to enhance productivity and competitiveness. They welcomed the authorities' commitment to an open trade regime to accelerate export development. Directors considered the development of the energy sector to be vital to achieving a vibrant private sector and reducing poverty. They emphasized the importance of raising electricity tariffs to levels consistent with full cost recovery, and of strengthening the corporate governance and efficiency of the public utility. Directors welcomed the progress made toward participation in the Extractive Industries Transparency Initiative.

Zambia: Selected Economic Indicators (2004-07)
  2004 2005 2006 2007
  (In percent changes; unless otherwise indicated)

National account and prices


GDP at constant prices

5.4 5.2 6.2 6.2

GDP deflator

20.5 18.6 13.8 10.0

GDP at market prices

25,997 32,456 39,223 45,849

(In billions of kwacha)


Consumer prices (average)



18.0 18.3 9.0 10.8

Underlying (excluding food)

19.8 18.1 13.6 16.5

Consumer prices (end of period)

17.5 15.9 8.2 9.0

External sector


Terms of trade (deterioration -)

34.6 6.8 54.8 5.4

Average exchange rate (kwacha per U.S. dollar)

4,779 4,464 3,601 ...

(in percentage change; depreciation -)

-1.0 6.6 19.3 ...

Real effective exchange rate (depreciation -)1

3.0 24.1 32.3 ...

Money and credit (end of period)


Domestic credit to the private sector

47.7 18.7 54.3 35.0

Reserve money2

21.1 10.2 29.7 -12.6


30.3 0.4 45.1 17.7
  (In percent of GDP)

National accounts


Gross investments

23.0 22.5 22.6 24.1


8.7 7.0 4.1 5.7


14.3 15.5 18.5 18.4

National savings

16.0 17.4 25.5 20.1

Gross foreign savings

7.0 5.1 -2.9 4.0

Central government budget3


Overall balance

-0.8 -2.6 18.6 -0.6

(excluding grants)

-6.3 -8.3 -7.4 -5.4


18.2 17.4 16.9 18.4


5.5 5.6 26.0 4.9

Total expenditure

24.5 25.7 24.3 23.8

External sector


Current account balance


(including official grants)

-7.0 -5.1 2.9 -4.0

(excluding official grants)

-12.2 -10.9 -1.3 -8.8
  (In percent of export of goods and services)

NPV of external public debt (including IMF)

176 80 16 14

Sources: Zambian authorities; and IMF staff estimates and projections.

1Excludes Zimbabwe.

2The projected reduction in reserve money for December 2007 reflects the lowering of statutory reserve requirements from 14 to 8 percent on October 1, 2007.

3Grants in 2006 include MDRI debt cancellation amounting to 21.4 percent of GDP.

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.


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