Zambia’s development strategy targeting a rapid scaling up in infrastructure spending has resulted in large fiscal deficits, financed by nonconcessional debt
IMF staff and Zambian authorities took stock of recent economic developments and the future outlook and prospects as part of the 2019 Article IV consultation; large fiscal deficits and rising debt service have resulted in domestic expenditure arrears, taking a toll on growth; discussions focused on policy options to lower debt-related vulnerabilities and support economic growth.
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.
At the conclusion of the mission, Ms. Goodman issued the following statement:
“Our discussions on Zambia’s 2019 Article IV were frank and collaborative. This has been a valuable opportunity to take stock of the current situation and outlook for the economy and to gain a shared appreciation of current challenges and policy options going forward.
Growth is projected to slow from 3.7 percent in 2018 to 2.3 percent in 2019, lower than earlier envisages due to the impact of the drought on agricultural production
“Growth is projected to slow from 3.7 percent in 2018 to 2.3 percent in 2019, lower than earlier envisages due to the impact of the drought on agricultural production. 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.
“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), and total public and publicly-guaranteed debt including domestic arrears at end-2018 was 73.1 percent of GDP.
“With the recent increase in yields on government paper and higher interest costs on foreign debt due to the depreciation of the kwacha, government spending in other areas is being squeezed, 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.
“To reduce risks, staff recommended a large up-front and sustained fiscal effort, including: avoiding contracting any new non-concessional debt, steps to raise revenues, halting the buildup of new arrears, and aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space.
“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.
“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. Specifically, the passage of the Planning and Budgeting Bill will be important to enhance the project selection/appraisal process while the revised Loans and Guarantees Act would provide the necessary framework for medium-term debt management.
“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. The IMF mission wishes to express its gratitude to the authorities and other stakeholders for the openness and constructive discussions during its visit to Zambia. 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.”