PRESIDENT Edgar Lungu has told the IMF that he is considering calling for an early election to get politics out of the way as he addresses the country’s economic situation.
In an internal momerandum dated November 30 issued by Tsidi Tsikata, who headed the International Monetary Fund mission to Zambia last month, President Lungu expressed interest in a Fund programme but could not agree to it immediately for fear that the opposition would politicise the initiative.
“In a meeting with the mission, President Lungu expressed interest in a Fund program but said it would be politicised by the opposition parties,” Tsikata stated in a memorandum addressed to IMF managing director Christine Lagarde.
“To get the politics out of the way of the need to address the economic situation, he said he is considering calling an early election. The Constitution requires that general elections be held by September 2016, but the President has discretion on the precise timing.”
The IMF has suggested a programme with a US$1 billion interest free loan for Zambia that is aimed at getting the country out of its current economic problems, but with conditions, such as the realignment of expenditure on ongoing road infrastructure, reducing fuel subsidies and discontinuation of unplanned expenditures.
But President Lungu rejected the proposal based on the fact that the suggested measures are likely to work against his reelection next year.
Tsikata, in the preamble of the memorandum, stated that Zambia’s economy is facing pressures of a magnitude not seen in more than a decade.
“Low copper prices and severe electricity shortage have slowed economic activity and contributed to a sharp depreciation of the exchange rate. Domestic and external financing conditions have tightened markedly, in part reflecting waning market confidence in the authorities’ policy response. The government budget is burdened with fuel subsidies, the cost of electricity imports and spending on new construction projects. Since the mission, President Lungu has announced measures aimed at reducing pressures on the budget,” he stated.
The IMF further stated that economic activity has also slowed significantly in 2015, and projected that growth would remain subdued in 2016.
“The economy is under stress from low copper prices, a severe electricity shortage, a reduced harvest, and waning market confidence in the authorities’ policy response. Preliminary indications are that real GDP growth will decline from 4.9 per cent in 2014 to about three per cent in 2015, driven primarily by lower output in agriculture and mining,” Tsikata stated.
On the kwacha’s performance, he stated that President Lungu’s announcement of “austerity measures” to curb fiscal expansion saw the local currency appreciate in the short term.
“Inflation is on the rise. Year-on-year consumer inflation jumped from 7.7 per cent in September to 14.3 per cent in October and to 19.5 per cent in November. The rise in prices has been broad based, driven by kwacha depreciation and cost pressures stemming from the lower harvest and electricity shortages. In response, the Bank of Zambia (BOZ) has tightened monetary policy, including by raising the policy rate from 12.5 per cent to 15.5 per cent,” Tsikata stated.
He stated that the Zambian government was financially strained.
“Lower-than-budgeted revenues and spending pressures largely associated with fuel subsidies, electricity imports and construction projects have strained government finances. Access to domestic financing has been significantly strained, as evidenced by under subscription T-bill auctions and high interest rates currently averaging about 22 per cent. External financing is also highly constrained. Continued borrowing and the depreciation of the domestic currency are pushing public debt toward unsustainable levels,” stated Tsikata.
“The mission recommended that the government cuts the deficit substantially through a combination of revenue and expenditure measures. Revenue measures could include: raising the VAT rate, harmonising the corporate income tax, and reducing tax expenditures. On the expenditure side, at a minimum, the government should remove the subsidies on fuel and electricity as soon as possible. It should also consider postponing all new capital projects and sharply contain spending on poorly targeted subsidies in the agriculture sector. The mission urged the authorities to implement a credible package of measures to lower the fiscal deficit and begin to restore market confidence.”