No IMF bailout as expenditures outpaced revenues

• Fund staff and Zambian authorities made progress regarding economic program that could be supported by an IMF arrangement
• Economic growth is expected to improve slightly to 3.5% in 2017. Sustaining high inclusive growth in the future requires sound policies & reforms to improve competitiveness.
• IMF team welcomed the government’s fiscal consolidation plans which aim at putting public finances on a sustainable path

An IMF team led by Tsidi Tsikata visited Zambia during March 9-24, to conduct the 2017 Article IV consultation and hold discussions on an economic program that could be supported by an IMF financial arrangement.

At the end of the mission, Mr. Tsikata issued the following statement:

“We have had fruitful discussions with the Zambian authorities and made progress towards reaching understandings on an economic program that could be supported by an IMF arrangement. There is broad agreement on key objectives, targets, and policies, most of which are drawn from the Government’s Economic Program. However, further engagement is needed on details of measures and reforms to achieve fiscal consolidation targets while protecting social spending and clearing the large stock of arrears without accumulating new ones. We have agreed to continue discussions at the forthcoming Spring Meetings of the IMF and World Bank in Washington D.C. next month.

“The mission held wide-ranging discussions with a broad range of stakeholders. Topics included Zambia’s experience under past IMF-supported programs, reforming the subsidies in the energy and agriculture sectors, and policies needed to diversify Zambia’s exports, create jobs and make the economy more resilient to shocks.

“The mission projects real GDP growth in Zambia to improve slightly from about 3 percent last year to 3.5 percent this year, reflecting good rains which are expected to boost agricultural output and domestic electricity generation. Over the medium term, realization of Zambia’s enormous potential for achieving and sustaining high inclusive growth will depend on the continuous implementation of sound economic policies, and on reforms to boost productivity across sectors and enhance Zambia’s international competitiveness.

“The mission welcomed the fiscal consolidation plans outlined in the 2017 budget speech by the Minister of Finance, which aims at putting public finances on a sustainable path. However, in the first two months of the year, expenditures outpaced revenues substantially, with the deficit financed mostly by domestic borrowing. In contrast to most of last year when the government faced severe domestic and external financing constraints, so far this year government securities auctions have been consistently over-subscribed, with increased participation of foreign investors. The mission advised the government to steadfastly implement the measures needed to achieve the 2017 budget targets; this would reassure markets and reduce the risk of souring sentiments and associated outflow of funds.

“The mission welcomed the recent easing of monetary conditions by the Bank of Zambia (BoZ). The BoZ’s tight monetary stance since late-2015 succeeded in stabilizing the exchange rate and lowering the annual rate of inflation from a peak of 22.9 percent in February 2016 to 6.8 percent in February 2017. However, the ensuing very tight liquidity conditions contributed to elevated stress in the banking system. Monetary conditions remain tight; although interest rates in the interbank money market and the yields on government securities have started coming down, lending rates remain very high.

“The mission also discussed the findings and recommendations of the Joint IMF-World Bank Financial Sector Assessment Program (FSAP) mission that took place in July 2016. The assessment found that the financial sector was under considerable stress from the combination of external and domestic shocks. Financial supervision was not fully effective and several financial sector laws are in urgent need of upgrading. The authorities have welcomed the FSAP findings and recommendations, and have energetically initiated remedial actions. A resulting Financial Sector Stability Analysis report is expected to be published in the context of the Article IV consultation process.

“The mission met with Minister of Finance Felix Mutati; Governor of the Bank of Zambia Denny Kalyalya; Minister of Health Chitalu Chilufya; other senior government and BoZ officials; members of parliament; and representatives of the private sector, labor unions, civil society organizations, and Zambia’s development partners.

“The mission expresses its gratitude to the authorities and stakeholders for their openness and the constructive spirit in which all discussions were held.”