The Business Year

Tsidi Tsikata

Chief, IMF Mission to Zambia 2016

Ina-Marlene Ruthenberg

Country Manager Zambia, World Bank

The Zambian government is working hand in hand with the IMF and World Bank to bring down public debt, stabilize government revenue streams, and create the conditions for more sustained and inclusive growth.

How would you describe your profile in Zambia?

Tsidi Tsikata The IMF has good working relations with Zambia, and in recent years the focus has been on providing policy advice and technical assistance in a wide range of areas. In our press release at the end of the October 2016 mission, we noted that the economy was suffering from the effects of external and domestic shocks, including low copper prices and electricity shortages. We also highlighted that an unbalanced policy mix had contributed to the difficulties facing the economy. In particular, while government revenues were falling short of expectations, spending was well above budgeted levels, leading to increased borrowing and a large accumulation of arrears. Concurrently, a tightening of monetary policy succeeded in stabilizing the exchange rate and lowering inflation, but the tight liquidity conditions, combined with the accumulation of government payment arrears and the slowdown in economic activity, put enormous stress on the private sector and the financial system. The main challenges facing the authorities is the achievement of a more balanced policy mix—fiscal tightening to allow room for some easing of monetary conditions—and creating the conditions for sustained and inclusive growth based on a more diversified and resilient economy.

Ina-Marlene Ruthenberg We have a portfolio of 21 projects, which are a combination of national IDA lending and regional IDA lending, and some trust fund operations. The cumulative total of these 21 projects is over USD900 million, a significant amount, and we are even expecting to grow further, following the positive outcome of the IDA18 replenishment negotiations. We will still await the new IDA 18 envelope for the next three years, for which we expect an increase of up to 70%, which means an envelope of up to about USD600 million. Zambia is an IDA country (benefitting from the soft loan window of the World Bank Group), transitioning, after meeting key criteria, to IBRD. The Zambian government has been paramount in this evolution, and IBRD will permit Zambia to have access to more financial resources. Because of this, we are fortunate to be able to implement a variety of projects in different sectors, though we are primarily focusing on water, energy, the environmental impact of mining, and on agriculture—including climate change resilience. Finally, we have recently expanded human development programs, including social protection.

What actions must be taken by Zambia in order to reduce the country’s fiscal deficit?

TT In his budget speech to parliament in November 2016, the Honorable Felix Mutati laid out clearly the economic challenges facing the country and how the government was going to address them. The theme of his speech was very apt, “Restoring fiscal fitness for sustained inclusive growth and development.” Achieving the objectives he spelt out in the speech requires strict controls to limit spending to available resources, and lower public debt (measured in relation to GDP) from its current path to a sustainable trajectory. In view of the debilitating effects of government arrears on the financial system and the economy at large, it is critical that the government exercises better control over its spending to ensure that while it clears the outstanding stock of arrears it does not create new ones.

IMR We need to recognize that Zambia is once again facing the challenge of a high national debt and the high and growing cost of servicing the debt is crowding out developmental expenditure. Zambia has switched from a reliance concessional debt to tapping the international debt markets, including USD3 billion in Eurobonds, and this has made the portfolio riskier. The rapid depreciation of the kwacha in 2015 highlighted the country’s exposure to foreign exchange risk as the debt to GDP ratio shifted above 50%. From our perspective as a Cooperating Partner, this is disappointing, since Zambia benefitted significantly from the multilateral Highly Indebted Poor Countries Debt (HIPC) initiative in 2005. However, we are increasingly confident that debt can be better managed and a first step would be to develop a clear debt management strategy. The debt issues are linked to repeat fiscal deficits, so what can be done to reduce wasteful or poorly targeted expenditure? Recent budgets have included unsustainably high levels of subsidy, especially in the fuel and electricity sectors where the government has set the prices and tariffs below what it costs to deliver them. Now though, we are pleased to see the Ministry of Finance addressing these, in particular those subsidies that have benefited segments of the population that did not particularly need government help, most notably the costly fuel subsidies.



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