June 14, 2004
This statement provides additional information that has become available since the issuance of the staff report for Zambia. Developments through end-May were in line with the staff-monitored program (SMP) and, therefore, do not alter the thrust of the staff’s assessment.
In May, the 12-month rate of inflation stood at 17.4 percent, slightly below the SMP target (18.1 percent). The kwacha has remained stable against the U.S. dollar.
Available data indicate that eight out of the nine quantitative targets for April and May were met. The target on the nonaccumulation of arrears on wages was missed by a small margin in April and, on the basis of partial data, appears to have also not been observed in May. The ceilings on net domestic assets and gross international reserves of the Bank of Zambia and net domestic financing of government were again met by large margins in April. Preliminary data indicate that that these ceilings were also met by large margins in May and they would also have been observed if wage arrears had not been incurred.
Through May, government tax revenues were in line with the program, while nontax revenues (fees and penalties) were 0.2 percent of GDP less than programmed. Expenditures remained below the program targets, mainly because of a slow pace of execution of domestically financed capital spending in the first quarter of the year, a lower than anticipated monthly wage bill and savings on domestic interest payments. Funding for poverty-reducing programs was in line with the targets.
Reserve money increased by 2.7 percent through May, well below the rate of 6.8 percent projected under the SMP. However, through end-April, broad money growth exceeded the target (8.5 percent compared with a target of 5.1 percent), reflecting an overperformance in net foreign assets of the banking system, as well as larger than expected credit to the private sector. The average commercial bank lending rate declined to 37.3 percent in May from 45.8 percent in October 2003. The Bank of Zambia has continued to take action to mop up excess liquidity in the banking system; average interest rates on treasury bills stabilized at just below 7 percent in May. Staff is closely monitoring developments in this area.
On June 2, the authorities confirmed in writing that Cabinet had approved the Public Sector Management and Financial Accountability program and received, for consideration and approval, an action plan for implementing the Financial Sector Development Plan, thereby meeting the two prior actions for the approval of the new PRGF arrangement. All the continuous benchmarks under the SMP were observed.