Abstract
The fiscal stance has been more expansionary in 2008, but there should be no need for net domestic financing. The new fiscal regime for mining increases the average effective tax rate from a level that was significantly below that of other mining countries. The monetary program aims to reduce annual inflation to 7 percent in 2008. The authorities intend to address the challenge of coordinating fiscal and monetary policies to enable the Bank of Zambia (BoZ) to improve liquidity management. Structural policies will complement the medium-term macroeconomic framework.
1. This statement provides information that has become available since the staff report was issued to the Board. The thrust of the staff appraisal remains unchanged.
2. Inflation has picked up in recent months, placing the end-year inflation target at risk. The higher rate of inflation largely reflects increases in food prices. The twelve-month rate of inflation rose from 8.9 percent in December 2007 to 10.9 percent in May 2008, as food prices rose from 6.9 percent to 11.7 percent. Over the same period, nonfood price inflation declined from 11.7 percent to 10.1 percent. In the nonfood component, the recent increases in world oil prices, which have still to be fully passed through, are being offset by the appreciation of the kwacha.
3. The higher world oil prices than projected in the staff report will have an adverse impact on the balance of payments, but this is expected to be more than offset by higher copper prices. Based on the most recent WEO oil price projection for 2008, and assuming unchanged import volumes, the balance of payments is projected to deteriorate by 0.9 percent of GDP. However, based on recent increases in copper prices and the prices in futures contracts, and assuming unchanged export volumes, the balance of payments would improve by 2.9 percent of GDP. Thus, overall the balance of payments is expected to improve by about 2 percent of GDP.
BOP Impact of Higher Oil and Copper Prices in 2008
BOP Impact of Higher Oil and Copper Prices in 2008
| Staff Report | May Revision | BOP Impact | ||
|---|---|---|---|---|
| Oil price assumption (US$/barrel) | 95.5 | 112.0 | … | |
| Oil imports (US$ millions) | 703 | 824 | -121 | |
| (In percent of GDP) | 5.5 | 6.4 | -0.9 | |
| Copper price assumption (US$/lb) | 3.20 | 3.49 | … | |
| Copper export (US$ millions) | 3,785 | 4,161 | 376 | |
| (In percent of GDP) | 29.5 | 32.4 | 2.9 | |
| Total impact (US$ millions) | … | … | 255 | |
| (In percent of GDP) | … | … | 2.0 | |
BOP Impact of Higher Oil and Copper Prices in 2008
| Staff Report | May Revision | BOP Impact | ||
|---|---|---|---|---|
| Oil price assumption (US$/barrel) | 95.5 | 112.0 | … | |
| Oil imports (US$ millions) | 703 | 824 | -121 | |
| (In percent of GDP) | 5.5 | 6.4 | -0.9 | |
| Copper price assumption (US$/lb) | 3.20 | 3.49 | … | |
| Copper export (US$ millions) | 3,785 | 4,161 | 376 | |
| (In percent of GDP) | 29.5 | 32.4 | 2.9 | |
| Total impact (US$ millions) | … | … | 255 | |
| (In percent of GDP) | … | … | 2.0 | |
4. Zambia is usually self sufficient in staple food crops, and the crop forecast survey for the 2007/08 agricultural season indicates that overall food supplies will remain adequate. The harvest for the staple food, maize, will be smaller this year, mainly as a result of flood damages in late 2007 and early 2008, but including the stocks carried over from the last agricultural season, the total supply of maize is projected to exceed total national requirements. The authorities have not taken any actions specifically in response to the global food crisis. The import and export of agricultural commodities have since 1994 required permits, which, with the exception of maize exports, have generally been readily granted. Permits for the export of maize are only granted when adequate supplies are available. In early May 2008, as in previous years, the authorities announced that export licenses for maize will not be granted until the food security situation has been fully assessed; likely by the end of June.
5. Reserve money growth was lower than envisaged in recent months, helped by a strong fiscal outturn. At end-April 2008, reserve money was about 6 percent below the end-December 2007 level.
6. Revenue performance was strong through April. Total revenue was about 1 percent of GDP greater than projected, as income taxes, VAT, and nontax revenue all registered strong performances. Expenditures were broadly as budgeted.
7. Since the beginning of the year the kwacha has appreciated by about 10 percent against the U.S. dollar, in large part reflecting dollar weakness. Against the euro, the kwacha has remained broadly unchanged. Official foreign exchange reserves have continued to increase; at mid-May they stood at 2.8 months of imports.