Introduction

My Zambian authorities wish to convey their gratitude to the Fund for the helpful policy dialogue and technical assistance in support of the country’s macroeconomic program. Their program is guided by vision 2030, which is being implemented through the Fifth National Development Plan 2006-10 and the Sixth National Development Plan 2011–15 whose objectives are to sustain high positive growth and maintain macroeconomic stability in the near and medium term. This is in addition to accelerating the diversification program, enhancing competitiveness, pursuing infrastructure and human development as well as achieving the Millennium Development Goals (MDGs). The authorities seek completion of the fifth review under the ECF arrangement and financing assurances review. Moreover, they seek waiver of the missed end-2009 ceiling on non-concessional borrowing, and modification of end-December 2010 performance criteria. My authorities are in broad agreement with the staff report.

Macroeconomic developments

Economic growth for 2010 is expected to be higher than earlier projected at more than 6.6 percent as a result of continued strong performance in the agriculture, mining, tourism and construction sectors as well as supportive macroeconomic policies. Growth is expected to remain strong in the medium term, propelled by the mining and manufacturing sectors as agricultural output returns to trend levels. The fiscal deficit increased by 0.8 percent from an initial projection of 2.5 percent of GDP in 2010 arising from invalidation of the assumption on which the revised program target was based—the salary increase for 2010 was budgeted at 9 percent but the actual outturn after negotiations with the unions was 15 percent. Recruitment of teachers, medical staff and police; financing of surplus maize; and the fuel subsidy also contributed to the budget deficit. Inflation remained under control in the single digits and further declined from 7.3 percent in October to 7.1 percent in November 2010. Monetary policy implementation has been in line with the program and the balance of payments position continues to improve. The key challenges include enhancing revenue performance in the medium term, reducing high rural poverty, and financing infrastructure.

Program performance

Program performance was on track with all quantitative performance criteria for end-June 2010 being met. One indicative target on payment of domestic arrears was missed on account of pre-requisite investigation and verification process of the arrears by the Drug Enforcement Commission. The electricity tariffs benchmark was met with some delay of less than 4 weeks while the establishment of a lender of last resort framework was partly met, both of which were due to consultation processes that took longer.

On the case of misreporting, my authorities regret reporting to Fund staff a tentative interest rate of 1.25 percent on the OPEC Fund loan contracted on June 12, 2009 during the fourth review as contained in the MEFP and staff report. The loan in question financed the implementation of the second phase of the Cancer Diseases Hospital Project at the cost of US$6.0 million with an interest rate of 1.5 percent and a grant element of 34 percent. The first phase of the project was financed by a loan from the same source of US$5.6 million contracted in 2002 with an interest rate of 1 percent and a grant element of 36 percent. While the first loan clearly met the concessionality threshold of 35 percent, the second loan did not, missing the grant element by 1 percent. In view of the inadvertent nature of the misreporting and the corrective actions being undertaken by the authorities, including initiating disciplinary action and providing information to staff through one focal officer after clearance with the Senior Management, my authorities request granting a waiver for nonobservance of the non-concessional debt ceiling under de minimis procedures.

Fiscal policy

The authorities are committed to enhancing revenue performance and reducing the proportion of the wage bill in the medium-term in order to provide more room for capital spending and increased expenditure in social sectors. Revenue enhancement measures focus on broadening the tax base and increasing compliance, including for the mining sector. In this regard, the government will enforce compliance with the mining tax regime. On the expenditure side, recruitment freeze outside education, health and security sectors has been imposed for one year. The Food Reserve Agency (FRA) will recover part of the funds for financing the surplus maize through selling the bulk of the surplus maize to deficit countries in the region to moderate the cost on the budget.

Monetary policy

The monetary policy objective is to maintain single digits inflation and financial stability. The current framework based on monetary aggregates will remain in place during the migration to the interest rates framework to anchor inflation expectations in order to ensure smooth migration. As my authorities have indicated, they seek to benefit from Fund TA to ensure the adoption of international best practices.

Debt management

The authorities underscore their commitment to enhancing their debt management capacity. In this regard, debt management operations are being restructured through implementation of recommendations of the institutional development plan for the debt management office. The key recommendation is reorganizing and consolidating the office along functional lines. The authorities would further seek IMF TA in risk management and debt sustainability analysis.

Structural reforms

The authorities are improving the management and overall performance of public service through the introduction of service delivery charters, customer service centers and development of a comprehensive public service pay policy. A salaries and wages review commission has been constituted to develop a comprehensive public services salaries structure. An anti-corruption implementation plan has been put in place to enhance the fight against corruption. The anti-corruption Act will be amended to align it with the policy and related legislation. The public interest disclosure bill and forfeiture of proceeds of crime bill has been passed by parliament. My authorities are ready for review by the Africa Peer Review Mechanism of the African Union, which aims at enhancing the standards of good governance.

A new public procurement Act establishing the Zambia Public Procurement Authority has been enacted to provide a solid framework for public procurement reforms, and audit committees have been appointed in Ministries to enhance the effectiveness and efficiency of use of public resources. My authorities continue to reduce the cost of doing business by implementing the private sector development reform program (PSDRP), which has made significant progress. The authorities have launched a simplified trade regime for micro, small and medium enterprises aimed at expanding capacity to exploit trade opportunities, the first one being with Malawi. Further, establishment of one-stop-border post is progressing well aimed at making cross border trade easier.

Poverty reduction

In their continued efforts to reduce the high poverty levels, especially in rural areas, and improve food security, my authorities expanded the farmer input support program, which contributed to the unprecedented harvest of 2.8 million metric tons of maize. My authorities should be congratulated for having achieved this outcome, which not only achieves food self-sufficiency, but also holds promise of export to other countries that still face food deficits. This outcome was new and the maize market was not adequately prepared to handle it. My authorities promptly responded by providing additional financial support to the FRA to purchase the crop from remote areas not usually reached by private players thereby helping correct the market failure that heightened as a result of the bumper harvest.

Agriculture marketing in Zambia remains fragile and need government support from time to time. One of the institutions that the government uses is the FRA for the purpose of managing strategic reverse and, thereby also playing a stabilizing role. To help address the challenges in agriculture marketing, the FRA will be trading on the Zambia Commodity Exchange to off load stocks in the market during periods of scarcity.

Further efforts to reduce poverty include enactment of an agriculture credit bill aimed at improving access to credit by farmers, and investing in irrigation and feeder roads. A credit guarantee scheme has also been established to improve access to finance by small businesses.

A multi-year financial and technical assistance cash transfer scheme in the amount of US$63 million over a 10 year period has been developed with the cooperation of donors aimed at reducing extreme poverty.

Infrastructure financing

One of the key objectives of the country’s economic program is infrastructure development, which is critical in reducing the cost of doing business thereby facilitating private sector investment and trade. Implementation of infrastructure development has become difficult due to project specific ceilings on medium- to long-term non-concessional borrowing because it is limiting the ability of the government to implement the ongoing Road Sector Investment Program. The authorities do not expect the Board of the Fund nor Cooperating partners to decide which projects should be implemented. Therefore, my authorities request the Board to accordingly modify the end-December 2010 performance criteria.

Conclusion

The Zambian authorities consider their engagement with the Fund important in helping to support the implementation of their macroeconomic program. They are committed to enhancing conducive environment for private sector investment, while sustaining macroeconomic stability, public sector efficiency and accountability, creating the necessary fiscal space for capital spending, and ensuring debt sustainability. They request completion of the fifth review under the ECF arrangement and financing assurances review. In addition, they request waiver of the missed end-2009 ceiling on non-concessional borrowing, and modification of end-December 2010 performance criteria.