Introduction

We note that the staff report is in support of the authorities’ macroeconomic policy stance and structural reform agenda for which, the authorities should be commended. This marks Zambia’s first Article IV consultation without a formal program with the Fund since July 2011. While we are in broad agreement with the staff assessment we have a few areas of concern. We focus on the following for emphasis.

Background

The authorities’ economic policies and structural reforms are anchored on the Sixth National Development Plan (SNDP) that covers the period 2011-2015. As we pointed out in our Buff statement of June 20, 2011, the SNDP focuses on two pillars—improving infrastructure and human development—in order to achieve the strategic objectives of accelerating diversified economic growth, attaining the Millennium Development Goals, lowering inflation and strengthening the resilience of the economy against external shocks. The attendant macroeconomic policy stance and structural reforms remain valid, notwithstanding ushering into office of a new administration on September 23, 2011 following elections won by the opposition party, the Patriotic Front.

Economic performance

Economic growth performance was robust at 6.5 percent in 2011 as a result of a record maize harvest and expanding bank credit. Inflation was recorded at 7.2 percent at end-2011. The fiscal deficit was low, at 3.5 percent of GDP. The external current account surplus narrowed and gross international reserves stood at 3 months of prospective imports. In 2012, growth is expected to be even higher, at 7.7 percent, on account of strong growth in the mining sector and non-maize agriculture as well as expansionary fiscal policy. Inflation is to be contained at around 6 percent. The budget deficit is targeted at 4.1 percent of GDP as a consequence of a ramp up in infrastructure capital spending. Net domestic financing is targeted at 1 percent of GDP. In the medium-term, growth is expected to remain strong, propelled by the mining and manufacturing sectors.

Key challenges include enhancing revenue performance in the medium term, containing spending, reducing unemployment and high rural poverty, and enhancing diversification. The authorities remain committed to ensuring sustainable and high growth in order to create employment and reduce poverty while maintaining macroeconomic stability; creating fiscal space for growth enhancing expenditures, targeting low inflation and gradual migration to inflation targeting; enhancing structural reforms aimed at deepening the financial sector, over-hauling maize marketing and pricing; and continuing public financial management reforms, including better budgetary planning and execution.

On investment climate, while one international rating agency—Fitch Ratings—revised Zambia’s long-term foreign and local currency issuer default rating from stable to negative on account of reversal of fraudulent/corrupt transactions and unauthorized statements, Standard & Poor’s on the other hand maintained the Country’s B+ rating. As has been explained by the authorities, the fight against corruption and indeed the unauthorized statements should not be interpreted as reflecting policy reversal. Moreover, evidence on the ground shows that mining companies are moving forward with ambitious plans to expand their operations, paragraph 5 on page 9. In light of this, we would have expected a balanced staff report on these issues.

Fiscal policy

The fiscal policy objective aims at fiscal consolidation while creating space for priority infrastructure and social spending. This is based in the main, on improving collection of taxes including enhancement of mining tax through technical assistance from cooperating partners and the IMF which has stationed a Resident Advisor, aimed at improving the collection of mining taxes, which are currently under performing (Figure 6, page 15) compared to comparators and continued implementation of a comprehensive reform of tax policy. On the expenditure side, focus shall be on controlling the growth of the wage bill and enhancing domestically financed priority infrastructure and social spending. If revenues do not match projections, the authorities are ready to undertake expenditure re-prioritization particularly in current expenditure. Only slow moving capital expenditure will be reprioritized within the capital budget.

Monetary and financial policies

The monetary policy objective is to maintain low and stable inflation at single digits without constraining growth and private sector credit expansion. Monetary policy was accommodative towards the end of 2011 with both the reserve requirements and liquid assets ratios reduced in an attempt to lower high lending ratios. As reported before, the authorities continue to monitor closely developments in the financial sector to ensure stability in the financial system and stand ready to tighten monetary policy should circumstances warrant. The current practice to base the monetary framework on reserve money targeting will continue while efforts to shift to interest rates as the main instrument to anchor inflation expectations are ongoing—as evidenced by the recent introduction of the policy rate. We note staff support in this direction.

Structural reforms

As earlier reported, progress in the implementation of the remaining structural reforms continues. This includes rolling out the implementation of the treasury single account, the second phase of the Financial Sector Development Plan, lender of last resort, addressing inadequacies in maize marketing, ensuring cost recovery in energy pricing, and improving debt management capacity and project appraisal. The authorities’ intentions to improve project and debt management capacity at sectoral and central level aimed at enhancing project/debt selection, effective implementation and oversight should not be construed as a shift in policy. Again, we note staff support in this direction but wish to caution that it cannot be achieved overnight.

On the background note, we do agree with the analysis that “keeping maize prices high disadvantaged the urban poor and many poor smallholders that are the net buyers of maize”, page 4. While agreeing with the staff, we would like to point out that the authorities are committed to reforming the program by refocusing the role of the Food Reserve Agency and attaining a more market based pricing system. The authorities are also addressing the problem of poor targeting of the Farmer Input Support Program (FISP) that has a bias towards maize production by introduction of the electronic voucher system that will better target beneficiaries and allow for a more diversified crop range. This measure will diversify the agriculture sector and allow for growing of cash crops that will better benefit the smallholder farmers. In this regard, the authorities are cautiously piloting the electronic voucher system in 10 districts in the 2012/13 agricultural season with the aim of up-scaling the program in the later years. This is expected to have a considerable impact on reducing the high poverty levels.

Inclusive growth

We commend staff for the various informative annexes. However, on inclusive growth, we were expectant of the outcome of the recent tripartite conference on inclusive growth in Zambia organized by the authorities, the International Labor Organization and the IMF. Accordingly, we look forward to the findings of the conference in the near future.