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IMF Country Report No. 19/263

ZAMBIA

2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ZAMBIA

August 2019

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Zambia, the following documents have been released and are included in this package:

  • A Press Release including a statement by the Chair of the Executive Board.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 24, 2019, following discussions that ended on April 30, 2019, with the officials of Zambia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 11, 2019.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.

  • A Statement by the Executive Director for Zambia.

  • A Statement by the Staff Representative for Zambia.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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Telephone: (202) 623–7430 • Fax: (202) 623–7201

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2019 International Monetary Fund

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ZAMBIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

July 11, 2019

Key Issues

Context. Zambia’s development strategy has targeted a rapid scale-up of public investment to address infrastructure needs. This has resulted in large fiscal deficits, financed by nonconcessional debt and the accumulation of domestic arrears, adversely impacting the private sector. Recent efforts to adjust the fiscal stance have delivered some improvement in revenues, but deficits have continued to rise following faster-than-budgeted execution of foreign-financed capital spending. With the anticipated growth dividend yet to materialize, the debt burden has risen sharply, resulting in currency weakness and rising local borrowing costs that have further pushed up the interest bill. Reserve coverage has fallen to 1.7 months of imports.

Outlook and Risks. The path forward is very narrow. With the outlook already subdued, the drought in the south and west is further weighing on growth, via agriculture and the heavy dependence on hydro power, placing vulnerable groups at risk. While tightening cash constraints are forcing some fiscal adjustment, Zambia’s public debt under current policies is on an unsustainable path. Zambia has remained current on debt service obligations, but a significant reorientation of the fiscal policy stance is needed to preserve macroeconomic stability and begin reducing debt-related vulnerabilities. With an end of the drought and progress addressing arrears, growth would accelerate in the medium term. However, risks would remain elevated.

Key Policies. A large, frontloaded, and sustained fiscal effort is needed to bring debt down to safer levels. This should include a moratorium on contracting new external non-concessional borrowing, steps to raise revenues, halt the buildup of domestic expenditure arrears, and to better prioritize public investment projects. Avoiding too harsh a drag on growth or priority social spending is key, and effective responses are needed to the drought. The authorities agreed on the need for action to restore stability and reduce debt accumulation. Decisive steps forward to build confidence and deliver meaningful fiscal adjustment will be essential. Appropriately tight monetary policy also has a role to play in securing stability. Reserves should be replenished over the medium term. Steady attention to the business environment is also needed to support private investment going forward.

Approved By

David Robinson (AFR) and Martin Sommer (SPR)

Discussions were held in Lusaka from April 16–30. The staff team comprised Ms. Goodman (head and SPR), Messrs. Kalonji, Gupta, Pondi Endengle (all AFR), and Li (SPR). Mr. Robinson (Deputy Director, AFR) joined the mission’s concluding policy discussions. Mr. Mwansa (Economist, Office of the Resident Representative) assisted the mission. Ms. Mannathoko (Alternative Executive Director) and Mr. Sitima-wina (both OED) participated in policy discussions. Staff met Minister of Finance Margaret Mwanakatwe, Bank of Zambia (BoZ) Governor Denny Kalyalya, other senior government and BoZ officials, members of parliament, senior officials of selected parastatals, as well as representatives of the private sector, labor unions, civil society organizations, and Zambia’s development partners. Bakar Ould Abdallah, Krisztina Fabo, Cleary Haines and Sandrine Ourigou (all AFR) assisted from headquarters.

Contents

  • CONTEXT

  • RECENT ECONOMIC DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Reducing Debt-Related Vulnerabilities

  • B. Strengthening PFM to Anchor Fiscal Sustainability

  • C. Strengthened Debt Management and Market Development

  • D. Enhancing Monetary Policy and Operations

  • E. Securing Financial Stability

  • F. Achieving Higher and More Inclusive Growth

  • G. Capacity Building and Statistics

  • STAFF APPRAISAL

  • BOX

  • 1. Impact of Drought and Other Climate-Related Shocks

  • FIGURES

  • 1. Recent Developments

  • 2. Fiscal Developments

  • 3. External Sector

  • 4. Monetary & Financial Developments

  • TABLES

  • 1. Selected Economic Indicators, 2016–24

  • 2a. Fiscal Operations of the Budgetary Central Government, 2016–24 (Millions of kwacha)

  • 2b. Fiscal Operations of the Budgetary Central Government, 2016–24 (Percent of GDP)

  • 3. Monetary Accounts, 2016–24 (Millions of kwacha)

  • 4a. Balance of Payments, 2016–24 (Millions of U.S. dollars)

  • 4b. Balance of Payments, 2016–24 (Percent of GDP)

  • 5. Financial Soundness Indicators, 2008–18 (Percent)

  • ANNEXES

  • I. Main Recommendations of the 2017 Article IV Consultation and FSAP

  • II. External Sector Assessment

  • III. Risk Assessment Matrix

  • IV. Macro-Financial Linkages

  • V. Mining Sector

  • VI. Institutions and Governance

  • VII. Capacity Development Strategy Note

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ZAMBIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

July 11, 2019

Prepared By

African Department (In consultation with other departments)

Contents

  • FUND RELATIONS

  • JOINT WORLD BANK-FUND WORK PROGRAM, 2019–20

  • STATISTICAL ISSUES

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ZAMBIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS1

July 11, 2019

Approved By

David Robinson (AFR) and Martin Sommer (IMF) and Marcello Estevão (IDA)

The Debt Sustainability Analysis (DSA) was prepared jointly by the staffs of the International Monetary Fund and the International Development Association, in consultation with the authorities.

Zambia: Joint Bank-Fund Debt Sustainability Analysis

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An updated DSA is prepared using the revised Low-income Countries Debt Sustainability Framework (LIC DSF) to assess Zambia’s current debt situation. Debt burden indicators have deteriorated considerably since the October 2017 DSA mainly on account of large fiscal deficits as the authorities made use of available financing to boost infrastructure spending, weaker growth and exchange rate, and a worsened external environment (terms of trade and financial conditions). Rising debt service costs (both externally and domestically) and a large pipeline of contracted and to-be-disbursed loans place Zambia’s public debt on an unsustainable path under current policies while budget expenditure arrears have risen. Zambia’s debt-carrying capacity has also weakened with its FX reserves’ import coverage declining from 4.7 months in 2015 to 1.7 months in May 2019. All four external debt burden indicators breach their indicative thresholds, three of them by large margins and throughout the medium-term under the baseline scenario.

Total public debt is projected to increase somewhatin the near-term as, under unchanged policies, fiscal deficits remain large, before gradually declining as large debt-financed public projects are completed and forced fiscal adjustment occurs given financing constraints. As a frontier market, Zambia’s high gross financing needs (peaking at 19 percent of GDP over the next three years), combined with wide EMBI spreads (1,575 basis points on June 11, 2019) and high domestic borrowing costs, expose it to significant market-financing risks. Despite the challenging fiscal situation, Zambia has remained current on all its debt obligations—domestic and external—and has not experienced a debt distress event. The authorities remain committed to prioritizing debt service payments and have identified resources to continue meeting debt obligations in the near-term. However, staff assess the risk of external and overall public debt distress for Zambia as very high at this juncture, and that a large upfront and sustained fiscal adjustment is essential to begin reducing debt vulnerabilities.

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Press Release No. 19/311

FOR IMMEDIATE RELEASE

August 2, 2019

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