Even IMF sounds alarm at PF regime’ policy uncertainties, says growth uncertain debt would rise

Even IMF sounds alarm at PF regime’ policy uncertainties, says growth uncertain debt would rise

The International Monetary Fund says Zambia’s medium term growth outlook is uncertain due to significant policy uncertainties.

And the International Monetary Fund has charged that Zambia’s current fiscal stance is clearly unsustainable and warns that government debt would rise to over 50 percent by 2018 from the current net present value of about 30 percent of GDP in 2013.

The IMF says in light of the significant policy uncertainties, Zambia’s growth and inflation outlook in the medium-term is uncertain.

The Fund however projects that Zambia’s projects growth will remain between 7 and 8 percent and inflation to decline gradually to 5 percent assuming front-loaded fiscal reforms leading to a medium-term deficit of 3 percent of GDP, and a business friendly policy environment

This is according to the IMF’s latest country staff report for Zambia released at the end of a staff mission to Zambia in October 2013.

The IMF noted that the balance of risks to growth is on the downside due to the uncertainties regarding the pace of fiscal adjustment and the investment climate.

It warned that the Zambian economy would be highly vulnerable to negative shocks, with low international reserves and rapidly rising public debt if the needed fiscal adjustment is delayed.

The Fund observed that policy priorities should include preserving the economy’s hard won macroeconomic stability called for a reduction of the fiscal deficit and increased international reserves.

“This will require mobilizing additional domestic revenue, realigning spending priorities, and creating fiscal space for infrastructure investment, while also maintaining a business environment that encourages job creation. At the same time, the targeted transformation of the Zambian economy requires fundamental administrative and institutional reforms to promote credible policy implementation, higher efficiency of public infrastructure investment, and deeper financial intermediation,” the lender said in a report.

The IMF added, “The fiscal deficit for 2013 is projected to reach 8.6 percent of GDP, assuming that the government implements planned fourth quarter spending cuts through reducing spending on goods and services and maintaining capital spending at least 0.5 percent of GDP below the annual budget.

It said virtually all categories of spending have deviated substantially from approved levels adding that the sharp increase in wages and the large overruns on subsidies forced the government to make sharp cuts in goods and services, intergovernmental transfers, and capital spending.

“To finance the above-budget deficit, the Zambian Government has increased issuance of Treasury bills, used part of the 2012 Eurobond proceeds that had earlier been transferred to State Owned Enterprises for investments but had not yet been spent, and intend to borrow abroad via a syndicated loan,” It said.

The IMF said there are risks that the fiscal deficit for 2013 will be higher than currently planned, if the authorities fail to implement the spending cuts discussed with the mission.

It warned that this could lead to a substantial accumulation of arrears or reliance on central bank financing.

“In this regard, the IMF staff expressed concern about the recourse to central bank bridgeloans, which are intended to assist with cash management but could if not quickly repaid constitute central bank financing of the budget.”

The IMF also advised against raising the Personal Income tax free threshold, which the Government was considering, noting that the threshold is already high at 3 times the Gross National Income per capita. The proposed tax measures together with rising mining revenue and improved non-tax revenue collection are expected to raise revenues by5 percent of GDP over the medium term.

The Washington based lender also welcomed the Pension system saying Public Service Pension Fund (PSPF)has accumulated pension arrears of an estimated 1.1 percent of GDP, and its annual funding is insufficient to prevent the accumulation of new arrears.

Staff supported the government’s intention to reform the system, including through increasing the retirement age to 65 from 55 years.

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