Zambia economy resilient but facing challenges-IMF

Zambia has weathered the global downturn, and a review of an International Monetary Fund poverty reduction arrangement is on track, the IMF said on Wednesday, but the country must do more to improve public finance.

‘While the overall performance of the economy has held up well, government revenue collections, particularly of import-related taxes, have fallen short of expectations,’ the IMF said in a statement following a staff mission to Zambia.

An International Monetary Fund (IMF) mission visited Lusaka October 15–28 to conduct the discussions for the 2009 Article IV consultation and for the third review of Zambia’s Poverty Reduction and Growth Facility (PRGF) with the IMF. The mission met with the Minister of Finance and National Planning, Hon. Situmbeko Musokotwane; Governor of the Bank of Zambia, Dr. Caleb Fundanga; other senior officials; and representatives of the business community, labor unions, civil society, and Zambia’s cooperating partners. The mission is grateful to the authorities for the fruitful discussions and warm hospitality over the last two weeks.

At the conclusion of the mission in Lusaka today, Mr. George Tsibouris, mission chief for Zambia, released the following statement:

“I am pleased to say that we have reached ad referendum understandings on macroeconomic and structural policies for 2010 that would pave the way for the completion of the third review under Zambia’s PRGF arrangement with the IMF.

“Against the background of the global economic crisis, the Zambian economy has shown considerable resilience, and economic growth is now expected to exceed 5 percent in 2009. Mining and agriculture have shown strong gains in output; nonetheless, there have been job losses in mining and some financial difficulties in the agricultural sector. Inflation is moderating, assisted by a softening of food prices and a limited reversal of the earlier depreciation of the Kwacha; the revised inflation target of 12 percent by end-2009 is well within reach. The external position has also strengthened, both because of the earlier-than-expected recovery in copper prices and the exchange rate-related compression of imports. Zambia’s reserve position at about US$1.7 billion is now stronger than it has been in almost four decades, thanks in part to the recent Special Drawing Rights (SDR) allocation of US$629 million from the IMF.

“While the overall performance of the economy has held up well, government revenue collections, particularly of import-related taxes, have fallen short of expectations. In order to preserve targets for domestically-financed capital spending, the government has accessed some financing from the Bank of Zambia. There have also been delays in the disbursement of donor aid, both budget and sector support, which has further hampered government’s ability to meet spending targets. The government is to be commended for its handling of fiscal policy in 2009.

“The economic program for 2010 is premised on a budget, now being discussed in Parliament, that maintains an appropriately supportive stance in a resource-constrained environment. Monetary policy aims at containing inflation while providing adequate credit for the private sector. The outlook is for some pick up in economic growth and a further easing of inflation into single digits by the end of the year. The external position is expected to remain strong.

“Looking ahead, Zambia faces a number of challenges that need to be addressed if robust economic growth is to be sustained over the medium term. Key among these is the need to increase fiscal space for infrastructure and social sector spending to support the diversification of the economy and poverty reduction. This will require both the mobilization of additional domestic resources by reversing the downward trend in tax revenue collections seen in recent years and, equally importantly, by ensuring that public spending is cost-effective. Particular attention needs to be paid to the public sector wage bill, which currently consumes more than one half of domestically-generated resources, and could end up displacing other high priority needs.

“The IMF Executive Board is expected to discuss the third review under the PRGF arrangement and the 2009 Article IV consultation by late-December 2009.”

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