The latest statement by the International Monetary Fund (IMF) says Poverty in Zambia remains very high, at over 60 percent of the population with a large population of underemployed youth. The IMF further says Zambia is likely to miss many of the Millennium Development Goals.
The IMF says Zambia’s economy currently faces strong headwinds. The IMF said the current account has deteriorated, international reserves have fallen, and the exchange rate has been under downward pressure.
According to the latest statement issued by the IMF board after meeting the Zambia team, Zambia achieved strong growth and macroeconomic stability over most of the last decade, ‘However, in the last two years, the Zambian economy has been facing strong headwinds from large fiscal imbalances, lower copper prices, and policy uncertainties.
The IMF explained that Zambia achieved high growth and macroeconomic stability over most of the past decade. This performance was the result of market-liberalizing reforms that started in the 1990s, strong copper prices (from 2004) which helped attract foreign direct investment (FDI), and prudent macroeconomic policies. The IMF said unfortunately over the last two years, large fiscal deficits, lower copper prices and policy uncertainties have exerted significant pressures on the exchange rate and slowed growth.
The IMF said Year-on-year inflation fell from a peak of 8.1 percent in November 2014 to 7.2 percent in March 2015, largely driven by lower fuel prices. The fiscal deficit on a cash basis rose sharply to 6.5 percent of GDP in 2013 and remained elevated at 6 percent in 2014.
The Zambian kwacha has fluctuated widely since the beginning of 2014. After depreciating by about 20 percent in the first half of the year, it recovered in the second half of the year reflecting tightened monetary policy and the issuance of Zambia’s second Eurobond in the amount of US$1 billion. The Zambian kwacha was under pressure during the first half of 2014 and again in the first quarter of 2015. The kwacha depreciated by about 20 percent against the U.S. dollar during both periods, reflecting both external factors (lower copper price for both periods and dollar strength in the first quarter of 2015), and domestic factors(loose fiscal policy for both periods and uncertainty about mining taxation in early 2015).
The IMF warned that frequent regulatory changes and uncertainty about the policy direction (e.g., changing the mining fiscal regime without consultations) could lead to a sharp drop in FDI.
Just yesterday, Zambia said will have to Borrow Offshore to Fund Deficit as Growth Cut.
Zambia is considering raising funds externally to help finance a widening budget deficit as growth slows because of a drop in copper and corn production, Finance Minister Alexander Chikwanda said.
The “unfinanced” budget gap is forecast to be 10.5 billion kwacha ($1.42 billion), which the government will finance by borrowing overseas, Chikwanda told lawmakers Tuesday in the capital, Lusaka. The Treasury will seek parliament’s approval to raise the southern African nation’s external debt limit to 60 billion kwacha from 35 billion kwacha, he said.
Zambia has “one plausible option which is external financing,” Chikwanda said. Domestic borrowing is “not prudent” because of higher interest rates and risks crowding out private industry in Africa’s biggest copper miner, he said.
Zambia’s finance ministry said last week the deficit would swell to more than 6 percent of gross domestic product, compared with a previous target of 4.6 percent, after the government reversed a proposed increase in mine taxes. Changes due to come into effect in July will lower the royalties that the government raised in January, and reintroduce a profit tax for mines.
Chikwanda cut this year’s economic growth target to 5.8 percent from a previous estimate of more than 7 percent.
Zambia will save an estimated 5 billion kwacha through “rationalizing” spending by starting new projects only once ongoing ones are completed, he said. “If we don’t control expenditures we shall be in a quagmire,” said Chikwanda. “Government is now strict in controlling expenditures.”
Spending curbs on public services may draw criticism, Clare Allenson, an African analyst with Eurasia Group, said in an e-mailed note to clients. “The proposed spending cuts that are largely made up of social programs will be unpopular,” Allenson said.