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Zambia: Fourth Review of the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), Request for Modification of Performance Criteria, and Financing Assurances Review
IMF Country Report No. 06/263
International Monetary Fund (IMF)
July 2006
SARPN acknowledges the International Monetary Fund (IMF) as a source of this document.
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Executive Summary
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Zambia has achieved robust economic growth over the last several years and poverty, though still widespread, has begun to trend downwards. Prudent fiscal policy has reduced the government’s domestic financing need and facilitated the implementation of a firmer monetary policy. Inflation has fallen steeply since last year, aided by the sharp appreciation of the currency and lower food prices.
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The external position has strengthened markedly. Record high copper prices significantly improved the terms of trade, and the HIPC Initiative and the MDRI have canceled the bulk of Zambia’s external debt. The improved economic fundamentals have boosted confidence in the economy, leading to unprecedented inflows of portfolio investment and a large real appreciation of the currency. International reserves, however, remain low.
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Performance under the PRGF-supported program remains broadly satisfactory. All performance criteria and benchmarks for end-December 2005 were met, but the March 2006 indicative target ceiling on the government’s domestic financing was exceeded.
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The prospects for continued strong growth and low inflation are favorable. The policy challenge is to stay the course on macroeconomic stabilization—anchored on lowering government’s domestic borrowing—while moving ahead on the structural reform agenda to boost productivity growth and enhance international competitiveness.
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The strong appreciation of the currency is projected to considerably reduce the kwacha value of donors’ budget support and lower revenue from import taxes. Expenditures will be cut and tax collection efforts strengthened in order to meet the 2006 net domestic financing target.
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To strengthen revenue performance over the medium term, the authorities will undertake a comprehensive review and reform of the tax system, with technical assistance from the Fund. Also a committee has been established to renegotiate mining
agreements, including raising the very low royalty rate on minerals.
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The resources from debt relief provided under the MDRI will be used gradually, in line with annual debt-service savings. Spending on priority agriculture and infrastructure projects identified in the National Development Plan is being increased.
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The boom in copper prices and the accompanying appreciation of the kwacha and sizable inflows of portfolio capital pose a challenge to the conduct of monetary policy and the competitiveness of nontraditional exports. While a flexible exchange
rate can best buffer real shocks such as changes in the terms of trade, efforts should be made to broaden the scope for sterilized intervention to smoothen exchange rate fluctuations and build up international reserves. It is essential also to advance the
structural reform agenda to enhance international competitiveness and remove impediments to exports.
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