The International Monetary Fund says Zambia’s budget is under stress from significant obligations that have emerged in relation to fuel and agricultural subsidies, pensions, and road construction.
Head of the an International Monetary Fund team led by Mr Tsidi Tsikata visited Zambia from March 19-31 said there is an urgent need for action to contain the fiscal deficit in order to alleviate financing pressures that are keeping interest rates high and crowding out lending to the private sector.
Mr Tsikata said the Bank of Zambia’s recent action increasing the reserve requirements for banks is helping to stabilize the kwacha but noted that monetary tightening would be more effective if accompanied by fiscal tightening.
He said the Zambian economy is experiencing strong headwinds adding that policy uncertainties at home and external shocks are dampening economic activity.
‘In particular, the mining sector, which accounts for three quarters of the country’s export earnings, has been burdened by ongoing tax issues and by copper prices that declined to five-year lows in January 2015.
He added, ‘The kwacha has depreciated sharply against the US dollar since the beginning of the year, reflecting the general strength of the dollar and low copper prices, but also domestic factors clouding the outlook for the supply of foreign exchange to the domestic market.’
‘The annual rate of inflation has been falling steadily in recent months, helped by a series of reductions in fuel prices. However, the prevailing pump prices are not covering costs and contributed to payment arrears that led to fuel shortages in the country in early-March. The recent depreciation of the kwacha and the need to raise fuel prices will put upward pressure on inflation,’’ he said.
Mr Tsikata added, “The mission welcomes the recent easing of documentation requirements for VAT refund claims of exporters and urges the authorities to resolve the large stock of outstanding claims. The mission also welcomes President Lungu’s directive calling for a review of the mining tax regime that came into effect at the beginning of this year, which has had a negative impact on the sector. We hope resolution of the impasse will result in a transparent system applicable to all mines rather than mine-by-mine agreements that would likely entail the government foregoing substantial revenues to keep individual mines in operation.’’
“While pressures on the economy have grown, the challenges are not insurmountable. Resolute actions to contain the budget deficit, resolve the mining tax disputes, and foster policy coherence and stability would go a long way toward boosting investor confidence and unlocking the country’s high growth potential. IMF staff remains committed to working with the authorities on these issues.’’