The International al Monetary Fund has charged that after a period of strong macroeconomic performance, the Zambian economy is now facing significant challenges.
The IMF said the challenges are arising from large fiscal deficits, lower copper prices, and policy uncertainties.
This is according to a statement from the IMF Executive Board after concluding their 2015 Article IV Consultation with Zambia.
‘In the last two years, the Zambian economy has been weighed down by large fiscal imbalances, lower copper prices and policy uncertainties. Real GDP growth has slowed, the current account has deteriorated, international reserves have fallen and the exchange rate has been under downward pressure,’ the Directors said.
They Directors estimate that real GDP growth slowed from 6.7 percent in 2013 to 5.6 percent in 2014, driven by a contraction in copper production.
‘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,’ they said.
The Directors emphasized that steadfast and strong efforts are needed to ensure macroeconomic stability and foster inclusive growth.
They underscored the need for significant fiscal consolidation in 2015 and over the medium term, to reduce the deficit, stabilize debt, and create conditions for lower interest rates.
The Directors also called for sustained expenditure and revenue efforts, including efforts to contain the wage bill, target social spending through cash transfers, broaden the tax base, and put the pension system on a sustainable footing.
They also welcomed the authorities’ decision to rescind the royalty based mining fiscal regime, and called for swift action to resolve the issue of outstanding VAT refund claims to exporters.
‘Directors noted that Zambia’s moderate risk of external debt distress calls for prudence in borrowing on commercial terms. Recognizing the need to address infrastructure gaps, they advised the authorities to strengthen the project selection process and prioritize capital spending,’ the statement read.
They also called for the development of a comprehensive debt management strategy to help address public debt vulnerabilities.
‘Directors supported the commitment of the Bank of Zambia to maintain a tight monetary policy stance to contain inflationary pressures. They stressed the importance of continued exchange rate flexibility and rebuilding reserves to provide adequate buffers for the economy.’
The IMF Directors also noted that poverty remains high, particularly in rural areas.
‘To foster job creation, inclusive growth, and economic diversification, Directors encouraged the authorities to improve the business climate by restraining labour costs and ensuring a stable regulatory environment,’ the statement said.