The minister hides when the economy loses its head
Whenever the economy loses its head, the Minister of Finance hides from the Zambian public. And whenever there is a slight signal of macro-economic improvement, he comes out of the hiding to make incomplete statements. That is why, I have decided to reproduce the report of the IMF staff made public in October 2017 about the Zambian economy. Surely, the dark messages in the IMF report such as on debt couldn’t have improved so fast as the Minister implies in his Lusaka Times article of Friday 26 January 2018, could it? The Minister is renowned for making lopsided statements of good things only but conceals other important aspects of the economy that he deliberately fails to mention. For example, the IMF is lamenting about (i) rising debt, the Minister is saying it is reducing and, the IMF says, “Advice on fiscal policy was not followed” but Government says, “At the conclusion of the meeting, the two Ministers called on the Cooperating Partners to continue their collaboration with the Zambian Government to mutually achieve development interests.”
The full reproduced IMF report is below.
Zambia : 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Zambia
International Monetary Fund. African Dept.
Context: Shocks, Policies, and Vulnerabilities
1. The Zambian economy was in near-crisis in 2015Q4 and most of 2016, reflecting the impacts of exogenous shocks and lax fiscal policy. Low copper prices reduced export earnings and government revenues, weakening the kwacha. Poor rainfall led to a contraction in agriculture output in 2015, and to a sharp drop in hydropower generation. Severe power rationing contributed to a marked slowdown in the pace of economic activity. Government spending was significantly above budget while revenues underperformed. Tightened financing conditions during 2016 and lack of expenditure restraint in the lead up to general elections in August, resulted in the government accumulating substantial arrears.
2. Monetary policy carried the burden of policy adjustments. Tightening of monetary policy in 2015Q4 helped to stabilize the exchange rate and lower inflation. The ensuing liquidity crunch combined with government arrears and subdued economic activity put the financial system under considerable stress. Non-performing loans (NPLs) rose sharply, credit growth plunged, and the Bank of Zambia (BoZ) took over a small bank and intervened in three nonbanks in late 2016. Since November 2016, with inflation receding and the emergence of exchange rate appreciation pressures (reflecting capital inflows and weak demand for imports), BoZ eased monetary policy considerably by unwinding administrative and quantitative measures it employed to tighten liquidity in 2015.
3. Public debt has been rising unsustainably. It increased from 36 percent of GDP at end-2014 to 61 percent at end-2016. External debt now accounts for 60 percent of public debt, making the portfolio highly susceptible to exchange rate risk. Government securities account for about half of domestic debt, with commercial banks and foreign investors holding about 40 percent and 17 percent of the total, respectively. Public debt is crowding out lending to the private sector and making the economy vulnerable to capital flow reversals.
4. The government has initiated important fiscal reforms, but is ambivalent on its commitment to debt sustainability. It has reduced regressive subsidies in the energy sector and is implementing reforms to enhance the efficiency and focus of subsidies in the agriculture sector. However, the pace and scale of contracting new loans for capital projects—sometimes before appraisals are ready—are inconsistent with stated debt sustainability objectives.
5. The near-term economic outlook has improved, driven by good rains and rising copper price. A bumper harvest and increased hydro power generation are expected to boost real GDP growth to 4 percent in 2017 from 3.4 percent in 2016. Inflation is projected to remain within the authorities’ target range of 6-8 percent, reflecting recent appreciation of the exchange rate. Increased foreign investor participation in the government securities auctions since late-2016 has eased the government’s financing constraint and supplied foreign exchange to the domestic market. With copper accounting for about 70 percent of Zambia’s export earnings, the recent increase in the world price—from about US$5,700 per metric ton in December 2016 to nearly US$6,500 in August 2017—has brightened the economy’s prospects.
6. The government has launched its Economic Stabilization and Growth Program (ESGP) and the Seventh National Development Plan (7NDP). The ESGP (2017-2019) aims at restoring macroeconomic stability and creating conditions for sustained growth, with a heavy emphasis on public financial management: enhancing resource mobilization, refocusing public spending on core public sector mandates, scaling up social protection programs, strengthening accountability and transparency in the use of public resources, and restoring budget credibility. The 7NDP outlines the medium-term strategy for creating jobs, encouraging economic diversification, and supporting human capital development, with the overarching objectives of reducing poverty and inequality.
7. Rising political tensions pose risks. Following closely contested general elections in August 2016, political tensions rose between the ruling Patriotic Front party and the main opposition United Party for National Development (UPND). Tensions heightened when the UPND leader was charged with treason and jailed in April 2017. Following mediation by national religious leaders and the Commonwealth Secretariat, the UPND leader was released in August, and the treason charges have been dropped. In response to a series of arson attacks on markets and electricity infrastructure, on July 5, 2017 President Lungu declared the existence of a situation that could degenerate into a state of emergency if not addressed.
8. IMF staff and the Zambian authorities have held discussions on a possible Fund-supported program. Further progress will require greater clarity on fiscal policy commitments and aligning the government’s borrowing plans to achieving public debt sustainability.
9. Implementation of past IMF policy advice has been mixed. Advice on fiscal policy was not followed. Some progress was made on structural fiscal reforms, but weaknesses in commitment control persist, resulting in the accumulation of arrears. In line with staff advice, BoZ maintained a tight monetary policy stance in 2015 and most of 2016. The level of international reserves has declined, but BoZ has been opportunistically purchasing foreign exchange from the market.
Recent Economic Developments and Near-Term outlook
10. Economic growth is beginning to recover. After averaging 7 percent a year during 2005-2014, real GDP growth dipped to 2.9 percent in 2015, reflecting the dampening impacts of low copper price, power rationing, government arrears, and restrictive monetary policy. Growth picked up to 3.4 percent in 2016, driven mainly by mining activities and private construction. A bumper harvest and increased hydro power generation are expected to lift growth to 4 percent in 2017.