Zambia’s infrastructure spending has resulted in large fiscal deficits – IMF

The IMF has observed that the government has continued to incur large fiscal deficits despite continuous advice from the Bretton Woods institution.
But finance minister Margaret Mwanakatwe has promised to institute serious debt accumulation control measures.
An International Monetary Fund delegation led by Mary Goodman was in the country to conduct the 2019 Article IV consultation with the government.
The delegation held meetings with several senior government officials, including Mwanakatwe and Bank of Zambia Governor Dr Denny Kalyalya, from April 16 to 30.
At the end of the consultation, the IMF observed, among other things, that large fiscal deficits and rising debt service had resulted in domestic expenditure arrears.
“Zambia’s development strategy targeting a rapid scaling up in infrastructure spending has resulted in large fiscal deficits, financed by non-concessional debt. The 2018 budget deficit (commitment basis) reached 10 per cent of GDP (7.5 per cent on a cash basis), and total public and publicly-guaranteed debt including domestic arrears at end-2018 was 73.1 per cent of GDP,’’ delegation leader Goodman said in a statement.
‘’ Growth is projected to slow from 3.7 per cent in 2018 to 2.3 per cent in 2019, lower than earlier envisaged due to the impact of the drought on agricultural production. Inflation is close to the Bank of Zambia’s upper band and is projected to rise over the course of 2019. Reserves stood at 1.7 months of imports at end March 2019.’’
Goodman stated that such rising debt service had resulted in domestic expenditure arrears, and was taking a toll on growth.
She stated that the discussions focused on policy options to lower debt-related vulnerabilities and support economic growth.
‘’With the recent increase in yields on government paper and higher interest costs on foreign debt due to the depreciation of the kwacha, government spending in other areas is being squeezed, including on social programmes and transfers to local governments,’’ Goodman stated.
‘’The significant buildup in domestic expenditure arrears is weighing on households and businesses and presents a risk for the financial sector. With a diminished impact of the drought over time, and progress in addressing arrears, there is potential for growth to accelerate over the medium term.’’
The delegation has since recommended a stop to further debt contraction, especially non-concessional.
“To reduce risks, staff recommended a large up-front and sustained fiscal effort, including: avoiding contracting any new non-concessional debt, steps to raise revenues, halting the buildup of new arrears, and aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space,’’ stated Goodman.
“The mission welcomed the enactment of the Public Finance Management Act in 2018, which should strengthen management of public resources once the accompanying legislation has been enacted. Specifically, the passage of the Planning and Budgeting Bill will be important to enhance the project selection/appraisal process while the revised Loans and Guarantees Act would provide the necessary framework for medium-term debt management.’’
For her part, Mwanakatwe said the government and the IMF agreed on a number of areas that require an immediate policy response.
She highlighted areas such as reducing debt accumulation, and reducing domestic arrears, among others.

‘’Government takes note of the projected slowdown in growth for 2019, at the back of the drought experienced in some parts of the country during the past agricultural season, and the higher projected inflation. The government will therefore, put in place measures to redress the impact of the drought on growth,’’ she stated.
‘’The Bank of Zambia through use of various monetary policy instruments is also geared to ensure that inflation is maintained within the set band of 6-8 per cent. Measures to keep the deficit within the 2019 budget target, as well as the medium term, will be undertaken as part of the adjustment measures agreed with the IMF. In this regard, control measures around debt accumulation and halting arrears build up will be implemented expeditiously.’’
Mwanakatwe pledged to take the IMF recommendations to Cabinet for consideration and endorsement.
Government sources expressed concern that the country was in trouble with debt.
‘’This statement comes at the end of the Article IV visit, so it doesn’t imply anything about programme discussions. It doesn’t sound like there was any move on that end. The government is accumulating domestic payment arrears, this has been in the news, no surprise,’’ said the sources.
‘’Forex reserves at 1.7 months at end March? It should be at least 3. Government deficit is unsustainable. As usual the Fund is recommending that government slash spending, increase taxes, and stop foreign (non-concessional) borrowing. Bottom line: Zambia is in trouble.’’

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