Zambia’s debt unsustainable under current policies – IMF

THE IMF says Zambia’s economic outlook is clouded by the ongoing drought and heightened debt vulnerabilities.

The International Monetary Fund executive board assessment, following the July 24 conclusion of Article IV consultation with Zambia, noted the deterioration in macroeconomic outcomes in Zambia and heightened vulnerabilities due to the ongoing drought and recent policy slippages.

They expressed concern that public debt and debt service have increased rapidly due to heavy reliance on non‑concessional debt to finance large infrastructure investment, while growth has lagged, thus putting Zambia at high risk of external and public debt distress.

The directors emphasized the urgency of reforms and of a firm commitment to implement them.

“Under current policies public debt is on an unsustainable path, and ongoing financing constraints have started to force the inevitable fiscal adjustment to occur in a disorderly way, with mounting expenditure arrears,” the directors observed. “There is a narrow window for tackling fiscal challenges in an orderly and planned manner. This would require a large front‑loaded and sustained fiscal adjustment centered on stronger control and prioritisation of public investment projects and postponing the contracting of new non‑concessional debt, accompanied by enhanced revenue mobilisation and the scaling back of exemptions and tax expenditures, while reducing domestic expenditure arrears.”

The directors stressed that the adjustment strategy should aim to minimise drag on growth and contain the impact on priority social spending.

Some directors also urged the government to carefully consider the benefits and disadvantages of shifting from a value‑added tax to a sales tax.

On Friday finance minister Dr Bwalya Ng’andu deferred the introduction of General Sales Tax to January 2020.

The IMF directors welcomed the Cabinet decision in late May to indefinitely postpone the contracting of all new non‑concessional loans, cancel some committed but undisbursed loans and enhance the control and management of disbursements of foreign‑financed loans, and to strictly adhere to public financial management rules under the 2018 PFM Act.

They emphasised that strong actions would be needed to reduce debt‑related vulnerabilities and called for continued efforts to enhance debt management and transparency.

The IMF urged the government to address weaknesses in procurement and in project selection and management to ensure prioritisation and greater investment efficiency.

“Stronger procedures are needed to ensure that budget execution reflects the authorities’ fiscal goals,” the Fund stated. The directors noted the importance of ongoing and future technical assistance in enhancing the authorities’ capacity in those areas.

The IMF noted that Zambia’s development strategy has focused on a rapid-scaling up of public investment to address the country’s infrastructure needs.

“While public investment has increased sharply, economic growth remains well below levels seen earlier this decade and is estimated at 3.7 per cent in 2018,” it stated. “Inflation averaged seven per cent in 2018, but a depreciation of the currency late in 2018 and again this spring coupled with food price rises has pushed inflation above eight per cent. Fiscal revenues exceeded budget targets in 2018, but the deficit widened above 10.5 per cent on a commitment basis (over 8 percent of GDP on a cash basis) due to a rising interest bill and a surge in public investment reflecting faster than expected execution of public investment projects. Total public and publicly-guaranteed (PPG) debt including arrears at end-2018 was 78 per cent of GDP.”

The IMF stated that the current account deficit widened to 2.6 per cent of GDP in 2018 due to higher imports and debt service, while reserves declined from 2.4 months of import cover in 2017 to 1.9 months at end-2018.

“The outlook is clouded by the ongoing drought and heightened debt vulnerabilities. Growth is projected to slow to two per cent in 2019, reflecting a decline in mining sector activity in an uncertain environment for mining companies and the drought’s impact on hydro power production,” the Fund stated. “Absent significant policy adjustments, growth is likely to remain subdued over the medium term as expenditure arrears and an ongoing forced adjustment in response to increasing debt-related pressures weigh on the private sector. Inflation is projected to remain above the top of the Bank of Zambia’s (BoZ) target band in 2019 and 2020…While the central bank has [in May] moved to shore up reserves as market conditions have permitted, reserves are projected to decline to 1.6 months of import cover by end-2019. Key risks include the uncertain impact of the drought, a potential tightening of global financial conditions, a further escalation in trade tensions, and the uncertain growth dividend from recent infrastructure investments.”

The IMF directors commended BoZ’s actions to implement the recommendations of the 2017 FSAP (Financial Sector Assessment Programme), including strengthening its supervisory capacity and enhancing the crisis preparedness framework.

They urged the government to closely monitor pressures from the macro-financial linkages between the financial system and the sovereign.

They also recommended continuing to address nonperforming loans.

The directors saw potential for growth to accelerate over the medium term with the appropriate fiscal adjustment.

“Achieving inclusive growth and reducing poverty will require a steady focus on improving the investment climate, promoting productivity and human capital, and addressing the risk of corruption,” advised the directors. “The authorities [government] should develop proactive strategies to respond to the drought and climate‑related risks and to promote well‑functioning support programmes in the agricultural sector to enhance resilience.”

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