THE PF government has not implemented key IMF recommendations from the 2017 Article IV Consultation, leading to increasing debt stock by about 10 per cent of GDP in 2018.
On outlook and risks, the Fund says, “the path forward is very narrow. With the outlook already subdued, the drought in the south and west is further weighing on growth, via agriculture and the heavy dependence on hydro power, placing vulnerable groups at risk. While tightening cash constraints are forcing some fiscal adjustment, Zambia’s public debt under current policies is on an unsustainable path.”
The International Monetary Fund in 2017 recommended debt sustainability – lowering the debt level including restricting external non-concessional borrowing to move from high to moderate risk of debt distress rating but government has not implemented that.
The Fund recommended fiscal consolidation – reducing the overall fiscal deficit – but the government did not implement it.
IMF noted that the fiscal deficit widened significantly as there were large spending overruns on capital outlays, compounded by continued arrears on VAT refunds and suppliers’ credits.
At the end of 2018, the stock of verified VAT refunds stood at K4 billion, with a large stock of unverified claims. There was, in April, an outstanding K1.1 billion owed to NAPSA (K450 million in delayed contributions and K650 million in penalties).
The Fund urged revenue mobilisation (increasing domestic revenues by broadening VAT and CIT tax base, introduce land titling, reducing widespread exemption/incentives), again the government did not implement the recommendations. But the PF was quick to implement the recommendation on fuel process – recovering importation and procurement costs in the supply value chain and reflect changes in international prices and the exchange rate. The Energy Regulation Board has been reviewing fuel prices every 60 days and has changed fuel prices when needed to recover procurement costs.
On public investment management, IMF recommended prioritising infrastructure projects in line with absorptive capacity by setting up an institutional framework for approval of public investment projects, including for large projects.
“Not implemented. The government has continued to approve public investment projects without implementing a proper framework for coordinating and managing the identification, preparation, appraisal and implementation of public investment projects to ensure efficiency and value for money,” the Fund noted.
It recommended finalizing the energy sector cost of service study.
“Not implemented,” it noted.
According to the IMF Staff Report for the 2019 Article IV consultation on debt sustainability analysis (DSA), Zambia’s risk of external debt distress is high and overall risk of debit distress is equally high. On granularity in the risk rating, the Fund states that public debt under current policies is on unsustainable path.
IMF says total public debt is projected to increase from 78 per cent of GDP in 2018 to 91.5 per cent of GDP in 2019 as the large stock of undisbursed project loans (roughly 40 per cent of GDP) continues to disburse.
The debt service burden is also expected to rise above 30 per cent of government revenues in 2019.
The Fund states that while the DSA baseline is characterised by large and protracted breaches of both solvency and liquidity indicators, the Zambian authorities have committed to remain current on their debt obligations and there are no arrears on either external or domestic debt. It states that the risk of debt distress has increased substantially since the last DSA (October 2017) and is currently assessed to be at a very high level.
“Zambia is facing a difficult macroeconomic environment. The drought in the southern and western parts of the country – impacting both the agricultural sector and electricity production – has added to the growth slowdown,” the IMF notes.
“While the government’s development strategy has targeted a significant scaling-up in infrastructure investment, the growth benefits have yet to materialise, resulting in large fiscal deficits financed through non-concessional borrowing. With depreciation of the kwacha and the end of grace periods on several loans, increasing debt service payments are compromising the government’s ability to deliver on its priorities and support the most vulnerable.”
On outlook and risks, the report states that growth is expected to slow markedly in 2019 and remain subdued going forward absent a large up-front fiscal adjustment.
Growth in 2019 is expected to drop to 2.0 per cent as agriculture and electricity production continues to suffer from weather-related shocks, domestic demand remains weak, and mining activity declines somewhat due to lower international copper prices and in response to changes in the mining tax regime.
The report states that while a rebound in agriculture and a moderate recovery in mining activity is projected for 2020, growth is projected to decline next year and over the medium term as financing constraints force continued disorderly cuts in public expenditures.
The Fund states that liquidity constraints and depreciation pressures would lead to a contraction of both manufacturing and import-dependent services, notably wholesale and retail trade (which account for 20 per cent of GDP), pushing growth down to 1.5 per cent by 2023.
“Absent an effective policy adjustment strategy, inflation would remain above the BoZ’s upper band in 2019 and 2020 due to the pass-through of exchange rate depreciation in addition to the impacts of the drought,” it states.
“External imbalances are projected to widen, adding to pressure on reserves. The current account deficit is expected to widen in 2019 on lower copper exports (with lower prices and production) and the higher imports and interest payments associated with public investment. FDI and other financial account inflows are expected to remain subdued. International reserves under the baseline are projected to decline to 1.6 months of imports by end-2019 and to around one month of imports by 2021, leaving little buffer to cushion external shocks or for redemption of the 2022 Eurobond. Additional risks are posed by foreign holdings of local-currency debt (currently at about $0.7 billion, or half of FX reserves).”
The report states that the impact on rural households in regions impacted by the drought could be more severe than anticipated, presenting challenges for an effective policy response.
It states that delayed policy adjustment could exacerbate the erosion of consumer and investor confidence and result in large capital outflows, exchange rate depreciation and further tightening of domestic financial conditions.
“A weaker kwacha would increase the debt service burden, further crowding out priority social spending. Tightened global financing conditions would further complicate rollover of the 2022 Eurobond,” the Fund notes.
“Escalating trade tensions and a slowdown in growth in China could adversely impact copper prices, while the modest recovery anticipated in mining activity in 2020 after a decline in 2019 is subject to uncertainty.”
The Zambian government broadly agreed with IMF staff’s near-term growth and inflation outlook, notably the impact of the drought on 2019 outcomes.
Over the longer term the authorities expected a larger growth pay-off from recent public investments that they consider have significantly increased the country’s growth potential. They also emphasised the large investment needs to close the infrastructure gap, especially in the rural areas where fast population growth has led to increasing demand for social, health, education, and transportation infrastructure. They noted that the government would put in place measures to offset the impact of the drought by tapping the strategic maize reserve stocks and providing support to farmers. Government said the decision to begin load-shedding was a proactive response to the drought.”