IMF country report on Zambia

By Nawa Mutumweno – Economic growth is expected to remain robust in 2012 at around 7.7 percent and inflation to remain close to 6 percent, with the Government planning to widen the fiscal deficit (but reduce net domestic borrowing) and have tightened monetary policy in line with achieving these objectives.

Economic conditions remain favourable and there has been little impact to date from the European crisis. Zambia has achieved sustained high growth and macroeconomic stability over the last decade, but poverty remains high.

Inflation has declined to single-digit levels, international reserves have grown to a comfortable position, and debt is low. The key policy challenge is how to make growth more inclusive.

‘’Promoting inclusive growth will require reforms on a number of fronts while simultaneously continuing to safeguard macroeconomic stability. These reforms include creating space for growth enhancing and poverty reducing spending; improving access to financial services for the unbanked population; and boosting the agriculture sector and other labour-intensive activities,’’ an IMF Country Report on Zambia issued in July 2012 says.

Real GDP growth averaged 5.2 percent in 2000 – 10 (or 3.1 percent per capita); inflation declined from 30 percent to single digits; debt declined sharply; and international reserves increased markedly.

However, the 2011 Ex-Post Assessment (EPA) found that despite this strong macroeconomic outcome, extreme poverty remained high – about 60 percent of the population still lived below the poverty line in 2010.

‘’The EPA found that economic growth has not sufficiently benefitted the areas and sectors where the poor are most numerous. This may reflect a concentration of growth in highly capital-intensive or urban-based sectors like mining, construction and services. Per capita agricultural growth – a key factor for the rural population – lagged for most of the period,’’ the report reads in part.

Moreover, policies that kept maize prices high disadvantaged the urban poor and the many poor smallholders that are net buyers of maize in 2008 – 10 when agriculture growth was strong.

The EPA also found that despite weathering the 2008 – 09 global financial crisis well, Zambia could do more to reduce vulnerabilities to future shocks.

‘’Achieving sustainably higher and more inclusive growth would require entrenching macroeconomic stability, improving human capital and infrastructure, and diversifying the economy. In this context, the EPA concluded that policies should focus on:-

  • Reversing declines in capital spending and strengthening public infrastructure
  • Mobilising revenues
  • Sustaining the recently achieved low to moderate levels of inflation; and
  • Further developing the financial sector

Recent developments and outlook

Macroeconomic performance in 2011 was positive, with robust growth and declining inflation.

Real GDP is estimated to have grown by six and half percent, driven by a record maize harvest and bank credit growth of about 30 percent.

Inflation declined to 7.2 percent at end-2011, broadly in line with the authorities’ target, and has declined further to 6.0 percent in February 2012. The monetary policy stance was eased in late 2011 with a reduction in both the reserve requirement and liquid asset ratios.

The Kwacha has depreciated by 7 percent against the US dollar since September 2011, likely reflecting the easing of monetary conditions in Zambia and shifts in foreign portfolio investment flows to other markets, especially in in East Africa.

Despite copper prices rising to record highs, the external current account surplus narrowed from 7.1 percent to 1.3 percent of GDP, mainly reflecting a strong expansion in imports and a decline in grants. Still, gross international reserves rose above US$2 billion for the first time ever, equivalent to three months of prospective imports.

Preliminary data suggest that the fiscal deficit of the central government remained flat at around three percent of GDP in 2011, reflecting a large expansion in election-related current spending and public investment being offset by one-off payment of mining tax arrears.

Government’s 2012 economic programme aims to increase growth while keeping inflation below 7 percent. Real GDP is projected to rise by 7.7 percent, reflecting strong growth in copper production and non-maize agriculture, and an expansionary fiscal policy.

The 2012 budget targets a deficit of 4.1 percent of GDP and a significant increase in investment. More than half of budget financing is expected to come from a sovereign bond issue, and net domestic financing is targeted to remain low at about one percent of GDP. With a slight tightening of monetary policy, inflation is projected to remain around 6 percent in 2012.

Key risks arise from the uncertain prospects for the global economy that could lower copper prices and from domestic policies. Although the crisis in Europe has had little spillover to the Zambian economy to date, and mining companies are moving forward with ambitious plans to expand their operations, a further deterioration in the global economic conditions could squeeze trade credit lines; reduce demand for Zambian exports; and lower copper prices.

On domestic policies, 0.8 percent of GDP in fiscal measures could be needed to ensure that the fiscal, inflation, and reserve targets are met, especially if much needed maize sector reforms are delayed; while careful implementation of planned financial sector reforms will be necessary to safeguard financial sector stability.