International Monetary Fund To Work With Zambia To Implement Fiscal Policies And Reduce Deficit In 2016

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The International Monetary Fund (IMF) has recently concluded a ten-day mission to Zambia aimed at reviewing the country’s recent economic developments and policy responses, to the macroeconomic challenges that it is currently facing.

The mission led by Tsidi Tsikata, stayed in the country during November 11th – 20th, 2015 and held meetings with Zambian officials headed by President Edgar Lungu, Finance Minister Alexander Chikwanda and Bank of Zambia Governor Denny Kalyalya.

The mission’s concluded that the success on monetary policies tightened in the recent months, is needed to be followed by fiscal policy tightening to help to revive Zambia’s economy.

Market confidence has been hurt and the economy is under stress due to lower copper prices and an electricity shortage that are constraining economic activity mostly in the mining sector, which has affected the Zambian Kwacha’s (ZMW) value and brought difficulties to other economic sectors, explained Mr. Tsikata.

Since the privatization of the Zambian mining sector in late 1990s and early 2000s, the country’s economy saw its dependency from copper raising due to heavy foreign direct investment (FDI) that has since totaled the USD 10 billion as of 2013 according to the IMF.

It raised copper production from 250,000 tonnes to over 750,000 in the same period reaching a contribution of 73% of total exports and around 30% of Zambia’s GDP.

Consequently, a drop of approximately 29% from USD 282.55 per pound to a current price at USD 201.10 per pound on a year to date basis, made the ZMW to depreciate over 83% from ZMW 6.39 per USD to a current rate at ZMW 11.72 per USD.

This fact put upward pressure on inflation which almost doubled to 14.4% in October, 2015 and together with domestic and external financing conditions, brought the interest rates on Zambian Government debt to higher levels, added Mr. Tsikata.

Additional spending commitments hurt the market confidence on Zambia’s fiscal discipline, however, recent monetary policies that have been properly tightened reduced pressure over the ZMW/USD exchange rate, he concluded.

Since the IMF mission’s arrival to Zambia and Government decision to raise the overnight lending rate to 25.5% after the first days of meetings, the ZMW has appreciated approximately 16% from ZMW 13.89 per USD on November 10th to ZMW 11.72 on November 23rd, 2015.

Zambia and the IMF will closely work next year to implement measures that will help to lower the country’s current fiscal deficit and restore market confidence.

This is the fourth time in the last two years that the IMF appoints a mission to Zambia to review its economic developments and policies due to pressure from falling copper prices, raising fiscal deficit and depreciating currency.

In June, 2014 an IMF mission to Zambia discussed the possibility to buy Zambian Eurobonds to lower yields to record lows and improve the country’s fiscal deficit which had reached the 6.8% of Zambia’s GDP in 2013, beating a forecast of 4.3%.

The mission came back in September, 2014 for further talks with Zambian lawmakers and agreed to reduce fiscal deficit to 3.0% over the medium term by changing the mining industry’s tax system, reason why a third IMF team visited Zambia in March, 2015 to back the government’s decision to raise royalties to 20% for some mines.

The IMF has been closely working since 1996 with emerging countries to help them to reduce its fiscal deficits, improve public debt management and boost social spending with programs totaling USD 75 billion of aid flows between 1999 and 2013.

39 countries have been so far benefited out of which 30 are in Africa and most of them in the Sub Saharan region which thanks to the IMF support, have been recently growing above the global average according to the Central Bank of Nigeria.