The World Bank (WB) estimates that Zambia has to reduce its fiscal vulnerabilities, such as large deficits and inefficient government spending, to achieve economic recovery.
This was included in the WB’s recent study titled “Beating the Slowdown in Zambia: Reducing Fiscal Vulnerabilities to for Economic Recovery”.
“What remains critical is that any reduction in the fiscal deficit is planned and managed carefully,” said Gregory Smith, World Bank senior country economist for Zambia.
“A disorderly and incomplete adjustment will not restore market confidence. A too severe or too quick adjustment will undermine growth,” he added.
WB Recommendations to Zambia
The study proposes the following ideas to boost economic recovery and improve market confidence in Zambia:
- The Zambian government urgently needs to reduce its fiscal deficit through revenue mobilization and expenditure cuts such as subsidies for fuel, emergency power, maize and farm inputs. By reducing the size of the fiscal deficit, the government will create space for increased levels of private sector financing and investment, including in non-copper sectors of the economy.
- The Zambian government should also develop fiscal rules to guide the level of fiscal deficit that is compatible with macroeconomic stability. The WB notes that commitment to fiscal discipline is needed before any fiscal rules or debt ceilings can be effective.
- Relatively more public expenditure needs to be invested in areas that can support economic diversification and future growth prospects, for example increased power production capacity.
- The Zambian government also needs to improve domestic revenue mobilization. Domestic revenues can be boosted by broadening the tax base and ensuring the continuity of revenue administration reforms. Furthermore, a framework for the granting of tax incentives should be put in place and published to ensure that revenue opportunities are not wasted where companies would have invested despite the incentives.
Zambia’s GDP growth averaged 7.4% between 2004 and 2014, above the average for sub-Saharan Africa of 5.7%.
Zambia’s mining sector accounted for more than 60% of its exports and contributed 10% to the GDP.
However, in 2015, real GDP growth slowed to an estimated 3.2%, its lowest rate since 1998, due to falling copper prices, poor harvest and power crisis.
In addition, inefficient government spending is limiting the scope for rapid economic recovery, which the WB examined in its latest study on Zambia’s economy.
The WB support to Zambia commenced in 1955. As of March 2016, the WB has 14 active projects in Zambia, including 8 national projects with a net commitment amount of USD577m, two trust-funded projects (USD53m) and 4 regional projects valued at USD225m.