IMF Raises Flag Over Zambia’s Debt

Lusaka, Zambia.

The International Monetary Fund has strongly advised the Zambian government to avoid contracting new non-concessional debt to reduce risks of depressing the economy.

It has also warned that the significant build up in domestic expenditure arrears presents a risk for the financial sector as it is weighing on households and businesses.

A team from the IMF has issued a statement at the end of 2019 Article IV visit in which it further recommends up-front and sustained fiscal effort.

“To reduce risks, staff recommended a large up-front and sustained fiscal effort, including: avoiding contracting any new non-concessional debt, steps to raise revenues, halting the buildup of new arrears, and aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space,” stated the team led by Mary Goodman.

During their visit  between April 16 and April 30, the team met Minister of Finance Margaret Mwanakatwe, Bank of Zambia Governor Dr Denny Kalyalya, other senior officials, representatives of the Parliamentary Committees on budget and on trade and national economy, as well as financial market, business, and trade union representatives, civil society organizations, and development partners.

The mission, according to Goodman, will prepare a report of the Article IV consultation which will be discussed by the IMF’s Executive Board in the coming months.

The IMF said at the conclusion of the mission, discussions focused on policy options to lower debt-related vulnerabilities and support economic growth.

This should include avoiding contracting any new non-concessional debt, take steps to raise revenues, halt the buildup of new arrears, and align the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space, Goodman said.

The IMF said its staff and Zambian authorities took stock of recent economic developments and the future outlook and prospects as part of the 2019 Article IV consultation and raised concerns over large fiscal deficits and rising debt service.

“Our discussions on Zambia’s 2019 Article IV were frank and collaborative. This has been a valuable opportunity to take stock of the current situation and outlook for the economy and to gain a shared appreciation of current challenges and policy options going forward,” the IMF said.

It has further projected that growth is projected to slow from 3.7 percent in 2018 to 2.3 percent in 2019, lower than earlier envisaged due to the impact of the drought on agricultural production.

“Inflation is close to the Bank of Zambia’s upper band and is projected to rise over the course of 2019. Reserves stood at 1.7 months of imports at end-March 2019. Zambia’s development strategy targeting a rapid scaling up in infrastructure spending has resulted in large fiscal deficits, financed by nonconcessional debt,” IMF stated.  “The 2018 budget deficit (commitment basis) reached 10 percent of GDP (7.5 percent on a cash basis), and total public and publicly-guaranteed debt including domestic arrears at end-2018 was 73.1 percent of GDP.”

It says higher interest costs on foreign debts owing to the kwacha’s depreciation has further squeezed government spending in other areas.

“With the recent increase in yields on government paper and higher interest costs on foreign debt due to the depreciation of the kwacha, government spending in other areas is being squeezed, including on social programs and transfers to local governments. The significant buildup in domestic expenditure arrears is weighing on households and businesses and presents a risk for the financial sector,” IMF stated.

“…With a diminished impact of the drought over time, and progress in addressing arrears, there is potential for growth to accelerate over the medium term. The mission welcomed the enactment of the Public Finance Management Act in 2018, which should strengthen management of public resources once the accompanying legislation has been enacted. Specifically, the passage of the Planning and Budgeting Bill will be important to enhance the project selection/appraisal process while the revised Loans and Guarantees Act would provide the necessary framework for medium-term debt management.”