Happy new year to all our esteemed readers! A lot has happened while we were on break. We hope to touch on these points where possible.
One of the things that happened is that the IMF made a somewhat meaningless visit to Zambia in December 2014. You will recall that IMF had planned to visit Zambia to agree a new funding programme. But given that we have elections next week nothing was going to be agreed with anyone. That said, the IMF did issue a good summary of its perspective on Zambia's economic situation:
IMF STATEMENT ON ZAMBIAPress Release No. 14/589An International Monetary Fund (IMF) team led by Tsidi Tsikata visited Zambia during December 4-18 to hold discussions for the 2014 Article IV consultation. At the end of the mission, Mr. Tsikata issued the following statement:“The Zambian economy continues to register strong growth. Non-mining growth has remained close to 7 percent, but technical outages at some mines led to a decline in copper production that is projected to reduce overall real GDP growth to about 5½ percent in 2014. The exchange rate depreciated sharply in the first half of the year. A marked tightening of monetary policy and a boost to international reserves from Eurobond proceeds helped to partially reverse the depreciation and stabilize the exchange rate. Nevertheless, the annual rate of inflation edged up to 8.1 percent in November.
“Zambia’s growth potential remains high, but the medium-term outlook is clouded by domestic and external risks. The outlook is buoyed by several mining and electricity supply projects that are about to come on stream. However, political and social pressures for loosening fiscal policy in the run-up to the 2016 general elections are potential sources of downside risks. Moreover, lower world copper prices and the announced shift to a royalty-only mining tax regime with high rates are likely to adversely affect the mining sector. The authorities indicated that they are looking to assuage the concerns of mines and prevent closures.“Greater policy stability and consistency would help anchor confidence in Zambia as an attractive investment destination. In this regard, the mission urged the authorities to seek a speedy resolution to the impasse over VAT refunds to exporters. More generally, it will be important to enhance dialogue between stakeholders, particularly between government and the mining sector where there is a need to build mutual trust.“Effectively addressing the country’s fiscal imbalances is critical for maintaining macroeconomic stability and ensuring a strong foundation for sustained economic development. Despite some progress in 2014, keeping public finances in line with approved government budgets has proved challenging, and deficit financing has put upward pressure on interest rates. In the mission’s view—based on the current international and domestic environment—the 2015 financing requirement is likely to be larger than planned. The mission welcomed the authorities’ intention to take measures to keep the deficit within the budgeted level. Such consolidation would, with time, allow for a normalization of monetary policy and a reduction in interest rates.“After the January 20 presidential by-election, the mission team will engage the incoming government to discuss its policy intentions and priorities before submitting a report to the IMF Executive Board on the 2014 Article IV consultation.“The team met with Finance Minister Alexander Chikwanda, Bank of Zambia Governor Michael Gondwe, and other senior government officials, as well as members of parliament and representatives of the private sector, civil society, and development partners. The mission wishes to thank the authorities for their hospitality and for the open and constructive spirit in which the discussions were held. It also expresses its gratitude to all other stakeholders with whom it held discussions.”(Source: IMF December 2014)
Three things worth noting.
First, the GDP growth for 2014 is actually likely to be around 6% according to Ministry of Finance not 5.5% as suggested by the IMF. We need to see the final figures from the CSO in due course to be sure. Clearly the size of GDP is important for interpreting debt and fiscal space, but generally crucial in terms of how fast the economy is growing and it's ability to withstand external shocks. In this case we are talking about a reduction in the growth rate - and possibly similar slower growth in 2015. However, in general Zambia is registering very good growth.
Secondly, as we had previously noted the "the 2015 financing requirement is likely to be larger than planned". The IMF attributes this to "the current international and domestic environment". The current general election and ongoing spending commitments, including likely lower GDP growth all add to these pressures. These challenges of course mean that any presidential candidate promising you manna from heaven or change in the current course is not only not speaking sense, but possibly even dangerous to the economy. What the economy needs is more stability. It is also important to note that any reduction in mining taxes will worsen the funding challenge. Again that means GRZ for now must stay the course for 2015-16.
Finally, it is worth noting that the IMF has not called for a reduction in mining taxes. Whilst it suggests the new "royalty-only mining tax regime with high rates are likely to adversely affect the mining sector", it simply says "the authorities indicated that they are looking to assuage the concerns of mines and prevent closures". The IMF is more concerned with GRZ resolving VAT issues for exporters. The problem there is that resolving that issue is complicated by the fiscal challenges, which in turn could get worse if that issue is not resolved, now that we have a new mining fiscal regime squeezing on some mining companies in a negative direction (though the risk this end is manageable). It is a paradoxical situation.
We shall have more to say on these rather complicated issues.