Editor's note: The latest IMF statement on Zambia confirms the gloomy state of the economy. The only good news at present is the stability of the exchange rate. How long that holds depends on fast the fiscal issues are addressed. It remains to be seen whether the increased willingness by the government to contemplate an IMF supported programme will be matched by real sacrifices. There doesn't appear to be political room for such a programme before the elections (August 2016). But then again agreeing austerity measures that are unlikely to bite until after August ought to be a no-brainer.
At the invitation of the authorities, an International Monetary Fund (IMF) team led by Tsidi Tsikata visited Zambia during March 9-18 to review recent macroeconomic developments and discuss with the authorities how best to address the current economic challenges facing the country. At the end of the mission, Mr. Tsikata issued the following statement:
"The Zambian economy is under intense pressure. Lower copper prices, electricity shortages, and poor rainfall have dampened the pace of economic activity. Moreover, inflation has increased, expenditure pressures have risen, and financing conditions have tightened substantially. The mission estimated that economic growth declined to about 3 percent in 2015. Resolute action is needed as quickly as possible to restore macroeconomic stability and pave the way for a return to high sustained growth.
"Government finances are under immense stress. Expenditure is running far above budget, in large part as a result of fuel subsidies and contracted emergency electricity imports that together are estimated to cost the treasury about US$660 million a year at the current pace (equivalent to 3.2 percent of GDP). At the same time, domestic and external financing options have become more limited along with rising interest rates. Mounting domestic arrears are adding to concerns about debt sustainability.
"Tightening of monetary policy has been effective in stabilizing the exchange rate but tight liquidity conditions have contributed to persistent under-subscription of treasury bills and bonds. However, there is little scope to loosen monetary policy as long as fiscal imbalances are not addressed. A key challenge going forward will be to normalize activity in the interbank foreign exchange market while avoiding a return of last year's extreme volatility in the exchange rate.
"The mission and the authorities reached a shared understanding of the challenges and risks associated with the current economic situation. The authorities stressed that, notwithstanding the upcoming general elections, they are committed to addressing the budgetary pressures, including moving to cost-reflective energy pricing, and scaling back on discretionary spending while safeguarding social protection programs. They indicated that strong near-term measures are being evaluated and that, at the IMF/World Bank Spring Meetings in mid-April, they would provide further guidance on the policy direction and reforms, and their plans for an IMF-supported program.
"The mission is confident that Zambia's current economic challenges can be overcome with resolute policy action, allowing a resumption of growth in line with the country's abundant potential. In particular, a package of measures that makes clear that the fiscal pressures are being tackled would boost market confidence and pave the way for increased investment and growth. However, delays in implementing corrective measures will only worsen the situation, increase the adjustment cost and postpone the recovery.
"The team met with Finance Minister Alexander Chikwanda, Bank of Zambia (BoZ) Governor Denny Kalyalya, other senior government and BoZ officials, members of parliament, leaders of political parties, as well as representatives of the private sector, labor unions, civil society organizations, and Zambia's development partners. The mission thanks the authorities and the other stakeholders it met, for their openness and the constructive spirit in which all discussions were held."