The State of the Zambian Economy (Oct 2016)

On October 20, 2016, the Zambian minister of finance, Mr. Felix Mutati issued a ministerial statement on the state of the Zambian economy.  The full statement can be downloaded here. Key highlights of his statement were as follows:

Zambia is experiencing slower growth in 2016 after a decade of accelerated growth

The causes of this slowing down in the growth of the economy are both external and domestic.

External causes relate to low international commodity prices and adverse weather linked to the El Nino weather system over the past two agricultural seasons.

Domestic causes include:

  1. the power crisis and high inflation that have increased the cost of production for the private sector;
  2. policy reversals that have adversely impacted business planning particularly in the mining sector; and
  3. the impact of growing expenditure pressures that have exerted pressure on monetary policy whose ability has been reduced:
    • a build-up of arrears related to infrastructure, particularly in the road sector;
    • government expenditures on fuel subsidies;
    • financing of emergency electricity imports to mitigate the impact of the power crisis; and
    • above budget expenditures via the Food Reserve Agency and FISP.

These factors have had a negative effect on the confidence of foreign and domestic investors and the players in the financial markets.

A weakened external sector

The value of exports has fallen with global price falls. A trade deficit has emerged as the country is at present importing more than it is exporting. This has put pressure on international reserves, which have substantially declined from US$3.9 billion in July 2015 to US$2.3 billion at present. Foreign exchange is flowing out of the country. This is as a result of the existing commitments, particularly those relating to subsidies that have an external component.

Deterioration of public finances

The economic challenges are also reflected in the deterioration of public finances. In 2016 the fiscal impact of the economic shocks forced public expenditure upwards while revenues fell short of expectations. This has caused the gap between taxes collected and government expenditure to drift further. The fiscal deficit when unpaid bills or arrears are included is expected to reach 10% of GDP by end of year. Key parts of the deficit include:

Rising debt service costs

Added to these pressures have been rising debt service costs as a result of the depreciation of the Kwacha and higher domestic lending rates.

The Economic Recovery Programme

Zambia’s Economic Recovery Programme has five pillars:

The first pillar involves strengthening tax policy and administration, to improve revenue inflows, and to shift public expenditure back to affordable levels.

The second pillar will see an increased budgetary allocation to social protection including addressing the plight of pensioners.

Under the third pillar, government will ensure that it improves economic and fiscal governance. This will involve strengthening of regulations and laws to make them more punitive to abusers and ensure transparency in the way we arrive at economic and spending decisions.

The fourth pillar will be centered on improving budget credibility. Better planning and adherence to expenditure plans and improvement of the quality of Government's spending.

The fifth pillar will provide greater economic stability. Under this pillar, Government will also put in place measures to unlock growth by targeting investment in the sectors with binding constraints to growth. On the investment side enhancing energy and transport infrastructure remains key. On the policy side government will be prioritizing efforts to reduce the costs of production and ease doing business.

No detailed programme discussions with the IMF yet

Government has not yet hosted any detailed programme discussions with the IMF and there are no IMF preconditions.