- Drought-hit Zambia will get immediate access to about $184 million from the IMF.
- Lender says authorities in the southern African country remain committed to maintaining macroeconomic stability and restoring fiscal and debt sustainability.
- Worsening impact of drought is, however, set to see Zambia’s economy decline to 1.2% growth this year.
Zambia has secured about $184 million from the International Monetary Fund (IMF) to provide budget support to the southern African country that is reeling from adverse effects of drought, which now threatens to see the economy grow by marginal 1.2 per cent this year.
The funding brings Zambia’s total disbursement under its 38-month Extended Credit Facility ECF-supported program to SDR 992.86 million or about $1.3 billion.
According to the IMF Deputy Managing Director Nigel Clarke, policymakers in the country must implement a number of reforms to drive resilience in the face of looming economic slowdown.
“Governance and structural reforms are vital for promoting private sector activity and economic diversification. Enhancing transparency in the energy sector and resource management, strengthening anti-corruption measures, continuing agriculture reform, alongside building climate resilience, will improve the business climate and support sustainable and more inclusive growth,” explained Clarke in a statement.
Zambia’s ECF arrangement was approved on August 31, 2022, for SDR 978.2 million (100 percent of quota, or about $1.3 billion), with the access augmented to SDR 1,271.66 million (130 percent of quota, about $1.7 billion) on June 24, 2024.
Zambia’s Eighth National Development Plan
The program supports Zambia’s home-grown Eighth National Development Plan, a blue print that aims at entrenching macroeconomic stability, attain debt and fiscal sustainability, enhance public governance, and foster inclusive growth to improve the livelihoods, especially for the vulnerable populations.
According to the IMF, the programme performance has remained broadly satisfactory despite difficult domestic and international challenges. The lender noted that all June 2024 quantitative performance criteria (QPCs) and most indicative targets (ITs) for between June and September have been met, except for the June 2024 IT on the clearance of expenditure arrears and the September IT on social spending, which were missed by a small margin.
Overall, IMF’s assessment shows that five out of 15 structural benchmarks were not met, although two were completed with a slight delay.
With the historic drought and the related negative impacts of climate change significantly contracting agriculture and electricity production, growth projections for this year show that Zambia’s economy will decline further to 1.2 percent, down from 2.3 percent projected earlier.
According to the IMF, while Zambia’s current account has improved, attributable to a dip in imports earlier in the year, while inflation has increased further due to higher food prices and currency depreciation against major world units.
Nevertheless, the Washington-based lender said authorities in Zambia remain committed to maintaining macroeconomic stability and restoring fiscal and debt sustainability, while supporting vulnerable households.
“The authorities are also taking steps to improve governance and advance other structural reforms, including in the energy sector, to foster inclusive growth,” IMF stated.
Decreasing agricultural production
Clarke added: “The authorities remain committed to economic stabilization and advancing structural and governance reforms, despite the severe impact of a historic drought. Contracting agricultural and electricity outputs have slowed growth and accelerated inflation.
“Fiscal consolidation, prudent monetary policy and further reserve accumulation, exchange rate flexibility, and sound financial policies will be crucial for safeguarding macro-financial stability and building resilience against shocks.”
Additionally, Zambia’s public debt is assessed as sustainable, but the country remains at high risk of overall and external debt distress based on a full post-restructuring macro-framework.
This framework incorporates, among others, the treatment of official bilateral claims agreed with Zambia’s Official Creditor Committee (OCC), the completed Eurobond exchange, and the agreements in principle (AIP) reached with most external commercial creditors, which enable Zambia to fully close its exceptional financing gap.
Although Zambia is at a high risk of debt distress because of near-term breaches of the DSA thresholds, the country is expected to reach a moderate risk of external debt distress over the medium term.
“The fiscal consolidation path envisaged in 2025 will support restoring fiscal and debt sustainability. Planned measures to expand the tax base, harmonize corporate income tax, and index excises are adequate, although heightened risks to the post-drought recovery necessitate contingency revenue and expenditure measures,” noted Clarke.
Spending efficiency and transparency
Progress in enhancing revenue mobilization and strengthening spending efficiency and transparency, including of state-owned enterprises, are critical to generate much needed fiscal space, including to support the most vulnerable.
“Zambia’s public debt is assessed as sustainable but remains at high risk of overall and external debt distress. This assessment is based on a full post-restructuring macro-framework, incorporating the treatment of official bilateral claims agreed with the official creditors committee, the completed Eurobond exchange, and the agreements in principle with most commercial private creditors. Zambia is expected to reach a moderate risk of external debt distress over the medium term.
“The Bank of Zambia remains ready to act and maintains data-dependent monetary policy, which is key to preserving the credibility of its inflation targeting framework. Reserve accumulation and sustained exchange rate flexibility remain critical for addressing external shocks.
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