US: IMF directors raise concern at Zambia’s rising external debt

11 Octobre 2017

Washington, D.C., US, October 11 (Infosplusgabon) - Executive Directors of the International Monetary Fund (IMF) have expressed concern at the pace at which Zambia’s public debt, especially external debt, has increased and now puts the southern Africa country “at high risk of debt distress”.

While recognizing the need for Zambia to address infrastructure gaps, the Directors emphasized that to maintain debt sustainability, it is critical to slow down on the contraction of new debt, especially non-concessional loans, strengthen debt management capacity, and improve project appraisal and selection processes.

Concluding the Article IV consultation with Zambia, the IMF Executive Board noted that the   near-term outlook for the economy has improved in recent months, driven by good rains and rising world copper price.

In a statement issued Tuesday, the Board said the Zambian economy was in near-crisis from the fourth quarter of 2015 through most of 2016, reflecting the impacts of exogenous shocks and lax fiscal policy in the lead up to general elections.

Low copper prices had reduced export earnings and government revenues, while poor rainfall in the catchment areas of hydro-power reservoirs led to a marked reduction in electricity generation and severe power rationing. A sharp depreciation of the kwacha fuelled inflation which rose from an annual rate of 7 percent in mid-2015 to nearly 23 percent in February 2016.

According to IMF, tight monetary policy succeeded in stabilizing the exchange rate and slowing down inflation to 6.3 percent in August 2017, but contributed to elevated stress in the financial system evidenced by a sharp rise in nonperforming loans and a plunge in the growth of credit to the private sector.

“Stress tests suggest that the banks are resilient to credit and liquidity pressures, but the financial system faces considerable risks, owing to high dependence on copper exports, rising public debt and funding pressures,” the Fund cautioned.

Zambia’s public debt has been rising at an unsustainable pace and has crowded out lending to the private sector and increased the vulnerability of the economy.

The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016, driven largely by external borrowing and the impact of exchange rate depreciation.

However, increased participation of foreign investors in the government securities market has eased the government’s financing constraint but has made the economy more vulnerable to swings in market sentiments and capital flow reversals.

In their assessment, IMF Directors have commended the Zambian authorities for taking strong measures to phase-out regressive fuel and electricity subsidies, and for scaling-up spending on social protection programmes.

Meanwhile, they noted that achieving the government’s fiscal consolidation goals would require stronger efforts to increase domestic revenues, including by addressing widespread exemptions and broadening the VAT and income tax bases.

“Directors emphasized the importance of containing recurrent spending, improving commitment controls, phasing out subsidies, and strengthening public financial management,” said the statement.

Directors welcomed the recent easing of monetary policy and commended the Bank of Zambia (BoZ) for unwinding the quantitative and administrative measures it had used to tighten monetary conditions.

In addition, they underscored that greater reliance on interest rates and market mechanisms would enhance the transparency and effectiveness of monetary policy, stressing that credible fiscal consolidation is necessary to sustain the current monetary policy stance.

“Macroeconomic stability, policy consistency, and investment in human capital are critical to addressing Zambia’s high rates of poverty and income inequality and promoting sustainable growth,” the Board emphasized.

Also, they encouraged the authorities to address policy uncertainties that are clouding the investment climate, including clarifying the roles of the state and the private sector in the energy and agriculture sectors.

FIN/INFOSPLUSGABON/RED/GABON 2017

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