The Zambian economy continues to be under stress from the impact of external and domestic shocks and an unbalanced policy mix WASHINGTON D.C., United States of America, November 1, 2016/APO/ — At the invitation of the authorities, an International Monetary Fund (IMF) team led by Tsidi Tsikata visited Zambia during October 19-31 to help assess the current economic situation and provide policy advice to restore macroeconomic stability and promote broad-based economic growth. At the end of the mission, Mr. Tsikata issued the following statement: “The Zambian economy continues to be under stress from the impact of external and domestic shocks and an unbalanced policy mix. The pace of economic activity remains sluggish in 2016, with growth projected at 3 percent due to continued electricity shortages, low exports and subdued private sector consumption and investment. “Public finances are severely strained. Fiscal performance through the first three quarters of 2016 was characterized by shortfalls in revenue and substantial spending overruns on fuel and electricity subsidies. The government has also been accumulating payment arrears to suppliers and contractors. The stock of arrears is projected to increase from about ZMW10 billion (5 percent of GDP) at end-2015 to about ZMW 20 billion (9 percent of GDP) at the end of 2016. On a cash basis, the fiscal deficit for the whole year is projected to reach 5 percent of GDP, and the deficit on a commitment basis (i.e., taking into account the net accumulation of arrears during the year) at about 10 percent of GDP. To date, the cash deficit has been largely financed with domestic borrowing, mainly from the Bank of Zambia. “Monetary policy has continued to carry the burden of policy adjustments. A tightening of monetary policy helped stabilize the exchange rate and put inflation on a downward trajectory. However, the ensuing tight liquidity conditions together with the slowdown in growth and the accumulation of government payments arrears have put the private sector and the banking system under stress and led to an increase in non-performing loans. “The mission and the authorities discussed a broad range of measures to create fiscal space for beginning to clear government’s arrears, scale up social spending and reduce the fiscal deficit on a commitment basis in 2017. This adjustment would help to put public debt on a downward path and allow monetary policy to gradually unwind the current tight stance, allowing the economy to recover. “Zambia’s current economic challenges can be overcome with resolute policy action such as the recent adjustment of fuel prices to cost-reflective levels and the announced intention to reduce electricity subsidies. These measures, if coupled with structural reforms to reduce inefficiencies and increase capacity utilization in the energy sector, would go a long way toward increasing Zambia’s potential growth. The mission welcomes the authorities’ plan to scale up social cash transfers and protect social spending, including on health and education, to mitigate the potential impact on the poor. “The mission welcomes the authorities’ decision to undertake a broad-based consultative process to ensure support within the government and across national stakeholders for their policies and reforms that could be implemented under an IMF arrangement. At the authorities’ request, the mission will return to Zambia in early 2017 to conduct Article IV consultation and program discussions. “The team met with Finance Minister Felix Mutati, Bank of Zambia (BoZ) Governor Denny Kalyalya, National Development Planning Minister Lucky Mulusa, other senior government and BoZ officials, members of parliament, 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 who it met with, for their openness and the constructive spirit in which all discussions were held. The IMF stands ready to support Zambia and its people as needed.” Distributed by APO on behalf of International Monetary Fund (IMF).