IMF cautions Govt over forex inflows

IMF cautions Govt over forex inflows
By Chiwoyu Sinyangwe
Tuesday March 04, 2008 [03:00]

GOVERNMENT should not to be excited by increased foreign exchange inflows and overspend but instead enhance its reserves in case of a slump in copper prices, the IMF has cautioned. But commerce minister Felix Mutati has said the Zambian government is “aggressively” pursuing economy diversification to prepare the country for any slump in copper prices.

executive board members who recently visited the country to assess the economic progress the country has made warned that if Zambia did not handle the current economic ‘fortunes’ properly, it would result in “boom and bust cycle that other countries have found themselves in.”

Leader of the IMF mission team Miranda Xafa said in an interview that there was need for Zambia to handle commodity price windfalls prudently and develop infrastructure to avert a possible recession.

"You certainly do not want to get into a boom (and) bust cycle that others have found themselves in, in that while the boom and bust lasts, they try to spend it all at once and while commodity prices fall, they slow down in possible recession- what we call ‘Dutch disease’," Xafa said.

“When the commodity prices go up there is exuberance and a lot of spending and inflation and when the commodity prices go down there is slow down and recession you want to keep a sort of even pace of spending and I am sure you wouldn’t like to go through that.”

Xafa who is also IMF alternate director said there was need to restructure the country’s spending in a manner that dependence on commodity prices was minimised.

“You want to keep a sort of even pace of spending and kind of detach your fiscal spending from the commodity cycle and commodity prices,” Xafa said.

The IMF also cautioned government not to be “over ambitious” when attracting foreign direct investments into the country because the country did not have the infrastructural capacity to handle that growth.

Xafa said the current weakness in electricity supply, coupled with unreliable road and rail network, could result in the country failing to absorb the investments coming into the country.

“I understand there are investors waiting to come in with mining projects and also in other sectors but there is not enough energy right now to service these new requests,” she said. “So, I think, before we can talk about plans to expand production, it is important to remove these bottlenecks.”

And the IMF warned that Zambia’s economy could overheat if government did not prudently expend the increased foreign exchange inflows.

“Now commodities are very high and you are flooded with capital inflows both from exports proceeds and from foreign direct investments in addition to the usual donor inflows,” said Xafa.

“So what I am saying is that as you lay out your spending plans, it is important to take into account the economy’s capacity to absorb the spending because I am sure you don’t want your economy to overheat… you don’t want to bump against resource constraints and you certainly don’t want to have a boom and bust economy.”

But Mutati in a separate interview said the government could not reduce its expenditure because the poverty levels in the country were still too high.

“We are diversifying our economy by encouraging significantly investments in other sectors other than mining, like agriculture, tourism, manufacturing and the industries,” Mutati said.

“We don’t’ hold the fortunes of copper in prices so you have to have other options in case the price of copper does not perform as much it must perform. There are other alternatives that you can actually lean on and that is why we are diversifying our economy so that we have a diversified portfolio both for the export markets as well export potential.”

Mutati also said the Zambian economy was not likely to overheat in the next few years.

“Poverty still remains a major challenge. A lot of our people don’t have access to basic things particularly in rural areas and, in fact, statistics indicate that we are not giving a major dent to rural poverty,” Mutati said.

“So before the economy can overheat we still have to deal with this huge component of poverty and I don’t think the economy can overheat in the next one or two years because the challenge we have got in terms of poverty reduction is quite a lot.”

Mutati also said while the government admitted that the infrastructure in the country was weak, the country could not halt the attraction of foreign investments.

“Yes, infrastructure problems like power issues and road infrastructure still remain a challenge not just for us but the whole region but that is something we trying to address,” said Mutati.

“International Finance Corporation have already been assigned to do a feasibility for development of Kafue lower, and Zesco is interacting with Tata on Itezhi tezhi…so we are determined to address those constraints, we may not resolve it at once but we think it will help address it.

With regard to the road infrastructure in this year’s budget, we have a total of K1.2 trillion to attend to the road infrastructure and this will be a continuous process of dealing with the road infrastructure.

Yes, while it is a constraint we can’t hold back attracting investments until we deal with all these issues because if we do that, the moment we go back and say now we want to bring in the investors they would have looked elsewhere because they are not obviously just waiting for Zambia; they are being spoken to by other countries in the region and other parts of the world.”