Maravi

IMF raises alarm over Zambia's low reserves
By Kabanda Chulu
Sat 21 Dec. 2013, 14:00 CAT

ZAMBIA has achieved strong economic growth over the past decade due to improved macroeconomic management and increased copper production but rising fiscal imbalances and lower reserve coverage are posing serious risks, says the IMF.

And the International Monetary Fund has welcomed the government's plans to freeze-wage spending in 2014 and limit the cost of agricultural subsidies.

The IMF has also advised the government to accelerate revenue mobilisation through changes in tax policy and improve mining tax administration and broadening the tax base.

According to a statement released yesterday after the Executive Board of the IMF concluded the Article IV consultation with Zambia, robust output growth continued in 2012 at slightly above seven per cent, driven by agriculture and services, but was slowing in 2013 due to a weaker harvest.

"Expansionary fiscal policies, mainly from spending on subsidies and wages, have raised the projected 2013 deficit to about 8.5 per cent of GDP. Rising imports together with weakened copper prices are expected to move the current account into deficit, and international reserve coverage has fallen to two and half months of next year's imports," reads the statement.

IMF stated that the banking sector had grown steadily and remained profitable and well-capitalised.

"Private sector credit growth has started slowing down in 2013 from a rapid increase in the second half of 2012. Non-performing loans declined to 8.2 per cent of total loans in mid-2013 from 15 per cent in 2010," it stated.

Over the medium term, the IMF stated that economic growth was expected to stay strong, averaging about 7.5 per cent a year.

"However, this is premised on significant policy adjustment to restore fiscal sustainability and preservation of the investment climate. The authorities are targeting a three per cent GDP deficit over the medium term with no more than 1.5 per cent of GDP net domestic financing," it stated.

"In order to help achieve this, the government is planning a wage and net recruitment freeze for 2014 and is aiming to limit the cost of agricultural subsidies. The central bank also aims to build up reserves gradually with the aim to reach four months of imports over the medium term."

The IMF stated that Zambia's strong economic performance over the past decade has been underpinned by prudent macroeconomic management.

"Nevertheless, the outlook is subject to significant risks from the recent widening of fiscal imbalances, reduced external buffers and volatile copper prices. We therefore recommend containing the fiscal deficit, accelerating public financial management reforms, strengthening external buffers, and improving the business environment to help diversify the economy away from mining and accelerate poverty reduction," it stated.

"Zambia should also implement comprehensive policy actions to address the unsustainable fiscal position following the spike in wage and subsidy spending last year. With the rapidly rising public debt and substantial downside risks to the budget, we recommend fiscal consolidation through increased revenue mobilisation and a reorientation away from recurrent spending to create fiscal space for infrastructure investment and control of the public debt."

The IMF advised that raising the tax-free threshold on personal income taxes runs counter to fiscal consolidation efforts and recommended accelerating revenue mobilisation through changes in tax policy, enhanced mining tax administration, and broadening the tax base.

"There is need for strengthening public financial management through improvements in budget planning, fiscal reporting, expenditure controls and debt management combined with stricter oversight and accountability. Strengthening debt management and project assessment capacity is critical, given the planned rise in infrastructure spending and recourse to non-concessional borrowing," stated the IMF.

"Due to inbuilt risks, we advise against issuance of the proposed sub-national Eurobonds in favour of sovereign bonds and all external borrowing should be subject to project appraisal and screened for consistency with macroeconomic stability, debt sustainability and the overall debt management strategy."

The IMF further stated that rising inflationary pressures warrant a tighter monetary stance.

"We support progress in transitioning the monetary framework toward utilising the policy rate and we recommend improving liquidity forecasting and management. Government should also rebuild external buffers through enhanced exchange rate flexibility and further reserve accumulation," it stated.

"Zambia should exercise caution over imposition of lending rate ceilings, restrictions on the use of foreign exchange and rapid increases in minimum wages because they can undermine external competitiveness and erode investor confidence."

Labels: GDP, IMF

posted by MrK @ 5:12 PM