IMF raises alarm over Zambia budget deficit

Lusaka- The International Monetary Fund (IMF) has expressed concern over Zambia’s budget deficit and advises that it should be contained to avoid affecting the economic growth the country seeks to attain.

The IMF team led by Tsidi Tsikata visited Zambia during March 19-31, 2015 to complete discussions for the 2015 Article IV consultation following an initial discussion in December.

In a statement issued after the visit, the global lender noted that the 2015 budget is under stress from significant obligations that have emerged in relation to fuel and agricultural subsidies, pensions and road construction.

“There is an urgent need for action to contain the fiscal deficit in order to alleviate financing pressures that are keeping interest rates high and crowding out lending to the private sector,” Tsikata said in the statement.

 

The IMF said the Bank of Zambia’s recent increase of reserve requirements for banks is helping to stabilise the Kwacha. However, Tsikata said monetary tightening would be more effective if accompanied by fiscal tightening.

The IMF official noted that the Zambian economy is experiencing strong headwinds adding that: “Policy uncertainties at home and external shocks are dampening economic activity”.

In particular, the IMF said the mining sector, which accounts for three quarters of the country’s export earnings, has been burdened by ongoing tax issues and by copper prices that declined to five-year lows in January 2015.

In its review, the IMF stated that the Kwacha has depreciated sharply against the US dollar by an estimated 19 percent since the beginning of the year, reflecting the general strength of the dollar and low copper prices.

Tsikata said the annual rate of inflation has been falling steadily in recent months, helped by fuel price reductions.

However, the prevailing pump prices are not covering costs and contributed to payment arrears that led to fuel shortages in the country in early-March.

 

The depreciation of the Kwacha and the need to raise fuel prices will put upward pressure on inflation.

But the recent easing of documentation requirements for Value Added Tax (VAT) refund claims was welcome and the IMF urged the authorities to resolve the large stock of outstanding claims.

The IMF welcomed President Edgar Lungu’s directive calling for a review of the mining tax regime that came into effect at the beginning of this year.

The Breton Woods institution hopes that a lasting solution to the impasse would result in a transparent system applicable to all mines rather than mine-by-mine agreements that would likely entail the government foregoing substantial revenues to keep individual mines in operation.

In recent months, the Government and the mining sector have crossed swords over new mining regulations including non-refunds of the more than US$600 million in exports of various commodities and the newly introduced mineral royalties in which mining companies are expected to remit from their gross earnings on copper exports in the range of six to 20 percent for underground and open cast mining companies.

However, the IMF believes that although the problems buffeting the country over mining and other economic spheres are not insurmountable and can be resolved with concerted efforts of all involved.

“Resolute action to contain the budget deficit, resolving the mining tax disputes, and foster policy coherence and stability would go a long way toward boosting investor confidence and unlocking the country’s high growth potential,” the IMF says.

During the visit, the mission met among other officials, Finance Minister Alexander Chikwanda, Bank of Zambia Governor Denny Kalyalya, and senior government officials, as well as representatives of the private sector and development partners.

The IMF’s Executive Board is tentatively scheduled to discuss the staff report in May.

Credit –  Jeff Kapembwa – Southern Times Africa