And the IMF has projected that payment arrears to suppliers and contractors will increase from about K10 billion at end-2015 to about K20 billion at the end of 2016.
Briefing the media at the end of the IMF Staff Mission visit to Zambia, team leader Tsidi Tsikata said the IMF and the Zambia government have not yet agreed an aid package due to dwindling economy performance.
Mr Tsikata said it would have been premature to engage in an economic bailout package for now as the two weeks the IMF team has been in Zambia was spent on negotiations with Government and other stakeholders.
He emphasised that the Zambian economy is currently under stress because of internal and external factors.
Mr Tsikata revealed that the IMF team will be returning in early 2017 for normal consultations and to discuss possible IMF programme.
He also said that the IMF supports the removal of fuel subsidies and the planned removal of electricity subsidies.
“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 3percent due to continued electricity shortages, low exports and subdued private sector consumption and investment,” Mr Tsikata said.
“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.”
He added, “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 International Monetary Fund Washington, D.C. 20431 USA 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.”
“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.”
Mr Tsikata said 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.”