Key Areas that could be on the Table in a Zambia/IMF Program

​Cabinet recently approved engagement of the International Monetary Fund (IMF) with a view to setting up a program. The economy has been hit by shocks from a 70% depreciation of the currency versus the US dollar in 2015, a 590MW electricity deficit which started in H2 2015 and a decline in global copper prices (contribute over 70% of export earnings). This has put even more pressure on Government finances which are not only committed to major infrastructure projects but are also subsidizing a number of things in addition to forking out more Kwachas to pay interest on external debt ($6.4b as of eoy 2015).  

​Inflation reached 22.9% in February. The Bank of Zambia (BoZ) has focused the majority of its monetary toolbox to tightening liquidity and stabilizing the Kwacha in order to stave off further acceleration in inflation. This has seen interest rates rise – a factor which will negatively affect business this year.

So what could this IMF program potentially  involve?

1. Subsidies

The Government currently subsidises the Farmer Input Support Program (FISP), Food Reserve Agency (FRA) and fuel pump prices:

​They have also been supporting state-utility ZESCO in the importation of electricity which is costing around $25 million a month. The IMF will be looking for changes in these areas.

Potential Outcomes

- Increase in fuel pump prices to cost-recovery levels and possible reform of procurement system
- FRA purchases limited to 500,000MT of maize for strategic reserves
- Increased electricity tariffs to help cover importation costs in the short-run with a view to attracting more investment in the long-run

2. Civil Service Wage Bill

Over the last 3 years since civil service wages were increased, they have been consuming about 49% of revenues (42% pre 2013 hike):

​This doesn't leave a lot of fiscal space for the Government to invest in other much needed areas or react to economic shocks as has been the case since the second half of 2015. The IMF will be looking to help unlock efficiencies in this area. For instance – according the the Governments Annual Economic Report of 2014, the health sector had a total of 37,130 staff of which 43% were administrative staff (i.e. NOT doctors, nurses etc).

Potential Outcomes

- Restructuring of labour force in various ministries
- Wage and hiring freeze in non-key areas

3. Revenue Raising

Cost savings alone will not be the silver bullet to increasing fiscal space for the Government. Revenues have more than doubled since 2010 but the pace at which they were growing has slowed:

Expenditure on much-needed infrastructure projects remains a priority but requires the Government to grow and diversify their revenue streams. This is another area that an IMF program will be focusing on.

Potential Outcomes

- Rise in VAT (currently at 16%)
- Higher tax rate for low taxed sectors
- More stringent enforcement of various tax measures (e.g. withholding tax on rental income)
- Increasing capacity and resources of Zambia Revenue Authority

In addition, further reform of the civil service pension system will also be on the table because the system has been underfunded for a long time.

What the Government has already done (or is currently implementing):

• Redesigned taxation in mining sector
• Raised the retirement age
• Started enforcing withholding tax on rental income
• Raised fees for various Government services
• Construction and implementation of tolling booths
• Curtailed FRA maize purchases to just over 500,000MT in 2015
• Migration to an e-voucher system in the Farmer Input Support Program (FISP)
• Raised electricity tariffs for the mining sector to $10.35c per Kwh
• Implemented the Treasury Single Account
• Introduced performance based contracts for Permanent Secretaries
• Cut domestic and foreign travel by 50%
• Cut support to 33 parastatals and transferred ownership to the Industrial Development Corporation
• Cut in the size of domestic treasury bill and bond auctions
• Started to eliminate backlog of VAT refunds
• Bank of Zambia removed interest rate caps in Q4 2015

And possibly more.

Bottom line
​
Right now, there isn't a lot of confidence in the Government to adequately address fiscal issues in an election year. Increased Eurobond yields are an indication of global investors dim views on the Zambian economy (on top of a reduction in participation in domestic treasury and bond auctions).

Some of the which will be part of the IMF program, if implemented to the full extent will put further pressure on the pockets of consumers/businesses which are already constrained with inflation in the 20s. But in the long term, IF the Government follows through on key measures, they will create a much stronger base for the country to grow on.