Zambia: 2013 Article IV Consultation

KEY ISSUESContext. The Zambian economy has performed well in recent years, with stronggrowth and modest inflation, and has high growth potential. The government hasresolved to step up development by scaling up investment in infrastructure. However,this year has seen a significant loosening of fiscal policy, leading to a large fiscal deficit.Outlook and risks. Assuming front-loaded fiscal adjustment toward a sustainabledeficit, growth is projected to remain strong at 7–8 percent and inflation to declinegradually to 5 percent over the medium term. Key risks to the outlook are theuncertainties about fiscal policy and the broader business environment, and a possibleslowdown in emerging markets and its impact on copper prices.Fiscal stance. The current fiscal stance is unsustainable. To improve Zambia's fiscalposition, fundamental reforms are required to contain the wage bill and recurrentexpenditures, boost domestic revenue, and create fiscal space for infrastructureinvestment. Staff recommended reducing deficits to 5 percent of GDP in 2014 andgradually to 3 percent over the medium term, and bringing down net domesticfinancing to 1½-2 percent of GDP to avoid crowding out the private sector.Public financial management (PFM). To support fiscal consolidation, PFM reformneeds to be stepped up. Investment planning and implementation also need to bestrengthened to support planned scaling up of capital expenditures, and debtmanagement strengthened in light of the increasing reliance on non-concessionalfinancing.Monetary policy. Given the low level of international reserves, the Bank of Zambia(BOZ) should allow more exchange rate flexibility and continue to build up reserves inline with their medium-term target. BOZ also needs to continue to tighten monetarypolicy to contain inflation.Competitiveness. Over the last decade, Zambia's competitiveness has been boostedby strengthened macroeconomic fundamentals and a favorable business environment.However, a series of recent regulations have raised questions about the policydirection, and high minimum wages could hamper the country's competitiveness, jobcreation, and economic diversification.