Identifier
Created
Classification
Origin
06LUSAKA1523
2006-11-03 10:03:00
UNCLASSIFIED
Embassy Lusaka
Cable title:  

IMF LAUDS ZAMBIA'S ECONOMIC MANAGEMENT, BUT NOTES

Tags:  ECON EFIN EINV EAID ZA 
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UNCLAS SECTION 01 OF 02 LUSAKA 001523 

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EAID ZA
SUBJECT: IMF LAUDS ZAMBIA'S ECONOMIC MANAGEMENT, BUT NOTES
SHORTCOMINGS IN PRIVATE SECTOR DEVELOPMENT

UNCLAS SECTION 01 OF 02 LUSAKA 001523

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV EAID ZA
SUBJECT: IMF LAUDS ZAMBIA'S ECONOMIC MANAGEMENT, BUT NOTES
SHORTCOMINGS IN PRIVATE SECTOR DEVELOPMENT


1. (SBU) Summary: Zambia's macroeconomic stability is impressive,
but the country's environment for private sector development "needs
improvement," an International Monetary Fund team told donor
representatives on November 1. IMF officials noted that fiscal
management was generally good, the kwacha had been more stable in
recent months, and the Fund was discussing a range of tax policy
issues with the GRZ. Zambia's macroeconomic performance also got
good marks from the IMF, but the team noted that Zambia still needed
to attain higher levels of economic growth in the longer-run, which
required a much more dynamic role for the private sector. End
summary.


2. (U) Introduction: An IMF mission visited Zambia from mid-October
through early November to conduct the fifth review of Zambia's
performance under the Poverty Reduction and Growth Facility (PRGF).
The mission chief, Francesco Caramazza, briefed donors at the start
of the mission and at the mission's end, on November 1. He said
that the official written report from the mission should be
finalized and available in early January. Highlights of the
briefing are provided below.

Fiscal, Monetary Management Good


3. (SBU) Caramazza reported that government revenues, which were
reportedly well below targets earlier in 2006, were on track or just
slightly below targets, as of September 2006, and the expectation by
yearend was for revenues to remain on track. Government
expenditures were also slightly below the programmed amount for

2006. Government financing was consistently above desired targets,
but this was due in part to increasing carry-overs from previous
years, when spending could not be fully executed due to large cash
inflows in short timeframes.


4. (SBU) The IMF officials said that the Bank of Zambia's
sterilization operations helped to absorb liquidity in the monetary
market that resulted from high levels of spending in the
August-September 2006 timeframe (the run-up to national elections).
These efforts helped reduce kwacha volatility, and have kept the
kwacha more stable (in the 3700 to 3900 kwachas to the dollar
range). He also advised that a government "megabond" held by the

Bank of Zambia would be converted to marketable securities, which
would also help to mop up liquidity in the market.

Budget and Tax Issues Under Scrutiny


5. (SBU) Caramazza noted that the Fund did not have detailed
discussions with the GRZ about the 2007 budget, because a new
Cabinet continued to sort out national priorities. He said that the
IMF and GRZ agreed on broad outlines for revenues and for domestic
financing for the 2007 budget, and that the IMF expects continued
fiscal prudence by the GRZ.


6. (SBU) Over the past 12 months, the Fund has sent several focused
missions to Zambia to address tax issues. Two missions addressed
tax policy for the mining sector, one dealt with tax administration
and another recent mission looked at broader tax policy issues. The
IMF has prepared and presented a document to the Ministry of Finance
and National Planning, which will eventually become available to
donors as well. Overall, Caramazza said, the tax system is sound,
but one problem the IMF identified was tax exemptions, which are
distortionary and effectively pick winners and losers. The tax
system should be more predictable, transparent and equitable, he
stressed. The GRZ faces the challenge of trying to broaden the tax
base while also increasing compliance, effectiveness and efficiency
in taxation.

Macroeconomic Performance Positive


7. (SBU) For 2006, the Fund expects GDP growth of 6 percent, as a
result of continued mining sector expansion, a large investment in a
new cement plant, and a strong housing sector. The GRZ also remains
committed to meeting inflation targets and expects to achieve an
annual rate of 9 percent at year-end. Its medium-term inflation
target is 5 percent. One of the longer-term challenges faced by the
GRZ is raising levels of growth higher. To do so, the GRZ must give
a more prominent role to the private sector and reduce the cost of
doing business.

Private Sector Development Lags


8. (SBU) Caramazza noted that the GRZ has a good program for private
sector development (PSD),but it has been very slow to implement
agreed-upon PSD reform measures. For example, the creation of the
Zambia Development Agency continues to be hindered by financial
difficulties, including ever-increasing costs for retrenchment of
officials from the various agencies that will be merged to form the
ZDA. In side discussions, IMF officials also acknowledged that the
performance of state-owned utilities (particularly for
telecommunications and electric power) has been disappointing.


LUSAKA 00001523 002 OF 002


Donors Concerned About Decentralization, Social Spending


9. (SBU) Responding to donor questions about the GRZ's fiscal
decentralization efforts, Caramazza noted that although the concept
was good, the IMF was concerned about the capacity of local
government councils to take on greater financial responsibility, and
encouraged the GRZ to build local council capacity before moving
ahead with decentralization plans. On the issue of GRZ performance
in social sectors, the IMF team noted that the GRZ was making
progress in both health and education, particularly in hiring new
teachers and health professionals and in improving spending
accountability.


10. (SBU) Donors also asked for the IMF's views of the Public
Expenditure Management and Financial Accountability (PEMFA) reform
program and introduction of an Integrated Financial Management
Information System (IFMIS). Caramazza conceded that implementation
of these important financial accountability measures has been slow,
but he voiced optimism about progress in the next year, based on the
strong interest and commitment of the Secretary to the Treasury.
The IMF also noted the resource needs identified in the GRZ's Fifth
National Development Plan, and the expected gap in donor funding to
meet the GRZ's needs. Donors remain concerned about the GRZ's
absorptive capacity to manage scaled-up funding, but Caramazza
claimed capacity constraints were a "chicken and egg" issue and
urged donors to consider providing more resources so that more
capacity could be developed.

Comment


11. (SBU) We share the IMF's appreciation of Zambia's good
macroeconomic management, but remain concerned about the lags in
implementing private sector development and financial accountability
reforms. Although the delays in the PEMFA programs are largely a
result of capacity constraints, the troubles in implementing PSD
reforms appear to be more a result of entrenched interests, weak
political will, and lack of strong leadership.

MARTINEZ