Identifier
Created
Classification
Origin
07LUSAKA1109
2007-10-01 13:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lusaka
Cable title:  

IMF GIVES ZAMBIA PASSING MARKS, BUT GROWTH PLATFORM "NEEDS

Tags:  ECON EAID PGOV EINV ENRG ZA 
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VZCZCXRO3321
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #1109/01 2741324
ZNR UUUUU ZZH
R 011324Z OCT 07
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 4977
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 LUSAKA 001109 

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EAID PGOV EINV ENRG ZA
SUBJECT: IMF GIVES ZAMBIA PASSING MARKS, BUT GROWTH PLATFORM "NEEDS
IMPROVEMENT"

Ref: A) Lusaka 1029; B) Lusaka 903

UNCLAS SECTION 01 OF 02 LUSAKA 001109

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EAID PGOV EINV ENRG ZA
SUBJECT: IMF GIVES ZAMBIA PASSING MARKS, BUT GROWTH PLATFORM "NEEDS
IMPROVEMENT"

Ref: A) Lusaka 1029; B) Lusaka 903


1. (SBU) Summary: Zambia's macroeconomic performance continues to
receive good reviews from International Monetary Fund analysts, but
budget execution remains a challenge, and may generate excess
liquidity and inflation later in 2007. To achieve higher rates of
growth that lift more Zambians out of poverty, Zambia will need to
improve infrastructure (the energy sector in particular will need to
become more effective),diversify its economy (which remains
over-reliant on copper production),and enact more structural
reform. Zambia's Poverty Reduction and Growth Facility (PRGF) is
coming to an end and the Government of Zambia (GRZ) has not yet
decided how it will continue to engage with the IMF in future. End
summary.


2. (U) Background: An IMF mission visited Zambia September 12-26,
2007 to conduct Article IV consultations and to discuss future
engagement by the Fund in Zambia. Mission leader Francesco
Caramazza and other members met with cooperating partner (donor)
representatives on September 13 and on September 26 to discuss the
visit and its results.

GRZ'S ECONOMIC MANAGEMENT SOUND...


3. (SBU) Caramazza commended the sound performance of the Zambian
economy, noting improved fiscal management and a prudent monetary
policy that has caused inflation to fall and remain at historically
low levels. (Note: the GRZ announced on September 26 that in
September 2007 the annual inflation rate was 9.3 percent, down from
10.7 percent a month earlier.) He added that debt relief and high
world copper prices had played a positive role in strengthening
Zambia's external position. At the start of the PRGF, Zambia's
foreign exchange reserves were equivalent to 1 month of imports, and
they currently are at 2.5 months of imports, he told cooperating
partners.

...BUT IT NEEDS TO DO MORE, FOR HIGHER GROWTH


4. (SBU) For 2007, the IMF expects economic growth of approximately
6.2 percent. The rate of 7.0 percent projected in the Government of
Zambia's Fifth National Development Plan (FNDP) may not be reached

until 2009 or 2010, in the Fund's view. To attain higher levels of
growth, the GRZ will need to create a stronger platform to support
growth. Caramazza emphasized that the GRZ must improve
infrastructure, with a particular emphasis on the reliable and
affordable supply of energy (both power and fuel). Also, the GRZ
will need to take steps to diversify the economy further. Copper
prices are expected to fall in the future, and the GRZ must be in a
stronger position to deal with the economic consequences of the
copper price cycle, Caramazza stressed. He also noted the
importance of structural reforms to improve public sector management
and the environment for private sector growth. In discussions with
cooperating partners, the mission members stressed that
infrastructure, diversification into agricultural production and
other sectors, and structural reform are beyond the IMF's scope of
engagement and influence. Cooperating partners expressed
frustration over the GRZ's continued emphasis on distortionary
fertilizer subsidies and its lack of progress in promoting private
sector development.


5. (SBU) The FNDP also requires additional resources to obtain
poverty reduction goals through the provision of health services,
education and more infrastructure. Caramazza said that Zambia needs
more "fiscal space" to implement the FNDP. He encouraged donors to
consider providing more assistance to Zambia, and noted that
expected increases in revenues will help as well. Improved tax
collection may lead to a rise in revenues for 2007, to an expected
18.1 percent of GDP -- stronger than in 2006, Caramazza noted. IMF
technical assistance on mining sector issues should help the MOFNP's
efforts to negotiate new tax and royalty terms in development
agreements with mining companies.

CHALLENGES: BUDGET EXECUTION, MANAGING INCREASED LIQUIDITY


6. (SBU) The IMF remains concerned about Zambia's weak budget
planning and execution capacity. Caramazza noted that at the end of
August 2007 there was a considerable surplus of funds in the GRZ
fiscal account. Caramazza also warned that because of poor budget
execution to date, there is a possibility for a large injection of
liquidity into the economy in the last months of 2007, as the pace
of government spending accelerates, especially on capital projects
that faced delays. The GRZ will need to be diligent in its monetary
policy, to avoid inflationary pressures of the possibly large
amounts of spending expected. The Fund suggested allowing
government agencies to issue tenders based on budget allocations
rather than wait for the MOFNP to release funds. Caramazza also
told partners that the 2008 budget was at a very preliminary stage
and that the Fund will discuss budget issues with the MOFNP later in
the year.

LUSAKA 00001109 002.2 OF 002



GRZ DEALS WELL WITH EXTERNAL AND DOMESTIC DEBT


7. (SBU) The MOFNP has developed a draft debt management strategy
that the IMF is currently reviewing. The Fund has advised the GRZ
to seek concessional loans on a case-by-case basis, following the
parameters of the strategy and linking loans to economically viable
projects. The Mission also reported that the GRZ will not give a
sovereign guarantee for any loans to public enterprises. Caramazza
noted that the external debt data does not reflect the debt of
public enterprises such as power utility ZESCO or communications
service provider ZAMTEL. Comment: Without sovereign guarantees,
some of the new hydropower generation projects planned by ZESCO (Ref
B) may not be finalized quickly or easily, further limiting economic
growth prospects. End comment.


8. (SBU) Although the MOFNP takes a fairly cautious position on
incurring new external debt obligations (Ref A),it may come under
political pressure at higher levels to allow new loans, IMF's
resident representative commented. Local press reported on October
1 that Finance Minister Ng'andu Peter Magande said that the GRZ
would soon contract a new debt of $39 million from China, to
purchase equipment for road maintenance. Such a loan deal, although
not project-oriented, is consistent with the goal to improve
transport infrastructure, in support of economic growth. The GRZ
also has plans to address the continued high levels of domestic
arrears over the next two years. The MOFNP will make allocations in
the 2008 and 2009 budgets to pay off all outstanding domestic debts.


Next steps with IMF still undecided


9. (SBU) As the current PRGF expires this month and a final
disbursement is made, the Fund is discussing two options with the
MOFNP, a low access PRGF of USD 70 to 80 million, or a new option, a
Policy Support Instrument or PSI. The PSI comes with similar
conditionalities and reviews as with a PRGF, but with no funding
attached. At the inbrief with cooperating partners, Caramazza said
that the GRZ was leaning towards the PRGF, mainly because it was the
option with which the GRZ was familiar and more comfortable.
Caramazza also noted that the Fund expected that any new program
would retain the focus of the expiring PRGF, namely public
expenditure management, tax administration and policy, and financial
sector development. At the outbrief, he indicated that no final
decision had been made. Caramazza told partners that the work
program will go to the IMF board in December and that the Fund
expects its next mission to come to Zambia in February 2008.