IMF CONTENT WITH ZAMBIA DESPITE RISING INFLATION AND BUDGET

UNCLAS LUSAKA 000980

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ZA
SUBJECT: IMF CONTENT WITH ZAMBIA DESPITE RISING INFLATION AND BUDGET
DEFICIT


1. (U) Summary. A team from the International Monetary Fund (IMF)
briefed diplomatic missions on its quarterly meetings with Zambian
Government (GRZ) officials. The team's overall impressions of GRZ's
macroeconomic performance were good; they noted continued GDP growth
and national spending that remains approximately in line with
government revenues. However, inflation figures have risen to
double digits, public expenditures are rising in the wrong areas,
and the need for more efficient public financial management and a
Treasury Single Account persists. End Summary.


2. (U) The IMF evaluators forecast a real GDP growth in 2008 of 5.8
percent, slightly below 2007 growth of 6.3 percent, but they noted
that these assessments were based on weak data quality. Higher
production costs have dampened increased productivity. Year-on-year
inflation in September was 14.2 percent, driven by high fuel and
food prices. Although the IMF representatives projected a 12.7
annual inflation rate for CY 2008, they thought it likely that this
could be contained to nine percent in 2009.


3. (U) The assessment team noted an increase in government
expenditures composed primarily of higher salary payments (including
housing allowances for government employees),an expanded fertilizer
support (subsidy) program, power sector rehabilitation projects,
interest payments on debt, and holding the unexpected presidential
by-election. Reduced spending in other areas (international
government travel, deferred fertilizer support payments, National
Constitutional Conference fees, and capital investments) largely
compensated for these increases, but unfinanced budget shortfalls
will rise.


4. (U) IMF underscored to Charge subsequently that GRZ spending
increases--although not large--are a cause for some concern,
inasmuch as they represent a departure from previous years of
relative fiscal discipline, and a shift toward discretionary
government spending (i.e., short term political gains) instead of
capital expenditures. The team speculated that the deficit will not
require financing. Instead, the GRZ is likely to tap into
committed--yet unliquidated--capital spending funds.


5. (U) Increased government spending on public sector salaries and
fertilizer support will have long-term impact, however, as the GRZ
is unlikely to reduce these in future budgets. The IMF mission
noted continued problems in public financial management and pointed
to the need for a Treasury Single Account. An IMF representative
separately acknowledged USG assistance in this area and said that
the Ministry of Finance had prepared a policy recommendation that is
pending Cabinet's approval. He also said that technical assistance
on debt-related issues was not a priority need at this time.


6. (U) The IMF evaluators commented on the need for improvements in
tax administration and financial sector development to strengthen
the money market. A draft debt management strategy has been
submitted to Cabinet, as well as a strategy paper on energy to
revise electricity rates, improve efficiency, and increase
investment. GRZ capital spending remains inefficient. An estimated
400-500 billion kwacha (approximately USD 115-145 million) sits in
government accounts awaiting release.


7. (U) According to the IMF evaluators, the GRZ had collected
corporate tax and royalties from mining companies consistent with
the new mining tax regime. They noted a shortfall, however, in the
collection of windfall tax. They anticipated total mining revenues
(minus windfall tax) in 2008 to be one trillion kwacha (USD 285
million) and 2009 to be 1.2 trillion kwacha (USD 345 million). On
the Extractive Industries Transparency Initiative (EITI),they
explained that the GRZ is submitting a plan in order to become an
EITI candidate country, with an aim to becoming EITI compliant in

2010.


8. (SBU) Comment: IMF reps seemed alarmed at how quickly the GRZ
abandoned fiscal discipline and gave way to populist electioneering
economics in the short period since President Mwanawasa's
hospitalization in July, although they downplayed the actual deficit
increase. If the ruling Movement for Multiparty Democracy stays in
power, it will be difficult to withdraw the largesse bestowed.
However, the need to grant even more will decline dramatically after
the election, regardless of who wins. We remain hopeful that the
GRZ will then recognize once again the wisdom of capital investment.


KOPLOVSKY