IMF SEES TALL 'GREEN SHOOTS' WITH SHALLOW ROOTS IN

UNCLAS SECTION 01 OF 02 LUSAKA 000792

SIPDIS

E.O. 12958: N/A
TAGS: ECON ZA
SUBJECT: IMF SEES TALL 'GREEN SHOOTS' WITH SHALLOW ROOTS IN
ZAMBIA

REF: A. LUSAKA 571

B. LUSAKA 749

SUMMARY
--------------


1. (U) At the conclusion of a two-week IMF mission to Lusaka
on October 28, mission chief George Tsibouris told donors
that the Zambian economy is performing better than expected
and that the IMF now expects real GDP growth to exceed 5
percent in 2009, up from an August estimate of 4 percent (Ref
A). The IMF expects similar GDP growth in 2010. Inflation,
at 13 percent in September, is projected to fall to 12
percent by the end of the year. (Note: October statistics
released after the IMF team's departure reported October
inflation at 12.3 percent.) Zambia's reserves are at a
healthy USD 1.75 billion, including over USD 600 million in
IMF Special Drawing Rights (SDRs),and the government has a
manageable debt load. Tsibouris cautioned that, while Zambia
recovered quickly from the global economic downturn, the GRZ
must address structural weaknesses to strengthen the
economy's ability to weather the next downturn. END SUMMARY.

ZAMBIA'S FUTURE LOOKS BRIGHT
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2. (U) On October 28, IMF mission chief George Tsibouris
briefed donors on the results of the Fund's two-week mission
for the 2009 Article IV consultations with the Zambian
government (GRZ) and for the third review of Zambia's Poverty
Reduction and Growth Facility (PRGF). Tsibouris reported
that the Zambian economy was performing surprisingly well and
that GDP growth would likely exceed 5 percent in both 2009
and 2010. A sharp rebound in global copper prices and a
bumper maize crop helped to turn the economy around.
Tsibouris also praised the GRZ's fiscal discipline in the
face of falling government revenues and the Bank of Zambia's
(BOZ) efforts to "smooth" the Kwacha's slide, which he said
acted as a shock absorber for the economy. October inflation
was at 12.3 percent, helped primarily by lower food prices,
reduced imports and a somewhat stronger Kwacha. Tsibouris
expected end of year inflation to be 12 percent, with
inflation falling to about 8 percent by the end of 2010.


3. (U) The IMF reported that it had included in its 2010
program for Zambia up to USD 600 million in non-concessionary
borrowing to fund energy and other infrastructure projects.
Tsibouris explained that a prohibition on non-concessionary
borrowing was too inflexible and that Zambia's debt capacity
could comfortably absorb the non-concessionary debt. An IMF
debt sustainability analysis determined that Zambia's debt,
including GRZ debt, projected non-concessionary debt, and
contingent liabilities such as pension obligations equaled
approximately 25 percent of GDP. Preliminary results from a
range of standard systemic downside scenarios showed that
Zambia's debt load did not exceed 40 percent of GDP under any
of the shock tests.


4. (U) Zambia's foreign reserves are at a record USD 1.75
billion, the highest level in 40 years. In July 2009, after
spending considerable reserves to smooth Kwacha volatility
during the economic downturn, the GRZ reported only USD 750
million in reserves. Total reserves include approximately
USD 600 million in SDRs and represent more than four months
of import coverage. The IMF expects modest reserve growth in

2010.

ADDRESS STRUCTURAL WEAKNESS FOR SUSTAINED GROWTH
-------------- --


5. (U) While the IMF concluded that Zambia's economic outlook
was good, Tsibouris cautioned that structural weaknesses that
increased economic uncertainty still needed to be addressed
to ensure that economic growth would be sustainable. Key
challenges include public sector spending on infrastructure
and the social sector to diversify the economy and reduce
poverty. Until Zambia can diversify its economy, it will
still be beholden to global copper prices and mother nature.


6. (U) The IMF based its 2010 program on the 2010 GRZ budget
now being discussed in Parliament (Ref B). The budget
includes almost USD 200 million in donor budget support
(almost 6 percent of the total 2010 budget) that has not yet
been approved by cooperating partners (CPs). Tsibouris
reported that the IMF was not considering making up any
revenue shortfall if donors withhold some level of assistance
in 2010 and, given Zambia's economic performance and
strengthening balance of payments, PRGF augmentation was
unlikely as well. If donors did not come through, Tsibouris
concluded, the IMF would look to the GRZ for some budget
revisions.

LUSAKA 00000792 002 OF 002




7. (U) Tsibouris emphasized the need for the GRZ to focus on
revenue collection, which has been deteriorating as a
percentage of GDP. The GRZ intends to look closely at its
tax policies and implementation in 2010 and make reforms to
reverse the negative trendline. In the interim, the 2010
budget assumes a modest revenue collection improvement from
15.7 percent to 15.9 percent of GDP. In the past,
infrastructure spending has usually been the first victim of
revenue shortfalls.


8. (U) In the financial sector, the IMF is looking to the
Bank of Zambia (BOZ) to play a more active role in improving
systemic weaknesses. To free up liquidity in the market, the
BOZ should work to develop a secondary market for treasury
bills and create overnight lending facilities for banks to
lessen their perceived need to hoard liquidity. The IMF team
also concluded that the BOZ should create the capacity to be
the lender of last resort for the Zambian financial system to
be able to confront systemic crises.

COMMENT
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9. (U) Tsibouris was surprisingly upbeat, and caught many of
the gathered donors off guard (not us) with the IMF's rosy
outlook for Zambia's economy. We continue to expect the
Zambian economy to perform well so long as copper prices
remain high and the rains arrive on time, and in sufficient
volume, for the maize growing season. Unfortunately,
Zambia's strong economic performance could cause the GRZ's
focus on economic diversification to flounder as it has
during past periods of robust copper-fueled economic growth.
BOOTH