IMF deal to anchor Zambia’s reform agenda

AN International Monetary Fund (IMF) programme will provide the Zambian government with a policy anchor for its reform agenda and secure other sources of long-term external financing, says Fitch, a global credit rating agency.

And the agency has rated Zambia with a negative outlook “B”, reflecting the continuing downside risks from persistent fiscal deficits and increased external debt servicing costs.

According to the agency, the IMF programme was an anchor for Zambia’s reform agenda which had been affected by fiscal deficit expected to widen to 7.8 percent of the Gross Domestic Product (GDP) in 2017 on a cash basis, from 5.8 percent in 2016.

The agency explained that this fiscal deficit reflected a combination of current year budgeted spending and the payment of accumulated arrears to contractors.

Fitch, however, observed that the IMF negotiations had stalled because Government and the fund were having difficulties agreeing on certain issues, particularly, private commercial borrowing.

“Disagreements over the sustainable level of new private commercial borrowing have so far prevented the authorities from coming to an agreement with the IMF on a support programme. The Zambian authorities have signalled their desire to enter a programme, but progress towards an agreement has been slow and negotiations have stalled,” said the agency.

Fitch also expected that efforts to move farm subsidies to a new e-voucher system and to increase Value Added Tax compliance would lead to smaller fiscal deficits in the coming years.

The agency’s forecast indicated that Zambia’s real GDP growth would accelerate to 4 percent in 2017, from 3.6 percent in 2016, and to increase further to 4.7 percent in 2018.

Fitch expects that the easing of drought conditions will improve both crop harvests and the supply of electricity, which along with higher copper prices, will drive growth in the agricultural, mining and manufacturing sectors. Meanwhile, Fitch explained that the negative outlook for Zambia reflected the nation's elevated public debt burden, weak fiscal management and high commodity dependence.

According to Fitch, failure by Government to implement the fiscal consolidation programme outlined in the Medium Term Expenditure Framework 20182020 could result in the debt/ GDP ratio continuing to rise to 65 percent through 2026.

Fitch forecasted gross general government debt to increase to 56 percent of GDP at end-2017, from 55 percent at end-2016.

Fitch also expected gross international reserves to fall to US$2.2 billion by end-2017, from US$2.4 billion at end2016.

“Additionally, recovery in imports means that reserves will fall to 2.6 months of current external payments (CXP) by end2017, from 3.3 months in 2016,” said the agency.