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Zambia: Second review under the three-year arrangement under the PRGF review report

International Monetary Fund (IMF)

IMF Country Report No. 05/138

April 2005

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Executive Summary

Recent Economic Developments and Performance Under the PRGF-Supported Program

  • Zambia’s economy outperformed expectations in 2004: real GDP growth reached 5 percent, marking the fifth consecutive year of solid expansion, while inflation was held to 17Р… percent (compared with the program projection of 20 percent), despite higher fuel prices.

  • A strong fiscal adjustment and a consequent reduction in government domestic borrowing contributed to this positive outturn, easing pressure on inflation and interest rates. For the first time, budget allocations for priority poverty-reducing programs were fully released in 2004.

  • Performance under the PRGF-supported program has been good, although there were delays in some structural measures. All but one of the performance criteria (PCs) and all benchmarks under the quantitative program for December 2004 were observed. Two structural PCs were observed, and the third one, for end-February 2005, is now a prior action for the completion of the second review.
Medium-Term Outlook and Program

  • The medium-term strategy in the PRSP focuses on reducing poverty through strong economic growth and diversification driven by the private sector, and a reorientation of government spending to priority areas. The strategy targets real GDP growth of at least 5 percent a year, single-digit inflation by 2007, and a strengthened international reserve position. Macroeconomic policies are anchored in limiting government’s debt financing. Spending on poverty-reducing programs is expected to increase by 1Р… percentage points of GDP by 2007.
Program for 2005

  • The proposed program for 2005 aims to maintain the key features of the program approved by Executive Directors at the time of the first review under the PRGF. It envisages real GDP growth of 5 percent; an end-year inflation rate of no more than 15 percent; and a buildup of gross international reserves to 1.3 months of import cover by end-2005.

  • Similarly, the program continues to limit government domestic borrowing to 1.6 percent of GDP, and includes a tightening of monetary policy. The authorities have requested a modification of quantitative targets for the first half of 2005 to reflect actions started in January 2005 to mop up the unanticipated expansion in liquidity at end-2004 and have proposed quarterly program targets for the second half of 2005.

  • New structural measures are proposed for (i) the public expenditure management and financial accountability program; and (ii) the financial sector development plan.

  • The program is subject to a number of risks. Attainment of the completion point and the approach of the elections in 2006 may lead to pressures for a relaxation of fiscal policy and a slowing of the momentum of reform. The staff therefore welcomes the emphasis in the government’s recent statements, including the budget speech, on steadfast policy implementation.

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