Republic of Zambia BRIEF BY THE HONOURABLE MINISTER OF FINANCE, MRS. MARGARET D. MWANAKATWE, MP, DURING 2018 MID-YEAR ECONOMIC BRIEF JULY, 2018
1. INTRODUCTION Members of the Civil Society and the Press Let me begin by thanking you most sincerely for coming to 2018 mid-year economic performance brief. I will brief you on the following: o Recent economic developments, o Policy and structural reforms measures update; o Implications of Austerity measures; o IMF programme; and o My views on our interaction. 2. RECENT ECONOMIC DEVELOPMENTS GDP Growth I remain confident that the annual projection of the revised growth of above 4 percent remains feasible as real sector indicators show a rise in economic activity in the first half of 2018. Over the medium term, the expectation is that growth will be in the range of 4-5 percent. This will be driven by sectors such as mining, tourism and construction supported by stable power supply and stable global development. Downside risks to the growth projections include volatility in copper prices, high lending rates and adverse weather conditions. Fiscal Performance Fiscal performance remains satisfactory although adverse liquidity conditions has made financing difficult. Revenue outturn Preliminary estimates for revenues and grants in the first half of 2018 amounted to K25.07 and were broadly in line with the period projections. Domestic revenues were above target by 3.3 percent, supported by positive performance of VAT collections. 1
Lower than target performance was recorded in some revenue categories such as the income tax, customs and excise duties, export duties, non-tax revenues and grants. In an effort to address some of the challenges associated with the low revenue collection in some tax types, government is undertaking measures which include: o use of electronic solutions in revenue collection including the telecommunications transaction monitoring system for mobile service providers and rollout of fiscal registers; o Increased pace of implementing the land titling programme. We are working with the World Bank on this matter; and o The recent change in the taxation for fuel importers to enhance excise duty collection. Expenditure Outturn Total expenditure (including amortization) for the first half of 2018 amounted to K39.6 billion, against the budgeted K34.19 billion. The major components which were above target were interest payments by 43.2 percent and capital expenditure by 65 percent. Going forward, expenditure control will be at the core to achieve fiscal adjustment given the tight financing conditions and higher deficit. In this regard, measures on enhancing payroll management, expenditure cuts in areas such as use of goods and services, progressing on procurement reforms and debt reprioritization will be the focus for the rest of the year. This is meant to create a lower spending base as we get into the 2019 financial year. 2019 budget Preparations Members of the Press, I wish to inform you that the 2019 budget preparation process has commenced. As we prepare the 2019 budget, we have broad objectives which include: i. Increased revenue performance, particularly taking bold steps on non-tax revenue collection; ii. implementing in full measures announced by His Excellency the President while protecting growth and enhancing social protection; and 2
iii. Reducing Government borrowing, particularly in the domestic market. I am aware that some of the cooperating partners were involved in the preliminary work in the Joint Cluster Working groups. We call upon you and other economic players to make suggestions on how Government can enhance the budget management and credibility. Monetary Policy Developments Inflation remained within the target range of 6-8 percent closing the period at 7.4 percent down from the May rate of 7.8%. For the rest of the year, the expectation is that inflation will remain within the programmed target. The low levels of inflation continued to support monetary policy. We however note that room for monetary easing is becoming tight amid government financing under tight liquidity conditions. Therefore, It government s priority to scale back in domestic borrowing to help improve monetary conditions and lowering the cost of borrowing. Suffice to mention that further reduction in lending rates also hinges on implementation of the austerity measures to support fiscal consolidation. Foreign Exchange market and External Sector The Kwacha remained relatively stable against the major trading currencies during the first half of the year, trading at an average of K9.93 per US$. Trade deficit during the first five months of 2018 continued being positive with a surplus of K245.4 Million recorded in May 2018. Recovery in the performance of Non-traditional exports in the recent past has been recorded with the share of NTEs averaging of 22.9 percent in export earnings between May and April 2018. In view of the positive performance it is expected that the current account balance will further narrow down in 2018 and become positive over the medium term. Reserve position The reserve position as at end June 2018 was US$1.82 billion. Debt Position 3
The stock of external debt as at end of first quarter was US $9.37 billion. The slight increase in the debt stock was on account of disbursements during the review period. As at June 2018, Government paid US$161.3 Million in external debt service. Total guaranteed debt was US$2.7 billion, of which US$1.21 billion had been drawn against the principal amount. The stock of domestic debt as at end June 2018 was K51.86 billion. Domestic Arrears Domestic arrears in the first quarter 2018 increased to K13.91billion from K12.77 billion due to a rise in arrears related to roads and other RDCs. The pace of arrears accumulation is a source of concern to the Government and commitment controls are being strengthened to avoid accumulation in RDCs. Road sector arrears are on account of more work being done as a result of payments made. The concentration of dismantling projects at 80 percent and above will address this problem going forward. 3. POLICY AND STRUCTURAL REFORMS UPDATE Ladies and Gentlemen, I would like to assure you that policy and structural reforms will continue to be undertaken. The major ones are: o Reforms to parastatal bodies with attention being given to institutions such as Zesco whose debt is high resulting in operations being unsustainable. o Energy sector reforms that include reforming the fuel importation system and the completion of the cost of service study which has so far faced challenges that require resolution. o Legislative reforms that form a cornerstone of fiscal sustainability. In the review period, the Public Finance Management Act has been signed into law, while the crediting reporting and Public Private Partnership bill are at an advanced stage in Parliament. 4
o Work on the enactment of of the Planning and Budgeting Bill is advanced. We aim to take the Bill to parliament as part of the budget legislation alongside the new procurement Bill. o Work on the Loans and Guarantees (Authorization) Act which has been delayed due to reviews to the constitution. 4. IMPLIMENTATION OF AUSTERITY MEASURES Members of the Press, His Excellency the President announced a number of measures to address the fiscal imbalances and high debt that the country faces. We are now in the process of implementing these measures, so that we have a new fiscal and debt outlook into the medium term. This said, am aware that there are questions on the implications of the recently announced austerity measures. I would like to clarify as follows: i. The measures announced are supposed to support growth and social protection going forward. Therefore, ongoing projects whose financing has been signed for will continue to be implemented as these will support growth going forward. ii. We will be selective on the cancellation of current contracted debt which have not yet disbursed to address economic impact, financial and legal implications; iii. We will be aiming to free up cashflows by carrying out liability management on selected bilateral loans, both local and foreign, by extending the maturity profile; I wish to assure you that these measures are in no way indicating an intention by the Government to default on any of its loans. The major objective is to reduce the pace of debt accumulation, and to smoothen the maturity profile, so that the Government has more fiscal space, especially around the time of maturity of the Eurobonds. This is also important for the country to return to moderate risk debt distress and support fiscal consolidation. 5. IMF ENGAGEMENT 5
On IMF engagement, I have seen that there has been some excitement in the press on this matter. I however wish to update you as follows: i. We have taken measures that were announced by my office to rein in on fiscal slippages and risks related to debt. ii. iii. iv. These measures are now being incorporated in our fiscal and debt position for 2018 and over the medium term. It is this data that once completed will be given to the IMF to assess our adjustment and get their feedback as to the appropriateness of the measures for macroeconomic sustainability. Whilst we have shared the raw data, the adjustment data has not yet been provided to the IMF as our team is still working through it. Again, we wish to state that as this work is proceeding, we will refrain from making public statements on this matter until we have a firm position with the IMF. 6. OUTLOOK AND RISKS FOR 2018 Implementation of the recent austerity measures will aid the sustenance of the macroeconomic environment, growth prospects and renewed confidence in the economy. Risks on the outlook include; o o o o Climate variability failure to achieve structural adjustment measures announced by Government over the medium term that may impact on growth failure to address tight liquidity in the market to address the limited access to credit by private sector, global economy developments such as trade issues. 7. CONCLUSION In conclusion, let me assure you that government is committed to implementing the recent austerity measure to support inclusive growth and fiscal consolidation. I have already taken action for some of the recent measures which include cutting on expenditure related to travel and payroll reforms and revenue collection related to excise duties. 6
Your Excellencies. Please feel free to express your views so that together we can chart the way forward. I thank you. 7