A LOOK AT ZAMBIA”S ECONOMIC GROWTH 2019 BY PMRC
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By Mrs. Bernadette Deka Zulu – PMRC Executive Director
In 2019 GDP growth was revised down to 2% from an initial projection of 4%.
Adverse weather conditions of 2018/19 led to negative growth in agriculture and electricity generation, in turn slowing down most sectors i.e. retail, wholesale trade and manufacturing industry.
Liquidity constrained because of higher debt service payments stifling private sector economic activity.
FISCAL DEVELOPMENT 2019
Estimates indicate that fiscal deficit on cash basis was 8.2% of GDP against target of 6.5%.
Revenues and grants were higher by 5.7% at K61.3 billion compared to the target of K58 billion.
There was non-disbursement of grants by some cooperating partners; K838.5million received against a grant budget of K1.9 billion.
Total expenditures were higher by 8.7% at K94.3 billion against budgeted target of K86.8 billion.
Depreciation of the Kwacha led to a rise in total expenditure by 8.7% due to interest payments which were 27.1% above target.
DEBT DEVELOPMENTS
Stock of external debt increased from US$10.23 billion at end of June 2019 to US$11.2 billion at end of December 2019 on account of new disbursements on existing loans.
Stock of Government securities increased to K80.2 billion at end of December 2019 from K60.3 billion at end-June 2019.
Stock of domestic arrears excluding VAT increased to K26.2 billion at end-September 2019 from K20.2 billion at end-June, 2019.
MONETARY, FINANCIAL, AND EXTERNAL SECTOR DEVELOPMENTS
INFLATION DEVELOPMENTS
Inflation increased from 7.9% at end-December 2018 to 11.7% at end of December 2019 due to an increase in fuel prices, food items and depreciation of the Kwacha.
FINANCIAL SECTOR CONDITIONS
Average lending rates for Commercial banks increased to 28% in December 2019 from 25.4% in June 2019, this reflected the rise in the cost of funds.
Non-performing loans ratio of 9.8% at end of December 2019 was below the 10% prudential threshold level.
EXCHANGE RATE DEVELOPMENTS
Kwacha generally depreciated and averaged K12.97 and K13.86 against the US dollar in the 3rd and 4th quarters of 2019 respectively. There was heightened demand of dollars for petroleum, electricity and fertilizer imports.
GROSS INTERNATIONAL RESERVES
At the end of December 2019, there was an increase in the Gross International Reserves from $1.41 billion [representing a 1.6 months of import cover] at end-June 2019 to $1.45 billion [representing a 2.1 months of import cover] at end-December 2019, attributed to purchase of foreign exchange by Bank of Zambia and continued payment of mineral royalties in US Dollars.
ECONOMIC OUTLOOK IN 2020 AND THE MEDIUM TERM
Economic growth is expected to be above 3% in the medium term because of climate change risks.
Fiscal deficit is projected at 5.5% of GDP – Government is enhancing revenue collection.
Special focus to be given to funding pensions, health, social cash transfer and education as well as efforts at domestic arrears dismantling.
Inflation is expected to remain high in the 1st half of the year on account of exchange rate depreciation, as well as increase in fuel and electricity prices.
Inflation is expected to taper down in the 2nd half due to reduction in food prices as fresh produce comes to the market.
Bank of Zambia to purchase forex and gold from the market as a reserve asset to stabilize and augment external reserves.
STRUCTURAL AND LEGAL REFORMS
Government is implementing reforms to enhance domestic resource mobilisation by stepping up the modernization of revenue collection processes and provision of Government services through electronic platforms.
Government committed to reforming the Farmer Input Support Program.
Government committed to Implementing energy sector reforms.
Government presented the Planning and Budgeting Bill to the National Assembly to enhance the credibility of the planning and budgeting processes.
Government is finalizing a new Public Procurement Bill to entrench the credibility of the budget and also avoid wasteful expenditure and over-pricing.
DEBT MANAGEMENT
To manage debt, Cabinet directed that the following measures be undertaken:
A moratorium on contraction of external project loans;
Cancellation of selected external project loans; and
Re-scoping of selected externally financed projects in order to reduce project cost, and undisbursed loan balance.
These measures are aimed at reducing the current undisbursed external debt of approximately US$7 billion by about US$5 billion.
Re-scoping exercise in the road sector will reduce project costs from K10 billion to K1.4 billion.
ARREARS CLEARANCE
Between December 2019 and January 2020, the Ministry released a total of K590 million to the National Road Fund Agency and paid out K452 million representing 77% of the amount owed to local road contractors and consultants.
To avoid accumulation of arrears, Government has enhanced its commitment control systems.
ENGAGEMENT WITH THE IMF AND OTHER COOPERATING PARTNERS
Between 13th-19th November, 2019 the International Monetary Fund (IMF) mission and Government discussed recent economic developments and the economic outlook for 2020.
Government to work with the IMF to define a working relationship with them and determine the nature of its support to the Government.
Next engagement with IMF to be held from 18th March to 1st April, 2020.
PMRC RECOMMENDATIONS
PMRC urges the Ministry of Finance to give regular updates on the Sinking Fund [or any other viable proposed redemption strategy] especially for the Euro-bonds taking into consideration that the bullet payment of the first Eurobond amounting to US $750 million falls due in 2022.
PMRC urges the Ministry of Finance to continue engaging the IMF for technical assistance and possible bailout package that will assure and signal stability of the economy to bondholders and investors.
With regards to Farmer Input Support Program (FISP), PMRC urges the Government through the Ministry of Agriculture to develop an exit and graduation strategy for all beneficiaries to ensure sustainability of the programme in the long term.
In view of the approved the New Energy Policy 2019, we re-echo the need to improve the creditworthiness of ZESCO as the sole off-taker in order to instil confidence in private sector investors that the organization would purchase energy generated.
In light of the challenges faced by Government in meeting commitments on the Social Cash Transfer in 2019, PMRC urges the Government to ring-fence funds for social protection purposes to prevent delays in disbursements.
Mrs. Bernadette Deka Zulu – PMRC Executive Director
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