Zambia Zambia: Challenges 2010 : Challenges 2010-2011 2011 and - - PowerPoint PPT Presentation

Perry Perone Perry Perone

Zambia Zambia: Challenges 2010 : Challenges 2010-2011 2011 and Beyond and Beyond

Perry Perone Perry Perone IMF Resident Representative IMF Resident Representative Zambia Zambia

Presentation at PricewaterhouseCoopers Breakfast Meeting, Lusaka, October 14, 2010 The views expressed in this presentation are not necessarily those of the IMF

Overview Overview

 Recent Events

Recent Events

 Broader Challenges

Broader Challenges

 Budget and Prospects for 2011

Budget and Prospects for 2011

 Summary and

Summary and conclusion conclusion

Recent Events

 External Factors

 Slow Recovery inWorld Economy  Euro Zone Crisis

 Domestic Factors

 Record Maize Crop  Record Maize Crop  Elections

 Historical Perspective

 Improvement in all macroeconomic variables

 Regional Comparison

 Higher Growth than most other SSA Countries

Recovery of World Economy?

 Recovery in advanced economies is expected to be sluggish

 households and financial institutions seeking to repair balance

sheets

 credit growth constrained  persistent demand and employment uncertainty  persistent demand and employment uncertainty

 Recovery in emerging markets expected to rebound more

quickly

 Potential effects on demand for Zambian Exports and thus

economic growth

Euro Zone Crisis—Risk Aversion

4,400.0 4,500.0 4,600.0 4,700.0 4,800.0

Kwacha per USD January-October 2010

Euro Effect May-August

4,800.0 4,900.0 5,000.0 5,100.0 5,200.0 5,300.0 4-Jan 3-Feb 5-Mar 4-Apr 4-May 3-Jun 3-Jul 2-Aug 1-Sep 1-Oct

Domestic Factors

 Record Maize Harvest--Financing Need

 Maize pricing—Floor well above market price  Decision to purchase the entire surplus rather than what is

sufficient for food security

 No well-developed export channels  No well-developed export channels

 Elections--Political budget cycle

 Potential to Overspend  Potential for Short-Term Policy Perspective

Historical Context

 Increased Economic Growth  Inflation Down  CurrentAccount Deficit Financeable  Government Debt Manageable

Reserves Up

 Reserves Up

Sustained Real Economic Growth

5 10

Real GDP Growth-1990-2011

• 15
• 10
• 5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Percent

Inflation Under Control

140 160 180 200

Inflation, 1990-2011 (12-month, year-end)

20 40 60 80 100 120 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Percent

Current Account Deficit Reduced

2 4

Current Account Balance, Incl. Grants, 1992-2011 (Percent of GDP)

• 14
• 12
• 10
• 8
• 6
• 4
• 2

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Government Debt Manageable

150 200 250

Government Debt-2000-2011 (Percent of GDP)

50 100 150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Foreign Debt (% of GDP) Domestic Debt (% of GDP)

Strong Reserve Position

2.5 3.0 3.5 4.0 1,500 2,000 2,500 Imports llions

International Reserves-2000-2011

• 0.5

1.0 1.5 2.0 500 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Months of Im USD Millio

Import Cover Gross Reserves

Good Policies = Buffers Against External Shocks

7 8

ent

Real GDP Growth--Regional Comparison

SSA LICs Average

4 5 6 2003 2004 2005 2006 2007 2008 2009 2010

In Percent

Zambia

Reasons for Improved Macroeconomic Reasons for Improved Macroeconomic Performance Performance

 Recovery of Copper market

Recovery of Copper market

 Support from international community, particularly debt

Support from international community, particularly debt relief relief relief relief

 Structural

Structural reforms: reforms: Privatization, lowering of trade Privatization, lowering of trade barriers, floating of the exchange rate, etc. barriers, floating of the exchange rate, etc.

 Prudent macroeconomic

Prudent macroeconomic policies policies

Prudent Macroeconomic Policies Prudent Macroeconomic Policies

Low Low fiscal fiscal deficits lead to: deficits lead to:

 Reduced borrowing, both foreign and domestic

Reduced borrowing, both foreign and domestic

 Bank

Bank of Zambia

• f Zambia being

being able to focus on its monetary policy able to focus on its monetary policy

• bjectives rather than monetization of deficits
• bjectives rather than monetization of deficits

 Build

Build-up of buffers against external shocks up of buffers against external shocks

Manageable Deficits Manageable Deficits

15 20 25 30 35

Fiscal Balance-2000-2011 (percent of GDP)

• 10
• 5

5 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Revenues Expenditures Balance

Reduced Borrowing Reduced Borrowing

2 3 4 5 6

Budget Financing-2000-2011 (percent of GDP)

• 3
• 2
• 1

1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Foreign Domestic

Medium Medium-Term Challenges Term Challenges

 Create fiscal space for development expenditures which

Create fiscal space for development expenditures which create conditions for high growth create conditions for high growth

 Maintain stable macroeconomic conditions

Maintain stable macroeconomic conditions

Create Fiscal Space Create Fiscal Space

 Improve revenue performance

Improve revenue performance

 Make expenditures more efficient

Make expenditures more efficient

 Make expenditures more efficient

Make expenditures more efficient

Improving Revenue Performance

 RevenueTrends

 Tax Revenues trending down (but expected to pick up in 2010-

2011)

 Income tax doing reasonably well

Income tax doing reasonably well

 Trade related taxes,VAT, excises, and, duties have declined

Trade related taxes,VAT, excises, and, duties have declined

 Trade related taxes,VAT, excises, and, duties have declined

Trade related taxes,VAT, excises, and, duties have declined

 Mining sector contribution very small compared to

Mining sector contribution very small compared to contribution to GDP (although expected improvement in 2010 contribution to GDP (although expected improvement in 2010- 2011) 2011)

 DonorAidTrending Down

17 18 19

Tax Revenue-2000-2011 (Percent of GDP)

Trend

14 15 16 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

10 12 14 16 18 20

Tax Revenue Components-2000-2011 (Percent of GDP)

2 4 6 8 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Income Tax VAT Customs and other import duties Excises

1.5 2.0 2.5

Mining IncomeTax Revenue-2006-2011 (Percent of GDP)

• 0.5

1.0 2006 2007 2008 2009 2010 2011

4 5 6 7

Donor Support-2000-2011 (Percent of GDP)

1 2 3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Budget support grants Project grants

Policies to Improve Revenues Policies to Improve Revenues

 StrengthenTax Administration

StrengthenTax Administration

 ReviewTax Policy

ReviewTax Policy

 Regularize Relations with the Mining Sector

Regularize Relations with the Mining Sector

Making Expenditures More Efficient Making Expenditures More Efficient

 ExpenditureTrends

ExpenditureTrends

 Overall

Overall spending has been on a declining trend, particularly spending has been on a declining trend, particularly capital capital spending spending

 Salaries and benefits account for the largest share of current

Salaries and benefits account for the largest share of current

 Salaries and benefits account for the largest share of current

Salaries and benefits account for the largest share of current spending and are increasing spending and are increasing

 Spending on interest has

Spending on interest has declined declined

Expenditure Expenditure Declining Declining

25 30 35

Expenditures-2000-2011 (percent of GDP)

5 10 15 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Current Capital

Wages Dominate Expenditures… Wages Dominate Expenditures…

60% 70% 80% 90% 100%

Current Expenditures-2000-2011 (percent of total)

0% 10% 20% 30% 40% 50% 60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Wages Goods & Services Interest Transfers

… and are increasing in relation to GDP … and are increasing in relation to GDP

6 7 8 9 10

Wages-2000-2011 (percent of GDP)

1 2 3 4 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Expenditure Policies Expenditure Policies

 Implement modern public financial management system

Implement modern public financial management system

 Effective Liquidity Control

Effective Liquidity Control

 IncreasedTransparency/Accountability

IncreasedTransparency/Accountability

 ControlWage Bill (public sector reform)

ControlWage Bill (public sector reform)

 Review Food Reserve Policy

Review Food Reserve Policy

Maintain Stable Macroeconomics Maintain Stable Macroeconomics

 Maintain prudent fiscal

Maintain prudent fiscal position position such that domestic such that domestic and external debt are managed from the point of view of and external debt are managed from the point of view of sustainability sustainability

 Focus Monetary Policy on inflation

Focus Monetary Policy on inflation while maintaining while maintaining conditions conducive to growth conditions conducive to growth conditions conducive to growth conditions conducive to growth

 Structural Issues in Financial Sector

Structural Issues in Financial Sector

 Negative real interest rates

Negative real interest rates

 Relatively low growth of credit to the private sector

Relatively low growth of credit to the private sector

 High interest rate spreads

High interest rate spreads

Prospects for 2011

 Ambitious Budget

 Increase in tax revenues—Measures to Support?  But even more increase in expenditures (both wages and capital

expenditures)—EconomicallyViable Projects?

 Overall deficit to increase—Room to borrow more?

 General Macroeconomics  General Macroeconomics

 Inflation expected to fall compared to 2010  Strong Real GDP Growth

 Risk Factors

 Uncertainty about Cooperating Partner disbursements  Potential resurgence in inflationary pressures

Conclusions

 To reduce poverty high growth rates must be sustained  This requires massive public investments in infrastructure

and human capital

 Given the secular decline in external aid, GRZ will have to

finance this from domestic resources finance this from domestic resources

 This will require increasing revenues and making

expenditures more efficient