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

Zambia Zambia: Challenges 2010 : Challenges 2010-2011 2011 and Beyond and Beyond Perry Perone Perry Perone 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 Kwacha per USD January-October 2010 4,400.0 4,500.0 Euro Effect May-August 4,600.0 4,700.0 4,800.0 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 Real GDP Growth-1990-2011 10 5 0 Percent 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -5 -10 -15

Inflation Under Control Inflation, 1990-2011 (12-month, year-end) 200 180 160 140 120 Percent 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Current Account Deficit Reduced Current Account Balance, Incl. Grants, 1992-2011 (Percent of GDP) 4 2 0 -2 -4 -6 -8 -10 -12 -14 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Government Debt Manageable Government Debt-2000-2011 (Percent of GDP) 250 200 150 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Foreign Debt (% of GDP) Domestic Debt (% of GDP)

Strong Reserve Position 2,500 4.0 International Reserves-2000-2011 3.5 2,000 3.0 2.5 Imports 1,500 llions USD Millio Months of Im Import Cover 2.0 1,000 1.5 1.0 500 Gross Reserves 0.5 0 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Good Policies = Buffers Against External Shocks Real GDP Growth--Regional Comparison 8 SSA LICs Average 7 ent In Percent 6 Zambia 5 4 2003 2004 2005 2006 2007 2008 2009 2010

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 of Zambia being being able to focus on its monetary policy able to focus on its monetary policy objectives rather than monetization of deficits objectives rather than monetization of deficits  Build Build-up of buffers against external shocks up of buffers against external shocks

Manageable Deficits Manageable Deficits 35 Fiscal Balance-2000-2011 30 (percent of GDP) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -5 -10 Revenues Expenditures Balance

Reduced Borrowing Reduced Borrowing 6 Budget Financing-2000-2011 (percent of GDP) 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1 -2 -3 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

Tax Revenue-2000-2011 (Percent of GDP) 19 18 Trend 17 16 15 14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Tax Revenue Components-2000-2011 (Percent of GDP) 20 18 16 14 12 10 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Income Tax VAT Customs and other import duties Excises

Mining IncomeTax Revenue-2006-2011 (Percent of GDP) 2.5 2.0 1.5 1.0 0.5 - 2006 2007 2008 2009 2010 2011

Donor Support-2000-2011 (Percent of GDP) 7 6 5 4 3 2 1 0 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 Expenditures-2000-2011 (percent of GDP) 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Current Capital

Wages Dominate Expenditures… Wages Dominate Expenditures… Current Expenditures-2000-2011 (percent of total) 100% 90% 80% 70% 60% 60% 50% 40% 30% 20% 10% 0% 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 10 Wages-2000-2011 9 (percent of GDP) 8 7 6 5 4 3 2 1 0 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