Zambia Ministry of Finance: Statement on the economy and on government reforms
Delivered by Margaret Mwanakatwe, MP, Minister of Finance of the Republic of Zambia, in Lusaka on 21 February 2018
I wish to update the nation on the performance of the economy in 2017, the general outlook for 2018, and Government’s reaffirmation of the commitment to continue the implementation of policy and structural reforms aimed at sustaining the macroeconomic stability attained so far. This is in the light of recent observations and speculations on the state of the economy and on government’s engagement with various stakeholders on the economy, both local and foreign.
I take this opportunity to strongly re-affirm that the work on policy, structural, and legal reforms will continue to be implemented with greater vigor.
2017 Economic performance
GDP Growth: Driven largely by positive performance in manufacturing, mining and agriculture sectors, GDP growth continued on a positive trajectory. Despite being positive, preliminary data shows that growth is expected to be lower at 3.7% than the above 4% earlier projected. I will update the nation on growth once the final 2017 assessment is finalised.
Inflation: Inflation was contained within the band of 6-8 percent that was set at the beginning of the year. End-2017 inflation closed at 6.1%, the lowest in over thirty years.
Fiscal Performance: Preliminary numbers show that the fiscal deficit was below the budget target of 7.0% of GDP at 6.1%. This is consistent with the fiscal consolidation policies that the Government embarked on in the year under review.
Monetary policy, and banking and external sectors
Banking sector conditions continued to be sound and satisfactory. Liquidity conditions largely improved with the easing of monetary policy.
A slight reduction in lending rates was recorded at 24.6% as at end 2017 from 29.49 0% in 2016. Lending rates are still prohibitively high and posing challenges for enhanced business activities. The Government will work with the Bank of Zambia (BOZ) to institute targeted measures and engagements with the banking sector to meaningfully start to achieve lower rates in 2018.
The Kwacha remained relatively stable against the major convertible currencies. The Kwacha trade against the US Dollar in 2017 averaged K9.99 per US$. The current account deficit narrowed to US$760.3 million in 2017 from US$1.037 billion in 2016. International foreign reserves in 2017 were recorded at US$2.1 billion.
2018 Economic outlook
Economic performance in 2018 is expected to remain positive supported by a stable macroeconomic environment and implementation of various policy, structural and legal reforms under the Economic Stabilization and Growth Programme (ESGP). Growth is projected to remain positive while inflation is expected to be low and in single-digit while the fiscal deficit will be maintained within budgeted levels.
However, some of the potential risks for 2018 include relatively high lending rates and uncertain weather patterns that may impact negatively on electricity generation and agriculture activities.
Policy, legal and structural reforms
The envisaged positive economic outlook in 2018 and the medium term will be anchored on key reforms being undertaken by Government under the ESGP. These reforms will also support the implementation of the Seventh National Development Plan.
The need to sustain economic and fiscal governance, through maintenance of price stability for sustaining macroeconomic stability and fiscal fitness is paramount and necessary ingredient for growth, employment creation and poverty reduction. In this regard fiscal and monetary policy coordination will continue to be strengthened.
Government will step-up fiscal reforms to ensure fiscal consolidation is fully attained. Government will continue to enhance domestic revenue mobilization and expenditure restraint to attain a 3% of GDP fiscal deficit by the end of the medium term. Key to expenditure restraint is to concentrate on completing ongoing projects as outlined in the ESGP and emphasized by His Excellency the President of the Republic of Zambia Mr. Edgar Chagwa Lungu.
On debt management, the Government will continue to enhance debt management capacities and transparency. In this regard, the Government will prioritize the slowing down of debt accumulation and address perceptions around debt numbers by strengthening institutional and legal framework that will boost transparency in debt contraction. To this end, Government will be re-energising the engagement of stakeholders that are cardinal to improving debt dynamics and related economic fundamentals to support these reforms. Government is also working on improvement of Public financial management laws.
In addition, Government has developed a Medium-Term Debt Strategy while regular debt sustainability analysis will be undertaken.
Regarding the programme with the IMF, the nation may wish to note that we started engaging with the IMF on the basis of the ESGP approved by Cabinet in 2017. The ESGP is being strictly implemented with much of the milestones achieved. We are committed to continue the implementation at all levels of Government. In this regard, we will continue to engage the IMF on a similar basis with respect to debt management.
The government is developing a financing profile that is aimed at addressing our economic development aspirations without compromising debt sustainability, in an effort to bring the debt levels to moderate risk of debt distress over the medium term from high risk of debt distress. Once our new strategy has been completed, I will be engaging the IMF to obtain their concurrence.
I will now clarify the position of Cabinet and the Ministry on the restructuring of debt. This issue is unfortunately being misinterpreted that Government is anticipating challenges in servicing its debt. As announced in the 2018 budget address, the Government has commenced preparations to address the repayment of its Eurobonds through the operationalization of a sinking fund. Part of the process involves addressing liquidity risks at the time of paying/refinancing of the Eurobonds. As part of prudent risk management, the Government decided to reposition some flows falling due during the period of the Eurobonds, by engaging some creditors that may be open to pushing some flows this period forward. We are not contemplating any stock re-profiling but just the flows that fall due in the period of the repayments. China being a natural first creditor and accounting for 28% of our debt was a natural creditor to have a discussion with.
May I emphasize that Zambia does not intend to and will not default on its obligations. Only creditors that will be amenable to the proposal will be engaged and this will be on the basis of willingness. As part of the broader strategy, the Government has since put in place a team of officers from the Bank of Zambia, Ministry of Finance and Ministry of Justice to undertake work that will determine exactly what form of strategy will be adopted for the repayment/redemption of Eurobonds. The work will be completed by the end of the 1st quarter 2018.
Other major policy reforms that must continue are in agriculture and energy. In the agriculture sector Government is committed to resolving the teething challenges of the implementation of the e-voucher. Further, the e-voucher has given us an opportunity that will allow us to have a benchmark for graduating of farmers in future. In the energy sector, reforms in the both fuel and electricity sub-sectors, will continue in 2018 and beyond. These include full migration to cost reflective prices and sustenance thereafter, Government disengagement from importation of finished petroleum and comingled products. These will help anchor the fiscal and ensure efficiency in service delivery thereby enhancing economic performance.
The implementation of measures to strengthen tax revenue will commence in earnest in 2018. The Treasury has developed a monitoring framework to ensure early finalization and implementation of the National land titling programme, installation of fiscal registers and monitoring system for excise duties in telecommunications.
Other structural reforms include improving business environment and ensuring an affordable and more sustainable pension system. Government will accelerate the development and implementation of legal and institutional framework that will give business greater chance of survival. This will be done through limiting regulatory and administrative burden for MSMEs as contained under the ESGP. In the pension area, a review of national pension and broader social security protection reforms will be carried out.
In order to reposition the State-Owned Enterprises, Government through IDC will continue work on ascertain long term sustainability of these assets. This is with the view to improve the contribution of state owned enterprises to the Treasury as well as country’s development.
The Government will strengthen the PPP function and law as a key measure to augment resource mobilization going forward through private sector engagement.
Legal reforms form a cornerstone of effective service delivery for any country. In this regard reforms, such as those in the Public Financial Management will continue. These include the Zambia Public Procurement Act (ZPPA), Insurance Bill, Bank of Zambia Bill, Deposit Protection and Pensions and Social Security bill, planning and budgeting, loans and Guarantee (Authorization) Act.
Government will ensure the enactment of the new Public Financial Management Act during the current sitting of Parliament in 2018.
Procurement reforms will continue to control wastage and overpricing. The amendment of the law will be undertaken to introduce reference pricing, expert estimates for works and services and enhance preferential contracting for locals.
Information provision to the public
In order to improve information flows, the Ministry of Finance will be working out measures to periodically disseminate information on economic performance on a predictable basis and undertake appropriate stakeholder engagements.
As a democratically elected Government, we owe it first to the Zambian people to tell them the truth not just about the debt government contracts on their behalf, but also about the state of the economy in general. Transparency in the management of public finances will therefore be key for us to win both the public trust, confidence of international financiers trading in government instruments and investors.
May I take this opportunity to thank His Excellency the President of the Republic of Zambia, Mr. Edgar Chagwa Lungu for his trust through the mandate given to me to steer the Ministry of Finance’s work in delivering service to the people of Zambia and to build on the successes of my predecessor Honourable Felix Mutati, MP. I wish to commit myself to His Excellency’s call for me to deliver the mandate without letting down the people of Zambia. Fiscal sustainability for a prosperous Zambia will be my guiding principle as I take up this work. Together, we will succeed.