VZCZCXRO3321
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #1109/01 2741324
ZNR UUUUU ZZH
R 011324Z OCT 07
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 4977
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 LUSAKA 001109 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EAID PGOV EINV ENRG ZA
SUBJECT:  IMF GIVES ZAMBIA PASSING MARKS, BUT GROWTH PLATFORM "NEEDS 
IMPROVEMENT" 
 
Ref: A) Lusaka 1029; B) Lusaka 903 
 
¶1. (SBU) Summary: Zambia's macroeconomic performance continues to 
receive good reviews from International Monetary Fund analysts, but 
budget execution remains a challenge, and may generate excess 
liquidity and inflation later in 2007.  To achieve higher rates of 
growth that lift more Zambians out of poverty, Zambia will need to 
improve infrastructure (the energy sector in particular will need to 
become more effective), diversify its economy (which remains 
over-reliant on copper production), and enact more structural 
reform.  Zambia's Poverty Reduction and Growth Facility (PRGF) is 
coming to an end and the Government of Zambia (GRZ) has not yet 
decided how it will continue to engage with the IMF in future.  End 
summary. 
 
¶2. (U) Background: An IMF mission visited Zambia September 12-26, 
2007 to conduct Article IV consultations and to discuss future 
engagement by the Fund in Zambia.  Mission leader Francesco 
Caramazza and other members met with cooperating partner (donor) 
representatives on September 13 and on September 26 to discuss the 
visit and its results. 
 
GRZ'S ECONOMIC MANAGEMENT SOUND... 
 
¶3. (SBU) Caramazza commended the sound performance of the Zambian 
economy, noting improved fiscal management and a prudent monetary 
policy that has caused inflation to fall and remain at historically 
low levels.  (Note: the GRZ announced on September 26 that in 
September 2007 the annual inflation rate was 9.3 percent, down from 
10.7 percent a month earlier.)  He added that debt relief and high 
world copper prices had played a positive role in strengthening 
Zambia's external position.  At the start of the PRGF, Zambia's 
foreign exchange reserves were equivalent to 1 month of imports, and 
they currently are at 2.5 months of imports, he told cooperating 
partners. 
 
...BUT IT NEEDS TO DO MORE, FOR HIGHER GROWTH 
 
¶4. (SBU) For 2007, the IMF expects economic growth of approximately 
6.2 percent.  The rate of 7.0 percent projected in the Government of 
Zambia's Fifth National Development Plan (FNDP) may not be reached 
until 2009 or 2010, in the Fund's view.  To attain higher levels of 
growth, the GRZ will need to create a stronger platform to support 
growth.  Caramazza emphasized that the GRZ must improve 
infrastructure, with a particular emphasis on the reliable and 
affordable supply of energy (both power and fuel).  Also, the GRZ 
will need to take steps to diversify the economy further.  Copper 
prices are expected to fall in the future, and the GRZ must be in a 
stronger position to deal with the economic consequences of the 
copper price cycle, Caramazza stressed.  He also noted the 
importance of structural reforms to improve public sector management 
and the environment for private sector growth.  In discussions with 
cooperating partners, the mission members stressed that 
infrastructure, diversification into agricultural production and 
other sectors, and structural reform are beyond the IMF's scope of 
engagement and influence.  Cooperating partners expressed 
frustration over the GRZ's continued emphasis on distortionary 
fertilizer subsidies and its lack of progress in promoting private 
sector development. 
 
¶5. (SBU) The FNDP also requires additional resources to obtain 
poverty reduction goals through the provision of health services, 
education and more infrastructure.  Caramazza said that Zambia needs 
more "fiscal space" to implement the FNDP.  He encouraged donors to 
consider providing more assistance to Zambia, and noted that 
expected increases in revenues will help as well.  Improved tax 
collection may lead to a rise in revenues for 2007, to an expected 
18.1 percent of GDP -- stronger than in 2006, Caramazza noted.  IMF 
technical assistance on mining sector issues should help the MOFNP's 
efforts to negotiate new tax and royalty terms in development 
agreements with mining companies. 
 
CHALLENGES: BUDGET EXECUTION, MANAGING INCREASED LIQUIDITY 
 
¶6. (SBU) The IMF remains concerned about Zambia's weak budget 
planning and execution capacity. Caramazza noted that at the end of 
August 2007 there was a considerable surplus of funds in the GRZ 
fiscal account.  Caramazza also warned that because of poor budget 
execution to date, there is a possibility for a large injection of 
liquidity into the economy in the last months of 2007, as the pace 
of government spending accelerates, especially on capital projects 
that faced delays.  The GRZ will need to be diligent in its monetary 
policy, to avoid inflationary pressures of the possibly large 
amounts of spending expected.  The Fund suggested allowing 
government agencies to issue tenders based on budget allocations 
rather than wait for the MOFNP to release funds.  Caramazza also 
told partners that the 2008 budget was at a very preliminary stage 
and that the Fund will discuss budget issues with the MOFNP later in 
the year. 
 
LUSAKA 00001109  002.2 OF 002 
 
 
 
GRZ DEALS WELL WITH EXTERNAL AND DOMESTIC DEBT 
 
¶7. (SBU) The MOFNP has developed a draft debt management strategy 
that the IMF is currently reviewing.  The Fund has advised the GRZ 
to seek concessional loans on a case-by-case basis, following the 
parameters of the strategy and linking loans to economically viable 
projects.  The Mission also reported that the GRZ will not give a 
sovereign guarantee for any loans to public enterprises.  Caramazza 
noted that the external debt data does not reflect the debt of 
public enterprises such as power utility ZESCO or communications 
service provider ZAMTEL.  Comment: Without sovereign guarantees, 
some of the new hydropower generation projects planned by ZESCO (Ref 
B) may not be finalized quickly or easily, further limiting economic 
growth prospects.  End comment. 
 
¶8. (SBU) Although the MOFNP takes a fairly cautious position on 
incurring new external debt obligations (Ref A), it may come under 
political pressure at higher levels to allow new loans, IMF's 
resident representative commented.  Local press reported on October 
1 that Finance Minister Ng'andu Peter Magande said that the GRZ 
would soon contract a new debt of $39 million from China, to 
purchase equipment for road maintenance.  Such a loan deal, although 
not project-oriented, is consistent with the goal to improve 
transport infrastructure, in support of economic growth.  The GRZ 
also has plans to address the continued high levels of domestic 
arrears over the next two years.  The MOFNP will make allocations in 
the 2008 and 2009 budgets to pay off all outstanding domestic debts. 
 
 
Next steps with IMF still undecided 
 
¶9. (SBU) As the current PRGF expires this month and a final 
disbursement is made, the Fund is discussing two options with the 
MOFNP, a low access PRGF of USD 70 to 80 million, or a new option, a 
Policy Support Instrument or PSI.  The PSI comes with similar 
conditionalities and reviews as with a PRGF, but with no funding 
attached.  At the inbrief with cooperating partners, Caramazza said 
that the GRZ was leaning towards the PRGF, mainly because it was the 
option with which the GRZ was familiar and more comfortable. 
Caramazza also noted that the Fund expected that any new program 
would retain the focus of the expiring PRGF, namely public 
expenditure management, tax administration and policy, and financial 
sector development.  At the outbrief, he indicated that no final 
decision had been made.  Caramazza told partners that the work 
program will go to the IMF board in December and that the Fund 
expects its next mission to come to Zambia in February 2008.