VZCZCXRO8576
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #1523/01 3071003
ZNR UUUUU ZZH
R 031003Z NOV 06
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 3486
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 LUSAKA 001523 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAID ZA
SUBJECT: IMF LAUDS ZAMBIA'S ECONOMIC MANAGEMENT, BUT NOTES 
SHORTCOMINGS IN PRIVATE SECTOR DEVELOPMENT 
 
¶1. (SBU) Summary: Zambia's macroeconomic stability is impressive, 
but the country's environment for private sector development "needs 
improvement," an International Monetary Fund team told donor 
representatives on November 1.  IMF officials noted that fiscal 
management was generally good, the kwacha had been more stable in 
recent months, and the Fund was discussing a range of tax policy 
issues with the GRZ.  Zambia's macroeconomic performance also got 
good marks from the IMF, but the team noted that Zambia still needed 
to attain higher levels of economic growth in the longer-run, which 
required a much more dynamic role for the private sector.  End 
summary. 
 
¶2. (U) Introduction: An IMF mission visited Zambia from mid-October 
through early November to conduct the fifth review of Zambia's 
performance under the Poverty Reduction and Growth Facility (PRGF). 
The mission chief, Francesco Caramazza, briefed donors at the start 
of the mission and at the mission's end, on November 1.  He said 
that the official written report from the mission should be 
finalized and available in early January.  Highlights of the 
briefing are provided below. 
 
Fiscal, Monetary Management Good 
 
¶3. (SBU) Caramazza reported that government revenues, which were 
reportedly well below targets earlier in 2006, were on track or just 
slightly below targets, as of September 2006, and the expectation by 
yearend was for revenues to remain on track.  Government 
expenditures were also slightly below the programmed amount for 
¶2006.  Government financing was consistently above desired targets, 
but this was due in part to increasing carry-overs from previous 
years, when spending could not be fully executed due to large cash 
inflows in short timeframes. 
 
¶4. (SBU) The IMF officials said that the Bank of Zambia's 
sterilization operations helped to absorb liquidity in the monetary 
market that resulted from high levels of spending in the 
August-September 2006 timeframe (the run-up to national elections). 
These efforts helped reduce kwacha volatility, and have kept the 
kwacha more stable (in the 3700 to 3900 kwachas to the dollar 
range).  He also advised that a government "megabond" held by the 
Bank of Zambia would be converted to marketable securities, which 
would also help to mop up liquidity in the market. 
 
Budget and Tax Issues Under Scrutiny 
 
¶5. (SBU) Caramazza noted that the Fund did not have detailed 
discussions with the GRZ about the 2007 budget, because a new 
Cabinet continued to sort out national priorities.  He said that the 
IMF and GRZ agreed on broad outlines for revenues and for domestic 
financing for the 2007 budget, and that the IMF expects continued 
fiscal prudence by the GRZ. 
 
¶6. (SBU) Over the past 12 months, the Fund has sent several focused 
missions to Zambia to address tax issues.  Two missions addressed 
tax policy for the mining sector, one dealt with tax administration 
and another recent mission looked at broader tax policy issues.  The 
IMF has prepared and presented a document to the Ministry of Finance 
and National Planning, which will eventually become available to 
donors as well.  Overall, Caramazza said, the tax system is sound, 
but one problem the IMF identified was tax exemptions, which are 
distortionary and effectively pick winners and losers.  The tax 
system should be more predictable, transparent and equitable, he 
stressed.  The GRZ faces the challenge of trying to broaden the tax 
base while also increasing compliance, effectiveness and efficiency 
in taxation. 
 
Macroeconomic Performance Positive 
 
¶7. (SBU) For 2006, the Fund expects GDP growth of 6 percent, as a 
result of continued mining sector expansion, a large investment in a 
new cement plant, and a strong housing sector.  The GRZ also remains 
committed to meeting inflation targets and expects to achieve an 
annual rate of 9 percent at year-end.  Its medium-term inflation 
target is 5 percent.  One of the longer-term challenges faced by the 
GRZ is raising levels of growth higher.  To do so, the GRZ must give 
a more prominent role to the private sector and reduce the cost of 
doing business. 
 
Private Sector Development Lags 
 
¶8. (SBU) Caramazza noted that the GRZ has a good program for private 
sector development (PSD), but it has been very slow to implement 
agreed-upon PSD reform measures.  For example, the creation of the 
Zambia Development Agency continues to be hindered by financial 
difficulties, including ever-increasing costs for retrenchment of 
officials from the various agencies that will be merged to form the 
ZDA.  In side discussions, IMF officials also acknowledged that the 
performance of state-owned utilities (particularly for 
telecommunications and electric power) has been disappointing. 
 
 
LUSAKA 00001523  002 OF 002 
 
 
Donors Concerned About Decentralization, Social Spending 
 
¶9. (SBU) Responding to donor questions about the GRZ's fiscal 
decentralization efforts, Caramazza noted that although the concept 
was good, the IMF was concerned about the capacity of local 
government councils to take on greater financial responsibility, and 
encouraged the GRZ to build local council capacity before moving 
ahead with decentralization plans.  On the issue of GRZ performance 
in social sectors, the IMF team noted that the GRZ was making 
progress in both health and education, particularly in hiring new 
teachers and health professionals and in improving spending 
accountability. 
 
¶10. (SBU) Donors also asked for the IMF's views of the Public 
Expenditure Management and Financial Accountability (PEMFA) reform 
program and introduction of an Integrated Financial Management 
Information System (IFMIS).  Caramazza conceded that implementation 
of these important financial accountability measures has been slow, 
but he voiced optimism about progress in the next year, based on the 
strong interest and commitment of the Secretary to the Treasury. 
The IMF also noted the resource needs identified in the GRZ's Fifth 
National Development Plan, and the expected gap in donor funding to 
meet the GRZ's needs.  Donors remain concerned about the GRZ's 
absorptive capacity to manage scaled-up funding, but Caramazza 
claimed capacity constraints were a "chicken and egg" issue and 
urged donors to consider providing more resources so that more 
capacity could be developed. 
 
Comment 
 
¶11. (SBU) We share the IMF's appreciation of Zambia's good 
macroeconomic management, but remain concerned about the lags in 
implementing private sector development and financial accountability 
reforms.  Although the delays in the PEMFA programs are largely a 
result of capacity constraints, the troubles in implementing PSD 
reforms appear to be more a result of entrenched interests, weak 
political will, and lack of strong leadership. 
 
MARTINEZ