#1IMF OFFICE IN ZAMBIA 2017 IMF Article IV on Zambia What implications for Public Debt? ERNATIO ONETARY AL FUND* Alfredo Baldini Resident Representative International Monetary Fund Zambia October 26, 2017#2Outline 1. Main take-aways from the 2017 Article IV for Zambia 2. Main take-aways from the 2017 DSA 3. Risks and Policy Advice. On October 6, 2017, the Executive Board of the IMF concluded the Article IV consultation with Zambia and issued a press release. All the related Staff reports have been published on October 25 on www.imf.org public website. ERNATIO MONETAR HOME AND INTERNATIONAL MONETARY FUND ABOUT THE IMF RESEARCH COUNTRIES PRESS RELEASE NO. 17/394 Resources ♥ f IM Cc Octo On ( conc Executive Board The drive http://www.imf.org/en/Publications/CR/Issues/2017/10/25/Zambia-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by- the-45358#3. 4. Main takeaways from the Article IV - Zambia The near-term outlook for the Zambian economy has improved in recent months, driven by good rains and rising world copper price. Tight monetary policy succeeded in stabilizing the exchange rate and slowing down y-o-y inflation to 6.6 percent in September 2017, 6 5 Sectoral contributions to GDP growth, 2011-17 (Percent) 8 7 4 3 2 1 0 -1 2011 2012 2013 2014 2015 2016 2017 (proj) Other services Non-mining industry Agriculture Wholesale and retail Mining -GDP growth о Jan-11 Inflation (Year-on-year percentage change) 30 25 Overall Food 20 15 10 Non-Food A LO Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17#4Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Policy Rate and Interbank Rate (Percent) Average Lending and Deposit Rates (Percent) 30 28 27 24 24 21 18 15 Interbank Overnight Rate Policy Rate 2 Percent corridor Upper corridor 2252963o 12 Deposit Rate, Checking Overnight Interbank Rate Deposit Rate, Savings 180-day+ Lending Rate 4. Main takeaways from the Article IV - Zambia Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Bank Credit to Domestic Economy (billions of kwacha) Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 ZMW-denominated Loans Foreign Currency Loans 35 30 15 10 04220225050 о • Despite recent unwinding, monetary policy tightening contributed to sharp rise in lending rates... ⚫ ...with GRZ domestic arrears, rise in NPLs (12.1 percent of totals loans July 2017) and a plunge in the growth of credit to the private sector 20 16 12 8 4 о Jan-13 Jul-13 Jan-14 Jan-13 Bank Credit Growth (year-on-year percent change) 110 100 90 Bank Credit (Total) 80 Credit to the Private Sector 70 Credit to Central Government 60 50 40 30 20 10 0 -10 -20 -30 Jan-17 Jul-16 Jan-16 Jul-15 Jan-15 Jul-14 Jan-13 Jul-14 Jan-14 Jul-13 Jan-15 Jul-16 Jan-16 Jul-15 Jan-17#54. Main takeaways from the Article IV for Zambia Accumulation of domestic arrears and backlog of VAT refunds are significant. 4 Percent of GDP Public debt has risen rapidly pushed by external debt and the accumulation of domestic arrears. Total Public Debt Domestic debt ווןווי 0 घ 70 8 60 50 40 Public External Debt Stock of domestic arrears 0 70 60 च 50 -8 -8 40 30 30 -12 -12 20 20 10 10 -16 -16 0 0 2012 2013 2014 2015 2016 2017 Prel. Proj. 2012 2013 2014 2015 2016 2017 Prel. Proj. Cash deficit Arrears & VAT refunds Commitment deficit Sources: Zambian authorities and IMF estimates and calculations. . Public debt has been rising at an unsustainable pace and has crowded out lending to the private sector and increased the vulnerability of the economy. The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016, driven largely by external borrowing and the impact of exchange rate depreciation.#6Risks Domestic High: delayed fiscal adjustment/Sharply rising Public debt Medium to High: Policy Inconsistency - the government should speak with one voice on key objectives and policies. Medium Rising political tensions Maintain the relative political stability enjoyed by Zambia over the years to sustain investor confidence in the economy. R • External High: tighter and more volatile global financial conditions - Increased external commercial borrowing costs will squeeze fiscal space for priority S spending. K • Medium: Volatility in global copper prices - Maintain exchange rate flexibility and build resilience against external shocks by strengthening the efforts to diversify the economy.#7RNATIO INTER MONET ARY FUND PRESS RELEASE NO. 17/394 Resources Executive Board The IMF Directors Views Directors expressed concern at the pace at which public debt, especially external debt, has increased and now put Zambia at high risk of debt distress. • OK the need to address infrastructure gaps, but to maintain debt sustainability, it is critical to slow down on the contraction of new debt, especially non-concessional loans, strengthen debt management capacity, and improve project appraisal and selection processes. http://www.imf.org/en/News/Articles/2017/10/10/pr17394-imf-executive-board-concludes-2017-article-iv- consultation-with-zambia#8Zambia DSA Conclusions: 2013-17 2017 2015 2013 Risk of debt Distress (current policies) High Moderate Low Augmented by significant Risks stemming from domestic public and/or private external debt? Yes Yes No 2017 joint IMF-WB DSA for Zambia: further downgrading October 2017#9Main Joint IMF-WB DSA Take-aways #1 The present value (PV) of PPG external debt breaches the 40 percent of GDP threshold; it rises from 37 percent in 2016 to 42.6 percent by 2019 and to a peak of 44.3 percent in 2022. #2 The debt-service-to-revenue ratio temporarily breaches its 20 percent threshold in 2022 and 2024 when Eurobond payments fall due. #3 All indicators breach their respective thresholds in the case of extreme shocks. #4 The fixed primary balance scenario, which keeps the primary deficit-to-GDP ratio unchanged from 2016 (at 2.2 percent), shows the debt ratio rising throughout the forecast period, highlighting the urgent need for fiscal consolidation.#10Evolution of Debt Indicators (2017 DSA - Art. IV) Text Table 1. Evolution of Debt Indicators 2011 2012 2013 2014 2015 2016 Percent of GDP Total External debt 15.9 17.3 20.5 28.5 91.5 78.5 Public and publicly guaranteed 8.4 13.7 13.8 20.1 43.1 36.5 Central Government 6.5 11.6 11.3 16.6 37.6 32.1 BOZ 1.9 1.6 1.4 1.3 1.5 0.8 Publicly guaranteed 0.0 0.5 1.2 2.3 3.9 3.5 Private and Parastatal 7.5 3.6 6.7 8.4 48.4 42.0 Private 7.5 3.6 6.7 6.0 44.4 39.8 Parastatal 0.1 0.0 0.0 2.4 4.0 2.3 Total Public debt 20.8 25.4 27.1 35.6 61.4 60.5 Domestic debt 12.4 11.7 13.2 15.5 18.3 24.0 Securities 11.4 11.2 12.2 11.7 10.7 11.9 T-bills 6.0 5.9 6.1 5.6 5.3 6.0 T-bonds 5.4 5.3 6.0 6.1 5.4 5.9 Other 1/ 1.0 0.6 1.1 3.8 7.6 12.1 External debt 8.4 13.7 13.8 20.1 43.1 36.5 Multilaterals Bilaterals Private banks/investors Suppliers' Credit Securities T-bills T-bonds Other 1/ Composition of Central Government's External Debt (percent) 59.7 33.6 35.5 27.1 20.2 20.5 9.4 3.2 2.1 3.0 3.3 6.2 0.0 34.7 32.5 45.7 51.2 46.3 31.0 28.5 30.0 24.3 25.3 26.9 Composition of Domestic Debt (percent) 92.6 93.2 79.0 74.4 57.0 49.8 48.5 48.8 40.0 71.7 28.3 25.1 44.1 44.4 39.1 38.8 28.7 24.7 7.5 6.8 21.1 25.6 43.0 50.2 Sources: Zambia authorities and IMF staff calculations. 1/ Includes accumulation of domestic arrears and financing from BoZ and commercial banks.#11IMF Policy Advice and Authorities views Fiscal consolidation Debt dynamics improve substantially under an adjustment policies scenario. Fiscal consolidation, restraint on non-concessional borrowing, and strengthened debt and public investment management capacities are needed to put debt on a sustainable path. Authorities views • ● The authorities broadly agreed with the DSA assessment. They will publish the Medium-Term Debt Strategy which will guide government borrowing, with a view to ensuring that public debt remains at sustainable levels. • In this context, they will seek to (i) maximize concessional loans and (ii) strengthen parliamentary over- sight of public borrowing through an amendment to the Loans and Guarantees Act.#12Macro-Fiscal Scenarios (2017 DSA - Art. IV) Real Growth Text Table 4. 2015 AIV DSA vs. Current DSA (assumptions) 2016 2017 2018 2019 2020 2021 (Percentage Change) 2015 DSA 6.2 6.9 7.0 6.8 6.8 6.5 Current Policies DSA 3.4 4.0 4.5 4.5 4.5 4.5 Adjustments Policies DSA 3.4 4.0 4.5 5.0 5.5 5.5 Inflation (deflator, av.) 2015 DSA 7.3 6.3 5.2 4.8 4.8 5.0 Current Policies DSA 14.3 7.9 8.1 8.1 7.8 8.0 Adjustments Policies DSA 14.3 7.9 6.8 6.3 6.0 6.0 (Percent of GDP) Budget Deficit 2015 DSA 6.0 5.0 4.0 3.4 2.9 2.9 Current Policies DSA 5.7 8.0 7.8 7.2 6.5 5.3 Adjustments Policies DSA 5.7 7.3 5.9 4.0 3.2 2.4 Net FDI 2015 DSA 6.6 6.6 6.6 6.6 6.6 6.2 Current Policies DSA 7.3 6.3 6.1 6.0 5.8 5.8 Adjustments Policies DSA 7.3 6.3 6.1 6.0 5.8 5.8 Current Account Balance 2015 DSA 1.4 2.5 3.0 3.3 3.4 3.2 Current Policies DSA -4.4 -3.6 -2.8 -1.5 0.0 -0.2 Adjustments Policies DSA -4.4 -3.0 -1.5 0.1 1.2 1.4#13Thank you Natotela Zikomo Very Sana Kwambili much http://www.imf.org/en/Publications/CR/Issues/2017/10/25/Zambia-2017-Article-IV- Consultation-Press-Release-Staff-Report-and-Statement-by-the-45358