Mr. Speaker, I thank you most sincerely for according me this opportunity to brief the House and the nation, on the state of the economy and Government’s engagement with the International Monetary Fund (IMF).
The first part of my briefing will provide an update on the state of the economy while the second will provide a brief on the IMF engagement.
Sir, economic performance has rebound with inflation down to single digits, the exchange rate remaining largely stable while GDP growth has started recovering. I will now give highlights.
Mr. Speaker, Growth in 2017 is projected to rise to 4.3% against an initial forecast of 3.4%. This is as a result of increased agricultural output, recovering generation for electricity and higher mining output supported by better prices and power supply. Other sectors that are supporting growth are construction, wholesale and trade and tourism sectors.
Sir, inflation that closed the end of 2016 at 7.5% reduced further to 6.5% in May 2017. This was supported by the continued stability of the exchange rate, lower food prices in view of a good harvest and improved market confidence in the country’s policy direction. Inflation is projected to remain in single digits in 2017.
EXCHANGE RATE AND EXTERNAL SECTOR DEVELOPMENTS
Mr. Speaker, the exchange rate of the Kwacha against major currencies has remained stable, with a bias towards an appreciation. The Kwacha appreciated against the US dollar to an average of K9.34 in May 2017 from K9.92 in December 2016. The stability of the currency is on account of improved supply of foreign exchange, better outlook for copper prices and positive market sentiment.
Sir, in the external sector, the country’s current account deficit narrowed to US$257.1 million in the first quarter of 2017 from a deficit of US$574.7 million in the fourth quarter of 2016. This was largely explained by an improvement in the trade and primary income balances.
As at end-May 2017, foreign reserves stood at US $2.4 billion, which translated to around 3.3 months of import cover. The Government’s goal is to attain 4 months of import cover over the medium-term.
Mr. Speaker, let me now provide Government’s perspectives on lending rates, which are still very high for sustainable economic growth. In the first five months of 2017, the rates averaged 28%, a level that limits lending to the private sector. This rate is slightly below the 29% average rate recorded at the end of 2016.
Sir, in an effort to lower the cost of credit and increase lending to the private sector, the Bank of Zambia eased monetary policy. Both the policy rate and statutory reserve ratio were reduced to 12.5% from 15.5%, and from 18.0%, respectively. These measures will be complimented by Government’s fiscal restraint. I urge the Banking community to reciprocate and pass on cheaper credit to the market.
Mr. Speaker, may I now brief the house on fiscal developments. Sir, fiscal performance in the first five months of 2017 was challenging. Revenues under-performed by 10% compared to the budget. The under performance in revenues has been on account of low tax compliance by taxpayers, and delayed implementation of budget measures such as land titling, installation of electronic fiscal devices to improve VAT collections, implementation of electronic equipment in the communications sector to improve the performance of excise duty and the introduction of a single window at entry points to reduce turnaround times at borders and boost revenue.
Sir, to contribute to resolving the challenge of low revenue collections, we are enhancing tax compliance efforts, coupled with getting additional resources through the tax amnesty. Further, we must all play our part by ensuring that we meet our tax obligations. Failure to do will attract punitive measures.
Mr. Speaker, following the lower than projected revenues during the first five months of 2017, the Government, will reduce and realign expenditures to meet its deficit target and fiscal consolidation objective. The Government will also hasten the implementation of the 2017 budget measures.
EXTERNAL AND DOMESTIC DEBT PERFORMANCE
Mr. Speaker, Zambia’s External debt stock as at end-May 2017 increased to US$7.2 billion from US$6.9 billion in December, 2016. The increase in the stock was on account of new disbursements. The domestic debt stock was K38.6 billion in May 2017 compared to K33 billion in December 2016. The rise is explained by increased demand for Government paper.
Sir, in order to ensure continued debt sustainability, Government has finalized a Medium Term Debt Strategy that provides a framework for prudent debt management. Further, regular debt sustainability analysis will be the guiding principle for future borrowing activities.
STOCK OF GOVERNMENT ARREARS
Mr. Speaker, as at end-March, 2017, the stock of Domestic arrears was K17.35 billion. In 2017 alone, the Government has paid out a total of K4.3 billion towards clearance of arrears.
Honourable Members, to address the arrears situation in a sustainable manner, Government has designed a time-specific arrears-dismantling strategy. The strategy also includes measures that will stop accumulation of new arrears.
Mr. Speaker, the Government will continue to implement structural reforms aimed at strengthening Public Finance Management to support fiscal prudence and address other structural challenges to stimulate inclusive growth. These include:
1. The full roll-out of the Integrated Financial Management Information System (IFMIS) and full implementation of the Treasury Single Account (TSA) by the end of 2017.
2. Full implementation of the e-voucher system under the Farmer Input Support Programme (FISP).
3. Revision of a number of laws including the Public Finance Act, a new Zambia Public Procurement Bill, review of the Loans and Guarantees (Authorization) Act and introduction of the Planning and Budgeting Bill to Parliament.
THE MEDIUM-TERM OUTLOOK
Mr. Speaker, as outlined in the Seventh National Development Plan, growth over the medium-term is forecast to rise to at least 5.0%. Growth will be mainly driven by the agriculture, energy, mining, construction and manufacturing sectors. The exchange rate stability will be sustained while inflation is projected to be within the target range of 6-8%.
Regarding the fiscal position, the Government will work towards fiscal sustainability and consolidation. This will create room for lending to the private sector, and stimulate increased economic activities.
Sir, overall, pressure on the external sector, is expected to continue in 2017 mainly attributed to the slow pick up in export earnings. However, the external sector is expected to rebound in the medium-term, largely driven by the expected increase in copper and non-traditional export earnings. Copper export earnings will mainly rebound on account on increased production while growth in non-traditional export earnings will be supported by Government’s diversification measures.
GOVERNMENT’S ENGAGEMENT WITH THE IMF
Mr. Speaker, the country has made tremendous social and economic progress. However, risks remain on the external side. Based on the need to support the external sector, increase market confidence, enhance investment flows and leverage more resources from cooperating partners, Government has engaged the IMF on a possible programme. In this regard, we hosted the IMF in discussions from 29th May to 10th June, 2017.
Mr. Speaker, during these meetings, the Government and the Fund agreed on remaining actions needed to reach staff-level agreement on a programme that could be supported under the IMF’s Extended Credit Facility. When the agreed required actions are implemented in the next few weeks, the Programme could be presented to the Board in August 2017.
Mr. Speaker, let me take this opportunity to emphasize the position with regard to where we are in our discussions. The major issues required to be addressed for us to proceed to conclusion mainly relate to higher than projected budget deficits, accumulation of arrears and an increase in debt levels.
As Members of the House may re-call, I did highlight key policy and structural measures aimed at mitigating these challenges, including reforms in energy and agriculture. Further, recognizing that the reforms might have adverse effects on vulnerable members of society, I did state that Government would scale up the social protection programmes. In addition to increased resources that Government has committed for the programme, our cooperating Partners have also augmented resources for social protection.
Mr. Speaker, in concluding, allow me to mention that the growth prospects that I have highlighted require the support of all Zambians from all walks of life. I therefore wish to urge us all to put the interest of Mother Zambia first, as we deliberate, including on the need for an IMF programme.
Further, I wish to indicate that Government will in a few months be presenting before this House the 2018 budget. I encourage all of our people to participate actively in the budget formulation process, in line with the nation’s values and principles. This will ensure that we lay the necessary foundation to sustain our financial needs largely using domestic resource mobilisation.
Mr. Speaker, I thank you.