Country Report Zambia April 2010

Economic performance: The IMF is optimistic about the economy's prospects

An IMF delegation visited Zambia at the end of February to hold discussions on the fourth review of the country's performance under the extended credit facility (ECF) arrangement (formerly known as the poverty reduction and growth facility). At the conclusion of its mission the Fund issued a statement commending the government's management of the economy and expressing optimism about the economy's medium-term prospects. It endorsed the govern-ment's management of fiscal policy in 2009 and its use of greater domestic financing to compensate for the decline in tax collection to ensure that capital expenditure projects were implemented as planned. The Fund noted that the key medium-term policy challenge would be to create greater fiscal space both by raising domestic tax revenue collection-including from the mining sector-and by improving the efficiency of government spending, in particular through keeping the wage bill in check and avoiding fuel subsidies. This is essential if the government is to raise capital spending-and therefore the investment rate-which will be a critical determinant of the economy's longer-term performance.

Gross fixed investment
(% of GDP)
South Africa20.222.520.6
Source: Economist Intelligence Unit.

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The Fund's explicit mention of the mining sector in this context is potentially significant given the recent controversy surrounding Zambia's mining tax regime. In April 2008 the government increased certain aspects of the mining tax regime. This met with considerable opposition from mining firms, as the new structure was inconsistent with the development agreements that these firms had previously signed with the government (April 2008, Economic Policy). Although one component of the new tax regime-a windfall tax-was abolished in 2009 in response to the drop in copper prices (February 2009, Economic policy), the other elements of the new regime were retained, and the recent surge in copper prices has made it increasingly unlikely that they will be retracted (March 2010, Economic performance). The IMF's statement could be interpreted as an endorsement of the current tax regime, further reducing the likelihood that the 2008 tax increases will be retracted. The Fund expects buoyant economic growth over the medium term, underpinned by strong international copper prices.

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