The IMF published a press statement last night following the conclusion of the long-awaited staff mission to conduct the 2019 Article IV consultation.
The statement notes the (still) difficult economic situation, with large fiscal deficits, rising debt service and pubic debt, the accumulation of domestic reserves, and low reserve coverage. Staff expect real GDP growth to slow to 2.3% this year, from 3.7% in 2018, due to weaker agricultural production caused by drought, although it does suggest medium-term growth prospects are brighter. Inflation, which is close to the upper band of the central bank's inflation target, is projected to rise over the course of 2019.
Crucially, the IMF projects that the 2018 fiscal deficit reached 10% of GDP (commitment basis, including arrears) and that public debt rose to 73.1% of GDP (PPG basis, including domestic arrears). Reserves, however, stood at just 1.7 months of imports at end-March 2019.
In terms of policy advice, staff recommended a large up-front and sustained fiscal effort. This should include avoiding contracting any new non-concessional debt, revenue raising measures, preventing the build-up of new arrears, and aligning the pace of public investment with available fiscal space.
Staff did, however, welcome new legislation on various aspects of PFM, including budgetary planning and granting of loans and guarantees.
We make two observations:
- Despite reporting the dire fiscal situation, there is no mention in the statement that the authorities either recognise the position or intend to do anything about it. The statement notes a "frank and collaborative" discussion, but there is no mention of the authorities' policy response or their view on the Fund's policy advice. Our sense of policy drift since the 2017 Article IV was completed in October 2017 continues. Of course, more details may be available in due course, along with the authorities' view and policy intentions, and upon the board approval of the Article IV.
- There is no mention of appetite for, and discussion of, a Fund programme or renewing programme discussions. Given the context, this may not be surprising as the mission was specifically an Article IV mission not a programme discussion. But this was an opportunity for the authorities to refresh their appetite for a programme (as did, for instance, Tajikistan in the staff's 2017 Article IV mission in May 2017). IMF programme discussions were put on ice following the 2017 Article IV and despite occasional words of reassurance from the ministry of finance, it seems we’re no nearer now than we were then (the inference being obvious: that the government is currently unable or unwilling to implement the adjustment necessary and produce fiscal and borrowing plans consistent with the IMF DSA). We expect the IMF will have to update its DSA in the Article IV, but the headline numbers reported in this press statement confirm our view that as time has passed, and policy has drifted, the starting point for any programme discussion – assuming the authorities still want one – is worse now than it was two years ago, and so the policy effort required is now even greater.
The Article IV is expected to go to the board in coming months.
Our recommendation remains a Sell, as it has been for some time. The recent fall in bond prices now reflect the lack of progress on the programme discussions.
Chart 1: Price of Zambia 27s (US$)