February 1, 2023

IMF approves fresh $1.3 billion loan for Zambia to be disbursed within 38 months with immediate release of $185 million

Managing Director Kristalina Georgieva participates in an afternoon meet-and-greet with young professionals at the International Monetary Fund.

IMF Photo/Cory Hancock
7 July 2022
Washington, DC, United States
Photo ref: CH220707016.arw
Managing Director Kristalina Georgieva participates in an afternoon meet-and-greet with young professionals at the International Monetary Fund. IMF Photo/Cory Hancock 7 July 2022 Washington, DC, United States Photo ref: CH220707016.arw

The executive board of the International Monetary Fund (IMF) on August 31, 2022, approved a fresh $1.3 billion loan for Zambia to be disbursed within 38 months under an arrangement known as an Extended Credit Facility (ECF). The decision enables an immediate payment of $185 million.

Zambia will start paying back its loan in  2028, about 5.5 years from now, with the last installment in 2032, about 10 years from now. According to the IMF, financing under the ECF carries a zero interest rate with a grace period of 5½ years, and a final maturity of 10 years.

The IMF reviews the level of interest rates for concessional facilities under the Poverty Reduction and Growth Trust (PRGT) – a Trust Fund to provide concessional support to low income countries – every two years based on the PRGT interest rate mechanism, with the next review expected to be completed no later than end-July 2023.

In a statement, the IMF said that the new loan is based on “Zambia’s homegrown economic reform plan that aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth.”

“Zambia is dealing with the legacy of years of economic mismanagement, with an especially inefficient public investment drive. Growth has been too low to reduce rates of poverty, inequality, and malnutrition that are amongst the highest in the world. Zambia is in debt distress and needs a deep and comprehensive debt treatment to place public debt on a sustainable path,” IMF wrote in a statement, adding that the ECF-supported program will help “reestablish sustainability through fiscal adjustment and debt restructuring, create fiscal space for social spending to cushion the burden of adjustment, and strengthen economic governance, including by improving public financial management.”

It added that the program “will also catalyze much needed financial support from development partners.

Following the Executive Board discussion on Zambia, Ms. Kristalina Georgieva, Managing Director of the IMF said that “Zambia continues to face profound challenges reflected in high poverty levels and low growth. The ECF-supported program aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth.”

She added, “Restoring fiscal sustainability will require a sustained fiscal adjustment. The authorities’ adjustment plans appropriately focus on eliminating regressive fuel subsidies, enhancing the efficiency of the agricultural subsidy program, and reducing inefficient public investment. Domestic revenue mobilization also needs to support the medium-term adjustment. The adjustment creates fiscal space for increased social spending to cushion the burden on the most vulnerable, help reduce poverty, and to invest in Zambia’s people. The ongoing expansion of the authorities’ Social Cash Transfer program and their plans to increase public spending on health and education are particularly welcome. Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt treatment under the G20 Common Framework to restore debt sustainability.

“A substantial strengthening of fiscal controls is needed to support the fiscal adjustment, as well as address governance and corruption vulnerabilities. Public investment management and procurement practices need to be strengthened to ensure transparency and the efficient use of scarce resources. It will also be important to bolster the framework for monitoring fiscal risks, particularly those related to large state-owned enterprises.

“The Bank of Zambia should continue its efforts to reduce inflation and preserve financial stability. International reserves should be replenished as conditions allow and the exchange rate should continue to reflect market conditions. Addressing high NPL levels and ensuring adequate capital buffers will also be important.”

You can read below questions and answers about the new loan to Zambia under the ECF as provided by the IMF

What are the goals of Zambia’s Extended Credit Facility (ECF) program?

The 38-month, $1.3 billion ECF-supported program is based on the Zambian authorities’ homegrown economic reform plan. It aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth by addressing Zambia’s most pressing macroeconomic challenges, namely:

(i) restoring sustainability through fiscal adjustment and debt restructuring;

(ii) creating room in the budget for much-needed social spending; and

(iii) strengthening governance and reducing the risk of corruption, including by improving public financial management.

How will the program protect society’s most vulnerable? Will the delivery of key social programs like free education be impacted?

A key objective of the authorities’ reform program, supported by the Fund, is to gradually increase the level and quality of social spending to reduce poverty and inequality, as well as improve access to basic social services, especially in rural areas.

Spending on social protection is projected to more than double from 0.7 percent of GDP in 2020 to 1.6 percent by 2025 (around the average for sub-Saharan African countries). Measures to support the most vulnerable include increasing the number of recipients of the Social Cash Transfer to 994,000—an almost 50 percent increase over 2019 recipients—and the monthly benefit increased from 90 to 110 kwacha, with World Bank support. Other social protection programs are also being expanded:  including programs to mitigate food security risks, keep girls in school, and help provide meals for students in schools.

The Fund-supported program incorporates providing access to free education for all and a much-needed increase in spending on health and education, including hiring over 41,000 additional health and education workers.

How will the program promote transparency and help fight corruption?

Strengthening governance and reducing the risk of corruption, including by improving public financial management are critical to addressing the root causes of the debt crisis faced by Zambia. The authorities have emphasized a zero-tolerance approach to corruption. At their request, a comprehensive IMF-staff supported governance diagnostic assessment was launched in January 2022 to identify the main governance weaknesses and risks of corruption, as well as specific measures to address them. A final report will be published by the end of the year.

At the same time, with support from Fund capacity development, the authorities are strengthening accountability and transparency, particularly around the use of public resources. This includes a new debt management bill, new public procurement regulations, strengthened commitment controls of budget resources, and additional transparency in the agricultural input subsidy program.

What actions are being taken to restore debt sustainability?

The authorities are undertaking a sustained fiscal adjustment by reducing inefficient spending and raising domestic revenues. It is anchored on cutting back inefficient public investment, eliminating regressive fuel subsidies, and reforming the agricultural subsidy program by reducing  procurement costs. The domestic revenue mobilization strategy is anchored on policy changes to increase revenues from corporate income tax, VAT, and excises as well as improvements in tax administration.

Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt treatment under the G20 Common Framework to place public debt on a sustainable path in the medium-term. Significant improvements in debt management and transparency are also being implemented.

What are the next steps in the debt restructuring process?

The next step is for the Official Creditor Committee for Zambia, under the G20 Common Framework, to agree with the authorities the specific modalities of how official creditors intend to deliver debt relief consistent with Fund-program parameters in the form of a Memorandum of Understanding (MoU). The authorities are aiming to complete discussions on the MoU by the end of 2022.

The MoU will include the following key parameters; “at least (i) the changes in nominal debt service over the IMF program period; (ii) where applicable, the debt reduction in net present value terms; and (iii) the extension of the duration of the treated claims.”

In parallel, Zambia will initiate specific discussions with private creditors on how comparability of treatment, a requirement of the Common Framework that will be further described in the MoU, might be achieved. Official bilateral creditors will then implement the MoU through bilateral agreements signed with Zambia while agreements in principle reached with private creditors will also be implemented through various modalities.


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