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Republtc of zambta MII{ISTERIAL STATDMENT OII THE STATE OI.

THE ECONOMY BY HONOURAALE ALEXA]TDER B. CHIKWA.IIDA.

MP, MINISTER OF FII{ANCE MII{ISTRY OF FINA.

}ICE February,2016 INTRODUCTION 1.

Mr. Speaker, Honourabl€ members of the house, it is my inescapable duty that as Minister of Finece, I appraise the nation through this Aueust House on the peformance of our economy in 2015 including the outlook of the economy in 2016 and over the medium term.
ln my statement this afternoon, I highlight ou assssment of economic gros'th as well as developments in the fiscal, monetary and extemal B. Macroeconomlc Perlormance 2.

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Dtsttngubhed m€mbcrs, you will recal that when I presented the 2Ol5 budget, the broad specilic socio economic policy objectives included, achieving a real GDP growth rate of above 7.O percent; end yed irflation rate of no more than 7.0 percent and containing the lisca.l deficit within sustainable levels.
These objectives were premised on a favorable global and domestic economic environment.

You will further.ecall that in my June,2ors address to this house, these prospects were downcast with glowth expected at around 5 percent owing to concems emanating from ea:temai and domestic developments.

M!.

speaker slr, may I now prcceed with the specific economic hishlishts.

2 Real GDP Growth 5.

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SL, preliminary estimates indicate that the economy grew by 3.5 percent in 2015.
This leflects the genemlly slow globat growth which has da.rnpened demand and indeed prices of many commodities includiDg copper.

In addition, adverse weather conditions dd rhe electricity deficits afected output across the different sectors.

The agriculture sector contracted by about 8.3 percent while mining sector output substantialy slowed dom growing only by 1.5 Percent.
However, positive gro&th was registered in the constlucUon, transport md communications; and the Manufacturing is eryected to grow at around 3.7 In 2016, the €conomy percent against the budeet projection of around 7 percent The lower thm exQected outtum is on account of the er,?ected continuation of adve.se weather conditions, persistent electriciry deficit and the chalenges associated with the mining sector, vhich have their origins in depressed conmodity prices, itself a consequence of a potous elobar 7.
Mt.

speaker, the Govemment has ta.ken stock of the economic challenges that we have faced as a countrv in 20 15 as vell..s in 2016.

In this regad, government has this vear L 9. taken measures to increase the resilience of the economy to boih extemal and domestic shocks.
In the agriculture sector, efforts have been stepped up io developing irrigation fac ities and diveGirying the sector away from maize production through the introduction of the In the mining sector, the mineral royalty regime has been redesigned in oider to ensure that op€rations of the mining companies a-re sustained and jobs are secured, while at the same time minimizing the impact on the fiscat position.

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Govemment will also continue rolling out economic infrastruch-re particularly, in the transport and energ,.

sectors to underpin growth dd emplolment creation this year and beyond.

ln the energr s€ctor, the coming on strean of additional power fiom Sreenfield projects is *pected to support higher gro{d prospects.

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As a result, Honourable members, over the mediun term , growth is er\T'ected to improve to an average of5 perc€nt.
This is further premised stable macloeconomic envilonment, improvement in the weather conditions, stabilisation of commodity p ces on the international market and increased electricity generation.

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Distinguished members, it is the rcsolve of Government to contiDue with policies and strategies that will furiher consolidate the diversificaiion of our economy, alxd in the process ensure resilience to any adve.se external developments, such as those experienced in 20 1 5. c. Fiscal Dewelopments 13.
Mr. Speaker, budget implementation in 2015 was fa.ced with chalenges attributed to shordalls in both revenues and grants coupled with expenditure pressutes.

Govemment raised a total oI K34.1 bilion in revenues and erants.

Agarnst the budget target oI K35.4 bi ion, this reptesents a 4 O percent underpeforma-nce on account ol lo\r€r colections under customs duty s well as mineral royalties 14.
Customs and excise duty was below target by 26 percent due to reduced import volumes whilst mineral royalty conections underperforrned by 37.O percent due to the reduction in th€ ls.

Total expenditure amounted to K51.26 bi ion and was 10 percent above the target of K46-6 billion.
This outtum was on account of uforeseen expenditures related to importation of emereency power, higher expenditures on lan inputs and grain purchase by the food Resewe Agency (FRA) bevond what was provided for in the Budget Fuel subsidies werc also higher on account of the Kwacha depreciation.

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The depreciation of the Kwacha 31so impacted negativelv on constitutional palments such as debt seFicing and maintenance of missions abload.
Further, due to tightened monetary conditions interest rates went up resulting in higher payments on domestic debt.

-17. slr, due to the mismatch in revenues and er.

?enditures, the fiscal deficit in 2015 was 8 1 percent of GDP, higher than the revised projection of6.9 percent ofGDP in June, 2015 18.

Mr. Spea.ker, Govemment is confrdent that the 2016 budget deficit will be contained around 3-9 perent of GDP.
This is premised on the implementation of liscal consolidation and sustainabiliry measures that were artounced by His Excelency the President in November, 2015.

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For the medium term, the Govemmeat will reduce the deficit to an averaSe of 3.0 perceDt of GDP- This wir1 be firmlv dchored on continued re alisiment of expenditures to priodty areas such as innastructure, maintaining the policv ofrealigning subsidies a.rld, improved public service delivery' 20.
The Govemment has also commenced the operations of the Treasury Single Account ITSA) which is expected to contribute to improved fiscal management, entlance implementation of monetary policv and end the vice of Govemment borrowing its own filnds as a result of Govertnert's subst ntial unspcnt bolances in the Commercial Banks ) 21 Further, the tightened controls on the budget as result ofthe enactment of the new constihrtion will ensure that budeeting is reatistic and mis-application offunds is curbed Debt and Debt awtatnability 22.
Mr. sp€aker, debt sustanrabilitv remains a kev objective for the Govemment.

I wish to infom this hbuse that despite the sharp depleciation of the Kwacha, Zambia's debt ratlos r€main within intemationally acceptable thresholds 23.

Zambits extemal debt as at end-Dec€mber, 201s stood at US $6.4 billion.
This represents 38.7 percent of GDP below the intemationaly accepted threshold of 40 percent When domestic debt is inctuded, the ratio of total public debt to GDP is 52.7 percent which is below the intemational threshold of 56 percent 24.

Sn, that said, excesses and euphoria in tems of bolrowins will continue to be discouraged.

To this end, borrowing wilr continue to be [mited to sectors that underwrite future growth.
The Governoent will also continue to undelta&e pedodic Debt Sustainabili8 Analysis (DSA) to establish the sustainability of the counby's debt arld the public will continue be informed on the debt situation in line with the provisions of the amended constituuon.

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Mr. Speaker, in Iine with the requirements of the constitution, I will in due course be rcquesting this August house to re alisn the debt ceilings on domestic and q<ternal loans as well as contingent liabilities This measure is aimed at ensuring that we mobilise adequate resources to attair our ambitious growth and poverg reduction objectives.

D. Monetary and E*terral sectot Dewelopmeats Irnatbn 26.

Mr.

speake!, as earlier indicated, we set an iniation taleet ol 7.O percent for 2015.
As at end December 2or5, the inflation ra.te was recorded at 2 1 .

I Percent 27.

The higher infiation was mainly a result of the pass through effects of the shdp dept€ciation of the Kwacha in the third quarter oI 20 L S coupled with the high production costs which were induced by power rationi4g.

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Honoulable members, inflauon is pxpecred to remain high particularly during the tust half of this year, but will decline sharply from the third quaiter.
We project that inllation will ctose the year at aJound 15 percent.

Over the medium terrrl, we expect inflation to retum to single digit levels as the exchange rate stabitizes, fiscal delicit reduces dd the pover situa.tion improves Exchange Rate 29- Mr. Speaker sir, lesarding th€ exchange .ate, the bias for the iarger part of 2015 was towards depreciation.

For instance, the Kwacha depreciated by 24 percent and 20 percent in September dd October, 2015, respectively.
ln response, the Bank of Zambia tightened monetary policy altd sold foreign excha.nge to the market that led to relative stability ofthe currency obsened since Novembet,2015.

This was complimented by the Trcasury that increased its operational liaison with the Cental Bok and begun to operationalize the Treasury Single Account (TSA) to facilitate effective cash flow manaAement.

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As a result, the Kwacha appreciated against the US Dolld by 8.6 peicent to K10.98 in December, 20l5 from Kl3.7 at end September, 2015.

The Kwacha also firmed up against other major trading partner cunencies and has dffendy stabilised dound K11.3 per US Dolar.

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Governnent wil continue to ensure stability of the alcheAe rate by using appropriate liscal and monetary instruments while maintaining a fine balance between the use of these instuments arld gto\rth objectives.
Itrterest Rate Developmcrts 32.

Mr.

Speake!, consistent with a rise in inflation nte, interest rates have remained relatively high during 20 I 5.

Commercial Bdk average nominal lending rate rose to 23.9 percent at end-December, 20 15 from 20.5 percent i4 December,2014, reflecLinS Lhe Light moneLarJ policy stance padiculdly in Lhe last quarter of 2015.

Gove.ment however, remains comitted to ease liquidity conditions in the financial sector once stabfity in the exchdge rate has been sustained.
Balarce of Paym€nt!

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Mr. Speaker, in 2015, the balance of payment position detedorated with the current account posting a deficit.

The financial account, however, registered a surplus mair y on account of increased finmcial inflows associated with the l0 issuance of the third Eurobond while the capita.l account balance reduced folowins a deciine in project gra.nts inflows.
34- As at end ofDecember 2015, M overall batance of pal,ments deficit of US$ 432.3 million was recorded compared to E surplus of US$321.6 million registered in 20l4.This outturn was mainly on account of the a delicit in the cur€nt account balance which in tum was explained by Iower copper and reduced non traditional er?ort eamings.

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As at end December 2015, the current account deficit w6 US$767.7 million compaied ,o r surpLus o{ US$ 5a1.2 million in 2014.
This was mainly on account of a dencit in the trade balance of US $ 74.3 oillion from a surplus of US $1,625.4 million in 2014, folowing a sha-rp decrease in exports of both tradrlronal dd non traditional erporrs Foreign Direct Inv€stmert Flows 36.

Mr. Speaker, investor confidence continued to be strong in 2oL5 evidenced by continued dse in FDI inflo{rs.

As at end- December,2015, FDI inflows were US $1,542.7 million,6.3 percent higher than in 2014.
It is worth noting that the investments covered go$'tn sectors such as agricultue, tourism, minins dd manufacturing.

lt Forelgn Reserveg 37- str, foreign reserwes at end 2Ol5 were US $2.94 bilion comp{red to US $ 3.01 bilion at the cnd of 2014.

This translates to 3.7 months of import cover and in ]ine with the SADC converaence target.

The goal is to attain 4 months of import cover in the medium-term and 6 months rhereaJter.

E Other Ecoromtc Matterc Relatloas with ttre IMI.

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Mr.
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Mr.

Speake!, Govemment continues to enjoy good relations with the lntemational Monetary Fund (IMF).

Folowing the expiry of the last programme in June 20 1 1 , the Govenment has been interacting with the Fund through staJlda-rd surveillance under the provisions ol Article a of the Fund's govemins laws.

The last review we had with the Fund was November, 2015- 39.
I wish to inform this August House that Cabinet at its meeting held on 15rh February, 2016 approved ihat Govemment eneages the IMF on an economlc programme within 2016.

An IMF team is ex?ected in March, 2016 to commence discussions in this regard.

The mddate of the IMF is to assist member countries iD the balance of palmeats.

A1l member countries have a right to seek recourse to IMF assistdce on terms that are mutually agreed Mtnnrg secto!

chaUeng€s 40.
chaUeng€s 40.

SA, the challenges cutently being faced in the mining sector transcend social dd economic dlinamics in the areas wherc the mining companies operate.

closing of any mining operation has the potential of disrupting the core economic and sociai structures of the country.

Therefore, the linkages between minine and other sectors should not be down played.

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In recognizing this fact and as I aluded to eariier, Govemment has taten a bold step to ensure continuation of minins activities and rimit the disruption such as loss of emplo]'ment and the potential indease in poverty levels.

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I will therefo.e, present to this sitting of pd]iment ,a realignment of the fiscal legime for the mining sector which will eDable the mining companies to be aioat in boom e'ld burst periods.
I therefore cafl upon honourable memberc on both sides of the house to tully support the measures.

For a while, mines will contiDue to be the single most significant ll gowth engiDe of our economy.

Supporting the mining sector is therefore d essential requirement- 43.

Mr.

Speake!, as I coDclude, l€t me indicate that covemment will continue with inclusive grollth md job creating strategies through ensuring macroeconomic stabiliry that suppods both local md foreign dnect investment.
Furthe!, Govemm€nt will continuc to pay particular attention to diversification ofthe economy and support to SMES, aJld will encourage as it has been in the past, effective and reguld engagement with investors and the private sector.

This wiu ensure mutual benefits al)d equity for both the country and 44.

Difficulties experienced in the slobal economy will continue for a foreseeable tuture.
The only way we can insulate our country against externally induced shocks is to ultilise the unmatched compdative advantage in areas like agriculture and the enerry sectors.

This mems hard work and strearrnined thinking for it cannot be business as usual Mr, Speaker, r thank you