# **INTRODUCTION and CONTEXT**

The Republic of Zambia is a resource-rich country with massive mineral endowments (especially copper)<sup>4</sup> , agricultural potential, and increasingly reliant on construction and other services as a share of its GDP. The country is geographically large but relatively sparsely populated, with a rapidly growing population (approximately 15.7 million people) (CSO 2016).

In the past decade, Zambia has built on all these factors to experience robust growth. In the 2000s, after 25 years of decline, per capita incomes improved considerably. In 2011 Zambia returned to lower middleincome status. Between 2004 and 2014, it recorded impressive economic growth, which averaged 7.6 percent (Smith and others 2016), while Sub-Saharan Africa (SSA) was averaging 5.8 percent (WDI, various years). Between 2004 and 2014, with population growth averaging close to 3.0 percent per annum, Zambia’s real GDP per capita growth averaged 4.6 percent. During the 25 years, its per capita incomes improved considerably, moving from US$925 in 1996 to $1,619 (2010 prices) in 2015 (Bhorat and others 2016).

Nevertheless, growth has not brought commensurate improvements in living standards, especially in rural areas. In 2015 almost 55 percent of the population was living below the national poverty line (Central Statistical Office 2016). In rural areas, home to the majority of Zambians, the 2015 poverty headcount ratio exceeded 75 percent. Meanwhile, inequality (as measured by the Gini coefficient of consumption per capita) in 2015 was 0.56—one of the highest rates globally. This level of inequality represents a significant increase since 2010, when the Gini coefficient in Zambia hovered at approximately 0.52.

Against this background of relatively solid economic growth but with entrenched poverty and inequality, fiscal policy can directly impact poverty and inequality. This can happen both through the government’s overall fiscal position – for instance, loose fiscal policy leads to macroeconomic instability which could lead to higher inflation: the worst tax on the poor– and through the distributional implications of tax policy and public spending. Experience shows that public spending that is targeted for poor or vulnerable households may achieve a broader distribution of the benefits of economic growth. For instance, taxes and transfers have played a significant redistributive role in rich countries and have somewhat attenuated high inequality (Ravallion 2017).

Poverty reduction policy in Zambia is slowly becoming less growth centered. Previous poverty reduction policy in Zambia focused on economic growth. Policy makers had shared the view that direct transfer spending could lead to entitlements and dependency. Noting the limited impact of growth alone, over the last decade, the government started rolling out unconditional cash transfers via safety net programs as well as farming input subsidies to smallholders. The government recently also moved toward withdrawing fuel and electricity subsidies to address current fiscal imbalances while creating fiscal space for capital spending, addressing large payment arrears, and possibly increasing resources toward social safety net programs. While allocating public resources, identifying fiscal interventions to help reduce poverty increasingly has become a concern of the government.

The government’s current fiscal objectives are to address imbalances, including reducing public debt levels and payment arrears to sustainable levels; and to improve macroeconomic stability. In the energy sector, reforms will include removing subsidies by moving to full cost-recovery pricing while maintaining the lifeline to protect the low-income sectors of the population. For electricity, tariff adjustments are expected to reduce the budgetary burden of public electricity production, distribution, and subsidization; and attract private investment to boost power supply. For fuel, the government has eliminated subsidies by moving to full cost recovery. Future fuel prices will adjust to align with the cost of future fuel supplies (primarily

> 4 In 2015 Zambia was the second largest copper producer in SSA and the ninth largest in the world.

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