Recent years have seen a decisive turnaround in the performance of the Zambian economy.

Economic growth has been higher and more stable than before, inflation hit the single digit range in 2006 and 2007 and would have stayed there had it not been for external factors, and the current account balance has improved.

Zambia has also, in some respects, weathered the global economic crisis better than many of its peers in Sub-Saharan Africa; thus, while growth in most countries in the region has slowed sharply in 2009, growth in Zambia has eased only marginally, if at all.


It is important to note that, while the revival of the mining sector following privatisation earlier in the decade has given a significant boost to the economy, the turnaround began earlier. With hindsight, it seems apparent that the wide ranging structural reforms during the 1990s, however painful at the time, laid the foundation for the turnaround.

During this decade, the pursuit of prudent economic policies, particularly through small budget deficits and limited domestic borrowing, has greatly enhanced the confidence of both domestic and foreign investors and created scope for significant private sector credit. One consequence has been the veritable boom in construction that has been a major driver of growth in the Zambian economy in recent years.


Zambia has aspirations to progress substantially toward the Millennium Development Goals by 2015 and become a middle-income country by 2030. In order to do so, the economic performance of recent years will need to be sustained and even improved.

While mining will undoubtedly continue to play an important role for a long time to come, macroeconomic stability and diversification of the economy are key ingredients in rapid and sustained growth over the long term. The Zambian government recognizes this and successive budgets have been geared toward this objective.


The exchange rate, both its level and stability, is one aspect of competitiveness. It is in this respect that the large increase in Zambia’s international reserves, including from the allocation of SDRs by the IMF, is welcome as it should lead to greater stability in the foreign exchange market.

However, the success of diversification will also depend on improvements in infrastructure, such as power generation, transportation, and telecommunications and in human capital, including through tertiary education. This will require significant government resources aimed at high priority investment and the social sectors.


Against this background, several trends on the fiscal front are cause for some concern. Overall tax revenue has been declining relative to the size of the economy, particularly in 2009, while at the same time there has been strong upward pressure on current spending, particularly for salaries and benefits of government workers. When combined with a significant contraction in project aid from donors, these trends have narrowed the scope available to government for spending on investment.


With prospects for donor aid likely to be influenced by the difficult economic and fiscal situation in most advanced countries, and the need to continue exercising caution in foreign borrowing, the government will need to finance a large share of investment and social sector spending from domestically-generated resources, in other words from tax revenue.


All sectors and sources of revenue must pitch in. The only source of tax revenue that has held up relative to GDP in recent years is the personal income tax, whereas the revenue yield from non-mining corporate income tax and all indirect taxes—VAT, excises, and customs duties—have fallen off.

While declining imports as a result of the depreciation of the Kwacha earlier in the year, account for some of the decline in import-related tax revenues this year, they do not explain the longer term trend. Restoring these revenue sources through the broadening of tax bases and the strengthening of tax collection efforts is essential in order to generate more resources for government.


Prospects for additional government revenue coming from the mining sector are favorable. The mining tax regime, with the three percent royalty rate and the variable profit tax already in place (not higher as I was misqouted as stating in news articles last week), should, over time, yield more revenue as carryover losses and investment allowances are exhausted, provided, of course, that copper prices stay reasonably high.


More revenue is not the only possible source of increased scope for government to spend on investment and the social sectors. Lower current spending is an additional option. In this regard, the wage bill stands out in that it takes up more than one half of domestically generated resources. Civil service and pay reform are key to the containment of the wage bill moving forward. Such reforms are not easy and will take time and political commitment. They are, however, essential.


Zambia, with its abundance of human and natural resources and tradition of political stability, has the potential for rapid and sustained growth in the years to come. The realization of this potential will require substantial investment in infrastructure and human capital. The resources for this will have to be mostly generated from domestic sources, namely through a stronger revenue collection effort and the effective prioritizing of spending.


Birgir Arnason is the IMF resident representative to Zambia.