Government’s huge domestic arrears owed to contractors and suppliers has put pressure on households and businesses and presents a risk for Zambia’s financial sector, says the International Monetary Fund (IMF).

And the IMF has projected that Zambia’s growth will slow from 3.7 per cent in 2018 to 2.3 per cent in 2019, lower than earlier envisages due to the impact of the drought.

In a statement following the conclusion of the Fund’s 2019 Article IV consultation to Zambia, IMF head of mission Mary Goodman observed that the Zambian government’s huge arrears had put pressure on ordinary households and businesses, a situation which left the country’s financial sector at risk.

Government’s domestic arrears owed to contractors and suppliers continued rising to unprecedented levels of K15.1 billion by the end of last year, up from K14.7 billion by the end of the third quarter of 2018, while external debt climbed to K10.05 billion as at December 31, 2018, compared to US $8.74 billion by the end of 2017.

“With the recent increase in yields on government paper and higher interest costs on foreign debt due to the depreciation of the kwacha, government spending in other areas is being squeezed, including on social programmes and transfers to local governments. The significant build-up in domestic expenditure arrears is weighing on households and businesses and presents a risk for the financial sector,” Goodman stated in an end-of-mission statement released, Tuesday.

She added that the Mission staff advised government to avoid contracting any new non-concessional debt to arrest further unnecessary build-up of arrears.

“To reduce risks, staff recommended a large up-front and sustained fiscal effort, including: avoiding contracting any new non-concessional debt, steps to raise revenues, halting the build-up of new arrears, and aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space,” she stated.

Goodman also observed that Zambia’s economic growth will weaken this year in response to the country’s drought conditions.

“Growth is projected to slow from 3.7 per cent in 2018 to 2.3 per cent in 2019, lower than earlier envisages due to the impact of the drought on agricultural production. Inflation is close to the Bank of Zambia’s upper-band and is projected to rise over the course of 2019. Reserves stood at 1.7 months of imports at end-March 2019,” stated Goodman, who, however, thanked the Zambian government for “frank and collaborative” discussions during the Mission’s country visit.

“The IMF mission wishes to express its gratitude to the authorities and other stakeholders for the openness and constructive discussions during its visit to Zambia. The mission will prepare a report of the Article IV consultation, which will be discussed by the IMF’s Executive Board in the coming months.”

The IMF staff team, led by Goodman, visited Zambia during April 16-30, 2019, to conduct the 2019 Article IV consultation as part of an ongoing process to help the country continue implementing a strong fiscal consolidation agenda ahead of a desired, much-needed, economic bailout package expected to be around US $1.3 billion to boost Zambia’s balance of payments.