Thursday, January 15, 2009

Zambia should speed up reforms, maintain taxes: IMF

By Shapi Shacinda, LUSAKA (Reuters), 13/01/2009

The IMF on Monday urged Zambia not to cut taxes amid pressure from copper mines to abolish controversial mining taxes introduced last year because of a need to increase spending on infrastructure development.

International Monetary Fund (IMF) resident representative in Zambia, Birgir Anarson, said the agreement between the Fund and Zambia reached in December was to increase spending in infrastructure development and to diversify the economy, while safeguarding macroeconomic stability.

"There would thus be no scope for increasing current expenditure as a proportion of total spending or for weakening the revenue effort through tax cuts," Anarson said at a meeting with senior government officials in the capital Lusaka.

Foreign owners of copper mines in Zambia have been piling pressure on the government to scrap a 25 percent windfall tax and 15 percent profit variable tax on taxable income above 8 percent, and also to reduce the 30 percent corporate tax to 25 percent.

Revenue is projected to decline by 0.5 percentage points of GDP (gross domestic product), reflecting lower mining tax revenue but higher trade related taxes," he said.

He added that expenditures were projected to rise by 0.6 percent of GDP, mainly because of higher domestically financed capital spending, current expenditure would be kept constant as a percentage of GDP.

Anarson said Zambia, which loosened monetary policy in 2008 to accommodate effects of the fuel and food prices shocks, "needs to stay firm enough" to keep inflation on the downward trend in the medium term.

He said Zambia should also slow reserve money growth and expand credit to the private sector to achieve lower inflation at targets of 10 percent in 2009 and 7.0 percent in 2010.

"In view of weak demand for government securities, the BoZ's (Bank of Zambia) net claims on government may have to rise substantially necessitating significant net sales of foreign exchange by the BoZ to contain excess liquidity," he added.

Anarson said the IMF aimed to conclude its first and second reviews of the Zambia economy under a $79.3 million poverty reduction growth facility (PRGF), a three-year IMF lending programme signed with Zambia last June, before the end of May 2009.

Zambia is expected to adopt a single account system at the Treasury and to implement an electricity strategy, which would enable the country to carry out reforms in the energy sector, including raising power electric tariffs as part of the Fund's lending programme, officials say.

Anarson said Zambia's efforts to maintain economic growth at higher levels would continue to be undermined by the external environment following the global financial crisis.

He said the structural reforms in telecommunications, energy, transport and agricultural sectors would have to be enhanced to mitigate these effects.