The Zambian economy has performed well in recent years. This reflects strengthened macroeconomic policies, a favorable external environment, and extensive debt relief. Growth picked up further in 2006 and inflation has been held in check. The revival of the mining sector and high copper prices have contributed to a marked improvement in the trade balance and a steep appreciation of the currency.
The exchange rate and domestic economic and financial policies are consistent with external stability. The exchange rate is currently aligned with economic fundamentals, including the large improvement in the terms of trade.
Despite the favorable economic performance, budget execution and liquidity management have been problematic. Poor execution of the 2007 budget risks an excess of liquidity late in the year. That would complicate the conduct of monetary policy, which needs to hold firm to avoid an upsurge in inflation. The recent lowering of the statutory reserve requirements could further increase short-term pressure on monetary policy. The authorities believe that some of the budgetary releases already made will remain unspent, as it will not be possible to implement all of the planned projects. Furthermore, to ease the burden on monetary policy, releases for the last part of the year will be kept below planned levels in nonpriority areas. The authorities stressed that they were prepared to take whatever action needed to achieve the objectives of the monetary program.
To foster economic diversification, further raise growth, and enhance income opportunities for the poor, Zambia will need to address several medium-term policy
challenges. These include creating fiscal space for increased spending on infrastructure and the social sectors; strengthening the capacity to undertake an expansion in public investments; managing the macroeconomic effects of high foreign exchange inflows; and further improving the conditions for private sector growth.
Addressing these challenges will require better budget planning and execution, closer coordination between fiscal and monetary policy, and enhancing the competitiveness of the non-mining export and import-competing sectors. A secure and efficient supply of energy will be critical to ensure that economic growth is not stifled by energy shortages and high costs.