Policy makers in commodity-exportingcountries have faced increasing challenges in the past twoyears, in the face of reduced demand from China anduncertain economic recovery in developed economies. Zambiais no exception. Falling copper prices and a power crisishave contributed to an economic slowdown. The effects of theslowdown could arguably have been counteracted in asustainable manner by utilizing fiscal buffers, but thisoption was not available, as Zambia did not make savings orprovide for stabilization measures when the economy wasprospering. Furthermore, options to access externalfinancing are limited, as Zambia’s debt levels have soaredin recent years following repeat non-concessional borrowing,making it more difficult and expensive to borrow frominternational debt markets. This policy note examinesZambia’s fiscal vulnerabilities and the costs associatedwith its expansionary, subsidy-oriented fiscal policy. Itthen sets out the benefits of coordinating fiscal policywith monetary policy in a way that is mutually reinforcingand beneficial to private sector investment, instead ofhaving the two pull in opposite directions, as is currentlythe case. Finally, it makes recommendations to help shiftthe fiscal position to a more sustainable path and in turnimprove market confidence and the prospects for sustainableeconomic recovery.
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