IMF in Zambia crisis talks

Zambia is increasingly relying on outside aid

The Zambian Government and the International Monetary Fund (IMF) have begun a week of talks, aimed at resolving a month-long stand-off over fiscal policy.

The IMF in June suspended a $100m (£63m) poverty-reduction credit after Zambia unveiled an unexpected and unexplained $125m budget deficit.

The Fund is concerned that Zambia's external position could become unsustainable, given its $6.8bn of foreign debt.

Without a reconciliation with the IMF, Zambia will find it hard to keep on terms with international lenders, many of which see the Fund as a benchmark.

Bitter fall-out

The extra expenditure in Zambia's budget will almost double its deficit - to 3% of gross domestic product, from the previous target of 1.55%.

The falling-out with the IMF is likely to make the deficit worse still, as Zambia becomes ever more estranged from its foreign lenders and donors.

The currency, the kwacha, is likely to be hit in turn by the increased demand for dollars to pay for imports.

Worst of all, some worry that the government will postpone or cancel crucial investment projects, thereby lowering Zambia's potential for future economic growth.

Compromise promised

The severe consequences of a prolonged break in relations make it likely that the IMF will come to terms this week.

The Fund is believed likely to agree to disburse at least some of the $100m.

For its part, the Zambian Government has shown itself willing to at least contemplate some spending cuts.

The government is currently standing firm in the face of strikes by civil servants and other public-sector workers who are demanding higher salaries.