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UPDATE 2-Zambia says budget deficit unsustainable, started IMF talks

* Zambia to conclude programme with IMF in April

* Spending $660 mln on fuel subsidies, power imports annually

* IMF says Zambia GDP grew 3 pct in 2015 vs 7 pct target (Adds IMF statement)

LUSAKA, March 18 (Reuters) - Zambia and the International Monetary Fund have begun talks on an aid program after agreeing that the country’s budget deficit was not sustainable, a senior Treasury official said on Friday.

The budget has come under strain as weak metal prices, electricity shortages and a slowing economy in resource-hungary China have hit growth in Africa’s second-biggest copper producer

The government hopes to conclude negotiations on an IMF programme during the lender’s annual meetings in April, against the background of the yawning budget deficit which widened to 8.1 percent of GDP in 2015 compared to a target of 6.9 percent.

“We are both of the view the current levels of the budget deficit are unsustainable, as it leads to increased future requirements for debt repayment,” Treasury secretary Fredson Yamba said at the end of an IMF mission to Zambia.

In February, Finance Minister Alexander Chikwanda had told parliament the 2016 budget deficit would be contained around 3.9 percent of GDP, as the government implemented austerity measures announced last year.

The IMF said in a statement at the end of its mission that the government’s finances were under immense stress, with expenditure running far above budget.

Fuel subsidies and contracted emergency electricity imports were estimated to cost Zambia about $660 million a year, the IMF said.

There was little scope to loosen monetary policy as long as fiscal imbalances are not addressed, it said.

“The authorities stressed that, notwithstanding the upcoming general elections, they are committed to addressing the budgetary pressures,” it said, referring to general elections in August.

Inflation had increased, expenditure pressures had risen, and financing conditions had tightened substantially, it said.

The IMF mission estimated that economic growth declined to about 3 percent in 2015 from a target of 7 percent.

The IMF called for measures to tackle the fiscal pressures to boost market confidence and pave the way for increased investment and growth, adding that “delays in implementing corrective measures will only worsen the situation, increase the adjustment cost and postpone the recovery.”

Yamba said on Friday the government was also undertaking key structural reforms, such gradually shifting to higher electricity tariffs and fuel pricing, to streamline expenses.

In the short term, Zambia faced multiple challenges such as tapering economic growth mainly due to lower mining and agricultural output, as well as an electricity shortage. (Editing by James Macharia and Toby Chopra)