"There will be progressive removal of subsidies and the government is drawing up plans to significantly reduce subsidies on electricity, fuel and fertiliser,"
A ratings downgrade by Moody's would have little impact on Zambia as it was already negotiating a programme with the International Monetary Fund (IMF), officials and analysts said.
Moody's downgraded the southern African nation's long-term issuer rating to B3 from B2 late on Tuesday and changed the outlook to negative from stable, due to anticipated fiscal slippages in 2016 and prospects of further debt deterioration.
Presidential spokesman Amos Chanda said Zambia’s budget deficit would not worsen because of austerity measures.
"There will be progressive removal of subsidies and the government is drawing up plans to significantly reduce subsidies on electricity, fuel and fertiliser," Chanda told Reuters.
The kwacha weakened 1.5 percent to 9.3900 per dollar, as sentiment for commodity-linked currencies waned with copper prices backtracking after a 3-week rally as well as a dent to broader investor confidence after Moody's downgrade.
"In essence, it means that there are few alternatives open to the sovereign other than to adopt the policy prescriptions of the Fund," Standard Chartered Bank Africa chief economist Razia Khan said in response to an email from Reuters.
"The downgrade nonetheless serves as a reminder of the many challenges that Zambia faces."
Zambia and the IMF began talks in March on an aid programme after agreeing that the country's budget deficit was not sustainable.
Moody's said Zambia was likely to face liquidity pressures and find it difficult to finance the budget deficit.
In February, Finance Minister Alexander Chikwanda had told parliament the 2016 budget deficit would be contained at around 3.9 percent of GDP.
Zambia's economy is expected to grow at 3.7 percent in 2016, up from 3.6 percent last year, due to shrinking demand of its main export copper, the central bank said in February.
Moody's said Zambia's debt could exceed 60 percent of GDP by 2018.
University of Zambia analyst Chrispin Mphuka said the debt issue would be addressed by the IMF programme which is expected to kick in after general elections in August.
"Once the IMF programme is in place, there will be measures to control the debt and it is unlikely to get to the levels that Moody's is projecting now," Mphuka told Reuters.