Pricewaterhouse Coopers (PwC) says the country is walking a tight rope with its huge debts, public sector wage bill and effects of climate change on the economy.

And PwC has noted that the country’s public sector wage bill is one of the highest in the world and detracts from the optimal use of scarce resources.

Finance minister Dr Bwalya Ng’andu on Friday presented a K106 billion 2020 national budget, the bulk of which will go towards debt servicing and emoluments for public workers.

In its National Budget Bulletin 2020 titled ‘Walking a tightrope’, PwC stated that Zambia is in a difficult position as it is confronted by both local and international factors that are challenging economic growth.

“With difficult options for successful resolution of the debt crisis, challenges of implementing effective austerity measures in the public sector, the growing impact of climate change, and ongoing trade wars and Eurozone uncertainties over Brexit all contributing to the ongoing challenges of achieving sustainable economic growth, we are walking a tightrope. To tackle the crippling debt burden, the Hon. Minister in his budget speech outlined the following key steps: Slowdown external debt contraction; b) Postpone or cancel some pipeline loans; c) Cease issuance of guarantees; and d) Refinancing existing loans. There is little information on how the Hon. Minister will implement the above measures. Of particular interest will be the manner in which existing loans will be refinanced. In essence, the Hon. Minister has the following key options: Mobilize concessional and semi-concessional sources of finance; b) Postpone and extend debt repayment with current bond managers; c) Entering into alternative bilateral debt and financing agreements with other sovereign nations to refinance the existing debt obligations; or d) Refinance existing debt with the issue of new Eurobonds,” PwC stated.

“The first option will inevitably require stricter austerity measures that meet required conditionality’s for concessional borrowing. Yields or interest on Eurobond debt in the first half of 2019 jumped to 19.8%, 19.2% and 16.5% from 14.1%, 14.3% and 13.3% for the USD 750m, USD 1bn and USD 1.25bn Eurobonds respectively. This suggests that any restructuring under the latter three options will not only be costly and but may be subject to terms which are detrimental to the long term national interest. The Hon. Minister faces an enormous task of maneuvering through this minefield.”

It stated that with the 2019 and 2020 mining tax regime changes, Zambia is at risk of ranking amongst the highest mining tax regimes in the world.

“Following the 2019 and 2020 mining tax changes, Zambia will rank as one of the highest mining tax regimes in the world. Rising energy costs from poor rainfall, lower ore grades and fears of nationalization have contributed to further decline in investment in the mining sector, resulting in reduced mineral production. Copper production in the first and second quarter of 2019 saw a decline of 9% against the last quarter of 2018 and it is expected to further decline by 12.8% by the end of the year according to the Zambia Chamber of Mines. In spite of the challenges faced in the current year, Zambia is a country whose mining industry has the potential to grow. The decision to maintain the VAT system in the proposed 2020 budget is commendable as it takes into account the varying concerns expressed by stakeholders. We encourage the government to continue to dialogue with the sector to foster increased investment and grow the impact that mining can have on the Zambian economy,” PwC stated in the bulletin.

And PwC further stated that the country’s huge public wage bill is stressing the depleted Treasury.

“The narrowing of the wage bill as a percentage of domestic revenues, whilst simultaneously increasing recruitment of frontline personnel assumes the rate of increase in domestic revenues will exceed the rate of increase in the public sector wage bill. The IMF has advised that Government should continue its efforts to identify ghost workers. The public sector wage bill in Zambia is one of the highest in the world. This, coupled with general low productivity, detracts from optimal use of scarce resources,” it stated.

“The 2019 -2021 Medium Term Expenditure Framework and 2019 Budget states that: expenditure on personal emoluments as a share of domestic revenues still remains high at 47.1 per cent in 2018, thereby, constraining other developmental expenditures. Therefore, over the medium-term, the Government will ensure that the public service wage bill, as a share of domestic revenues, is narrowed to not more than 40 per cent by 2021. This will be achieved by restricting recruitment to only front-line personnel and ensuring that annual wage adjustments are made in the context of the resource envelope. In this regard, a provision of K808.7 million has been allocated over the medium-term to cater for the recruitment of approximately 15,500 frontline personnel.”

It warned that the changes made to the Value Added Tax (VAT) have the potential to have the same effects as sales tax if not properly explained.

“We should highlight that the budget so far does not provide much guidance on what would constitute a consumable or stock in trade. We look forward to clarifications in the amendment Act or subsidiary legislation. As a result we can only speculate as to the definitions of these terms at this stage. In view of this our subsequent comments are based on general definitions of consumables. Based on the general definitions, where a business uses goods in its production process and these goods do not form part of the finished products, then the goods may be considered to be consumables. Taking the above into account, the measure may result in significant cost escalation businesses. For example, manufacturers of cement, detergent paste and lime use coal in processing their raw materials. As the coal does not form part of the final product, does it mean that it will be treated as a consumable? If the coal will be treated as a consumable, the effect may be similar to that of Sales Tax,” stated PwC.