What will next year hold? Making predictions can make a fool of any of us. But, as the dust settles on the 2020 budget which sets the country’s economic direction for the year ahead, we draw out some key lessons on growth, taxes, government spending and, of course, the country’s debt.
The budget seeks to address pressing economic issues such as debt through dismantling arrears, operationalizing the sinking fund and slowing down debt contraction. However, it is an expansionary budget, which increases spending, including social protection, as well as defense and public order. Funded by increasing revenue by K16bn and new borrowing of K31bn. This is in the face of growing debt obligations, which have increased by 43% and will take up 47% of all revenue. Such an ambitious budget poses a severe risk to budget execution. This budget has the same expansionary position as last year and we tried to see how it will be executed next year – and how citizens and businesses will be impacted. This year, debt payments have been overbudget by 22%, which has squeezed other recurrent expenditure such as wages, education, health and social protection and led to a 25% increase in arrears to the private sector.
Furthermore, gross international reserves declined to US$ 1.4 billion at end-July 2019 from US$ 1.6 billion at end December 2018. The reduction in reserves was mainly attributed to external debt service payments. The external debt stock as at end-June 2019 increased to US$ 10.23 billion from US$ 10.05 billion at the close of 2018. On a positive note, the rate of debt accumulation at 1.9% was lower than the 7.6% recorded in the corresponding period in 2018. We however see the IMF as a silver lining. The IMF can provide balance of payment support to ease debt repayment costs. This can free up fiscal space and ensure the protection of social spending and as such we welcome the reengagement of the IMF, which will be visiting Zambia this month.
The budget speech showed that Zambia is in a difficult trade position. Export earnings, at US$ 4.0 billion, were 14.7% lower than US$ 4.6 billion realized over the same period in 2018. Copper export earnings declined by 22.0% to US$ 2.8 billion from US$ 3.5 billion, following a decline in both export volumes and copper prices. On a brighter note, non-traditional export earnings increased by 17.2% to US$ 1.1 billion from US$ 911 million over the first half of 2018.
Revenue Generation Analysis
Key Tax Measures
The decision to reverse sales tax was positive. Experts from business, think tanks and civil society had identified that the risks to inflation and jobs during a difficult time for the economy were untenable. The government has listened to stakeholder concerns and has rightly chosen a path to reform VAT to manage refunds and improve compliance. Now is the time to broker consensus between government and business to ensure that Zambia can enjoy higher revenue without hitting growth.
The national budget has a number of tax generating measures as well as tax compensating measures to offer tax relief in various sectors. For such an ambitious budget we are however concerned if the revenue measures will be sufficient to raise K106 billion.
If the proposed revenue generation measures do not achieve the desired domestic revenue mobilization and this means that the government again will have to rely on income taxes such as personal income tax that can burden Zambians. The budget also proposes tax concession measures which include reduction of the Withholding Tax (WHT) rate on interest payment on government securities to non-residents from 20% to 15%, proposal to exempt from WHT, interest payable to local banks and financial institutions who hold a banking OR financial institution’s license, suspension of duty on selected aqua culture equipment for three years on selected aqua culture equipment and lastly suspension of import duty on the importation of machinery for processing of solid waste for three years. These measures are intended to boost strategic sectors such as agriculture and the financial sector and attract foreign direct investments.
Expenditure Analysis – Priority sectors
We analyzed the 2020 budget in relation to priority sectors which we have particular interest in namely health, education, social protection, agriculture, water and sanitation and energy.
The health sector allocation falls far below the 15% Abuja Declaration. For the three-year period there has been a steady increase in terms of absolute value from K 6.8 billon (2018) to K 8.1 billion (2019) to K9.4 billion (2020). In terms of share to the national budget, there has been a continued reduction over the three-year period from 16.1% in 2018, 15.3% in 2019 to 8.8% in 2020. The reduction in the budget to health can compromise the quality of health services. As for the education sector the Ministry of Education has been allocated with K13.1 billion in 2020, representing 12.4% of the total budget (far below the 20% commitment according to the Dakar Declaration).
The allocation to education from national budget has seen a gradual reduction over the three-year period in terms of both the total share of the national budget and the absolute value which has declined from K13.3 billion in 2019 to K 13.2 billion in 2020. This is likely to pose a threat to the provision of free education as most education institutions need funding from Central Government.
With regards to social protection, social cash transfer programme will continue to target 700,000 beneficiaries with an allocation of K1.0 billion. This programme has suffered a number of setbacks and many targeted beneficiaries are still behind in terms of receiving their dues for the period 2018 and 2019 which has perpetuated poverty among low income households, especially women and children, the aged, people with disabilities and the terminally ill. According to the CSO Living Conditions survey of 2015, it is estimated that 48.3% of Zambians are malnourished. These social protection measures, though they involve minimal amounts, have great potential to lift the extremely poor households out of poverty.
As for the agriculture sector the government has proposed to allocate K1.1 billion towards the Farmer Input Support Programme (FISP) implementation which has increased in absolute terms but reduced in terms of share of the total budget (2.4%) from 2019 which was at 2.5%. The reduction in the allocation will lead to fewer small-scale farmers benefiting from the programme of whom, the majority are women. Given the food security challenges that the country is faced we would have expected that the 2020 budget allocation would have broadened and also prioritized research and development and agriculture infrastructure.
Another priority sector we monitor closely is water supply and sanitation access to clean and safe drinking water, as well as adequate sanitation services is crucial for the realization of a healthy nation to be able to participate in developmental processes. It is sad that a total of 6 million Zambian citizens representing 35% still do not have access to at least basic water in many rural and even some urban areas. Further, in 2015 only 31% of the total population had access to at least basic sanitation service with 49% in the urban and 19% in rural areas.
The 2020 allocation for water and sanitation has prioritized completion of ongoing water and sanitation infrastructure in urban and rural areas. Investing in this area has positive results on women`s and girls` access to water sources as this will reduce the time spent on drawing water. This saved time could be spent on other productive activities.
Finally, energy being another important “cross cutting” sector. In order to diversity and boost the electricity power generation capacity, Government has allocated a total of K1.1 billion from K415 million in 2019 for investments in the energy sector, representing more than 50% increase to the sector. However, the funding allocated towards the Rural Electrification Fund has reduced from K182 million in 2019 to K166.3 million. To promote the use of alternative energy sources, the Government has proposed zero rating the supply of gas stoves and other gas cookers and gas boilers, suspending import duty, for 3 years, on the importation of machinery for processing waste to generate electricity.
There is a need to address the various economic challenges that the country is facing through the national budget. In terms of the debt situation there is need to refinance the country’s debt as soon as possible as the first Eurobond will be due in less than three years. There is need for strong financial oversight to oversee public funds. Also, there is need for accelerated fiscal consolidation. IMF is key to making this work. Finally, without mainstreaming gender, inclusive growth will not be realized as it will leave out more than 50% of the population who are women and children. These factors need to be taken into account if indeed we want to stimulate the domestic economy that will benefit the women, children and other vulnerable groups.