Former Minister of Finance Situmbeko Musokotwane has expressed concern at the size of the budget deficit that the PF government is running. In a statement released to the media, Dr Musokotwane started by conveying his congratulations to the Minister of Finance Alexander Chikwanda for the 2014 budget because it was never easy anywhere to present a national budget as resources are always finite.
The Former Finance Minister offered a detailed analysis as to why he thought the 8.5% deficit the Government was running was not a good sign and was considered by many as unsustainable. Dr Musokotwane further said that only 17 countries have deficits of 8.5 percent and bigger, and these included countries like Greece.
Below is the full statement
Dr Situmbeko Situmbeko’s reflection on the 2014 national budget
I begin by conveying my congratulations to the Minister of Finance for the 2014 budget. It has never been easy anywhere to present a national budget because you cannot satisfy everyone since resources are finite.
In the African context, especially, there is unlimited desire for public spending on many programs, many of which reflect genuine development aspirations. A tour of most areas in rural areas will indeed convince any reasonable person that government spending to ease the lives of the people there is necessary.
While there is pressure for government to spend, there is always pressure from citizens to lower their taxes. This tension of expanding expenditure while reducing taxes, if unchecked, can lead to huge deficits in the government budget. This is what seems to be happening today in Zambia
Requests to Comment on the Budget
I have received many requests to comment on the 2014 budget proposals. After reflecting on the requests, I thought I should indeed comment. Rather than comment on every sundry, I feel I should just focus on a single theme that is of critical importance to the future of the country.
My remarks are therefore on the theme of finiteness of financial resources and the budget.
Resources are Limited
In our homes, it is easily accepted that resources are limited and therefore it is impossible to get everything we want at any one time. At the national level resources are limited too. But few, including politicians, accept this self-evident truth.
At national level, countries sometimes delude themselves that they can spend beyond their means. But this this comes at great cost by creating massive macroeconomic stability, which then requires painful correction. The most obvious forms of macroeconomic instability are frequent and substantial changes in the exchange rates, prices and interest rates.
Take the movements in exchange rates as an example of macroeconomic instability. In 1985 the exchange of the dollar was about K5 (un-rebased) to 1$. Then the Kwacha started losing value against the dollar to twelve, twenty, fifty, two hundred and so on until it reached K5,200 to the dollar before the Kwacha got to be rebased.
Further, take the example of inflation, the measure of price changes. It also rose sharply, at one point reaching around 300 percent per annum. Today, the inflation for the whole year can be around seven to eight percent. In the early and mid 1990s, this rate of inflation was attained just within a month! Life was truly uncomfortable then. Structural adjustment measures were needed to stop these difficulties.
Those who were adults during the periods of economic structural adjustments during the 1980s and 1990s remember just how painful the adjustments measures were – cash budget, high interest rates, and so on. The measures were a necessary evil to re-establish macroeconomic stability. Having achieved and maintained stability for more than a decade, we must spare our children from those harsh experiences of fighting to bring stability by preventing the re-emergency of instability.
Politicians are the Source of Over Expenditure
Politicians are the major source of pressure for over expenditure, or for allowing pressure for unsustainable expenditure to occur without adequate brakes. In succumbing to pressure for unsustainable expenditure, macroeconomic stability becomes an orphan. Not enough voices, especially from the government, are forth coming to warn of the dangers of run away budget deficits.
Not enough voices, especially from the government, are forth coming to warn of the dangers of run away budget deficits.
The aspect of economic management in Zambia that is being watched closely today by local and foreign economists, international organizations like the World Bank and AfDB, is our government budget deficit. Even credit rating agencies and therefore investors are watching our deficit very closely.
In paragraph 77 of the budget speech, the Minister acknowledges and he refers to the problem of the 2013 budget deficit when he says and I quote
“Mr. Speaker, 2013 has been a challenging year for fiscal policy but important steps have been taken to address policies that have created structural imbalances. Challenges will remain in 2014, but Government is actively engaged in creatively resolving them to maintain prudent fiscal management”
Similarly, in a report entitles Zambia’s Job Challenge- Realities on the Ground published in October 2013, the World Bank states:
“The 2013 budget has come under stress due to several unplanned expenditures and a shortfall in revenue collection”.
The budget is said to be under stress because the expected expenditure is estimated to be way above of the expected revenue, which is itself below target, causing a budget deficit much bigger than expected.
Budget deficits are normal. In fact, most countries on earth run budget deficits. For example, out of 210 countries and fiscal authorities surveyed by the American Central Intelligence Agency (CIA) for 2012 fiscal outcomes, only 45 ran either balanced budgets or had budget surpluses. The remaining 167 or nearly 80 percent ran deficits. It is therefore not a strange thing that Zambia should run a budget deficit.
But we should not comfort ourselves in observing that it is normal for a country to run a budget deficit. A more important issue to analyze is the size of the deficit and its consequences on the economy. In this kind of business, size does matter.
Before we delve into the issue of whether our budget deficits in 2013 and 2014 are excessive or not, let us clarify something about measuring deficits. We can measure the size of the budget in monetary terms. Very often however, such a measure is not useful in evaluating whether a deficit is excessive or not. The difficulty arises because a given sum of deficit in monetary terms may be considered either too big or too small depending on the size of the economy.
The same consideration comes into play if we have to evaluate whether K100 million borrowed by individuals is too excessive or not. For a rich man it may be nothing. For a poor man, it may be too much.
To avoid this pitfall, we evaluate national budget deficits by relating them to the size of the economy of the borrowing country. For 2013, the Minister has told us that the expected deficit will be 8.5 percent of the size of our economy (the Gross Domestic Product or GDP).
Few economists, if ever, can be happy with this size of deficit of 8.5% of GDP. I also consider this deficit excessive for the following reasons:
Firstly, it is way above the average deficits Zambia has run in the past decade or so at about 3.5 percent of GDP. The last time a budget deficit of the size of 8.5% of GDP was run was probably in the unstable 1980s or 1990s.
Contrary to the unstable experiences of the 1980s and 1990s, Zambia has enjoyed a relative high degree of macroeconomic stability since the late 1990s – a period associated with significantly lower deficits/GDP ratios than what we have today.
The last time a budget deficit of the size of 8.5% of GDP was run was probably in the unstable 1980s or 1990s.
Secondly, the 8.5 percent of GDP deficit is excessive when seen against the practice in other countries. If deficits of this size were good, or if they were prudent, we would expect most other countries in the world to run deficits of similar sizes.
The evidence is in the opposite. We look again at the survey done by the CIA. Of the 210 countries and fiscal authorities covered, the simple average size of the deficits was 2.5 percent of GDP. On the other hand, the average size of deficits corrected for the size of the economy was 3.8 percent of GDP, still way below ours at 8.5 percent.
Of the 210 countries and fiscal authorities surveyed, only 17 had deficits of 8.5 percent and bigger, and these included countries like Greece that have recently suffered from lack of confidence in their ability to manage their debts. The rest, constituting about 80 percent of the authorities had deficits below 8.5 percent of GDP. Clearly then, Mr. Speaker, the Zambian projected deficit is an outlier. It lies beyond the range that is considered by others to be sustainable.
Thirdly and finally, the 2013 deficit is excessive because that size was never what the Minister had intended in the first instance. The intended size as per the 2013 budget speech was 4.3 percent. We got to where we are because of unplanned circumstances. It has been caused by political pressure.
Against what has happened in 2013, the projected deficit in 2014 is 6.6 percent of GDP. I consider this as reasonable effort to reign in public expenditure although I would have been happier if the target for the deficit was lower. But vigilance is required. The 2013 deficit was never intended to be as big as it became eventually. Therefore, there is no automatic assurance that the 2014 deficits will be what it is intended now.
Already, some of the measures that the Minister had relied upon to reign in expenditure such as the two years wage and hire freeze have been thrown out right from start. The expenditures related to these areas mean that from the start the 2014 budget deficit will probably not be lower than the 2013 deficit unless new measures, still to be thought of and announced, are instituted.
Already, some of the measures that the Minister had relied upon to reign in expenditure such as the two years wage and hire freeze have been thrown out right from start.
I see the effort to reign in public expenditure in 2014 requiring even more courage. The trouble is that big budget deficits behave like viruses in the sense that they unleash pressure for new over expenditure.
The construction of several public universities in a very short time period means we must quickly find money to fund hitherto non-existing expenditures for books, laboratory expenses, remuneration for lecturers and staff and so on. The same thing for the new bomas created. Then we must also start looking for money for repairs and maintenance for the new infrastructure being built. It is not that these investments are undesirable. It is more about developing them in a sustainable manner.
Pressure on the Budget will only get Bigger
So, the pressure on the budget will only get bigger. In other words, the odds for further budget overruns have increased. The Ministry of Finance requires our support to prevent this.
I said budget and budget deficits are political phenomena. Supposing the politicians who believe they have discovered a new, easy formula for national development through unrestrained borrowing get their way? Supposing the deficits will continue to grow beyond acceptable levels? What can we expect for our economy?
There are a number of serious negative consequences to continued and consistent excessive budget deficits such as that estimated for 2013.
Firstly, deficits unless financed by grants (gifts) increase the stock of national debt, whether foreign, domestic or both. Bigger deficits quickly accelerate the growth of national debt to the point when it becomes a problem to service, as was the case before HIPC.
I have heard some people say, Zambia’s debt service burden is still manageable. This is correct. But we must remember that debt service unsustainability is not arrived at as an event. It is arrived at as a process. Large deficits accelerate the arrival to the time when debt becomes unsustainable. May I ask some of the economists reading this article to develop scenario, at different levels of budget deficits and at realistic expected growth of the economy, to see when (time period) debt unsustainability kicks in?
I have heard some people say, Zambia’s debt service burden is still manageable. This is correct. But we must remember that debt service unsustainability is not arrived at as an event. It is arrived at as a process.
Secondly, running huge deficits reduces the willingness of those with surplus cash to lend to us. Increasingly, they will see us as big risks and hold back even at a time when we desperately need credit such as in an emergency. According to the World Bank study on Zambia that I mentioned earlier, the following observation is made on page 11:
“Fiscal policy remains on a sustainable trajectory, but escalating recurrent and off-budget expenses must be reined in. Major global credit rating agencies have a negative outlook for Zambia.”
Indeed, both Standard and Poors and and others have now published their credit ratings for Zambia both of which portray negative outlook.
Thirdly, we must therefore indeed consider what would happen if lenders, domestic and foreign, were to reduce their willingness to lend to us.
One possible outcome would be for the government to aggressively seek funding by attracting money that is more expensive. In other words, this means raising interest rates. This is the so-called classical crowding out – the government attracting more credit to itself at the expense of the private sector and economic growth.
Another possible outcome if there are no lenders is simply to reduce planned expenditure to the available resources. I believe this is what the Minister is planning when he proposes a smaller deficit in 2014, even though in this particular case it has not been occasioned by reduced interest from lenders. But, as said earlier, reigning in expenditure is easier said than done.
In reality therefore, consistent big deficits raise the odds that the Bank of Zambia will be forced to expand its credit to the government. This is what economists call printing of money even though the physical side of printing may not happen, at least not immediately. The expansion of credit by the Bank of Zambia is what caused the instability of the 1980s and the 1990s that I spoke about earlier. There are all the chances that the same result will happen now. The zeros that we cut off when re-basing our currency, at high cost to the country, will automatically come back.
Best wishes to the Minister of Finance in controlling expenditure so that what we suffered from in the 1980s and 1990s does not return to Zambia.
Situmbeko Musokotwane-Former Minister of Finance