Wednesday, May 22, 2024

Zambia’s 2017 Budget: Will it restore fiscal fitness?


Finance Minister Felix Mutati interacting with Professor Geoffrey Lungwangwa
Finance Minister Felix Mutati interacting with Professor Geoffrey Lungwangwa

By Gregory Smith-Senior Economist at World Bank Group

After 5 elections in 10 years, the government has –following constitutional changes- the prospect of a full five-year term. This should provide a platform for economic reform and recovery, especially as it’s been tough times for the economy in 2015 and 2016. To get the ball rolling the Minister of Finance presented the government’s budget on Friday November 11. Here are 6 reflections on what the government labels its shift to fiscal fitness.

First, the macroeconomic plans and 2017 goals are achievable if the bold measures get implemented. End-year inflation of 9%, reserves to 3-months of cover and growth of 3.4% (compared to around 3% this year and last) are all doable. Worth noting that there’s an upside and a downside to the growth projection. Bullish sentiments relate to the recent copper price bounce (making copper prices great again), political space for policy reform, prospects of a good harvest and an improved electricity situation. The bearish sentiments relate to the reverse of these factors.  One truth is that there’s a lot of uncertainty out there right now, in Zambia and the wider global economy.

Second, we’ve just seen a trailer for the movie and its only part one of three. It’s a trailer because it only gives us a taste of what might happen (the gap between the 2016 budget plans and what actually happened is vast).  And it’s part 1 of 3 because the pressure of fiscal consolidation is being place in 2018 and 2019 and not 2017. The projected deficit of 7% of GDP in 2017 reflects that unpaid bills or arrears that built-up rapidly in 2016 must be repaid. A full medium-term and detailed economic recovery plan needs to be published. Improved market and business confidence cannot wait in suspense.

When there’s no information people fill the gaps (with uncertainty often leading to more bearish thoughts than the reality). The government has bright people with good ideas, in many areas it simply needs to just communicate better.

Third, arrears clearance is essential to the recovery. The Minister talked to the issue, but was silent on the magnitude. He hinted that the cash deficit would be 3% of GDP in 2016 and it would reach 10% on a commitment basis; suggesting the addition to the arears stock from 2016 might be 7% of GDP.

The IMF in their monitoring-mission press statement put the stock at US$2 billion with half being accumulated in 2016 alone. It is clear a huge task awaits. Details will follow (hopefully) with a separate arrears clearance plan. In the budget speech there is an allocation of around US$360 million for ‘dismantling arrears’ and there’s some arrears clearance under pensions. Better analysis can follow when the ‘yellow book’ comes out detailing all the plans line-by-line, but at first glance US$500 million or so looks promised. Maybe that’s not enough in 2017; can the government be bolder here?

Fourth, expenditure looks set to get a boost (10.5% increase in real terms). Perhaps, not much of an austerity budget in the end? It makes sense if arrears are being cleared, but if its mostly new expenditure areas, then government’s announced move to ‘fiscal fitness’ is being delayed another year. That said at least the expenditure is in developmental areas (education up 6%, health 18% and support to famers by 160% in real terms) with fiscal space being made via cuts to fuel and electricity subsidies, a real decrease (-7%) in defense spending and revenue measures.

Fifth, revenue measures have been introduced to bring greater fiscal sustainability over the medium-term. If Zambia wants a big state and larger public spending, it has to pay for it through higher taxes. Tax policy changes include both efforts to improve compliance and changes in rates with a target of ensuring 18% of GDP is collected in 2017. In the 2016 budget the government had been extremely ambitious on non-tax revenue collection, and on failing to realize the collections in 2016, has made more reasonable projections.

Sixth, there are some really good ideas for structural reforms. Both to help the mining sector and the non-copper economy. Agriculture gets promoted above the rest, but there are bold measures from economic zones being accelerated, promotion of girl’s education and youth empowerment (crucially through skills), avoiding export bans for maize, to trade and public finance management reforms, and a full review of government parastatals. However, there are concerns that at least ten pieces of legislation have been tabled for change in the budget to permit these reforms to move, but how many will get through this well-known legislative bottle-neck?

In summary there’s a lot in the speech to rally behind, but the works starts and doesn’t end here. To get support for implementation from key stakeholders like the Zambian private sector there’s a pressing need for more details and better communication of where the economy is in 2016 and exactly where the Government wants to take it. The trailer suggests it worth seeing the movie, many of the right things get said and through a positive lens you can see a more sustainable fiscal situation. However, waiting to watch it play out will not restore confidence in the economy quickly. Sharing the script will help build support for this plan and help make the economic recovery a success. Can a detailed economic recovery plan be issued?


  1. Well summarized indeed. The only problem I have in this budget is that so many things have been pointed out but in the end we will still see situations where a lot of money meant for Health, Agriculture and many more projects will be misapplied. When I read the Auditor General’s report every year, I shudder to think what kind of security wings we have, I say so because people that misapply our money are well known and nothing happens to them and others feel that’s the way to go and yet our people in the rural areas are really suffering. If offenders were being arrested and prosecuted, it was going to be sending a signal to would be offenders, in that way, our money was going to be safe. It’s high time the government put it’s house in order so that our Tax payer’s money is protected.

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