2019 Budget is bold, progressive and PF best ever but is there political will to implement it?

By Kalima Nkonde

In October,2018, this writer penned a strong Op- Ed on the 2018 budget and criticised it as flawed because it did not address issues of tax evasion and avoidance, illicit financial flows and taxing the mines sufficiently as part of domestic revenue mobilisation strategy. The 2019 budget does address most of the concerns raised in that article and some of the recommendations in recent articles.

The big question is, will it be implemented given that short term political expedience is what drives economic policy implementation in Zambia and past history on implementation is not impressive. The jury is out. Budgets are useless without a process of budgetary control- continuous monitoring of achievement of targets set and taking timely corrective action.

The main issues that I have raised in the past twelve months in my articles are: excessive debt, excessive expenditure, lack of liquidity for private sector development, the mines and the Chinese investments not benefiting the ordinary Zambians and the treasury. The budget to a reasonable extent does address some of these issues and this article outlines the areas of the budget which are very progressive and are likely to have a positive impact on economic activity and job creation.

The budget objectives set are also quite realistic and in fact in some ways, are more on a conservative side, easily attainable and not setting a challenging aspiration level.

Agriculture infrastructure

The government plans for the Agriculture sector where measures relating to increase in farmer input support, promotion of aquaculture through cage farming initiatives in lakes Mweru, Bangweulu, Kariba, Tanganyika and kafue river, building of irrigation infrastructure, establishing a $100 million tractor factory and the promotion of mechanisation of agriculture in general should be commended. However, the level of investment is insufficient; the sector needed more money to fast track economic recovery. It makes no sense at all to allocate K5billion to defence or 5.8% of budget in peace time. This is getting priorities wrong. The best security for any smart politicians is by taking care of citizens’ economic well-being through job creation and providing social services and not buying excessive arms and strengthening the police and armed forces. Where is the fear coming from to warrant arming security forces to the teeth, one may ask?
Private sector promotion

It is a well-known fact that the promotion of private sector development especially the Micro, Small and Medium Enterprises (MSMEs) is the sure way of creating jobs. The budget does have measures aimed at promoting private sector development. The issue of payment of government creditors in form of suppliers and contractors is mentioned in the budget but it should be fast tracked and not delayed. Government commitment to reduce its domestic borrowings from domestic market from 4.0% to 1.4% of GDP will have positive impact in terms of making cash available to small businesses. The two measures if implemented in full will have positive impact within months and the cry by Zambians including venders of “indalama nashishupa’’ (Cash is scarce) will be a thing of the past. This is not rocket science. The increased of procurement by government from MSMEs will also go a long way in the growth of the private sector.

On the basis of the writer’s experience as a former advisor on a very successful USAID funded private sector development project with a foreign government, the Zambian government is advised to change its mind set of thinking government or bureaucrats know more about business than the private sector and need to prescribe what is good for them. The government needs to regularly and formally engage and consult with the private sector for the budget objectives to be achieved. It is important regular and formal consultative meetings and conferences are held between the private sector and the government where ideas could be exchanged and the two parties get to know each other’s challenges so that solutions for the benefit of the economy are mooted out.

Manufacturing sector interventions

The government interventions in the manufacturing sector which are meant to encourage private sector investment were not sufficient in this budget. Apart from encouraging the private sector to invest in adding value to copper cathodes by reducing the company income tax from 35% to 15%, which is commendable, the other initiatives good as they may be, where government driven. This include the establishing of manufacturing facilities through IDC for fruit processing in Eastern province, Cashew nut processing in Western province and pineapple processing in North Western province. The government needs to seriously look at reducing the rate of income tax for manufacturing companies to between 20%-25% in order to encourage and manufacturing.

Anti -Tax avoidance measures and transfer pricing measures

It is gratifying that the government has finally taken some serious action about multinational tax avoidance and transfer pricing schemes as noted by Finance Minister, Margret Mwanakatwe budget speech.
“Sir base erosion and profit shifting through aggressive tax planning is detrimental to enhanced domestic resource mobilisation,” She said.
There are a number of measures that were announced to minimise the risk of tax avoidance and transfer pricing which include the following:
• Limiting the interest allowable to be deducted to 30% of profit before interest, tax, depreciation and amortisation. The issue is multinationals including mines where creating artificial losses to avoid tax by charging abnormal interest payable to sister companies who they have borrowed money from to invest in Zambia
• Increased the period for multinationals should retain records for transfer price assessment from 6 years to 10 years
• Increasing penalty for transfer pricing offences to eight million penalty points
In future, the rules regarding the issue of the period for which multinationals especially mines write off their losses against income need to be seriously looked at. There are losses artificially created by capital allowances on “ Capital investments” which should be thoroughly investigated and loophole sealed. It is rumoured that there are mines that have operated for over twenty years and they have never paid income tax as they perpetually report tax losses.

Comprehensive Tax and mining reforms

The 2019 budget has some of the most comprehensive tax reforms aimed at the corporate sector especially the mines in recent years and which most patriotic analysts feel are long overdue as Zambian citizens have carried the weight of the country’s tax burden as the President of the economic Association of ZambiaLubinda Habazooka observed.

“How can you pay mineral royalty of 3.5% and then fail to declare corporate income tax despite the fact that you receive $700m in VAT refunds, $240m in electricity tariffs, $60m in fuel subsidies? It’s high time the mines came on board to help government raise resources.” Lubinda Habazooka said. “Government buys power from Maamba coal plant at 13 cents then sells to the mines at 6 cents when households and other companies pay 9 cents? Mines should stop holding government at ransom.”

The budget has introduced the a number of major tax reforms which are meant to raise more government revenue, broaden the tax base and bring in some semblance of equity so that the multinationals and the mines pay their fair share of taxes. These include the increase of royalty tax paid by the mines by 1.5% across board, the discontinuance of royalty tax being deducted as an expense from company income which previously contributed to tax losses thereby allowing mines not to pay income tax, taxing the imports of copper and cobalt concentrates at 5%, increase of withholding tax on dividends, interest and branch profits to 20% from 15%.
The government is also seriously looking at reviewing the tax incentives given to investors and stepping up monitoring of all investors who have accessed the tax exemptions to ascertain whether they have fulfilled their investment pledges.

The major tax reform with far reaching consequences is the abolishment of the VAT tax regime and reintroduction of Sales tax. This must have caught most people by surprise but according to the Finance minister, the VAT tax regime as it stands now is not benefiting the treasury.
The government’s intention of revising the Mines and Mineral development Act is also a welcome development they are well advised to look at the Tanzanian Act, which was revised in recent years as well as the Botswana Minerals Act; they may just learn one or two things. It is hoped that some of the unfair clauses in the Mining development agreements can be addressed. It is, however, important to make consultations with stakeholders in the process of revising the act.

Why VAT is being replaced by Sales tax

The Zambian government’s decision to scrap VAT is certainly informed by its experience with Value added Tax. VAT as a tax regime is good as it is supposed to raise more tax than sales tax in that it covers a broader base. In addition, it encourages investment, but if truth be told, the mines are responsible for the scrapping of VAT as they have abused it and used it as a source of capital and as a ransom to government.

According to finance Minister Margret Mwanakatwe, “VAT works better when you have an economy that has a strong manufacturing base. But we don’t have it! We are in constant refund and it cannot work now. We have to grow the manufacturing base because that is the sector that needs that support of a VAT refund. Right now, VAT is a subsidy and we are in austerity – we can’t afford subsidies. It is as simple as that. So, 1st April sales tax comes into play”.
According to some experts, government will save over a billion US dollars in terms of refunds as the mining industry gets approximately US$700million refund per year and the rest $300million. The mining industry is the greatest beneficiary of VAT refunds and any attempt to tighten claim procedures like revision of rule 18 which required claimants of refund to prove that the materials they bought were used in production by way of receipts and proof of final destination of the copper were resisted.

In November, 2017 according to ZRA Commissioner General Kingsley Chanda, Zambia Revenue Authority (ZRA) paid out over K4 billion in value added tax (VAT) refunds to mines and other sectors six months out of which 76 percent was made to mining companies.

As an independent analyst ,with no political agenda and based on my current and past views on how the economy can be turned around, the 2019 budget is a good document although it does not address some important and topical issues of high level corruption .It is just mentioned it in passing by what she calls “rent seeking” behaviour by civil servants which is low level stuff and not the elephant in the room- corruption at very high levels as recent scandals and the financial intelligence disclosures. Another important issue missing in the budget, given the plummeting kwacha, is the high level of foreign exchange retention by the mines. It is a paradox that the country’s foreign reserves do not improve even when copper prices are sky high! Zambia will have to bite the bullet and address this contradiction sooner rather than later.

The issue of the country’s debt was also not covered sufficiently as there were no details as to the actual measures that have been put in place to reduce the pace of debt contraction. The finance Minister admitted to that in some an indirect way.
“ I will, within the current session, be coming to this house with specific details on the implementation of austerity measures related to debt,” Mrs. Mwanakatwe said.

CONCLUSION

Although the budget looks good on paper, most Zambians will not be excited by it as we have been down this road before, where good policies were announced but not implemented mainly due to political considerations.

The first major problem as in the past to implementing policies, is the Presidency. President Lungu consciously or unconsciously, tends to undermine his own finance minister and government, by making statements that are seemingly impulsive on airport aprons or during bye elections campaigns which contradict his own government economic policies and makes observers confused about what to believe and creates uncertainly, the number one enemy of investment.

One previous case in point where he undermined his Finance Minister, Mr Alexander Chikwanda was the 100 % reversal of 20% royalty tax on mines-without any negotiations -after Mining houses lobbied him directly, when his finance ministers had sworn that they will not be reversed.

Whilst IMF talks were taking place and Ministry of finance was saying Zambia was going to reduce debt, the President was on the platform in Chawama saying government will continue borrowing for development. Also, while negotiations with IMF were at a crucial and sensitive stage, he said if IMF wants, they can go.
In June, 2019, austerity measures were announced, but immediately new districts were announced in North Western and Eastern province, huge delegation- may be the largest of all the 52 African countries that attended FOCAC meeting- went to China and spent a week. And amidst austerity, a Chartered plane was hired for the UN general assembly when neighbouring Presidents like Magufuli and others flew commercial. The list of contradictions and lack of implementation of policies is long.
One hopes that the President and his government would be motivated this time around by the IMF rejection of the bail out by implementing tough home grown solutions and proof that we can solve our own problems like pointed out before by other experts. Although the road will be tough, as Finance Minister pointed out, the pain may only be for two years and the fruits of recovery will start to show if we stick the plans.

“ Delivery of fiscal consolidation will require extraordinary measures. Courageous decisions are required to meet these challenges which need to be supported by a united people”, Finance Minister said.

The Budget is a short term document covering 12 months and so government is well advised to prepare two critical medium term documents to complement the budget and NDP 7, which cover two key areas of the economy-Mines and China. I would recommend studies are conducted with a view to develop the Mining development strategy and Zambia- Chinese cooperation strategy.

The writer is a Chartered Accountant by profession and a Private Sector Development expert. He is an independent commentator/analyst. He has lived in England, South Africa and Botswana for over 25 years.