CTPD’s 2021 National Budget Expectations

Introduction

As the 2020 fiscal year nears its end, the Minister of Finance of the Government of the Republic of Zambia will present the 2021 National Budget on Friday, 25^th September, 2020. This national budget presentation comes at a time when the world is faced with the Covid-19 global health pandemic which has impacted negatively on lives and livelihoods. Faced with a deteriorating macro-economy, the government is expected to present a national budget which speaks to prevailing socio-economic circumstances while painting a picture of hope towards economic recovery.

The Centre for Trade Policy and Development wishes to share its reflections on the performance of the 2020 national budget, on which basis, expectations for the year ahead are made.

Performance of the 2020 national budget

The 2020 national budget, whose theme was “Focusing national priorities towards stimulating the domestic economy,” was projected to be K106 Billion (32.4% of GDP). 67.9% of this amount was expected to come from domestic revenues while the balance would be raised via domestic and external financing.

In the spirit of “doing more with less”, the budget sought to achieve five (5) macro-economic targets, namely:

1. To achieve a real GDP growth rate of 3%,

2. To maintain inflation within the 6-8% target range,

3. To increase international reserves to at least 2.5 months of import cover,

4. To reduce the fiscal deficit to 5.5% of GDP and

5. To increase domestic resource mobilization to at least 22% of GDP.

Zambia’s economic growth is now projected to drop to negative 4.2% in 2020 as opposed to the 3% growth target envisaged during the presentation of the 2020 national budget. The main factors explaining this performance are:

1. The adverse impact of the Covid-19 pandemic on general economic activity and employment.

2. Episodes of load-shedding due to low electricity supply

3. Rising costs of production largely associated with rising energy costs and depreciating currency.

4. High public debt, leading to higher debt servicing costs, inevitably taking away social and productive sector public spending.

Inflation has remained substantially above the target range of 6-8% envisioned by the 2020 national budget, currently hovering around 16%. Given that food inflation remained relatively stable, lingering around 15% from December 2019 to August 2020, we note that upside pressures on overall inflation over this period emanated from non-food inflation which rose to 15.4% in August 2020 from 7.8% in December, 2019. Inflationary pressures over this period have been attributed to higher fiscal deficits and deeper than projected global and domestic economic contractions.

There was a nominal improvement in the reserve position for the first half of 2020, as gross international reserves increased to US$1.43 billion (equivalent to 2.3 months of import cover). In contrast to the 2.5 months of import cover target in the 2020 national budget. While this may appear encouraging given that three more months remain before the year ends, the improved reserve position is not due to increases in export earnings but rather a reduction in import volumes resulting from effects of the Covid-19 pandemic.

In terms of the fiscal deficit, estimations reveal a much larger deficit than the 5.5% envisaged by the 2020 national budget. Higher debt from both external and domestic sources due in part to spending pressures resulting from the Covid-19 pandemic. While for 2019, the Zambia Revenue Authority reported to have surpassed its revenue target, the substantial contraction in economic activity in 2020 is expected to lead to failure in achieving the 22% of GDP estimation in domestic resource mobilisation.

Based on these reflections, the 2020 national budget has so far underperformed. Thus, CTPD hopes that the 2021 national budget will provide candid economic recovery plan.In general, CTPD expects the 2021 National Budget to underscore strategies to mitigate the impact of Covid-19 while constructing strategies towards economic recovery. Specifically, we expect strategies and measures to address the fiscal deficit, rising inflation, depreciating Kwacha, domestic resource mobilisation, resuscitation of economic activity, especially in priority sectors.

Expectations on the Covid-19 pandemic, with reference to health and economic recovery

COVID-19: We expect that government continues to safeguard the lives and livelihoods of the people in the wake of Covid-19 pandemic. In this regard, we expect that health system strengthening will prioritise resources towards fighting the Covid-19 pandemic, particularly in terms of medical supplies.

We also expect the 2021 national budget to provide an update and further guidance on the implementation of the relief package commonly known as the Covid-19 bond or K10 billion medium-term refinancing facility or K10 billion stimulus package.

Further, in the quest to increase liquidity in the private sector and support businesses as they seek to revive operations following the loosening of Covid-19 restrictions, we expect government, through the Bank of Zambia (BoZ) Monetary Policy Committee to continue taking a relaxed monetary stance in 2021 that seeks to keep interest rates low and therefore improve credit availability.

Expectations on the Macroeconomic front

In anticipating economic recovery, we expect the 2021 national budget to report growth at the end of 2021. Thus, we recommend that government pursues a private sector led economic recovery. This will require putting up measures that will increase liquidity in the private sector such as dismantling of the domestic debt and arrears while maintaining low interest rates to increase the availability of credit.

We expect that the government will put in place measures to address inflation, aiming to reduce inflation to single digits in 2021.

We also expect the government to address the depreciating Kwacha in terms of promoting exports and other policies aimed at improving international reserves position.

On account of the sustained depreciation of the Kwacha, it is expected that the budgetary allocation towards debt servicing will increase. Thus, it is imperative that the Minister of Finance beckons government to remain committed to the fiscal consolidation agenda and assure the nation that debt will be at sustainable levels.

Further, we expect the government through the 2021 national budget to bring confidence in its fiscal management, particularly showing how debt servicing will not sacrifice crucial social (and productive) expenditure. Thus, we expect the 2021 budget to show that expenditure in education and social protection will not suffer due to debt repayments.

We expect the government to speak to debt restructuring. We also expect government to commit to active engagements with the IMF with a view to securing financial assistance and restore fiscal balance, while also sending message of fiscal confidence to potential investors.

 

FISCAL DEFICIT: We expect that the intent to reduce the fiscal deficit remains a key macro-economic target. This should be supported by measures that will seek to revive business operations in the private sector, widen the tax base and improve compliance levels in tax revenue collections. Government expenditure will also need to be put to check, especially in the run up to the 2021 general elections. We also acknowledge the ambitious infrastructure development agenda that government has continued to implement in 2020 which has led to rapid debt accumulation in the recent past. Going forward, we recommend that government considers extending the timeframe for completion of some of these projects while looking into alternative sources of funding them other than debt.

 

Expectations on the agricultural sector

Zambia’s budgeting for agriculture has been low and fluctuating. In the past three years, the share of the national budget has moved from 9.4%, 8.3%, 6.1%, 3.7% in 2017, 2018, 2019, and 2020 respectively. In 2020, this had been about 25% decline in public expenditure on agriculture. In monetary terms, the 2020 budget presented a decline from ZMK5.3 billion in 2019 to ZMK 3.97 billion. Some of these elements relate to the overall poor performance of the country. Compounding this has been constant marketing board price supports that affect private sector participation. This focus in terms of state approach has challenged value chain financing and commercialisation of agriculture in order to drive sectoral growth and long-term productive investments some of which relate to research and development, infrastructure and extension services.

The role of the FRA food reserve agency vis a vis the Food Reserve Bill 2020 remain controversial. Evidence suggests FISP has failed to reduce rural poverty as upfront costs, explicit targeting, and related cooperative requirements have tended to exclude the vulnerable groups with head count rural poverty rates still revolve around 58%. These elements advance amidst the wider challenges of climate change and COVID-19, elements considered necessary in building rural agriculture production and livelihood resilience. For the 2021 national budget presentation, our expectations are that:

1. The budget should endeavour to build not only production capacity for majority small-scale farmers but also the marketing dynamics related to this, somewhat of the long-term productive investments, research and development, infrastructure such as irrigation, and value addition.

2. There is need to enhance income disbursement for rural populations which can then help to adapt to COVID-19 and Climate change. Whilst this view has high payoffs in 5 to 20 years and is critical for sustained poverty reduction, the government will need to balance this objective with social protection as way to build local support.

3. The government should avoid a business as usual approach but adapt to the changing circumstances the sector to changing circumstances the sector finds itself into. We expect more wider support in production and marketing.

Expectations on the mining sector

The mining sector continues to be the backbone of Zambia’s economy. The sector contributes about 14% to GDP and about 74.4% of export earnings. This being so, the 2021 budget should exploit the mining sector to achieve economic recovery for the Zambia we want.

When Covid-19 broke out mineral commodity prices plummeted and this sent ripple effects across the economy. The government responded to this through the implementation of a tax relief package aimed at cushioning the mining sector. This included a suspension of export duty on precious metals and import duty on copper concentrates. This was a welcome move that was warmly received by the mining companies. However, we want to reiterate that government can further induce relief of mining cash flows to allow room for sustained mineral production, employment, and mine expansion through exploration activities.

As the Minister makes the presentation of the 2021 budget on Friday, the following are our expectations of the budget on the mining sector.

1. In the spirit of initiating economic recovery, we expect the Government to reintroduce the deductibility of mineral royalty to calculate Company Income Tax (CIT). However, the deduction should be limited to 50% of mineral royalty. Alternatively, the government should temporarily allow a 100 percent deduction for six months only.

2. We expect the Government to increase the allocation of resources to obtain geological information to attract investment and craft sound decisions.

3. The government is expected to increase the capital allowances claimed by mining companies in respect of capital expenditure from 20% to 25%. This should be done to further provide fiscal relief.

4. The government is expected to allocate resources to finance gold mining cooperatives. This should be done to improve the social welfare of communities hosting gold reserves but also to increase gold production which can be channeled to the Bank of Zambia to induce macroeconomic stability.

5. The government is expected to revise the mining taxation regime for artisanal and small-scale mining. This should be done to induce the formalisation of mining groups and improve the social welfare of people involved in mining.

6. To enhance tax administration, the government is expected to discard or undertake structural reformation of the VAT system applicable to mining. This tax system continues to be a serious revenue leakage for the government in the mining sector.