By Boyd Muleya Head of Research – Centre for Trade Policy and Development
In the spirit of fiscal consolidation principles, we expect the 2022 National Budget to be characterized by a re-alignment of priorities within the existing expenditure framework. We do not expect a substantial change in the total budget size.
Particularly, we expect that the infrastructure budget should reduce as we recommend that Government continues to re-scope many of the projects still under construction and being financed by debt. This should involve cancellation and/or extension of completion periods as the case may apply. Consequently, we expect the 2022 National Budget to be more skewed toward supporting productive and social sectors.
On the economic recovery front, we implore Government, through the budget address, to provide insights on its economic recovery strategy. Of particular interest is the new administration’s position on the Economic Recovery Programme (ERP) (2020-2023) which was developed by the previous administration. We urge Government to be emphatic on whether the ERP will continue to be implemented ‘as is’ or otherwise outline the plausible changes that will be made to the document. This will assist other stakeholders to better complement Government’s efforts in this regard, but will also inform the discourse on debt management to a large extent.
Given the evolving threat of the COVID-19 pandemic, we expect the budgetary allocation to health which declined from 9.3% to 8.1% over the immediate past three years to take an upward turn towards the 15% enshrined in the ‘Abuja declaration’. Being cognizant of the many financial scandals that have characterized the Ministry of Health in the recent past, we expect that Government will put stringent measures to curb the misapplication and abuse of public resources. Suffice to mention that this extends to all other Ministries and public institutions.
The allocation to the education sector which also declined from 15.3% to 11.5% over the immediate past is expected to increase-in alignment with the new administration’s pronouncements to improve access to education.
The social protection budget averaged 2.5% in the two years preceding 2021 in which there was a substantial increase to about 4%. Although this might have been motivated by the elections held this year, we implore Government not to downsize this allocation. We also implore Government to address some of the inherent problems facing our social protection programs which largely revolve around inconsistent funding, low coverage rates and most importantly, low budget execution rates when compared to other budget lines.
On the debt situation, we expect Government to outline its plan on how it will reduce debt service costs from the current estimates of 40% of the National Budget. This will create some fiscal space for Government to support social and economic sectors. Particularly, these interventions should revolve around:
1. Improving Domestic Revenue generation
We expect measures to curb leakages from the treasury to be enhanced. We expect Government to provide more support to the private sector and pursue a private sector-led economic recovery. This should start by allocating sufficient resources to the line ministries which include the Ministry of Commerce, Trade and Industry and indeed, the newly created Ministry of Small and Medium Enterprise.
We expect that the 2022 National Budget will have increased support from co-operating partners to supplement domestic revenue generation efforts. Nevertheless, we expect that the Domestic Resource Envelope should increase from the K68 billion which was envisioned and exceeded by ZRA in 2021. While we commend ZRA for the good performance in this fiscal year, going forward, we recommend that their revenue targets should be more aligned with the expenditure budget. This would entail narrowing the gap between planned expenditure and target revenues, which in 2021 stood at about K51.6 billion.
2. Stabilizing the Exchange Rate
For external debt which is denominated in foreign currency, reducing debt service costs will also require enhanced measures to strengthen and stabilize the Kwacha against major currencies. In this regard, our recommendation has been that, the larger part of the $1.3 billion that Zambia received from the IMF through the SDR initiative be directed towards strengthening the local currency. Thus, we implore Government, through the National Budget address, to also indicate how the funds from the SDR initiative will be utilized. This notwithstanding, long-term measures to strengthen and stabilize the Kwacha will require a robust diversification of our export base. We expect Government to enhance support to the mining sector, which still remains Zambia’s major foreign exchange earner (i.e 70%) but also looking into how other sectors can contribute to the export base. Particularly, we put forth the following sector-specific expectations:
We expect 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.
We expect Government to increase the allocation of resources to obtain geological information to attract investment and craft sound decisions. More generally, Interventions towards exploration of other viable minerals should be enhanced so as to safeguard the export base from the cyclic nature of copper prices.
We expect Government 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 is channelled to the Bank of Zambia to boost the international reserve position.
We implore Government to revise the mining taxation regime, with the view to establishing a specific 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.
We implore Government to build not only production capacity for majority small-scale farmers but also the marketing dynamics related to this. This is a double edged sword expectation: Improve production on one hand, while improving access to both domestic and external markets for the output. Particularly, we expect Government to be reluctant in imposing export bans on viable agricultural products.
We expect the agricultural budget to provide more support for Research and Development, Extension services, value addition and infrastructure that can support irrigation to reduce overdependence on rain fed agriculture.
The tourism sector is one of the sectors that has been badly hit by the COVID-19 pandemic. As the pandemic is seemingly here to stay, we expect Government to put forth incentives such as tax rebates to support the sector but also to focus on making the sector resilient and be able to remain productive in the midst of the pandemic.
Ultimately, we look forward to a budget which will exhibit a great deal of consistency between Government pronouncements and its commitments which will be evidenced by the budgetary allocations thereof. Post-budget presentation, emphasis will be on ensuring budget credibility-sticking to the plan! We implore the Minister of Finance to make a resounding assurance and commitment in this regard.