What's the Big Deal about the 2016 National Budget?

By Florence Banda-Muleya and Caesar Cheelo

Two weeks ago the Minister of Finance delivered the 2016 National Budget Address to the National Assembly. The buzz that came in the aftermath of the Address was no surprise. For days the general public and organisations alike talked about nearly every segment of the Budget trying to figure out what the big deal about this particular Budget was. Why should it matter so much?

To begin with, the National Budget represents Zambia's financial plan for the fiscal year, in this case 2016.

It reveals the current and expected future economic conditions including the economic growth performance and prospects. Perhaps more importantly, it estimates the amount of revenue to be raised by the public sector and expresses the spending plans of the Government in 2016. The Budget is regarded as the most important short-term instrument for ensuring the smooth operation of the public sector in providing goods and service for social and economic development.

At least three things are quite striking in the 2016 Budget: Firstly, the target to mobilise domestic revenue of at least 20.4% of GDP (compared to 18.1% of GDP projected in 2015) is very ambitious. The 2016 Budget somewhat departs from the Government's original intentions in the 2016-2018 Medium Term Expenditure Framework (MTEF), which foresaw gradual growth of domestic revenues from 17.4% of GDP in 2016 to 20.1% in 2018. Although the intention to enhance revenue mobilisation is commendable, meeting the pronounced revenue targets by the end of 2016 is likely to be difficult. It is likely to be marred by the confounding effects of the depreciating Kwacha on imports and production as well as those of the electricity shortage on productivity. Unmediated, these factors are likely to pose a steep uphill challenge for tax revenue mobilisation.

Secondly, the sharp expenditure cuts across all but a few critical outlays in 2016 – towards fiscal consolidation – are also overly ambitious. The only outlays spared in the Government's intentions to rationalise spending are general public services (interest payments, Sinking Fund contributions, funding Government Equalization Fund and spending on the tripartite elections/referendum), road infrastructure, empowerment funds and though not explicitly stated, the wage bill. The wage bill remains biggest expenditure-side challenge. With the 2016 election the enforcer of spending pressures, maintaining a prudence fiscal stance for fiscal consolidation will be hard.

As such, although fiscal consolidation was inevitable in view of the emerging challenges in both the global and domestic markets, the most striking is the intention to reduce the deficit to 3.8% of GDP in 2016 from the 6.9% level of 2015 which seems implausible. Moreover, after years of an expansionary fiscal stance underpinning an aggressive development agenda, the Government should be wary about economic growth slowdown that consolidation may bring.

Moreover, evidence from advanced countries shows that fiscal consolidation of a large deficit should happen over a minimum period of two years. Zambia is not an advanced country and yet it seeks to reduce the fiscal deficit by 3.1 percentage points within one year period. This intention may only be achievable at great social and economic costs. The authorities would therefore do well to revise the consolidation timeframe in favour of a more relaxed and realistic one.

Considering the anticipated difficulty of raising the Budgeted ZMW41.9 billion from domestic revenues, external financing maybe become a popular recourse. But, Moody's recent downgrading of Zambia's credit rating coupled with a somber global economic environment and Zambia's mounting debt-to-GDP ratio (up from 20% in 2010 to over 41% in 2015) mean Zambia is internationally perceptive being at risk of default. This will attract higher interest rates on any future non-concessional borrowing.

The Government should therefore shy away from further external borrowing and instead seriously consider seeking cheaper sources of finance, perhaps even enlisting into an IMF supported economic recovery programme. Returning to the IMF may help to strengthen fiscal and debt discipline, create a stable macroeconomic environment and restore investor confidence. In turn, this may help to stimulate growth, enhance productivity and contain the escalating job losses seen recently.

Ultimately, that the mounting fiscal deficit may not be reduced to the extended anticipated in the Budget is perhaps the biggest big deal about the 2016 Budget, which should concern everyone interested in Zambia's welfare. As Mahatma Gandhi aptly put it "We must be the change we wish to see in the world". As such, all Zambian citizens and residents should be interested in Zambia's budgetary planning and execution, fostering changes within their respective spheres of influence. When the Government seeks Budget submissions, people should be willing and ready to provide inputs. People must readily seek to hold the Government accountable through continuously and collectively monitoring the Budget, and offering their opinions. These are essential ingredients for effective Budget execution, good governance, public transparency and accountability.

The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR).
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