2017 National Budget welcomed as realistic, but serious questions raised about increased Government spending

The Zambia Institute for Policy Analysis and Research (ZIPAR) has welcomed the Government’s 2017 budget, which it says is realistic in the face of current challenging economic conditions. Overall, the budget presents some conservative and more realistic targets such as  expected economic growth, job creation and inflation  ZIPAR also welcome the Government’s intention to “develop, publish and implement a robust medium term debt management strategy in 2017”.

However, ZIPAR cautions that the Government’s home-grown economic recovery plan is likely to face challenges given that the 2017 National budget does not spell out aggressive measures towards cutting overall spending. Spending on debt interest payments, Farmer Input Support Programme, road infrastructure projects, and so on is set to increase from the previous year’s level.

  • In 2017, Government spending is set to increase by 2.3% of GDP compared to 2016: it is proposed to rise to ZMW64.5 billion or 27.7% of GDP from ZMW53.1 billion or 25.8% of GDP in 2016.
  • Within this budget, Governments proposes to spend ZMW8.6 billion on road infrastructure projects compared to ZMW6.6 billion in 2016.
  • On the Farmer Input Support Programme (FISP) Government proposes to increase the allocation almost threefold from ZMW1 billion in 2016 to ZMW2.9 billion in the 2017/2018 agricultural season, targeting 1 million small-holder farmers.

In a comprehensive analysis of the 2017 budget, ZIPAR argue that the long ‘shopping list’ of road infrastructure and the subsequent increase in the road infrastructure is too large a scale given the current resource availability and economic circumstances.

ZIPAR further raises questions about why FISP is proposed to be scaled up in this period when the Government recently announced that the programme will be reviewed because they face challenges with targeting. While the e-voucher system may resolve most of the implementation challenges under FISP, it is not likely to resolve the targeting challenges.

The Government announced some changes aimed at increasing revenue, such as increased road tolling and a raise in the top rate of Pay as You Earn (PAYE), these measures will only increase domestic revenue collections by 2% compared to the previous year. This is in consideration of the economic challenges the country is undergoing which does not leave so much room for government to increase revenues.  Therefore, the Government needs to focus on structural reforms that grow the economy and yield more private sector contributions to tax revenues.

With increased spending and flat revenues the government deficit  will increase to 7% of GDP in 2017. The overall stock of government debt will increase by close to US$2 billion next year. The cost of paying off this debt is likely to increase, unless such debts are used to finance projects that can generate revenue within a reasonable period to pay off the debts. The implication of this is that soon Zambia will need to use nearly one-third of its domestic revenues to pay interest on public debt and one-fifth on road infrastructure. When the public sector wage bill is added, there will be little domestic revenue left for other activities.

Other aspects of the budget analysed by ZIPAR include:

  • Economic diversification: the Government is proposing a number of measures to boost production in agriculture beyond maize and support local production among industries away from mining of base metals. The measures include, for example, a Cashew Nut Infrastructure Support Programme in Western Province and a new Kafue Iron and Steel Economic Facility Economic Zone. These measures are more progressive when compared to the diversification measures in 2015.
  • Energy: An interesting twist to the budget in 2017 is the Government’s bold decision to disengage from the petroleum sub-sector in order to increase efficiency. Procurement of finished petroleum products will be undertaken by the private sector from 1st March 2017. While the decision by the Government is commendable, implementing such a policy effectively will among others, require putting in place adequate measures to guarantee sufficient strategic reserves.

In order to address the economic challenges raised in the 2017 budget analysis, ZIPAR recommends a number of policies and measures as follows:

  • To manage expenditure pressures Government must prioritise road infrastructure projects and consider carrying out extensive project appraisals that take advantage of the availability of long term financing.
  • To boost tax revenue Government must widen the tax base, improve compliance and administration and continue to reform the administration of non-tax revenue as this is an easy revenue source to administer.
  • The budget response to economic diversification is still dominant in agriculture, mining and forestry sectors with not so much beyond this to include manufacturing of selected products which are low-hanging. In order to realise the goal of economic diversification, fostering local manufacturing should be prioritised in future budgets.

Notes to Editors

  1. This is based on the ZIPAR 2017 National Budget Analysis report titled: “Walking a tight rope to economic recovery: Restoring Fiscal Fitness for Sustained Inclusive Growth and Development”. The report is found here: https://goo.gl/jZfjdY 
  2. ZIPAR is a socio-economic think-tank whose mandate is to conduct research and policy analysis. ZIPAR was established by the Government Republic of Zambia (GRZ) with the support of the African Capacity Building Foundation (ACBF).

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