2018 National Budget set to restore Zambian economy, but serious questions raised about increased deficit and debt burden

The Zambia Institute for Policy Analysis and Research (ZIPAR) has welcomed the Government’s 2018 budget, which it says has chartered a course for accelerating fiscal fitness and putting the Zambian economy back on the path of robust sustained and inclusive growth and development.

However, ZIPAR also raise questions about increased debt – total government debt will be 47% of GDP in 2017, more than double the 21% of GDP it was in 2011.

Overall the budget presents commendable efforts to sustain the economic recovery that has occurred since 2015. A raft of policies continuing the path toward economic diversification are welcome – for example the farm block model – but as the budget shows non-copper exports down marginally by 3% from 2016 to 2017, which suggests limited progress on diversification to date.

Despite the clear economic improvements ZIPAR has raised concern that Zambia’s debt situation is worsening each year mainly driven by ambitious infrastructure development programmes which have consequently pushed the debt stock to 47% of GDP in 2017.

  • In 2018 the debt stock is set to increase as Government proposes to finance K20.1 billion or 28.1% of the budget through domestic and external borrowing.
  • Debt servicing is expected to be around 20% of total Budget expenditure and of this, external debt repayment will total K7.3 billion while domestic debt repayment will amount to approximately K7 billion.
  • Clearly, the deficit and the debt will pose serious challenges in 2018. While the Government has put in place a Debt Management Strategy 2017-2019 and proposes to revise the Loans and Guarantees (Authorisation) Act, the 2018 Budget does not spell out, specific measures to reduce the fiscal deficit to 3% of GDP by 2020, as targeted in the MTEF. The Government should therefore, incorporate into debt management legislation a provision for the setting of fiscal rules or legally binding, long-standing quantitative restrictions on some budgetary or fiscal aggregates.

However, ZIPAR cautions that consolidation measures are likely to face challenges given that spending on ambitious infrastructure projects is set to continue coupled with unplanned spending such as inflated procurement costs. Therefore, the Government needs to urgently revise and enact key fiscal legal instruments such as the Public Finance Act, Loans and Guarantees Act, Public Procurement Act and the Budgeting and Planning Bill to ensure accelerated fiscal fitness.

Other aspects of the budget analysed by ZIPAR include:

Shifting and vanishing pledges: some important budgetary commitments were mysteriously deferred to 2018 (from 2017) or dropped from the Budget. For example, the 2017 Budget pledged to “support the creation of at least 100,000 decent jobs”; this simply vanished in the 2018 Budget. Similarly, the total proposed Budget for 2018, at K71.7 billion, is nominally 9.5% larger than the Medium-Term Expenditure Framework (MTEF) projected Budget for the same year (K65.4 billion). The proposed 2018 Budget was also larger than the projected 2019 MTEF Budget (K69.1 billion). Thus, MTEF projections are not good predictors of final budget allocations, even over time horizons that are as short as one month. Ultimately, the shifting and vanishing pledges threaten the integrity and credibility of the Budget.

Linking Budget to the 7NDP: the linkage between national development planning and annual budgeting is under threat of remaining ambiguous and weakin the absence of the enactment of the long overdue Planning and Budgeting Bill. Challenges can be foreseen related to how development projects funded under the 2018 Budget will be coordinated under the multi-sectoral approach. The Government should mind the gaps as it links the Budget to the overarching multi-sectoral integrated approach of the 7NDP.

Economic diversification: While it is a challenge to measure whether the economy is making progress towards diversification, commendable efforts have been observed in the following:

  • Agriculture: Investments and interventions in agriculture such as the farm block model are set to improve farmer access to export markets, especially in livestock.
  • Tourism: To address administrative barriers and access to tourism sites, the Government will put in place a single licensing regime. It will also prioritise major roads, bridges and air strips leading to tourism destinations. However, the pace and extent of actually applying the measures in 2018 is of concern owing to the country’s past record.
  • Energy: The Government proposes an amendment to the Energy Regulation Bill to allow for enhanced supervision and regulation of the energy sector and the Electricity Bill to allow for participation of other players in the industry. It is however not clear whether these pieces of legislation will address both the market structure and ZESCO.
  • Industrialisation: The 2018 Budget has set clear policies to promote value addition and economic diversification. The development of MFEZ and Industrial Parks will be continued. However, the lack of access to affordable and adequate finance is a major constraint for SMEs. The Agricultural and Industrial Credit Guarantee Scheme and the restructuring of three key financial intermediation institutions are therefore commendable moves.

Notes to Editors

1. This is based on the ZIPAR 2018 National Budget Analysis report titled: “Staying the Course of Fiscal Fitness-Accelerating Fiscal Fitness for Sustained Inclusive Growth, Without Leaving Anyone Behind” which was released on 5th October 2017.
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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