A review of Mutati’s budget

The K64.5 billion ($6.6 billion) budget presented on November 11 by Minister of Finance Felix Mutati outlines the government’s macroeconomic plans for the fiscal year 2017. 

This budget has come at the tail end of a fifth election in 10 years – underscored by the death of two sitting presidents – and the enactment of a new constitution that will undergo further change in the current session of Parliament. Some K19.33 billion will be financed through foreign and domestic debt.

Mutati, brought into the PF from the MMD presidency, a peculiarity of Zambia’s politics, has the cushion of the ruling party’s five-year term to move the economy to fiscal fitness. 

In the MMD government, Mutati served as deputy finance minister under Ng’andu Magande as Zambia weathered the Highly Indebted Countries (HIPC) initiative in 2002 and was also energy minister before heading the commerce trade and industry portfolio.

“We all agree that the task of restoring stability and accelerating growth will not be easy. We have to be bold and decisive,” he said on November 11.

The measures he outlined in the budget are certainly bold. However, the by-word is IMPLEMENTATION.

To begin with, the target of end-year inflation of 9%, reserves of 3-months cover and 3.4% gross domestic product growth are achievable – even against the backdrop of the uncertainty in the global and domestic economy.

But growth projections are a two-headed monster. The rallying of copper prices, the likelihood of adequate rainfall this season and of a bumper harvest, and prospects for an improved energy situation, give room for bullish sentiments. 

Copper output rose 8.2% to 575,780 metric tons in the first nine months of 2016. The price of the metal, which accounts for three-quarters of export earnings, rose 15.4% in November. 

Copper earnings have declined US$3.2 billion (from US$5.3 billion at the same time last year) in the nine months of 2016 due to fluctuation in copper prices. Meanwhile, the electricity shortage that contributed to growth slowing to about 3% in 2016 from more than 5% per year in the decade to 2014 has eased.

However, the downside, and a reason for bearish sentiments, is the notorious gap between Zambia’s budget plans and what happens on the ground. In that respect, the 2016 budget is no different from those presented before.

The forecast deficit of 7% of GDP for 2017 shows that the debt which has built up during 2016 needs to be repaid. This has put the pressure of fiscal consolidation in 2018 and 2019, not in 2017.

The country started this year with a foreign debt of about US$9.7 billion and domestic debt of about K26.5 billion, an indication of the serious pressure of the debt burden. In the 2015 budget, over K5 billion was allocated for debt servicing, the figure rising to K7 billion in the 2016 budget.

In his budget speech, Mutati spoke of an allocation of around US$360 million for ‘dismantling arrears’ and there’s some arrears clearance under pensions. The cash deficit, he said, would be 3% of GDP in 2016 – and would reach 10 percent on a commitment basis. This suggests that the addition to the arrears stock from 2016 might be 7% of GDP. 

Expenditure will rise by 10.5% in real terms over the 2016 budget. Spending on education is up by 6%, health by 18% and support to farmers by 160% in real terms. Slashes in fuel and electricity subsidies and a decrease of 7% in real terms on defence spending will create some fiscal space. 

If public spending has to increase, then higher taxes have to inevitably kick in. Then there is the issue of tax compliance and revenue collection. In the 2016 budget, Mutati’s predecessor Alexander Chikwanda was more ambitious on non-tax-revenue collection. Mutati has lowered the bar and made more realistic projections, given the failures of that ambitious strategy.  Tax policy changes for fiscal 2017 include efforts to improve compliance and changes in rates, with a target of ensuring 18% of GDP is collected. 

The 2017 budget has placed a priority on agriculture, with the Western Province getting a lion’s share of the agro budget.  The US$55.4 million Cashew Nut Infrastructure Support Programme will target 600,000 beneficiaries in a province with a population Central Statistical Office figures put at around one million people. 

According to the Africa Development Bank (AfDB), which has provided the loan to enable the programme, the development goal is to contribute to the country’s economic growth and food security. The project will be implemented over five years in Mongu, Limulunga, Senanga, Kalabo, Nalolo, Sikongo, Shangombo, Sioma, Lukulu, and Mitete districts.

With reference to clearance of arrears, former finance minister, Ng’andu Magande, expressed concern over some allocations in the budget, pointing specifically to the allocation for general services, half of which he says will go to pay “for work which has been done”. This he says means there will not be enough money in the future.  

In the final analysis, Mutati’s budget follows a period where Zambia, Africa’s second largest copper producer, has grappled with weak copper prices, a volatile currency, rising inflation and a widened budget deficit. 

Over the last two years, the macro-economic fundamentals have deteriorated, the result of a weak global environment and the country’s susceptibility to external shocks – this in turn the result of low diversification drive in key sectors like power, manufacturing and agriculture. With the fiscal and monetary policy misaligned, most sectors of the economy have been operating below optimal capacity. 

For Mutati particularly, it is clear a monumental task lies ahead. Hopefully, details of arrears clearance will become less sketchy with a separate arrears clearance plan and publication of the Yellow Book, which details all the plans line by line.

 

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