budgeting process, budget financing, implementation ... · district infrastructure development zmw...

Defence ZMW 3.25 Billion

7.0%

Housing andCommunity Ammenities

ZMW 798.71 Million1.7%

Social ProtectionZMW 1.26 Billion

2.7%

Public Service Pension FundZMW 805.00 Million 1.7%

Social Cash TransferZMW 180.00 Million 0.4%

O/W GRZ ContributionZMW 150.00 Million 0.3%

Food Security PackZMW 50.00 Million

0.1%

Rural Electrification FundZMW 70.71 Million

0.2%

Sovereign Wealth FundZMW 100.00 Million

0.2%

Farmer Input SupportProgrammeZMW 1.08 Billion 2.3%

Empowerment FundsZMW 123.70 Million

0.3%

Strategic Food ReserveZMW 992.90 Million2.1%

Agricultural E-Voucher SystemZMW 254.90 Million

0.5%

ZESCO Power RehabilitationsZMW 600.00 Million1.3%

Livestock Disease Controland Aquaculture Development


Roads InfrastructureZMW 5.63 Billion

12.1%

O/W GRZ ContributionZMW 3.22 Billion 6.9%

School InfrastructureZMW 1.07 Billion 2.3%

Research and Development EquipmentZMW 28.50 Million 0.1%

University InfrastructureZMW 650.00 Million 1.4%

BursariesZMW 200.20 Million

0.4%

Trades Training Institutes ZMW 79.60 Million

0.2%

School Feeding ProgrammeZMW 32.00 Million

0.1%

Teacher Recruitmentand Establishment OperationsZMW 6.41 Billion 13.7%

THE 2015NATIONAL BUDGET

ZMW 46.7 BILLION

Constitution Making ProcessZMW 29.26 Million

0.1%

External Debt InterestZMW 2.39 Billion 5.1%Public A�airs and Summit

ZMW 68.86 Million 0.1%

Local GovernmentEqualisation FundZMW 586.76 Million 1.3%

Compensation and AwardsZMW 100.00 Million

0.2%

Constituency Development FundZMW 210.00 Million

0.5%

New Province / District Infrastructure DevelopmentZMW 500.00 Million 1.1%

Domestic Debt InterestZMW 2.90 Billion6.2%

Water Supplyand Sanitation

ZMW 540.99 1.2%

EducationZMW 9.43 Billion

20.2%

General PublicServices

ZMW 12.04 Billion25.8%

Drugs and Medical SuppliesZMW 753.52 Million 1.6%

Medical Infrastructure and EquipmentZMW 268.24 Million 0.6%

Health ZMW 4.46 Billion

9.6%

Sub categoryBudget amountPercentage of National Budget

SECTORBudget Amount

Percentage ofNational Budget

KEY

Environmental ProtectionZMW 174.96 Million

0.4%

Recreation, Cultureand Religion


Public Order and SafetyZMW 2.18 Billion

4.7%

Economic A�airs ZMW 12.75 Billion

27.3%

BUDGETING PROCESS, BUDGET FINANCING, IMPLEMENTATION, ALLOCATION AND BUDGET DEFICIT

©2015 | UNLOCKING ZAMBIA’S POTENTIAL

PUBLIC LECTURE PRESENTATIONM U L U N G U S H I U N I V E R S I T Y - K A B W E

T H U R S D A Y 0 2 N D J U L Y 2 0 1 5

START

P O L I C Y M O N I T O R I N G A N D R E S E A R C H C E N T R E


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ZMW 46.7 BILLION


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ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

OPENING REMARKS

OPENING REMARKS

PMRC STATED AIM• To promote public understanding through research and education• To be a source of quality data and encourage debate on social and economic policy issues• To support government machinery in recommending policy and procedures to ensure effective delivery of a

national agenda

PMRC is a public policy think tank with a mission to ‘Unlock Zambia’s Potential’

Focus on governance, accountability and transparency in public expenditure

Ways and means of how to improve the management of parastatals in Zambia

Propose policy reforms to ensure greater use and impact of national resources

Aim to prompt and support action to improve governance and enhance social and economic development in Zambia

1 2 3 4

MISELO BWALYA - RESEARCHER



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ZMW 540.99 1.2%


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9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

INTRODUCTION

A l l p u b l i c a t i o n s a v a i l a b l e o n l i n e : w w w. p m r c z a m b i a . c o m

INTRODUCTIONSALIM KAUNDA - HEAD OF MONITORING & EVALUATION

On 10th October 2014, the Minister of Finance, Hon. Alexander Chikwanda MP, delivered the 2015 Budget Address to parliament and Zambia as a whole. The theme of the 2015 National Budget is

“Celebrating our Golden Jubilee as One Zambia One Nation by making Economic Independence a reality for All”.

a. Achieve real GDP growth rate of above 7%b. Attain end year inflation of no more than 7%c. Increase international reserves to at least 4 months

of import coverd. Increase domestic revenue collections to atleast

18.5% of GDP

e. Limit domestic borrowing to 2.0% of GDPf. Accelerate the diversification of the economy and

continue the drive to create decent jobs especially for the youth

g. Accelerate implementation of interventions on health, education, water and sanitation sectors.

MACROECONOMIC OBJECTIVES, POLICIES AND STRATEGIES



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ZMW 46.7 BILLION


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ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

OUTLINE OF THE PRESENTATION

OUTLINE OF THE PRESENTATION

Financing The 2015 National Budget K46.7Billion

2015 Budget Expenditure by Function

Comparison of the 2012- 2015 National Budgets

2013- 2015 National Budget amounts

Global Economic Developments

What Has Caused The Weak Performance In The Economy

What Is Budget Deficit?

Why Has Debt Grown So Fast?

Reality Of The Deficit

The Case Of The Eurobond

About The Kwacha

Pmrc Recommendation



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ZMW 46.7 BILLION


0.1%





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ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

FINANCING THE 2015 NATIONAL BUDGET K46.7BILLION

FINANCING THE 2015 NATIONAL BUDGET K46.7BILLION

1

Under the 75% of domestic resource mobilization, the government aims to generate revenue mainly through various taxation strategies such as:

n The Pay As you Earn (PAYE) system

n Introducing mineral royalty of 8% for underground and 20% for open cast mining respectively

n Increasing presumptive tax payable by public service vehicle operators by 100%. ££Increasing customs duty on explosives from 15% to 25%.



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ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

2015 BUDGET EXPENDITURE BY FUNCTION

2015 BUDGET EXPENDITURE BY FUNCTION

2



7.0%




2.7%





0.1%


0.2%


0.2%



0.3%



0.5%





12.1%






0.4%


0.2%


0.1%



ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

COMPARISON OF THE 2012- 2015 NATIONAL BUDGETS

COMPARISON OF THE 2012- 2015 NATIONAL BUDGETS

3



7.0%




2.7%





0.1%


0.2%


0.2%



0.3%



0.5%





12.1%






0.4%


0.2%


0.1%



ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

2013- 2015 NATIONAL BUDGET AMOUNTS

2013- 2015 NATIONAL BUDGET AMOUNTS

32.2 BILLION42.6 BILLION

46.7 BILLION

4



7.0%




2.7%





0.1%


0.2%


0.2%



0.3%



0.5%





12.1%






0.4%


0.2%


0.1%



ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

GLOBAL ECONOMIC DEVELOPMENTS

The global economy continues to post modest recovery.

According to the IMF, global growth is estimated at 3.4% in 2014 and projected at 3.5% in 2015.

Underlying this growth is recovery in advanced economies, particularly the United States and the United Kingdom and a slowdown in emerging and developing economies.

The anticipated increase in interest rates in the United States poses challenges for emerging and frontier economies, including Zambia, as it is likely to be associated with adverse capital flows and increased volatility in exchange rates.

GLOBAL ECONOMIC DEVELOPMENTS

5



7.0%




2.7%





0.1%


0.2%


0.2%



0.3%



0.5%





12.1%






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ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

WHAT HAS CAUSED THE WEAK PERFORMANCE IN THE ECONOMY

THE ZAMBIAN ECONOMY IS EXPERIENCING STRONG HEADWINDS IN THAT:

WHAT HAS CAUSED THE WEAK PERFORMANCE IN THE ECONOMY

n “Policy inconsistencies and uncertainties at home and external shocks are dampening economic activity”.

n In particular, the mining sector, which accounts for three quarters (3/4) of the country’s export earnings, has been burdened by ongoing tax issues and by copper prices that declined to five-year lows in January 2015.

n The Kwacha has depreciated sharply against the US dollar by an estimated 19 percent since the beginning of the year, reflecting the general strength of the dollar and low copper prices.

n The annual rate of inflation has been falling steadily in recent months, helped by fuel price reductions. However, the prevailing pump prices are not covering costs and contributed to payment arrears that led to fuel shortages in the country in early-March.

n The depreciation of the Kwacha and the need to raise fuel prices will put upward pressure on inflation. But the recent easing of documentation requirements for Value Added Tax (VAT) is a positive move.

6



7.0%




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ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

WHAT IS BUDGET DEFICIT?

In simple terms, a Budget Deficit is when Government expenditure exceeds revenue. A budget deficit occurs when government budgets more spending than there is revenue available to pay for the spending over a specific period of time. Debt is the aggregate value of deficits accumulated over time.

When referring to accrued government deficits, the term “national debt” is used. The opposite of a budget deficit is a budget surplus And when inflows equal outflows, the budget is said to be balanced.

Budget deficits as a percentage of GDP may decrease in times of economic prosperity, as increased tax revenue, lower unemployment and economic growth reduce the need for government programs such as unemployment insurance

WHAT IS BUDGET DEFICIT?

7



7.0%




2.7%





0.1%


0.2%


0.2%



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0.5%





12.1%






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ZMW 46.7 BILLION


0.1%





0.2%


0.5%




ZMW 540.99 1.2%


20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

WHY HAS DEBT GROWN SO FAST?

Debt grows when a government borrows to finance its fiscal deficit, which is expenditure in excess of government resources from tax and non-tax revenues

and grants.

IN ZAMBIA, THE AVERAGE FISCAL DEFICIT DURING 2012-14 WAS 4.8 PERCENT OF GDP.

WHY HAS DEBT GROWN SO FAST?

GOVERNMENT EXPENDITURE ITSELF GREW FAST BECAUSE:

New road construction and infrastructure

projects

Much bigger maize subsidies

Large fuel subsidies The large increase in salaries of public

servants.

8



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ZMW 540.99 1.2%


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9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

CAUSES

THE MINISTRY OF FINANCE ATTRIBUTED THE WIDENED BUDGET DEFICIT TO:

n A slowdown in government revenue mainly due to reduced copper earnings and

n Some unbudgeted for expenditure such as the January 20 presidential elections. THE 2015 BUDGET CAME UNDER PRESSURE FROM:

n The payments of K 1.3 billion road sector arrears and

n An additional K376 million which went to financing Maize purchasing.

n K 148 million was used for the Kafue Bulk Water Supply Project

n Payment for fuel arrears amounting to K3.2 billion

n K163 million used to finance the presidential election.

n Unbudgeted for expenses have now taken the total expenditure by 13.43 billion kwacha beyond the budget.

n At its most basic level of analysis, a budget deficit is caused when a government spends more than it collects in taxes.

n Reducing tax rates may also cause a deficit if spending isn’t reduced to account for the decrease in revenue.

CAUSES

Periods of economic growth and economic decline can have a tremendous effect on the ability of a government to finance its spending

Unplanned expenses can also cause a deficit. National disasters such as droughts, floods and hurricanes not only destroy assets, but also impede or stop economic activities that will result in less taxable income from which to collect revenue.

9



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20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%

REALITY OF THE DEFICIT

The Zambian government spends more on salaries as a share of the Gross Domestic Product-GDP compared to 30 percent of other countries in the world.

The 2015 budget is under stress from significant obligations that have emerged in relation to fuel and agricultural subsidies, pensions and road construction.

Government has since revised the targeted end year GDP growth rates of at least 7s percent to 5.8 percent. The revision in the economic growth is also due to lower maize output following a fall output of maize and other cash crops.

Debt Costs - Increased external borrowing may lift Zambia’s annual debt-servicing costs to about $500 million from $150 million.

REALITY OF THE DEFICIT

Ministry of Finance disclosed that the 2015 budget deficit has

swelled from a projected K8.5 billion to a staggering

K20 billion in the first six months of the year.

0

5

10

15

20

25

30

DEFICIT

BILL

ION

S ZM

K

10



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KEY


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4.7%


27.3%

THE CASE OF THE EUROBOND

CAUTION: The 2013 Auditor General’s report has already raised an alarm on how the proceeds of the 2012 Eurobond have been used. Major issues include:

n Misapplication of funds n Lack of receipt and disposal details n Delayed and irregular disbursements.

Borrowing from abroad is not necessarily a bad thing. If we are spending the borrowed money in the right places that create jobs, wealth and prosperity, then we will have more than enough to dedicate a portion of it to repaying the loans. The Eurobonds have been used to mainly finance infrastructure projects in the transport and energy sectors.

THE CASE OF THE EUROBOND

n Since 2012, Zambia has borrowed US$1.75 billion worth of what are called Eurobonds.

n Zambia’s first Eurobond worth US$750 million was issued in 2012,

n The second one worth US$1 billion was issued in 2014.

n As with any debt, Eurobonds attract interest and the two Eurobonds so far issued will gobble up in excess of US$125 million in interest payments per year until the bonds reach maturity.

n Moreover, the two bonds have what are referred to as bullet repayment structures, meaning that lump-sum principal payments will be paid at the end of their respective 10-year maturity periods in 2022 and 2024. This may lead to significant repayment risks if there are adverse changes in the domestic or international market conditions at the time of repayment.

US$1.75 billion

Even though most of the selected projects are high-value and can potentially boost economic growth, the future economic benefits are likely to be delayed due to the ‘business-as-usual’ approach in the use of the proceeds so far. This increases the risk that Zambia may struggle to repay its debts between 2022 and 2024 if appropriate measures are not put in place.

11



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KEY


0.4%




4.7%


27.3%

In his address to Parliament, the Minister of Finance announced that he had approved the establishment of a sinking fund for the repayment of the two Eurobonds. Through the sinking fund, Government will set aside funds annually,

which will be used to make payments against the principal.

The traditional view is that the sinking fund should be adopted only in the case of a government revenue surplus. However, a surplus is unlikely to happen any time soon in Zambia. Therefore, a small part of the current revenue

receipts needs to be earmarked for this fund even in the context of government deficits. Once set up, the level of funding to the sinking fund could be scaled up in the medium-term after the high fiscal deficit is reduced and some fiscal space

created.

If put in place, these measures will lower the repayment risk and will signal to bond holders that we do not want to default on the debt. Lowering of the repayment risk would also translate into a lower interest rate on future

borrowings.

REPAYMENT OF EUROBOND USING SINKING FUND

POLICIES TO REDUCE BUDGET DEFICIT

12



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KEY


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4.7%


27.3%

ABOUT THE KWACHA

The Zambian kwacha has fluctuated widely since the beginning of 2014. After depreciating by about 20 percent in the first half of the year, it recovered in the second half of the year reflecting tightened monetary policy and the

issuance of Zambia’s second Eurobond in the amount of US$1 billion.

Downward pressures on the Kwacha re-emerged in the first quarter of 2015 reflecting external developments (U.S. dollar strength, and lower copper prices) as well as domestic factors (growing fiscal deficit, depleting government

deposits and a change in the fiscal regime that adversely affected the outlook for the mining sector). Monetary policy has carried the burden of containing inflation and countering the depreciation pressures on the Kwacha.

ABOUT THE KWACHA

13



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20.2%






9.6%


SECTORBudget Amount


KEY


0.4%




4.7%


27.3%


The obvious way to reduce a budget deficit is to control/cut government spending and increase tax rates, and ultimately growing the economy. However, the difficulty is that this fiscal tightening can cause lower economic

growth – which in turn can cause a higher cyclical deficit (government get less tax revenue in a recession). The best way to reduce fiscal deficits depends on the situation a country is in.


14



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4.7%


27.3%

CUT SPENDING

The government can cut its public spending to reduce its fiscal deficit. Spending should be focused on priority programmes that also contribute to economic growth. In the case for Zambia, some on-going projects may need to be halted.

For example, in the 1990s, Canada reduced it’s public spending quite significantly by up to 20% within four years across the board. This proved a successful policy in reducing the budget deficit. During this period of spending cuts, the Canadian economy continued to grow which also helped reduce the budget deficit.

In the Eurozone crisis, many European countries have cut government spending to try and reduce their budget deficits. For example, Greece, Ireland and Spain have all reduced spending. However, these spending cuts have contributed to a decline in economic growth, leading to lower tax revenues and rising debt to GDP.

TAX INCREASES

Government in some instances may resort to increase taxes so increase the overal revenues. CAUTION: Spending cuts, tax increases could cause lower spending and lead to a fall in economic growth. Again it depends on the timing of tax increases. In a recession, tax increases could cause a big drop in spending. But during high growth, tax increases won’t harm spending as much.

ECONOMIC GROWTH

One of the best ways to reduce the budget deficit as a % of GDP, is to promote economic growth. If the economy grows, then the government will increase tax revenue, without raising taxes. With economic growth, people pay more VAT, companies pay more corporation tax (tax on profits), and workers pay more income tax. High economic growth, is the least painful way to reduce the budget deficit because you don’t need to raise tax rates or cut spending.

Other options

BAILOUT

In some circumstances, countries can be eligible for a bailout from an international organisation, such as the IMF. This means they can draw on temporary funds to help with temporary liquidity shortages. The bailout may reassure investors and give the country more time for dealing with the deficit.

DEFAULT

Sometimes countries have got to the stage where they can’t manage their budget deficit. Arguably the case of Greece. The government have tried spending cuts and tax increases, but the budget deficit continues to be large. Therefore, they may be better off defaulting, leaving the Euro and starting again.



15



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4.7%


27.3%

PMRC RECOMMENDATION

n Government must avoid “excessive” foreign debt,

n Having more effective tax collection (widening the tax base including the measures to tax the informal sector,

n Getting public sector pay under control,

n Rationalizing spending on infrastructure projects,

n “It would be prudent to limit debt-financed spending to critical public infrastructure projects,” “If the deficit is not reduced, the fiscal position will become unsustainable.”

n Diversification of the economy with focus on agrictulture, mining, manufacturing and tourism,

n Generally growing the economy. (through enhanced productivity and manufacturing for export as well)

PMRC RECOMMENDATIONS

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27.3%

PMRC CONCLUSION

PMRC CONCLUSION

“Resolute action to contain the budget deficit, resolving the mining tax disputes, and foster policy coherence and stability would go a long way toward boosting investor confidence and unlocking the country’s high growth potential,” the IMF says.

The best way to reduce the budget deficit is to aim for positive economic growth, but in the long-term evaluate government spending commitments and reduce spending to sustainable levels.

17

Plot No. 32 Sable Road, corner Bishop and Sable Roads, Kabulonga, Lusaka, Zambia, Private Bag KL 10Tel: +260 211 268 385 | +260 979 015 660

THANK YOU

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Unlocking Zambia's Potential Response to this presentation can be sent to: [email protected]

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