Macroeconomic Constraints and Public

Spending in Zambia

Lusaka, 1 December 2010Public Expenditure Review Workshop

OutlineMacroeconomic Constraints

The Evolution of Fiscal Policy

Composition of Public Spending

Benefit Incidence of Public Spending

Conclusions

Macroeconomic ConstraintsZambia has made significant strides on the

macro economy over the last decadeGrowth has been the result of favorable

external conditions but based on adequate economic policies

Structural reforms, as well as fiscal, monetary, and exchange rate policies have resulted on a stable macroeconomic environment of low inflation

Dependence on copper exports and government revenues pose a challenge

Economy has been growing by about 6 percent in the last decade

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0Real GDP Growth

(Annual percent change)

Inflation has fallen to single digits

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f0

5

10

15

20

25

30

35

Annual Inflation(percent)

The Current Account deficit has been reduced

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f-15.0

-10.0

-5.0

0.0

5.0

External Current Account(percent of GDP)

Evolution of Fiscal PolicyUnsustainable high public (external) debt was

caused by weak fiscal discipline and inefficient state-owned enterprises

Privatization initiated a period of fiscal stabilization reforms in the early part of the decade

Debt relief (HIPC and MDRI) in 2006 was the result of a strong reform program

Higher fiscal revenues are needed to support government spending priorities (and lower donor support)

Evolution of Fiscal Policy

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f-8.0

-6.0

-4.0

-2.0

0.0

2.0

Fiscal Deficit(percent of GDP)

Evolution and Composition of Public SpendingOverall public spending rose slowly through 2006

and slightly faster thereafter (falling in 2009)Spending rose by 63% in real terms from 2002 to

2009, but only from 20% to 21.5% of GDP.Spending does not account for aid (project

grants)Budget execution has improved (budget cycle

and capital spending)Limited availability of resources (both domestic

and external) require greater efficiency (to do more with less)

Evolution and Composition of Public Spending

1 2 3 4 5 6 7 80

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

under spending

Actual

Budget

Composition of Public SpendingEducation remains the largest sectorSpending on transport (roads) has

acceleratedHealth spending, which had recovered since

2006, fell slightly in 2009Agriculture spending has increased, but two

major programs (Farmer Input Support Program and Food Reserve Agency) account for most of it

Spending on the Water sector remains low (considering the important effect on health)

Composition of Public Spending(constant 2009 prices)

2002 2003 2004 2005 2006 2007 2008 20090

500

1,000

1,500

2,000

2,500

3,000EDUCATIONHEALTHTRANSPORT (ROADS) AGRICULTUREWATER

Poverty and InequalityNational poverty rates have fallen by a small

percentage, from 68% in 1996 to 59% in 2006Poverty remains very high in rural areas, at

77% in 2006, compared to 84% in 1996But it has continue to fall in the urban areas,

to 27% in 2006, from 41% in 1996In addition to the rural-urban divide,

inequality has actually increase (the Gini coefficient rose from 47.4 in 1996 to 52.6 in 2006)

Poverty and Inequality

Poorest 2nd 3rd 4th Richest0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2,213,092

1,964,024

1,725,915

1,184,320

536,155

132,950

379,167

618,667

1,159,760

1,808,104

Population by Consumption Quintile and Place of Residence, Zambia 2006

RuralUrban

Benefit Incidence of Public SpendingPoverty reduction is a difficult goal to achieve

through the budget process on an annual basis

But government should be able to identify which expenditures have a positive impact in reducing some of the effects of poverty

Governments usually concentrate in public goods such as education and access to health

Equity analysis does not substitute for need to analyze efficiency of public spending (ex-ante and ex-post)

Benefit Incidence - EducationEducation is the largest sector on

government spendingData from 2006 shows that 32 percent of

the poorest quintile of the 15-19 years old has not attended school (vs. o.6 percent of the richest)

Total (primary and secondary) net enrollment rate for the poorest rural quintile is 66 percent, compared to 88 percent for the richest urban quintile

Educational Outcomes

Poorest 2nd 3rd 4th Richest0

20

40

60

80

100

66.4

73.777.9

80.4 81.9

69.9

75.7

81.583.9

87.5

Overall Enrollment Rate of Primary and Secondary Schooling by Consumption Quintile and Locality, Zambia 2006

RuralUrban

Benefit Incidence – Access to Electricity

Only 20 percent of the total population has access to electricity, but only 3 percent of the rural population

Compared to 51 percent of the urban households

In equity terms, 64 percent of the richest quintile has access to electricity compared to 0.6 percent of the poorest quintile

Benefit Incidence- Access to Electricity

Poorest 2nd 3rd 4th Richest0

20

40

60

80

100

0.5 0.8 2.45.8

21.0

2.7

10.8

24.3

44.6

76.8

0.6 2.4

8.2

25.0

64.0

Access to Electricity for Lighting by Consumption Quintile and Location, Zambia 2006

RuralUrbanTotal

Benefit Incidence - WaterWater services are dominated by various

public-sector and quasi-public institutionsBased on data of the 2006 LCMS, 65

percent of the poorest quintile uses water from an unprotected well or a river

Compared to 72 percent of the richest quintile uses water from a public or private tap

Benefit Incidence - Water

Poorest 2nd 3rd 4th Richest0%

20%

40%

60%

80%

100%

Source of Water Supply by Consumption Quintile, Total

River Well-unprotected Well-protectedBorehole Own tap Public/other tap

ConclusionsZambia has achieved significant gains over

the last decade at the macroeconomic levelDespite faster growth, government spending

remains constrained (by resources and in its effectiveness)

No significant results of government spending on reducing poverty (or inequality)

Analysis of public spending efficiency limited by data availability, but more can be done