2017 Zambia Budget analysis and highlights

2017 BudgetKampamba Shula

Economics Association of Zambia

23rd November 2016

Enhance Domestic Resource

Mobilization

Scale up Protection Programs

Raise levels of accountability

and transparency

Minimize Unplanned

Expenditures

Policy Consistency

Zambia Plus Economic Recovery Program

Turnover & PAYE Tax bands adjusted

No Export ban in Agriculture

Government to disengage from oil

procurement

Free sanitary pads to be distributed to

Rural and Peri Urban Areas

Social Health Insurance bill

coming in 2017

Cost reflective electricity tariffs in

2017

Government to operationalize

Higher loan scheme

Slow down on Capital project

financed through costly borrowing

Dismantle arrears to suppliers and contractors

Realign Farmer input support program

Mitigate effect of economic recovery

programme on vulnerable in society

Support Growth in key sectors of

Economy

Key 2017 Budget Highlights

2017 National Budget

28%

5%

4%

31%

1%1%

9%

1%

16%

4%

2017 Expenditure by Function

General Public Services

Defence

Public Order Safety

Economic Affairs

Environmental Affairs

Housing and Communityamenities

Health

Recreation, Culture and Religion

Education

Social Protection

8%

15%

5%

3%

15%

12%1%

8%

6%

27%

Resource Envelope 2017

Company Income tax

PAYE

Withholding

Mineral Royalty

VAT

Custom and Excise

Other revenues

Non Tax revenues

Domestic revenues

Grants and Financing

Government proposes to spend K64.5 billion in 2017

The resource envelope projects Grants and Financing at 27%, which is a rather large percentage. The grants and financing will be greatly affected by how much Government is able to

solicit confidence in the economy’s fiscal trajectory and debt sustainability. A deal with the IMF in the first quarter of 2017 could help accomplish this.

Budget Review

The 2017 budget projected at K64 billion is 26% higher than the projected amount in the medium term expenditure framework. Recent expenditure patterns have rendered the

medium term expenditure framework impotent in guiding spending policy. As can be observed from the graph above the proposed budgets in the last two years have been

substantially higher than the projected medium term expenditure framework which means the internal budgeting process, actual budgets or even projected budgets for that

matter are significantly at disparity with the medium term expenditure framework

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2012 2013 2014 2015 2016 2017

Bill

ion

s

Proposed Budget Medium term expenditure framework

Source: Ministry of Finance

Expenditure Review

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015

Bill

ion

s

Actual Tax Revenue Actual Expenditure

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015

Bill

ion

s

Projected Expenditure Actual Expenditure

The gap between actual expenditure and actual revenue in the last five years has widened.

This shows that expenditures have increased at a rate that was not correlated to actual Tax

revenue. This trend highlights a great problem in the budget constraint.

Actual expenditure has exceeded projected expenditure more times than it has

underperformed in the last five years. This further shows a recurrent problem in sticking

to planned for expenditure which if unchecked will undermine the budgeting process.

Source: Ministry of Finance Source: Ministry of Finance

Debt Review

Since 2012 Zambia’s debt position has been deteriorating with both domestic and external

debt climbing to almost unsustainable levels according to IMF standard international

sustainable debt ceilings.

Actual Fiscal deficits have also outstripped projected Fiscal deficits in the last three years

with the widest difference noted in 2015.

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015

Bill

ion

s

Domestic Debt External Debt Government Borrowing

0

2

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015

Bill

ion

s

Projected Fiscal Deficit Actual Fiscal Deficit


“Medium Term Debt Management Strategy coming in 2017.”

Honorable Minister of Finance Felix Mutati, 2017 Budget

Attain year end inflation no more than 9%

Attain domestic Revenue Mobilisation of atleast 18% of GDP

Limit overall fiscal deficit to no more than 7% of GDP on cash basis

Maintain domestic borrowing to no more than 2% of GDP

Build Foreign exchange Reserves to atleast 3 months import cover

Support creation of 100,000 decent jobs

Agriculture Industrialisation Tourism Mining

Macroeconomic Objectives

Seventh National Development Plan

Global Economy

3.2 3.1

44.2

3.4

1.4

3.5

3

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2015 2016

Global Growth Emerging Market Sub-Saharan Zambia

“Zambia projected to grow at 3% in 2016 and 3.4% in 2017”


As you can observe actual GDP fell below potential GDP in 2008-2009

due to the effects of the financial global crisis on Zambia’s actual GDP

growth. Zambia’s actual GDP again fell below potential GDP growth in

2013 and has been below potential GDP growth to this date. This is

due to low commodity prices, unfavorable weather conditions and

most importantly a power deficit which reduced productivity in many

sectors in the economy.

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Residuals (Potential vs Actual Output)

Source: World Bank & EAZ calculations

0

5

10

15

20

25

30

Non Food Food Total

Inflation

Inflation has remained high in double digits and is projected to drop to single digits by year end next year. The projection that inflation will drop to single digits by the year end of

2016 is very unlikely as fuel prices were not factored in the base effect drop of inflation in October 2016.

Source: Central Statistics Office

Trade Balance

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2015 (Jan-Sep) 2016 (Jan-Sep)

Export Earnings (US$ Billions)

Copper ExportEarnings

Non-TraditionalExport Earnings

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

Mill

ion

s

Trade balance

0

2

4

6

8

10

12

Bill

ion

s

Exports (US$) Imports (US$)

As the trade balance graph shows over the past 2 years Zambia has recorded trade deficits and more importantly Zambia’s gap between imports and exports began to narrow as far

back as 2011.This shows our terms of trade have deteriorated greatly

Source: Central Statistics Office Source: Central Statistics Office Source: Central Statistics Office

Mining

500,000

510,000

520,000

530,000

540,000

550,000

560,000

570,000

580,000

2015 (Jan-Sept) 2016 (Jan-Sept)

Copper Production (Metric tons)

0

0.5

1

1.5

2

2.5

3

3.5

4

2011 2012 2013 2014 2015

Bill

ion

s

Mineral Royalty

As the graph above shows Government revenue collection in terms of

royalties increased in the last five years with a major spike in 2014 due

to a revision on the royalty rate.

Increased Copper production for year 2016 compared to same period in 2015. Mobile

Phone users increased showing opportunities for business in mobile based platforms

GOVERNMENT WILL KEEP THE TAX STRUCTURE UNCHANGED IN THE MINING

INDUSTRY


10.6 10.8 11 11.2 11.4 11.6

2015

2016

MOBILE SERVICE USERS (MILLION)

Mobile service users increased from 10.9million to 11.5 million. This

underscores the great potential the country has in mobile based

platforms.

Laptop Tablet

Phone

Technology


Energy

Kafue George, 4,413,730

Kariba North, 2,163,326

KNBE, 455,247

Victoria Falls, 632,470

ITPC, 394,262

Mini-Hydros, 107,917 Diesels, 15,945

Energy (MW) Jan-Sept 2016

Kafue George Kariba North KNBE Victoria Falls

ITPC Mini-Hydros Diesels

65,881

183,659

48,020

375,549

71,454

5,526

77,925

23,052

395,944

2,729,904

4,414,352

OTHERS

AGRICULTURE

QUARRIES

MANUFACTURING

ENERGY AND WATER

CONSTUCTION

TRADE

TRANSPORT

FINANCE AND PROPERTY

SERVICES

MINING

- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000

SECTOR CONSUMPTION (MWh), JAN-SEPT 2016

SECTOR CONSUMPTION

The bulk of electricity consumption still goes to the Mining sector followed by

services, Finances and property and then manufacturing

The bulk of power generation comes from then Kafue Gorge followed

by Kariba North

GOVERNMENT WILL MOVE TO COST REFLECTIVE TARIFFS BY END OF 2017 TO

ATTRACT PRIVATE SECTOR INVESTMENT WHILE MAINTAINING THE LIFE LINE TARIFF

TO PROTECT POORER HOUSEHOLDS.

Source: Zesco Source: Zesco

Energy

2016 2017 2018 2019 2020 2021 2022

Supply (GWh) 12,773 14,894 21,018 21,018 22,118 22,118 34,476

Demand (GWh) 16,764 18,314 19,117 19,944 20,721 21,185 22,021

Energy satiation to normalize after 2

good rainy seasons

New Energy from KGL, BGHES and LRB

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Ener

gy (

GW

h)

Energy Load Forecast, 2016-2022

Supply Capacity

Power Demand

According to Zesco Energy satiation is projected to normalize after two good rain seasons. This

effectively means load shedding will end.

Source: Zesco

Energy

0

0.5

1

1.5

2

2.5

3

2010 2011 2012 2013 2014 2015

Bill

ion

s

Projected Fuel subsidy Actual Fuel subsidy

In the petroleum sub sector, the Government will disengage from the procurement of finished

petroleum products with effect from1st March, 2017 this will be undertaken by the private

sector.


Agriculture

0

500

1000

1500

2000

2500

3000

2015 2016 2017

Agriculture Policy (K'million)

FISP

FRA

0

0.5

1

1.5

2

2.5

2010 2011 2012 2013 2014 2015

Bill

ion

s

Projected FISP Actual FISP

Government will promote diversification to cash crops through full migration to the E-Voucher

system. This will be done in order to reduce the associated wastage and overheads with the

current FISP. Government has allocated a total of K2.8bn in the 2017 budget for FISP and K942m

for FRA. This is the largest FISP amount in 3 years.

Government will refrain from using export bans to regulate agricultural markets.

Actual FISP expenditure has outstripped Projected expenditure for the last five years.

This shows a serious challenge in sticking to budgeted amounts for FISP..


Transport

5626.51

6629.93

8644.5

2015 2016 2017

Road Infrastructure (K'million)Government is seeking to partner with the private sector on the

North-West and Livingstone Sesheke railway line.


Government budget allocation to the transport sector with reference to road

infrastructure has been increasing in the last 3 years

Government will attract equity partners to revamp operations

of Zambia Railways Limited and TAZARA. Inter-mine rail links

operated by Zambian Railways will be rehabilitated to reduce

strain on the roads.

Source: Ministry of Finance National Budgets

PPP Ndola-Lusaka Road

Government will embark on Public private partnership

PPPKasomeno-Mwenda Road.


PPP Ndola-Kasumbalesa Road


BridgeKazungula Bridge

when completed will substantially enhance trade within the southern corridor. Trade with Angola will be enhanced on strengthening the Kafue Hook Bridge on the Lusaka-Mongu road.

Transport

Government is seeking to partner with the private sector on the North-West and Livingstone Sesheke railway line.


Water and Sanitation

540.99

283.64

391.7

2015 2016 2017

Water Supply & Sanitation (K'million)

Budget allocation in the last three years to water and sanitation declined in 2016

compared to 2015 and picked up in the 2017 budget. It is still a relatively smaller

amount than the budget allocation in 2015.

Education

9433.33

9143.21

10641.93

2015 2016 2017

Education (K'million)

Budget allocation to the education sector dropped from 2015 to 2016 but

increased dramatically in the 2017 budget.

Source: Ministry of Finance National Budgets Source: Ministry of Finance National Budgets

Health

4464.09 4431.85

5762.03

2015 2016 2017

Health (K'million)

Allocation to the health sector dropped in 2016, but has picked up

significantly in the 2017 budget. Government will continue prioritizing

procurement and distribution of resources necessary for health services to

be fully functional.

Government will in 2017 Commence the distribution of free

sanitary towels to girls in rural and peri-urban areas.

Government will in 2017 table the Social Health insurance Bill to facilitate the implementation of a compulsory social health insurance scheme.


Social Protection

1257.8 1273.76

2693.21

2015 2016 2017

Social Protection (K'million)

Allocation to the health sector dropped in 2016, but has picked up

significantly in the 2017 budget. Government will continue prioritizing

procurement and distribution of resources necessary for health services to

be fully functional.

Government will

upscale social cash

transfer both in

terms of coverage

and monthly

amounts to each

beneficiary

household in all

the 105 districts

with monthly

amounts rising by

28%.

Source: Ministry of Finance National Budgets Source: Ministry of Finance National Budgets

Monetary Policy

0

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30

35Ja

n-1

1

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

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-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

BOZ Policy Rate Average Lending Rate

Weighted Interbank Rate

0.0000

2.0000

4.0000

6.0000

8.0000

10.0000

12.0000

14.0000

16.0000

18.0000

20.0000

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

May

-13

Jan

-14

Sep

-14

May

-15

Jan

-16

Sep

-16

K/US$ K/Euro K/BPS K/ZAR

0

5

10

15

20

25

30

35

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Bonds

24 months 3 year 5 year

7 year 10 year 15 year

Sovereign bonds for Zambia have had their yield rise substantially since late 2014. Fiscal consolidation will be needed on the part of Government to bring yields down. The Zambian Kwacha

depreciated significantly in 2015 but has relatively appreciated in 2016.Bank of Zambia will adopt a target range of inflation of 6-8% thereby supporting a forward looking monetary policy.

Exchange rates will continue to be market driven.

Source: Bank of Zambia Source: Bank of Zambia Source: Bank of Zambia

Fiscal Targets

Dismantle arrears to Suppliers and Contractors and prevent the accumulation of new arrears through effective control systems

Restore budget credibility and enhance transparency and accountability

Restrict new public sector recruitments to only frontline workers in Health and Education.

Implement phased removal of electricity subsidies

Restrict new capital projects and major equipment procurements until all ongoing projects are completed.

Target public spending to support the Economy Recovery programme as well as increased social protection

Realign FISP and restrict FRA to the procurement and management of strategic reserves.

Debt Management Policy

Slowdown on Capital infrastructure projects which are debt financed through costly borrowing.

Develop and publish a Medium term Debt management strategy in 2017

Use Government Securities as the main instrument for domestic financing as they offer competitive prices

Utilize PPPs and Joint Ventures to finance Government projects

Establish trade centres at the boarders of major nontraditional export markets beginning with Kasumbalesa, Kipushi and Chirundu.

Implement a single window platform for various boarder agencies to enhance trade facilitation

Operationalize the Bilateral Trade agreements with the Democratic Republic of Congo and Angola

Provide for advance ruling on rules for origin for goods originating from countries with which Zambia has signed trade agreements including SADC, COMESA, India and China

Trade Policy

Monthly Turnover

Category

Proposed Regime

K1-K4,200 K100 per month + 3% of monthly turnover above

K3,000

K4,200.1-K8,300 K225 per month + 3% of monthly turnover above

K3,001


K3,002


K3,003

K16,500.1-k20,800 K800 per month + 3% of monthly turnover above

K3,004

Above K20,800 K1,025 per month + 3% of monthly turnover

above K3,005

Engine Capacity Current Rate Proposed rate

Less than 1500cc including motor cycles 50 70

1501cc to 2000cc 100 140

2001cc to 3000cc 150 200

3001cc and above 200 275

Capital

allowance for

plant,

equipment and

machinery used

in farming and

agro processing

increased from

50% to 100%

Honorable Minister of Finance, 2017 Budget address

Require every person changing ownership of a

vehicle to obtain a tax clearance certificate from

ZRA

Honorable Minister of Finance, 2017 Budget address

Increase advance income tax rate paid at importation of goods from 6

to 15%.Advance income tax is not a final tax and is refundable at the

end of the year pending tax compliance proof

TAX CARD

Editorial TeamHERRYMAN MOONO NATIONAL SECRETARY

KAPELE STEPHEN NDUMBA ACTING EXECUTIVE DIRECTOR

MULONGWE MUSONDA RESEARCH ASSOCIATE

KAMPAMBA SHULA

RESEARCH ASSOCIATE

Contacts

For the Full Report on “The 2017 Budget Highlights & Analysis”

Contact:

Kampamba Shula – Programs Officer

[email protected]

26 Parairenyatwa Road,

Rhodes Park, Lusaka

Telephone: +260 211 842 088;

P.O. Box 38006

Twitter: @EAZambia

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Economy & Finance

2017 Zambia Budget analysis and highlights