2014 Budget Analysis
On the 11th October 2013 ,
the honorable Finance minster presented the 2014 Budget address to the national
assembly.This is an analysis based on
the information in the Address. All Graphs and Calculations belong to to
the author and no claim can be made by any who choose to use the analysis in
this article.
Overview of the Global and Domestic Economy Sectors in
2013
The global economy continues
to recover slowly with global growth projected at 2.9%.This underscores the
slowdown in emerging markets like Brazil, Russia, China and India whose growth
in the recent years has been a pillar of the global economy. Weaker growth in
the United States and the extended effects of the Eurozone recession have
looked to further undermine global growth.
Sub-Saharan Africa’s
performance has been relatively stronger in light of this with a real Gross
Domestic Product (GDP) projected at 5%.
Commodities
Commodity prices have
generally been lower in 2013 compared to 2012 partly due to lower demand form
emerging Market like China and increased supply by copper producers like Chile.
Copper prices fell from an average of US$7,960 per metric tonne in 2012 to
US$7,416 between January and September 2013 (see graph above).
Zambia’s GDP growth is
projected to remain strong above 6%.This is on the backdrop of strong
performance in the mining, construction,manufacturing ,transport and
communication sectors. With the decline in agricultural output, this projected
out turn is lower than our budget forecast of above 7 percent
Inflation
In 2013, monetary policy
focused on achieving an end-year inflation of 6 percent. As at end-September,
2013, inflation remained above target at 7 percent, following inflationary
pressures largely associated with the removal of fuel and maize subsidies. To
address these inflationary challenges, the Bank of Zambia raised the Policy
Rate over the first half of the year to 9.75 percent from 9.25 percent in
December, 2012. To complement this, the Central Bank undertook aggressive open
market operations to curb money supply growth.
Lending rate
Average commercial bank
lending rates have remained relatively stable at 16.5 percent as at
end-September, 2013. The Government still believes that these rates are
unacceptably high and are holding back domestically financed investments.
Exchange Rate
With regard to the exchange
rate, this has stabilized at around K5.4 to the US dollar, reflecting
improvement in the supply of foreign exchange during the third quarter of 2013.
Exports of gemstones, cement,
electricity, sugar, tobacco, cotton lint, maize and maize seed all registered
strong growth and this demonstrates the increased diversification and
resilience of the Zambian economy
Gross International Reserves
as at end-September 2013 stood at US$2.7 billion, about US$200 million higher
than a year earlier, translating into 3 months of import cover.
With regard to fiscal policy,
Government undertook measures to address long-standing structural challenges
relating to fuel and maize subsidies as well as distortions in the public
service pay structure. This was done to reinforce fiscal prudence, as well as
enhance productivity for better public service delivery. As a result of these
developments, the projected fiscal deficit for 2013 will be 8.5 percent of GDP,
compared to the budget estimate of 4.5 percent.
Macroeconomic
objectives
The Sixth National Development Plan has been revised to
align it with the PF Government’s development agenda.
Macroeconomic objectives for 2014 are to:
a) Achieve real GDP growth of above 7 percent;
b) Create at least 200,000 decent jobs;
c) Attain end year inflation of no more than 6.5 percent;
d) Increase international reserves to over 3 months of
import cover;
e) Maintain a fiscally sustainable public external debt
level so that debt service and amortization do not exceed 30 percent of
domestic revenues;
f) Increase domestic revenue collections to over 21 percent
of GDP; and
g) Limit domestic borrowing to 2.5 percent of GDP and
contain the overall deficit to no more than 6.6 percent of GDP
To ensure that Government is able to better capture the jobs
created in the economy; data collection will be strengthened so that
comprehensive labour market information at national and sub-national levels can
be produced in a timely manner
Agriculture, Forestry and Fisheries
In the 2012/13 farming season, crop
and livestock production had mixed results. The outbreak of army worms at the
time of planting and lower than normal rainfall in the southern half of the
country led to reduced maize output.
More regrettable was the
significant decline in cotton production due to poor pricing in the previous
year. Burley tobacco, soya beans, wheat and sunflower however, were among the
crops which registered higher production levels. The livestock sub-sector has
continued to grow in 2013, with cattle numbers increasing by 10 percent to
almost four million and the number of poultry increasing by 18 percent to over
92 million.
Tourism Sector
Zambia successfully co-hosted the
United Nations World Tourism Organisation’s 20th General Assembly this year.
This is because Government provided targeted tax incentives for the tourism
sector in 2013. In addition, Government heavily invested in expansion and
rehabilitation of infrastructure at the Harry Mwaanga Nkumbula International
Airport, as well as in road infrastructure and social amenities in Livingstone.
Government intends to build on this
raised international profile to achieve its development targets for tourism.
These include the promotion of product diversification and further investment
in tourism infrastructure, including the Kenneth Kaunda International Airport.
The aim is to diversify the tourism base by improving accessibility to our
national parks, heritage sites and natural attractions. Government will also
continue to streamline licensing procedures and enhance capacity in the
hospitality industry.
Government has already introduced
the hologram to protect income rights of musicians and film makers. In 2014,
Government will also complete work on national film policy.
Manufacturing Sector
Government released K106.9 million
to the Development Bank of Zambia to support the financing needs of industry,
particularly Small and Medium Scale Enterprises. These enterprises also
benefited from the resumption of funding through the Citizens Economic
Empowerment Fund.
The linkages between the
manufacturing and agriculture sectors have been strengthened through the
rehabilitation of Nitrogen Chemicals of Zambia.
The removal of customs duty on most
electrical and mechanical industrial equipment in 2013, allowed manufacturers
to import major capital items at relatively lower costs. As a result of this
measure and other initiatives under the Private Sector Development Programme,
the manufacturing sector is expected to grow by 4.3 percent in 2013.
In 2014, Government will continue
to promote the diversification of manufactured products, especially those with
export market potential by, among other things, accelerating the development of
the Multi-Facility Economic Zones. The Government remains committed to
facilitating value addition in manufacturing with a view to exploiting regional
and international export markets and creating more jobs for our youths
Mining Sector
Mining sector performance in the
first half of 2013 remained positive. Copper production increased by 13.2
percent in the first half of 2013 to over 374,000 metric tonnes, compared to
production over the same period in 2012. This was due to improved mining
production techniques, the opening of Lubambe mine and ramping up production at
Mulyashi copper mine. On the basis of this performance, copper production from
large scale mines is projected to exceed last year’s production level.
Local auctioning of gemstones
commenced this year. Government will continue to encourage this initiative and
urge small scale gemstone miners to use this approach so that they get better
value for their gemstones. Local auctioning will also improve Government’s
ability to collect appropriate revenues from the sub-sector.
Private Sector Development
Government will continue to
implement reforms aimed at building and enhancing a sustainable legislative and
regulatory environment for private sector-led growth. This will include the
continuation of business registration and licensing reforms. Key among these
are the establishment of provincial one-stop shops for business registration,
and the decentralisation of certain elements of the filing procedures for
registration to Local Authorities to reduce the cost of doing business.
Infrastructure Development
Transport and Communications Infrastructure
In 2014, Government will continue
to implement the Link Zambia 8000 programme. Under this programme, which
commenced last year, work is progressing well on over 1,500 kilometres of
roads. These include the Pedicle; Mongu-Kalabo; Kalabo-Sikongo-Angola border;
Kasama-Mporokoso-Kaputa; Mbala-Nakonde; Mansa-Luwingu; Chipata-Chadiza-Katete;
Chama-Matumbo; Isoka-Muyombe-Chama; Kitwe-Chingola; and the Leopards
Hill-Chiawa roads as well as the bottom road from Munyumbwe to Chaanga. The
programme is expected to promote development of local contracting capacity and
create 24,000 jobs throughout the country. Already, 16,000 workers, mainly
youths, have been employed.
His Excellency the President
launched the Pave Zambia 2000 programme in September this year and work has
commenced in Chawama in Lusaka and Petauke in Eastern Province. The Government
will scale up this programme in 2014 to cover all the provinces. Once fully
operational, this programme will generate income for up to 20,000 workers.
In addition to township roads, the
Lusaka 400 programme was launched this year with the aim of decongesting the
capital city by constructing 400 kilometres of link roads. I am pleased to
report that work on this project has progressed significantly with over 150
kilometres of roads to be completed by the end of this year. This programme is
expected to be completed by 2016.
Energy
Government continues to work with
the private sector to increase installed electricity generation capacity and
improve the transmission infrastructure. The extension of the Kariba North Bank
Power Station will add 360 megawatts of hydro power to the installed capacity.
By the end of this year, 180 megawatts will be added and the balance will come
on stream in 2014. In addition, the Ndola Energy heavy fuel generating project
is nearing completion and will contribute 50 megawatts by the end of this year.
With respect to Itezhi-tezhi,
financing has been secured and works have progressed, whilst for the Kafue
Gorge Lower power station, the tender process to engage a strategic equity
partner is in progress. Itezhi-tezhi is expected to come on stream in 2015 with
120 megawatts, while the Kafue Gorge Lower power station with the capacity of
750 megawatts is expected to come on stream in 2019.
Two provincial fuel depots will be
completed this year and a third in 2014, with installations in other provinces
to follow thereafter. While efforts to upgrade Indeni Oil Refinery will
continue in 2014, Government will also explore other options including
construction of a new refinery with sufficient capacity to meet the ever
increasing demand of our robust economy with surpluses for export.
Health Sector
Government remains committed to
bringing affordable and quality health care as close to the family as possible.
Accordingly, Government will continue to develop regional hubs to decentralise
storage and distribution of medical drugs and supplies to better ensure their
availability to all Zambians. Two hubs, in Chipata and Choma have already been
established with two more in Mongu and Kasama planned for 2014. In 2014,
Government will procure specialised medical equipment and requisite supplies
for tertiary level hospitals to ensure non-interruption of services and reduce
the number of referrals abroad. Further, Government will continue investing in
district hospitals, especially for those districts that are currently not served
with first level referral services and will also continue with its programme of
constructing 650 health posts.
Education and Skills Development
Government will accelerate the
re-introduction of the primary and secondary school system; promote the
teaching of life skills to enable learners cope with the demands of
self-employment in the labour market; promote the teaching of science and
mathematics subjects; construct more technical schools and provide laboratory
equipment.
With regard to tertiary education,
Government will increase the number of students accessing quality and
affordable university and college education by:
a) expanding student accommodation,
lecture rooms and libraries at the University of Zambia, the Copperbelt
University and Mulungushi University;
b) continuing with the development
of infrastructure at Chalimbana and Palabana universities in Lusaka Province,
Paul Mushindo and Robert Kapasa Makasa universities in Muchinga Province,
Mukuba University on the Copperbelt and Kwame Nkhrumah University in Central
Province; and
c) commencing the construction of
Luapula University in Luapula Province and King Lewanika University in Western
Province.
Monetary and Financial Sector Policies
The Bank of Zambia will maintain
price and financial system stability by continuing to implement monetary policy
through its interest rate targeting framework. Further, it will strengthen the
regulatory framework governing the financial sector by updating and harmonising
legislation.
Government will continue to
maintain a flexible exchange rate regime with the Bank of Zambia only
intervening to smoothen short term volatility. Additionally, the Bank of Zambia
will continue to build international reserves to over 3 months of import cover.
Public Financial Management Reforms
With regard to public procurement,
the Zambia Public Procurement Authority has already been transformed from an executing
institution to an oversight and regulatory institution with procurement
functions decentralised to spending agencies.
Therefore, under the Public
Financial Management Reforms, Government will accelerate the establishment of a
Treasury Single Account to enhance Government’s ability to oversee its accounts
and avoid the accumulation of idle funds. Currently, Government is using the
Treasury Single Account to fund personal emoluments, transfers to grant aided
institutions and capital programmes. Beginning 2014, this will be extended to
funding other categories of expenditure.
2014 Budget
Government proposes to spend a
total of K42.68 billion or 30.7 percent of GDP. This will be financed through
domestic revenues of K29.54 billion as well as grants of K2.63 billion from our
cooperating partners. The balance of K10.51 billion will be met through foreign
and domestic borrowing.
Allocations
General Public Services
Government has set aside K10.73
billion or 25.1 percent of the Budget for General Public Services which
includes allocations for infrastructure development for the new districts,
inter-governmental fiscal transfers and debt payments. Combined, these three
account for 56.5 percent of this allocation.
Economic Affairs
Government has allocated K11.94
billion to economic sectors, representing 28.0 percent of the Budget.
·
Key interventions include the countrywide
construction of dip tanks and silos for which an allocation of K231.9 million
has been provided. The target is to increase the number dip tanks to combat
animal disease and increase grain storage capacity to 1.3 million metric tonnes
by the end of 2014. In addition, K80.9 million has been allocated to develop
irrigated agriculture.
·
K500 million for the Farmer Input Support
Programme to facilitate the provision of affordable crop and livestock inputs
for our small scale farmers.
·
To secure and maintain the 500,000 metric tonnes
of strategic food reserves, K1.0 billion has been set aside in the 2014 Budget.
·
K6.07 billion or 14.2 percent of the Budget has
been allocated to the transport sector to construct, rehabilitate and maintain
road, rail, water and air infrastructure.
·
K5.13 billion of this is earmarked for the Link
Zambia 8000 Programme, PAVE Zambia 2000 project, the Lusaka 400 project and
feeder roads in the rural areas.
·
With regard to the rail subsector, Government
has allocated K339.8 million to recapitalise TAZARA and rehabilitate Zambia
Railways Limited. The quality of rail travel for both goods and the public will
improve and the negative impact on the nation’s roads from heavy commercial
traffic will be mitigated.
·
K250 million for other critical interventions in
the transport sector. These include the procurement of radars to bring our air
safety levels to world standards, and dredging equipment and water vessels to
improve water transport in the country.
·
In the energy sector, K550 million has been set
aside for the power rehabilitation project under Zesco while K65 million has
been allocated for the Rural Electrification Programme.
Education
·
K8.61 billion or 20.2 percent of the Budget on
education. Out of this amount, K1.28 billion will go towards the construction
of education infrastructure which will include 53 new secondary schools and the
upgrading of 220 basic schools into secondary schools. Government will also
construct an additional 150 primary school classrooms in the rural areas with
corresponding 150 teacher houses, by using the community mode method.
·
Included in the education sector infrastructure
budget is K404.3 million for university and other tertiary infrastructure, in
particular student hostels at the University of Zambia, Copperbelt and
Mulungushi Universities while an additional K395.3 million has been provided
for operational grants for universities, student tuition and bursaries.
Health
·
9.9 percent of the Budget, or K4.23 billion on
health services in 2014. Within this amount, K245.7 million is provided for the
construction and rehabilitation of district hospitals, health centres, training
schools and the upgrading of tertiary health care.
·
In order to enhance the availability of
essential drugs and medical supplies, the budget in 2014 for these items has
been increased by 24.3 percent to K738.7 million from K594.1 million in 2013. A
further K66.6 million has been provided for medical equipment including the
specialised equipment I mentioned earlier.
Public Order and Safety
·
K2.12 billion. To begin to redress the
deplorable conditions in our prisons, K21.9 million has been allocated for
expanding and improving prison infrastructure with a further K22.6 million
allocated to prison farms so as to improve the nutrition of in-mates.
·
K27.2 million to procure digital forensic
equipment and a mobile forensic laboratory, among others.
·
A total of K661.0 million has been allocated for
housing and community amenities. Of this amount, K417.8 million has been
budgeted for the provision of safe water and sanitation in both rural and urban
areas.
Social Protection
·
K1.18 billion for social protection programmes
in 2014. A large part of this increase arises from higher allocations to the
Public Service Pension Fund, which will receive K754.2 million, in addition to
the employers’ contribution.
Revenue Estimates and Measures
Revenue Measures
·
Increase excise duty on airtime from 10 percent
to 15 percent.
·
Duty on clear beer from 40 to the duty rate of
60 percent. The revenue gain from these measures is K514.8 million.
·
Increased the property transfer tax rate from
the current 5 percent to 10 percent. The measure is expected to generate an
additional K100 million.
·
Charge at the rate of 0.2 percent of the value
transferred on money transfer service to a recipient within or outside the
Republic of Zambia. This measure will bring to the Treasury K180 million.
Rationalisation of the Tax System
·
Expand the Value Added Tax base by shifting
several categories of zero rated goods and services to the standard rated
category. This will generate a revenue gain of K151 million.
·
To equalize tax treatment between branches and
subsidiaries and prevent tax avoidance, I propose to extend the withholding tax
to profits distributed by branches of foreign companies. This will generate
additional revenues of K1 million.
·
withholding
tax on payments to non-residents on royalties, management and consultancy fees
is at 20 percent
·
Withholding tax on commissions, public
entertainment fees and payments made to non-resident contractors to 20 percent.
This measure will result in a revenue gain of K71.7 million
·
Change the taxation of rental income by reducing
the withholding tax to 10 percent from 15 percent and make this a final tax. As
such, turnover tax on rental income shall not be applicable.
·
As a way of further stimulating the booming
property sector, which is a source of employment creation, It has been propose
to exempt from withholding tax interest arising from the debenture part of a
property linked unit paid to Zambian investors in any Property Loan Stock
Company listed on the Lusaka Stock Exchange.
·
In order to broaden the tax base, I propose to
introduce a withholding tax of 20 percent on winnings from gaming, lotteries
and betting and make it a final tax.
Streamlining of Tax Incentives
Any investor,
foreign or local, who pledges to invest at least half a million United States
dollars in a priority sector or product, as declared under the Zambia
Development Agency Act, is entitled to tax incentives. In particular, they are
exempt from paying duty for the first five years, are entitled to a five year
income tax holiday and benefit from a further five years of preferential income
tax rates.
Align the sectors
declared as priority under the Zambia Development Agency Act to the Revised
Sixth National Development Plan
Current PAYE Regime
Income Band
|
Tax Rate
|
0 - K2,200 per month
|
0%
|
K2,201 – K3,000 per month
|
25%
|
K3,001 – K5,900 per month
|
30%
|
Above K5,900 per month
|
35%
|
Proposed PAYE
Regime Income Band
|
Tax Rate
|
0 - K3,000 per month
|
0%
|
K3,001 – K3,800 per month
|
25%
|
K3,801 – K5,900 per month
|
30%
|
Above K5,900 per month
|
35
|
Non Tax Revenues
·
As part of its comprehensive land reform
programme, Government has launched the Integrated Land Management Information
System whose benefits, among others, are to strengthen the administration of
land and regularise land ownership through surveying and titling of land
country wide. This measure will improve certainty of land location and
ownership, enhance security of tenure for both customary and state land,
improve transparency in land transaction procedures and increase revenue
collection among others.
·
Toll fees collected from toll gates based on the
Road User Pay principle is one of the most sustainable sources of financing for
the roads. The Government has embarked on tolling of selected major roads whose
proceeds will be channelled to the rehabilitation and maintenance of roads
country wide. Tolling of commercial traffic will commence before the end of
this year using the existing weigh bridge infrastructure.
·
Revise upwards various fees and fines to bring
them to appropriate cost recovery levels of providing the respective services.
These fees include those collected by the Ministry of Lands. Natural Resources
and Environmental Protection, Ministry of Information and Broadcasting
Services, Ministry of Mines, Energy and Water Development and Ministry of Home
Affairs. These measures will take effect from 1st January, 2014.
·
Government will raise an estimated K550 million
from these non-tax measures in 2014.
Short
Comings (Authors view)
This Budget is a decent attempt at creating
equity in resource allocation, that being said they are some shortfalls.
In my personal view there are certain short
comings in this budget which need to be addressed in this budget.
Public
sector reforms
Public sector pay has been characterised by
distortions in salary levels and inequities in other conditions of service. In
2013, Government has fast-tracked the implementation of the reforms, especially
to benefit the lower paid public workers.
Review
of public pensions
Enhancement of the public service
performance management system and the creation of a public service credit union
to replace the various loan schemes that
are currently in place need to be managed with the utmost prudence.
Pension
Reforms
A good pension system should subscribe to
the basic principles of affordability, sustainability, portability, wide
coverage and adequacy. The current pension systems, particularly the public
pensions, clearly fall short of these principles. The public pension funds for
instance, are fiscally unsustainable, not transferable between jobs and are
unable to meet the minimum living requirements of retirees. Over the medium to
long term, Government will implement wider reforms.
The Public Service Pension Fund has huge
deficits that are projected at K2.9 billion in 2014, K2.6 billion in 2015 and
K2.8 billion in 2016. Given that the Public Service Pension Fund is wholly
owned by Government, it means that these deficits have to be funded from tax
payers’ money. Against the backdrop of significant fiscal challenges that we
are experiencing to mobilise sufficient resources for development, pension
reforms can no longer be avoided.
Government intends to implement changes to
the Public Service Pension Fund that will include changing the retirement age;
revising the basis for calculating the pensionable emoluments and reviewing the
commutation factors. My concern is here is that if the retirement age is increased,
the number of job openings will reduce for incoming graduates and other
workers. In essence this could change labour demographic dynamics in a negative
way.
Agriculture
The allocation of K500 Million and K1
Billion to the FISP and FRA respectively heavily skews agricultural finance to
none research oriented projects. A little portion of this money could have gone
into strengthening the research capacity. More research can be done in disease
and crop marketing. However the constructing multi-purpose dams and irrigation
schemes to limit dependence on rain-fed agriculture is a welcome initiative.
Tourism
Sector
Value added Standard rate for the supply of
All distinct tourism services including game viewing, bungee jumping, and Pre-booked
tour packages booked after 1 January, 2014, could possibly hurt the tourism Industry
depending on the elasticity of such services
Manufacturing
Sector and SMEs
It appears that incentives for investors
remain skewed towards big corporations with finance to qualify for MFEZ and ZDA
tax incentives. The portion of finance allocated to the growth of SMEs is at
K106.9mil is relatively small What SMEs need is not only finance but a healthy
environment that fosters their growth. In this regard some more key incentives
for SMEs could be implemented to cushion some of their costs. SMEs hire their
most people in the labour force and will help create the much needed Job
growth.
There was not sufficeient finance allocated to the value addition process, especially in agriculture and copper.
Infrastructure
K618.5 million from the Eurobond proceeds was
earmarked for track rehabilitation and procurement of rolling stock for Zambia
Railways. Progress has been lethargic due to procurement delays and
administrative bottlenecks. This sort of management of infrastructure funds is
not prudent and serves to undermine the completion of earmarked projects. The
reason Eurobond money was under the auspice that the projects had already been identified.
A bureaucratic procurement process doesn't help at all.
References
2014 Budget Address by the Minister of Finance
London Metal Stock exchange
Bank of Zambia
Central statistics Office
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