Zambia Debt Analysis by Kampamba Shula

Zambia Debt Analysis
Recently the Minister of Finance presented the 2014 Budget and estimated the budget deficit to be around 8.5% of GDP. Standard & Poor recently changed their outlook to negative while Fitch Downgraded Zambia’s debt. This and many other recent events called for a fresh review of Zambia’s debt.
Intro
In April 2005, Zambia reached the completion point of the enhanced initiative of Highly Indebted Poor Countries (HIPC Initiative). This resulted in more than 80% of Zambia’s external debt being forgiven (2000 – US$6.5billion, 2004 – US$7.1 billion, 2006 US$0.7 billion). Further, given the prevailing conducive macro-economic environment, domestic borrowing has been on the rise hence threatening the sustainability of domestic debt. (Masengo, 2011)
Fitch Ratings 
On October 28 Fitch Ratings downgraded Zambia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. Its foreign currency senior unsecured bond ratings have also been downgraded to 'B' from 'B+'. The Outlook is Stable. Simultaneously, the Short-term IDR has been affirmed at 'B' and the Country Ceiling downgraded to 'B+' from 'BB-'.
The authorities expect a deficit of 8.5% of GDP in 2013, against an expected deficit at the time of the budget of 4.5% and an average of 2%-3% between 2006 and 2011. The overshoot largely reflects overspending on subsidies, which will total 4% of GDP, against 0.7% in the budget. This reflects perennial under-budgeting for subsidies, delays in scrapping the fuel subsidy as well as arrears payments and taking on contingent liabilities of the Food Reserve Agency. Lower-than-expected revenue also contributed towards the deterioration. (Reuters, 2013).
Domestic Financing and Crowding Out
In addition, though it is healthy to borrow domestically, excessive borrowing is distortionary. If the government becomes heavily indebted domestically and inflation and interest rates rise, the government will have to pay high interest to service this domestic debt. Further, in most cases domestic debt cannot be defaulted or rescheduled unlike external debt. This is because domestic debt is mostly held by the banking sector and default may trigger a banking crisis. Domestic borrowing has distortionary effects in the economy when excessively done. It can affect interest rates – heavy borrowing can lead to increased interest rates. It can also lead to “crowding out effect” – where the private sector’s access to finance for investment is shadowed by heavy government borrowing (Masengo, 2011).
It can also result in the ponzi game effect – where there is accumulation of borrowing to service already existing domestic debt (borrowing to pay off maturing debt and interest thereof).

Debt: The Bigger picture 
Reports by (Masengo, 2011) suggest that Zambia’s domestic debt has become sustainable, owing to the past decades positive developments– external debt cancellation, price and financial system stability. These results have been similar for both revenues with and without grants. The first reason explaining this result is the attainment of the HIPC completion point which led to (and has continued to result in) cancellations of most of the external debt stock. This has freed resources from external debt service towards domestic deficit and project financing. This has also reduced the size of the Government’s total expenditure as it includes external debt service.
Notably, Zambia has embarked on and succeeded in bringing and keeping inflation in single digit levels since sometime in 2006. GDP growth rate has also been consistently above 5% since 2003. Exchange rate stability has been achieved and maintained for relatively long periods. Project financing has been directed towards intended sectors like infrastructure development, citizen’s empowerment and poverty reduction. This, if properly done will enhance economic development and poverty reduction and help break the syndrome of repeated borrowing for the same expenditure.
However, it is important that Zambia continues with its economic diversification efforts so as to reduce dependency on exports of raw copper. There is need to enhance the manufacturing and processing sectors to begin exporting value products in both mining and agriculture. Further the Government needs to widen the tax base to incorporate the informal sector. This will reduce the tax rates and reduce incidents of tax avoidance and tax evasion. Therefore, it is evident that Zambia has continued to make progress in fiscal management and economic development, and indeed performing an analysis of domestic debt sustainability, for quarterly data for the recent period of say 2000 to 2010 would yield more precise and convincing results. However, this study recommends that for Zambia to achieve and maintain a strong form of sustainability for both domestic and indeed external debt, a debt sustainability monitoring office needs to be permanently set up. This office should regularly carry out thorough analysis for sustainability of both domestic and external debt (Masengo, 2011).
Economics Association of Zambia Insight
We are aware that the MoFNP has been conducting Debt Sustainability Analysis to guide the levels of additional loans that the Government contracts. The Ministry has indicated to the EAZ that the DSA conducted in 2007 and confirmed by the Word Bank and IMF in 2008 showed that the country’s debt is sustainable over the period 2007 to 2023. The analysis further indicates that the country can still sustain additional non-concession borrowing of US$1.0 Billion and concessional borrowing of the same amount. According to the Ministry, this analysis was confirmed in the subsequent DSA conducted in 2009 and 2010 (Economics Association of Zambia , 2012).

In line with the recommendations of the JCTR Report in 2007, the EAZ believes that it is in the interest of the country to develop a comprehensive debt strategy and policy that will stipulate when to borrow, at what terms and for what purpose. This should also be reinforced by a policy that debt should not finance recurrent expenditure but only capital expenditure.   Adequate guidelines should also be set regarding the contraction of domestic debt. The Government’s strategy of rolling – over could be defective and a careless way of using public resources (Economics Association of Zambia , 2012).
There is also need to move towards reorganization of the debt offices particularly to centralize borrowing powers, strengthen the monitoring capacity of the debt stock and strengthening of the debt strategy and policy.  In line with this, there is need to improve debt data management systems. As observed by the JCTR report, Zambia does not have a centralized comprehensive domestic debt database. The data is usually inconsistent and has moving figures in certain particular years. This has resulted in the lack of control and monitoring of the debt (Economics Association of Zambia , 2012).
The Economics Association of Zambia is also aware that there are intentions to review the legislation to address issues relating to the weakness in the debt management practices. Among these issues is the inclusion of a provision requiring the Minister to obtain approval and authorization of National Assembly and also to report on:
 The source of the loan
 The extent of the total indebtedness by way of principal and accumulated interest
 Provision made for servicing or repayment of the loan
 All borrowings by any state institution or authority annually
 Provision requiring debt managers’ strict adherence
 Provision for the establishment of a central depository of   original loan agreements
 Setting limits to the indicators such as Public debt/Gross Domestic Product (PD/GDP)
It is the Economics Association view that these proposals be supported by the members of the parliament as they are meant to enhance the debt management system in Zambia

EuroBond
Zambia, which 13 months ago issued its first international debt, is considering the sale of a record $1 billion Eurobond to plug a budget deficit that contributed to a credit downgrade.
Africa’s biggest copper producer will try to contain some spending to reduce the fiscal shortfall to below the forecast of 8.5 percent of gross domestic product for this year, Treasury Secretary Fredson Yamba said in a phone interview from Lusaka, the capital, today. The government this month raised its estimate for the gap from 4.3 percent and is finalizing as much as $250 million in syndicated loans as funding needs are pushed higher by government spending on wages and subsidies.
Yields on Zambia’s $750 million of bonds have climbed 161 basis points since being issued in September 2012 compared with an average 123 basis-point increase for dollar-denominated African debt tracked by JPMorgan Chase & Co. Fitch Ratings yesterday lowered Zambia one step to B, five levels below investment grade. Standard & Poor’s downgraded its outlook to negative on Oct. 25, while retaining its B+ rating.
The sale of a second Eurobond “is one of the avenues available,” Yamba said. “We are looking at various options. We have to go out there and see which is the cheapest source.”
While the southern African country would be able to sell a $1 billion Eurobond, it will be more expensive than its debut securities, Chris Becker, a market strategist at Johannesburg-based ETM Analytics, said by phone. A sale would follow record issuances by African nations, including debut bonds from Rwanda and sales by Ghana, South Africa and Nigeria, with plans by Tanzania, Kenya and Senegal to tap international markets.
Conclusion
Some might say that Zambia should not borrow externally and even as sincere as they may be they are wrong. When the Government borrows locally “Crowing out” happens. This raises the cost of borrowing for private companies. As this research indicates there is room for concessional and non-concessional borrowing.But prudent fiscal and debt management should not be overlooked.

Sincerely
Kampamba Shula
Member of Economics Association of Zambia
Economic Advisory at Economeka Capital



References
Economics Association of Zambia . (2012). THE STATUS OF ZAMBIA’S DOMESTIC AND EXTERNAL DEBT. Lusaka: EAZ.

Masengo, P. C. (2011). DOMESTIC DEBT SUSTAINABILITYANALYSIS. Lusaka: UNZA.

Reuters. (2013, October 28). Fitch Downgrades Zambia to 'B'; Stable Outlook. Retrieved October 30, 2013, from Reuters: http://www.reuters.com/article/2013/10/28/fitch-downgrades-zambia-to-b-stable-outl-idUSFit67460520131028

http://www.bloomberg.com/news/2013-10-29/zambia-considering-1-billion-eurobond-after-rating-cut.html

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Zambia 2014 Budget Analysis by Kampamba Shula

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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