Zambia Budget Review: Revenue and Expenditure (2004-2014) by Kampamba Shula

1.          Trend analysis

1.1.       Revenue

1.1.1.      Overview

·         The highest revenue collections in the past 10 has been from Valued added tax followed by PAYE then by Customs, Excise and Trade Taxes.

·         Revenue collection of the broad forms of taxes improved dramatically after 2010 as can be seen from the graph above.

·         Mining tax which was royalty based increased dramatically in 2010. This was on account of an exceptional performance of mining tax revenue.

·         Domestic borrowing was low from 2003 to 2010 but has steadily increased over the last 5 years. External financing grew exponentially in from 2010 to become the second highest contributor to budget revenue in 2013.

1.2.        

1.3.       Expenditure

1.3.1.      Overview

·         Over the past 10 years General Public services accounted for the bulk of expenditure at 29%. It was followed by Economic affairs (25%) and Education at 18%. Health followed not so closely at 10%.

Review

·         Economic affairs (Purple) increased substantially compared to General public services(Blue) over the last 10 years.

·         Defence spending has steadily increased over the last 10 years with greater expansion especially over the last 5 years.

·         Education expenditure has constantly increased over the past years with sharp increases over the past five years.

·         Health expenditure on the other hand actually experienced a decline from 2009 to 2011 but showed good growth from 2012 to 2014.

·         Housing, Social protection and environmental protection have been relativel stagnant. Public order and safety showed good expenditure growth however.

Source: Ministry of Finance

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Zambia Investment Profile: Overview Invest in Zambia by Kampamba Shula

Zambia Investment Profile
Economic Review
The country's economy has historically been based on the Copper Mining Industry. However, the Zambian Gvernment is undertaking economic diversification to reduce the country's reliance on the Copper Industry and exploit other components of Zambia's rich resource base by promoting Agriculture, Tourism, Gemstone Mining and Hydro Power generation.
Gross Domestic Product (GDP)
In 2013 real GDP was K125.9 billion compared to K106 billion in 2012. GDP growth in 2013 was 6.5%, with average real growth over the past three years (2011 – 2013) of 6.9%
Key contributors to real GDP growth in 2013 were: transport, storage and communications (27.1%); construction (24%); community, social and personal services (17.4%); financial institutions and insurance (13.7%); manufacturing (8.2%); and mining (5%).
The growth sectors that the Government is presently promoting include; Mining, Agriculture, Energy, Manufacturing and Tourism. These sectors have experienced exponetial growth in recent years, and are expected to continue to grow due to the numerous investments opportunities that are available in the country.

Zambia is consistently undertaking vcarious measures to improve its business environment. The Private sector reform development programme (PSRDP) is bent on streamlining business licensing processes and improving other administrative processes related to business establishment.

ZDA

The Zambia Development Agency (ZDA) was established in 2006 under Act No. 11 of 2006.
The ZDA is responsible for fostering economic growth and development in Zambia through promoting trade and investment and an efficient, effective and coordinated private sector led economic development strategy.The agency also has the challenge to develop an internationally competitive Zambian economy through innovations that promote high skills, productive investment and increased trade.
The ZDA principally furthers the economic development by promoting efficiency, investment and competitiveness in businesses, as well as promoting exports. It also addresses the high cost of doing business in the country by simplifying the processing of various business formalities, such as licensing.It builds and enhances the country’s investment profile for increased capital inflows, capital formation and employment creation. It also promotes the growth of the SME sector by providing incentives that can propel long-term sustainable domestic growth.

Investment Incentives
A corporate tax rate of 0% for 5 years from commencement of operations
Taxation on only 50 % of profits in year 6 through year 8 from commencement of operations and only 75% for years 9 and 10
5-year exemption on dividend taxes following the first year of declaration
5-year customs duties exemption on imported machinery and equipment
Improvement allowance of 100% Capital Expenditure on improvements or upgrading of infrastructure.

There are no limits on the amount of investment required to be made, however, there are some minimum investment thresholds to qualify for certain benefits, specifically: No less than US$250,000 in order to qualify for an Investors Permit ; and, No less than US$500,000 in order to qualify for special tax incentives for Priority Sectors or products (a list of such sectors and products can be found under Annex 2).
Once received, the CoR is valid for ten (10) years from the date of issue and you may apply for its renewal prior to the date of expiry.

Non-Fiscal Incentives
Once you hold a CoR you will be entitled to the following non fiscal incentives: Investment guarantees and protection against state nationalization; Free facilitation in applying for immigration permits, secondary licenses, land acquisitions and utilities; and The ability to own land under the company’s name.
Fiscal Incentives
If you invest $500,000 or more in a priority sector, you will be able to receive: A corporate tax rate of 0% for an initial period of 5 years from the first year profits are made by your company. For years 6 to 8 thereafter your corporate tax rate will only be applied to 50% of your profits and then 75% of the profits in year 9 to 10; Dividends shall be exempted from tax for 5 years from the year of first declaration; and Improvement allowance of 100% Capital Expenditure on improvement or for the upgrading of infrastructure Suspended Customs Duty to zero for 5 years on machinery and equipment.
Other Incentives Applicable to CoR Holders
As a CoR holder, you will also be entitled to the incentives of: Exemption from taxes on dividends declared by a company listed on the Lusaka Stock Exchange; Exemption from taxes on dividends declared by a company in the assembly of motor vehicles, motor cycles and bicycles industries for a period of five years from the date of first declaration; Duties on computer parts being reduced from 15% to zero percent;

Agriculture

Zambia is endowed with a large land resource base of 42 million hectares of which only 1.5 million hectares is cultivated every year. There are abundant water resources for irrigation and the country has 40 percent of the water in Central and Southern Africa.
Agricultural output in Zambia increased from 18 percent of the Gross Domestic Product (GDP) in 2008 to about 20 percent of GDP in 2009. This was as a result of increased area planted, good rainfall patterns in the whole country, as well as favorable agriculture policies by the government.
The agricultural sector continues to be the backbone of the Zambian economy as it contributes to the growth of the economy and also to exports. Primary agriculture contribute about 35 percent to the country’s total non traditional exports (all the country’s exports other than copper and cobalt) and about 10 percent of the total export earnings for the country.
Agro-processing
Agriculture in Zambia remains a major contributor to Zambia’s economy contributing about 13% to the country’s Gross Domestic Product (GDP). Agriculture is also a major employer in Zambia and currently employs about half the total workforce in Zambia. However agriculture alone not enough to bring about meaningful development to the Zambia people, there is need for Zambia to diversify from primary agriculture into agro processing. Alternative or additional income generating opportunities are needed to support the millions of poor families who can no longer support their livelihoods from the land alone.
Agro processing - turning primary agricultural products into other commodities for market - has the potential to provide those opportunities.
Currently the agro processing industry and the manufacturing industry contributes about 11% to Zambia’s Gross Domestic product with increase investment it is hoped that the sector can contribute more to Zambia economic well being and bring about tangible benefits to the Zambian people such as employment creation and poverty alleviation.
Agro processing aims to increase income and access to food for the poor, by establishing smallscale, appropriate and sustainable processing businesses that are flexible, require little capital investment and can be carried out without the need for sophisticated or expensive equipment.

Tourism

Zambia’s tourism sector is currently one of the country’s growth potential areas. It has been given the non-traditional export status and is receiving a lot of support from the Government by way of infrastructure development, promotion of increased private sector participation, as well as attractive tax incentives for all investments in the sector.

Zambia’s tourism potential draws from its natural environment, from which abound a variety of tourism attractions. The main tourism attractions in the country include; the Victoria Falls (which is one of the most renowned beautiful transcendental Seven Natural Wonders of the World), and the wealth of wildlife spread out in the country’s 19 national parks and 34 game management areas with a total area of 65,000 km2. Furthermore the country boasts of vast water falls, lakes and rivers, one of the largest concentrations of bird species in the world, a rich cultural heritage and several monuments spread across the country.

Infrastructure

Infrastructure development, is one of the Government of Zambia’s priority areas, and is upheld in both the country’s Fifth National Development Plan, and the Sixth National Development Plan, as well as in the National Vision 2030.
Infrastructure is an essential driver of competitiveness which is critical for ensuring the effective functioning of any economy and the country has basic reliable infrastructure in terms of; airports, road networks, railway lines, energy generation and transmission installations and telecommunication infrastructure.

Energy

Zambia’s energy sources include; electricity, petroleum, coal, biomass, and renewable energy. It is only petroleum which is wholly imported in the country, while the country is basically self-sufficient in all the other energy resources, as it has substantial unexploited reserves of these forms of energy. The country’s economy has been growing at an average of 5 percent per annum over the past 10 years and demand for energy has also been rising.
The demand for the most important energy source in the country - electricity has been growing at an average of about 3 percent per annum mainly due to the increased economic activity in the country especially in the agriculture, manufacturing and mining sectors, as well as increased activity in the region. Furthermore the country’s growing economy has also lead to an increase in the demand for the other forms of energy such as petroleum and coal, as these are key factors of production and operations in most economic sectors. The demand for renewable energies has also seen significant growth in the recent years as the market explores alternative sources of energy, with renewable energies proving to be a viable alternative.

Mining

Zambia is Africa’s largest producer of Copper and Cobalt. Although copper production was affected by low copper prices in the late 1990s, Copper production has been increased since 2000.  It increased to 572,793 tonnes in 2007 from a low of 256,884 tonnes in 2000, representing an increase of over 100%.  The rise in copper production over the years is attributed to investment in rehabilitation of infrastructure and technological innovations in existing mines, the coming on board of new mines and the increase in existing mines, the coming on board of new mines and the increase in small-scale copper mining activities.  Copper production has been increasing over the recent past from 575,000 metric tonnes in 2008 to 665,000 metric tonnes in 2009 and to about 700,000 metric tonnes in 2010.  This has been due to increased capacity utilisation facilitated by the continued increase in metal prices on the international markets.

The Zambia Development Agency Act provides for incentives for companies investing substantial amounts in the mining sector in the country. The Act provides for the investment thresholds that investors have to meet in order to qualify for fiscal and non-fiscal incentives. Currently the threshold is; investments of US$ 500,000 and above qualify for the incentives.
The general investment incentives applicable to the mining sector are;
Guaranteed input tax claim for five years on pre-production expenditure for exploration companies in the mining sector.
Any mining company holding a large-scale mining license carrying on the mining of base metals is taxed at 30%. Other mining companies are taxed at 35%
Dividend paid by a mining company holding a large-scale mining license and carrying on the mining of base metals is taxed at 0%
Income earned by companies in the first year of listing on the Lusaka stock exchange qualifies for a 2% discount on the applicable company tax rate, however companies with more than 1/3 of their shareholding in the hands of Zambians qualify for a 7% discount
Duty free importation of most capital equipment for the mining sectors.
100% mining deduction on capital expenditure on buildings, railway lines, equipment, shaft sinking or any similar works.
The debt to equity ratio reduced from 2:1 to 3:1 to encourage further investment in the sector.

Manufacturing Sector Overview

The manufacturing sector in Zambia accounts for about 11 percent of the country’s Gross Domestic Product (GDP) and has been growing at an average annual growth rate of three (3) percent in the last five years. Growth in the sector is largely driven by the agro processing (food and beverages), textiles and leather subsectors. Secondary processing of metals in another main activity in the sector, including the smelting and refining of copper, and this has led to the manufacturing of metal products. Fertilizers, chemicals, explosives and construction materials such as cement are also produced in the sector. Other activities include wood products and paper products.
The manufacturing activities in the country are undertaken by the private sector with government playing a proactive role. The sector is of vital importance in relation to the country’ macroeconomic strategy for encouraging broad based economic growth. In this regard, the Government has put in place measures to support manufacturing activities, such as the establishment of Multi-Facility Economic Zones (MFEZs) and Industrial Parks (these are industrial areas for both export orientated and domestic orientated industries, with the necessary support infrastructure installed), and provision of sector-specific investment incentives. Government also promotes small and medium enterprises in rural and urban areas so as to enhance labour intensive light manufacturing activities in these areas.

The sector has attracted significant investment in recent years (foreign direct investment stocks in the sector totalled about US$ 1,200 million as of 2009), and other than producing many different products, manufacturing also absorbs much of the output from other sectors such as agriculture, and also supplies inputs into the other sectors such as mining and construction.

Public Private Partnership (PPP) Projects
A PPP is a contractual arrangement whereby the private sector performs government functions of service delivery or infrastructure development, or uses state property, and assumes associated risks for the property, on behalf of Government, for a defined and agreed period of time. The private sector in return receives financial remuneration in form of concession fees, user fees, or any other form of repayment that maybe agreed upon with the Government. In this process, the Government retains a significant role in the partnership as the main purchaser of services or the main enabler of the project.

Health

An Ultra-modern Center of Excellency Hospital in Lusaka
Three diagnostic health facilities in Lusaka, Livingstone and on the Copperbel
Transport

E-Governance programme
Chingola-Solwezi-Lumwana-Jimbe railway line
Kazungula-Livingstone railway spur
Kafue Lions den
Njanji commuter
Nseluka-Mpulungu railway spur
Solwezi via Kasempa-Kaoma-Mongu to Katima Mulilo
TAZARA line to Chipata
Operation of train services between Chipata and Mchinji
Agriculture

Development of Kalumwanga Farming block
Development of Luena Farming blocks
Energy

Development of Kabompo mini-hydro
Development of Kalungwishi mini-hydro
Development of Mombututu mini-hydro

Multi-Facility Economic Zone (MFEZ)
The Multi- Facility Economic Zone (MFEZ) is a Government programme.Introduced to Zambia in 2005 by the Japanese Government through Japan International Corporation Agency (JICA).
The aim is to create a platform for Zambia to achieve economic development by attracting significant domestic and foreign direct investment (FDI) through a strengthened policy and legislative environment. The initiative emphasises on political will and integrity, private sector dynamism and integrity and civil service efficiency and integrity as key forces that enable the economy to attain accelerated economic development.
The implementation of MFEZs in Zambia is designed to make Zambia competitive through increased activity in the trade and manufacturing sectors, which have numerous positive spillover effects in other sectors such as utilities, transport, agriculture and services.
The MFEZs are, special industrial zones for both export-oriented and domestic-oriented industries. The zones will have the well appointed infrastructure in place in order to attract and facilitate establishment of world-class enterprises in the zone (s).
The MFEZs blend the best features of the free trade zones (FTZs), export processing zones (EPZs) and the industrial parks/zones concept and create the administrative infrastructure, rules, regulations etc that benchmark among the best dynamic economies. The blending of physical infrastructure with an efficient and effective administrative infrastructure will create the ideal investment environment for attracting major world class investors.
The legislation governing the MFEZs, is mainstreamed in the Zambia Development Agency (ZDA) Act No. 11 of 2006 under section 18.
In addition, the regulations and guidelines governing the declaration and establishment of MFEZs were put in place through a Statutory Instrument No. 65 of 2007.
Section 5 (p) of the ZDA Act no. 11 of 2006 mandates ZDA to administer, control and regulate MFEZs in Zambia.
The MFEZ incentives are non discriminatory and applies fairly to all eligible investors be it from Zambia or outside Zambia.

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Zambian 2013 Budget Reviewed by Kampamba Shula

Zambia Budget Review

On 12 October 2012, the Minister of Finance, Hon. Alexander Bwalya Chikwanda, MP, announced the 2013 National Budget. Budget highlights and taxation and other changes as contained in the Budget speech and the Zambia Revenue Authority (“ZRA”) publication.

The Government plans to spend K32.2 trillion to be financed by:

·         K24.7 trillion (77 percent) from domestic revenues;

·          K5.9 billion (18 percent) from domestic and foreign borrowings; and

·          K1.5 billion (5 percent) grants from cooperating partners.

Macroeconomic targets for 2013 are to:

·         Achieve real GDP growth of above 7 percent;

·         Attain end-year inflation of no more than 6 percent;

·         Achieve domestic revenue of at least 20 percent of GDP;

·         Limit overall fiscal deficit to 4.3 percent of GDP, of which domestic borrowing will be 1.3 percent;

·         Maintain gross international reserves of at least 4 months of import cover; and

 

Utilization of US$750 million Eurobond Proceeds

The Minister has proposed to apply:

·         US$430 million, 57.3 percent of the Eurobond proceeds, towards road and rail transport projects;

·         US$255 million (34 percent) on energy generation and transmission projections; and of

·         The balance of US$65m going to fund central hospitals, SMEs and transaction and funding costs.

Tax Incentives and Loopholes in Customs and excise duty

·         Remove customs duty on importation of :

(a) Engines of all types;

(b) Cranes of all types;

(c) Conveyor belts;

(d) Machines for cutting, grinding, polishing, drilling and welding;

(e) Vacuum and liquid pumps; and

(f) Sprayers of all types.

·         Remove customs duty on importation of the following:

(a) Automatic data processing machines;

(b) Magnetic or optical readers; and

(c) Machines for transcribing and processing data.

·         Remove the 15 percent customs duty on importation of ambulances in a move aimed at increasing access to health care services.

·         Remove the 15 percent customs duty on importation of motor cycles. Motor cycles play an important role in supporting access by rural health and agriculture extension workers to areas not accessible by other means of transport.

·         Increase customs duty from zero percent to 15 percent on flat rolled products of iron or non-alloy steel excluding those coated with tin and lead used in the manufacture of roofing sheets.

·         Remove excise duty on carbonated drinks and packed water in a measure intended to stimulate growth of the beverage sector.

·         Remove customs duty on locomotives, carriages and rail traffic control equipment for railways to encourage investment in the railways sector.

·         Suspend duty on articles and equipment for sports, games and general physical exercise for a period of 3 years to 31 December 2016.

·         Suspend customs duty on the following goods up to 31 December, 2013 effect from midnight on 12 October, 2012:

(a) New motor vehicles for tourism enterprises that offer transport services;

(b) New articles and equipment for furnishing and refurbishment of accommodation and catering

facilities for businesses licensed as tourism enterprises.

·         Remove customs duty on new and re-treaded pneumatic tyres intended to reduce the cost of doing business

Sectors

Agriculture

 

The agriculture sector is expected to contribute one half of the new employment opportunities over the next five years, making it one of the priority sectors. The Country has continued to record bumper harvests in crop production. However, this has mostly been concentrated in maize production, which has been the focus of the Farmer Input Support Programme (FISP). In order to boost and diversify crop production, Government intends to:

·         Include other crops in the FISP such as soya, cotton, sunflower and rice;

·         Streamline the electronic voucher system from 2013 in order to strengthen the private sector’s role in supplying agriculture inputs;

·         Scale up investment in extension services, irrigation, training institutions and research and development in order to improve crop yields.

Key initiatives in 2013 will include:

·          Promotion of increased local production of key inputs such as fertilizer and seeds;

·          Incentives to encourage local value

·          Restriction of the operations of the Food Reserve Agency to management of strategic food reserves only.

·         The Government has increased the budget allocation to this sector from K1,698 billion in 2012 to K1,865.4 billion.K1.1 trillion for the core agriculture programmes, including those aimed at promoting the sector’s diversification and cater for livestock, fisheries, crops and irrigation development;

·         an amount of K500 billion (2012: K500 billion) for the reformed FISP; and

·         K300 billion (2012: K300 billion) for the purchase of strategic food reserves.

Mining

The sector performance has been weaker than expected against a backdrop of a lethargic global economy leading to depressed copper prices and reduced copper export volumes during the year. To improve monitoring and mining systems the Government will aim to:

·         Building capacity at the Ministry of Mines, Energy and Water Development to facilitate the monitoring of both quality and quantity of mineral production and exports; and

·         Strengthening the regulatory and penal system with regard to false reporting of production and export volumes.

Tourism

The Sector has been identified as key in diversification of the economy. Accordingly, the Government intends to promote and expand tourism products and develop key infrastructure with the planned move to make Choma the provincial capital for Southern Province, it is expected that resources in Livingstone will be devoted to enhancing its status as the tourist capital. A total of K21.1 billion has been allocated

to the Tourism Sector compared to K12.8 billion in 2010 towards marketing activities. In order to leverage the maximum benefit from hosting the 2013 United Nations World Tourism Organisation Conference, Government proposes to suspend duty up to 31 December 2013 on the following goods:

·         New motor vehicles for tourism enterprises that offer transport services; and

·         New articles and equipment needed to furnish or refurbish accommodation and catering facilities for businesses licensed as tourism enterprises.

 Government aims to facilitate creation of 300,000 jobs in the tourism sector over the next 5 years.

Manufacturing

The Government’s primary strategic objective is to enhance the competitiveness of locally manufactured products, in both the local and export market by:

·         Promoting value addition to locally available raw materials; and

·         Implementing targeted investment incentives for entrepreneurs involved in value addition ventures.

The Government proposes to eliminate the following duties:

·         Customs duty on engines and cranes of all types, conveyor belts, machines for cutting, grinding, polishing, drilling and welding, vacuum and liquid pumps and sprayers of all types;

·          Excise duty on carbonated drinks and packed water; and

·         Customs duty on locomotives, carriages and rail traffic control equipment to reduce transportation costs for bulky products.

The Government has made a specific K255 billion budgetary allocation for the rehabilitation of the Nitrogen Chemicals of Zambia. The Government anticipates that some 90,000 jobs will be generated over the next five years as a result of these interventions.

Energy

The sector faces a number of challenges including frequent disruptions of power supply.

In collaboration with the private sector, the Government intends to:

·         Increase installed generation capacity;

·         Improve the transmission and distribution infrastructure; and

·         Expand rural access to electricity.

To this end, the Government is working with the private sector with regard to the:

·         Development of the Itezhi – Tezhi and Kafue Gorge lower power stations; and

·         Completion of the extension of the Kariba North Bank Power Station, amongst others. The petroleum sub-sector continues to be of key focus with the Government pledging to:

·         Continue with the construction of fuel depots across the country; coupled with the

·         Promotion of the use of renewable energy and alternative sources of energy such as solar, bio-mass, geo-thermal and wind.

In support of the above initiatives as the Government proposes to allocate:

·         K984.3 billion for electricity generation, transmission and distribution infrastructure; and

·         K336.3 billion for the rural electrification programme.

The Government expects approximately 90,000 jobs to be created on account of these interventions.

Transport and Communication

The Government has reaffirmed its commitment to reduce the cost of doing business through, among others, transport infrastructure improvement. Government’s objective is to ensure that all provincial capitals and rural areas have accessibility to markets.

The following key initiatives have been undertaken by the Government:

·         Link Zambia 8,000 project to result in over 8,000km of a road network over a five year period K billion has been allocated over three phases

·         2,000 km of township roads to be paved using labour- initiative and environmental friendly technology

·         Termination of concession agreement of the Railway Systems of Zambia and Government proposes to allocate K642.6 billion to revamp the sector.

·         US$430 million of the Eurobond proceeds have been allocated to road and rail transport

Monetary and Financial

Despite unfavorable global economic conditions Government believes performance of the domestic economy has been satisfactory. Government monetary policy targets to stay this course and:

·         Achieve real GDP growth of above 7 percent;

·         Achieve year end inflation of no more than 6 percent;

·         Achieve domestic revenue of at least 20 percent of GDP;

·         Limit the overall fiscal deficit to 4.3 percent of GDP, of which domestic borrowing will be 1.5 percent;

·         Maintain gross international reserves of at least four months of import cover; and

·         Maintain a flexible foreign exchange climate that espouses limited Bank of Zambia interventions to curb volatility. Other notable decisions undertaken in 2012 to facilitate Government macroeconomic policy implementation in 2013 are as follows:

·         Rebase the Zambian Kwacha from January 2013 for the purpose of simplifying financial transactions;

·         Increase commercial bank’s minimum aggregate capital from the current ZK12 billion to ZK104 billion for locally owned banks and to ZK520 billion for foreign owned banks. This is intended to enhance commercial banks’ capacity and promote the financial services sector;

·          Introduction of a policy rate to signal the Bank of Zambia’s monetary policy stance and to provide financial markets with a credible and stable anchor for setting of interest rates;

·         Removal of tax on interest earned by individuals from savings and deposit accounts;

·          Removal of medical levy currently charged on interest earned on savings and deposit accounts, treasury bills, government bonds and other similar financial instruments;

·          Statutory requirement for all local transactions to be effected in Zambian Kwacha; and

·          Statutory guidelines to address large disparities between buying and selling foreign exchange rates levied by authorized foreign exchange dealers.

Health

A total of K3.6 trillion representing 11.3% of the total budget has been allocated towards the health sector. This is 40.% over the 2012 allocation. The focus in the health sector has been highlighted as follows:

·         Improving service delivery especially in rural areas;

·         Scaling up of the provision of essential drugs and medical equipment and other supplies; and

·         Upgrading all hospitals commencing with the three referral hospitals.

Empowerment Funds

K103.9 billion has been allocated for the purpose of empowerment of entrepreneurs, with women and the youth the primary focus. This compares with K40 billion allocated in 2012

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