Zambia 2014 First Half Economic Review: H1 2014 by Kampamba Shula

Zambia 2014 First Half Economic Review: H1 2014
This is the first ever edition in the series which highlights the performance of the Zambian Economy in the first half of 2014.

Growth

Industrial Performance: Whole sale and retail grew by 31% while real estate and construction grew by 9.5% and 9.1% respectively
• The Whole sale and retail was the best performing sector in the first quarter growing by 31%.
• The real estate sector was the second best performing sector growing by 9.5%
• Construction was the third best performer growing at 9.1%
• Other sector performance
• Financial services growth of 2%
• Transport sector growth of 2%
• Energy sector was the worst performer contracting by 23%
• Manufacturing contraction by 14%
• Mining contraction by 2%

Agriculture

In terms of the National Food Balance Sheet for the 2014/2015 agricultural marketing season, the country has a significant maize surplus above the national maize requirement. Other crops expected to register an increase include rice, tobacco, millet, and groundnuts.
• The stock of maize held by the Food Reserve Agency (FRA) declined to 349,120.3 mt as at end-May 2014 from 644,682.4 mt at end-December 2013.
• Similarly, the stock of rice held fell to 1,560.0 mt from 1,948.5 mt during the same period. The decline in stocks is typical during the lean period, which runs from October to May. However, with the crop marketing season commencing soon, the stock of maize is likely to increase significantly.
• According to the Crop Forecast Survey results for 2013/2014 the country is expected to produce 3,350,671 mt of maize, 32.3% higher than 2,532,800 mt produced during the 2012/2013 agricultural season.
Construction

The Zambia Government propped up construction expenditure on the Link 8000 and Pave 2000. K245 Million was released to the National Road Fund Agency.The Zambia Development Agency (ZDA) has disclosed that the country recorded US$3.3 billion in foreign direct investment (FDI) pledges in the first quarter ended 31st March, 2014.
The pledge of US$3.3 billion is mainly in the construction sector which accounted for US$3 billion
Construction was the third best performer growing at 9.1%

Mining

China has began to revaluate its use of copper as collateral for loans. This coupled with lower manufacturing sentiment has contracted demand for commodities like copper.
• Mining sector contracted by 2% in Q1 but rebounded slightly in the second quarter
• Copper prices fell by 7% in Q1
• Weaker demand constrained supply of the usual foreign exchange reserves from the Mining sector
MOPANI Copper Mines in Mufulira has increased copper production by 2,500 tonnes in the first quarter of 2014 highlighting a growth rate of 10 per cent
First Quantum Minerals (FQM), the owner of Kansanshi copper mine in Solwezi, recorded a 43 per cent rise in copper production during the first quarter ended March 31 2014.
The increase is due to sound management of the factors under the mines control and benefits from the investments in process improvements.
Copper prices have trended down since reaching an all-time high in early 2011 and fell by more than 10% during the first quarter of 2014 (mainly in March), owing to market concerns about the Chinese economy, and linked to this the ability of Chinese firms to continue to use copper as collateral in trade financing which has supported higher global prices
Copper output rose to 473,249 mt during the period January to May 2014, compared to 399,515 mt produced during the same period last year. However, cobalt production was lower at 1,951 mt when compared with 2,709 mt produced during the corresponding period in 2013.
Energy
Fuel prices rose in Q1 by 7.22% for petrol, 8.75% for diesel and 9.54% for kerosene on the back of foreign exchange rate losses on the oil import bill.

In the energy sector, total electricity generation during the period January 2014 to May 2014, increased to 5,731,907 Mwh from 5,467,181 Mwh during the corresponding period in 2013. This reflects the investments made in power generation in order to raise power supply required to meet the high demand arising from increased economic activity in the country.
Inflation
Inflation has been on an upward trend since the beginning of the year with annual inflation rising to 7.9% in June from 7.1% in December 2013

Factors contributing to these inflationary pressures include
• The seasonal supply factor (lean pre-harvest period October-May), removal of Government subsidy on maize,
• Pass-through effects of the depreciation in the exchange rate, higher fuel prices
• Increase in excise duty on cigarettes and alcoholic beverages
Foreign Exchange Market

The exchange rate of the Kwacha against the US dollar has exhibited a depreciation trend since the beginning of the year. As at 11th June 2014, the Kwacha had depreciated by 14.9% against the US dollar to trade at K6.3348/US$ compared to K5.5126 per US dollar at the close of December 2013. This was mainly due to intra-day mismatches between supply and demand for foreign exchange in the domestic market on account of the following:
• A reduction in the supply of dollars to the market, particularly from the mining sector which accounts for the bulk of foreign exchange supply.
• The decline in copper price by 9.1% to US$ 6,691.00 per tonne as at 11th June 2014 from US$7,360.00 per tonne at the end of December 2013, which impacted on market sentiment.
• Deterioration in the current account balance to a deficit of US $260.7 million during the first quarter of 2014, from a surplus of US $28.7 million in the fourth quarter of 2013, mainly on account of stronger imports relative to exports and higher service payments.
•  A significant build-up of liquidity over the fourth quarter of 2013 into the first quarter of 2014 (after civil service wage increase) and expanding informal trade sector which supported demand for foreign exchange.
•  The strengthening of the dollar on the international financial markets has also impacted on the Kwacha, leading to a corresponding weakness in then Kwacha through financial flows.
Government and Private Investments

During the first quarter of 2014, the Treasury released K1 Billion for Investments and Special Projects
• K245 Million was released to the National Road Fund Agency
• K140 Million was targeted at remodelling works at the Kenneth Kaunda International Airport
• K35 Million for ZESCO rehabilitation works
Other Investments included
• K15 Million for recapitalization of the Government Printing Department
• K6.8 Million as GRZ support to the Millennium Challenge Account Compact.
• K6.4 Million was released for the Youth Skills Development Programme
Government Spending

Ministry of Finance released K168 Million grants to various institutions of government to facilitate their operations and efficient programme implementation in Q1
The Treasury has also released K84 Million for road maintenance, rehabilitation, and construction. K20.7 Million was released to the Ministry of Local Government and Housing for water and sanitation programs.
A further K166 Million was released for salaries for civil servants in various government institutions, compensation and awards, and for emoluments for personnel in Zambia’s Missions Abroad.
Foreign Direct Investments 

Zambia recorded US$3.3 billion in foreign direct investment (FDI) pledges in the first quarter ended 31st March, 2014.
China recently emerged as Zambia's biggest source for FDI with inflows estimated at about US $1 billion, mostly into mining, manufacturing and construction sectors.
• Pledges reflect an increase in foreign direct investment in 2014 as compared to 2013 during the same period which recorded pledges of US$2.3 billion
• US$3.3 billion is mainly in the construction sector which accounted for US$3 billion, with the manufacturing sector accounting for US$132 million while other sectors contributed the rest of the FDI.
• The increase in FDI in the first quarter of 2014 as compared to the same period in 2013 further explains that regardless of how the economy is performing, increase in FDI is dependent on what the investor is looking for in terms of resources, market and the expected returns.
• Projection for the second quarter, the month of April has already recorded US$98 million in FDI pledges with pledged employment of one thousand forty five jobs from 25 projects.
Monetary and Fiscal Policy

During the period January to May 2014 monetary policy remained focused on achieving the end-year inflation target of 6.5%. In line with this objective, the Bank of Zambia (BoZ) tightened monetary policy by raising the policy rate from 9.75% in January 2014 to 10.25% in March, and then 12.0% in April 2014. The statutory reserve requirement was also increased by 600 basis points to 14% with effect from 10th March 2014. Following persistent volatility in the exchange rate, the Bank of Zambia took further measures to tighten liquidity in the banking system by extending the application of statutory reserves to government deposits and vostro accounts, as well as tightening the maintenance regime for statutory reserves.
Money market liquidity, as measured by commercial banks current account position, decreased by 46.8% to K593.6 million at end-March 20145 from K1,115.7 million at end-December 2013.
This was mainly on account of
• Net statutory reserve withdrawals
• Net Government securities sales
• Net sales of foreign exchange
Weighted lending rates

Commercial banks’ nominal interest rates recorded a mixed performance during the review period. The average lending rate rose to 18.1% in May 2014 from 16.4% in December 2013, following the rise in the BoZ policy rate. However, the 30-day deposit rate for amounts exceeding K20,000.00 and the average savings rate for amounts above K100.00 was little changed at 5.4% and 3.5% from 5.3% and 3.6%, respectively in December 2013.
Yield rates on Government securities have however trended upwards, largely reflecting higher Government domestic borrowing. The weighted average composite yield rate for Treasury bills closed 410 basis points higher at 19.4% in June 2014 from 15.3% in December 2013, while the weighted average bond yield rate gained 180 basis points to close at 18.1% from 16.3%.
In terms of the outstanding stock of Government securities, Government Treasury bill marginally declined to K9,881.2 million in June from K9,942.9 million in December 2013, while the stock of Government bonds rose to K10,576.8 million from K9,429.1 million in December 2013. Commercial banks remained the largest investors in Treasury bills with holdings of K6,160.9 million at face value, representing 62.4% of the total bills in circulation as at end June. The non-bank public accounted for 26.9% while the Bank of Zambia holdings stood at 10.8%. In the Bond market, the non-bank public were the largest holders at 53.0% (K5,601.7 million), while commercial banks accounted for holdings of 30.0% or K3,167.4 million. The Bank of Zambia held 17.1% or K1,807.6 million.

Fiscal Policy: Debt Management

As at end of April, 2014, external debt stood at US $4.2 Billion or 22 % of GDP whilst domestic debt stood at K20 Billion or approximately 16.4 % of GDP. In this regard, both external and domestic debt levels remain below the international thresholds of 40% and 25%, respectively.
For the period from January, 2014, total external debt service (principal plus interest payments) now stands at USD 52.2 Million of which USD 2.6 Million is a payment made in April, 2014. According to Ministry of Finance projections, the total external debt falling due over the next 12 months stands at USD 249 Million or 1.3% of GDP.
For the period from January, 2014, total domestic debt service related to Government securities (principal plus interest payments) now stands at K3.2 Billion of which K544.6 Million is a payment made in April, 2014. In the same month, Government issued K458 Million Treasury Bills in the domestic market. According to Ministry of Finance projections, the total domestic debt falling due over the next 12 months stands at K9.8 Billion or 8% of GDP.

External Sector Developments

Preliminary data shows that Zambia’s international trade performance during the first five months of 2014 was unfavourable. The merchandise trade surplus narrowed by 16.1% to US $271.1 million from US $323.7 million recorded over the corresponding period in 2013. This was largely attributed to a higher decline in merchandise export earnings relative to the merchandise imports bill.

Merchandise export earnings declined by 5.0% to US $4,264.3 million from US $4,488.9 million realized the same period in 2013, explained by a decline in non-traditional exports and cobalt earnings.
During the first five months of 2014, Non-traditional export earnings, at US $1,009.5 million were 30.0% lower than US $1,441.9 million registered during the corresponding period last year. This was largely on account of lower earnings from the export of copper wire, burley tobacco, cotton lint, fresh flowers, fresh fruits and vegetables, gemstones, cement and lime, and maize.
Similarly, cobalt export earnings declined by 23.2% to US $45.7 million from US $59.5 million recorded during the corresponding period in 2013, largely on account of a 37.0% decline in export volumes to 1,725.6 mt from 2,740.1 mt registered the previous year. The realized monthly average price of cobalt, however, increased by 22.0% to US $26,491.91 per ton from US $21,709.42 per ton registered during the same period in 2013.
However, copper export earnings grew by 7.4% to US $3,209.1 million during the first five months of the year from US $2,987.5 million recorded over the same period last year, driven by higher export volumes. Copper export volumes, at 477.485.3 metric tons (mt), were 19.4% higher than 399,919.8 mt recorded during the corresponding period in 2013. The average realized price of copper, however, declined by 10.0% to US $6,720.86 per ton from US $7,471.77 registered during the same period last year.
Meanwhile, the year-to-date (May 2014) merchandise imports bill declined by 4.1% to US $3,992.6 million from US $4,165.2 million registered in 2013. This was due to lower import bills of commodity groups such as industrial boilers and equipment, motor vehicles, chemicals, plastic and rubber products, and paper and paper products.
There was a decrease in the total value of metal exports from K 3,631 Million in January to K 3,458 Million in March 2014.
The overall contribution of metals and their products to the total export earnings averaged 75 percent.
The share of Non Traditional Exports recorded an average of 25 percent in revenue earnings between February and January 2014.
Gross International Reserves
Gross International Reserves (GIR) rose to US $3,387.13 million as at end-May 2014 from US $2,683.8 million at end-December 2013, largely due to the receipt of the second Euro bond proceeds. The level of reserves in May 2014 represents about 3.5 months of import cover as opposed to 3.0 months of import cover in December 2013.
Banking Sector
The banking sector financial performance and condition continued to be satisfactory and stable. As at 31 May 2014, the banking sector was adequately capitalized, with the aggregate capital adequacy ratios at 21.7% and 23.8%, which were well above the minimum requirements of 5.0% and 10.0% for the primary and total regulatory capital, respectively. In addition, the sector continued to post strong earnings

Projections for Third quarter 2014 and Rest of the year
Inflation is expected to edge downwards by the end of the third quarter of 2014. This projection is premised on expected improvement in the supply of various food stuffs as well as the lagged effects of the kwacha strengthening following monetary policy tightening in recent months. However, upside risks include cost push factors emanating from the recent increase in fuel prices and electricity tariffs.

The Bank of Zambia projects an annual growth rate of 6.5% of rebased GDP. We estimate a growth rate slightly higher at 6.8% of rebased GDP on the premise of a rebound in the third quarter driven by the mining sector, construction (especially railways and roads),energy, Agriculture and tourism driven by the 50th Jubilee independence celebrations.

Disclaimer: All speculation given in this article is plausibly deniable.

You can download this report at the link below

Click here to view and download on academia

Read More

Emerging Markets Currency Depreciation :Case of Zambia by Kampamba Shula

Emerging Markets

The worst sell off in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability (Bloomberg, 2014).
The Turkish lira plunged to a record and South Africa’s rand fell yesterday to a level weaker than 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low.
Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus (Bloomberg, 2014).
Two very troubling things:
1. uncertainty about the Fed policy,
2. Combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment
Investors don’t invest in emerging markets like they do in developed markets. Capital rushes in when the economy is hot; when the economy cools, investors dump their local currency holdings (Forbes, 2014). That leaves piles of devalued local currency which the central bank is hard-pressed to prop up. (In developed markets like the U.S., United Kingdom, Japan, in contrast, investors are more willing to hold on to the currency.)
In the midst of the Great Depression, President Franklin D. Roosevelt said, “We have nothing to fear but fear itself.” Fear of weakening emerging market economies – and the panicked reactions that follow – is a bigger driver of currency depreciation than the weakness itself. It is irrational exuberance in reverse (Forbes, 2014).
We’ve been seeing that phenomenon play out on the main stage for the past couple of weeks. The Argentine peso plummeted 15 percent in a single day (January 23rd); the “contagion” quickly spread to other emerging markets, including most prominently Turkey, South Africa, and Russia. It was what Bloomberg has dubbed “the single biggest sell off in emerging market currencies since 2009.”

Argentina – In January, the Argentine peso fell 23percent. The most dramatic peso depreciation since the country’s 2002 financial crisis was triggered by the central bank’s decision to stop intervening in the markets to maintain the peso’s value – intervention that was increasingly costly, draining the country’s foreign currency reserves (Forbes, 2014).
Turkey – The Turkish lira fell 6 percent in January; at its low point, the lira was down 9 percent from January 1st. On January 28th, the Turkish central bank took action to brace the falling lira, raising its benchmark one-week lending rate for banks from 4.5 percent to 10 percent. The lira rallied, then gave up those gains, and then recovered slightly (Forbes, 2014).
South Africa – The South African rand fell 7.5 percent in January, its weakest level since 2008. The currency continued to fall even after the central bank raised its benchmark interest rate to 5.5 percent from 5.0 percent – the first rate increase in almost six years (Forbes, 2014).
Russia – In January, the Russian ruble fell 7 percent, hitting a five-year low. But unlike the central banks in Turkey and South Africa, which have raised interest rates in attempts to prop up their currencies, Russia’s central bank has maintained a hands-off approach (Forbes, 2014).
What is causing the panic?
A confluence of factors is causing the emerging market panic. The first is the pull-back of stimulus in the U.S. Since September 2012, the Federal Reserve has pumped massive amounts of liquidity ($85 billion at its highest) every month into the global market in what has come to be known as “quantitative easing.” In December 2013, outgoing Fed Chairman Ben Bernanke announced the beginning of tapering – a $10 billion reduction in monthly bond buying. On January 29th, the Fed announced that it would reduce its bond buying an additional $10 billion, to $65 billion a month.
Much of the capital that the Fed was infusing into the market through its bond buying flowed to emerging markets. With the Fed tapering off quantitative easing, that liquidity is drying up. In simple terms, no more easy money. And that means that growth in emerging markets will, in all likelihood, be both more expensive, and slower (Forbes, 2014).
Both the tapering of stimulus in the U.S. and weakening of emerging market economies lead to currency volatility (clearly), which leads to panic, which leads to more volatility.
Emerging markets don't have enough foreign-money debt this time around to make their falling currencies much of a concern. What is a concern is whether their central bankers realize this. They might overreact—they might already be—and raise rates to prop up their currencies, when they should be lowering them to prop up their economies.

Zambia

THE Kwacha recently hit a historical-low against the United States dollar for the first time after the 2008-09 global financial crisis, as the foreign exchange market continued to witness low greenback supply
Similarly, Standard Chartered Bank says increased demand for the dollar resulted in the weakening of the Kwacha“
There is a sizeable mismatch between demand streaming mainly from local corporates and real money market players as compared to the current level of supply for the dollar which is likely to see the currency remain under pressure for the time being,” the bank says in its daily brief (Daily Mail, 2014).
The annual rate of inflation, as measured by the all items Consumer Price Index (CPI) for January 2014 was recorded at 7.3 percent compared to the 7.1 percent recorded in December 2013. This means that on average, prices increased by 7.3 percent between January 2013 and January 2014 (CSO, 2014)
Export Market Shares, December and November 2013
The Southern African Development Community (SADC) was the largest market for Zambia’s total exports, accounting for 32.6 percent in December 2013. Within SADC, Congo DR was the dominant market with 47.3 percent. Other notable markets in SADC were Zimbabwe, South Africa, Namibia and Tanzania.
Asia regional grouping was the second largest market for Zambia’s total exports, accounting for 27.2 percent in December 2013. Within Asia, China was the dominant market with 80.3 percent. Other notable markets in Asia were United Arab Emirates, Japan, India and Singapore.
Import Market Shares
The major source of Zambia’s imports in December 2013 was South Africa, accounting for 38.1 percent. The major import products from South Africa were Machines, structures and parts of structures, of iron or steel, contributing 9.4 percent.

Conclusion
South Africa has experienced the effects of emerging market contagion like other emerging markets. South Africa is Zambia’s biggest source of Imports. Dollar flows between the two countries are highly correlated. The supply of Dollars has been low due to investors pulling their money out of emerging markets on speculation about US Fed QE. This will continue to have ripple effects on the economies of emerging markets and the periphery. Zambia does not exactly qualify as a leading emerging market but is in the emerging market periphery.
There is a fundamental level at which the Kwacha should be trading and Bank of Zambia has figure which it uses to calculate this. The problem is that the emerging market currency volatility has created a contagion which had affected the supply of Dollars across the emerging markets and the periphery. This has resulted in a shortage of supply of Dollars in Zambia causing the sharp depreciation we have witnessed.

Recommendation
The Bank of Zambia faces a dilemma.
They could raise rates and get a foreign credit boom, or cut rates and have a domestic credit boom. If the central bank keep, or raise, rates high where they "should" be, it will only attract more "hot money"—quick, speculative capital looking for the best return—from abroad. This will make exports even less competitive by pushing up their currencies more, and set off a lending boom that could reverse itself at the click of a mouse.
But it is a bit of a catch-22. If the central banks keep rates lower than they should be, it will make the economy less attractive to yield-hungry foreign investors. Less capital will flow in, and exports will not be as priced out by a too-high currency—but persistently too-low rates will risk inflation and a credit boom of their own making.
I suggest Bank of Zambia wait it out and if any action should be taken I suggest doing the opposite of logical thinking and actually drop rates to support the local economy. Inflation may be a problem but the robustness of Zambia’s economy to withstand emerging market periphery shocks will improve.

You can download this full academic article at the link below.
Download via academia.edu

References
Bloomberg. (2014, January 24). Contagion Spreads in Emerging Markets as Crises Grow. Retrieved February 20, 2014, from Bloomberg: http://www.bloomberg.com/news/2014-01-24/contagion-spreads-in-emerging-markets-as-crises-grow.html
CSO. (2014, January 31). Bulletin January. CSO Bulletin, pp. 2-19.
Daily Mail. (2014, February 17). Kwacha hits histotic low against US dollar. Retrieved February 20, 2014, from Daily Mail: http://daily-mail.co.zm/blog/2014/02/17/kwacha-hits-histotic-low-against-us-dollar/
Forbes. (2014, February 3). Why Panic-Prone Emerging Markets Are Breaking Down In 2014. Retrieved February 20, 2014, from Forbes : http://www.forbes.com/sites/steveschaefer/2014/02/03/why-panic-prone-emerging-markets-are-breaking-down-in-2014/

Read More

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

Read More