08 OCT - 22 OCT
Barely a fortnight ago, Mwanakatwe delivered an USD8.6-billion estimates of revenues and expenditures dubbed the 2019 budget at which she proposed a new tax regime for the mining sector hoped to fund the fiscal programs in the austerity year of 2019. Mwanakatwe has been opposed by the Chamber of Mines citing that these drastic measures will make Zambia un-investable and that they will break the economy’s back.
The IMF in the last week of August 2019, recalled Resident representative for Zambia, Alfredo Baldini following no IMF deal prospects, a move that sent credit default spreads on Zambia’s dollar bonds on a blow out to over 1,350bps above similar US treasuries as investors got more nervous of sentiment in the copper producer. Zambia has been in talks with the IMF for over two years with little fruition as the Southern African nation grapples with high risk of debt distress which the Washington has requested for sustainable borrowing plans going forward. Mwanakatwe and team are, post budget presentation, expected to rekindle the faded hopes of a USD1.3-billion balance of payment support program especially at a time when Zambia’s reserves have significantly declined to levels below 2.1-months of import cover. In the interim Zambia’s law makers have authorised the payment of mineral royalty taxes directly to the central bank in dollars to help shoal foreign currency reserves which are at USD1.815-billion.
Western investor confidence has waned with Zambia looking to the eastern bloc partners like China to assist balance the investment paradox. Zambia was among the African nations in attendance at the Forum for China and Africa Corporation – FOCAC where the Southern African nation stands to benefit from the USD60-billion China has set aside to assist cushion debt pressure for in African trade and investment partners.
All eyes are on Mwanakatwe’s ability to get Zambia out of the woods through implementation of the 2019 budget, rekindling faded hopes of an IMF deal, debt restructure and simultaneously growing gross domestic product to levels targeted.
An IMF mission team is expected in the country in November this year. Zambian finance minister Margaret Mwanakatwe presented the country’s 2019 budget on Friday against a backdrop of civil society protests and donor dissatisfaction about mismanagement of public funds.
Early last month, at least four of Zambia’s biggest co-operating partners suspended their funding of government projects after it was revealed that nearly $5m in donor funds — meant to support 632,000 poor people — was missing from the departments of health, education and local government.
Business Day Live PAGE 21
In a statement on his Twitter account after the news broke, Fergus Cochrane-Dyet, Britain’s high commissioner to Zambia, said: "It is correct that the UK has frozen all bilateral funding to the Zambian government in light of potential concerns until audit results are known. The UK takes a zero-tolerance approach to fraud and corruption."
Finland, Sweden and Ireland, as well as UN children’s fund Unicef, are also withholding financial support.
But Mwanakatwe appealed to donors not to freeze aid, saying: "In 2019, government will maintain the target of 700,000 beneficiaries [of government support] and will scale up the number in subsequent years. However, recently there have been concerns by stakeholders regarding the administration of the social cash transfer scheme [the government programme to aid the poor]. I appeal to all our co-operating partners to continue supporting this noble programme."
The government earlier said it had located the missing social cash transfer funds in an account with the Zambia National Commercial Bank, and that it will pay back this money to maintain donor relations.
But this was not sufficient to quell disquiet around alleged financial mismanagement. While Mwanakatwe presented the budget, nine civil society organisations, led by the Alliance for Community Action, took to the streets outside parliament, protesting against alleged corruption and a lack of accountability in the use of public resources.
"We protest because citizens need to be heard," says Laura Miti, executive director of the alliance. "The very future of our beloved Zambia … depends on citizens understanding and exercising their power to hold those who govern us to account. Those who govern us today, and those who seek to do so tomorrow, must not be allowed to forget why they hold office … With accountable use of our shared money, life can be better for all."
Public concern extends to the government’s resolve to keep within its means, given Zambia’s failure to secure a $1.5bn bailout from the World Bank after it expressed worry over the country’s "unsustainable" debt.
According to Mwanakatwe, Zambia’s external debt as of June was $9.4bn (34.7% of GDP), up from $8.7bn in December. Domestic debt was $4bn (19.2% of GDP), against $3.9bn in the same period.
Yet the finance minister said the $7bn 2019 budget provides a firm foundation to return the country to moderate debt levels, entrench overall macroeconomic stability and promote sustained and inclusive growth.
"Government proposes to spend K86.8bn or 28.9% of GDP in 2019, of which domestic revenues account for 64.6%, while 2.2% is support from co-operating partners," she said. The balance would be raised from foreign (28.4%) and domestic (4.8%) sources.
She noted how the government is looking to ensure debt sustainability in the coming fiscal year by paying down debts owed to local and international financiers, and slowing government spending to reduce borrowing. Economist Trevor Simumba is sceptical. He believes the government’s measures may in fact cause its debt position to deteriorate.
"The revenue envelope for 2019 relies on a significant quantum of foreign loans to finance the projected 2019 budget deficit of 6.5% of GDP, which indicates [ government] will have to keep markets onside," he says.
The problem is that Zambia needs a hefty third of its budget to be raised from foreign financiers, which means further borrowing rather than debt reduction and stability — "a point that will lead to even more debt and fiscal deficits", says Simumba.
A potential policy contradiction could also put the government even deeper in the debt hole. "There are typical contradictions [ in the budget]," he says. On the one hand, the minister reaffirmed a promise to fund only public projects that are more than 80% complete — but she "then went on to discuss [funding of ] the Kenneth Kaunda airport, at 75% complete, and the Copperbelt Airport, which is only 13% complete".
Then there’s the roughly 65% of the budget to be raised from domestic revenue. To this end, Mwanakatwe announced an increase on mining taxes. Among the changes is a 1.5 percentage point increase on all mining royalties from 6%, and the introduction of a 10% royalty rate that will apply when copper prices rise above $7,500 a ton.
Simumba says the new mining tax regime is "aggressive": high royalties will drive up costs of mineral extraction, which is unlikely to go down well with mining companies. But Lubinda Haabazoka, president of the Economics Association of Zambia, disagrees. He says the increase will benefit Zambians — and that makes it "the sanest thing I’ve seen from government in recent years".