08 OCT - 22 OCT

Zambian Business Times - - FISCAL AND DEBT MANAGEMENT -

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.

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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".

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