The minister of finance, Alexander Chikwanda, delivered the 2015 budget address, entitled “Celebrating our Golden Jubilee as One Zambia One Nation by making economic independence a reality for all” to the national assembly on October 10. According to the socio-economic policy objectives for the 2015 fiscal year (FY), Zambia targets real GDP growth of 7% while restricting end-year inflation to 7% y-o-y and firming the external buffer to at least four months of import cover. The fiscal stance remains decidedly expansionary, with the government proposing to spend ZK46.7bn (24.6% of GDP) in 2015, of which 75.2% (ZK35.1bn or 18.5% of GDP) will be sourced from domestic revenues. The government projects that grants will amount to ZK1.2bn, or 2.6% of the total budget. The government further proposed to borrow ZK3.8bn (2% of GDP) from the domestic market, while ZK4.2bn will be sourced from foreign programme and project financing. Proceeds from the 2014 Eurobond will be used for the balance of ZK2.4bn. Unsurprisingly, in terms of domestic revenues, the buck will be passed to the corporate sector instead of voting citizens. For miners, the two-tiered tax system will be replaced with (as final tax) a higher mineral royalty tax rate regime. Specifically, underground mining operations will be liable to pay an 8% mineral royalty rate, while open cast mining operations face a 20% mineral royalty tax rate. Mineral royalties are currently taxed at 6%, after being doubled in 2011. Furthermore, income earned from tolling, as well as “the processing of purchased mineral ores, concentrates and other semi-processed minerals, currently taxed as income from mining operations” will be taxed at a flat rate of 30%.
The government has however acknowledged the need to strengthen fiscal consolidation to both create fiscal space for infrastructural development and to address crowding out of the private sector. High government borrowing on the domestic market increases borrowing costs, which crowds out the private sector due to the resultant higher commercial bank interest rates, with adverse consequences for private sector-led economic development and job creation. Mr Chikwanda noted that the fiscal deficit is projected to fall within the target of 5.5% of GDP in 2014 before narrowing to 4.6% of GDP in 2015 (compared to 6.5% of rebased GDP in 2013). The government recognised that recurrent expenditures need to be limited to create fiscal space for capital expenditure, and cited the need to restrict expenditure on maize marketing and ensure cost-reflective fuel pricing in particular. The government furthermore expects that operational streamlining via the Treasury Single Account innovation and e-based tax and customs administration will translate into an improved fiscal position.
WHY DO WE CARE? We continue to hold a more negative view regarding the fiscal account trajectory than the official projections, and specifically the structural nature of fiscal pressures. We remain circumspect of the government’s ability to (i) rein in fiscal expenditures in 2015 while pre-election spending pressures will most certainly mount, and (ii) raise the budgeted amount via foreign financing within a global context of significant liquidity shifts. An inability to raise the budgeted foreign financing amount in 2013 has proven to be an expensive mistake on Zambia’s part, as fiscal strain necessitated expensive borrowing on the domestic market and contributed to the significant divergence between the budgeted and actual fiscal outturn. Unsurprisingly, the government passed the burden of an expansionary fiscal stance to the corporate sector rather than voters, and has shown short-sightedness in doing so. The mining sector in particular has struggled with higher administered costs, electricity constraints, unpaid VAT claims and a higher domestic interest rate environment while commodity prices have softened (and are expected to face significant headwinds next year). As we stated a fortnight ago, our concern is that Zambia’s effective overall mining tax rate structure is quite high, and any further increases may certainly adversely affect foreign direct investment (FDI) decisions. Political risk will continue to cast a shadow on glowing official statements of a prudent fiscal framework and inclusive economic growth as the corporate sector continues to bear the brunt of a government which is unwilling to pay the political costs of a full fiscal overhaul.