Zambia’s budget blues
Zambia’s finance minister aims to bring debt to a sustainable level in the 2019 fiscal year. But with almost a third of the budget set to be raised abroad, it’s unclear how this will materialise
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.
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.
We believe that with accountable use of our shared money, life can be better for allLaura Miti
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 ZK86.8bn 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.
What it means
Zambia’s government is in a financial hole because donors, annoyed by corruption, have withdrawn their support
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 most sane thing I’ve seen from government in recent years".