Maravi

Zambia losing grip on funding own Budget

Zambia losing grip on funding own Budget
By David Punabantu

LOOKING at the 2007 Budget, to have an idea of the big picture, firstly requires a look at other budgets.

As seen in 1995, Zambia produced 307,558 tonnes of copper. The average price of copper on the LME then stood at US$2,623.5 per tonne, giving US$806 million in revenue. With non-traditional exports (NTEs), exports reached about US$1 billion. The exchange rate on Budget day then stood at K853 per US dollar. The Budget was about K853 billion, indicating against the exchange rate that it was worth US$1 billion.

The 1996 Budget was K1,161 trillion, and naturally, the exchange rate stood between K1,000 and K1,160 per US dollar on Budget day. The Budget thus in US dollar terms was worth US$1 billion.

The 1999 Budget was at about K2.2 trillion and was worth US$840 million on Budget day, as the exchange rate stood at K2,650 per US dollar.

Hence, the Kwacha appreciated after the Budget to about K2,200 per US dollar.
The appreciation drove the Budget to represent US$1 billion. However, by December 1999, Government passed a supplementary Budget of about K500 billion.

This pushed the 1999 Budget presented by the then Finance minister, Edith Nawakwi, from K2.2 trillion to about K2.7 trillion.

Naturally, the exchange rate moved to a similar position prior to the 1999 Budget of K2,650 per US dollar.

At this position, the 1999 Budget maintained its US$1 billion position.

The same pattern is seen for the 2000 Budget. It stood at around K2.9 trillion, to which the exchange rate moved to maintain the Budget export revenue and exchange rate configurations.
It is behind this pattern that whatever export revenue is obtained by the private sector is neutralised in real value terms by Government expenditure. The exchange rate under these conditions has been affected negatively, despite it being in a free market economy. What this implies is that if exports grew to US$3 billion a year, so too would Government revenue; hence Government expenditure would eat up all the real value produced by the mine sector.

A look at the 2005 Budget shows that the Budget was worth K9.7 trillion or roughly worth US$2 billion in US dollar terms.

The 2004 Budget was worth, roughly in US dollar terms, US$1.8 billion.

THE 2004 Budget was worth roughly US$ 1.8 billion. Past Budgets presented to Parliament on Budget day from 1990 to 2003 except for 1993 hovered around US$1-1.3 billion.

What this means is that if the Government stuck to the past traditional Budget of US$1 billion, Zambians can fund the Budget without donor support.

Hence the K5.7 trillion from domestic revenue in the 2005 Budget covers the past traditional value. Consequently does reaching the HIPC Completion Point mean just that, Zambia being able to fund its own Budget from domestic resources?

In a space of just two years the Budget has almost doubled in US dollar terms from 2003 to 2005.
What is interesting in the sudden increase of the Budget in the 2006 Budget speech by Finance Minister Ng’andu Magande when he said: “total export earnings have increased by 17.5 per cent to US$2,127 million from US$1,810 million in 2004.

It is worth noting that export earnings in 2005 doubled from US$1,061 million in 2003. The increase in the value of export earnings was mainly attributed to the growth in the copper export volumes and the rise in copper prices.”

Thus, the 2007 Budget still shadows export earnings pegged for last year at US$3.9 billion and it was planned when the exchange rate was round K3078 per US dollar.

What this basically means is that if the Government is to be freed from operating independently in the economy, its foreign exchange policy has to change so that the ownership of foreign exchange can be only through Kwacha purchases, thereby, the linkage between US dollar export revenue and the Budget would be broken.

Consequently, what can be expected from the misalignment is that Zambians will continue to suffer from a Kwacha shortage as opposed to a US dollar shortage experienced in the second republic.
These are areas that the Finance Minister should have addressed especially the misalignment from the tradition Budget, exchange rate and export revenue configuration.
The minister of finance talked of Zambia’s external debt dropping.

Preliminary information indicates that the country’s external debt stock stood at US$635 million as at end of December 2006, a reduction of 86.7 per cent from the end of 2005 stock of US$4.5 billion.

This year, foreign debt service will be US$33.9 million against the pre-HIPC and pre-MDRI figure of US$373.2 million in 2004.

Zambia is therefore no more a Heavily Indebted Poor Country.

When it comes to PAYE the figure has not really changed. Last year it stood at around K2 trillion. This year it still stands at around K2 trillion. The Finance Minister has however, given some tax relief that has been raised to K500, 000 from K320, 000. If one was to look at K320, 000 worth of goods at the start of last year, like fuel etc, it would be found that these same goods would cost about K500, 000 or more in value terms meaning that the relief in value terms has remained the same.

The Finance Minister has at least raised mineral royalty tax from 0.6 per cent to 3 percent and withholding tax on dividends, interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector. This indicates that he is serious about the Zambian Government cashing in on the high copper prices.

Further more, he is trying to bring into the tax net mining companies by indicating that he is going to re-negotiate tax regimes for the mines. What this basically means is that if the Finance Minister is successful, in the next Budget PAYE may be reduced much further.

Labels: 2007 BUDGET

posted by MrK @ 10:12 PM