Thursday, December 11, 2008

(TIMES) Challenges of restructuring national budget

COMMENT - Is this guy working for the mining companies? "the romanticism of a numerically increased amount due into Government coffers infatuated many Zambians" - huh? Taxing the mines is a 'romantic' notion?? I think The Times needs to have a double take on who is working for them.

Challenges of restructuring national budget
By David Punabantu

AMIDST a drop in copper prices and a growing global recession, fears over Government finances being undermined by the current crisis have become a major source of concern.

Consequently, the new Finance and National Planning Minister, Situmbeko Musokotwane, has the daunting challenge to restructure Government finances to reflect the economic realities the Zambian economy now faces.

For starters, the controversial new mining taxes introduced by the former Finance minister, Ng’andu Magande, gave the impression that Zambia was to benefit from the high copper prices then.

Although the romanticism of a numerically increased amount due into Government coffers infatuated many Zambians, as they got caught up in the figures, in real value terms, however, very little value would have been created on the ground within the Zambian economy.

Understanding how value moves in the Zambian economy and how it is lost, gained, destroyed or created means taking a closer look at the operational parameters of the Zambian budget, and its capacity in transmitting the total value of Zambian goods and services into the activities of ordinary Zambians to develop the nation is important.

Appreciating these value-related synergies of the national Budget means understanding the linkage between Government finances and Zambia’s export revenue, which is clearly embedded in Zambia’s past budgets.

As seen in 1995, Zambia produced 307,558 tonnes of copper. The average price of copper on the London Metal Exchange (LME) stood at US$2,623.5 per tonne, giving $806 million revenue.

With non-traditional exports (NTEs), it reached about $1 billion.

The exchange rate on Budget day stood at K853 per US dollar. The Budget then was about K853 billion, indicating against the exchange rate that it was worth $1 billion and this shadowed export earning.

The 1996 budget was at 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 $1 billion.

The 1999 budget was at about K2.2 trillion and was worth $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 against a backdrop of a World Bank loan being released for Zambia as it finally privatised Nkana and Nchanga copper mines that produced then 60 per cent of Zambia’s copper output.

By December 1999 the Zambian Parliament 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 $1 billion position.

The same pattern is seen for the 2000 budget. It is behind this pattern that whatever export revenue is obtained by the private sector, it is neutralised in real value terms by Government expenditure, including the new mining taxes, and hence no real value is being added to the economy.

The 2004 budget was worth roughly, in US dollar terms, $1.8 billion against the prevailing exchange rate indicating on the surface an overvalued Kwacha.

Yet a look at the 2005 budget shows that the budget was worth K9.7 trillion or in US dollar terms roughly worth $2 billion and did not follow the traditional $1 billion.

The reality to this was a depreciating US dollar making the Kwacha appreciate in value terms and thus precipitating what was widely perceived as the success of the Zambian economy between 2003 and 2007, which also increased Zambia’s US dollar value of the budget.

Therefore, in a space of just five years from 2003 to 2008, the budget has almost tripled in US dollar terms and prior to 2003 while Zambia had HIPC and loans to pay off, the whole of Government could run on just $1 billion. Today, without HIPC and Zambia’s debts halved, Government requires triple that base line figure.

Therefore, what HIPC basically meant was that Zambia could fund her Government from her own resources provided the national budget remained within the $1 billion mark in value terms.

Unfortunately, the structural design of the budget, with the rest of the Zambian economy, meant that the budget would always shadow export earnings and hence it is indicative that if copper prices drop so would Zambia’s export earnings and hence the Zambian budget.

In effect, the gross value of the new mining taxes, including Zambia’s export revenue has already been spent in value terms by the national Budget.

The question that arises is what then is all the tax collection by the Zambia Revenue Authority (ZRA) about since the budget basically covers Zambia’s US dollar revenue derived from exports?

The answer to this lies in the fact that the Bank of Zambia allows for 100 per cent direct foreign exchange retention, meaning exporters can directly keep their US dollar earnings from exports without the Kwacha being involved in purchasing that foreign currency.

The mines therefore do not raise Kwacha cover like ordinary Zambians wanting to buy US dollars from bureaux.

It is the national budget under its current value condition that raises the Kwacha cover for the mines and thus ceases to be a national budget in real terms.
It is these linkages that the new Finance minister has to change to weather the storm by making the linkage of Zambia’s export revenue being anchored to the Kwacha through a 100 per cent foreign exchange retention policy through Kwacha purchases only.

This is within the powers of the new Finance minister as outlined in Chapter 360 of the Laws of Zambia, Bank of Zambia Act, Part VII, Relations with Government, Section 56(1) that states, “The bank shall be the agent responsible for administering exchange controls and any instruction and directives that the Minister may from time to time issue.”

It is under such circumstances that the mines would have to raise their own Kwacha cover to buy foreign exchange, and make the Government budget become a real and operational budget anchored to the Kwacha.

This, naturally, would free Zambia’s monetary policy, making it more effective for the Bank of Zambia to control.

At present, the relationship between the money supply and the national budget is that the money supply is usually one tenth of the budget, and in US dollar terms it hovered around $100 million in the past.

The $100 million in value terms of Kwacha currency in circulation threshold is seen in January 1998 with an average Kwacha exchange rate of K1,454.54 per US dollar, against a currency in circulation placed at about K149,659.2 million worth US $102.89 million.

The average exchange rate in January 2002 was K3,848.65 per US dollar that faced a currency in circulation of about K389,649.8 million, placing a US dollar value of the same currency in circulation at about $101.24 million.

For January 2003 it was K4,576.32 per US dollar against a currency in circulation figure of about K453,647.8 million or worth in US dollar terms, $99.12 million.
However, the exchange rate of June 4, 2004 at K4,795.83 per US dollar faced a currency in circulation of about K732,138.9 million worth about $152.6 million as the budget also increased in line with Zambia’s export revenue.

By 2007 when the former Finance minister Mr Magande left the helm, Zambia had about K1.5 trillion in circulation worth about $333 million from the traditional $100 million as export earnings increased.

The sudden increase of the budget in US dollar terms is seen in the 2006 budget speech by Mr Magande when he said: “Total export earnings have increased by 17.5 per cent, to $2,127 million from $1,810 million in 2004. It is worth noting that export earnings in 2005 doubled from $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 budget shadows export earnings and hence it is indicative that if copper prices drop so would Zambia’s export earnings and hence the Zambian budget.

Accordingly, the new Finance and Planning minister has to recast and re-engineer the structural persona of the national budget to reflect a Kwacha position and its liquidity anchored to Zambia’s production capacity rather than a US dollar based position.

It was increasing Government expenditure that removed the ever increasing Kwacha “cover” from the economy and thus gave the impression of a stable Kwacha, coupled with a depreciating US dollar.

But with falling export revenue, and already existing high levels of Kwacha liquidity, reeling in excessive Kwacha liquidity in the economy, is bound to push the economy into a precarious US sub-prime crisis, against a depreciating Kwacha, rising inflation and interest rates against a back drop of a credit crunch unless the US dollar itself devalues.

Already, the effects of the misalignment are being felt as past Government expenditure has increased above the economic growth rate in US dollar terms since 2003.

This has increased the pressure on unemployment levels in Zambia together with a decline in the monetary value of existing jobs as outlined in the past 1964 Seers, 1967 Brown and the 1969 Turner reports.

Consequently, the threat of job lay offs from the mines has captivated the nation but impending job cuts in the civil service are bound to occur as the real value related realities close in on balance sheets.

Restructuring the linkages between Zambia’s export revenue, the national budget, the exchange rate and the nation’s money supply is thus important to avoid a value related meltdown.

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