2021 BUDGET ANALYSIS
By Alexander Nkosi (Development Economist: firstname.lastname@example.org, 0963190263).
1.1) Government has released a K119.6b budget for 2021, increasing from K106b for 2020. There has been heightened anxiety surrounding this budget given the strange circumstances brought by Covid 19 that left our GDP growth rate at (-4.2%) and revenue shrinking. High debt levels and the huge temptation to implement expansionary monetary and fiscal policies in the face of 2021 elections made Zambians even more anxious. The budget is out and apart from people whose views are strongly influenced by political affiliation, the rest are torn between excitement and despair. Did we expect better given the circumstances? Should government be commended for this given the circumstances? Would anyone else make a better budget given the circumstances? What are the major take aways from this budget? How does it fit into the medium and long term growth plans? These questions require serious debate to be tackled exhaustively. This article does not necessarily answer these questions but analyses the budget as follows: (i) Analysing potential impact of proposed tax incentives on stimulating economic growth; (ii) Analysing debt service in relation to social sector spending; (iii) Debt sustainability and the road ahead; (iv) Politics of the 2021 Budget; and (v) Budget Credibility.
2. ANALYSING POTENTIAL IMPACT OF PROPOSED TAX INCENTIVES ON STIMULATING ECONOMIC GROWTH?
Government should be commended for proposing a number of tax measures across sectors to encourage local production and cushion local products from foreign competition. Some of the notable measures are outlined below.
2.1 AGRICULTURE AND MANUFACTURING
2.1.1) Suspend import duty on biological control agents, remove import duty on greenhouse plastics, reduce import duty to 15 percent from 25 percent on selected bulb plants and seedlings, reduce import duty on secateurs and pruners to 5 percent from the current 15 percent and 25 percent and emove import duty on selected agricultural clippers.
2.1.2) Remove export duty on crocodile skin.
2.1.3) Remove import duty on copper ores and concentrates to encourage local processing.
2.1.4) Suspend import duty on importation of
2.1.5) Reduce import duty to 5 percent from 25 percent on selected trimmings to promote the local garments and textile industry.
2.1.6) Increase import duty to 40 percent from 25 percent on agro products such as beef and beef processed products, pork and pork
processed products, chicken and chicken processed products as well as fish imported from outside the SADC and COMESA regions.
2.1.7) Introduce excise duty at the rate of K1.50 per litre on reconstituted milk and harmonize import duty rate on reconstituted milk with other forms of milk at 15 percent;
2.2.1) Reduce corporate income tax rate to 15 percent from 35 percent on income earned by hotels and lodges on accommodation
and food services.
2.2.2) Suspend import duty on safari game viewing motor vehicles, tourist buses and coaches.
2.2.3) Suspend license of renewal fees paid by hotels and lodges.
2.2.4) Suspend the retention fees paid by tourism enterprises.
2.2.5) Suspend registration fees for hotel managers.
2.3 PRIORITY SECTOR INVESTMENTS
2.3.1) Introduce a local content allowance for income tax purposes for utilisation of selected local raw materials.
2.3.2) Reduce the investment threshold for a Zambian citizen to qualify for tax incentives under the ZDA to US$100,000 from US$500,000 for those intending to operate in a priority sector, a multi facility economic zone or industrial park.
2.4 WILL THESE TAX INCENTIVES STIMULATE GROWTH?
2.4.1) While these measures are good, stimulating local production requires policy consistency or rather broader and complimentary changes across various policy areas. When you increase tax on imported finished products, you push up their prices so as to make local products cheaper and attractive to consumers. However, you need to ensure that the broad range of incentives provided will increase local production and suffocate foreign products, failure to which consumers will end up buying expensive foreign products arising from the increased import taxes. Has government addressed a broad range of factors to stimulate production?
2.4.2) Local firms need capital but with government increasing domestic borrowing by close to 5 times from K3.5b in 2020 to K17.4b in 2021 the cost of borrowing will be high as banks would rather lend to government than private sector. High interest rates will make it hard for the private sector to access credit required to expand production. Hence production will not increase despite the tax incentive put in place by government.
2.4.3) For local products to compete favourable with foreign products there is need for local firms to invest significantly in acquiring state of the art technology which has to be imported. Where as it was expensive for them to acquire this technology a few years ago when the exchange rate was K10/$, it is worse now as they have to pay twice for the technology at K20/$. Even government removes tax on importation of this technology the sharp depreciation of the kwacha has made this technology more expensive.
2.4.4) Fuel and electricity are important inputs in production. With expensive fuel and electricity the cost of production for local firms remains high. Worse still load shedding has persisted.
2.4.5) When inflation is high, the cost of production also goes up. So inflation has a tendency of pushing up costs of production making final products more expensive. These producers are also consumers. High inflation increases their expenditure of consumption leaving less for re-investment into growing their business.
2.4.6) If government does not addressed a broad range of factors that affect local firms – their production costs will remain high, production levels will remain low and the quality of products will remain low compared to imported products. The result is that consumers will still go for expensive foreign products. The high taxes on imports will end up hurting consumers more. They will spend more on consumption, save less and invest less. Hence this good measure aimed at protecting local industries might lead to a counterproductive effect if government does not address all the necessary measures (policy inconsistencies).
3. ANALYSING DEBT SERVICE IN RELATION TO SOCIAL SECTOR SPENDING
3.1) While proposed social sector spending has gone up in 2021 compared to 2020, the specific sector spending as a proportion of the budget has gone down with an exception of social protection. It should further be noted that this increase in the social sector budget is only in nominal terms as high inflation has eroded the real value the proposed expenditure.
3.2) The proposed total expenditure on education, health, housing and community amenities, environmental protection, recreation, culture and religion and social protection is K31.6b. Total expenditure on debt service is K46b. So essentially government is spending more on debt service than total social sector spending. While the borrowed money was spent on improving social sector infrastructure, it is now chocking government’s capacity to provide better social services. The fear is that as debt service outlays grow they will keep suffocating social sector spending and the quality of social services will not improve. This will defeat the whole essence of borrowing. This is why borrowing should always be approached cautiously as it tends to hinder the development it should be facilitating if not managed well.
4. DEBT SUSTAINABILITY AND THE ROAD AHEAD
4.1) Foreign debt has increased to $11.97b in 2020 from $10.23b in 2019. Domestic debt has increased to K114.4b in 2020 from K60.7b in 2019. The allocation to debt service has increased to K46b in 2021 budget from K33.7b in 2020 budget. Expenditure on debt service has been increasing at a fast rate over the years. Our total debt is now either close to or slightly over 100% of GDP since our GDP has been shrinking while debt is rising at a fast rate. In the 2021 budget, allocations to debt service constitute 70% of domestic revenue, implying that domestic revenue is not sufficient to cover debt service and the public service wage bill, government has to borrow part of the money just to cover these two items.
4.2) In 2021, a total of K53.4b will be financed through borrowing, increases from K34.1b in 2020. Clearly Zambia is trapped in a situation where debt is unsustainable but borrowing keeps going up. Does Zambia really have a good debt sustainability plan? If so, is it being implemented? These numbers do not indicate any improvement in debt management. Things seem to be getting worse every year and one wonders how government will convince lenders to postpone debt repayment if borrowing is still high.
5. POLITICS OF THE 2021 BUDGET
5.1) It is hard to avoid analysing just how much 2021 elections might have influenced the 2021 budget. Some interesting shifts in budgetary allocations can be observed and while there could be compelling development arguments to back this up, speculating that 2021 elections could have influenced some decisions is inescapable.
5.2) While studies have indicated that FISP is not effective and has so many challenges, it has been increased to K5.7b in 2021 from K1.1b in 2020. FISP has so many challenges starting with the procurement itself right through distribution. Farmers that significantly contribute to national production are left to struggle with high prices of inputs on the market. The other challenge is that government has not invested in local production of inputs, importation of inputs drains dollars out of the economy contributing to kwacha depreciation. Hence while one would have expected a steady reduction in FISP and restructuring of inputs production base and market, allocations have gone up by 5 times. Even if we factor in currency depreciation it is still a huge increase. There is a high possibility 2021 elections played a role here.
5.3) Social cash transfer has increased to K2.3b in 2021 compared to K1b in 2020 and the food security pack has increased to K1b from K122m. While there is a compelling argument that more people have been left vulnerable by Covid 19, this will definitely mean more people receiving hand outs in 2021. While social protection is important, it is always worrisome when more money goes to a sector while implementation has married marred with so many irregularities and challenges. Do we now have strong systems to safeguard this?
5.4) The tax exempt threshold has increased from K3300 to K4000. On paper this is appealing but considering the fact that inflation has gone up from 9.3% mid 2019 to 15.5% mid 2020, the real value of the net pay has gone down despite the tax exempt threshold adjustment.
5.5) Depsite challenges in revenue mobilisation infrastructural projects have received about K9b which will most likely go towards completion of outstanding projects crucial in the politics of 2021.
6. BUDGET CREDIBILITY?
6.1) Can government accurately and consistently meet its revenue and expenditure targets. Revenue targets so much depend on how the Covid 19 situation and its resultant effect on the economy evolves. However it will be very hard for government to remain disciplined in expenditure during this critical elections campaign period.
7.1) While we can debate for a decade on the merits and demerits of this budget, the document we are looking at is just one part of the puzzle, the other equally important part is its implementation. Just how good have we been in budget implementation? Can we raise the targeted revenue? Will the deficit grow deep into the year? Will government remain disciplined in spending during campaigns?
In conclusion I want to commend government for the good job done in putting this together. We knew it wasn’t going to be an easy process, the idea is not to shoot down and discredit the good efforts put in but to thoroughly review and provide meaningful feedback. This debate is a very important part of the budgeting process.
Thank you and God bless Zambia, our leaders and the hard working citizens.🙏