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 2010-10-10 03:37 am Back to NEWS
2011 Budget analysis
Finance & National Planning Minister Situmbeko Musokotwane displays the copper briefcase containing the budget speech on his arrival at Parliament Buildings in Lusaka yesterday.Times of Zambia

The K20,537.4 billion 2011 budget appears to be an ambitious budget for an emerging economy like Zambia.

Yet budgets in Zambia are very simple to read. The minister has proposed a K15.769 billion Budget from domestic resources, with an additional K1, 587 billion from Cooperating Partners. The deficit of K3, 180.6 billion he anticipates would be financed from domestic and external borrowing.

This in total brings the Budget to K20,537.4 billion. At the current exchange rate of about K4,770 per US dollar the budget in US dollar terms is worth about $4.3 billion which is roughly equal to Zambia's copper exports.

The rule of the thumb is that the budget is usually a tenth of the currency in circulation being around K2.3 trillion for August 2010 indicating that the Government Budget should be around K23 trillion. 

It is within this configuration and straitjacket that Government has to offer hope to the Zambian people. If exports continue to increase, so will Government's Budget and naturally taxes, making paying tax in the long run an expensive product for Zambians. 

In effect the budget appears to be providing Kwacha cover for exporters who have been given the mandate by the Bank of Zambia to have 100 per cent direct retention of their foreign exchange income through their exported goods.

If Government is to free itself of this straitjacket and have that value manifest in the Kwacha economy which drives the micro economy, then foreign exchange retention regulations have to be altered to allow for only 100 per cent through Kwacha purchase. 

This would fuse the outstanding US dollar revenues associated with macroeconomic success of the Zambian economy into the micro economy and hence the domestic economy.

Looking at the dynamics of the budget, what is worrying about the budget is that the increase from K15.769 billion to K20,537.4 billion is about 17.3 per cent being obtained from external resources. 

Considering that the economic growth rate of the economy is about 6.6 percent, and going by the 1964 United Nations Seers Report, the 1967 Brown Report and the 1969 Turner Report, these reports clearly indicated that if increases in Government expenditure exceeded the economic growth rate, it would compromise the monetary value of existing jobs and manufacture unemployment in the future.

At the macroeconomic level, economic growth is occurring as noted by the trade surpluses Zambia has achieved, the bumper harvest, infrastructure development etc but its impact on the Kwacha's purchasing power has been negative; while job creation has occurred, the value of those jobs in terms of wages still remains very low.

Consequently the Budget has tried to balance, quite partially, the level of investment needed in improving and developing Zambia's infrastructure so that it becomes a middle income nation by 2030, against the social needs of the nation.

This is the gamble that the 2010 Budget has taken. As observed in 2009 that tax targets were not met, this may well be a result of a contracting domestic economy as people's Kwacha's wages experience the "Seers effect" as the micro economy stagnates.

It is understandable that Government is in a hurry to develop Zambia to create a middle income nation by 2030, but that also means that Zambian workers must have middle income salaries to create the necessary domestic consumer demand to support the local economy and Government revenue. 
No such policy seems to be in the Budget.

The choice here is does Government tax the wage before it is spent and denies firms from having their products being purchased? Or does Government collect its taxes after workers use their "middle income wages" to purchase goods through which Government collects its revenue through company tax, so as to keep the factors of production operational and preserve jobs?

Hence, the measure by the minister to impose a duty on imported steel to boost local demand and production is a step in the right direction. 

If this could be extended to wages, then the K1 million non-taxable threshold should have been higher through moving the tax band to company tax or Value Added Tax (VAT), so as to enhance consumer demand.

It is a question of looking at the linkages in the economy as linkages provide opportunities to create jobs and create savings to increase income values. 

Take, for example, the duty placed on plastic bags. It means shops not supplying plastic bags and the expected duty may well vanish. 

What would have been perfect was to encourage the processing of such plastic products hence creating more jobs. This kind of approach is seen in the minister zero-rating VAT on hammer mills.

It is a question of give and take. Another example is the increase in motor vehicle licence fees by 50 per cent. 

The question is that if the number of cars on Zambia's road is increasing, isn't more revenue being collected? 

If duty and tax on motor vehicle imports were reduced, would that increase the level of imports hence the number of people paying such fees? 

Wasn't this kind of argument the case for the dropping of the International Gate Way fee to increase volumes and rake in more revenue from the traffic?

The fundamental question here is that if Zambians are to use the roads that are being built, they need transportation. They need vehicles to do business. Vehicles have a high maintenance cost, whose spare parts are also taxed.

Increased volumes of vehicles mean more repairs, and more spare parts will be needed. This spells more imports hence more tax going into duty and customs.

In general, the budget has lost out on boosting Zambia's manufacturing sector, in total the macro economy. It has kept silent on the issue of "Windfall Tax" on the mines needed to reduce the tax burden placed on Zambians mainly in the formal sector.

It has instead given a kind of "Windfall Tax" on banking services which will definitely be passed onto the consumer. The end result will be people avoiding banks.

Instead of focusing on formalising the informal sector, bringing the cost structure down, with regards to having the majority of US dollar receipts and US dollars from exported goods passing through Zambia's commercial bank system, thereby influencing downwards the exchange rate in favour of the Kwacha, it is creating a high-cost structured domestic economy.

It must be noted that Zambia's export revenue in the 1990 was struggling to reach $1 billion and now it is touching over $4 billion, but unfortunately most of that revenue seems to have eluded the domestic economy where the micro economy resides. 

This achievement is commendable, and the government just has to take one little step further so that that value can be captured by the Kwacha economy momentarily before it is externalised.

Yes, bold strides have been made in infrastructure, agricultural production etc but these can easily turn into white elephant figures as the domestic economy fails to be fused into the macro economy, as noted recently by the Food Reserve Agency (FRA) being bailed out of its maize marketing exercise by an international loan.

It is within this the Budget can be described basically as a Budget for Government, with some inclination to benefit Zambians. 

Infrastructure development is good, more clinics and health posts need nurses and doctors, more schools need more motivated teachers.

Yes, Government's efforts are very noble, building health centres in rural areas whose populations grow most of Zambia's maize for practically nothing. 

Sadly rural Zambians for a long time have had to face the worst of the health care system, the most awful education structures and the lack of teachers, skilled manpower which the government is desperately trying to correct.

Urban Zambia wants maize cheaply but is not prepared to pay for it or grow it. They prefer to hold a beer than a plough, while rural Zambia toils away growing food. But clinics in rural and urban Zambia need drugs, schools need teachers with proper educational equipment. 

It is a fine line between quantity and quality.

The quality of life in Zambia can only improve if every Zambian is a partner in the developmental efforts of Government.

This to some extent has been realised by Government in its agricultural policies as seen in the bumper harvest. 

But farmers should have been allowed to export their maize individually rather than wait for the FRA to buy that maize. 

If next year another bumper harvest is due, will the K150 billion given to the FRA suffice? 

Can Government give incentives for Zambians to turn that maize into cornflakes that can be exported? Can we learn to process our agricultural production into contemporary goods?

The Budget should have focused more on bringing in Zambians as partners in development and looking at incentives to increase economic activity to enhance its balance sheet. 

This was well illustrated by the Minister increasing the customs clearance threshold from $500 to $2,000. However on the revenue side Customs and Excise Duty is anticipated to rake in K3,430 billion while Value Added Tax from imports is to bring in K3,170.3 billion.

Basically what this spells is that the Minister has given one incentive to import more, but Custom and Excise Duties still remain relatively high. 

The end result is that this cost is passed on to the consumer.


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