Dream Budget

Friday 30^th January, 2009 was Budget day and the Finance Minister spent much of the afternoon reading his budget speech to a packed house and public gallery in the Parliament building.

The first information given to the public was that the theme of the 2009 budget is 'Enhancing growth through competitiveness and diversification'

The budget speech also alluded to the uncertainty in the world economy and the effects of the lower copper prices on the Zambian economy.

The 2009 budget looks to a Zambia where Zambians are well nourished, have decent housing, and have access to clean water and sanitation. In addition, the budget looks to developing paved roads with adequate drainage, access to reliable and renewable energy sources, and the provision of quality health care and education.

The 2009 budget strategy includes economic diversification programs, lower dependency on the mining sector, and for the Government to play its role in creating a conducive and competitive environment for wealth creation and poverty reduction.

The budget seeks to attain 5 percent economic growth and to maintain inflation at 10 percent within a framework that will limit domestic borrowing to no more than 1.8 percent of GDP.

The budget policy highlights a focus on Agriculture, Tourism and Manufacturing as key economic drivers. The policy aims to provide a steady food and fuel supply during 2009. The budget takes into account an expectation that oil prices will remain low during 2009. Resources will be channeled to infrastructure and social services with a prudent domestic borrowing policy. Government plans to incur foreign debt to develop water sources, sanitation, energy sources and roads. An emphasis is placed on undertaking non concessional borrowing for energy development and entering into Private Public Partnerships through the guidance of a bill to be passed during the year. Several instruments are envisaged that will assist Government deliver development to the country, and these include devolution of service delivery to the Local Authorities, the take off of the Decentralization Implementation Plan, the Local Government Capacity Building Plan, and the expediting of the National Decentralization Policy.

The tangible events that will be undertaken during 2009 in agriculture include the development of a 155,000 Hectare farm block in Serenje, and the promotion and facilitation of processing and packaging in Zambia. To this end the budget raises income tax on exports of cotton from 15 percent to 35 percent, much agriculture machinery and equipment will be zero rated, cotton seed export tax will be increased from 15 percent to 20 percent, and boring and sinking equipment will be zero rated.

Tourism development programs include the development of Kasaba Bay to include roads, air strip and electrification, and a tourism zone in Livingstone. The rehabilitation of airports and roads within the infrastructure allocations for 2009 will impact positively on tourism development. The budget allocation to tourism is K77 billion which is a sizeable upgrade from the K26 billion allocation in 2008.

Key developments to enhance manufacturing include the development of Economic Zones across the country, the promotion and facilitation of value addition for selected primary raw materials produced in Zambia, the zero rating of imports for dehullers, windmills, and refrigeration and cold room equipment. Crude vegetable oils, gray fabric, and packaging materials will be re classified to attract lower customs duties in a bid to support manufacturing.

Major infrastructure programs to be funded in 2009 include rehabilitation of the Zimba Livingstone road, seeking investment to develop the Kafue Gorge Lower Power station, a rural electrification initiative, a PPP package for Tazara, the development of the railway systems in Zambia, airports renovations and extensions, and road drainage works.

The 2009 budget seeks to ease the pressure on the mining industry during the copper recession by the removal of windfall taxes, the provision of capital allowance of 100 percent, the reduction of customs duties on heavy oil fuels by 50 percent, and the zero rating of many copper and cobalt processing inputs.

Some attempts to make ZESCO more commercial have been captured in the budget by promoting a tariff increase that will allow ZESCO to experience cost recovery revenues by 2010. Our competitive advantage as a low cost energy centre will be eroded and our attraction for Foreign Direct Investment will be undermined. Furthermore, rural electrification will put pressure on the already overloaded national grid and if tariffs are too high then charcoal burning and deforestation will continue.

The budget places emphasis on converting two teacher training colleges into University Colleges whilst investing in the rehabilitation and development of trades training institutes in Mongu, Kaoma, Ukwimi, Mwinilunga, Lusaka, Solwezi and Chipata. This is a good initiative to raise the skills levels of many Zambians.

The total budget for 2009 amounts to K15.2 trillion, of which K11.7 trillion is from domestic financing, and K3.5 trillion is from foreign grants and loans. In 2008, 25 percent of the budget was foreign financed and in 2009 we expect 24 percent to be foreign financed even in the face of a global recession. Pledges and delivery are two different issues and our 2008 experience informs us that the pledges do not always transform into delivery.

K2.6 trillion is expected to come from Pay As You Earn, K2.5 trillion from VAT, K1.4 trillion from Import Duties, and K1.6 trillion from Excise Duties. Foreign Grants of K2.7 trillion are expected to cover Direct Budget Support, Sector Budget Support, and Project Support.

The 2009 budget is marginally bigger than that of 2008 but there is currently a global economic recession, our mines are laying off workers, and the disposable income for foreign tourists is declining thus negatively impacting on our tourism expectations for the year. The weaker Kwacha will reduce the expected imports which will in turn reduce the revenues anticipated for Import Duties and VAT.

The projections for 2009 are optimistic and are not backed up by complete facilitation cycle initiatives within the budget provisions.

For example, manufacturing will not really be supported until the Government facilitates manufacturing through lowering or removal of taxes on imported machinery and raw materials, and safe guarding the market for domestic manufactures by introducing tariff increases on manufactured imports. There is need to nurture domestic industry to a level where the industry will compete favorably with imports. Deliberate funding and financing for exports will have to be in place for cotton and cotton seeds to be locally processed.

Piecemeal support to tourism by allocating resources to either Livingstone which is over subscribed, or Kasaba Bay which substantially only needs access through an airport or airstrip, will not help matters much. Investors in tourism want to be able to ensure that tourists will be able to access their lodges, hotels and resorts first. Issues of electricity and roads come as a second step after assessing what the tourists are looking for. Upgrading roads that have no tourism impact will not help the economy much.

Air access to Samfya, Siavonga, Kafue National Park and Kasaba Bay are the basic requirements. The private sector will then determine the next steps for development.

The levels of PAYE and Corporate Taxes may be over estimated as many businesses go through what promises to be a few years of business slump.

Several of the assumptions and expectation in the 2009 budget seem to ignore what is happening in the global economy. Railway systems have not delivered on their concession agreement and yet they are ready to make more pledges of USD30 million. How feasible is this?

There is need for more prudent expenditure within the Government machinery this year if we are to finance and balance our 2009 budget. More than K6 trillion is allocated to General Public Services, Defence, and Public Order and Safety. This figure can be down sized to reflect our developing country status leaving more resources for Economic Affairs, Health, Education and Social Protection.

The 2009 budget appears to be a good wish list. It will take a very determined administration to ensure that the other K9 trillion goes towards truly transforming the economy in a meaningful way such that businesses thrive during the year and the focused sectors of Agriculture, Tourism and Manufacturing deliver as predicted. Anything less than this will mean we have a Dream Budget that will fall short of expectations and not live up to the 2009 budget theme.

Published 3 February 2009