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Friday, 9 October 2009

Zambia Budget 2010

The Finance Minister, Situmbeko Musokotwane MP delivered the Budget Statement today. Formal analysis to follow, but on a quick read this appears to be a pretty disappointing budget : the size of the budget is actually lower than last year's budget in real terms (accounting for inflation); agriculture budget is also lower when we compare actual spending in 2009 and 2010 allocations; government debt has gone up (external and domestic) as government has had to borrow due to reduction in donor money thanks to corruption allegations; and to cap it all off, over a third appears go on general government services with significant proportions gobbled up by the Census, Voter and National Registration. Important but still unproductive activities.

Zambia Budget 2010

Update :
And here goes the overview of main tax changes :
2010 Budget Hightlights

8 comments:

  1. I think you're mistaken about two things:

    1. That the Budget is lower in real terms doesn't paint the full picture. What matters is how resources have been allocated within the Budget. For example, Health and Education have received tremendous increases in domestic resource allocations -- Health 19 percent, Education 29 percent.

    Further, the Budget is only marginally lower than inflation. The speech indicates that the end-year target is 8 percent in 2010, and 12 percent in 2009. This means that average inflation for 2010 will be bewteen 8 and 12. Let's assume 10 percent. The Budget is 9.6 percent higher in nominal terms, and therefore lower by 0.4 percent in real terms.

    Now, assuming 10 percent average inflation for 2010, Health and Education are doing very well.

    In Agriculture, all the increases have gone towards non-FSP programmes, since FSP's allocation is the same. So despite a less than inflation increase, the bulk of the budget has had NO increase.

    What I'm trying to say is that you shouldn't rush to judge that the budget is flawed just because it's not higher than inflation. That's a very uni-dimensional way of looking at it.


    2. I think your numbers are wrong on NCC, Voter Reg and Census. There's no way 30 percent of the Budget was spent on those three things. You will find, in fact, that the amount is 1.7 percent of the Budget.

    3. Nothing wrong with Government debt rising. Fiscal deficit levels have been under control for years, and a modest domestic debt rise to 3 percent isn't very bad in a bad year for revenues. Zambia is also well lower than most regional deficit numbers. In fact, it is a stellar performer this year in Sub Saharan Africa.


    YM
    LSK

    ReplyDelete
  2. Oops, I meant three things, not two!

    YM
    LSK

    ReplyDelete
  3. YK (LSK)

    I am somewhat taken back by the strength of your language. We certainly share different perspectives on the budget, but that surely does not translate in either part being “mistaken”. In fact I am more than happy to be corrected as I merely skimmed through it. I make it clear that  “formal analysis to follow, but on a quick read this appears to be a pretty disappointing budget”. So there’s no need to be unnecessary confrontational.

    As it turns out you seem not to have corrected by “mistaken” assessment. Lets take your  points in turn. 

    1. Is the budget lower in real terms or not?  

    You don’t dispute that it is, but you seem to regard it as less important compared to distributional issues. Was I mistaken to state a fact? No! It is smaller than last year’s budget. The reason is obviously because Government is fiscally constrained due to the withdraw of donor funding.

    The other point you questioned was the scale of the reduction. You say its small because you are using A FUTURE INFLATION INDEX. That is not robust economics. You should use this year’s index because that is money committed this year to be spent next year. It is this year’s commitment.  But even if I allowed you to use next year’s expectations, the past should be the predictor not government unfounded expectations of the future.

    2. Is the budget better distributionally?”

    You have rightly point to health and education, but again in real terms these are small increases.

    The point you miss on agriculture is fundamental.  We don’t compare how much government allocated last year to this year, but how much government actually spent relative to this year’s budget. All of us monitoring government expenditure in agriculture know that government have been deviating from allocation significantly. So this year’s budget is actually a REDUCTION in commitments both real and nominal.

    3. Where is a third being spent?”

    I agree with you. What I actually meant to say was over a third appears to go on general government services with significant proportions gobbled up by the Census, Voter and National Registration. I will correct the narrative when I have a chance.

    4. Is there anything wrong with rising government debt?”

    This is a matter of individual opinion. I think that rising external debt is bad. That is going up and running back to HIPC.  Rising domestic debt is also bad especially when you are spending it to maintain a unnecessarily large and bloated government.  With the cost of borrowing for ordinary consumers high, I am surprised anyone would defend a pile up of domestic debt, which simply makes banks less willing to lend to domestic consumers.

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  4. Cho,

    Please don't mistake my tone for anything personal. It's purely techincal, and I mean no personal offense.

    On point one, I disagree with you. These are resources committed FOR next year, to BE spent next year. The question, therefore, is, will those resources that are committed be adequate at the time that they are spent. Therefore, it is correct to use the price level that will prevail at the time of expenditure, not at the time of allocation.

    The Government's 'unfounded' expectations are key to the process. Economics 101 will tell you that inflation is a forward looking variable, and so expectations of key economic agents are pivotal in how the variable is shaped. The Government is one of the most important agents, as it also has the additional ability to control the movement of the variable.

    Almost all modern macroeconomic policymaking is based on forward looking projections, not historical based trends.

    On point two:

    Whether they are small or not is a matter of preference. I would love to see a 10,000% percent increase in Education as well. For that matter, I'm sure everyone in Government would vote for a 10,000% increase in everything for next year, but that's clearly not what the point is.

    What matters is that the Budget speech clearly defines certain areas of focus, and then goes on to allocate resources in those areas.

    Education and Health receive large real increases of domestic resource allocations. Non-FSP agriculture receives a 6.x percent increase, which is below inflation. The inference in that case is that Education and Health were the number one priority for the Government, and Agriculture was a lower priority. If you look at operational expenditures, they are down, which means in real terms, they are well in negative territory.

    What would be interesting to see is what peer countries do with their budgets. I have done that, and have found that Zambia fares quite well when it comes to commitments to finance social sector priorities.

    (Continued in next coment...)

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  5. On point 3

    On the issue of a third going to GPS, this is understandable, given that the Government is playing a vital role as a private sector substitute for service delivery. Who's fault is that? Yes, it is, in part, the Government's own making, but now that it is in the place that it is, the Budget must ensure that service delivery is maintained. GPS numbers have fallen substantially, from the high 40s, to the low 30s in just a few years. That's pretty good when you look at performances of the peer group.

    On point 4:

    If my memory serves me correctly, external debt in 2009 is lower than what was budgeted and approved by Parliament. Your aversion for external debt is understandable given Zambia's economic history. This is something I sympathize strongly with you, and with the anti-Debt campaigners that Zambia is famous for. What is not easily condoned is your aversion to placing your faith in macroeconomic principles ahead of your instinctive urge to use history as the predominant variable in your analysis.

    Zambia contracted ridiculous amounts of debt over twenty five years because:

    a. There was absolutely no form of governance whatsoever.
    b. Most of the debt was non-concessional.
    c. The decline of the economic structure was a joke every PhD student in Economics studied (and still studies about)


    Today:

    a. No matter how corrupt RB or anyone you think is, Zambia's governance is light years ahead of what it used to be with KK and FTJ. Corruption is still rife, but there is some semblance of a working Government, with an active Parliament and Judiciary. Parliament approves all debt contracted by Government, as it approves the financing for the National Budget.

    b. Almost all the debt that is contracted is done at highly concessional rates (0.5 percent to 0.75 percent, with many years of grace). This means that the structure of the economy, which I will come to in point c, is able to easily catch up with the debt obligations, and therefore debt is sustainable. Even if Zambia did contract non-concessional debt for wasteful spending, the IMF and donors would very quickly void those debt agreements. There are checks and balances in place.

    c. I don't think I need to spend too much time telling you how different Zambia 2009 is from Zambia pre-2000, Zambia 2001, Zambia 2002, 2003, 2004 or even 2005. This country's economic surface is changing in remarkable ways, with or without Government support.

    d. There are frequent debt sustainability analyses conducted to ensure that debt remains sustainable. There are clear risk management processes in place that prevent another episode of the 70s/80s/90s.

    You get the point.

    It's not the world's best budget, but I think your criticism isn't wholly warranted.


    My suggestion: Look forwards, don't dwell on the past.

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  6. YM (LSK),

    I am glad it’s purely technical.
    I value your assessment and eagerness to engage on these issues. No everyone who posts or guest authors shares my perspective and they shouldn't. The moment we all agree, we stop learning.

    As you have touched on general issues, let me get these out of the way before I tackle the four issues raised.

    My preliminary thoughts on the budget where neither intended to be forward or backward looking. I respect the actions of government in some areas, we disagree in others. I was simply noting my first impression off a quick skim. It is premature to admonish me to look forward because their many areas where I have applauded Government’s direction on this website. In fact I was chastised by colleagues when I recently suggested President was the more forward looking of the four Presidents. I can only imagine you have not fully taken time to study the material posted on this website because there’s lots of praise for government and criticism in equal measure.

    KK vs FTJ vs LPM vs RB

    In terms of governance, I have a lot to say on this issue. Again, if you want to know what I think about governance in Zambia and President Banda please see all the posts under the governance tag

    Now on the “four points”

    Point One

    No its not correct to use the price level in the future for two reasons:
    1. The "future index" is highly uncertain

    2. The money is being allocated in this year’s budget. It is being budgeted this year. So we must ask how this year’s budget differs from last year’s budget in real term. Take it from me, this is the appropriate comparison. Pick up any reputable budget in the UK or USA. Real changes are shown this way.

    You make the following point regarding “rational expectations”:

    ”The Government's 'unfounded' expectations are key to the process. Economics 101 will tell you that inflation is a forward looking variable, and so expectations of key economic agents are pivotal in how the variable is shaped. The Government is one of the most important agents, as it also has the additional ability to control the movement of the variable.”

    You are conflating two separately issues. The first is whether forward expectations are important. The second is whether government’s own forecasts are accurate. And the third, and more relevant to our discussion, is whether forward expectations should be the basis for converting nominal budgets into real budget.

    On the third, I have told you my position. On the second, its quite clear that Zambia’s inflation forecasts are guess work. Infact I was speaking to a fellow economist in Zambia sponsored by ODI who agreed that our data is poor. But not only that our forecasts have always tended to be inaccurate due to our poor modelling of external shocks. On the first, of course forward expectations are important, which is why I have rebuked Fundanga on several occasions for not recognising this point - see random expectations

    But I have gone further, I have even encouraged people to speak positive about Zambia to encourage investment- see Cultivating a positive image of Zambia

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  7. ....continued

    Point Two We have to agree to disagree. I hold that Agriculture spending has gone down relative to actual allocations. You hold that it has not and in fact non-FSP spending has gone up. Yes non-FSP allocation may have increased but its not sufficient and it is within an overall real and nominal decrease.

    You make the following point :

    ”What would be interesting to see is what peer countries do with their budgets. I have done that, and have found that Zambia fares quite well when it comes to commitments to finance social sector priorities.”

    I appreciate this may be an area of your present interest but its actually besides the point. However other nations behave should be no guide for our. Compaaring ourselves to Angola, DRC or Malawi does us no good. Neither for that matter is a comparison to RSA or Malawi. We have a phrase on this website : "Sakism"

    Apart from the logical fallacy of the argument, there’s actually a sound economic reason why we should not care about what other nations are doing – its the Rodrik “constraints argument”. The path to development lies in understanding our own constraints in the economy and tackling those. Our constraints may be different from Botswana or Mozambique or Zimbabwe.

    One of the reasons Zambia is undeveloped is that it has not recognised that other countries are not there to be copied, they are there to give us a better understanding of what constrains growth. In that regard they serve as examples not of spending, but knowledge.

    Zambian policy makers have not grasped this, but God willing as we open more dialogue they will begin to think along the lines of constraints rather than copying others or comparing themselves. Its a pointless path. In fact after the destruction of the modernization hypothesis and the Washington consensus all development economists are converging on one point - there's no single answer to development. Each nation must try and see what works for it. That is consistent with the Rodrikan approach.

    Point Three

    I am surprised by your assessment :

    ”Yes, it is, in part, the Government's own making, but now that it is in the place that it is, the Budget must ensure that service delivery is maintained.”

    One does not head down the wrong path because he has found himself on the wrong path and must just keep heading that way.

    I put to you that the NCC is a waste of money and it is there to appease political parties while our women and children continue to eat wild fruits. We are killing our people by wasting money like this. It’s absolutely criminal to waste money on pointless adventures. These institutions are important but we are wasting money.

    I speak as someone who values institutions and is currently advising the UK government on constitution and justice economics. I explain here why I think we have got this far : Satonomics, 2nd Edition

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  8. ....continued

    Point Four

    You state :

    ”What is not easily condoned is your aversion to placing your faith in macroeconomic principles ahead of your instinctive urge to use history as the predominant variable in your analysis.”

    I believe I have addressed your “rational expectations” point above.

    Also if you took time to study the 2000+ posts on this website (and when I have been interviewed in the Press) you will realise that I am optimistic about Zambia. If I wasn’t optimistic this website would not exist. I would just bury my head in the sand like many have done and say we are doomed.

    We should stop accusing those who try and hold government to account as retrogressive or pessimistic.I owe Zambia all that I have and will not stop at holding this and any government past, present or future to account.

    A formal review of the Budget is coming. I keep saying, I only skimmed it.

    ReplyDelete

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