The 2014 Budget contains seven targets for government economic policy in 2014. I asked for your comments on which of those targets raised questions on your mind and why. We had over 100 comments on the Zambian Economist Facebook page thread. Here is the broad summary of what you said. Where relevant, I have added additional points for clarity and ease of reading.
A) ACHIEVE REAL GDP GROWTH OF ABOVE 7%
It was noted that this target was merely a repeat of last year’s Budget target of 7% for 2013. It therefore speaks volume that Chikwanda is again aiming for the same target of 7%. Many thought the target was unachievable just as the last Budget’s target proved unachievable. It was noted that the latest IMF statement shared on the Zambian Economist projects Zambia's growth in 2013 is at 6.0% based on discussions with the Ministry of Finance. This is a big drop from 7.1% growth in 2012.
Many believed the Government is unable to meet its growth target because of general poor economic management which has resulted in weakening macroeconomic fundamentals i.e. growing fiscal deficit, unstable exchange rate and increased foreign borrowing. It is also noted that Zambia is extremely vulnerable to the China's slowdown and the decline in copper prices - and the latest Budget does not appear to address this vulnerability. Based purely on Chikwanda's record it therefore seems that achieving 6% is not guaranteed let alone 7%.
B) CREATE AT LEAST 200,000 DECENT JOBS
It was noted that this target is merely a repeat of last year’s budget of 200,000 decent jobs in 2013. Many believed that just like the last Budget was a failure in this area, so it will also be the case in 2014. Many wondered, what PF will do in 2014 differently that it failed to do in 2013 to achieve this target?
It was particularly noted that the word "decent" meant permanent and well paying jobs, not temporary construction jobs. Given that government only managed to create less than 60,000 jobs (a mixture of temporary and permanent) in the economy in 2013 largely due to public sector hiring there's a serious doubt whether it can deliver around 17,000 jobs per month.
The new wage and hiring freeze in the public sector means those new 200,000 decent jobs must all be private. The minimum wage coupled by public sector wage inflation (raising expectations) all point to a repeat of last year’s failure to secure 200,000 new jobs.
C) ATTAIN END YEAR INFLATION OF NO MORE THAN 6.5%
It was noted that this year’s 6.5% target is lower than the 6% target set in last year’s budget. This new upper target clearly reflects the government's recent failures to keep inflation in check. Although the 6.5% is just below the prevailing inflation rate around 7%, some wondered how is inflation going to be brought down when there is pressure from new wage increases. The pressure’s for wage increases in the private sector (as a result of public sector increase) will determine where we land in 2014.
D) INCREASE INTERNATIONAL RESERVES TO OVER 3 MONTHS OF IMPORT COVER
It was noted that since PF came into power international reserves have continued to fall with now Zambia barely supporting 2 months of import cover. As the latest World Bank report noted, the reason for the fall in reserves is that Alexander Chikwanda has been using the Bank of Zambia to directly fund Zambia's oil import bill and debt-servicing obligations. Many thought the current poor management of reserves is likely to get worse in 2014 with more borrowing and associated larger debt servicing.
E) MAINTAIN A FISCALLY SUSTAINABLE PUBLIC EXTERNAL DEBT LEVEL SO THAT DEBT SERVICE AND AMORTISATION DO NOT EXCEED 30% OF DOMESTIC REVENUES.
Many were worried by this very large target. As someone put it, “to envisage ever paying 30% of domestic revenue on external debt servicing is outrageous (that would be K8.86 billion of 2014 domestic revenue; whereas actual allocation is K1.822 billion which equates to 3.06%)”. Did Mr Chikwanda make a mistake in the Budget, and actually mean 3%? This seems likely because last year’s target was 1.5%. I have put these questions to the Ministry of Finance, among many, and they have not responded with a coherent answer.
Another problem is that the Budget currently suggests Zambia's debt servicing in 2013 will be somewhere between $0.8bn - $1.0bn depending on exchange rate and interest rates in 2014. What has concerned people is that Zambia’s borrowing spree appears to be nothing more than simply financing previous debt. It was noted that Alexander Chikwanda plans to borrow $2bn in 2014. Only to give $1bn back in debt servicing! This new bizarre policy has been given many terms by several readers, ranging from "crazy economics" to “zedonomics” .
F) INCREASE DOMESTIC REVENUE COLLECTIONS TO OVER 21% of GDP
Last year’s target was 20%. Many thought this target was not going to be met - just as last year’s target was not met. And this will again put more pressure for more borrowing. But more importantly even if it is met, it is now clear that 55% of the collected domestic revenue is going on public sector wage bill. Some asked, what is the point of collecting domestic revenues only to spend it on people? Is this not "robbing Peter to pay Paul"?
G) LIMIT DOMESTIC BORROWING TO 2.5% OF GDP AND CONTAIN THE OVERALL DEFICIT TO NO MORE THAN 6.6% PERCENT OF GDP.
This was target which was most scoffed at. Many thought it was totally unachievable. PF have revised the deficit up from 4.3% in the last Budget (which was totally blown by large spending). But it has kept the target below the actual deficit in 2013 of 8.5%. It is projecting a 6.6% deficit next year, on the back of a budget 30% larger than the 2013 budget. To many readers the numbers are struggling to add up.
To meet this 6.6% deficit, Chikwanda is planning to borrow substantially abroad and at home ($2bn) most of it going on towards meeting the wage increases from last year. He is also planning to supplement this with a new stream of “exceptional revenue” worth K2.1bn (around $400m). But that only leads us to more trouble. In the 2013 Budget, exceptional revenues were 34% of non-tax revenues (at K0.4bn in rebased currency). In this new budget exceptional revenues are 98% of non-tax revenues (at K2.1bn). This seems very large and the jump too big. Again I have asked the Ministry of Finance for an answer to this - but no response. A number of readers have offered some guesses on what this might, with the best bet so far being that Government is planning to sell its shares in ZCCM-IH but that remains.
To help meet the deficit target, Chikwanda has also promised to implement a wage and hiring freeze. It was noted that the public sector hiring freeze does not make any sense when we are supposedly building 53 new secondary schools, 150 new primary school classrooms, 3 new teacher training colleges, 5 new trades training institutes, 650 health posts, infrastructure for new districts and provincial capitals. The best guess therefore is that Chikwanda’s wage and hiring freeze is hot air. Certainly the idea of 2 year freeze is not politically credible given the election coming up.
The upshot of all this is that one expects the government spending to go up and the deficit to go beyond the 8.5% in 2013. Indeed, it is very much possible that Zambia may break the 10% fiscal deficit barrier, as macroeconomic fundamentals are further eroded.
Taken together the response from Zambian Economist readers on that thread was generally a large thumbs down to Budget 2014. Though there were a few outliers who voiced support many people thought the targets were not credible and the budget as whole does not appear to have met many Zambian Economist readers' aspirations.
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Chola Mukanga | Economist Copyright © Zambian Economist 2013