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Wednesday, 22 January 2014

IMF on Zambia's Fiscal Deficit

The recent IMF Article 4 report suggests that Zambia will again exceed its fiscal deficit set out in the Budget 2014 :

IMF stressed that the proposed 2014 budget does not take sufficient steps to start addressing the large fiscal deficit. The budget submitted to Parliament in October calls for a deficit of 6.2 percent of GDP in 2014, above staff’s recommendation of 5 percent. The budget aims to increase domestic revenue by about 1.3 percent of GDP, mainly through non tax measures (including bringing revenue from FRA and other government agencies on budget, raising road tolls, and introducing a surcharge on money transfers).

Contrary to [IMF] advice, the [Zambia] budget proposes raising the Personal Income Tax (PIT) tax-free threshold to K3,000 from the current 2,200, which will generate a revenue loss of about 1 percent of GDP [Under the new PIT tax-free threshold, only about 33 percent of employees in the formal sector are expected to pay income taxes]. The budget also proposes a wage freeze for 2014 and 2015, as well as a net recruitment freeze for 2014 and limits FRA activities to maintaining a strategic reserve.

In addition to the higher than desirable planned deficit, there are substantial downside risks to the proposed 2014 budget. Based on available information, [IMF] estimates that revenue and spending policies in the budget would produce a deficit of 7.4 percent of GDP, about 1 percent of GDP higher than budgeted. [The deficit could be significantly higher if the increase in non tax revenue falls short of the authorities’ ambitious projections]

Moreover, the proposed wage and hiring freezes will be difficult to achieve given opposition from unions. Even modest increases in wages and new recruitments could incur additional spending of 1–1½ percent of GDP. To reduce the proposed deficit to 5 percent of GDP, staff recommended further measures [refrain from raising the tax-free threshold; Starting to raise corporate income tax (CIT) rates on low-taxed sectors ; postponing some infrastructure projections; and, reducing intergovernmental transfers]

(Source: IMF Article 4 Report 2013, Paras 17-18])
Once again the key picture here seems to be the Budget is increasingly not worth paper it is written on. It is particularly noticeable that the IMF believes, “the deficit could be significantly higher if the increase in non tax revenue falls short of the authorities’ ambitious projections”.

I suspect that is given because most of the non-tax revenue includes the “exceptional revenue” figure which is essentially a holding number that GRZ has failed to justify. On top of that a lot of revenues has been projected from the not fully implemented toll roads and also the land audit. Government has also already moved to reverse some of the hiring and wage freezes. In addition there non-budgeted spending commitments being made already e.g. INDECO, new stadiums.

Some people have raised legitiminate questions on why the IMF analysis matters. It matters because no one else is is in position to take an indepth look at our finances than the IMF and World Bank because GRZ is not very open to anyone except the IMF and World Bank. The Bretton Woods institutions are able to look underneath the covers and see the rottenness. Until GRZ becomes more transparent to its own people and we have fully fledged research institutions it is foolish to ignore IMF and World Bank analysis on the many pressing issues.

Chola Mukanga | Economist
Copyright © Zambian Economist 2013


  1. This does seem to be irresponsible government. Zambia is hastening towards over indebtedness not so long since it's debt was forgiven.

    It won't happen a second time. Zambia is going to suffer for decades - or rather the ordinary people of Zambia.

    How quickly the good policy of Levy has been ruined.

  2. I am a big proponent of stressing the importance of IMF views on the Zambian Economy, thank you for your concise but thorough delivery.


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