Zambia's Fiscal Deterioration

Ratings agencies have been weighing in on Zambia's current fiscal woes. Here is Fitch's rating latest assessment, which seems to point towards a credit downgrade in August if the external position worsens :

The increasingly large budget gap in Zambia may prove costly to finance, Fitch Ratings says. Domestic financing conditions are constrained, and new external financing could push government debt toward 40% of GDP by end-2015. 

The fiscal deficit could now jump to 7.7% (on a cash basis), according to IMF projections released earlier this month. The government expects the outturn to be lower, but has indicated that it expects the fiscal deficit to come in significantly above the 4.6% target announced in the 2015 budget. Mining revenue has come under pressure from lower copper prices and changes to the mining tax regime. 

Judicial Reforms in the Justice System in Zambia

Editor's report: We have been sitting on this report of the Parliamentary Committe on Legal Affairs that was published last year on the judicial reforms that are in needed in the Zambian justice system. Minor edits have been made for ease of reading.

In any democratic society, the Judiciary, as one of the three Arms of the State, is at the centre of ensuring that the rule of law, constitutionalism and protection of human rights prevail by providing checks and balances to the exercise of power by the other two Arms of State (the Legislature and the Executive). It was, therefore, critical for the Judiciary to remain independent in the context of the separation of powers if it was to effectively discharge its functions.

Small victory against corruption

The Supreme Court recently sentenced former Labour Minster Austin Liato to two years in prison for possession of K2.1 million (in today's rebased currency) because it is "reasonably suspected" to be proceeds of crime. The sentence will run effect 2 June 2015. Liato’s farm and money has also been forfeited to the State.

Diversifying Zambia's Agriculture

Editor's note : A recent Daily Nation editorial laments Zambia's agriculture policy. In recent years the newspaper has distinguished itself with its balanced and thoughtful pieces. The aricle below is well worth the read:

If we truly put our minds to it Zambia could become the bread basket of the region, if not the continent. Out of the 75million hectares of land, 43million has potential for agriculture production and yet we are using about 6million or just under 14 percent for the purpose. Our national irrigation potential stands more than 2.7m hectares.

Sustaining African Growth

Editor's note:  The article below by Marcelo Giugale for Vox EU argues  that the current positive growth in Africa is due both to good policies and higher prices of certain commodities (such as oil, gas, and minerals). To ensure sustainability governments should not rely only on these higher rents but rather implement policies that take advantage of them. We have reproduced it below because it's policy lessons are relevant for Zambia. 

Sub-Saharan Africa is doing well. The region has never grown so fast for so long.

• On average, the growth has been around 5% per year over the past decade; the region even breezed through the Global Crisis.

• Nine African governments have managed, for the first time, to sell bonds in London and New York – and, in a sign of confidence, these bond issuances were oversubscribed.

• The proportion of Africans living in poverty is, at last, on a downward trend.

Zambia's Credit Rating - Moody's (May 2015)

Editor's note: Moody's recently affirmed Zambia's credit rating at 'B1', but has revised its outlook to negative based on rising debt levels, poor track record of fiscal management and worsening trade deficit. Details below.

Moody's recently affirmed Zambia's B1 government bond rating and changed the outlook to negative. The key drivers for the negative outlook are:

» Deteriorating debt metrics, as evidenced by a rapidly rising debt burden and increasing debt servicing costs;

» A trend of missed fiscal targets that points to high execution risks in current deficit reduction plan to arrest the upward debt trajectory, particularly amid spending pressures in the lead up to next year's presidential election; and

» The shift of the current account into deficit, removing a key credit support that has historically suppressed external vulnerability.

Zambia's growing public debt

Editor's note : an interesting recent article from Kundhavi Kadiresan (World Bank - Zambia) focuses on Zambia's growing debt. There are a couple technical nuances missed (e.g. link to tax revenue base, trade deficit, international comparators, importance of CBA). But it is a helpful contribution to the debate. 

An intense debate is going on in the country on Zambia’s debt and how it is affecting the economy. The debate is taking place because debt owed by the government to domestic and foreign creditors has increased sharply during the past few years, evoking images of the not too distant past when Zambia was categorised as a highly indebted poor country and received a huge debt relief.

Zambia's mining taxes collapses

Government has cut mineral royalties for underground mines to 6 percent, lower than the 9 percent which was expected to take effect on July 1. Presidential aide Amos Chanda has told Reuters that “Mineral royalty tax will be reduced to 6 percent from the earlier proposed 9 percent. It will remain at 9 percent for open pit mines”

The 2015 Budget had introduced a new fiscal regime that set underground mining royalty at 8% and open pit mines at 20%. This was reversed in April when all the royalties were set at 9%. We noted at the time that the changes did not make sense for underground mines because it meant an increase of 1%. Given the cost for underground mines are higher they should have lower royalty taxes compared to open pit, otherwise the incentives become skewed.

Should Zambia have FOI?

GRZ says that though it remains committed to enacting the Freedom of Information (FOI) Bill it plans to do so cautiously. According to Information Minister Chishimba Kambwili the Government "is concerned that some media organisations are focused on making it fail instead of providing credible checks and balances".

The government's refusal to enact FOI based on the lack of effective media regulation seems to have received new life following the decision of the Botswana parliament to reject a similar FOI Bill in order to "preserve the secrets and security of the nation". Minister Kambwili was quick to add that "in a way you can agree with [Botswana], the situation in Europe and Africa is different” .

Where next on the constitution?

Justice Minister Ngosa Simbyakula recently appointed a Referendum Commission to oversee the holding of the constitution referendum in 2016. The government has decided, as we have previously argued, that holding the general election and the referendum simultaneously is a good way to manage costs given Zambia’s very difficult fiscal position.

In the meantime, PF plans to bring forward to Parliament “non-contentious clauses” in the existing Draft Constitution for immediate enactment, with the remainder subjected to the 2016 referendum. The nature of the "non-contentious clauses" is yet to be defined but it is thought to include such things as an "elected Vice President".