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Update on Economic Developments

Republic of Zambia

Update on Economic Developments in the Second Quarter of 2019

17 July, 2019

1.0 Introductory Remarks

May I begin by thanking you for joining our second quarter economic brief. As this is my first meeting with the Press, I want to take this opportunity to thank my predecessor, Hon. Margaret Dudu Mwanakatwe, MP, for the work in formulating the fiscal consolidation framework.

The broad measures that we are undertaking include the following.

  1. The first task is to achieve fiscal sustainability by reducing the deficit over the medium term to sustainable levels of 3 to 4 percent of GDP. In this regard, I will ensure that we enhance measures to achieve fiscal restraint or consolidation, by implementing well targeted expenditure measures.
  2. The second, and related task, is to increase our capacity to mobilise resources. This will entail increasing efficiency in collection of tax revenue and fixing leakages in Non-Tax revenue collections through increased use of IT solutions.
  3. Another priority will be ensuring debt sustainability, which is cardinal in reducing fiscal risks and vulnerabilities. Our main focus will be to enhance the pace at which we will be implementing the austerity measures that were pronounced by Cabinet;
  4. Dismantling of arrears owed to suppliers and contractors will be another important task. We need to commence implementing a calculated strategy towards dismantling of arrears to ease liquidity in the market, improve financial sector performance, get businesses to operate smoothly and reduce lending rates to get the economy back on a higher growth path.

Our vision, therefore, is to attain fiscal fitness, increase tax and non-tax revenue collections, sustainable debt levels, reduced arrears, a healthy financial system, reduced lending rates, and increased provisions for the social sector.

I would like to see an economy where all citizens meaningfully participate in economic activities and meet our obligations.

Having shared my broad thoughts, it is essential that I now share some highlights on the developments in the economy.

2.0 GDP Growth

In the first quarter of 2019, preliminary data indicates that the economy grew by 2.6 percent compared 2.7 percent in the first quarter of 2018.

Growth was driven by the wholesale and retail and information and communication sectors. The financial and insurance sector also performed favourably. Positive growth was also recorded in electricity generation and transport. Mining and Agriculture growth was subdued.

Looking forward to the rest of 2019, risks to growth include electricity load management being carried out by Zesco that will affect most sectors. Further, the continued lower investment and subdued commodity prices may affect copper production. Climate change challenges continue to weigh down agricultural production and electricity generation.

On the basis of these risks, we project that growth will be in the 2 to 3 percent range in 2019, and to gradually pick up in 2020 and the medium term.

3.0 Budget Performance

Over the first half of 2019, total revenues and grants amounted to K32.6 billion, 8.31 percent above the projection of K30.1 billion. Domestic revenues at K32.1 billion were above target by 9 percent. This was mainly driven by higher non-tax revenues collections, mostly from declaration of dividends. On tax revenues, VAT collections were higher than projected by 17 percent, although refunds have increased to an average of K1.4 billion per month from around K800 million in 2018. This has deprived the revenues required for capital and social sector spending. Other tax types were generally below projection.

Total expenditures were above target by 6.4 percent at K46.8 billion. This was mainly on account of interest payments on debt which were 27.3 percent higher than projected at K9.2 billion, due to the depreciation of the Kwacha in the second quarter of 2019. Most expenditure items were constrained below budget projections during the quarter.

The target for 2019 remains to reduce the budget deficit to 6.5 percent of GDP, a level which even if lower than last years is still high when compared to our objectives of getting the budget deficit below 4 percent of GDP.

On a broad policy level, I would like to point out that elevated fiscal deficits have been driven, by higher than programmed external project financing. Thus, Government has taken measures for management of project disbursements, debt cancellation and rescheduling to bring down deficits to sustainable levels. This is in line with the SADC macro convergence regional targets.

This will be supported by measures to postpone and cancel some contracted but not disbursed loans, which is in line with the directive by the President from the special Cabinet Meeting of 27th May, 2019. This is an activity which I intend to actively engage my fellow Cabinet Ministers.

4.0 Debt Position

  • The external debt stock as at end June 2019 was US $10.23 billion compared to US $10.18 billion at end March 2019.
  • The stock of guarantees is currently US $1.3 billion, unchanged from the end March 2019, and end-December 2018 position.
  • Domestic debt in terms of securities and bonds as at end June 2019 was K60.3 billion showing an increase from the end-March position of K58.3 billion.
  • During the quarter, subscription rates for government securities declined relative to the first quarter of 2019, due to liquidity challenges, perception and exit of foreign participates in the market.
  • Arrears stood at K16.7 billion at as end March 2019, up from K15.6 billion as at December 2018. The increase in arrears is due to increased disbursements on infrastructure development.

5.0 Monetary and Financial Sector

5.1 Annual inflation: During the second quarter, annual inflation averaged 8.1 percent from an average of 7.8 percent recorded in the first quarter of 2018. As at end June 2019, inflation was 8.6 percent. The rise in inflation was largely on account of price adjustments in some selected food and non-food items such as transport.

Going forward, the Bank of Zambia through the use of various monetary policy instruments is geared to ensure that inflation is maintained within the set band of 6-8 percent.

5.2 Exchange rate: The exchange rate of the Kwacha against major tradable currencies generally depreciated in the second quarter of 2019, relative to the first quarter. The depreciation was largely on account of elevated demand for foreign currency mostly for the purchase of petroleum products compounded by subdued supply.

The Kwacha depreciated by 7.6 percent against the US Dollar, trading at an average of K12.83 per US Dollar from K11.961 during the first quarter of 2019. The Kwacha also depreciated by 6.1 percent, 6.5 percent and 4.9 percent against the British Pound, the Euro and the South African Rand, respectively.

5.3 Reserves: External Gross Reserves as at end June 2019 remained at the same level as at end March 2019 at US $1.41 billion (1.6 months of import cover). The position has been supported by the continued foreign exchange purchases from the market and mineral royalty flows into reserves.

The Government will continue with policy measures to support the build-up of reserves, which among others, will include payment of mineral royalty in US dollars and buying of foreign exchange from the market by the Bank of Zambia. Measures on gold purchases will also continue.

6.0 Structural and Policy Matters

Allow me to provide an update on some key policy matters that are of public interest.

6.1 Sales Tax Implementation: Having finalised country-wide consultations on the switch from VAT to Sales Tax, we are now addressing issues that have come from the consultation process. These include:

  • Cascading effects due to multiple value chains;
  • The need to avoid loss of employment due to possibilities of value chains dying off;
  • The timing of introducing the tax; and
  • The need to protect manufacturers.

These will be addressed as the process evolves in Parliament.

6.2 Budget Framework for 2020: The Ministry has issued a request for proposals for tax and non-tax measures for consideration in the 2020 national budget. I wish to appeal to all concerned members of the public to submit their proposals to the Ministry for consideration.

6.3 Public Investment Management Reforms: Headway has been made to operationalize public investment reforms, following the establishment of the multi-sectoral Public Investment Board (PIB). The PIB will have oversight over the public investment project development process as projects evolve from Project Concept Note to Pre-Feasibility and Feasibility study. The Public Investment Management guidelines to provide details on the processes, procedures, institutional arrangements and tools, have been finalized.

6.4 Procurement Act: Finalisation of the new Public Procurement Act has continued, and we still aim to have this legislated this year.

6.5 Structural Reforms

6.5.1 Energy reforms

  • These include electricity and petroleum reforms that will include the amendment of Energy Acts to enable 100% private sector importation of fuel and get tariffs for electricity to cost reflective levels.
  • The cost of service study is being quickened to unlock investments in the sector as well as making it commercially viable.

6.5.2 Pension reforms

Unsustainable pension systems are draining revenue and accumulating arrears thereby leading to destitution. The key issue therefore under pensions is the restructuring of the social protection system in order to expand the scope of benefits under the national scheme and ensure sustainability of the pension system. We will soon be presenting the proposed reforms to Cabinet for approval.

6.5.3 Legal reforms

  • The ZPPA Act: This is going through the legislative process with the aim of introducing benchmark pricing, reference pricing and establishing an extra layer for high value procurements.
  • The Bank of Zambia Bill: To effect amendments to the BoZ Act, drafting will commence once consensus is reached on some of the proposed amendments.
  • Financial and Asset Regulations: These will come in force through the issuance of an SI. The regulations will support prudent resource use in the Government.

7.0 Update on implementation of Austerity Measures

Allow me to take this opportunity to update the nation on the implementation of austerity measures.

7.1 Indefinite postponement of contraction of all pipeline debt
The Ministry of Finance has engaged different Ministries to agree on projects to be slowed down, re-scoped, cancelled or postponed. The target is to free at least US$500 million annually over the medium term. This is a complex exercise that has legal implications. The process has however taken a little longer to complete.

7.2 Revenue

  • The Switch from VAT to sales tax is progressing in Parliament as I earlier indicated;
  • Completion of audits for large tax payers particularly in the mining sector;
  • Non-tax revenues measures- the implementation of the Land tilling programme will soon result in an increased pace in issuance of land titles as most challenges have now been resolved;
  • Further, we will scale up the pace of ensuring that all requisites to implement the Telecommunication Transaction Monitoring System for Mobile Service providers to enhance compliance levels for excise duty are put in place;
  • Automating and digitizing Government processes to enhance revenue collection and reduce leakages is another important area that we are going to be tackling.

7.3 Expenditure

The following measures are being undertaken:

  • Funding projects that are at least 80 percent complete as well as slow down on some non-growth supportive projects;
  • Controlling foreign financed disbursements has commenced as the Treasury is now working with Ministries to ensure that project timelines are adhered to;
  • Enhancement of commitment controls to curb accumulation of arrears – all MPSAs have been directed to stop any commitments without available resources;
  • Curtail PEs related expenditures – commutation of leave days has been restricted to cases where resources are available while all Government officials are obliged to take leave; and
  • Suspension of both foreign and domestic travel for top Government officials to ensure that cabinet measures are implemented.

8.0 Conclusion

Let me end by thanking you all for coming to this briefing meeting. I look forward to continued interactions with all of you as we jointly work on improving the economy.

I Thank You and God Bless!

Hon. Dr. Bwalya K. Ng’andu, MP