04:45 GMT 21st December 2011
Finance minister Alexander Chikwanda announced a ZMK27.6 trillion ($5 .5bn) budget last month in which half of the country's resources will be channeled into social and infrastructure development as part of the government's efforts to make Zambia a 'better place for all '.
Although Zambia's economy has been growing in excess of 5 per cent since 2002 and inflation has remained in single digit figures, more than 64 per cent of its 13 million people continue to live in abject poverty, subsisting on less than a dollar a day.
It was the failure to achieve any "trickle down" effect that swept the Michael Sataled Patriotic Front (PF) to power in September's election after 20 years of Movement For Multiparty Democracy rule.
'The Patriotic Front won the 2011 election because it listened to the needs of the people at all levels,' Chikwanda said in his budget speech. 'Now that we are in government, we have not and never will distance ourselves from the people.'
The government will focus on social justice and equity while sustaining macroeconomic stability, Chikwanda stressed, saying the budget would prioritise spending in the four core development areas of agriculture, education and skills development, health services and local government and housing.
Overall spending would rise to $5.5bn or 26.5 per cent of GDP, from 21 per cent in 2011 , Chikwanda said. Domestic borrowing for the year would amount to 1.3 per cent of GDP and foreign financing would be 3 per cent, giving an overall deficit of 4.3 per cent of GDP. Foreign aid would amount to less than 2 per cent of GDP.
A key policy is the doubling of the mineral royalty tax to 6 per cent. This will bring ZMK1.8 trillion contribution to the treasury and meets Sata 's pre-election promise to ensure people benefit more from the country's mineral wealth, which accounts for 70 per cent of all forex earnings. As expected, the move has caused a storm of protest among foreign mining firms operating in Zambia, which include the London-listed Vedanta and Brazil's Vale.
But they are equally relieved that the windfall tax on mining companies, which Sata made much of during his election campaign, has not been introduced. Chikwanda argued it might have prove counter-productive. 'Windfall tax is charged when the price of copper is infinitely high,' he stated. 'If you introduce windfall tax and the prices of copper drop to zero, what are you going to charge windfall tax on? Our idea of collecting money through mineral royalties, in my view, is better.'
The government has extended the duty on mineral exports, which was restricted to copper and cobalt, to all unprocessed or semi-processed mineral ores, while VAT deferment scheme on mineral concentrates has been removed in a bid to capture more revenue.
Other budget highlights include pay as you earn threshold doubling to ZMK2m; 800,000 low paid workers to receive tax relief; hospital fees scrapped; and bank lending rates to come down as corporate tax is slashed to 35 per cent.
The economy is estimated to grow by 6.5 per cent in 2011 in line with the initial projection of 6.4 per cent. 'Agriculture, manufacturing, construction, and transport and communications are the main drivers of this growth,' Chikwanda told parliament. 'Growth could have been significantly higher had the mining sector performed according to projection.'
The private sector, particularly the SMEs, which are considered the engine of economic growth, has complained about high lending rates and the government has also been praised for reducing the cost of borrowing by abolishing the upper corporate tax for commercial banks. This is expected to create fiscal space for the financial sector to offer affordable loans and most banks have already reduced their rates.
For many years, local government authorities have lagged behind in efficient service delivery due to the meagre resources allocated to them. It is hope that a doubling of grants to local authorities will put an end to the unsightly piles of garbage on roadsides and improve amenities like sanitation and the quality of water.
The new government has based part of its growth agenda on increased agricultural productivity and to this end has increased its allocation to the sector by 37.9 per cent. Despite this, the Zambia National Farmers Union (ZNFU) says the budget has failed to meet the Comprehensive Africa Agriculture Development Programme aim of increasing agriculture spending to 10 per cent. Zambia has allocated only 6 per cent to this in the budget. However, it welcomed the fact that the agriculture subsidy programme, which has helped Zambia score two consecutive bumper harvests, is being continued.
The ZNFU is also happy about the cut in farmers' corporate taxes - from 15 per cent to I 0 per cent - but says that its demands for a reduction on import duty on agriculture inputs, the removal of VAT on agriculture products, and removal of livestock levies have been ignored again. The union believes that once such measures are put in place, Zambia could become food sufficient.
Allocation to health has been increased by 45 per cent while fees for hospitals and clinics have been abolished. 'In order to increase access to health services, the government will remove all financial barriers to accessing health services by abolishing all user fees for primary care services not only in rural but also in urban areas,' Chikwanda elaborated.
The Zambia National Union of Teachers (ZNUT) has applauded the PF government for the 26.7 per cent increase in the education budget. 'The increase is most welcome and almost closer to what we had expected if not better than we expected,' said the union's general secretary Newman Bubala.
The government has set aside ZMK796.4bn for various infrastructure projects, including the construction of more than 2,000 new classroom blocks. The government has also undertaken to recruit 5,000 more teachers.
With infrastructure and social sector development receiving the lion's share of government money, there will be increased investment and job creation, ultimately reducing poverty levels from the current 60 per cent of the population, the PF says.
Commenting on the ZMK4.4 trillion budget provision for the road sector, African Development Bank (AfDB) country representative, Freddie Kwesiga, said the mismanagement already noted by the auditor general should acted upon. 'We must do proper contracting so that money is not wasted in very poor contracts,' he stated. Transparency International Zambia (TIZ) also stressed the need for all public road procurements to be audited in view of shady past practices.
Economics Association of Zambia (EAZ) vice-president Robert Liebenthal has given the budget the thumbs up, saying, 'The general reaction is that the macroeconomic targets are very, very assuring, particularly that there is commitment to fiscal soundness to a deficit of not more than 4.3 per cent GDP, domestic financing of 1.3 per cent and revenue of 19 per cent.'
The opposition National Restoration Party (NAREP), Forum for Democracy and Development (FDD) and Alliance for Democracy and Development (ADD) have all welcomed the increase in mineral royalty tax. ADD president Charles Milupi described it as 'a minor step in the right direction and we need to have more of that'.
Razia Khan, head of Africa research at Standard Chartered in London, was quoted by Reuters as saying, 'Even though the budget outlined slightly more spending than had been anticipated, it's still taking place against a backdrop of increased revenue collection, and an effort to raise more meaningful receipts from previously under-taxed sectors.'
But leader of the opposition, Felix Mutati, who was commerce minister in the previous government, said the challenge for the PF was balancing the equation between reduced taxes and sufficient revenue for the government.
Most observers say the success of the budget will be largely dependent on effective anti-corruption safeguards being put in place across the board. Certainly, donors are keeping a keen eye on how things are progressing on the graft front. AfDB, World Bank, Germany, Norway, Finland, the EU and UK are among the 'partners' that recently pledged $168m as a direct transfer to the Zambian government's treasury for the 2012 poverty reduction budget support.
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