In the two weeks following Finance Minister Hon. Bwalya Ng’andu’s 2021 National Budget proposal, much debate has centred on exactly how Zambia will achieve an economic recovery. With bondholders rejecting a debt repayment suspension deal, and talks with the International Monetary Fund (IMF) reaching a stalemate, optimism is in short supply. 

Here we share some insights from a selection of Zambia’s leading economists, finance professionals, and tax experts on where we are, and what the 2021 Budget means for Zambia.

Economist Professor Oliver Saasa shares his initial reaction to Budget 2021:

“Broadly speaking, it [the 2021 Budget] stopped where it should have started. I was expecting an austere budget that focused on downsizing and one doesn’t see that. One area where I expected to see reductions is overall Government expenditure. But it seems like the Government will continue getting the lion’s share of the national cake. Of course, there has been expansion in areas you’d call ‘social sectors’. The Farmer Input Support Program (FISP), for example, is increasing several-fold when all analyses point to the fact that this is not an efficient way of supporting the agriculture sector.”

Economist John Kasanga weighs in: 

“It’s very simple. [If I were in Government I would] cut back on unnecessary expenditure. The situation we are in has been aggravated by COVID, but COVID is not the cause. We must accept that we’ve been on a downward spiral since 2015. In 2015, only 11% of the Budget was going to debt servicing. Where are we now? 40%. The trajectory has been very clear. Why are we allocating five times more [from K1.1 billion to K5.7 billion] to FISP and targeting the same number of farmers?”

Chenai Mukumba, Policy Research and Advocacy Manager at the Tax Justice Network Africa, agrees:

“When you take a look at the Budget, the amount that was allocated to FISP, for me, was quite shocking. Earlier this year, when the IMF came for a mission, they also raised questions around the amount of money we were spending on the FISP program, partly because it’s not an efficient way of supporting the rural populations. FISP and subsidies are right at the bottom in terms of ‘value for money’. [Additionally] knowing how constrained we are, K6.2 billion on infrastructure [allocated to ongoing road projects] is too much.”

Prof. Saasa shares his view on infrastructure expenditure: 

“Roads are like flags: you can always point [at them] and say ‘Look I’ve done that.’ But, you can drive on a beautiful road heading to a hospital in an emergency. Then you arrive there to find that the money for medicines has been spent on the beautiful road you were using to travel to hospital. It’s terribly ironic! 

You can’t meaningfully talk about economic expansion if the road infrastructure and electricity infrastructure are in dire straits, but this must only be corrected to the extent that you have the resources. You should not be borrowing money [to build roads], to the point that it comes back to bite you, where the rating agencies chuck you into junk status, and then the cost of repaying your debts becomes unsustainable.” 

John Kasanga (second from left), Chenai Mukumba (centre), and Leonard Mwanza (far right) speaking at the Zambia 2021 Budget Analysis Webinar, hosted by KPMG.

Zambia has accrued domestic arrears of K26 billion, a large portion of which is owed to local contractors and suppliers to Government. How effective are the recent steps to dismantle K2.7 billion of it?

Ms. Mukumba: “Now more than ever, we need to be careful about putting our resources where they can be most effective and dismantling domestic areas is absolutely one of those areas, because of the potential multiplier effects this could have on the economy. This is where we should be putting [more of] our money.” 

Leonard Mwanza, CEO at the Bankers Association of Zambia, agrees:

“We are talking about more than K26 billion currently owed to local suppliers to Government. But if you compare what Government owes and what they’re saying they’ll pay [K2.7 billion], I don’t think it will do much. What is the impact of delayed payment to the supplier? There is some loss of value [and] inflation eats into his expected income. So, the chances are that when you receive your money maybe two years down the line it will not be sufficient to support your working capital, to re-supply to Government. In the interim, suppliers are forced to over inflate their prices because there is no predetermined period in which they’ll get back their money. 

I think it’s important that the issue of dismantling domestic debt is given urgency because, behind the arrears, there are businesses. These businesses may have used their own capital, they may have borrowed capital from families, from friends, from the banking system, and they owe those people. The best [thing] would be to have a more pragmatic programme to dismantle the entire K26 billion, not just looking at K2.7 billion which is less than 10%.”

Prof. Saasa agrees:

“Even if you wait for two years, [Government] will still pay [suppliers] the same amount there is no interest built in because the payment due is not time-sensitive and not indexed to inflation. So, the longer the Government does not pay you, the longer you are [effectively] giving them an interest-free loan. You have many that will wait for four years until inflation has grown several-fold, and then get paid peanuts! You cannot grow domestic industry that way.”

“If I were Government…”

Mr. Kasanga: “The accumulation [of domestic arrears] starts from challenges with fiscal management. Or, to put it bluntly, we could have been more disciplined as a Government so that we didn’t allow the accumulation of debts in the manner that we have. The starting point is to try and unlock as much of the money that you have [and] to direct it to resolving the productive sectors, because that is another way of stimulating the economy. If, for example, you took the K4 billion [more than the 2019 allocation] which is going to FISP and gave it to the productive sectors, the impact would be broader.

To unlock [liquidity] the Government must starve itself and allow the productive sectors to breathe and, as the productive sector breathes, there’ll be more money in the economy. But what has happened is Government is taking another almost 14% from the economy to finance this Budget [compared to] 3.3% last year. 

If I were the Government, I’ll simply say we are a cost to the economy. How can we reduce and make ourselves as thin as possible? Cut out expensive travel, cut, cut, cut to the bare bone!”

Stimulus is key, all parties agree

“If I were the Government, I’ll simply say we are a cost to the economy. Cut out expensive travel, cut, cut, cut to the bare bone!”

Mr. Mwanza: “One could say that the most important thing [in this Budget] would have been a stimulus package that helps the private sector to grow their base. More support going direct to the private sector would have helped to at least secure the [national] revenue projections. 

If you look at Government expenses, there are a lot of fixed expenses that we can’t do anything about, for instance, the debt service costs and the Government’s wage bill. When you analyse those fixed costs and put them together you might actually come to a point where you literally have no cash left to go towards the social sectors.”

Prof. Saasa: “At the moment, the Budget is lean on the structural changes that are required to transform the economy. The medium to small scale businesses have no access to finance at the moment and are all drowning, and there’s really nothing in this Budget that gives you the comfort that Government has thought this through. The issue then becomes: if you’re talking about 1.8% GDP growth [in 2021] from a contraction in 2020, what will be the drivers of this growth? Is it going to come from magic?”

The productive sector can drive growth

Mr. Kasanga: “In terms of going forward, my biggest worry is the way we’re treating the mining industry. We [should] make the mining industry the cornerstone of our industrialisation and resuscitation of the economy and focus on that because the mining industry is capable of attracting billions of foreign direct investment, just like that!

“We should make the mining industry the cornerstone of our industrialisation and resuscitation of the economy and focus on that.”

It could even underwrite the rest of the economy because of the linkages in terms of the products and services that the mines consume, and the employment it generates. If we want to resuscitate this economy, let’s not look further; let’s look at how we can support the mining industry. We are missing the boat by not putting the mining industry at the centre of Zambia as the means of supporting diversification and the resuscitation of the economy. 


The IMF and the elephant in the room

Mr. Mwanza: “We need to address the other elephant in the room: the issue of debt sustainability. I think it’s key in unlocking the potential to recover this economy. We hope the current discussions [with multilaterals including the IMF] are fruitful; if we can unlock $900 million, that’s a huge stimulus.”

Prof. Saasa: “For me, there is a clash where political expedience meets economic realities. You can’t afford to campaign with a budget which already has a huge deficit. We are now seeing a backlash from ratings agencies and the bondholders; the IMF are reluctant to come in. We are failing to do the most basic of things, especially in terms of the excessive appetite to borrow for things that are not yielding sufficient returns. You see unauthorised and unconstitutional expenditure every year. As long as things remain like that, we will have a problem with the IMF coming in. I can’t see anything happening without greater transparency from us, and without a credible plan for kickstarting our economy.”

See also: Risks and rewards: What does Zambia have to offer?