13 October 2012

Zambia: 2013 National Budget - Future of Country's Economy Bright


Budget Analysis 2013 National Budget

THE much awaited 2013 Budget realises the practicalities of the Zambian economy. Zambians must realise that Zambia is neither rich nor poor, but by working smartly, it can be turned into a paradise, where at the end of the day the majority of products in a Zambian home will be "Made In Zambia."

It is against this, that the 2013 Budget has focused more on national human resource mobilisation in both urban and rural areas, Government and private sectors, rather than Zambians funding Government expenditure.

To this, the Finance minister has quite rightly seized the opportunity of using the 2013 United Nations World Tourism Organisation Conference to demonstrate this "holistic" Budget to build Zambia's tourism sector by suspending duty on certain goods, in an effort to diversify the economy away from copper.

It is in this vein that the 2013 Budget acknowledged that "Non Tradition Exports (NTE) are projected to rise by over 50 per cent to US$2.5 billion in 2012 from US$1.6 billion in 2011."

This figure will continue to increase.

It is within this sphere that the Finance minister sees Small and Medium Enterprises (SME) as a major embryonic process in developing Zambia's new and future industrial capacity in meeting Zambia's domestic demand in products and the demand springing from obtained sub contracts from new foreign firms in Zambia's Multi Facility Economic Zones (MFEZ).

These MFEZ will now start to come on line as new hydro electrical power production begins to offset Zambia's electricity deficit at the close of the year and into the next.

In other words job creation will occur, but the small print is "skilled manpower" not unskilled.

It is this strategy that the minister hopes will accelerate job creation within the private sector, coupled with Government programmes. Accordingly the linkage between energy and SMEs is well reflected in the projected use of the US$750 million Eurobond funds coupled with connecting all the MFEZ in Zambia's ten provinces to transport goods and services on Zambia's rail and road network.

Thus the 2013 Budget continues to view Zambia's transport infrastructure as a major pillar in Government developing the nation, thus the term the Finance minister used "backward and forward" linkages is meant to consolidate economic growth.

To this, the Euro bond has helped to some extent for now to free up some extra finance.

The only area of concern is the rail sector, as was seen in the construction of the Tanzania-Zambia Railway line, the funds used could have built a university in each province in the 1960s which now the PF Government is trying to do.

Thus building up the national skills levels from chicken run projects to computer assembly lines to food processing skills to turn the agricultural sector to produce finished products is important in building a "Made In Zambia" economy, which appears to be vision of the PF Government.

Sadly many Zambians expected more tax contributions to the national treasury from the mining sector.

However, Government appears cautious over the issue until it implements tax reforms and a better monitoring system over the mining sector to get better compliance.

This cautious approach is against the back drop of a weak global economy, as indicated by the Finance minister that "turbulence in the Eurozone, lethargic growth in the United States and a slowdown in the major emerging markets such as China, India and Brazil."

It is this turbulence that has been the main thrust for the Finance minister to quickly encourage the diversification of the economy, and expand economic growth of the domestic economy so that it adds more to the Zambia's Gross National Product and economic growth, as opposed to economic growth mainly been driven by the mining sector.

Naturally off course the Finance minister has increased mineral royalties from 15 per cent to 20 per cent.

It appears the Finance ministers appears has avoided a Windfall Tax so as to continue encouraging investment in mining as Zambia still has a lot of mining potential.

On the agricultural sector however, much needs to be done.

Last year the Food Reserve Agency (FRA) got K300 billion, and this year's Budget the amount is the same with the role of the FRA being restricted to maintaining the national strategic food reserve.

However, this marketing season the FRA ended up buying about K1.2 trillion worth of maize.

The realities and practicalities of just purchasing enough maize for strategic reserves this year could have disastrous effects on the price of maize as was witnessed in the cotton sector this year.

Price collapses, a lack of demand may well affect the performance of not only the agricultural sector but the ambitious SME programme.

As noted, by the International Monetary Fund (IMF) at its World Economic and Financial Surveys, Fiscal Monitor October 2012, a progress report on Fiscal Adjustments noted that shortfalls in revenue arising from lower copper prices along with higher public wages will push up Zambia's deficit this year.

The small print is that the lethargic global growth is a reflection of the state of the US dollars, and this is the Big Picture that will have a major effect on the effectiveness of the policies put in place this year by the 2013 Budget.

Like today as was seen in the 1960s, Zambia's economic future looked bright.

However, as most Zambians old enough to recall "something went wrong" as recorded by the Bank of Zambia 1972 annual report, "Zambia was able to maintain a Balance of Payments surplus on current account in each year since Independence, until 1968.

'In 1968, for the first time since the achievement of independence there was a deficit on the current account estimated at K17 million."

The belief that high copper prices then as today were misleading as the same report notes that, "after June, when Sterling floated, the rise in Sterling prices did not compensate for the depreciation of Sterling, so that prices in Kwacha terms fell; and since Zambia produced more copper during the second half of 1972 than during the first half, the weighted average price of copper in Kwacha was probably lower in 1972 than in 1971."

The impact of this was a fall in Zambia's international reserves that were used to fund increasing import costs as the US dollar's purchasing power fell.

Today history appears to repeat itself with the US Federal Reserve's Quantitative Easing (QE3) pumping US$40 billion a month into the US economy as the US dollar liquidates itself, together with similar policies seen in the central banks of Japan and the Eurozone.

It was the crisis in the 1970s that saw in Jamaica in January 1976 the Interim Committee of the Board of Governors of the IMF fifth meeting "proposing reform the options open to the international community include: continuing with the prevailing situation with the role of the US dollar reduced, with an increased role for other currencies and private financial markets and with all governments trying to reduce their exposure to exogenous events; or moving in the direction of regional monetary blocs, which would each work out their own relations with other monetary areas; or advance to a better-organiSed world system."

For Zambia in the 1990s it meant market and foreign exchange liberalisation reforms.

Despite these protective measures, the global economy today is back facing the same crisis.

Therefore the 2013 Budget's approach in building up a strong SME sector which also requires a strong domestic market is a step in the right direction.

The Finance minister finally realises that we are neither rich nor poor and what we can afford is education and health which he intends to put right in the Budget.

The rest is up to Zambians to meet Government half way if the economy is to recreate itself with new machinery, new jobs and new skills to create the necessary growth for the upcoming economy.

The author is a Lusaka based Economist.

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