Zambia to cancel debts in economic revival bid
Monday September 30 2019
Zambia finance minister Bwalya Ng’andu has placed bolstering tax-hit copper mines at the enter of broad measures to invigorate the economy which is suffering from a slump in commodity prices and rising debts.
In a Kz106 billion ($8.03 billion) budget read on Friday September 27, Dr Ng'andu abandoned a controversial sales tax on mines in favour of an existing Value Added Tax, which allows companies to claim back money spent on inputs and capital expenditure.
With the International Monetary Fund warning that the country's debt was becoming unsustainable, Dr Ngandu said Zambia would postpone and cancel some planned loans, refinance existing ones and stop offering guarantees for quasi-public entities.
The treasury would also be more cautious in contracting new debt, he said, but still read a surplus budget which would be partially financed by external partners.
“The government proposes to spend Kz106.0 billion ($8.03 billion) in 2020, representing 32.4 percent of GDP. Of this amount Kz72.0 billion ($5.5 billion) will come from domestic revenues while the balance will be raised through domestic and external financing,” Dr Ng’andu told legislators on Friday.
Zambia’s external debt stock as at end-June 2019 increased to $10.23 billion.
The country's budget year runs from January to December.
Controversial sales tax
Dr Ngandu said the government will not replace its value-added tax (VAT) with a controversial non-refundable sales tax which met fierce opposition from businesses, opposition and civil society.
The proposal, a form of advance tax, had been proposed by former finance minister Margaret Mwanakatwe, who was sacked last July, in response to wanton tax evasion in key industries including the mining sector.
Dr Ngandu vowed to strengthen tax compliance and curb creating accounting that sees companies exaggerate production costs in order to lower their tax obligations.
Disputes over tax evasion and environmental pollution has put the government and miners at loggerheads, an example being the high-profile dispute with United Kingdom's Vedanta over the liquidation of Konkola Copper Mines.
Zambia’s economic growth slowed down due to adverse rainfall patterns in the 2018/2019 rainy season, which hurt farm out and electricity generation with negative spill-over effects on other sectors.
The country’s economic growth is projected to slow down to two per cent this year from four per cent in 2018.
State power utility, Zesco is set to start importing power from South Africa’s Eskom from October 2019 to help plug the 700megawatts deficit which has seen households endure up to 12 hours of blackouts.
Compounding the falling output was a sharp drop in the country’s copper export earnings to $ 2.8 billion from US$ 3.5 billion, following a decline in both export quantities and prices.
After climbing from $2.55 per pound in January 2019 to $2.95 per pound in April, Copper prices gradually retreated to $2.61 per pound as of September 27.
That is about 42 per cent short of the ten-year peak of $4.50 in February 2011 since the commodity crashed from $4 per pound to $1.3 per pound during the 2008 global financial crisis, according to tracking by Macrotrends
Zambia's former finance minister Ng'andu Magande said the the government now needed to manage resources prudently and to prioritise spending.
President Edgar Lungu's government has since coming to power in 2011 gone heavy on basic infrastructure expansion and upgrade, attracting heavy domestic and external borrowing.
"It's time to think strategically," he said, calling for more expenditure in agricultural output and "essential" roads to get the produce to markets.
The Centre for Trade Policy and Development described the budget as 'progressive' but cautioned on the ballooning domestic debt.
"Curbing that is one of the ways to stimulate private sector growth," CTPD senior researcher Bright Chizonde said.
Other economic commentators have called for a moratorium on international borrowing.
Zambia Liquefied Petroleum Gas Association said the government should have reduced value added tax on gas cylinders to help households use clean energy.
Importation of gas cookers is already zero rated.
Emmanuel Banda, a welder, said the government was yet to make good on its pledge to lower taxes when it dislodged the MMD party.
"It's been hard to do business because people are saying they don't have money to spend," said the 37-year-old craftsman.