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GDP Growth and Public Finance in Zambia: FY2019/20

GDP Growth and Public Finance in Zambia: FY2019/20

Zambia’s economy has been recovering due to improvements in copper prices and expansion of copper mining production[1]. The Zambian mining industry went through a recession because of fluctuations in world commodity prices towards the end of 2014. Because copper exports constituted 69.9% of total exports in 2018 (2015-2017: 67.2%), the Zambian economy is susceptible to external shocks cause by the commodity price fluctuations[2]. The price of copper declined by an annual average of -12.6% from USD 6863.4 per MT in 2014 to its lowest at USD 4867.9 per MT in 2016. As a result, export earnings declined and the Zambian Kwacha (ZMW) depreciated by an annual average of -19.1% from ZMW 6.2 per USD in 2014 to ZMW 10.3 per USD in 2016[3]. Due to the ZMW depreciation, pass through inflation caused Zambian consumer price inflation to rise to its peak of 17.9% in 2016 which far exceeds the Bank of Zambia’s policy target band of 6.0% to 8.0%[4]. Nevertheless, copper prices started recovering 2017 and copper production has increased which enabled a recovery in real gross domestic product (GDP) growth.

 

Figure 1: Real GDP Growth and Inflation in Zambia (2016-2022)

Real GDP Growth and Inflation in Zambia (2016-2022)

Sources: IMF 2017, Zambia 2017 Article IV Consultation Report; ZMoF 2019a, 2019-2021 Medium-Term Expenditure Framework. Notes: (*) CPI figures from 2017 onwards are projections from IMF, 2017; (**) Real GDP Growth figures from 2018 onwards are projections from ZMoF, 2019a.

Real GDP growth has recovered from an annual average of 3.8% from 2016 to 2018, to an estimated 4.3% in 2018[5]. Inflation has also moderated from an annual average of 10.7% to an estimated 8.0% in 2018. When real GDP increased slightly to 3.5% in 2016, (2015: 2.9%) the Government of Zambia (GoZ) responded by increasing public spending by 18.8% in 2017 by increasing capital expenditure by 57.2% and recurrent expenditure by 11.6%[6]. As real GDP growth continued recovering in 2017 the GoZ increased public spending by 11.4% by increasing capital expenditure by 14.3% and recurrent expenditure by 10.6% in 2018[7]. This is procyclical fiscal policy because the GoZ increased recurrent expenditure by the similar magnitude in spite of the higher debt-servicing costs. The GoZ increased total expenditure to ZMW 61.4 billion in 2017 (2016: ZMW 51.7 billion) by increasing capital expenditure by ZMW 4.6 billion compared to the increase of ZMW 5.0 billion in recurrent expenditure. However, debt-servicing costs increased by ZMW 1.4 billion due to higher public debt and depreciation of the ZMW[8]. Nevertheless, the GoZ increased recurrent expenditure on salaries, goods and services and other current expenses by ZMW 3.6 billion which is of similar magnitude to the increase in capital expenditure. Therefore, in spite of the higher debt-servicing which account for part of the higher recurrent expenditure, the GoZ implemented procyclical fiscal policy by increasing its other current expenses.

 

Figure 2: Sources of Government Revenue in Zambia (2016-2022)

Sources of Government Revenue in Zambia (2016-2022)

Sources: IMF 2017, Zambia 2017 Article IV Consultation Report; ZMoF 2019a, 2019-2021 Medium-Term Expenditure Framework. Notes: (*) Figures for 2017 are projections from IMF, 2017; (**) Figures from 2018 to 2021 are projections from ZMoF, 2019a; (***) Figures for 2022 are projections from the IMF, 2017.

The GoZ has maintained a fiscal deficit which increased from -ZMW 12.5 billion (approx. -5.8% of GDP) in 2016 to -ZMW 16.9 billion (approx. -6.1% of GDP) in 2018[9]. In spite of the persistent and rising fiscal deficit, total public debt has moderated from 61.4% of GDP in 2015 to an annual average of 58.7% of GDP from 2016 to 2018 due to the recovery in real GDP growth[10]. The GoZ has also rebalanced its public debt towards increased dependence on domestic public debt which is prudent fiscal policy. External public debt has declined from 43.1% of GDP in 2015 to an annual average of 35.6% of GDP from 2016 to 2018; meanwhile domestic public debt has increased from 18.3% of GDP to an average of 23.1% of GDP over this period[11]. In spite of the prudent fiscal policy, the GoZ’s fiscal position had deteriorated. Total public debt rose from an annual average of 58.7% of GDP from 2016 to 2018 to a projected 62.4% of GDP in 2019; and debt-servicing costs rose from an average of ZMW 9.1 billion (approx. 20.4% of total government revenue) to ZMW 14.2 billion (approx. 25.4% of total government revenue in 2018[12].

 

Figure 3: Government Revenue and Expenditure in Zambia (2016-2022)

Government Revenue and Expenditure in Zambia (2016-2022)

Sources: IMF 2017, Zambia 2017 Article IV Consultation Report; ZMoF 2019a, 2019-2021 Medium-Term Expenditure Framework. Notes: (*) Figures for 2017 are projections from IMF, 2017; (**) Figures from 2018 to 2021 are projections from ZMoF, 2019a; (***) Figures for 2022 are projections from the IMF, 2017.

The deterioration of the GoZ’s fiscal position has had wide-ranging impacts from the GoZ having to implement its Economic Stabilization and Growth Programme (ESGP) and stringent fiscal consolidation[13]. The GoZ started accumulating arrears and failed to pay service providers on time[14]. The GoZ also decided to change from a value-added tax (VAT) systems towards implementing a sales tax in order to reduce its liabilities which had risen considerably with VAT refunds exceeding collections[15]. In addition, the GoZ has had to cancel inefficient projects and some undisbursed loans[16]. However, the GoZ is expected to continue implementing procyclical fiscal policy in the forward-looking medium-term because public spending, particularly recurrent expenditure, is projected to increase in spite of the recovery in real GDP growth. The GoZ’s fiscal stance will no longer be prudent since the increased public expenditure will be mainly funded from external loans.

 

Figure 4: Government Expenditure Composition in Zambia (2016-2022)

Government Expenditure Composition in Zambia (2016-2022)

Sources: IMF 2017, Zambia 2017 Article IV Consultation Report; ZMoF 2019a, 2019-2021 Medium-Term Expenditure Framework. Notes: (*) Figures for 2017 are projections from IMF, 2017; (**) Figures from 2018 to 2021 are projections from ZMoF, 2019a; (***) Figures for 2022 are projections from the IMF, 2017.

Real GDP growth is projected to continue recovering from 4.3% in 2019 to an annual average of 4.5% from 2020 to 2022[17]. The GoZ is projected to increase total public spending growth from 9.9% in 2019, to an annual average of 12.2% from 2020 to 2022[18]. The increased public spending will be mainly on recurrent expenditure which is projected to continue growing at an annual average rate of 13.7% over the medium-term to ZMW 79.5 billion in 2022; meanwhile capital expenditure is projected to grow at an average of 8.7% to ZMW 26.6 billion (2020: ZMW 58.1 billion; ZMW 22.9 billion)[19]. The growth in recurrent expenditure is also not mainly spent on the increased debt-servicing costs which are projected to increase to an annual average of ZMW 15.2 billion (approx. 20.7% of total government revenue) for 2020 to 2022 (2019: ZMW 14.2 billion; 25.4% of total government revenue)[20]. Therefore, the GoZ is expected to implement procyclical fiscal policy because recurrent expenditure is projected to continue well above the rate of capital expenditure increases in spite of real GDP recovering in the medium-term.

 

Figure 5: Gross Government Debt in Zambia (2016-2022)

Gross Government Debt in Zambia (2016-2022)

Sources: IMF 2017, Zambia 2017 Article IV Consultation Report. Notes: (*) Figures from 2017 onwards are projections from the IMF, 2017.

Total public debt is projected to remain stable due to the continued recovery of real GDP growth in the medium-term, in spite of the procyclical fiscal policy and imprudent fiscal approach. Total public debt is projected to increase slightly to an annual average of 63.5% of GDP from 2020 to 2022 (2019: 62.4% of GDP). In addition, external public debt is projected to increase slightly to an annual average of 42.1% of GDP in the medium-term (2019: 40.4% of GDP)[21]. Meanwhile, domestic public debt is projected to moderate slightly to an average of 21.4% (2019: 22.0% of GDP)[22]. This is an imprudent fiscal approach because the GoZ is rebalancing public debt towards increased reliance on external debt. Therefore, the GoZ is expected to maintain procyclical and imprudent fiscal policy in the medium-term.

 

The GoZ has had a tendency to implement procyclical fiscal policy responses to real GDP growth performance. As earlier noted, fiscal policy has been procyclical because GoZ increased recurrent spending along with the recovery in real GDP growth and is projected to change this policy as real GDP growth recovers in medium-term. In the historic period from 2016 to 2018 the GoZ responded to improving real GDP growth with procyclical fiscal policy using an imprudent fiscal stance, which is expected to change in 2019. Therefore, as real GDP growth recovered from an annual average of 3.8% from 2016 to 2018, to a projected 4.3% in 2019, the GoZ is expected decrease its recurrent expenditure growth from the medium-term average of 11.8% to 1.2%; compared to the increase of 42.2% on its capital expenditure in 2019 (2016-2018: 11.9%)[23]. The typical countercyclical fiscal response to improving or high real GDP growth is to increase public savings or investment through capital expenditure; and when real GDP growth declining or low the typical countercyclical response is to increase government spending through recurrent expenditure in order to boost aggregate demand and enable real GDP growth.

 

During this time domestic public debt has decreased from an average of 23.1% of GDP from 2016 to 2018, to a projected 22.0% of GDP in 2019; which is imprudent fiscal policy given that the GoZ has increased its external debt to a projected 40.4% of GDP in 2019 (2016-2018: 35.6% of GDP)[24]. In the forward looking medium-term, as real GDP growth continues improving slightly to an annual average of 4.5% from 2020 to 2022, the GoZ is expected to continue increasing its recurrent expenditure at an annual average of 13.7% compared to its capital expenditure which is projected to increase at an average of 8.7% from 2020 to 2022[25]. Domestic public debt is projected to decrease slightly to an annual average of 21.4% of GDP from 2019 to 2021, meanwhile external public debt is projected to increase to an average of 42.1% of GDP[26]. Thus, the GoZ is expected to change from its current countercyclical fiscal policy taking its imprudent approach towards procyclical fiscal policy taking a prudent approach in the forward-looking medium-term.

 


[1] Saungweme, T. and Odhiambo, N.M. 2018. ‘An Analysis of Public Debt Servicing in Zambia: Trends, Reforms and Challenges’, Croatian International Relations Review, Vol. 24, No. 81, pp. 113-136. Available At: https://content.sciendo.com/ [Last Accessed: 16 April 2019].
[2] UNCTAD 2019. UNCTADStat Database, United National Conference on Trade and Development: Geneva. Available At: http://unctadstat.unctad.org/ Last Accessed: 18 August 2019].
[3] BoZ 2019. Commercial Banks Foreign Exchange Rates, Bank of Zambia: Lusaka. Available At: https://www.boz.zm/ [Last Accessed: 18 August 2019].
[4] BoZ 2016. Objectives of Monetary Policy, on the Bank of Zambia Website, viewed on 12 July 2019, from https://www.boz.zm/.
[5] IMF 2017. Zambia 2017 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 18 August 2019]; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, Zambian Ministry of Finance: Lusaka. Available At: http://www.mof.gov.zm/ [Last Accessed: 12 July 2019].
[6] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.
[7] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[8] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[9] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[10] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[11] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[12] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[13] ZMoF 2019b. State Owned Enterprises [Parastatals] Must Observe Austerity Measures – Mwanakatwe, on the Zambian Ministry of Finance Website, viewed on 17 July 2019, from http://www.mof.gov.zm/.
[14] ZMoF 2019c. Update on Budget Expenditure for the Month of January 2019, Zambian Ministry of Finance: Lusaka. Available At: http://www.mof.gov.zm/ [Last Accessed: 12 July 2019]; ZMoF 2017. We Are Committed to Dismantling Arrears – Mutati, on the Zambian Ministry of Finance Website, viewed on 17 July 2019, from http://www.mof.gov.zm/.
[15] ZMoF 2019d. Sales Tax Consultations with Business Community, on the Zambian Ministry of Finance Website, viewed on 17 July 2019, from http://www.mof.gov.zm/.
[16] ZMoF 2019e. Outcome of the Special Cabinet Meeting on the State of the Economy, on the Zambian Ministry of Finance Website, viewed on 17 July 2019, from http://www.mof.gov.zm/.
[17] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[18] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
19 IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[20] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[21] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.
[22] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.
[23] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[24] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[25] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.
[26] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.; ZMoF 2019a. Zambia Medium-Term Framework: 2019-2021, ibid.

 

 


Sylvia Olawumi Israel-Akinbo

Role: Regional Analyst
Contact: sylvia@politicaleconomy.org.za
Sylvia is an Economist specialising in environmental and natural resource management...

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