Toward Stability & Growth A Review of Pillar I & II of Zambia’s Economic Stabilisation and Growth Programme 2017-2019 Mulungushi International Conference Centre 11th July 2019

Introduction 2015 economic downturn led to macroeconomic instabilities Kwacha depreciation, high inflation, load shedding, copper price collapse, subdued growth In response, Economic Stabilisation & Growth Programme (ESGP) was launched Zambia Plus meant to help secure external support (e.g. IMF) Report aims to examine performance in implementing ESGP (Pillar I & II) Particularly through 2018 National Budget

Pillars of the ESGP Economic Stabilisation & Growth Programme 2017-2019 Restoring Budget credibility Enhancing domestic resource mobilisation & refocusing public expenditure Improving economic & fiscal governance Ensuring greater economic stability, growth and job creation Scaling up social protection programmes

Outline of Report Introduction Pillar I: Restoring Budget Credibility: The 2018 Budget and Zambia’s Fiscal Trend Improving Budget Execution Containing the Government Wage Bill Reforming FISP and Reducing the Role of FRA Refocusing Public Expenditure Improving Accountability and Transparency Pillar II: Enhancing Domestic Resource Mobilisation Conclusion and Recommendations

Pillar I: Restoring Budget Credibility The 2018 Budget and Zambia’s Fiscal Trend

Improving Budget Execution Ideally, actual revenue & expenditure should match approved Budget 2018 characterised by overall overspend of 10% - higher than planned debt servicing costs and capital spending Increased spending directed to debt servicing payments, crowded out social and other spending

Improving Budget Execution (cont.) Improvements in execution targets for revenues recorded in 2018 Collections 4% above target Improved performance largely attributed to VAT and Mineral Royalties However, Government was carrying heavy load of arrears ESGP made dismantling of arrears a priority in 2017 Arrears reduced to K12.7 billion (Dec 2017) from K18.8 billion (2016) In 2018, arrears had shot back up to K15.1 billion

Improving Budget Execution (cont.) Government anticipated closing deficit gap through domestic borrowing Domestic financing limited primarily due to undersubscription of treasury bills Fiscal deficit on commitment basis higher than deficit on cash basis 12.8% of GDP compared to 7.6%

Refocusing Public Expenditure ESGP aimed to implement public expenditure refocusing strategies and measures Supporting priority and growth areas support to priority and growth areas of the economy waned Allocations and expenditures to other priority growth areas also suppressed Rationalising the creation of new districts Between 2012-2017, districts increased from 72 to 105 By end 2018, number had increased to at least 115 Meaning more districts created despite pronouncements made in ESGP

Refocusing Public Expenditure (cont.) Effects on the vulnerable ‘ring-fencing’ of social protection expenditure However, underfunding of social protection expenditures deepened Social Cash Transfer, Food Security Pack, Empowerment Fund Activities could have been rationalised/delayed

Improving Accountability and Transparency ESGP specified transparency and accountability as key tenets for good economic governance However, some proposed legal reforms did not materialise Revision of outstanding legislation should be expeditated to complete strengthening of overall fiscal legal framework Legislation Desired Action Status Public Finance Management Act Review to make laws and underlying regulations more punitive to abusers Enacted Planning and Budgeting Bill Enactment to improve adherence to planned expenditure Not submitted to Parliament Public Procurement (Amendment) Act Urgent review to enhance transparency and accountability Not tabled in ESGP Loans and Guarantees (Authorization) Act

Containing the Government Wage Bill Wage bill single largest expenditure item on the annual Budget ESGP proposed two measures to contain wage bill: Wage ceiling of 9% of GDP Employment restricted to priority sectors Wage ceiling was not breached, reducing to 8% in 2017 and 2018 Employment to priority sectors continued (education and health) Regardless, personal emoluments as share of recurrent expenditure remained fairly constant at 43-44% (2016 – 2018)

Pillar II: Enhancing Domestic Resource Mobilisation Modernisation and automation of revenue collection Taxing the informal sector Enhancing the collection of revenue from property taxes Increasing revenue collection from road tolls Stemming illicit financial outflows

Enhancing Domestic Resource Mobilisation Modernisation and automation of revenue collection Reduced errors, quicker processing, lower admin costs Improved VAT collections Taxing the informal sector Cash economy presents challenge Only 1% of revenues collected from informal sector Enhancing the collection of revenue from property taxes Land titling programme proposed Rollout has been slow and inefficiencies hinder progress

Enhancing Domestic Resource Mobilisation iv. Increasing revenue collection from road tolls Road toll collections have overperformed 61.1% above target in 2017 (K1.1 billion) Over 96% above target in 2018 (K1.66 billion) Over performance attributed to Upward revision of tariffs since 2016 Increased number of inland toll points Strong option for revenue mobilisation

Enhancing Domestic Resource Mobilisation v. Stemming illicit financial flows ESGP proposed collaboration with cooperating partners May 2018, the Financial Intelligence Centre (FIC) flagged suspected illicit losses of K4.5 billion Currently weak preventive and corrective (law enforcement) mechanisms aimed at curbing IFFs Strengthening institutional oversight, improving transparency/accountability could increase revenues by 1-3% GDP

Conclusions Restoring budget credibility not completely achieved Revenue collections overperformed, but budget deficit remained high Arrears continued to mount, including VAT refunds Enhancing domestic resource mobilisation saw some positive gains Modernisation and automation measures led to improvement in tax collection Overall, DRM performed well, but work still required in stemming IFFs Overall, implementation of ESGP (for Pillars I and II) showed insufficient progress in programme implementation by end 2018 Positive outcomes registered: containing wage bill; limiting expenditure on FISP and FRA; and meeting most domestic resource mobilisation targets

Recommendations Government should improve in-year monitoring of budget execution All public sector institutions should report to Ministry of Finance on quarterly basis Government should devise a systematic and comprehensive framework for paying off arrears Develop mid-term arrears payment strategy Authorities should continue pursuing the domestic resource mobilisation strategy For example, in curbing IFFs, necessary to strengthen institutional oversight and strengthen and insulate law enforcement wings