Lusaka, 1 December 2010 Public Expenditure Review Workshop

Outline Macroeconomic Constraints The Evolution of Fiscal Policy Composition of Public Spending Benefit Incidence of Public Spending Conclusions

Macroeconomic Constraints Zambia has made significant strides on the macro economy over the last decade Growth has been the result of favorable external conditions but based on adequate economic policies Structural reforms, as well as fiscal, monetary, and exchange rate policies have resulted on a stable macroeconomic environment of low inflation Dependence on copper exports and government revenues pose a challenge

Economy has been growing by about 6 percent in the last decade

Inflation has fallen to single digits

The Current Account deficit has been reduced

Evolution of Fiscal Policy Unsustainable high public (external) debt was caused by weak fiscal discipline and inefficient state-owned enterprises Privatization initiated a period of fiscal stabilization reforms in the early part of the decade Debt relief (HIPC and MDRI) in 2006 was the result of a strong reform program Higher fiscal revenues are needed to support government spending priorities (and lower donor support)

Evolution of Fiscal Policy

Evolution and Composition of Public Spending Overall public spending rose slowly through 2006 and slightly faster thereafter (falling in 2009) Spending rose by 63% in real terms from 2002 to 2009, but only from 20% to 21.5% of GDP. Spending does not account for aid (project grants) Budget execution has improved (budget cycle and capital spending) Limited availability of resources (both domestic and external) require greater efficiency (to do more with less)

Evolution and Composition of Public Spending

Composition of Public Spending Education remains the largest sector Spending on transport (roads) has accelerated Health spending, which had recovered since 2006, fell slightly in 2009 Agriculture spending has increased, but two major programs (Farmer Input Support Program and Food Reserve Agency) account for most of it Spending on the Water sector remains low (considering the important effect on health)

Composition of Public Spending (constant 2009 prices)

Poverty and Inequality National poverty rates have fallen by a small percentage, from 68% in 1996 to 59% in 2006 Poverty remains very high in rural areas, at 77% in 2006, compared to 84% in 1996 But it has continue to fall in the urban areas, to 27% in 2006, from 41% in 1996 In addition to the rural-urban divide, inequality has actually increase (the Gini coefficient rose from 47.4 in 1996 to 52.6 in 2006)

Poverty and Inequality

Benefit Incidence of Public Spending Poverty reduction is a difficult goal to achieve through the budget process on an annual basis But government should be able to identify which expenditures have a positive impact in reducing some of the effects of poverty Governments usually concentrate in public goods such as education and access to health Equity analysis does not substitute for need to analyze efficiency of public spending (ex-ante and ex-post)

Benefit Incidence - Education Education is the largest sector on government spending Data from 2006 shows that 32 percent of the poorest quintile of the years old has not attended school (vs. o.6 percent of the richest) Total (primary and secondary) net enrollment rate for the poorest rural quintile is 66 percent, compared to 88 percent for the richest urban quintile

Educational Outcomes

Benefit Incidence – Access to Electricity Only 20 percent of the total population has access to electricity, but only 3 percent of the rural population Compared to 51 percent of the urban households In equity terms, 64 percent of the richest quintile has access to electricity compared to 0.6 percent of the poorest quintile

Benefit Incidence- Access to Electricity

Benefit Incidence - Water Water services are dominated by various public- sector and quasi-public institutions Based on data of the 2006 LCMS, 65 percent of the poorest quintile uses water from an unprotected well or a river Compared to 72 percent of the richest quintile uses water from a public or private tap

Benefit Incidence - Water

Conclusions Zambia has achieved significant gains over the last decade at the macroeconomic level Despite faster growth, government spending remains constrained (by resources and in its effectiveness) No significant results of government spending on reducing poverty (or inequality) Analysis of public spending efficiency limited by data availability, but more can be done