1. Challenges on Building Realistic Budgets-Zambia
Presentation at Collaborative Africa Reform Initiative Seminar, 1st to 3rd December 2004, Pretoria.

2. OUTLINE
This presentation is aimed at gauging the soundness of the budget preparation in Zambia and challenges faced in building a realistic budget.
Realistic Macroeconomic Framework
Reasonable Revenue Projections
Realistic Financing Provisions
Realistic Costing and Programmes
Future Cost implications
How Far Spending Priorities are Determined and Agreed

3. SOUNDNESS OF THE BUDGET SYSTEM IN ZAMBIA
In assessing the soundness of the Zambian budget system, a set of questions which form the standard by which the soundness of the budget system can be judged were used( IMF guidelines for public expenditure management)

4. Budget Based on Realistic Macroeconomic Framework?
Before the reforms MOFNP used to solely determine the Macroeconomic Framework
Government has realised the need to involve stakeholders. Government formed the Macroeconomic Sector Advisory Group (SAG) in order to have an objective assessment of the macroeconomic projections/parameters.
The macroeconomic framework is not robust. The Central Statistical Office is still using 1980 as a baseline on National Accounts. This information has not been updated thereby underestimating the GDP.

5. Cont’d
With the Macroeconomic SAG in place the result has been as objective assessment of all sectors (real, monetary, external and fiscal).

6. Revenue Estimates Based on Reasonable Projections?
In Zambia, revenue projections are determined by Tax policy committee comprising officers from Zambia Revenue Authority, MOFNP and revenue collecting ministries.
MOFNP and ZRA jointly set the targets of tax revenues to be collected. The estimated revenues are included in the annual budget that is laid before parliament by MOFNP.
Tax revenue collection as percentage of GDP have been stable and stand at 18 per cent .
Tax revenue is one of the few areas in the public finance system that has worked very efficiently.

7. Cont’d
However, non-tax revenue which includes fees and fines collected by Line ministries has proved to be difficult.
There is strong evidence that revenues from non-tax sources are under-reported and withheld at source rather than remitted to the government account at the Bank of Zambia.
Currently projections stand 0.66 percent of GDP

8. Realistic Financing Provision?
Financing in Zambia is comprised:
-Domestic financing (borrowing from the banking system)
-Foreign grants (programme and project grants).
-External loans (programme and project loans);
The most certain but limited source of financing in Zambia is the domestic borrowing.
There have been weakness in the estimation of external loans and grants.
Grants are usually dependent on Government meeting the conditionalities with the cooperating partners.

9. Cont’d
The budget has not been able to comprehensively cover donor activities/disbursements. The reason has been that donors and line ministries are reluctant to provide information on the quantum of donor support (suspect irregularities in PEM)
The current projections of foreign grants stand at 7.7 percent of GDP

10. Cont’d Harmonisation in Practice (HIP)-
With Zambia back on the PRGF and pursuing principles of sound public expenditure management and financial accountability (PEMFA), most of its cooperating partners have come together and decided to shift from specific project support to general budget support which is being termed as HIP budget support.
HIP budget support is general budget support and is not tied to any particular public expenditure programme or project.

11. Cont’d
Expenditures from these resources will be made at the discretion of the Government, in line with its spending priorities as reflected in the medium term expenditure framework.

12. Realistic Costing of Policies and Programmes
Input/line-item budgets based on previous year’s expenditure patterns with minimal attention placed on links between Government’s development goals and decisions concerning resource allocation.
The traditional “incrementalist/line item” budgets have been used; Budget estimates of the previous year are factored by a multiplier such as inflation rate or GDP growth to present the current year’s estimates.

13. Cont’d
With MTEF approach, Government has emphasized the need policies with the budget estimates, at the same time making sure that the agreed priorities fit into the budget. The Activity Based budget has ensured that the costing are realistic.

14. Future Cost implications
These usually come in the form of Contingent liabilities which including GRZ guaranties on public pensions funds, GRZ guaranties on loans to public enterprises Like Zesco.
Future cost implications of these guaranties was not taken into account.

15. How Far are spending priorities determined and agreed?
There is a lot of interaction between the MOFNP and Lines ministries.
MOFNP provides expenditure ceilings through a budget a circular (top-down process)
Lines ministries submit their programmes to be undertaken in a given year which are drawn from the TNDP/PRSP. Lines ministries have constituted Budget Committees which are now headed by the permanent Secretary.
These committees comprise all departmental heads and coordinate all budget activities

16. Conclusion
The reforms GRZ has embarked on are continuous and will need political commitment.
Need for a continuous interaction between the Line Ministries and MOFNP.