Zambia H1 2014 Fiscal Performance: What you need to know

This time last year, there were many whispers and unconfirmed reports of the government having financial issues – which we later found out they had. Expenditure falling under the category ‘Grants and Other Payments’ was 68.9 percent above budget at K5.4bn! This in combination with unplanned civil service salary increments in September 2013 led to an overall budget deficit of K8.2bn (6.8 percent of GDP) above the projection of K5.4bn.

Fast forward 12 months, the Ministry of Finance released data of the performance of the K42.7bn National Budget in the first half of this year:

[Revenue & Grants of K15.1bn – Expenditure of K18.2bn = Deficit of K3.1bn (2.1 percent of GDP)]

Revenue

The Government raised revenues and received grants amounting to K15.1bn:

Revenue

The Government raised revenues and received grants amounting to K15.1bn:

 “PAYE contributions were higher than projected, partly due to increased employment and revision of salaries in the private sector. Under VAT, the positive performance was attributed to efficiencies arising from the implementation of the tax-online system and the enhanced enforcement of VAT proof of export rules. Withholding taxes and other income taxes equally performed well during the first half due to increased compliance”.

Now, taking into account this week’s amendment of the much talked about VAT rule 18 which had led to the accumulation of over K3.5bn (approx. $600m) of VAT refunds primarily owed to the mines, some questions have to be asked. How are the VAT refunds treated with respect to revenue recognition? Did the MoF include them as revenue raised? The questions would ascertain whether or not the K15.1bn should be less K3.5bn (VAT refunds) or not. If the VAT refunds were included in revenue collected then the first half fiscal deficit should actually be just over K6.6bn (4.6 percent of GDP) because they are refundable.

Non-tax revenue was below target by 17.5 percent as a result of lower collections on road user charges and delayed implementation of new programs – National Titling, Inland Tolling of roads etc. – on which revenue projections were based.

The government received grants totaling K87.1m against an expectation of K784.9m (direct and project support). Did the MoF over-estimate how much grant support would be received in 2014? Or is something else going on? Grant support has been on the decline since Zambia was declared a lower-middle income country by the World Bank.

Expenditure

The Government spent a total of K18.2bn over the first half of the year as follows:

Personal emoluments (wages, allowances etc.) were 42 percent of expenditure and consumed a shade over 50 percent of revenues. This doesn’t leave a lot to spend on developmental project and is a key reason why there is a civil service hiring and wage freeze. The next big expenditure item was Assets which consisted of K3.2bn of capital expenditure on roads, power, railway and dismantling of arrears.

Takeaways

Generally, fiscal performance has so far been better than it was last year. Collection of tax revenues has improved. However, non-tax revenue collection needs to be ramped up heading into the second half of the year but it doesn’t look like the government will receive much in form of grant support this year.

Personal emoluments will continue to take up a significant portion of spending especially when mid-term gratuities of K500,000 are be paid out to each Member of Parliament (MP) next month. Infrastructure spending should increase as more of the funds from this years $1bn Eurobond are put to use.