Zambia has proposed measures to curb its budget deficit at a time when slumping commodity prices have seen the country face mine closures, rising unemployment, power shortages and soaring food prices.

New Finance Minister Felix Mutati told parliament on Friday that Africa’s second-largest copper producer would cut its fiscal deficit to 7 percent of Gross Domestic Product (GDP) in 2017 from a projected 10 percent this year.

Presenting a 64.5 billion kwacha ($6.6 billion) budget, Mutati said it sought to limit domestic borrowing to 2 percent of GDP in 2017, slightly higher than 1.2 percent this year.

“We are all agreed that the task of restoring stability and accelerating growth will not be easy. We have to be bold and decisive,” Mutati, who was appointed in September, said.

The economy would grow 3.4 percent next year from just over 3 percent this year due to low copper prices, power shortages, inflation and a government cash crunch, he said, adding the government would restrict new capital projects.

Zambia is in talks with the International Monetary Fund about a potential aid package after agreeing its budget deficit was not sustainable and hopes to conclude a programme with the IMF in the first quarter of next year.

The stock of the government’s external debt as at end-September 2016 was $6.7 billion representing 35 percent of GDP while the domestic debt in form of government securities was 26 billion kwacha – equal to 12 percent of GDP, he said.

“Clearly we are walking a tight rope. We must not burden the next generation,” Mutati said.

Razia Khan, chief economist, Africa at Standard Chartered bank, said the budget contained a mixed bag of measures.

“The context of this budget was clear – there was a need for fiscal consolidation and the demonstration of reform in order to ease the way for negotiations with the IMF early next year,” she said.

The finance minister said Zambia would introduce import duty on copper concentrates at the rate of 7.5 percent starting in January next year, but would not change existing mining taxes.

Copper earnings fell to $3.2 billion in the first nine months of 2016 from $4 billion in 2015, Mutati said.

Mining companies operating in Zambia include Glencore, Canada’s First Quantum Minerals, Vedanta Resources and Barrick Gold.

Zambia would raise the price of electricity to reflect the cost of production by the end of 2017, and review state-owned firms in a bid to recapitalize those that are making profit and sell off loss-making firms.

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Extracts from the 2017 Budget Address by Honourable Felix C. Mutati, MP Minister of Finance

Lusaka, 11 November 2016

Three months ago, the people of Zambia re-elected the Patriotic Front into Government which pledged to continue with its ambitious development agenda. The Patriotic Front Government under the able leadership of His Excellency the President Mr. Edgar Chagwa Lungu is a Government for all Zambians. As a demonstration of this fact, resources in the 2017 Budget have been allocated to promote equitable development across the country.

The past decade has been turbulent to our development agenda. Five Presidential elections have been held. This made it difficult to implement long term policies for economic stability and growth.

This new five year mandate that the Zambian people have given us provides ample time to achieve our set objectives. Accordingly, we shall ensure that we implement even those reforms that we could not previously undertake.

Turning the economy around requires that we make hard choices and implement difficult reforms. We are all agreed that the task of restoring stability and accelerating growth will not be easy. We have to be bold and decisive.

Only unity and hard work will help us overcome the current challenges for shared prosperity.

We are alive to the fact that the hard choices we are making will have consequences on our society, especially the vulnerable. Thus, we commit to scaleup our social safety net programmes. This is in fulfilment of the Patriotic Front Government’s commitment to alleviate the plight of the poor.

The economic environment in which the 2017 Budget will be implemented will be challenging. Growth in the global economy is expected to remain subdued. Domestically, low water levels will continue to hamper electricity generation and thus constrain production.

This reality means that we have to act decisively to address the challenges we face.

In order to restore economic stability, the Government has designed an Economic Recovery Programme dubbed “Zambia Plus”. This Programme is aimed at ensuring sustained and inclusive growth. I would like to reiterate that “Zambia Plus” is a home grown Economic Recovery Programme to be complemented by external support from our Cooperating Partners, including the International Monetary Fund (IMF).

I would like to clarify that Zambia has not yet discussed any programme with the IMF. Therefore, there are no conditions or financing arrangements that have been agreed upon. Discussions with the Fund will only be conducted in the first quarter of 2017 to augment our home grown programme.

Our Economic Recovery Programme, ‘Zambia Plus’, is built on five main pillars:

1. Enhancing domestic resource mobilisation and refocusing of public spending on core public sector mandates;

2. Scaling-up Government’s social protection programmes to shield the most vulnerable in our society from negative effects of the programme;

3. Improving our economic and fiscal governance by raising the levels of accountability and transparency in the allocation and use of public finances;

4. Restoring credibility of the budget by minimising unplanned expenditures and halting the accumulation of arrears; and

5. Ensuring greater economic stability, growth and job creation through policy consistency to raise confidence for sustained private sector investment.

This programme will not be achieved in one year, but over the medium term. This budget therefore aims to set the foundation for success.

I carry a message for my fellow Zambians this afternoon. The message is simple. We cannot spend what we do not have. We cannot borrow beyond our ability to repay.

On 30th September, 2016 during the official opening of the first session of the 12th National Assembly, His Excellency the President Mr. Edgar Chagwa Lungu addressed the nation through this august House on his vision for an inclusive vibrant and robust economy. It is in this context that the theme of the 2017 Budget is: “Restoring Fiscal Fitness for Sustained Inclusive Growth and Development”.

Global and domestic economic developments in 2016 and the outlook for 2017

Global economic growth in 2016 is projected at 3.1 percent, a rate slightly lower than the 3.2 percent recorded in 2015. This is on account of lower economic activity in the advanced economies. In the emerging and developing economies, growth is projected to strengthen slightly to 4.2 percent in 2016 from 4.0 percent in 2015. This is despite lower growth in China. In Sub-Saharan Africa, growth is projected to fall to 1.4 percent in 2016 from 3.4 percent in 2015. This is largely on account of a slowdown in the larger economies of South Africa, Nigeria and Angola.

World trade is projected to grow by 2.3 percent in 2016. This is lower than the 2.6 percent growth recorded in 2015. The main factors weakening world trade include sluggish global economic activity, waning pace of trade liberalisation and the recent increase in protectionist tendencies.

On the domestic front, the Zambian economy faced a number of challenges. These included low commodity prices including copper, electricity deficits, high inflation, a deteriorated external sector and Government’s challenge to fully finance its commitments. Growth is therefore, projected to be just above 3 percent in 2016 against a target of 5.0 percent and to marginally rise to 3.4 percent in 2017.

Sectoral Performance

Agriculture recorded favourable performance, notably for maize, soya beans, sunflower and sorghum. Copper production was up by 8.2 percent to 575,780 metric tonnes in the first nine months of 2016, from 531,163 metric tonnes produced in the corresponding period in 2015.

There was improved performance in tourism, partly reflected in increased international passenger movements and higher entry into our major national parks. We recorded a 4.7 percent increase to over a million in international passenger movements during the first nine months of 2016, compared to 957, 373 over the corresponding period in 2015.

I am glad to note that we are increasing our usage of Information and Communication Technology (ICT). Our utilisation of mobile services including internet has increased. In the first nine months of 2016, mobile users increased to 11.5 million from 10.9 million recorded a year earlier.

We all know our situation with respect to electricity generation challenges. In the period up to September 2016, generation declined by 19.9 percent to 1,329.2 Megawatts compared to 1,658.6 Megawatts in the corresponding period in 2015. This constrained economic activity.

The stock of Government’s external debt as at end September 2016 was US$6.7 billion, representing 35 percent of GDP. The stock of domestic debt in the form of Government securities was K26.0 billion, representing 12 percent of GDP. Clearly, we are walking a tight rope. We therefore, have the responsibility to ensure debt sustainability. We must not burden the next generation with debt.

Monetary policy has helped to anchor restoration of macroeconomic stability. Annual inflation declined significantly from a peak of 22.9 percent in February 2016 to 12.5 percent in October 2016. Inflation is now expected to fall to single digit by year end. The exchange rate has remained relatively stable.

Total export earnings declined in the first nine months of 2016 compared with the corresponding period in 2015. Earnings from copper fell to US$3.2 billion from US$4 billion. Nontraditional export earnings declined to US$1.3 billion from US$1.6 billion. This outturn was mainly explained by unfavourable international commodity prices.

The cost of credit continued to be high with commercial banks average lending rates remaining elevated at around 28.9 percent in September 2016. This is not conducive to the growth of the Small and Medium Enterprises (SMEs) and the economy in general. Fiscal consolidation will help to lower the yield on Government securities and enable monetary policy to support growth.

Execution of the 2016 Budget has been daunting. The cash deficit is expected to close around 3 percent of GDP, largely on account of revenue shortfalls and planned external financing not coming through. The deficit on a commitment basis will be around 10 percent of GDP. This is largely on account of arrears arising from unplanned expenditures related to fuel and electricity subsidies.

Macro economic objectives, policies and strategies for 2017

The gravity of the state of our economy requires that we immediately put in place bold measures that will stabilise and grow our economy. In this regard, our macroeconomic objectives for 2017 will be to:

1. achieve real GDP growth of at least 3.4 percent;

2. attain end year inflation of no more than 9.0 percent;

3. attain domestic revenue mobilisation of at least 18.0 percent of GDP;

4. limit the overall fiscal deficit to no more than 7.0 percent of GDP on a cash basis;

5. maintain domestic borrowing to no more than 2 percent of GDP;

6. build up foreign exchange reserves to at least 3 months of import cover by end 2017; and

7. support the creation of at least 100,000 decent jobs.

Key Sector Policies and Interventions

The Seventh National Development Plan is poised to give greater impetus to economic diversification and job creation. The underpinning macroeconomic objectives will therefore be supported by specific policy interventions related to the following:

1. Agriculture;

2. Industrialisation;

3. Tourism; and

4. Mining.

Allow me to now share with the House, specific policies that Government will put in place.

Industrialisation

Government will promote industrialisation as a means of diversifying the economy. This will be through facilitating value addition in the agriculture, mining and forestry sectors. In 2017, Government will facilitate the development of the Kafue Iron and Steel Economic Facility Zone and the Kalumbila Multi Facility Economic Zone. The private sector will invest US$100 million in the Kalumbila Multi Facility Economic Zone. Government will also assist up-scaling of investment projects at the Lusaka South-Multi Facility Economic Zone.

Industrialisation cannot take place without financing to SMEs that form the backbone of the economy. To address this, Government has accessed US$50 million for onlending to SMEs. This will create dynamic SMEs that will contribute to growth and generate jobs.

In 2017, Government will further develop financing instruments that will attract pension funds led by the National Pension Scheme Authority (NAPSA) and other investment companies to support industrialisation under the Industrial Development Corporation (IDC). Priority will be given to projects that add value to output of the agriculture, mining and other primary sectors.

Credit guarantee schemes are cardinal to alleviating the constraints facing SMEs in accessing finance. A significant number of our SMEs in Zambia demonstrate good commercial viability. However, they have limited access to conventional bank credit facilities. This is due to inadequacy of collateral and lenders’ limited understanding of the SME business model.

Government will in 2017 therefore establish an Agricultural and Industrial Credit Guarantee Fund for SMEs to facilitate access to affordable financing. These facilities will ensure SMEs contribute strongly to employment generation and economic growth.

Mining

The mining sector contributes over 70 percent of Zambia’s total export earnings. This sector will thus continue to play a pivotal role in the economy.

Government will ensure a stable and responsive mining tax regime. We will also fully implement effective mining monitoring mechanisms such as the Mineral Value Chain Monitoring Project to enhance transparency in the sector.

Government will accelerate the promotion of a diversified mining output base to other minerals such as gemstones, gold, nickel, manganese and iron. Government will also promote the exploration for oil and gas. Mapping of the entire Zambian territory will be undertaken to update the geological database to support future investment in the sector.

International Trade

We need to prioritise international trade as a tool for attaining inclusive growth and development. In 2017, Government will:

1. Operationalise the Bilateral Trade Agreements with the Democratic Republic of Congo and the Peoples Republic of Angola;

2. Provide for advance ruling on rules of origin for goods originating from countries with which Zambia has signed trade agreements. These include SADC and COMESA member states as well as India and China;

3. Implement a Single Window platform for various border agencies to enhance trade facilitation; and

4. Establish trade centres at the borders of our major nontraditional export markets beginning with Kasumbalesa, Kipushi and Chirundu.

The 2017 Budget

I now present the 2017 National Budget, which lays out revenue and expenditure measures aimed at achieving the objectives of our Economic Recovery Programme.

Government proposes to spend a total of K64.5 billion or 27.7 percent of GDP. In terms of financing the budget, K42.94 billion will be through domestic revenues, K2.23 billion through grants from our Cooperating Partners and K19.33 billion through debt financing from domestic and external sources.

Resources have been allocated to ensure that we:

1. accelerate the dismantling of arrears to suppliers of goods and services to unlock the crunch in the economy;

2. support growth in the key sectors of the economy;

3. sustain and enhance the critical services of health, education and public order and safety; and

4. mitigate the effects of the Economic Recovery Programme on the vulnerable in our society.