ZAMBIA clocks 50 years of budgets this year and Lusaka-based economic analyst, DAVID PUNABANTU, observes in this two-part article that a certain pattern has existed among export revenue derived mainly from copper exports, government expenditure, the exchange rate and the currency in circulation that is usually a 10th of government expenditure since the mid 1970s.
AS ZAMBIA celebrates her 50th Golden Independence Jubilee, the pending 2015 budget presentation in October 2014, serves as an important mile stone, as it covers 50 years of budgets, whose past performances are critical in understanding how future budgets will behave.
First and foremost understanding any system, especially budgets, as famous physicist Dr Albert Einstein put it, one has to “separate the objects of experience and seek the logical connections.”
As observed, the first human notion of a budget is that it is meant to last a calendar year, but the economic reality of this is that it never does, hence syndrome of supplementary budgets or certain items in a budget do not get their funding.
This effect fuels the talk of budget allocation that becomes so central amongst stakeholders.
The reason for this is that budgets are driven by taxes and are fully dependent on economic activity.
Thus if taxes are too high the budget ends up depleting the very economic foundation it rests on before the set time, which in turn causes the budget to collapse.
Thus the correct aggregate tax threshold that doesn’t deplete the economy and lasts a calendar year is about eight per cent.
This was well articulated in the 1964 United Nations (UN) Seers Report over Zambia’s economic development, the 1967 Brown Report, and the 1969 Turner Report that warned Government could not increase its expenditure in excess of the economic growth rate.
If the percentage increase in expenditure was above the economic growth rate, it would create unemployment, and compromise the existing value of job.
If it kept such percentage increases in expenditure below the growth rate, existing incomes would have more purchasing power and job creation would manifest in the economy.
Snap shots of budgets reveals a sad picture.
Between 1964 and 1965 Government expenditure increased by 37.7 per cent, while Zambia’s economic growth rate hovered below 10 percent.
Between 1970 and 1971 Government expenditure increased by 33.8 percent while between 2004 and 2005 Government expenditure increased by 17.4 percent, as Zambia’s economic growth rate hovered around 6.6 percent.
Thus when one looks out of the economic window, the huge army of unemployed youths and workers whose wages lack any real purchasing power, these are the results of five decades of percentage increases in Government expenditure exceeding the economic growth rate, making poverty a fundamental problem to many Zambians.
Despite attempts by the Governments, past and current, to create jobs through increased expenditure, these attempts in the medium to long run have created a much worse crisis.
What Government should be doing as outlined in the proposed UN £454 million plan for Zambia was to aim for budget surplus, which could be used to finance loans in the private sector.
Naturally then Finance Minister Arthur Wina in his July 4 1964 Northern Rhodesian budget had surplus of over £10 million.
The £10 million surplus on the current account allowed £7.5 million for development projects, £1.5 million for future debt repayments and the elimination of the accumulated deficit.
But by July 8th 1965 Finance Minister A. Wina announced a shocking “mini-budget” with big increases in custom duties for wines, spirits, private cars, washing machines, TV sets and the more expensive types of radios.
Duty on cars increased from 7.5 percent to 22.5 percent in an attempt as he said; “it is vitally necessary for Zambia to build up its reserves of foreign exchange so as to provide for the heavy imports of capital goods required for the implementation of the development plan.”
Past taxes as observed on cars at 7.5 percent duty took into account the dynamics of creating a sustainable economic system without depleting the economic resource.
Over time, Zambia’s surpluses got absorbed by government rather than concessionary loans being given to the private sector, as Zambia believed in state enterprises, which was the same path Ghana under Nkrumah followed.
Unfortunately as Zambia got independence, Ghana already seven years into her independence was bankrupt and heading to the International Monetary Fund (IMF) for assistance.
The other side of the coin is that taxes above 8 percent causes government to collect, spend, re-collect the budget, re-spend it in a cyclical pattern until no value is left.
In 1993, Zambia went through 17 budgets, or every 21 days marked an economic year.
Every 21 days price hikes occurred in increasing intensity until 227 days into the year, on September 14th 1993, the economy was depleted, and then government ate into the 1994 economy before it arrived, thus compromising real incomes in 1994.
The 1993 economic back drop then, had many local firms collapse under unpaid services, as thousands lost jobs and civil servants demanded a year’s wage as a monthly wage, until the Kwacha appreciated around August 15th 1993, as a result of the European Union Exchange Rate Mechanism (ERM) devaluing by 30 percent.
The ERM failure helped government quench unrest as it claimed ironically its reforms were working.
Yet by September the 14th government coffers run dry, that the then Finance Minister R. Penza said, “it is a problem facing all ministries and this has been caused by the cash budget we are sticking too.”
The logical connection of this system’s failure is the timing around the September-October inter-phase, is the experience of supplementary budgets.
Consequently the recent shift in budget cycles merely merged the supplementary expenditure into the main budget.
The biggest challenge that the 2015 budget faces is taxing the mines effectively.
This has been a bone of contention for civil society, donors, the IMF, World Bank and many ordinary Zambians.
The notion of increasing mine taxes is only feasible if it does not violate the parameters set by the Seers, Brown and Turner Reports.
In other words, other taxes like PAYE, duty on imports etc have to drop, while government cuts its wage bill to create surpluses to lend to the private sector, instead of borrowing more Euro bonds.
Looking back across 50 years of budgets a certain pattern exists between export revenue derived mainly from copper exports, government expenditure, the exchange rate and the currency in circulation that is usually a tenth of government expenditure since the mid 1970s.
For example in 1995, Zambia produced 307,558 tonnes of copper.
The average price of copper on the London Metal Exchange (LME) stood at US$2,623.5 per tonne, giving US$806 million revenue.
With Non-Traditional Exports (NTE), it reached about US$1 billion.
The exchange rate on budget day stood at K853 per US dollar.
The budget was about K853 billion, indicating against the exchange rate that it was worth US$1 billion.
(To be continued next week)