ZAMBIA clocks 50 years of budgeting this year and Lusaka-based economic analyst, DAVID PUNABANTU, continues with this second-part article in which he observes that a certain model exists 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.
Last week’s article looks at the budgets between 1964 and 1995 while today’s continues from there culminating into some 2014 budget expectation.
The 1996 budget was at K1.161 trillion then and naturally the exchange rate stood between K1,000-K1,160 then per US dollar on budget day.
The budget thus in US dollar terms was worth US $1 billion.
The 1999 budget was at about K2.2 trillion and was worth US$840 million on budget day, as the exchange rate stood at K2,650 per US dollar.
Hence the Kwacha appreciated after the budget to about K2,200 per US dollar.
The appreciation drove the budget to represent US$1 billion.
However, by December 1999, government had passed a supplementary budget of about K500 billion.
. Nawakwi
This pushed the 1999 budget presented by the then Finance Minister Edith Nawakwi from K2.2 trillion to about K2.7 trillion.
Naturally, the exchange rate moved to a similar position prior to the 1999 budget of K2,650 per US dollar.
At this position the 1999 budget maintained its US$1 billion position.
It is behind this pattern that whatever export revenue is obtained by the private sector, is neutralised in value terms by government expenditure, hence increased mine taxation may increase infrastructure development but the value necessary to maintain such infrastructure will not exist under the current tax and budget systems.
The K20, 537.4-billion budget which was presented by Dr Situmbeko Musokotwane in 2011 was placed against an exchange rate of about K4,770 per US dollar placing the budget in US dollar terms at about US$4.3 billion which is roughly equaled Zambia’s copper exports in 2009.
However as the rule of thumb also goes, the budget is usually a 10th of the currency in circulation being around K2.3 trillion for August 2010 indicating that the Government 2010 budget should have been around K23 trillion.
This by the end of the 2011 budget saw a market correction as it reached K24 trillion a “18.8 per cent higher than budgeted” figure noted Finance Minister Alexander Chikwanda in his 2012 budget address.
However, the biggest flaw in such a configuration is in the hidden axiom of the budget guaranteeing Kwacha cover for exporters by the exchange rate—US dollar export revenue-budget configuration.
This automatically makes the Zambian budget susceptible to external US dollar depreciations or the much-sung song of poor copper prices.
To this, the 1972 Bank of Zambia Annual Report noted “in that the trend in copper prices during the year was complicated by the decision taken in December 1971 to peg the Zambian Kwacha to the US dollar and the floating of the Sterling pound in June 1972.
After June when Sterling was floated, the rise in Sterling prices did not compensate for the depreciation of Sterling, so that prices in Kwacha terms fell; and since Zambia produced more copper during the second half of 1972 than during the first half, the weighted average price of copper in Kwacha was probably lower in 1972 than in 1971.
Once again the reality of high London Metal Exchange (LME) copper prices is illusionary if the payment system is directly in foreign exchange (forex) because it becomes inflationary.
All that Zambians know about copper prices is that they are determined by the LME.
Zambians should realise that there was a time Zambia sold her copper outside the LME pricing system in Rhodesian pounds and had at the time a 10 per cent economic growth rate.
As late as April 1966 Roan Selection Trust (RST) and Anglo American Corporation (AAC) sold Zambian copper at £336 per tonne and were under political pressure to increase their producer prices, while in the process of studying the massive Chilean copper price hike.
Chile then increased her copper producer prices from £160 a tonne to £336 per tonne, while the LME price was at £753 per tonne.
This pressure became a reality on April 25 1966 as the mines were forced by government to follow the LME price system that only allows payment settlements in US dollars, Japanese Yen, D-Mark and Sterling and not Rhodesian pounds or Kwacha.
It is here that the US dollar link to the budget replaced Rhodesian pounds.
What is interesting is that the pre-LME copper price budget had Rhodesian pounds on the government expenditure side and also on the export revenue side to give an exchange rate of K0.71 per US dollar.
That exchange rate persisted after the use of LME prices supported by Zambia’s international reserves until they got depleted, that marked the decline of the Kwacha.
Yet what is interesting is that the K0.71n per US dollar rate on a Kwacha-to-Kwacha budget configuration still exists instead of a US dollar export revenue configured to government expenditure, as the shift between the 2013 and 2014 budgets reflects a K0.75n per US dollar exchange rate.
Budget configuration mismatches based on US dollar export revenue against government’s Kwacha budget as observed in 1993 saw the 1993 budget pegged at K231.9 billion configured at the exchange rate of K255 per US dollar.
The result was the 1993 economic malaise, that the then Deputy Finance Minister Reverend Dan Pule admitted that government had under pegged the US dollar value of the budget at K300 per US dollar, when the market rate stood at K410 per US dollar on budget day.
For the 2015 budget the currency in circulation as of May 2 2014 reached K4.5 billion against the backdrop of increased Kwacha statutory reserves to K2.8 billion up from eight per cent to 14 per cent to stem the slide of the Kwacha that reached over K7 per US dollar.
Based on the currency in circulation including the Kwacha statutory reserves the real exchange rate is about K7.3 per US dollar.
However, as excess Kwacha liquidity has been “frozen” the rate hovers around K6.1 per US dollar, indicating the 2015 budget should be around K60-K55 billion provided exports touch US$10 billion.
But high US dollar copper prices do not compensate for the fall in the purchasing power of the US dollar and so the Kwacha will fall, marking increased taxes to meet the deficit thus breaking the parameters set by Seers, Brown and Turner.
