Public Financial Management
Government has identified public financial management as key to meeting its development agenda. In the 2022 budget focus, will be on strengthening national planning, internal controls and audit, resource mobilization, procurement as well as transparency in debt contraction and management, among other areas.
In the 2022 budget, Government has outlined its desire to expand the coverage of the Financial Management System to the district level and develop a standardized Local Authorities Financial Management Information System framework. PMRC commends this action because it will strengthen the financial governance of the Constituency Development Fund (CDF). This will serve to allay fears about abuse of the CDF.
Regarding public procurement, Government is committed to procuring goods and services at “the right price, of the right quality and delivered on time”. To this end, Government will endeavor to strictly adhere to the provisions of the Public Procurement Act No.8 of 2020 and ensure that all public investment projects are appraised. PMRC is of the view that gaps still remain in Zambia’s procurement legal frameworks, procedures and practices, which have previously resulted in abuses and significant losses in Government finances. Therefore, there is need for reforms to be undertaken in the procurement process in order to match Government’s commitment to undertake better procurement.
Zambia’s total debt as at September 2021 stood at US$26.96 billion, up 32% from December 2020 which is unsustainable. Government will spend K51.3 billion on servicing external debt and K27.3 billion on domestic debt, or K78.7 billion altogether. This represents 45.5% of the 2022 budget. Given the high debt servicing obligations, Government has had very limited resources to spend on programmes that contribute to economic growth and poverty reduction.
In November 2020, Zambia became the first nation in Africa to default on its debt during the COVID-19 pandemic. This happened when the country failed to make a US$42.5 million Eurobond repayment. The depreciation of the Kwacha against other currencies has contributed to higher debt service than planned.
Currently there are two important short-term measures of achieving debt sustainability which include a support programme from the International Monetary Fund (IMF) and the signing of the Debt Service Suspension Initiative (DSSI) with the Paris Club and G20 creditor countries and Intesa Sanpaolo. The IMF deal would allow Government to renegotiate its repayment terms with creditors under the Common Framework for debt treatment beyond the Debt Service Suspension Initiative, freeing up resources for development.
Going forward, Government will also endeavour not to contract further external non-concessional loans except for refinancing existing debt, while domestic borrowing will be restricted to scheduled auctions in preference to private placements. Concessional debt with a longer repayment period and lower interest will also be explored. With regards to strengthening the legal framework governing debt management and contraction, Government intends to repeal and replace the current Loans and Guarantees Act with a new Loans, Grants and Guarantees (Authorisation) Bill. PMRC commends Government on this move as the enactment and effective implementation of this Bill will enhance transparency in public debt management and loan contraction.
Government’s fiscal policy agenda for the year 2022 is to progressively reduce fiscal deficits to sustainable levels while supporting growth that generates jobs and poverty reduction. To achieve this, the Government intends to employ a combination of revenue mobilization, administrative reforms and expenditure rationalization measures.
In the medium- term, the target is to increase domestic revenue to at least 21.0 percent of GDP. And to achieve this, Government will streamline the tax system and place a high priority on fair and equitable taxation as well as establish a stable and predictable tax policy environment.
Further, the Government will rationalise the mining tax system to attract investment which will in turn increase production and also address base erosion and profit shifting to boost domestic revenues.
Government intends to take advantage of the Information and Communications Technology (ICT) for revenue collection and intends to connect an additional 100 public services to the Government Service Bus and Payment Gateway (BPG). This will bring the total number of services to 330 by the end of 2022. Further, the Zambia Revenue Authority systems will be interfaced with the Government Service Bus and other systems to improve on regulatory compliance and seal revenue leakages.
To rationalize expenditure, Government plans to reduce areas of wastage of resources in the budget and channel them to other needy areas that will improve the livelihoods of the people. The migration of beneficiaries under the Farmer Input Support Programme to the cheaper comprehensive agriculture support programme is an example of such a measure.
To further reduce expenditure on goods and services, the Government will strictly enforce the provisions of Public Procurement Act No.8 of 2020. This is to ensure that the procurement of public goods, works and services are done at the right price in accordance with the quarterly market price index published by the Zambia Public Procurement Authority.
Strategies on Dismantling of Domestic Arrears
Government has accumulated significant domestic arrears over the past years. This has been attributed to revenue shortfalls, financing challenges and weaknesses in commitment control systems (Economic Recovery Programme 2020-2023). The result of this is that domestic arrears have risen from about K641.2 million at the end of 2014 to K46.9 billion as at end- June 2021. The bulk of the arrears are to road contractors, suppliers of goods and services, Value Added Tax refunds and personnel related emoluments to public service workers.
Domestic arrears have led to a tightening of financial conditions, constrained the growth of private sector credit and contributed to a rise in non-performing loans which pose a threat to the stability of the financial system. The 2019 IMF Regional Economic Outlook for Sub-Saharan Africa suggests that as a result of payment delays, Government suppliers or State Owned Enterprises (SOEs) may withhold their tax payments until arrears are settled. If suppliers withhold tax payments, this lowers Government’s revenue which can result in inadequate public service provision and ultimately poor social outcomes. Additionally, SOEs may respond to the accumulation arrears by charging higher prices to compensate for delayed payments, thus delaying the supply of inputs for Government projects if they are financially constrained. This could further lead to the reduction in the size of their workforce, resulting in higher unemployment levels.
To curtail the accumulation of arrears and dismantle the stock, Government developed an arrears dismantling strategy. The key measures in the strategy include increased budgetary provisions, debt and/or cheque swaps, as well as debt refinancing and restructuring. Government plans to liquidate a substantial amount of domestic arrears over a period of five years. However, there is a need to give a more comprehensive explanation of the principles and prioritization criteria that will be used to determine how arrears are liquidated. This may prove especially beneficial to suppliers who lack understanding about prioritization criteria on payments of suppliers. In terms of halting the accumulation of new arrears, it will be especially important to restrict the commencement of new capital projects and major equipment procurements. This action will have the dual benefit of ensuring that all on-going projects are completed and that domestic arrears are either accumulated at a slower pace or not at all.
Government through the Bank of Zambia intends to maintain a flexible exchange rate regime. To this effect, measures that support the stability of the exchange rate will be promoted. The measures include:
- Stepping up the accumulation of international reserves to create a buffer to cushion the economy against external shocks, limiting it to at least 3 months of import cover.
- Fast-tracking the diversification of exports through an export-led industrialization and promote a viable foreign direct investment.
- Attain a real GDP growth rate of at least 3.5 percent.
- Reduce inflation to single digits by end 2022 and within the target band of 6-8 percent by mid-2023. This will result in the lowering the cost of living for the Zambians by reducing the current high level of inflation.
- Increase domestic revenue to not less than 21.0 percent of GDP.
- Reduce the fiscal deficit to no more than 6.7 percent of GDP; and limit domestic borrowing to no more than 5.2 percent of GDP.
- Further, implementation of monetary policy will continue to rely on the forward-looking framework anchored on the Monetary Policy Rate. This will take into account subdued economic activity and existing vulnerabilities in the financial system.
The concept of decentralization in Zambia is not a new phenomenon, it dates back to the 1960’s with development and implementation of various pieces of legislation but the actual take-off for decentralization in Zambia was in 2013 when the country launched the 2013 Decentralization Policy. The main aim of the Decentralization Policy is to promote people’s participation in democratic governance at the local level. It is important to note that not all functions would be transferred to the lower levels and councils, but that Central Government shall retain some core functions over essential national matters.
Focusing on Decentralisation Policy Implementation progress, it was noted that: The transfer of functions from Central Government to councils commenced in January 2015 and, apart from devolving functions, the Cabinet Circular also mandated councils to create “Ward Development Committees (WDCs)” as the fourth tier of Government as required in the Revised National Decentralisation Policy (R-NDP) then. In view of this, the National Planning and Budgetary Policy states that districts will be required to submit District Development Plans (DDP), which will be forwarded to the province and feed into the Provincial Development Plan (PDP). The province will then send the PDP to the Ministry of Finance and this was actualised in 2017, Central Government devolved functions to the local Authorities, recruited more human resource to build capacity and created more districts to ensure development is within the reach for people countrywide.
The final process of decentralization in Zambia over the last few years and what many proponents of decentralization have been advocating for the devolution of resources/fiscal decentralization to the local authorities. This form of decentralisation relates to power sharing for decisions relating to fiscal resources and revenue generating powers (Wunsch & Olowu, 1995). In many cases, fiscal decentralisation is the key to attaining the full benefits of overall decentralisation objectives. Despite the various prerequisites for success, (capacity of human resource and others) it has been argued to be a very effective form of decentralisation, as evidently seen in the case of Bolivia, where fiscal decentralisation led to Government being more responsive to the needs of the poor to promote more spending on social services, education and training, (Fauget .2003).
Fiscal devolution is applied through financial mechanisms such as Constituency Development Funds (CDF). CDF refers to a policy tool and development initiative whereby public money is dedicated to benefit specific political subdivision (Center for International Development 2009). Central Government delegates and allocates funds through Local Government, which has influence over various stakeholders represented by area Members of Parliament (MP’s) and Ward Councillors.
Therefore, the 2022 budget has actualised the final process of decentralization by ensuring resources through CDF are increased from K1.6 million per constituency to K25.6 million to enable communities identify their development priorities, make budgets and undertake development programs according to their development needs. The budget has devolved functions to the local authorities that used to be performed by Central Government these include among other functions, construction of primary school classrooms, desks, clinics, local courts, small bridges and canals, community boreholes, dip tanks and small dams. Further the increased CDF will include empowerment programs for local communities that were previously done through respective ministries as well as bursaries and skills development programmes.
While the decentralization of resources to local authorities is commendable, there are a number of measures that need to be put in place for the country to attain development in all parts of the country other than those suggested in the budget and these include:
- Strengthening accountability mechanisms to prevent corruption and misappropriation of funds as fiscal decentralisation is being implemented.
- Further, steps to enhance service delivery by sub-national authorities need to focus more sharply on coherent policies targeted towards outcomes hence the need for introduction of key performance indicators for all constituencies arising from their individual development plans.
- There is need for full participation of the private sector in the development committees to ensure that the choice of development projects meet value-for-money criterion.
- Continuous capacity building for local authorities in financial management and M&E for local communities to track development and demand for accountability and transparency in the use of CDF.
- Ensure adherence to financial management systems by the local authorities such as the Procurement Act 2020 and the Financial Management Act, 2018.
Public Private Partnership
Infrastructure development remains a very important component and bedrock for sustainable national development. Over the last 10 years, Government undertook various infrastructure projects which has contributed to the current debt stock.
With more demand for quality infrastructure critical for the survival and growth of the manufacturing sector, it is important that the country is land linked in its quest to become a sustainable transport hub within the implementation of the Continental Free Trade Agreement (CFTA) in order to increase the volume of manufactured goods and services for Zambia. Several infrastructure projects ought to be undertaken at a huge cost and the ingredient to this requirement is the key to ensure that alternative financing is sourced, so as to provide some relief for the national treasury.
PMRC has therefore been advocating for Public Private Partnerships (PPPs) as a viable avenue through which Government can continue to engage with the private sector in delivering various infrastructural needs in all sectors. Going forward, the proposal by the budget to repeal and replace the Public Private Partnership Act no.14 of 2009 is commendable as this will enable Government address all challenges and bottlenecks that exist in the implementation of this Act.
- Increased CDF should be supported by strengthened systems on procurement and planning for district committees. Review of the systems should be expedited before funds are released, to minimize the possibility of misappropriation.
- Expedite public service reforms to address unwarranted political interference in oversight institutions so that they can efficiently and effectively perform their mandates.
Government’s commitment to ensuring communication and free expression through the media is commended, as a means of providing checks and balances. The importance of universal access to information cannot, therefore, be over-emphasised; particularly so with the endeavour to ensure that development is taken to the people at constituency level. Information sharing and dissemination will be vital for the success of the development agenda. The intention to install communications towers and promote ICT for business is thus commended. To cure the ills that have plagued the media, Government will need to expedite consultations for an inclusive piece of legislation to provide for freedom of information, in furtherance of civil liberties on freedom of expression.