ADDRESSING CONCERNS RAISED BY MR. TREVOR SIMUMBA IN HIS ANALYSIS OF THE SUPPLEMENTARY BUDGET
By Alexander Nkosi
The supplementary budget presented to Parliament by the Minister of Finance has raised a lot of debate. Like many analysts, Mr. Trevor Simumba shared an article questioning whether the supplementary budget was driven by a fiscal surplus and also shared his views on monetary and fiscal policy management.
I agree with him that there is no fiscal surplus as explained in my article, the supplementary budget is mainly financed through reallocation of money from debt service due to external debt service suspension and this alone is K19.7 billion out of the K22.36 billion. The rest of the K2.969 billion is from dividends, carry-over from 2021 and grants. However, I don’t agree with his monetary and fiscal policy assessment and I will discuss this in five parts.
1) PRINTING MONEY FOR SALARIES?
Mr. Simumba argues that the Zambian government has targeted to borrow K6.6 billion every month. He further argues that with about 2/3 understated subscriptions they will start printing money in order to pay salaries.
To put this discussion into context it is important to give a breakdown of how Zambia intends to raise revenue in 2022 and where government securities come in. According to the 2022 budget presented to Parliament last year, government targeted to raise and spend K173 billion. The breakdown of how this money will be raised is as follows:
(i) Domestic revenue – K98.9 billion. This will be raised through taxes, fees, fines, charges and levies on insurance, tourism and skills development.
(ii) Domestic borrowing – K24.5 billion. This will be raised through issuing government securities (bonds and treasury bills).
(iii) External borrowing – K47.8 billion. This is broken down into program loans at K39.3 billion and Project loans at K8.5 billion. Note that as explained by the Minister of Finance this is mainly through disbursement of loans for ongoing programs and projects and less of new loans for new projects.
(iv) External Grants – K1.8 billion. These are grants from donors for budget support.
Clearly the sources of revenue for government are different as itemised above. However, in his analysis Mr. Simumba lumped domestic and foreign borrowing together and came up with a monthly average of K6.6 billion. While this monthly average, which is actually not even accurate, includes both domestic and foreign borrowing, he then only picked the performance of government securities on the domestic market and concluded government might be forced into printing money to pay salaries.
The target for domestic borrowing where the issue of performance of government securities on the domestic market comes in is K24.5 billion. This gives us an average of K2 billion per month. This is only domestic borrowing, what about domestic revenue which includes taxes, fees, fines, charges and levies specified above? Aren’t these sufficient to cover salaries now that external debt service has been suspended? According to ZRA, tax revenue has already surpassed mid-year target. It is also important to note that even if government does not meet its target for domestic borrowing, it can use part of the SDR to support the budget. Currently there is no risk of printing money to cover salaries.
Let me provide more details on 2022 budget performance with a focus on the revenue side. In the first half of 2022, government has raised K48.3 billion against a target of K46.2 billion from taxes, registering a surplus of K2.1 billion. In terms of domestic and external financing, in the first 5 months of 2022, government raised K6.6 billion borrowed from the domestic market through the issuance of government securities, K6.3 billion from the IMF Special Drawing Rights Allocation, K3.6 billion in form of disbursements for foreign financed projects and K426 million from the World Bank. A total K1.3 billion against a target of K759 million was received from coorporating partners as grants. We are already closing in on our annual target of K1.8 billion for external grants. On external borrowing which is mainly disbursement of loans for on-going programs and projects, government has taken a cautious approach in the first half of the year as these programs and projects were being reviewed.
Domestic revenue is above mid-year target, foreign grants are above mid-year target. Domestic borrowing has been low and SDR has been utilised to cover that gap. Despite using part of the SDR, our reserves increased to USD3 billion. Even before we bring in domestic borrowing, we are collecting enough domestic revenue and because of external debt service suspension, this is enough to pay salaries, why would we resort to printing money? If our situation was as bad as Mr. Simumba puts it and salaries are threatened, we wouldn’t be allocating K4.7 billion to FISP and K6.5 billion to dismantling of domestic arrears in the supplementary budget, we would be focusing on securing salaries. We actually wouldn’t even be recruiting over 40,000 teachers and health workers.
2) A CLOSE LOOK AT MONETARY POLICY
Mr. Simumba argues that we have squeezed money supply out of the economy to push for lower inflation and currency appreciation at the expense of the real economy.
The New Dawn Government took over at a time the economy was coming out of negative growth experienced in 2020. Growth in 2021 was slow but inflation was high around 24%. Kwacha had depreciated from an average of K9/ dollar in 2017 to an average of K21/ dollar in 2021. Much as we needed to stimulate economic activities, the situation we were in was very tricky for monetary policy because an increase in money supply would have worsened inflation and further hurt the kwacha. High inflation negatively affects the same production we would be attempting to promote through increased money supply. It should also be noted that Zambia is import dependent not just for consumption but also for key inputs in production like machinery, agriculture inputs, fuel etc. So the Bank of Zambia works closely with the fiscal team at Ministry of Finance to carefully analyse dynamics before arriving at a monetary policy decision. The monetary policy team does not work in isolation.
3) IS BOZ HURTING EXPORTS BY STRENGTHENING KWACHA?
Mr. Simumba argues that BOZ has manipulated the currency to hurt exports and the figures are showing.
The argument here is that a weak kwacha makes Zambian products cheaper and increases exports. While this could be true for a country like China that has a highly advanced production capacity and wants to make its products competitive, for Zambia what we need right now is a strong kwacha so that we can import inputs and machinery cheaply which we need to use to produce more for export. So we are not yet at a stage where a weak kwacha would encourage exports because we have to increase production first.
4) MACROECONOMIC STABILITY AND STRUCTURAL TRANSFORMATION?
Mr. Simumba argues that what Zambia needs is structural transformation and not manipulating the currency and inflation.
My view is that structural transformation is basically attaining high production and productivity through technological advancement. This is a long process and is not detached from macroeconomic economic stability as Mr. Simumba puts it. We need to create a stable macroeconomic environment to support structural transformation, otherwise it won’t work if kwacha depreciates to K30/ dollar and inflation goes beyond 30%. To increase production and productivity we need to import advanced machinery and other key things needed in production, how do we do it if kwacha is weak? In 2021 you needed double the amount of money to import a farm implement or food processing machine compared to 2017, how do you increase production under such circumstances? Today people are complaining that they cannot afford fertiliser, imagine if kwacha depreciates to K30/ dollar, how many people would afford it? Hence, much as we need structural transformation which I strongly support, it is important to ensure a stable macroeconomic environment to support this process and this is what the monetary and fiscal teams are doing. We are basically striking a delicate balance given our economic predicament. As we progress into the year, we can see that there is an attempt by government to increase spending as seen by allocations made in the supplementary budget and this is informed by dynamics at play.
In the long term, we want a strong kwacha driven by a strong export base but in the short term we need to use monetary policy instruments to ensure we have a strong and stable currency as this is key to supporting this same growth which will ensure long term kwacha stability.