A K106.6billion budget for 2020 budget in Africa’s red metal producer was delivered on Friday 27 September by former central banker, now fiscal head Dr. Bwalya Ng’andu. Former Finance Minister Felix Mutati in a post interview summarized the budget on one word, “sensible” he said. The budget has mixed positives and negatives though the positives do weigh more arguably. As per tradition, the next few weeks will be themed with budget analysis by stakeholders across the spectrum. Shelving sales tax was the biggest hallmark the new finance minister made in his debut presentation to parley cheering the private sector across the board. With energy inflation from widened fuel prices and a looming tariff hike as Zambia grapples with energy poverty, sales tax was going to heap inflationary pressure on the red metal producer.
The mines will always never be content
Despite retaining the value added tax system with tighter compliance monitoring and new adjustments to VAT such as increasing capital allowance on capital expenditure to 20% from 25% and limit VAT refunds on electricity to 80% from 100% the Chamber of Mines still feel the operating environment is still costly from a maintenance perspective, Chamber CEO – Sokwani Chilembo was on record telling Reuters after the budget was presented. At a PricewaterhouseCoopers post budget cocktail, he nonetheless thanked the minister for the sales tax move and said the mines were ready to contribute to increased production going forward. Union Gold Chairman Mark O’Donnell cautioned the MinFin on experimenting with the economy by introducing policies that caused havoc in the market and eventually reversing them. He told the minister that despite the budget centering on the government, the private sector really want to help and that working together to achieve the desired growth will only be with private sectors contribution.
Zambia’s Legrangean multiplier
With constrained optimization the Zambian budget allocates 41.6% towards emoluments and debt servicing, leaving the remaining portion to other sectors of the economy. A more positive step towards redeeming debt is seen in the $48million to be set aside to sink the debt fund in addition to the already existing balance of $9.5million. This balance was advised by Secretary to the Treasury Fredson Yamba while the Minster during a Q&A session at Pamodzi hotel said the MinFin would start to weigh Zambia’s refinance options as 2022 nears. Zambia’s $750million will be falling due in a the next two years. Dollar debt redemption is very key is easing jitteriness in offshore bondholders who are very nervous given the fiscal posture of the sovereign that reflects a junk rating of CCC+/CCC/Caa2 for Fitch/S&P/Moody’s.
Zambia will get a new IMF representative
The Minister states that Zambia has engaged the IMF on a resident representative and that through Article IV mission further engagement has continued though program talks are presumptive until the red metal producer meets its fiscal consolidation targets. Other areas the budget allocates attention to include alternative energy sources and aquaculture.
The taxman has a K72billion score card for 2020
The revenue authority have been given a target of K72billion of the K106billion which is expected to raised from domestic taxes as taxman strengthens their monitoring of non tax compliance to maximize collections.
Debt redemption strategy will calm offshore nervousness
There’s commitment to dismantle domestic arrears which have ballooned to levels of K16.7 billion and the minister does allocate 300% more than in 2019 a figure of 2.3 yards translating to 14% of the outstanding balance but at this pace will take 7 years to liquidate the total arrear backlog. In a post budget presentation dubbed “Navigating Turbulent Waters” the MinFin is advised to provide a clear and precise debt redemption strategy as it will help calm offshore bond holders nervousness around default risk on the existing Eurobonds. This will eventually help with narrowing credit default spreads which are used to proxy sentiment. The presentation revealed that CDS have blown out to about 1,650 – 1,750basis points to date reflecting the fiscal posture of the counter-party.
Energy inflation to weigh private sector pulse (PMI)
Markit Economics will be set to release business pulse readings for African nations on the 04 of September and Zambia’s Purchasing Managers Index (PMI) is forecast to slid deeper in contraction to 43.1 (*Sep) given the effects of extended load management on the manufacturing ecosystem. Africa’s copper producer last printed 46 (Aug) and has been in the doldrums for 11 straight months. Liquidity, an elevated cost environment and weak aggregate demand have been key drivers of the dampened trajectory in the private sector. With a fuel prices ebbing higher and an energy tariff hike being contemplated, energy inflation is the next risk driver of suppressed factory activity for Zambia. Input inflation remains fairly high as currency weakness continues to weigh.
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