Zambia to Almost Halve Budget Gap Despite Surge in Spending

  • Government to boost expenditure by 14% to 53 billion kwacha
  • Economy facing falling copper revenue, worst power crisis

Zambia’s government plans to almost halve the budget deficit next year, a target it may struggle to meet as it boosts spending by 14 percent.

Expenditure is set to increase to 53.1 billion kwacha ($4.5 billion) next year, up from 46.7 billion kwacha projected in 2015, Finance Minister Alexander Chikwanda told lawmakers in the capital, Lusaka, on Friday. The spending target is higher than the 48.8 billion kwacha estimated by the Finance Ministry in August.

Despite the surge in spending, Chikwanda, 76, plans to narrow the budget deficit to 3.8 percent of gross domestic product next year from 6.9 percent in 2015, mainly by boosting domestic tax collection. With plunging revenue from copper, Zambia’s biggest export, and the worst power shortage on record curbing output in the economy, achieving those goals may be difficult.

“The constructive levels forecast for the budget deficit in 2016 hinge on meeting fairly aggressive revenue collection targets,” Yvette Babb, an emerging-markets strategist at Standard Bank Group Ltd., said by phone from Johannesburg. “There are upside risks to that deficit target.”

The kwacha has plunged 46 percent against the dollar this year, the worst performer of 155 currencies tracked by Bloomberg. It rose 0.5 percent to 11.7876 as of 4:20 p.m. in Lusaka.

Chikwanda forecast a rebound in economic growth next year to 5 percent from 4.6 percent in 2015 and called for spending restraint.

Mining Jobs

“It is evident that the expansionary fiscal stance of the past four years will need to be moderated in the current global environment,” he said. “It is in this context that the theme of the 2016 budget is: fiscal consolidation to safeguard our past achievements and secure a prosperous future for all.”

Africa’s second-biggest copper producer has gone from being a favored investor bet three years ago to struggling to retain foreign capital. Mining companies such as Glencore Plc are planning to suspend operations in the country and threatening to cut thousands of jobs.

Even so, Chikwanda forecast a 20 percent jump in revenue next year to 42.1 billion kwacha, mainly through better collection of value-added tax and higher fees and fines. While domestic borrowing is set to drop to 2.5 billion kwacha, or 4.7 percent of the budget, foreign borrowing will almost double to 7.97 billion kwacha, or 15 percent of the budget.

Rating Downgrade

Zambia may struggle to convince market participants it can meet its budget targets. Moody’s Investors Service downgraded the nation’s debt on Sept. 25 to B2, five levels below investment grade, citing elevated fiscal shortfalls of 5 percent to 7 percent of GDP in the next few years. Spending pressures may increase as Zambia heads into an election next year.

“The root of Zambia’s current financial troubles has always rested on the fiscal side with bloated deficits plaguing the country long before the copper price slump and electricity shortages,” Gareth Brickman, an economist at Johannesburg-based ETM Analytics, said in a note to clients before the budget speech. “This key issue going on unaddressed has precipitated the kwacha’s collapse and Zambia’s ballooning external financing costs.”

Zambia’s power crisis has been triggered by falling water levels at Lake Kariba, the world’s largest man-made reservoir that fuels hydro plants supplying almost half of the nation’s electricity. 

To help mitigate the power deficit, Chikwanda proposed an increase in capital allowances for electricity generating equipment to 50 percent from 25 percent, as well as to extend the period for which companies can carry forward losses.

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