We doubt Zambia's 2020 Budget, presented today by the new Minister of Finance, Dr Bwalya Ng'Andu, will be enough to quell investor concerns about the strength of Zambia's fiscal commitment and efforts to restore debt sustainability.
Billed as an austerity budget in advance by President Lungu, amid perhaps belated political recognition that things couldn't continue as they were, it seems like business as usual to us (contrary to para 146, which states "it cannot be business as usual"), and perhaps a wasted opportunity. After preparing the ground for austerity, and expending political capital to do so, it could and should have gone further.
Here are our initial thoughts from reading the budget speech (we stress that the way the budget figures are presented makes a detailed assessment difficult, although more information may be provided in accompanying documents).
- The budget projects a headline deficit (cash basis) at 5.5% of GDP in 2020 (although it would be wider on a commitment basis with the inclusion of arrears). This marks a modest tightening compared with the expected outturn for 2019, which the government expects to be "close" to the 6.5% target. However, we think there are questions as to whether the 2019 target will be met. The IMF 2019 Article IV projected a deficit on a commitment basis of 9% of GDP for this year.
- The government emphasises (rightly) domestic resource mobilisation, albeit it is seemingly not front loaded as measures are to be implemented over the medium term, and precise costings are not obvious to discern.
- The government has decided not to replace VAT with a sales tax, and instead will work to strengthen the existing VAT regime, which we think will be welcomed by the IMF.
- Public spending appears to be 22% higher than the 2019 budget target, an expected increase of about 15% in real terms (and up 3.5ppts of GDP to 32.4% in 2020 from the 28.9% of GDP target in 2019). This doesn't shout austerity. However, figures on the projected 2019 outturn are not provided making this comparison imperfect.
- The budget repeats earlier promises to slow down the contraction of external debt, postpone or cancel some pipeline loans, cease issuance of guarantees and refinance existing loans. However, precise details and figures are not provided.
In all, we've heard a lot of this before and we think the government needed to go further to help repair its shattered fiscal credibility. Importantly, following the IMF's Article IV in July 2019, the government has had some time to review its policy recommendations and set out a bolder approach. Crucially for investors, there is no mention of resuming its interest in an IMF programme or any update on the status of restructuring its bilateral debt to China.
We'll undertake more analysis in due course.