ZAMBIA ECONOMIC BRIEF RAISING REVENUE FOR ECONOMIC RECOVERY DECEMBER 2016 ISSUE 8 8 th Z A M B I A E C O N O M I C B R I E F RAISING REVENUE FOR ECONOMIC RECOVERY December 2016 @ 2016 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved. This report was prepared by the staff of the Macroeconomic and Fiscal Management Global Practice of the World Bank Group. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. Cover design: Katarina Zeravica Photos: World Bank, Zambia and stock images ICONTENTS Acronyms i Foreword ii Acknowledgements iii Executive Summary 1 Section I: Recent Economic Developments 3 A. Regional Economic Developments 3 B. The State of the Zambian Economy 8 C. Economic Outlook, Risks and Policy Challenges 20 Section II: Raising Revenue for Economic Recovery 23 D. Revenue Performance 23 E. Mining Revenue 27 F. Planned Revenue Reforms and Challenges 29 G. Ideas to improve Tax Policy and Revenue Administration 33 References 35 Notes 37 Boxes 1 Large accumulation of spending arrears 13 2 Making every kwacha count 14 3 Zambia Plus 15 4 Who manages domestic revenue? 25 5 Challenges with Property Tax 32 Figures 1 Commodity prices remain well below their 2011 peak 4 2 Fiscal deficits have widened in oil-exporting countries 5 3 Zambia’s Eurobond spreads have improved in 2016 6 4 Growth in SSA countries has slowed 7 5 Drivers of growth 9 6 Copper production has recently held up despite lower prices 10 7 The kwacha has been more stable in 2016 11 8 Inflation has moderated in 2016 12 9 Repeat fiscal deficits 14 10 Trade levels reduced and reserves have fallen 18 11 Growing gap between expenditure and revenue 24 12 How does Zambia’s revenue collection compare? 24 13 Changes in revenue composition Since 2000 25 14 Mining contribution to the Government Budget 27 Tables 1 Quarterly Growth Rates 11 2 Fiscal Table 16 3 2016 and 2017 Budgets 16 4 Zambia’s 2017 Revenue Measures 26 5 Zambia’s Tax Administration Systems 29 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y IACRONYMS BoZ Bank of Zambia CIT Corporate Income Tax CSO Central Statistical Office DfID Department for International Development EFD Electronic Fiscal Devices FDI Foreign Direct Investment FSIP Farmers Input Support Program GDP Gross Domestic Product IFF Illicit Financial Flows IMF International Monetary Fund LCMS Living Conditions Monitoring Survey METR Marginal Effective Tax Rates MInGov Mining Investment and Governance Review MOSES Mineral Output Statistical Evaluation System MVCMP Mineral Value Chain Monitoring Project MW Mega Watts PAYE Pay As You Earn PPP Purchasing Power Parity SACU Southern African Customs Union SSA Sub-Saharan Africa TADAT Tax Administration Diagnostic Assessment Tool US$ United States Dollar VAT Value Added Tax WBG World Bank Group ZDA Zambia Development Agency ZEITI Zambia Extractives Industries Transparency Initiative ZIPAR Zambia Institute for Policy and Research ZMW Zambian Kwacha ZTP Zambia Tax Platform i 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y IFOREWORD I am pleased to share the eighth Zambia Econom- mainly to the richer segments of the population in ic Brief with a focus section on raising revenue for urban areas. Poverty remains far higher for the ru- economic recovery. This Brief is part of a series of ral population than their urban counterparts, and short economic updates produced twice a year by income growth between 2006 and 2015 was great- the World Bank. est among those with higher incomes and relatively weak for those with lower incomes. Each Brief includes two sections: the World Bank’s assessment of recent economic developments and There remains a need to look closely at ways to im- the outlook in the short to medium term, and its prove revenue collection so that economic recovery analysis of a specific development topic or theme. will be expedited, growth itself can be made more Previous Briefs covered opportunities for improving inclusive to support households’ escape from pov- public expenditure, the power sector, mining, jobs, erty, and to ensure that prosperity is better shared trade, and financial inclusion and can be found on in Zambia. the World Bank’s Zambia website. We hope that the findings of this Economic Brief will Zambia has continued to face tough economic con- stimulate a healthy debate around these questions ditions in 2016. Copper prices have improved this so that Zambia can beat the recent slowdown and year, but they remain low when compared to their shift to a path of more inclusive growth. peak. Also, domestic challenges including power outages, tight liquidity, and limited appetite for eco- nomic reform during the first half of 2016 have put downward pressure on growth. Implementation of the 2016 budget has led to a substantial build-up of spending arrears that need to be addressed with a well-thought-out strategy. Ina-Marlene Ruthenberg We also see that the past decade of growth was not Country Manager for Zambia sufficiently pro-poor and the benefits have accrued The World Bank ii 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y IACKNOWLEDGEMENTS The eighth Zambia Economic Brief has been prepared by Gregory Smith and Zivanemoyo Chinzara of the Macroeconomic and Fiscal Management Global Practice, World Bank Group. Inputs for Part II were provided by Srinivas Gurazada (World Bank) and David Child (World Bank Consultant). Richard Stern (World Bank), Congyan Tan (World Bank), Fiona Davies (World Bank Consultant), Alfredo Baldini (IMF) and Annelies Raue (UK’s DFID) provided useful comments. The report was edited and designed by Katarina Zeravica. Ina-Marlene Ruthenberg, the World Bank Zambia Country Manager; Mark Thomas, Practice Manager for Macroeconomic and Fiscal Management Global Practice; and Sebastien Dessus, Program Leader for Zambia, provided overall guidance. Carlyn Hambuba led the dissemination activities with support from Gebisa Chi- sanga, Mofya Mwanalushi and Hellen Mungaila. iii 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y EXECUTIVE SUMMARY Regional economic developments is made with structural reforms identified in the Economic activity in the Sub-Saharan Africa (SSA) 2017 budget. region continues to be subdued in 2016, with GDP expansion expected to stall to its slowest pace in Economic policy challenges over two decades. The region continues to confront To shift to faster and inclusive growth, efforts are tough global conditions; notably low global growth, needed to overcome a set of interlinked economic weak global trade, and low commodity prices. Eco- policy challenges – if progress is made on only some nomic performances remained divergent across of them, and not on others, the desired outcomes countries, with slowdown concentrated in the larg- will not be achieved. The sequencing and co-ordi- est commodity exporters. For countries that have nation of measures are key in 2017 and over the stronger fiscal and monetary policies, a better regu- course of a medium-term economic recovery plan. latory environment, a more diverse structure of ex- ports, and more effective public institutions, growth There remains a need for fiscal and monetary policy remained resilient. to work in tandem for faster growth. What remains critical is that any reduction in the fiscal deficit is The state of the Zambian economy planned and managed carefully. A disorderly and Zambia continued to face slower growth in 2016. incomplete adjustment will not restore market con- Tough global conditions have combined with do- fidence. A too severe or too quick adjustment will mestic challenges including power outages, tight undermine growth. liquidity, and limited appetite for economic reform during the first half of 2016. Implementation of the Responses to the immediate policy challenges can 2016 budget has been characterized by weak com- be grouped as either fiscal measures or structural mitment control and deteriorating budget credibil- measures. ity. As revenues fell below target, Government did not make the necessary expenditure adjustments, Fiscal measures include: resulting in a substantial build-up of arrears. Mon- etary policy has helped moderate inflation and sup- i. the need to urgently set and publish medium- ported exchange rate stability, but at the price of term fiscal targets; an increased cost of borrowing, a low availability of ii. the development of an arrears clearance strat- credit, and a drawdown in reserves, all of which have egy; added an extra drag on growth. The 2017 national iII. efforts to improve debt management; and budget and Economic Recovery Program provide a V. enhanced revenue mobilization (the focus of good framework to support a return to faster and Section II of this report). more inclusive growth. Structural measures include the need to fast-track Zambia’s economic outlook electricity sector reforms and ensure policies de- Given the tough global conditions for growth and signed to boost the non-copper economy get im- domestic challenges, GDP growth is forecast to plemented. The forthcoming National Development remain close to 3.0% in 2016, before improving in Plan should cement the reform direction, especially 2017 (4.0%) and 2018 (4.2%). The 2017 forecast as- in agriculture – a leading non-copper sector. How- sumes progress with the economic recovery plan, ever, efforts are needed to remove constraints to a better electricity situation than in 2015/2016 and the necessary structural reforms. For example, improved copper exports. For the medium term, it many legislative changes are required, but there is a assumes even higher copper production, that cop- bottle-neck in getting new laws passed. per prices will recover marginally, and that progress 1 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Part II: Raising Revenue include the TaxOnline system, more enforcement Revenue performance measures and audits, and the recent introduction Both public spending and revenues have grown of Electronic Fiscal Devices to link retailers directly considerably since 2010, but in recent years the with the Zambia Revenue Authority (ZRA). pace of expenditure has exceeded that of revenue. If current levels of government expenditure are to Ideas to improve tax policy and revenue admin- be maintained in a sustainable manner, then higher istration domestic revenue collections are essential. After ten There are two key areas on which Government is years of rapid growth, Zambia has emerged from working. The first is on improving tax policy, which being a country with a high aid dependency to one falls under the responsibility of the Ministry of Fi- where in 2015, grants provided just 1.4% of revenue nance, and the second is on improving tax admin- compared to 98.6% from domestic revenues. istration, which falls under the responsibility of the ZRA. Mining revenue The absence of good data on mining companies Three important studies for 2017 to inform tax pol- has helped support a common perception that icy are: not much revenue is being collected from them in Zambia. The reality is that the mining sector (which i. a tax gap study; includes quarrying and cement production) contrib- ii. a tax exemptions analysis; and uted ZMW 8.8 billion in 2014, equivalent to 28% of iii. a Marginal Effective Tax Rates (METR) study, total domestic revenue, up from ZMW 7.7 billion in aimed at understanding whether the revenue 2013 and ZMW 7.6 billion in 2012. There remains gains from a marginal tax increase would out- a pressing need for an improved flow of informa- weigh the potential loss of revenue. tion and transparency to ensure the contribution of the sector is better understood. Efforts are also Four ideas for improving tax administration are as needed to improve the monitoring of the country’s follows: mineral value chain from exploration to export, and to ensure that at the given rates, Zambia collects the i. develop a strategy to increase tax compliance; revenues it is due. ii. scaling up taxpayer-focused public education campaigns; Planned revenue reforms and challenges iii. design and build an effective system for property There have been many revenue-related reforms tax; and over the past few years, and some are still ongoing v. further support efforts to improve monitoring of or planned for the future. The reforms are aimed the country’s mineral value chain from explora- not only at increasing revenue collection, but also tion to export ensuring that collection is efficient and free from corruption. A recent assessment cites compliance as one of the weakest areas in Zambia’s tax admin- istration system. Key efforts to tackle this problem 2 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y 1 RECENT SECTION ECONOMIC DEVELOPMENTS A. REGIONAL ECONOMIC DEVELOPMENTS Economic activity in the SSA region continues to be subdued in 2016, with GDP expansion expected to stall to its slowest pace in over two decades. The region continues to confront tough global con- ditions; notably low global growth, weak global trade, and low commodity prices. Economic perfor- mances remained divergent across countries, with slowdown concentrated in the largest commodity exporters. For countries that have stronger fiscal and monetary policies, a better regulatory environ- ment, a more diverse structure of exports, and more effective public institutions, growth remained resilient. The World Bank’s Africa’s Pulse highlights the continued fragility of the global economic Economic activity environment facing SSA1. Global GDP growth is projected to decline to 2.3% in 2016 in Sub-Saharan from 2.6% in 2015 on the back of weak global trade, poor productivity performance and Africa has stalled raising policy uncertainty. As a result, economic activity in SSA has stalled significantly, significantly, with GDP growth projected to decline to 1.6% in 2016, from 3.0% percent in 2015; the with GDP growth slowest growth rate of the region in over two decades. projected to decline to 1.6% in Weak global growth affects SSA through three channels; notably low commodity prices, 2016. reduced trade, and rising costs of borrowing. This has been the case since 2015, and the region’s commodity-exporting countries and countries that depend on external borrowing and capital flows have been hit hardest. The situation has been exacerbated by domestic headwinds from policy uncertainty, droughts, weak policy buffers, and po- litical and security concerns which continued to weigh on activity across the region. The slowdown in growth implies that GDP per capita will contract by 0.7% in 2016, further complicating the challenge of accelerating poverty reduction in the region. In the first nine months of 2016, commodity prices have recovered some ground al- Commodity prices though they remain far below their recent peak (figure 1). Oil prices rose by 36.9% in Q2 have experienced 2016 relative to Q1 on the back of supply disruptions, and then a further 2.6% between some recovery but remain well below July and October 2016. Meanwhile, copper prices rose by 1.3% in Q2 2016 and a further their previous 0.9% between July and October 2016. However, they climbed 14% to US$5,549 per ton peak. in the first three weeks of November 2016, buoyed by speculation about increased in- frastructure spending in the USA, improved manufacturing production numbers from China, and speculative buying. Non-energy commodity prices rose 7% in Q2, led by ag- riculture. Despite recent improvements, the average prices of all commodities in 2016 remain below those for the corresponding period in 2015, except for gold. 3 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Figure Commodity prices remain well below their 2011 peak 1 Cumulative % Change to Index, 2010 = 100 Nigeria and 30 South Africa, the region’s two 15 largest economies, have been the key drivers of the 0 growth slowdown. -15 -30 Average Jan-Dec 2014 -45 Average Jan-Dec 2015 Average Jan-Oct 2016 -60 -75 Crude oil Copper ($/mt) Gold ($/troy Platinum Iron ore ($/bbl) oz) ($/troy oz) ($/dmtu) Source: World Bank Commodity Markets Data Countries that Regional aggregates disguise divergent economic and growth performance across Af- remained resilient rican countries. Nigeria and South Africa, the region’s two largest economies, which to a weak jointly account for 50% of its GDP, have been the key drivers of the growth slowdown. global growth Nigeria, the region’s largest oil exporter, fell into recession in the first half of 2016. GDP environment have contracted by 0.4% (year-on-year) in Q1 2016, followed by a further contraction of 2.1% stronger fiscal and in Q2 2016. Furthermore, the composite Purchasing Managers Index (PMI) fell to a re- monetary policies. cord low of 46.3 in August 2016, remaining below the 50-mark and suggesting that the contraction will continue through the second half of 2016. In South Africa, a declining mining sector and poor rains led to a GDP contraction of 0.1% in Q1 2016, although growth since then has picked up following improved performance in manufacturing and financial services. Elsewhere, growth continued to stall in oil-exporting countries (e.g. Angola, Chad, Ga- bon, and Equatorial Guinea). Non-energy mineral exporting economies, including Bot- swana, the Democratic Republic of Congo, Guinea, Liberia, Sierra Leone, and Zambia have also continued to struggle, despite benefiting from lower oil prices. In some coun- tries domestic challenges amplified the impact of external headwinds. For example, El Niño-related poor rainfall in the 2014-15 and 2015-16 seasons curtailed agricultural production and hydroelectricity generation across the Southern African region. Despite a slowdown of the regional economy, some countries continued to experience robust GDP growth. These include Cote d’Ivoire, Ethiopia, Rwanda, Uganda, Tanzania, and Senegal. According to the World Bank’s Africa’s Pulse (October 2016), most coun- tries that remained resilient to a weak global growth environment have stronger fiscal and monetary policies, a better regulatory environment, a more diverse structure of exports, and more effective public institutions. Recent improvements in commodity prices have not been large enough for commodity exporters to rebuild their eroded policy buffers. Consequently, internal and external imbalances are expected to remain elevated in most commodity-exporting economies. Furthermore, capital inflows into the region have stalled, indicating tightening external financing conditions. This has put pressure on the balance of payments. With tight fi- nancing conditions, increased external strains have been met, in part, by reserve draw- downs to support currencies. This has substantially weakened the reserve positions across commodity-exporting economies. In 2016, currencies in the region have continued to perform differently. The currencies of Angola, Mozambique, and Nigeria weakened substantially, while South Africa and Zambia have strengthened. Exchange rate pass-through to prices is high in the SSA re- gion.2 Consequently, inflation has increased in countries where currencies weakened, 4 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y and declined in countries where currencies appreciated or remained stable (including Ghana, Kenya, South Africa, Uganda, and Zambia). Compounding the external pressures, Compounding the external pressures, fiscal positions continued to be weak across the fiscal positions region. This is particularly so in oil exporters where the fiscal deficit is expected to widen continued to be to 4.8% of GDP in 2016 from 4.2% in 2015 on the back of declining revenues (figure 2). weak across the In Nigeria, the fiscal deficit is projected to widen by more than a third from the 2.8% of region. GDP recorded in 2015. In Angola, Chad, and Equatorial Guinea, fiscal consolidation re- forms began in 2015, but were abandoned in 2016 leading to further fiscal slippage. In Cameroon, Chad, and South Sudan, no adjustments were made and public expenditure continued to rise despite falling revenues. The fiscal deficit is expected to narrow to 4.4% of GDP in 2016 from 6.6% in 2015 in metal and mineral exporters (figure 2). This is because some countries undertook fiscal and structural reforms to cut expenditure and increase revenue. These include Benin, Botswana, Guinea, Namibia, Niger, Senegal, and South Africa. By contrast, in sev- eral commodity importers whose GDP growth remained strong, fiscal policies have not been sufficiently countercyclical, and as such, fiscal deficits have either remained high (Kenya, Zambia, and Togo) or widened (Ethiopia, Mali, Rwanda, and Uganda). Figure Fiscal deficits have widened in oil-exporting countries The fiscal deficit 2 Fiscal Fiscal Deficit Defiit (% (% GDP) GDP) is expected to 0% narrow for metal and mineral exporters, because -1% some countries undertook fiscal -2% and structural reforms. -3% -4% -5% 2013 2014 -6% 2015 2016f -7% Oil Exporting Countries Metal and Mineral Exporters Sub-Saharan Africa Source: World Bank (2016): Africa’s Pulse (October 2016) Large fiscal deficits, non-concessional borrowing, and weakened currencies have con- tributed to the rising debt levels, while debt ratios in 2015 were well above the levels In 2016, debt ratios in 2011–13. In 2016, debt ratios either remained elevated or further increased across either remained many countries in the region, which has eroded fiscal space. elevated or further increased across Market access has dropped significantly across the region in 2016. As of end-November many countries. 2016, only Ghana, Mozambique, and South Africa had tapped international debt mar- kets. Low Eurobond issuance was, in part, due to the increased cost of borrowing for many sovereigns between July 2015 and January 2016, as a result of uncertainty about government policies and a slowdown in the economies. However, sovereign spreads have declined (especially in Ghana and Zambia) since February 2016 (figure 3). The de- cline is on account of improved conditions in global financial markets since March 2016 and better prospects for domestic reform. 5 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Figure Zambia’s Eurobond spreads have improved in 20163 3 Daily Sovereign Spreads Africa Ghana 1,250 Namibia Nigeria South Africa Zambia 1,000 750 500 Market access has dropped 250 significantly across the region in 2016. 0 Source: Bloomberg Outlook for Sub-Saharan Africa The outlook for 2016 is expected to remain somber, reflecting the effects of weak global growth, low commodity prices, and tough domestic conditions. The growth projection for 2016 has been halved to 1.6% from 3.2% since the March 2016 issue of the World Bank’s Africa’s Pulse (figure 4). Beyond 2016, GDP expansion is expected to improve in 2017 (2.9%) and 2018 (3.6%). Growth rates will continue to be divergent across the region. After contracting in 2016, Nigeria’s economy is expected to improve moderately in 2017 and 2018 on account of fiscal expansion, increased oil production, and improved For- eign Direct Investment (FDI) inflow following a shift to a flexible exchange rate regime. South Africa is expected to encounter a sluggish medium-term recovery due to policy uncertainty, structural issues, and an unstable power supply. Beyond these two of Africa’s biggest economies, recovery is expected to be slow in oil- exporting economies due to low oil prices and declining oil production resulting from maturing oil fields. For oil importers such as Kenya, Rwanda, Senegal, and Tanzania, Beyond 2016, growth is expected to remain robust, supported by public investment. Sources of financ- GDP expansion ing for these public investments have varied from public-private partnerships (Rwanda) is expected to to donor aid (Rwanda and Tanzania) and Chinese entities (Ethiopia). Political uncertainty improve in 2017 in the Democratic Republic of Congo, Burundi, Comoros, and Zimbabwe, and political (2.9%) and 2018 instability in South Sudan, are expected to exert a drag on growth in the medium term. (3.6%). Net exports are expected to make a negative contribution to real GDP growth in the near term. Commodity prices at current levels will keep export receipts depressed, es- pecially among oil exporters, even as export volumes rise in some countries. Moreover, balance of payments, reserves and fiscal revenue of commodity exporters will remain under pressure from low commodity prices. Reflecting on these challenges, and given the increased cost of external private financ- ing, commodity exporters may need to make further fiscal adjustments, notably cutting inefficient expenditure and undertaking structural reforms to boost non-commodity fis- cal revenue. In the event that the recovery of commodity prices is faster than expected, these countries should prioritize on building their eroded policy buffers before any fur- ther fiscal expansion. 6 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Growth in SSA countries has slowed Figure 10% 4 9% Sub-Saharan Africa Balance of payments, reserves 8% Sub-Saharan Africa excl. SA and Nigeria and fiscal revenue Zambia of commodity 7% exporters will remain under 6% pressure from low 5% commodity prices. 4% 3% 2% 1% 2009 2010 2011 2012 2013 2014 2015 2016f 2017f Source: World Bank (2016): Africa’s Pulse (October 2016) and World Bank projections. Note: f= forecast. The balance of risks to the outlook remains slightly tilted to the downside. The global risks include: i. a sharper than expected slowdown in China (as the country rebalances growth to ward consumption and services), ii. political uncertainty following Brexit and the results of the USA election, and iii. an earlier-than-anticipated tightening cycle in the USA and the Euro Area which could trigger a strong decline in capital flows to emerging and frontier markets of SSA, leading to increased sovereign spreads and the volatility of heavily traded cur- rencies. On the domestic front, delays in adjustment to external shocks in affected countries would create policy uncertainties that could weigh on investor sentiment and weaken the recovery. For most countries in the region, adjusting to the low commodity prices will need to include stronger efforts to strengthen domestic resource mobilization to reduce the overdependence on revenue from the resource sector. 7 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y B. THE STATE OF THE ZAMBIAN ECONOMY Zambia continued to face slower growth in 2016. Tough global conditions have combined with do- mestic challenges including power outages, tight liquidity, and limited appetite for economic reform during the first half of 2016. Implementation of the 2016 budget has been characterized by weak commitment control and deteriorating budget credibility. As revenues fell below target, Government did not make the necessary expenditure adjustments, resulting in a substantial build-up of arrears. Monetary policy has helped moderate inflation and supported exchange rate stability, but at the price of an increased cost of borrowing, low availability of credit, and a drawdown in reserves, all of which have added an extra drag on growth. The 2017 budget and Economic Recovery Program pro- vide a framework to support a return to faster and more inclusive growth. Slower growth has persisted in 2016 Zambia has faced tough global and domestic conditions for growth since mid-2015. Real GDP grew at a lackluster 2.9% in 2015 (figure 5), well below the average growth of 7.4% experienced between 2004 and 2014. This recent rate of expansion is also just above population growth, meaning that on average, Zambia’s per capita income growth has been flat. The tough conditions have continued in 2016 and real GDP growth is expected to remain close to 3.0% (figure 5) as both external headwinds and domestic pressures remain. The tough conditions have The external headwinds include slower regional and global growth, and volatility in the continued in 2016 US dollar (US$) and investor appetite for emerging and frontier market investment. and real GDP The free fall in the copper market has stabilized in 2016, but prices remain far below growth is expected their 2011 peak. Domestic pressures relate to a lack of liquidity and confidence in the to remain close to economy, low availability of credit, and high costs of borrowing. 3.0%. The impact of the power crisis moderated in mid-2016, as emergency power was im- ported at a high cost and hydroelectric reservoirs recovered after late rains. However, in October 2016, power outages of 8 hours per day returned, reducing the productivity and output of businesses in all sectors. Double digit inflation and the rapid deprecia- tion of the kwacha in 2015 have now been stemmed, but they have left the cost of many domestic and imported goods high and subject to lower demand. For a deeper understanding of the 2015 and 2016 economic pressures in Zambia see: ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Economic Recovery’ (September 2016)4. Despite the lower copper prices, copper production picked up slightly during the first three quarters of 2016, due to an easing in electricity supply constraints and scaled-up production at the Sentinel copper mine (opened in August 2015). In this period how- ever, growth in the services and non-mining industries stalled following tough credit Despite the lower conditions imposed by a tight monetary policy and an erratic electricity supply. A slow- copper prices, down in services and non-mining industries has a significant impact on overall growth copper production because these two industries jointly contribute 80% to GDP. picked up slightly during the first The agriculture sector has contributed positively to growth in 2016, albeit marginally. three quarters of 2016. During the 2015-16 farming season, rains came later than expected but were above average in early 2016, leading to improved production for several crops. Maize pro- duction increased by 9.7%, soya beans by 8.7%, sunflowers by 75.9%, and sorghum by 73.7%. Meanwhile, in the fisheries sector, aquaculture production went up by 12.1% due to the adoption of better methods of fish production (e.g. cage commercial fish farming).5 8 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Figure Drivers of growth During the 2015-16 5 8% farming season, rains came later 6% than expected but were above 4% average in early 2016, leading 2% to improved production of several crops. 0% -2% -4% 2011 2012 2013 2014 2015 2016f Agriculture Mining Non-mining industry Services GDP growth Source: Ministry of Finance Much slower growth in non-mining output in 2016 relates to domestic challenges such as power outages, reduced demand, and low of availability of credit. Non-mining in- dustry consists of construction, manufacturing, electricity and gas, and water and sew- The construction erage management. The construction sector constitutes half of non-mining industry sector is expected GDP, and in 2015, the sector grew by 18.0% as a result of increased public sector to expand much infrastructure investments. However, public infrastructure investments have shrunk by slower than last half over the first three quarters of 2016, relative to the corresponding period in 2015. year, thereby Furthermore, Government has not yet paid many construction contractors for projects dragging down completed last year. As a result, the construction sector is expected to grow much the contribution more slowly than last year, thereby dragging down the contribution of non-mining in- of non-mining dustry to economic growth. industry to growth. Meanwhile, the electricity and gas sector, which contributes almost 10% to non-mining industry output, contracted in 2016. During the first half of 2016, electricity production was just 75% of the level produced in the same period the previous year. This expected contraction is in spite of the launch of new power generation at Maamba Colliers (150 MW output so far from a possible 300MW) and the Itezhi-Tezhi hydro-power plant (capable of generating 120 MW). Reduced electricity production is linked to low hydro- electric generation from the country’s main hydro-reservoirs, where 90% of electricity is generated. Lower rainfall in the 2014-15 season exacerbated the situation, but faster water use following the installation of peak turbines at Kariba Dam in 2014 has been a key factor leading to the lower water levels6. To manage the electricity deficit, Government continued 8-hour rolling daily power cuts between July 2015 and May 2016. This was reduced to 4 hours per day following The services sector improved water inflows to hydro-power reservoirs and increased electricity imports. has struggled in 2016 following However, since October 2016, 8 hours per day load-shedding returned following main- increased costs tenance work aimed at upgrading transmission lines, issues with the 48 MW generation of borrowing, plant operated by Ndola Energy Company Limited, and reductions in generation from the electricity Kafue Gorge and Kariba Dam to prevent the water from falling below critical levels. crisis, and slower consumption The services sector has been an important driver of growth over the past ten years, and growth combined the greatest contributor to national income. The sector has struggled in 2016 follow- with high inflation. ing increased costs of borrowing, the electricity crisis, and slower consumption growth combined with high inflation. For example, the wholesale and retail trade sector con- tributes 40% to the services sector’s output, but has experienced a decline in sales in 2016. A recent monetary policy update by the Bank of Zambia (BoZ) suggests that consumer spending declined by 6% in Q3 2016 on account of tight credit conditions.7 Growth of the financial sector has been constrained by a tight monetary policy. Simi- larly, the transport sector declined following weak economic performance across other sectors of the economy. 9 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Copper production Some sectors of the services industry have continued to grow. This was the case for the picked up by 8.3% information and communication sector, where the number of mobile subscribers and to 575,014 metric internet users increased by 6.6% and 22%, respectively. Moreover, tourism received tons in the first a boost from various international conferences held in Zambia, leading to a 4.7% in- three quarters of crease in international passenger movements during the first nine months of 20168. 2016. Copper production picked up by 8.3% to 575,014 metric tons (mt) in the first three quarters of 2016, from 531,140 mt in the corresponding period in 2015. This was on the back of improved production at the Kalumbila, Kansanshi, Konkola and Lumwana copper mines9 (figure 6). However, production declined at the Mopani copper mine following the suspension of activities from 2015 to allow for refurbishment and the completion of expansion projects. The improved performance of the mining sector followed an easing of domestic constraints, particularly electricity. Electricity plays a strategic role in mining, while the sector consumes 54% of power supply in Zambia. The improved copper production came in spite of copper prices remaining well below their 2011 peak. In January 2016, copper prices were at US$4,471 per mt, 54.7% lower than their peak in February 2011 (their lowest since April 2009). However, since Febru- ary 2016, copper prices have recovered to US$4,726 per mt in October 2016 (figure 6). Copper prices also experienced rapid gains in November 2016 with the rally following speculative buying after the outcome of the US elections and better manufacturing data from China. Despite the 2016 gains however, average copper prices have in 2016 remained below the corresponding period in 2015. Consequently, the US$ value of copper exports in the first three quarters of 2016 was 10.4% lower than the same pe- riod in 2015, despite higher production. Figure Copper production has recently held up despite lower prices Between January and end-November 6 Domestic Copper Production, MT (LHS) 9,000 95,000 2016, the kwacha World Copper Price, US$/MT (RHS) 8,500 has appreciated by 8,000 12.3% against the 85,000 US$. 7,500 75,000 7,000 6,500 65,000 6,000 55,000 5,500 5,000 45,000 4,500 35,000 4,000 Source: Central Statistical Office and World Bank Pink Sheets A key recent development has been the publication of a quarterly GDP series that pro- vides insight into past economic sectoral trends and will in future provide an in-year measure of economic performance, if it is calculated and published without too much of a lag (table 1). 10 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Tight monetary Table Quarterly Growth Rates policy measures 2014 2015 2016e contributed to the 1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1e strengthening and Agriculture, forestry and fishing 1.7 -0.6 -0.2 2.5 -8.5 -7.8 -6.1 -7.7 3.0 stability of the Mining and quarrying 3.5 -10.1 -0.7 -2.4 -4.7 17.1 -2.0 -6.1 7.9 kwacha. Manufacturing 9.4 11.6 0.4 5.3 5.2 1.8 8.7 6.2 1.1 Electricity 4.1 1.4 0.7 1.7 8.8 7.2 -2.9 -18.9 -15.4 Construction -6.5 15.3 10.7 22.2 37.4 20.5 3.8 15.4 9.1 Wholesale and retail trade 0.3 5.6 8.1 -0.1 1.0 -0.6 5.2 0.1 0.4 Financial and insurance activities 7.2 19.3 14.2 20.0 4.0 7.1 21.2 15.4 5.1 GDP Growth 2.7 5.3 5.3 5.5 3.9 2.8 4.2 0.9 3.1 Source: Central Statistical Office The kwacha has stabilized and slightly appreciated in recent months The kwacha has continued to fluctuate against its major trading currencies, but was stronger and less volatile in the first nine months of 2016 compared to 2015 (figure 7). Between January and end-November 2016, the kwacha has appreciated by 10.4% against the US$, 13.2% against the Euro, and 2.1% against the South African Rand. Four factors have contributed to the strengthening and relative stability of the kwacha. First is tight monetary policy measures introduced by the BoZ in November 2015, which continued to have an impact on the market during 2016. Second is reduced demand for imported goods, resulting in less demand for foreign currency. Foreign currency in- flows in the first half of 2016 were US$397 million, 20.3% less than the level in the same period in 201510. Third is the return of foreign interest in kwacha-denominated bonds at the August 2016 auction. Fourth is a perception that the economy has weathered the toughest part of the shocks and that an IMF-supported economic recovery plan is likely. After reaching a peak of 22.9% in February 2016, Figure The kwacha has been more stable in 2016 inflation declined 10% each subsequent 7 month until it reached 8.8% in -10% November 2016. -30% -50% -70% US$ -90% Euro Rand -110% 07-Aug-15 20-Dec-15 16-Aug-16 22-Aug-15 01-Aug-16 31-Aug-16 05-Dec-15 23-Feb-15 08-Feb-15 21-Oct-15 03-Feb-16 18-Feb-16 15-Oct-16 06-Oct-15 30-Oct-16 06-Sep-15 20-Nov-15 15-Sep-16 14-Nov-16 08-Jun-15 08-Jul-15 23-Jun-15 23-Jul-15 05-Nov-15 02-Jun-16 17-Jul-16 21-Sep-15 17-Jun-16 02-Jul-16 30-Sep-16 03-May-16 09-May-15 24-May-15 18-May-16 24-Jan-15 19-Jan-16 09-Jan-15 25-Mar-15 24-Apr-15 04-Jan-16 04-Mar-16 03-Apr-16 10-Mar-15 09-Apr-15 19-Mar-16 18-Apr-16 Source: Bank of Zambia Food inflation has Tight monetary policy has tamed inflation to near single digits been the main After reaching a peak of 22.9% in February 2016, annual inflation declined each sub- driver of overall sequent month until it reached 8.8% in November 2016 (figure 8). Although monthly inflation. inflation increased to 1.5% in November 2016, following the increase in fuel prices in October 2016. Food inflation has been the main driver of overall inflation. It remained above 20% between November 2015 and September 2016, but also declined to single digits in 11 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y November 2016 (9.2% year-on-year). Unlike food inflation, non-food inflation never breached the 20% mark. Its peak was 19.1% in February 2016, and it has since declined to reach single digits, namely 8.3% in November 2016. While tight monetary policy Lower inflation means that prices in Q4 2016 are increasing at a slower rate. However, has helped to many basic household and food items remain expensive, following the recent bout reduce exchange of higher inflation, tightening the budget constraints faced by households, particularly rate volatility and the poorest. During the year to November 2016, the price of breakfast maize meal moderate inflation increased by 16.7%, roller maize meal by 19.5%, tomatoes by 49.5%, onions by 25.5%, in 2016, it has not been without cost. and sugar by 31.7%11. Figure Inflation has moderated in 2016 8 Inflation rate BoZ policy rate 25% Ave. interbank rate Avg. T-Bill rate 20% 15% 10% Real interest rates fell sharply following the 5% Jan-14 Nov-14 Jan-15 Nov-15 Jan-16 Nov-16 Mar-15 Mar-14 Mar-16 May-14 Jul-14 May-15 Jul-15 May-16 Jul-16 Sep-14 Sep-15 Sep-16 increase in inflation, dropping from 13.1% in Source: Bank of Zambia September 2015 to 2.7% in December While tight monetary policy has helped to reduce exchange rate volatility and moder- 2015. ate inflation in 2016, it has not been without cost. Low liquidity has made it difficult to borrow at a time when the growth of the economy is slowing and firms are facing other domestic challenges (e.g. the power crisis). Total credit extension was US$8.0 billion in the first three quarters of 2016, compared to US$8.5 billion in the same period in 201512. Meanwhile, the ratio of non-performing loans to total loans increased to 11% in June 2016 from 10% in March 2016. The most severe impact of the liquidity squeeze has reportedly been on small and medium size firms13. The BoZ has in November 2016 responded to falling inflation by introducing some measures to ease liquidity, but has kept the reserve ratio, and policy and overnight lending rates unchanged. The liquidity measures include removing a once-a-week limit on commercial banks’ access to the BoZ’s overnight lending facility, ensuring that any intra-day credit automatically becomes an overnight loan, thus allowing banks to calcu- late their reserve ratio using weekly and not daily averages . These measures will help alleviate pressures on firms, reduce financial sector risks, and increase appetites for domestic paper. Underperformance in domestic Real lending rates fell sharply following the increase in inflation, dropping from 13.1% revenues was in September 2015 to 2.7% in December 2015. They have been recovering since March driven by VAT 2016, but still remained below 10% in October 2016. Real deposit rates have been (below target by negative since 2011, and following the spike in inflation, they fell by a larger magni- 22%) and customs and excise (below tude than the lending rate, leading to an increase in the lending spread. High lending target by 18%). spreads have been a disincentive for savings. The fiscal deficit has remained wide in 2016 and arrears have built-up The collection of domestic revenue reached ZMW 30.1 billion in the first three quarters of 2016, against a target of ZMW 31.6 billion. The slight underperformance in domestic revenues was driven by VAT (below target by 22%) and customs and excise (below tar- 12 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y get by 18%). VAT was below target on account of lower collections and higher than pro- jected refund claims, while customs and excise duties were below target due to lower imports. Contrastingly, income tax performed slightly above expectation (by 1.9%) due Implementation to improved compliance. of the 2016 budget has been The 2016 national budget set an ambitious target for non-tax revenue. At first glance, characterized by non-tax revenues appear to have performed well, at 9% above target (January to Sep- weak commitment tember 2016). However, these figures include a one-off dividend of ZMW 4.1 billion control and from the BoZ to Government, linked to the 2015 Eurobond. If only 2016 revenue deteriorating budget credibility. streams are considered, then the non-tax sources would have provided just 62% of their targeted revenue. Further information on revenues is provided in Section II: Rais- ing Revenue for Economic Recovery of this Economic Brief. While revenue collections were just a little below what was targeted in the 2016 budget, there has been considerable pressure on Government’s cash flow. Implementation of the 2016 budget has been characterized by weak commitment control and dete- riorating budget credibility. Although Government wage bill expenditures were only 88% of budgeted levels over the first nine months of the year, this could not prevent the need to make cuts to goods and services expenditure across spending agencies of 20% on average. Government’s social cash transfer program, one of the key means in which it can support the poorest households, was also subject to severe cuts. After nine months of 2016, only 43% of budgeted resources had been received. Furthermore, multi-year commitments to infrastructure spending, especially for the construction of roads, could not be honored and public investment expenditure fell to half the budgeted level between January and September 201615. This has stalled many multi-year projects in 2016 and several contractors, especially in the road sector, are awaiting payment. The expenditure pressures came in the form of election expenditures (budgeted for), an unbudgeted US$350 million fuel subsidy that averaged US$39 million per month in the first nine months of 2016, and an unbudgeted US$100 million subsidy to keep the price of electricity constant as expensive emergency power was imported. With insufficient cash available to meet planned expenditures, there has also been a huge build-up of unpaid bills or arrears, as central systems to control commitments in line with cash availability have been lacking (box 1). The IMF in November estimated that the stock of arrears would increase by ZMW 10 billion in 2016 to approximately 9% of GDP16, although the Ministry of Finance followed this statement by suggesting that a verification process is required to ensure all payment claims are valid. Box Large accumulation of spending arrears 1 Arrears had previously been an issue in Zambia, but until recently the situation had improved. For example, arrears reached an average of 12% of annual expenditure between 2002 and 200417, but were brought back under control and fell to just 1.9% of expenditure in 2009. Arrears increased again to 4.3% in 2011, and since then have re-emerged in large amounts. By the end of 2015, the stock of arrears had increased to approximately ZMW 10 billion (equivalent to al- most 20% of spending). In 2016, the stock is estimated to have doubled to ZMW 20 billion18. The arrears build-up in 2016 is largely due to the late payment of road contractors, Government’s pension contribu- tions, and delayed payments for imported fuel and electricity. There are also unpaid VAT refunds that have been excluded from the ZMW 20 billion estimate. In addition, arrears attract interest costs, leading to Government paying increased interest bills. Arrears can also affect the broader economy by reducing the credit worthiness of government suppliers, which in turn imposes difficulties in accessing credit, thus reducing economic and employment growth. Zambia can work to reduce the accumulation of arrears by strengthening the legal and regulatory frame- work relating to commitment control, improving budget credibility, strengthening the oversight of state- owned enterprises, ensuring the full implementation of the IFMIS, and ensuring that the Treasury Single Account moves from being a statement to concrete action.19 13 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Government expects the fiscal deficit, on a cash basis, to end 2016 at around 3% of The fiscal deficit, GDP20. To fill this gap between revenue and expenditure, Government has borrowed on a commitment from the BoZ as it has faced difficulty in raising other domestic and external financing21. basis (cash This appears to be a smaller deficit than in recent years (figure 10), but when the addi- plus arrears), is tion to arrears stock is also considered, the fiscal deficit, on a commitment basis (cash expected to end plus arrears), is expected to reach approximately 10% of GDP. 2016 at around 10% of GDP. Figure Repeat fiscal deficits 9 Revenue and Grants Expenditure %GDP Fiscal deficit (cash basis) Fiscal deficit (including arrears) 25% 20% 15% 10% 5% 0% -5% The growth of -10% -10.0% expenditure has -10.3% -15% been accompanied 2012 2013 2014 2015 2016f by concerns about the quality of the Source: Ministry of Finance and World Bank projections. expenditure. The growth of expenditure has been accompanied by concerns about the quality of the expenditure22. For example, there have been reports by the Auditor General’s depart- ment of increasing levels of wasteful expenditure (box 2), while public investment ex- penditure has been scaled up without building the necessary systems to manage pub- lic investment effectively. Systems for prioritizing and appraising projects are needed to ensure the best project proposals are being selected, taking economic and social – as well as political – returns into account. Further, financial planning and monitoring is needed to ensure that once active, projects are implemented at the expected cost, on time, and at the required quality. Box Making every kwacha count 2 According to the 2015 Auditor General’s report released in October 2016, wasteful spending in- creased by 59.6% (in nominal terms) to ZMW 879 million (or 2.0% of the total actual spending) from ZMW 550 million in 2014. The wasteful spending included government payments made without a payment voucher, irregular payments and payments where goods and services were not delivered, failure to account for revenue, failure to follow procurement procedures, wasteful payments, and overpayments. This is for a second successive year that wasteful spending has risen following a 102.6% increase in 2014. The report also points to issues including outstanding arrears, failure to meet revenue targets on individual tax types, failure to recover domestic tax debt and failure to collect ground rent among others.23 The Economic Recovery Program and 2017 budget Large fiscal deficits and inefficiencies in government spending have persisted as sourc- es of vulnerability for Zambia as the economy slowed down. In 2015, fiscal policy was too loose and monetary policy had to shoulder the burden of adjustment, putting a strain on the financial sector and business across the country24. A better balance be- tween fiscal and monetary policy had been required for faster growth. Austerity meas- ures had been announced in November 2015 to strengthen the fiscal position and help Government meet its targeted fiscal deficit, but they were either not put in place or were reversed. All the focus was on the August 2016 elections instead. 14 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y To support economic recovery, the Minister of Finance launched Government’s eco- nomic recovery program on October 20, 2016. The plan was dubbed ‘Zambia Plus’ because it is being led by Zambia with support from cooperative partners (box 3). The first bold action was to remove the costly subsidy on fuel prices by increasing the pump prices for petrol, diesel and kerosene for the first time since July 2015. This subsidy was mostly of benefit to the richest segments of society, and had become a huge drain on resources, crowding developmental expenditure, including in key sectors such as health and education25. Box Zambia Plus 3 The economic recovery program targets five pillars: Pillar 1: Moving back to a sustainable fiscal path by improving domestic resource mobilization (by strength- ening tax policy and administration), and cutting (and reforming) expenditure on subsidies and reallocating it towards productive sectors as well as to poor households. Pillar II: Increasing allocation to social protection including to pensioners to ensure a soft-landed transition to cost-reflective pricing. Pillar III: Cutting wastage through improved economic and fiscal governance by improving transparency and enforcing more punitive measures to abusers of public funds. Pillar IV: Improving budget credibility: Over the past few years, the variation of actual expenditures from the planned level has been as high as 25%, leading to over-spending in some budget lines, especially subsidies, and under-spending in others, particularly social protection. Pillar V: Promoting greater economic stability to boost market confidence and reduce constraints to pri- vate sector development, for example, by investing in energy and transport infrastructure; reducing costs of doing business; facilitating better access to credit; clearing arrears and diversifying the economy. The expectation was that the 2017 budget, guided by the ‘Zambia Plus’ plan, would be an austerity budget, where the amount of expenditure would be reduced26. However, 2017 expenditure is set to increase to ZMW 61.4 billion from ZMW 50.4 billion budg- Despite new eted for in 2016. Despite new revenue measures to help fund this expenditure, a fiscal revenue measures deficit of 7% is planned for in 2017 (on a cash basis) (tables 2 and 3). to fund this expansion of If no new arrears are generated, this plan would see a reduction of the fiscal deficit on expenditure, a a commitment basis from the 10% of GDP expected in 2016. The pace of fiscal adjust- fiscal deficit of 7% ment has been timed to limit any impact on growth in 2017, and to tackle the huge is planned for in build-up of arrears. 2017 (on a cash basis). The Minister of Finance stressed the need to curb the accumulation of arrears and to start dismantling the stock. It is for this reason that there will not be a larger reduction in the fiscal deficit in 2017 on a cash basis). The plan hints at a move to ‘fiscal fitness’ over the medium term, but at end-November 2016, no details had been given for 2018 or 2019. Government typically issues a Green Paper or medium-term public expendi- ture framework prior to the budget, but this was not the case before the 2017 budget address. 15 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Table Fiscal Table 2 2013 2014 2015 2016 % GDP actual actual actual forecast Revenue and Grants 18.4% 18.9% 18.7% 18.2% Domestic revenue 16.9% 18.2% 18.5% 17.9% Tax revenue 14.7% 15.5% 14.4% 13.1% Non-tax revenue 2.2% 2.7% 4.2% 4.8%* Grants 1.5% 0.8% 0.2% 0.3% Expenditure 25.2% 24.5% 28.1% 21.9% Current expenditure 18.9% 19.1% 21.1% 19.5% Wages and Salaries 8.2% 9.5% 8.8% 9.2% There is a need Goods and Services 3.4% 3.1% 2.9% 1.9% to curb the Interest Payments 1.5% 2.2% 2.8% 3.6% accumulation of Social Benefits 0.5% 0.4% 0.5% 0.3% arrears and to Subsidies 3.5% 2.0% 3.9% 2.7% start dismantling Intergovernmental transfers 1.8% 1.9% 2.3% 2.0% the stock. Public investment (includes foreign projects) 6.3% 5.3% 7.0% 2.4% Primary balance -5.2% -3.3% -6.5% 0.7% Fiscal deficit (cash basis) -6.8% -5.5% -9.4% -3.7% Fiscal deficit (including new arrears) -6.8% -8.8% -10.3% -10.0% Financing 6.8% 5.5% 9.4% 3.7% Domestic financing 6.3% 0.8% 1.7% 1.9% External financing 0.4% 4.7% 7.7% 1.8% Stock of Arrears - 2.4% 5.0% 11.3% Public Sector Debt (2017 = forecast) 29.1% 35.2% 52.9% 55.4% GDP (Current ZMW, millions) 151,331 167,053 183,381 209,162 Source: Ministry of Finance and World Bank projections Note: 2016 Non-tax revenue* = includes a ZMW 4.1 billion (2.1% of GDP) one-off dividend from the BoZ Table 2016 and 2017 Budgets 2016 2017 3 ZMW '000 budget forecast variance budget Revenue and Grants 42,655 38,111 -10.7% 45,169 Domestic revenue 42,109 37,533 -10.9% 42,938 Tax revenue 30,411 27,412 -9.9% 35,212 Non-tax revenue 11,698 10,121 -13.5% 7,726 The Grants 546 578 5.9% 2,231 macroeconomic Expenditure 50,410 45,845 -9.1% 61,421 targets set in Current expenditure 40,645 40,732 0.2% 47,070 the 2017 budget Wages and Salaries 20,394 19,251 -5.6% 20,055 include a fiscal Goods and Services 4,996 3,745 -25.0% 5,733 deficit of 7% (cash Interest Payments 7,098 7,546 6.3% 8,408 basis), end-year Social Benefits 1,130 621 -45.0% 2,207 inflation of 9% and Subsidies 2,910 5,428 86.5% 4,929 domestic revenue Intergovernmental transfers 4,117 4,141 0.6% 5,738 of at least 18%. Public investment (includes foreign projects) 9,765 5,113 -47.6% 12,197 Liabilities - - - 2,154 Fiscal deficit (cash basis) -7,755 -7,734 0.3% -16,252 Financing 7,757 6,018 -22.4% 16,260 Domestic Financing 1,750 3,395 94.0% 3,026 Foreign Financing 6,007 2,623 -56.3% 13,234 Source: Ministry of Finance and World Bank projections The macroeconomic targets set in the 2017 budget include a fiscal deficit of 7% (cash basis), end-year inflation of 9% and domestic revenue of at least 18%. Further, Govern- ment plans to limit domestic borrowing to 2% of GDP and increase foreign exchange reserves to three months of import cover. Despite the widespread talk of austerity, the national budget provided additional resources for education, health, social protection and agriculture. 16 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y The education budget was increased from ZMW 9.1 billion budgeted for in 2016 to Agriculture received a ZMW 10.6 billion in 2017. For health, the budget is being increased from ZMW 4.4 bil- substantial lion budgeted for in 2016 to ZMW 5.8 billion in 2017. Social protection has also received increase in a substantial increase in expenditure. Resources are being planned to ensure pension resources via an contributions are properly financed and to scale up the cash transfer program. The expansion of the number of households expected to receive the cash is being increased by 258,000 Farmers Input households and the monthly transfer raised from US$7 to US$9. Support Program (FSIP). Agriculture received a substantial increase in resources via an expansion of the Farm- ers Input Support Program (FSIP) to provide ZMW 1,700 to 1.6 million farmers at the start of the 2017-18 farming season. To finance this, the FSIP budget is being increased by 160% to ZMW 2.86 billion. Crucially, the increased FSIP resource allocation coincides with a full shift to the electronic voucher system that is intended to allow farmers to select the inputs they would like, and to support farming beyond maize. A recent pilot suggests there are still challenges to overcome, including targeting, but there is poten- tial for large financial savings when compared to the traditional system where Govern- ment procured and transported inputs directly to famers27. The allocation for the Food Reserve Agency is also up by 14% to ZMW 942 million in 2017. To make fiscal space for these increases, the defense spend declines by 7%, fuel sub- sides have been eliminated and Government has re-announced its intention to remove the electricity subsidy. The remaining financing gap is filled by borrowing and an in- crease in domestic revenue collection. New revenue measures have been introduced to bring greater fiscal sustainability over the medium term. Tax policy changes include Many structural reforms were both efforts to improve compliance as well as changes in rates with a target of ensur- announced as part ing at least 18% of GDP is collected in 2017. Section II: Raising Revenue for Economic of the budget, and Recovery provides an overview. if implemented will provide a boost Many structural reforms were announced as part of the budget, and if implemented to the economy will provide a boost to the economy and diversification efforts. Highlights include an and diversification intention not to impose export bans on maize in future (and instead tax maize exports efforts. at 10%); economic zones accelerated; girls’ education promoted; youth empowerment, crucially through skills; trade and public finance management reforms; and a full review of government parastatals. However, there are concerns as to whether the legal un- derpinnings to these reforms can be legislated on a timely basis. At least ten pieces of legislation require adjustment to permit these reforms to move forward. Public debt levels remain elevated During the budget address, the Minister stated: “We cannot spend what we do not have. We cannot borrow beyond our ability to repay”28. This is because debt levels remain el- evated in 2016, as repeat fiscal deficits between 2012 and 2015 were financed by ex- ternal non-concessional borrowing. In July 2015, Zambia issued its third Eurobond for US$1.25 billion (with an average tenor of 11 years) at a considerably higher cost than previous issues (the yield at issue was 9.375%). The Eurobond issues now total US$3 billion and have sharply increased overall debt levels. The Eurobonds are associated with repayment risks, given the bullet structure of the first two bonds (they each need to be repaid in one single year) and foreign currency risks29. Large exchange rate depreciations carry the risk of balance sheet effects, especially where there is substantial offshore foreign currency borrowing by Government and corporations. Foreign currency risks became a reality in Zambia in 2015, as a weaker kwacha has increased the cost of servicing external borrowing. Despite the apprecia- Foreign currency risks became a tion of the kwacha in 2016, the total public sector debt is estimated at 56% of GDP up reality in Zambia from 53% in 2015, driven by an increase in external debt. in 2015, as a weaker kwacha The increased indebtedness not only impacts when the debts require repayment, but has increased the also in the form of increased debt servicing costs each and every year. In 2017, interest cost of servicing payments are expected to utilize 20% of all domestic revenue, up from just 12% in 2014 external borrowing. and leaving less room for developmental expenditure. Participation by foreigners in the domestic debt market declined between January and September 2016, on account of risk aversion towards emerging and developing coun- tries, and increased foreign exchange risk. Tighter liquidity has also constrained the 17 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y participation of domestic commercial banks in the domestic debt market, and the size of the auction was halved from ZMW 900 million to ZMW 450 million in January 2016. However, non-bank financial institutions increased their participation in Q1 2016 and as liquidity conditions have improved, the auction size was lifted to ZMW 700 million on May 12, 2016. Overall, Treasury Bills were undersubscribed by 52.2% between January and September 2016. However, more foreign participants have returned to the do- mestic debt market recently, following relative stability and a slight strengthening of the kwacha, easing liquidity constraints and an anticipation that Government will secure an IMF Program. Issues have successively been oversubscribed since October 15, 2016. Accordingly, the outstanding stock of government securities increased by 3.4% in Q3, to ZMW 25.3 million, and interest rates on government securities declined.30 International trade and reserves have declined Imports have become more Zambia relies on copper for approximately 77% of its exports, and as global copper expensive due to prices have been low, the US$ value of exports has fallen in 2016. During the first three a weak Kwacha, quarters of 2016, the value of exports was US$4,588 million, 10.4% less than in the and have declined same period in 2015 (figure 10)31. The value of copper exports fell by a much larger much faster than magnitude (10.5%) than the value of non-copper exports (2.2%). exports in 2016, helping reduce the Imports have become more expensive due to a weak kwacha, and have declined much trade imbalance. faster than exports in 2016, helping reduce the trade imbalance and current account deficit. In the first three quarters of 2016, imports were US$5,163 million, 16.9% less than their level at the same time in 2015. As a result, total trade (exports plus imports) over the first three quarters of 2016 was US$9,751 million compared to US$11,334 mil- lion in the same period in 2015. Zambia has recorded quarterly trade deficits since Q1 2015, but the trade deficit has narrowed by 14% in the first three quarters of 2016 compared to the same period in 2015. This has come about through a painful adjustment where imports have de- creased in 2016 and an overall reduction in trade volumes. Falling exports have also reduced the inflow of foreign currency. Data from the BoZ suggest that the inflow of foreign currency in the first half of 2016 was US$397 million compared to US$499 million during the same period in 201532. On the other hand, the outflow of foreign currency was US$1,065 million in the first six months of 2016 com- pared to US$829 million in 2015. Of the outflows, 34.0% relates to external public debt servicing, 4.5% to other uses by Government (including the importation of electricity and fuel), 33% to transactions by non-government entities, and 28.1% was used by BoZ for foreign currency market interventions. Zambia has recorded quarterly Figure Trade levels reduced and reserves have fallen trade deficits since 10 US$ million Q1 2015, but the 3,000 trade deficit has Imports narrowed by 14% 2,500 Exports in the first three Trade Balance quarters of 2016. 2,000 1,500 1,000 500 0 -500 -1,000 Source: Central Statistical Office 18 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Lower foreign currency inflows combined with high outflows have put pressure on re- Lower foreign currency inflows serves and the current account in 2015 and 2016. After increasing from US$2,773 mil- combined with lion in June 2015 to US$3,937 million in July 2015, following the issue of a US$1,250 high outflows have million Eurobond, reserves have fallen for each successive month to reach US$2,052 put pressure on million in August 2016. Measured as a ratio of months of import, reserves fell from 4.6 reserves and the months of import cover in August 2015 to 2.9 in August 2016. current account in 2015 and 2016. Prosperity has not been shared equally The benefits of GDP growth have accrued mainly to the richer segments of the popula- tion in urban areas, and poverty remains largely concentrated in rural areas. In April 2016, the CSO launched the preliminary results from the 2015 Living Conditions Moni- toring Survey (LCMS)33. Their survey provides estimates of living conditions for Zambia’s 3 million households. Consumption is chosen as the preferred welfare indicator and is assessed via four main components: food, non-food, durable goods and housing. The LCMS finds that despite GDP growth averaging 7.4% between 2004 and 2014, there was only a marginal reduction in poverty. The CSO reports that in 2015, 54.4% of Results from the population were defined as poor and 40.8% of the population were experiencing the same survey extreme poverty as per the government’s poverty line. Using the US$1.9 per day (2011 also suggest that PPP terms) measure for international comparison, poverty is estimated at 61.3% in Zambia has one 201534. The poverty measured is largely a rural phenomenon, with 77% of the poorest of the highest households located in rural areas. Gini coefficients, measuring Results from the same survey also suggest that Zambia has one of the highest Gini coef- inequality, in the ficients, measuring inequality, in the world. The richest 10% of Zambia’s population are world. shown to receive 56% of income, the second richest 17% and the third richest 9%. This leaves just 18% of income for the remaining 60% of Zambian’s. The income profile of 2015 and persistent poverty suggest the rapid growth of 2004-13 was largely exclusive, suggesting that Zambia not only needs to return to faster growth, but also to ensure that growth is more inclusive going forward. 19 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y C. ECONOMIC OUTLOOK, RISKS AND POLICY CHALLENGES Given the tough global conditions for growth and domestic challenges, GDP growth is forecast to remain close to 3.0% in 2016, before improving in 2017 (4.0%) and 2018 (4.2%). The 2017 forecast assumes progress with the economic recovery plan, a better electricity situation than in 2015/2016 and improved copper exports. For the medium term, it assumes even higher copper production, that copper prices will recover marginally, and that progress is made with structural reforms identified in the 2017 budget. To shift to faster and inclusive growth, efforts are needed to overcome a set of in- terlinked economic policy challenges – if progress is made on only some of them, and not on others, the desired outcomes will not be achieved. The sequencing and coordination of measures are key in 2017 and over the course of a medium-term economic recovery plan. Medium-term outlook GDP growth will Reflecting the external headwinds and domestic pressures, the expectation is that GDP remain close to growth will remain close to 3.0% in 2016, before improving in 2017 (4.0%) and again 3.0% in 2016, in 2018 (4.2%). The outlook for the Zambian economy is underpinned by three main before improving in assumptions: 2017. i. Copper prices increase slightly over the medium term. World Bank forecasts suggest commodity prices are likely to increase by 4.5% in 2017 and 2018 as the global sup ply of metals balances better35. ii. Progress is made with implementing the ‘Zambia Plus’ economic recovery plan, in- cluding support from an IMF program and concessional financing from the World Bank and African Development Bank. iii. The impact of the power crisis is less severe than in 2015 and 2016 as new gen- eration capacity comes on stream. This will help increase both mining production and output from other industry and services. Copper prices recovery could Risks to the outlook also be slow if the The outlook is subject to both domestic and external downside and upside risks. Ex- level of oversupply ternally, lower than predicted output growth in China would weigh on the demand for persists beyond Zambia’s exports, further reducing copper prices, and would severely affect Zambia’s expectations. prospects. Copper prices recovery could also be slow if the level of oversupply persists beyond expectations. Furthermore, tighter global financing conditions would also in- crease the cost of tapping international debt markets over the medium term. On the upside, China’s manufacturing data has been stronger than expected and the outcome of the USA elections has led markets to speculate that infrastructure spending, crucial for copper demand, will increase. The main domestic risks relate to the supply of electricity and confidence in the econ- omy. Government has embarked on some bold reforms, but if it fails to stick to the fiscal consolidation path the economic recovery plan sets out, then confidence in the economy will stay muted. Slow fiscal adjustment could lead to exchange rate uncer- tainty, which will trigger inflation, and monetary responses will then dampen credit and economic growth into 2018. Policy challenges The sequencing Commodity-exporting countries’ policy makers face increasing challenges across the and co-ordination globe. Zambia is no exception and is grappling with multiple challenges as the economy of measures are has slowed down. Many challenges lay ahead, but the overriding challenge is that they key in 2017 and are interlinked – if progress is made on only some of them, and not on others, the de- over the course of sired outcomes will not be achieved. So the sequencing and coordination of measures a medium-term are key in 2017 and over the course of a medium-term economic recovery plan. economic recovery plan. Large fiscal deficits and inefficiencies in government spending persist as sources of vulnerability for Zambia. There remains a need for fiscal and monetary policy to work in tandem. In 2015, fiscal policy was too loose and monetary policy had to shoulder the burden of adjustment. Inflation was tamed and exchange rate volatility reduced, but 20 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y at the cost of very tight liquidity putting a strain on the financial sector and business across the country36. A better balance is needed for faster growth. What remains critical is that any reduction in the fiscal deficit is planned and managed carefully. A disorderly and incomplete adjustment will not restore market confidence. A too severe or too quick adjustment will undermine growth. The immediate policy challenges measures can be grouped as either fiscal measures or In order to deliver successfully on the structural measures as follows: fiscal measures, Government needs Fiscal measures to develop and publish robust • Set and publish medium-term targets: In order to deliver successfully on the fis- medium-term cal measures, Government needs to develop and publish robust medium-term tar- targets. gets that provide the policy framework – economic policy cannot continue moving from year to year on an ad hoc basis. • Arrears clearance: The accumulation of arrears has returned as a concern since 2015. Arrears attract interest costs, leading to increased government interest pay- ment bills. Arrears can also affect the broader economy by reducing the credit wor- thiness of government suppliers, which in turn imposes difficulties in accessing cred- it, and that in turn reduces economic growth and employment. The 2017 budget al- lows for a reduction in the stock, but a strategy for which stock to prioritize is re- quired. • Improve debt management: Publication of a medium-term debt strategy is es- sential to ensure a move from borrowing on an ad hoc basis to one based on proper debt sustainability analysis, which considers all the risks related to the types of bor- rowing and the costs of repayment. Further, borrowing decisions need to be clearly harmonized with the spending priorities. Setting an appropriate debt ceiling and im- proving market communication via quarterly debt reports and improved websites are also essential quick wins. Efforts are • Revenue mobilization: Zambia needs to strengthen efforts to improve domestic needed to remove revenue mobilization and to meet the targets in the budget. Section II: Raising constraints to Revenue for Economic Recovery of this report is focused on revenue issues. the necessary structural reforms. Structural measures • Fast-track electricity sector reforms: The 2017 budget repeats Government’s previous statement of intent for cost-reflective tariffs. Financial sustainability will help the sector, but there are other necessary reforms; including improved planning; bet- ter, fairer and more efficient tendering systems; and the removal of many inefficiencies in the management and supply of electricity that get passed through to the consumer. ZESCO should be prioritized as one of the first organizations to go through the announced State Owned Enterprises (SOE) review. • Boosting the non-copper economy: The commodity price shock highlights the need for Zambia to reduce its dependency on copper, a challenge it has been grap- pling with for over 50 years. There were plenty of good ideas presented in the 2017 budget, and the forthcoming National Development Plan should cement the reform direction, especially in agriculture – a leading non-copper sector. However, efforts are needed to remove constraints to the necessary structural reforms. For example, many legislative changes are required, but there is a bottle-neck in getting new laws passed. How can this bottle-neck be alleviated or which legislative changes should be at the front of this queue? 21 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y 16 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y 2 SECTION RAISING REVENUE FOR ECONOMIC RECOVERY D. REVENUE PERFORMANCE Both public spending and revenues have grown considerably since 2010, but in recent years the pace of expenditure has exceeded that of revenue. If current levels of government expenditure are to be maintained in a sustainable manner, then higher domestic revenue collections are essential. After ten years of rapid growth Zambia has emerged from being a country with a high aid dependency to one where in 2015 grants provided just 1.4% of revenue compared to 98.6% domestic revenues. The 2017 budget and ‘Zambia Plus’ economic recovery program have put an emphasis on the need to improve domestic revenue collection. Repeat and large fiscal deficits The 2017 budget have led to rising debt levels and put pressure on this fiscal stance. Both spending and and ‘Zambia Plus’ revenues have grown considerably since 2010, but in the recent years the pace of ex- economic recovery penditure has exceeded that of revenue. As growth has slowed down in 2015 and 2016, program have put public expenditure has continued on its upward trend in real terms (figure 11). an emphasis on the need to improve The gap between expenditure and revenue has been met by: domestic revenue collection. i. Large Eurobond issues in 2012, 2014 and 2015; ii. Bridging loans from the central bank in 2013 and 2016; and iii. Considerable arrears being allowed to accumulate, in 2015 and especially 2016. If current expenditure levels are to be maintained in a sustainable manner, higher do- mestic revenue collection appears essential. There are mixed perceptions about taxation and public spending in Zambia. One view is that taxes are too high, while another is that expenditure should not be reduced and should even be expanded from current levels. These views are hard to balance. Too Too much taxation much taxation can stem the growth of the private sector; too little and it’s not possible can stem the to provide the levels of public services demanded, the infrastructure required to de- growth of the velop, and the means of redistributing resources to the poorer households. private sector; too little and it’s not Zambia is experiencing rapid population growth of nearly 3% per annum, meaning that possible to provide the population doubles in approximately 24 years. While a larger population can create the levels of public more growth and more potential tax payers, a larger population also requires higher services demanded. levels of spending on services such as education and health to maintain the current levels of access and quality for all Zambians. 23 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Figure Growing gap between expenditure and revenue 11 Real ZMW (2010 constant prices) millions Zambia needs to 37,000 calibrate carefully how much revenue 32,000 Revenue and grants is required for its development goals. Expenditure 27,000 22,000 17,000 12,000 7,000 2000 2003 2006 2009 2012 2015 Source: Note: Excludes Ministry reliefexcludes debtNote: of Finance. grants. debt relief grants Zambia needs to calibrate carefully how much revenue is required for its development goals and to ensure this analysis feeds into the revenue policy and the administra- tion of taxation. To achieve this, coordination is required between the different entities responsible for revenue collection and policy (box 4). This sort of assessment needs to feed into Zambia’s development planning, and the expenditure needs matched to realistic revenue scenarios. The current target is ‘at least 18%’ of GDP, but there is no The current optimal rate. This target rate is below the 22.6% target in the revised sixth National De- revenue target is velopment Plan (NDP), but when compared to other middle-income countries, Zambia ‘at least 18%’ of is close to the median. GDP. There are many countries collecting and spending a bigger proportion of GDP than Zambia, especially in the Southern African Customs Union (SACU) region, but also many successful countries collecting and spending less revenue (figure 12). There are also other countries struggling to improve revenues, such as Uganda or Tanzania, where revenue collection remains low, relative to other countries, in spite of consistent eco- nomic growth. Figure How does Zambia’s revenue collection compare? 12 There are many countries collecting and spending a bigger proportion of GDP than Zambia, especially in the Southern African Customs Union (SACU) region. Source: World Development Indicators 24 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Box Who manages domestic revenue? 4 The Zambia Revenue Authority is tasked with tax collection, administration, compliance and enforce- ment via its operations and inspections. Operations are split into Domestic Taxes and Customs Services. The ZRA is governed by an Act of Parliament, Chapter 321 of the Laws of Zambia enacted in 1993. Under this law, it produces an annual report for Parliament. A few large taxpayers, especially from the mining sector, dominate collection in Zambia and consequently the ZRA has a large taxpayers unit. The Ministry of Finance is responsible for formulating revenue policy (both tax and to some extent non-tax revenues). Each year, tax policies are reviewed by a Tax Policy Review Committee, brought together by the Ministry of Finance, with the aim of optimizing revenue collection in the most cost-efficient and professional manner possible. The revenue targets are set by the Minister of Finance and approved by Parliament. The following laws govern the collection of revenue: • Income Tax Act, Chapter 323 of the Laws of Zambia; • Customs and Excise Act, Chapter 322 of the Laws of Zambia • Value Added Tax Act, Chapter 331 of the Laws of Zambia; • Property Transfer Tax Act, Chapter 340 of the Laws of Zambia; and • Mines and Minerals Development Act, No. 7 of 2008. Revenue performance After ten years of rapid growth and a doubling in size of the economy between 2004 to 2014, Zambia has emerged from being a country with a high aid dependency to Revenues increased one where in 2015 grants provided just 1.4% of revenue compared to 98.6% domes- in real terms as tic revenue, earned largely through taxation. Revenues increased in real terms as the the economy grew economy grew from the early 2000s (figure 13) and by 2013, domestic revenue had from the early reached 16.9% of GDP. It then rose to 18.2% of GDP in 2014 and 18.5% in 2015 (table 2000s and by 2015, 2). In 2016, revenues were targeted to reach 20.1% of GDP, but as growth and trade domestic revenue slowed, so did VAT and customs receipts. The forecast for 2016 is 17.9% of GDP (includ- had reached 18.5% ing the one-off BoZ dividend equal to 2.1% of GDP). of GDP. Figure Changes in revenue composition since 2000 13 Real ZMW (2010 constant prices) millions Other Revenue Value Added Tax 20,000 Customs and Excise Income Tax 15,000 10,000 Income tax has 5,000 provided the largest share of domestic 0 2000 2003 2006 2009 2012 2015 revenue since 2000, reaching Source: Ministry of Finance approximately 38% in 2015. Income tax has provided the largest share of domestic revenue since 2000, reaching approximately 38% in 2015. The amount collected has grown by 231%, in real terms, since 2000. Despite the high growth, a Zambia Institute for Policy and Research (ZIPAR) study in 2014 estimated that only 52% of “true” income was being taxed and an addi- tional 6.7% of 2014 GDP might have been collected, compared to 6.9% actually collect- ed, if PAYE had been received from all self-employed and paid employees at the time 37 .While reaching this level of collection would be enormously challenging, it highlights the scope for improved compliance. VAT collections have grown by 59%, in real terms, since 2000. In recent decades, VAT has evolved as the main workhorse of taxation in developing countries. In Zambia, it provided 25% of domestic revenue in 2015. A recent study found Zambia’s VAT effi- 25 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y ciency to be comparable to the average of other countries in the sub-Saharan Africa re- gion, although it did show some volatility38. However, between 2004 and 2014, the real Non-tax revenue, economy doubled in size while VAT only grew by 81%, suggesting that there is scope to which includes improve collections. mining royalties, grew slowly in the Non-tax revenue, which includes mining royalties, grew slowly in the 2000s. However, 2000s, but since since 2010, it has grown by 40% per year on average (albeit from a low base), as mining 2010 has grown firms have produced more and improved their tax compliance. In 2016, a large increase by 40% per year on average. in non-tax revenue was projected through the enhanced collection of fees and fines. However, those lines had not performed as expected in the first nine months of 2016 and non-tax sources, excluding the BoZ dividend (and despite an increase in royalty), provided just 62% of targeted non-tax revenue. As revenue collection has improved, it has also become more cost-effective. Since 2013, the ratio of the ZRAs budget to total revenue collected has decreased from ZMW 2 spent for every kwacha collected, to ZMW 1.4 in 2015, in spite of the slower economic growth that year. 2017 budget revenue targets The Minister of Finance set a revenue target of at least 18% of GDP in 2017, with the aim of limiting the fiscal deficit to 7% of GDP while dismantling some of the arrears that built up in 2015 and 2016. This target removes the ambition of the previous budget to increase revenues as a percentage of GDP, and instead settles for a similar level of collection recorded in 2014 and 2015. Non-revenue targets for 2017 are much more realistic than for 2016 (down by nearly ZMW 4 billion) and an increase of ZMW 4.8 bil- lion or 16% is expected from tax revenue, via new tax measures and efforts to improve compliance (table 4)39. To achieve this target, the allocation of resources to ZRA is being increased from ZMW 427 million in 2016 (which appears as if it will be received in full) to ZMW 769 million in 2017; an increase of 80%. However, only ZMW 100 million is expected to be available to fund new operational capacity. Much of the increase relates to the establishment of a pension fund and a gratuity fund (ZMW 150 million) and to cover exchange rate losses in respect of a number of contracts that are in US$. Non-revenue targets for 2017 Table Zambia’s 2017 Revenue Measures are much more realistic than for 4 Area Measures 2016 (down by Direct Taxes •10% rental income tax on Statutory Bodies nearly ZMW 4 •15% Advanced income tax billion). •100% capital allowance on agriculture equipment •Exempt PAYE threshold ZMW 3,300 •Income above ZMW 6,200 at 37.5% Customs and Excise •17.5% excise duty on airtime •15% on spare parts •ZMW 240 per mille on cigarettes •Carbon tax rates ZMW 70-ZMW 275 •5% surtax on locally manufactured goods •15% on semi-processed edible oils •40% on plastic bags VAT •Input VAT not claimable by non-registered sup- plier •90% diesel input VAT claimable, input VAT on pet- rol non-claimable •Abolish VAT group registration Export Taxes •ZMW 10/kg on raw timber •ZMW 5/kg on semi-processed timber •10% on maize Non-Tax Revenues •Skills development 0.5% •Fees on cross-border vehicles US$20-US$75 •Increase in various user fees and charges Source: ZIPAR (2016) 40 26 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y E. MINING REVENUE The absence of good data on mining companies has helped support a common perception that not much revenue is being collected from them in Zambia. The reality is that the mining sector (which includes quarry- ing and cement production) contributed ZMW 8.8 billion in 2014, equivalent to 28% of total domestic revenue, up from ZMW 7.7 billion in 2013 and ZMW 7.6 billion in 2012. There remains a pressing need for an improved flow of information and transparency to ensure the contribution of the sector is better understood. Efforts are also needed to improve the monitoring of the country’s mineral value chain from exploration to export, and to ensure that at the given rates, Zambia collects the revenues it is due. The lack of quality data has been a huge barrier to an improved understanding of the contribution made by the mining sector in Zambia. However, the Zambia Extractives Industries Transparency Initiative (ZEITI) has produced good data for the period 2008 to 2014, although the data was released with a delay of almost a year (for example the The lack of quality 2014 data was made public on December 2015). data has been a huge barrier The ZEITI report finds that the mining sector (which includes quarrying and cement pro- to an improved duction) contributed ZMW 8.8 billion in 2014, equivalent to 28% of total domestic rev- understanding of enue41. This was up from ZMW 7.7 billion in 2013 and ZMW 7.6 billion in 2012. The con- the contribution tribution to Government is split across tax revenue (VAT, Corporate Income Tax (CIT), made by the and PAYE) and non-tax revenue (mostly royalties) (figure 14). A considerable amount mining sector. of import VAT is paid because the mining conducted in Zambia is capital-intensive and heavily reliant on imported goods, as opposed to local content or labor, for production. Figure Mining contribution to the Government Budget 14 ZMW billions 10 Import VAT 8 Corporate Income Tax 6 Mineral Royalties 4 Other Payments 2 PAYE 0 2012 2013 2014 The Mining Investment and Source: ZEITI (2015) Governance Review presents an objective The Mining Investment and Governance Review (MInGov) presents an objective as- assessment of the sessment of the mining sector of several countries. Zambia was surveyed in 2016 and mining sector of it was concluded that the country remains an appealing place for investment due to several countries. its favorable geology; long history of mining; political stability; low risk of expropriation; high levels of security; and a relatively favorable economic environment42. Some of the positive findings were overshadowed by concerns of a lack of transparency and ac- countability regarding revenue management, a lack of consistency surrounding fiscal policy, and a lack of support for diversifying the economy and leveraging of infrastruc- ture for the general population. Tax policies and instruments, accountability and inclusiveness, and institutional capac- ity and effectiveness all performed in the “high” scoring range in the survey. Tax policies and instruments, and rules for auditing, base erosion and profit shifting, are deemed generally strong. The tax code is clear and readily available. Tax, cost, and physical audits of the major mining companies are undertaken. Transfer pricing, advanced pric- ing, and thin capitalization are each increasingly subject to policies developed by the ZRA, although key pieces of legislation are needed to strengthen this framework. 27 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Transfer pricing, Despite the strengths identified in the MInGov survey, the mining tax regime continues advanced to evolve, and efforts by the Government to ensure it has an adequate minimal rev- pricing, and thin enue stream in all production periods has so far borne limited results and created a capitalization are relatively turbulent mining taxation and market environment. each increasingly subject to policies The mining tax regime has changed eight times in the past eight years, and has in 2015 developed by the and 2016 been a source of tension between the mining companies and Government, ZRA. as prices have softened and reduced power supply has complicated production. This withstanding, the July 2016 tax regime was welcomed by the industry as a step towards balancing the competing interests, as the mines endeavor to maximize their returns from the extraction while the Government works to ensure Zambia gets a fair return for those assets and the associated environmental damage43. It is also important to note that at current prices, there is limited investment in the min- ing sector, so a balance is also needed between maximizing revenue flows during this period and creating the conditions needed to attract a new wave of investment that The mining can maintain or grow the sector in future44. tax regime has changed eight Better monitoring of the sector’s outputs times in the past A Mineral Value Chain Monitoring Project (MVCMP) is being used to support the design eight years. of a system to improve the monitoring of the country’s mineral value chain from ex- ploration to export. This will help to ensure that at the given rates, Zambia collects the revenues it is due. Central to the reforms is the use of the online Mineral Output Statistical Evaluation System (MOSES), which is used by the customs department at the export stage of min- eral declaration. Through the system, the mines will submit mineral production reports and apply for Mineral Export Permits. In addition, handheld equipment, linked to the system, can be used for spot checks when clearing export-bound minerals. An analysis laboratory can also be used for more accurate verification of mineral content. Objective testing using machinery has been shown to be effective in reducing opportunities for The successful corruption. implementation of the reforms The successful implementation of the reforms is expected to increase transparency in is expected the mineral value chain and result in higher revenue mobilization. When complement- to increase ed with reforms in the mining tax regime and strengthened accountability institutions transparency in the mineral value in the country, it is also likely to improve the attractiveness of Zambia as a minerals chain. investment destination. 28 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y F. PLANNED REVENUE REFORMS AND CHALLENGES There have been many revenue related reforms over the past few years, and some are still ongoing or planned for the future. The reforms are aimed not only at increasing revenue collection, but also ensuring that collection is efficient and free from corruption. A recent assessment cites compliance as one of the weakest areas in Zambia’s tax administration system. Key efforts to tackle this problem include the TaxOnline system, more enforcement measures and audits, and the introduction of Elec- tronic Fiscal Devices (EFD) that link retailers directly to the ZRA. The tax administration system has been improving At the request of the ZRA, an assessment of Zambia’s tax administration system was undertaken in May 2016. The Tax Administration Diagnostic Assessment Tool (TADAT) was used45. The aim of the assessment was to help determine reform priorities and Zambia has highlight reform achievements. a sound tax administration The assessment found that Zambia has a sound tax administration structure, with a structure, with a number of systems which encourage taxpayer compliance (table 5). The TaxOnline sys- number of systems tem, introduced in October 2013, is viewed positively and is clearly a benefit to both which encourage the ZRA and taxpayers. The ZRA is deemed to be sufficiently transparent and focused taxpayer on encouraging voluntary compliance by providing a wide range of support, and seeks compliance. taxpayer feedback regularly. The study also listed a number of areas where reform should be targeted. The assess- ment cites very low online filing, very high rates of tax arrears, and a backlog of VAT refund claims. They also found that the database of registered taxpayers contained inaccuracies, including a large number of inactive taxpayers. These issues point towards generally low taxpayer compliance. Furthermore, the systems used to manage and ana- lyze the compliance risks are fragmented. Further, there remains an opportunity to strengthen the analysis of internal and external data, and the outcome of audits, to improve decision making and inform steps to improve compliance. Table Zambia’s tax administration systems 5 Areas of success Areas for improvement •Structured processes are used •Uncertainty regarding the accuracy to identify, prioritize and mitigate of the taxpayer registration database institutional risks. (for example the total number of reg- istered taxpayers is not known with • A wide range of information is certainty). made available to taxpayers and there are mechanisms for taxpay- •Very low rates of on-time filing er feedback to ZRA. across all core tax types. • The TaxOnline system provides •The value of tax arrears is very high, a strong foundation for taxpayer casting doubt on tax debt manage- accounts, and allows for electronic ment procedures. filing and payment. •Management of compliance risks is • Efficient collection systems: with- weak and fragmented, and the out- holding at source is available for come of compliance activities (includ- all employment income, interest ing audits) are not well evaluated. and dividends; and advance pay- ment instruments are in place for •Taxpayer disputes are not well han- all business income. dled. They are not independent of the audit process and there is no set • Audit cases are selected centrally period within which an administrative on the basis of identified risks. review must be completed. •The dispute resolution process •An ombudsman exists but is not includes a tax appeals tribunal used for addressing complaints which is being used. about ZRA. 29 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Areas of success Areas for improvement •The revenue accounting system •The revenue accounting system does is robust and funds for repay- not interface with the Ministry of While the ZRA is ment claims are ring-fenced. Finance’s systems. making an effort to improve taxpayer •Regular internal and external •There are significant delays in education, audits provide good oversight and processing claims and making VAT taxation remains complicated and accountability. refunds. insufficiently understood. •Annual reports, strategic plans, •ZRA does not have a system of public and responses to audit findings or private biding rulings or coopera- are produced in a timely manner tive compliance arrangements. and published. Source: TADAT: Performance Assessment Report 2016 – Zambia While the ZRA is making an effort to improve taxpayer education, taxation remains complicated and insufficiently understood in Zambia. From a survey conducted in 2014 (including 22 large tax payers), ZIPAR concluded that tax literacy is low. They found that the respondents interviewed had limited knowledge of tax and the tax system in Zam- bia, suggesting further efforts are needed to ensure that messaging for taxpayer edu- cation is effective46. ZIPAR suggested that more workshops and seminars are needed and that the ZRA website needs to be improved as a source of information and guid- ance. The more complicated and difficult it is to assess tax obligations, the more likely they will be evaded. Communication is very important when it comes to tax systems and can be a key driver of improving compliance. The payment of taxes is more There already exists a lively debate on how Zambia can overcome its revenue chal- likely to motivate lenges, central to the conversation is the Zambia Tax Platform (ZTP), whose members, citizens to hold from a wide range of civil society organizations, have provided a wealth of research Government and suggestions on how revenue can be raised efficiently to finance development in accountable for the country. The ZTP argues that there are four important objectives for reform47. First the resources it is that while raising revenue provides development financing, it should come from a manages. broad base so that citizens engage and advocate for efficient expenditure service on the services they are entitled to. Second is redistribution, as tax revenues can supple- ment low-income families’ income buy financing transfers and the provision of public services. Third is re-pricing. The consumption of desirable goods can be encouraged via exemptions from indirect taxes, while goods that harm people’s health, such as cigarettes and alcohol, can be made more expensive as a disincentive for consumption. Fourth is representation. The payment of taxes is more likely to motivate citizens to hold Government accountable for the resources it manages on behalf of its people, as well as the spending it carries out on their behalf. Tackling compliance The TADAT assessment cites compliance issues as one of the weakest areas in Zambia’s tax administration system. Efforts have been made to try and improve compliance, but a large gap remains. In 2015, the ZRA undertook various enforcement activities and managed to increase the number of compliance issues it detected, as well as the value of these cases (up by 234% to ZMW 899 million in 2015). The majority of cases handled Investing resources related to under-declaration; under-valuation; wrong tariff classification; forgery; and to increase smuggling of various commodities including liquor, timber and motor vehicles. Compli- enforcement ance-enforcing initiatives and efforts geared at collecting tax arrears can be successful, activities makes but they require resources; principally human resources, as well as vehicles and fuel to particular sense if carry out site visits. more revenue can be realized as a Investing resources to increase enforcement activities makes particular sense if more result. revenue can be realized as a result. However, care is needed to ensure that additional resources are targeted as efficiently as possible from a revenue return perspective. In medium-sized African countries such as Zambia, large taxpayers (under 1,000) typically dominate revenue collections, providing 80% of revenues. Medium taxpayers (around 10,000) typically provide a further 15% of revenues. Small taxpayers (over 100,000) typi- cally only provide 5%. 30 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Efforts to improve tax collection are more likely to yield substantial resources if they are targeted at medium and large taxpayers. To realize similar levels of resources from small taxpayers would require coverage of many more thousands of taxpayers, and A key reform enforcement activities of this magnitude could overwhelm the available resources and to support manpower. For small taxpayers public sensitization campaigns might be more effective the collection from a cost-return perspective. of revenues from medium- The large payers unit in ZRA is already making good progress, so one of the core areas size taxpayers for attention for improving compliance relates to medium-size tax payers. Here the registered for VAT planned introduction of EFD and wider use of electronic filling via the TaxOnline system purposes is the use is expected to yield results in 2017 and over the medium term. of Electronic Fiscal Devices. In the Doing Business Report for 2017, Zambia is ranked 58th for the ease of paying taxes; this is two places down from its rank of 56th in 2016, but the scoring remains very similar (i.e. other countries have improved)48. A gain has been made since 2014 because Zambia has simplified its tax system to improve tax compliance, although it still remains relatively complex. An important development has been TaxOnline. However, the compliance rate for using TaxOnline needs to be tackled if the full benefits are to be realized. A key reform to support the collection of revenues from medium-size taxpayers regis- tered for VAT purposes is the use of EFD that are linked via a SIM card to the ZRA. This will help with the flow of information from taxpayers to ZRA, although manpower will still be required to make physical checks and ensure transactions are made through the system. Regardless of whether the EFDs are in place, consumers must demand that their transactions go through the vendor’s books and a receipt is issued. Very little property tax is Both of these reforms and other compliance drives are expected to yield results, but being collected in this expectation should be cautioned by the reality that activities often take time to Zambia. ramp up, and revenue flows results may only improve considerably over the medium term. New revenue areas Road tolls were recently introduced in Zambia, and in November 2016, Government announced that the toll rate would be doubled and additional roads would be tolled. The premise for this is that the funds collected can be channelled towards road mainte- nance activities to increase the life of the road, as well as to provide a potential revenue stream for road expansion via public private partnerships. Another key area that remains in its infancy is property tax. Very little property tax is being collected in Zambia, as is the case in many other African countries (box 5). While the 2016 budget did target increased revenue from property tax, no systems were put in place to reach the targets. There remains a need to value properties and to do so every five years, especially in a rapidly growing city like Lusaka. Property tax in Zambia is administered by local councils and levied on the value of capital-improved land. This is an important revenue source for local councils, but the collection and enforcement of property tax has been poor. The reasons cited for this are a lack of capacity, unclear property rights, and an old value base49. Not all tax challenges can Tackling Illicit Financial Flows be overcome at Not all tax challenges can be overcome at the country level; some require international the country level; collaboration. For example, the practice of illegally hiding income from tax authorities some require and sending it abroad hampers Government’s efforts to mobilize domestic resources. international The concept of Illicit Financial Flows (IFF) refers broadly to the cross-border movement collaboration. of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred or used that crosses borders50. Specific IFF acts include illegal acts (for ex- ample corruption, tax evasion), or when funds flowing out of the country are the results of illegal acts (for example smuggling and trafficking in minerals and wildlife). There have long been concerns that Zambia is being affected by these types of practices. Many numbers estimating the magnitude are quoted, but because of a lack of transparency, accuracy in estimating the potential losses is difficult. Despite the challenges in calculat- ing the extent of the losses, it seems reasonable to conclude they are substantial. 31 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Box Challenges with Property Tax 5 Property tax as a percentage of GDP averages 0.6% in developing countries, and 0.5% in Sub-Saharan Africa51; while in Zambia just 0.1% of GDP is collected. This suggests that there are gains to be made, but expectations need to be managed given the challenges developing countries face in this area. There are three common challenges. First is resistance by vested political and economic elites, and investors in property markets. Fair enforcement is key to improving property tax collection. Residents are unlikely to comply if they are not confident that their neighbor pay their fair share, irrespective of their political affili- ation and economic influence. Persuasion can also enhance compliance. For example, Rwanda, Tanzania, and Uganda hold annual taxpayers’ appreciation week, when the benefits of paying tax are communicated to the public. Second is inefficiency, which results from the level at which the taxes are collected or the methods of collec- tion. In Botswana, Malawi, and Tanzania, property tax assessment and collection has been sub-contracted to the private sector. This often improves collection, but at the expense of building amicable community rela- tions and state-building. Implementing the use of technology, such as mobile payments, can also increase collection, as has been the case in Kenya and Tanzania. Third is the low level of land titling. In Africa, land is largely owned by the state or is under customary land rights, making it difficult to tax. In Zambia, only 200,000 land titles exist. In 2017, Government will begin a pilot program to title land in Lusaka. A good example to emulate is Rwanda, where between 2008 and No- vember 2016, 8.4 million titles had been created and digitalized. Source: McCluskey, W.J. and Franzsen, R.C.D. (2016). Property Tax Reform in Africa: Challenges and Potential. Afri- can Tax Institute, University of Pretoria, South Africa. Zambia must It is important to understand how and why money flows out, and to then devise strate- address gies to stem these flows. Solutions to addressing IFFs differ depending on the country weaknesses in context and the underlying activities that result in these outflows. In some cases, ac- its legal and tions will involve preventing criminal activity. In other cases, it may involve identifying regulatory regimes and sanctioning serious and substantial illegal tax evasions. that make it susceptible to the Zambia must address weaknesses in its legal and regulatory regimes that make it sus- activities that lead ceptible to the activities that lead to IFFs, but what is also crucial is that other countries to Illicit Financial must take the lead on preventing inflows of illicit money. What is key is that Government Flows. includes a wide range of stakeholders in the process, as coordination and cooperation around key issues and players requires active participation from the private sector, international organizations, and civil society. Are tax incentives being used effectively? Tax incentives have been used in Zambia with the intention of attracting foreign direct investment (FDI) to generate employment and enhance economic growth. The Zambia Development Agency (ZDA) is responsible for promoting investment in the country, and administers the investment with other Government entities. For a firm to receive a tax incentive in Zambia, the Ministry of Finance (with the mandate for tax policy) makes a decision that is processed via a Statutory Instrument, or approved via the national budget. Both the Minister of Finance and the Minister of Commerce, Trade and Industry are empowered with respect to tax incentives via their respective legislation. There is There is a risk that no single overriding framework for the use of tax incentives and in consequence, their the tax incentives issuance is at times inconsistent. There is a risk that the tax incentives are not crucial to are not crucial to a firm’s decision to locate or invest in Zambia and thus a portion of potential revenue is a firm’s decision forgone. Further, they can be potential sources of corruption. to locate or invest and thus a portion Full transparency about what incentives have been offered to which firms will help pol- of potential icy makers evaluate exemption decisions better. Tax incentives need to be reviewed revenue is forgone. frequently to ensure those which no longer serve or have served their purpose are phased out. The entire tax incentives scheme should be part of a broader strategy of promoting investment from both Zambian and international firms that create em- ployment, transfer key skills and technologies, improve foreign exchange earnings, and promote economic diversification.52 The strategy can be laid out transparently in the National Development Plans, and clarity should be provided on how incentives will be monitored and reviewed. 32 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y G. IDEAS TO IMPROVE TAX POLICY AND REVENUE ADMINISTRATION Efforts are needed to ensure there is sufficient revenue to fund Government spending. There are two key areas in which Government is working. The first is on improving tax policy, which falls under the responsibility of the Ministry of Finance, and the second is improving tax administration, which falls under the responsibility of the ZRA. Extensive advice can already be found in the numerous documents and briefings pro- vided on the Zambian revenues situation (many of which are quoted in this Brief). This Communication section does not aim to include them all, but does suggest that the priority issues could is very important be guided by the following. when it comes to tax systems Many of the planned reforms and other compliance drives are expected to yield results, and can be a key but this expectation should be cautioned by the reality that activities often take time to driver of improving ramp up, and revenue flows results may only improve considerably over the medium compliance. term. Improved tax policy ideas By using the revenue data available, tax policy can become much better informed. There is much more data available since TaxOnline has been established, and it can be interfaced with other sources of data, such as the Labour Force Survey or Living Con- ditions Monitoring Survey, to better understand what types of households are being taxed and at what levels. Three important studies for 2017 to inform tax policy are: i. Tax gap study: Carry out a full review of tax base erosion to understand the extent of the tax gap and whether it is driven by non-filing or underreporting. This will then inform the most appropriate policy response to address the tax gap. ii. Tax exemptions analysis: List and evaluate the costs and benefits of current incentives. This analysis can be used to develop an incentive policy framework (as Efforts to improve part of a broader investment strategy) that is made public and that lists the differ- monitoring of the ent incentives offered. The results of the analysis should feed into a clear and country’s mineral transparent tax exemptions strategy that is integrated into the goals of the 5-year value chain from development plans. exploration to export need to be expanded. iii. Marginal Effective Tax Rates (METR) study: Carry out a study aimed at un- derstanding whether the revenue gains from a marginal tax increase would outweigh the potential loss of revenue. Improved tax administration ideas Four ideas for improving tax administration are as follows: i. Provide a strategy to increase tax compliance: The large payers unit in ZRA is already making good progress, so one of the core areas for attention for im- proving compliance relates to medium-size tax payers. Here the planned in- troduction of Electronic Fiscal Devices and wider use of electronic filing via the Tax- Online system is expected to yield results in 2017 and over the medium term. However, a clear strategy would help guide the use of resources, make compari- sons between competing ideas to ensure the most cost-effective option is pur- sued, and might also motivate increased resources and staffing for revenue col- lection. ii. Scaling up taxpayer-focused public education campaigns: While the ZRA is making an effort to improve taxpayer education, taxation remains complicated and insufficiently understood in Zambia. Communication is very important when it comes to tax systems and can be a key driver of improving compliance. To encour- age citizens to pay taxes there needs to be better understanding, and a sense of trust that public resources are being used effectively. Government can partner with civil society organizations in these campaigns. 33 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y iii. Design and build an effective system for property tax: It is not enough to simply target increased revenue in this area; efforts are needed to build a system. For example, much work is needed related to land titling and valuation. A good starting point is to review how other countries have progressed. v. Improving transparency in reporting mineral revenue: Efforts to improve monitoring of the country’s mineral value chain from exploration to export need to be expanded. This will ensure that at the given rates, Zambia collects the revenues itis due. 34 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y IREFERENCES Alexeev, M. and B. Chibuye (2016), ‘Estimating the Value Added Tax (VAT) Gap in Zambia: 2009-11’, IGC Zam- bia Policy Brief 41204. Auditor General Office (2015), ‘Report of the Auditor General on the Accounts of the Republic for the Financial Year Ended 31 December 2015.’ Government of the Republic of Zambia. Bank of Zambia (2016), ‘Monetary Policy Committee Statement for Third Quarter 2016’, November 16, 2016. Central Statistical Office (2016a), ‘Monthly Bulletin’, November 2016. Central Statistical Office (2016b), ‘Monthly Bulletin’, October 2016. Central Statistics Office (2016c) ‘2015 Living Conditions Monitoring Survey: Key Findings’, Central Statistics Office, Lusaka Zambia. Chamber of Mines (2016), ‘Taxation and Mining Investment in Zambia’, November 2016. Flynn, S. and Pessoa, M. (2014). ‘Prevention and Management of Government Arrears.’ Technical Notes and Manuals. International Monetary Fund. Goodfellow, T. (2016). ‘Property Taxation in Rwanda and Ethiopia.’ Brief No. 4. Sheffield Political Economy Research Institute. The University of Sheffield. IAPRI (2016), ‘2017 Agricultural Sector Budget Analysis’: http://www.iapri.org.zm/images/Presentations/2017_ Agricultural_Sector_Budget.pdf; Indaba Agricultural Policy Research Institute, Lusaka, Zambia. IMF (2016). ‘IMF Staff Concludes Visit to Zambia’. Press statement. November 2016. Ministry of Finance (2016), ‘2016 Mid-Year Economic Review’, October 2016, Ministry of Finance, Lusaka. Nalishebo, S. and A. Halwampa (2014), ‘Uncovering the Unknown: An Analysis of tax Evasion in Zambia’, ZIPAR Working Paper No.18. Nalishebo, S. and A. Halwampa (2015), ‘A Cautionary Tale of Zambia’s International Sovereign Bond Issuance’, ZIPAR Working Paper No.22, Lusaka. Razafimahefa, I. F. (2012). ‘Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determi- nants.’ IMF Working Paper 141. Washington DC. Republic of Zambia (2005). ‘Public Financial Management Performance Report and Indicators.’ December 2005. Republic of Zambia (2016), ‘2017 Budget Address by Honorable Felix C. Mutati, MP Minister of Finance to the National Assembly’. Ministry of Finance, Lusaka. Friday November 11, 2016. Sladoje, M (2016), ‘Zambia Urbanizing: Encouraging Good Contagion’, Africa at LSE. Blog: http://blogs.lse. ac.uk/africaatlse/2016/04/01/zambia-urbanising-part-2-encouraging-good-contagion/ 35 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y Smith, G., F. Davies and Z. Chinzara (2016), ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Eco- nomic Recovery’, Policy Note (September 2016). TADAT (2016), ‘Tax Administration Diagnostic Assessment Tool (TADAT)’: Performance Assessment Report Zambia’: http://www.tadat.org/files/Zambia_Final_PAR_2016.pdf World Bank (2015a) ‘Powering the Zambian Economy’, 6th Economic Brief (December 2015), World Bank, Washington D.C. World Bank (2015b), ‘Making Mining Work for Zambia’, 5th Economic Brief (July 2015), World Bank, Washing- ton, D.C. World Bank (2016a), ‘Africa’s Pulse’, October 2016 edition. World Bank (2016b) ‘Beating the slowdown: Making Every Kwacha Count’, 7th Economic Brief (June 2015), Washington D.C. World Bank (2016c) ‘Macro-Poverty Outlook for Zambia’: Spring 2016’: http://documents.worldbank.org/cu- rated/en/2016/04/26225105/macro-poverty-outlook-zambia World Bank (2016d), ‘Zambia Mining Investment and Governance Review’. Washington, DC. Zambia Revenue Authority (2016), ‘2017 Budget Highlights: Overview of Tax Changes’, Lusaka, Zambia. ZIPAR (2016), ‘Walking a Tightrope to Economic Recovery: Analysis of the 2017 Budget Speech, 17 November 2016. ZEITI (2015), ‘Seventh Report of the Zambia Extractive Industries Transparency Initiative: for the Year Ending December 2014’, Lusaka, Zambia. 36 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y INOTES 1 This section is based on analysis in World Bank (2016a), ‘Africa’s Pulse’, October 2016 edition. 2 Razafimahefa, I. F. (2012). ‘Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants.’ IMF Working Paper 141. Washington DC. 3 Bond spread is yield of sovereign bond compared with the yield of a United States Treasury debt security of a comparable maturity. 4 Smith, G., F. Davies and Z. Chinzara (2016), ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Economic Recovery’, Policy Note (September 2016): http://www.worldbank.org/en/news/feature/2016/10/11/beating-the-slowdown-in-zambia-reducing-fiscal-vulnerabilities-for-economic-recovery 5 Ministry of Finance (2016), ‘2016 Mid-Year Economic Review’, October 2016, Ministry of Finance, Lusaka. 6 World Bank (2015a) ‘Powering the Zambian Economy’, 6th Economic Brief (December 2015), World Bank, Washington D.C. 7 Bank of Zambia (2016), ‘Monetary Policy Committee Statement for Third Quarter 2016’, November 16, 2016. 8 Republic of Zambia (2016), ‘2017 Budget Address by Honorable Felix C. Mutati, MP Minister of Finance to the National Assembly’. Ministry of Finance, Lusaka. Friday November 11, 2016. 9 Ministry of Finance (2016), ‘2016 Mid-Year Economic Review’, October 2016, Ministry of Finance, Lusaka. 10 Bank of Zambia ‘Statistical Fortnightly Data’ from their website. 11 Central Statistical Office (2016a), ‘Monthly Bulletin’, November 2016. 12 Bank of Zambia (2016), ‘Monetary Policy Committee Statement for Third Quarter 2016’, November 16, 2016. 13 Smith, G., F. Davies and Z. Chinzara (2016), ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Economic Recovery’, Policy Note (September 2016). 14 Bank of Zambia (2016), ‘Monetary Policy Committee Statement for Third Quarter 2016’, November 16, 2016. 15 Ministry of Finance (2016), ‘2016 Mid-Year Economic Review’, October 2016, Ministry of Finance, Lusaka. 16 IMF (2016). ‘IMF Staff Concludes Visit to Zambia’. Press statement. November 2016. 17 Republic of Zambia (2005). ‘Public Financial Management Performance Report and Indicators.’ December 2005. 18 IMF (2016). ‘IMF Staff Concludes Visit to Zambia’. Press statement. November 2016. 19 Flynn, S. and Pessoa, M. (2014). ‘Prevention and Management of Government Arrears.’ Technical Notes and Manuals. International Monetary Fund. 20 Republic of Zambia (2016), ‘2017 Budget Address by Honorable Felix C. Mutati, MP Minister of Finance to the National Assembly’. Ministry of Finance, Lusaka. Friday November 11, 2016. 21 Government is permitted by the Bank of Zambia Act to take bridging loans up to a limit of 15% of the previous year’s revenue. 22 World Bank (2016b) ‘Beating the slowdown: Making Every Kwacha Count’, 7th Economic Brief (June 2015), Washington D.C. 23 Auditor General Office (2015), ‘Report of the Auditor General on the Accounts of the Republic for the Financial Year Ended 31 December 2015.’ Govern- ment of the Republic of Zambia. 24 Smith, G., F. Davies and Z. Chinzara (2016), ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Economic Recovery’, Policy Note (September 2016). 25 World Bank (2016b) ‘Beating the slowdown: Making Every Kwacha Count’, 7th Economic Brief (June 2015), Washington D.C. 26 ZIPAR (2016), ‘Walking a Tightrope to Economic Recovery: Analysis of the 2017 Budget Speech, 17 November 2016. 27 IAPRI (2016), ‘2017 Agricultural Sector Budget Analysis’: http://www.iapri.org.zm/images/Presentations/2017_Agricultural_Sector_Budget.pdf; Indaba Ag- ricultural Policy Research Institute, Lusaka, Zambia. 28 Republic of Zambia (2016), ‘2017 Budget Address by Honorable Felix C. Mutati, MP Minister of Finance to the National Assembly’. Ministry of Finance, Lusaka. Friday November 11, 2016. 29 Nalishebo, S. and A. Halwampa (2015), ‘A Cautionary Tale of Zambia’s International Sovereign Bond Issuance’, ZIPAR Working Paper No.22, Lusaka. 30 Bank of Zambia (2016), ‘Monetary Policy Committee Statement for Third Quarter 2016’, November 16, 2016. 31 Central Statistical Office (2016b), ‘Monthly Bulletin’, October 2016. 32 Bank of Zambia ‘Statistical Fortnightly Data’: http://www.boz.zm/ 33 Central Statistics Office (2016c) ‘2015 Living Conditions Monitoring Survey: Key Findings’, Central Statistics Office, Lusaka Zambia. 34 Central Statistics Office (2016c) ‘2015 Living Conditions Monitoring Survey: Key Findings’, Central Statistics Office, Lusaka Zambia. 35 World Bank Commodity Market Data (Pink Sheets). 37 8 th Z A M B I A E C O N O M I C B R I E F - R A I S I N G R E V E N U E F O R E C O N O M I C R E C O V E R Y 36 Smith, G., F. Davies and Z. Chinzara (2016), ‘Beating the Slowdown: Reducing Fiscal Vulnerabilities for Economic Recovery’, Policy Note (September 2016). 37 Nalishebo, S. and A. Halwampa (2014), ‘Uncovering the Unknown: An Analysis of Tax Evasion in Zambia’, ZIPAR Working Paper No.18. 38 Alexeev, M. and B. Chibuye (2016), ‘Estimating the Value Added Tax (VAT) Gap in Zambia: 2009-11’, IGC Zambia Policy Brief 41204. 39 Zambia Revenue Authority (2016), ‘2017 Budget Highlights: Overview of Tax Changes’, Lusaka, Zambia. 40 ZIPAR (2016), ‘Walking a Tightrope to Economic Recovery: Analysis of the 2017 Budget Speech, 17 November 2016. 41 ZEITI (2015), ‘Seventh Report of the Zambia Extractive Industries Transparency Initiative: for the Year Ending December 2014’, Lusaka, Zambia. 42 World Bank (2016d), ‘Zambia Mining Investment and Governance Review’. Washington, DC. 43 Chamber of Mines (2016), ‘Taxation and Mining Investment in Zambia’, November 2016. 44 World Bank (2015b), ‘Making Mining Work for Zambia’, 5th Economic Brief (July 2015), World Bank, Washington, D.C. 45 The TADAT is supported by many development partners including the World Bank. For the Zambia report see: TADAT (2016), ‘Tax Administration Diagnos- tic Assessment Tool (TADAT)’: Performance Assessment Report –Zambia’: http://www.tadat.org/files/Zambia_Final_PAR_2016.pdf 46 Nalishebo, S. and A. Halwampa (2014), ‘Uncovering the Unknown: An Analysis of Tax Evasion in Zambia’, ZIPAR Working Paper No.18. 47 Presentation by K. Muyunda from the Center for Trade, Policy and Development, Lusaka: ‘The Role of Taxation to Achieve Economic and Social Recovery”. 48 See: http://www.doingbusiness.org/data/exploreeconomies/zambia#paying-taxes 49 Sladoje, M (2016), ‘Zambia Urbanizing: Encouraging Good Contagion’, Africa at LSE Blog: http://blogs.lse.ac.uk/africaatlse/2016/04/01/zambia-urbanising-part-2-encouraging-good-contagion/ 50 See: http://www.publishwhatyoupay.org/pwyp-news/zambia-civil-society-position-on-illicit-financial-flows/ 51 Goodfellow, T. (2016). ‘Property Taxation in Rwanda and Ethiopia.’ Brief No. 4. Sheffield Political Economy Research Institute. The University of Sheffield. 52 Nalishebo, S. and A. Halwampa (2014), ‘Uncovering the Unknown: An Analysis of tax Evasion in Zambia’, ZIPAR Working Paper No.18. 38 The World Bank Group Lusaka Country Office 2nd Floor, Bank ABC House 746 Church Road P.O. Box 35410 Lusaka, Zambia Tel: +260 211 373200 +260 211 373217 Fax: +260 211 373248 www.worldbank.org/zambia ZAMBIA ECONOMIC BRIEF RAISING REVENUE FOR ECONOMIC RECOVERY