Country Report Zambia April 2010

Outlook for 2010-11: Fiscal policy

The challenge for the 2010 budget is to get policy back on track after the fiscal deficit opened up in 2009. The domestic tax take has begun to improve as revenue from the mining sector grows in line with increases in copper prices and production. Trade taxes should also improve after posting large falls in 2009 as world trade fell back. Expenditure will rise owing to an increase in civil service pay agreed in 2009, and as the government comes under greater pressure to meet its development commitments ahead of the elections. Nevertheless, the fiscal deficit is expected to come down to 2.7% of GDP in 2010. The MTEF anticipates fiscal consolidation in 2011, with the tax take increasing and expenditure growth slowing, leading to a fiscal deficit of 1.5% of GDP. However, restraining expenditure in an election year seems unlikely, and the government is being over-ambitious with its target for public-sector wages. As a result, the Economist Intelligence Unit expects a fiscal deficit of 2.4% of GDP in 2011.

In recent years the government has demonstrated that it is determined to keep domestic borrowing down as part of its drive to entrench macroeconomic stability and to lower the risk of crowding out the private sector. Although this policy suffered in 2009 as the fiscal deficit widened, the government should be more successful in 2010-11. External borrowing will therefore continue to play a large role in financing deficits. Most of this will be from donors at concessional rates of interest. China has recently committed to providing Zambia with a US$1bn concessional loan, which will help to ease budgetary constraints over the forecast period. The government has reiterated its interest in securing non-concessional loans to finance investments in infrastructure. The IMF recently expressed its support for this decision, increasing the likelihood that it will be implemented.

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