RE-ENGAGE IMF… there’s no option but to get on the table with them, HH advises govt

THE PF government has no option but to go back to the table with the IMF to signal commitment to fiscal prudence and commitment in order to see economic actors come on board and buying into the ruling party policies, says Hakainde Hichilema.

And Patriots For Economic Progress leader Sean Tembo has appealed to the government to reconsider its decision to remove Value Added Tax and its proposed introduction of sales tax.

Commenting on the K86.8 billion 2019 national budget presented by finance minister Margaret Mwanakatwe last Friday, Hichilema questioned whether the financial plan was realistic and reasonable.

The opposition UPND leader further wondered if the budget would achieve what Mwanakatwe promised Zambians in it.

“Let me start by addressing the elephant in the room, the debt. And let me simplify this for you to understand and I will use the figures in the budget as presented to the National Assembly by Honourable Mwanakatwe. On page 25 of the Budget speech, there is a Table, the 2019 Expenditure by Functions of Government. You will note that under General Public Services, the government has allocated K14.9 billion to service external debt and K8.6 billion to service domestic debt, meaning a total of K23.6 billion will go towards debt service in 2019 out of a total of K56.1 billion of domestic revenues that the government plans to raise in 2019 (This is found in the Table on page 28, Resource Envelope for the 2019 Budget),” Hichilema said.

He noted that 42 per cent of Zambia’s domestic revenues would go to service debt in interest payments on domestic and external debt.

“Paying interest and not repaying the principal which in economics is called amortisation. How much were we spending on debt service when PF government took over in 2011? It was 17 per cent of domestic revenues. This figure increased to 25 per cent by 2014 and 29 per cent by 2017 and now it is at 42 per cent of domestic revenues in 2019. Second point, according to ANNEX II (a) of the Green Paper 2019-2021, which is the Personal Emoluments (PE) expenditure ceiling, the 2019 Personal Emoluments figure is estimated at K25.1 billion, representing 45 per cent of domestic revenues. If we add debt service to this, it means K48.7 billion out of the K56.1 billion will go towards paying Personal Emoluments (which in simple terms is salaries) and servicing the debt,” Hichilema said.

“It means 87 per cent of the domestic revenues are already committed to these two commitments, one statutory (salaries) and the other constitutional (debt service). It means that the only domestic revenues available in the 2019 Budget are K7.4 billion for all other expenditures, which clearly is not enough. In short, for 2019, the elephant in the room, which is debt, has even grown bigger. To remove it, we will need to bring down the house as the doorway has become too small for the elephant. Unfortunately, for the people of Zambia, we will have to endure up to 2021 and because of this problem, we may continue to see a deteriorating macroeconomic environment.”

Hichilema advised the government to commit to fiscal consolidation and come up with a credible economic programme.

Hichilema also advised the government to root out corruption and re-engage cooperating partners in various social sectors.

“First, the PF government should seriously commit to fiscal consolidation and come up with a credible economic programme. Second, the PF government has no option but to go back to the table with the IMF to signal their commitment to fiscal prudence and commitment on the basis of which we will see economic actors come on board and buying into the PF policies. Third, the PF government must, on a serious note, root out corruption and reengage cooperating partners, especially in the social sector – education, health, Social Cash Transfer, water and sanitation – all of which have so far been embroiled in corruption or misappropriation of funds,” Hichilema said.

He further said the government should earnestly try to partner with the private sector to leverage private sector resources for economic growth.

Hichilema noted that the aforesaid could only happen if the private sector had trust that the government would steer the economy in the right direction and that any moneys invested would not be corruptly used by a few privileged at the expense of the majority Zambians.

And Tembo said instead of completely abandoning VAT and adopting sales tax across all sectors of the economy as outlined in the budget, the government should have considered making such a reform specific to the mining sector only.

Tembo said alternatively, a fourth category of VAT suppliers should be created in addition to the three existing categories of standard rated, exempt rated and zero-rated.

“Such a category could be referred to as ‘single rated’ and could operate in the same manner as sales tax so that single rated suppliers charge output tax but do not claim input tax, and a lower rate could be designated for such single rated suppliers to make it fair and equitable. Such a measure would address the specific problem that exists in the mining sector when it comes to unwarranted VAT refunds, without disrupting the other sectors of the economy. There is a very specific reason why more than 99 per cent of the countries across the globe, including Zambia, moved away from sales tax and adopted value-added-tax, during the global tax reforms in the 1980s and 90s. The main flaw of sales tax is that it is arbitrary, as it does not take into account the nature and value of a transaction. This arbitrary nature of sales tax will make it extremely difficult for a tax authority like ZRA to come up with a single appropriate sales tax rate, which would be suitable for all sectors of the economy. This is because some sectors such as jewelry retailing are high margin and low volume whereas other sectors like retailing of petroleum products are low margin and high volume. Adopting a high sales tax rate will fairly tax high margin sectors but will overtax and kill low margin sectors of the economy. Adopting an average sales tax rate will under tax the high margin sectors of the economy and overtax the low margin sectors. Adopting a low sales tax rate will fairly tax the low margin sectors of the economy such as petroleum and financial services, but will under tax the high margin sectors of the economy. If the government tries to come up with a different sales tax rates for each sector of the economy, there will be hundreds if not thousands of sales tax rates, which will be too complicated to the consumer and too expensive for ZRA to administer,” Tembo said.

He said should the government nevertheless decide to go ahead with what he called retrogressive reform, a longer transition period of at least two years should be considered in order to allow for time to change the various accounting computer systems across the economy.

“If government insists to rush the transition from VAT to Sales Tax and effect it by 1st January 2019, then they risk causing total havoc to the economy similar to the havoc that was caused by the abrupt introduction of Statutory Instrument No. 35 and 55 in 2013. As Patriots for Economic Progress, we have also noted with regret that at a time when the nation is deeply concerned about unsustainable national debt, the government, through the Honourable Minister of Finance, has decided to increase the portion of the national budget that will be funded from borrowing, from about 30 per cent in the 2018 National Budget to about 33 per cent (28.4 per cent external debt plus 4.8 per cent domestic debt) in the 2019 National Budget. Our position on this matter remains the same as before: Zambia cannot mortgage itself to prosperity. Government needs to exercise fiscal discipline by ensuring that our expenditure as a nation is matched to our income so that the need to borrow does not arise. In addition to the risk of debt distress, government borrowing has the added disadvantage of crowding out the private sector, which stifles economic growth and drives up interest’s rates. When private sector growth is stifled, ZRA collects less tax revenue on behalf of government and the fiscal deficit widens thereby compelling government to borrow more, which further stifles private sector growth. It is a vicious cycle which we have no hope of getting out of, for as long as government maintains its static mindset,” said Tembo

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