Italy: FinMin presents draft 2025 budget, proposes to cut deficit to 3.1% of GDP

• 2024 deficit revised to 6.4% of GDP from initial 4.8% estimate due to drought impact
• GDP growth seen at 6.6% in 2025, inflation targeted in 6-8% range
• Mining tax regime unchanged, energy sector interventions maintained
• Planned tax measures to contribute 0.4% of GDP to domestic revenue in 2025
• Tax measures to target non-traditional exports, property and imports, with excise duty increases
• Drought and energy crisis pose significant risks to 2025 budget goals

The government plans to achieve a fiscal deficit (cash basis) of 3.1% of GDP in 2025 as part of its macroeconomic objectives to build economic resilience. When presenting the 2025 budget in parliament, finance minister Situmbeko Musokotwane said that following the revision of the budget due to the drought, the 2024 deficit is now projected at 6.4% of GDP higher than the original estimate of 4.8% set in the budget. He added that the projected 2024 fiscal outturn is actually very commendable given all the pressures emanating from the drought as it was a reflection of government's commitment to prudent management of public funds. The decrease in the 2025 deficit is planned to be achieved via improved revenue mobilisation and further rationalisation of expenditures. Total expenditure for 2025 is expected at ZMW 217.1bn, representing 26.6% of GDP. The total domestic revenue and grants are projected at ZMW 182.4bn or 22.3% of GDP resulting in the projected deficit of 3.1% of GDP in 2025.

Macroeconomic outlook for 2025

The macroeconomic framework on which the 2025 budget was based include the following:

1. Attain a real GDP growth rate of 6.6%;
2. Reduce inflation to the 6-8% target band in the medium-term;
3. Maintain international reserves above 3.0 months of import cover;
4. Increase domestic revenue to at least 21.3% of GDP;
5. Limit net domestic borrowing to 1.9% of GDP.

Government moves to increase domestic revenue collection

The measures on the revenue side include efforts to seal revenue leakages and improve collection by implementing tax administration interventions and strengthening the capacity of the revenue authority incl. using technical means. Musokotwane stated that ZMW 174.2bn or 80.2% of the 2025 budget will be financed by domestic revenues (of which ZMW 137.4bn is tax revenues or 16.8% of GDP) while ZMW 8.2bn or 3.8% will be grants from cooperating partners. The balance of ZMW 34.7bn or 16.0% will be financed through borrowing. Domestic borrowing will be ZMW 15.4bn or 7.1% while ZMW 19.4bn or 8.9% will come from external sources. As a share of GDP, domestic borrowing is projected at 1.9% while external borrowing is set at 2.4%.

Musokotwane stated that following the successful restructuring of Zambia's external debt, government aims to strengthen domestic resource mobilisation to enable it service debt and sustain public service delivery. This will be achieved through tax and non-tax policy rationalisation as well as enhanced administration and compliance. The following tax measures were proposed to take effect on Jan 1, 2025:

• Advance Income Tax (AIT):?The government proposed a 15% AIT on remittances over USD 2,000 without a valid Tax Clearance Certificate, aimed at curbing undeclared income and illicit financial flows. It will also apply to non-compliant exporters.
• Corporate Income Tax (CIT) on profits from non-traditional exports:?The government proposed increasing the CIT rate on profits from non-traditional exports and value-added copper cathodes from 15% to 20%, aiming to harmonize the tax regime in the medium term.
• Selected Goods Surtax on imports:?To support local industries and boost investment, the government proposes introducing and increasing the Selected Goods Surtax on imports of specified locally manufactured products.
• Excise Duty indexation: The government proposed indexing excise duties on tobacco, fuel, and used vehicles to inflation, capped at 20%. A 10% excise duty will be introduced on betting amounts, and the duty on non-alcoholic beverages will increase from ZMW 0.6 to ZMW 1 per litre.
• Presumptive tax:?The government proposed a 20% increase in presumptive tax bands for motor vehicle operators transporting passengers.
• Property Tax:?The government, in collaboration with local authorities, will implement measures to enhance revenue collection, focusing on property taxes. No further details were given.

The revenue gain from these tax measures and other non-tax measures is projected at a total of ZMW 3.1bn in 2025 which is about 0.4% of GDP in our calculations.

Budget expenditure by function

Musokotwane revealed that of the total expenditure for 2025 which is expected at ZMW 217.1bn, representing 26.6% of GDP, ZMW 73.8bn or 34.0% would be spent on general public services. This would include ZMW37.3bn for domestic debt servicing, ZMW 16.7bn for external debt payments, ZMW 317.2mn for ongoing voter registration, and ZMW 5.7bn for settling outstanding government bills to boost liquidity.

Musokotwane proposed to spend ZMW 48.7bn or 22.4% of the budget to stimulate economic activity and improve livelihoods. It's worth noting that ZMW 15.4bn of this allocation will go towards supporting interventions in the agriculture, fisheries and livestock subsectors, probably a key drought intervention. Musokotwane also proposed to increase the allocation for the constituency development fund (CDF) to ZMW 5.6bn in 2025 from ZMW 4.8bn in 2024. This will increase the allocation to each constituency to ZMW 36.1mn from ZMW 30.6mn in 2024. In relation to the drought, Musokotwane proposed to spend ZMW 16.2bn on social protection. Of this amount, ZMW 8.3bn is for the Social Cash Transfer programme which includes the Drought Emergency Social Cash Transfer programme and ZMW 2.0bn for the Cash for Work programme.

Drought and energy risks remain significant, but expected to moderate

Amid severe drought and power cuts, Musokotwane stated that the government aims to navigate Zambia through the crisis and position the country for future growth and prosperity. The drought, which has also affected food security with over 9mn people impacted across 84 of 117 districts lead, President Hakainde Hichilema to declare a national emergency earlier this year. To address climate change-induced disasters, the government plans to establish a stabilization fund, channeling excess mineral royalty revenues into it. Additionally, it will collaborate with development finance Institutions to access contingent financing immediately after a natural disaster occurs. Furthermore, government proposed to spend ZMW16.2bn (approximately 2% of GDP) on social protection, with ZMW 8.3bn allocated for the Social Cash Transfer program, including the Drought Emergency Cash Transfer, and ZMW 2bn for the Cash for Work program. Musokotwane further reaffirmed government's commitment to the Farmer Input Support Program (FISP) with plans to improve inefficiencies by shifting to a Farmer Input Voucher system to enhance transparency and streamline input distribution.

Zambia's energy sector faces challenges as the country is currently generating only 1,205 MW of its 3,811 MW capacity according to Musokotwane. This has left the country with a power deficit which is currently in excess of 1,000MW. To address this, the government is currently importing power from Mozambique, Namibia, and South Africa, while ZESCO and independent producers invest in alternative energy technologies and off-grid solutions. This will continue going into 2025. Musokotwane further stated that the government is also doubling thermal energy at Maamba Collieries to 600 MW and promoting a net metering initiative for power trading. Additionally, the Rural Electrification Authority (REA) is expanding access to electricity with new connections and developing 15 solar projects in rural areas.

We?estimate?that over USD 11.5bn has been pledged by various investors for various power sector projects across the country in 2024 alone, according to a compilation using data reported on our website. While these commitments could more than cover the country's power deficit which currently stands above 1,000MW, they are unlikely to address the shortfall in the short term due to the time needed for implementation. Power sector commitments represent approximate 40.8% of Zambia's GDP with majority of these commitments been driven by Chinese firms, particularly after President Hichilema's recent visit to China where he was attending the FOCAC summit. Although Musokokwate did not speak further to these investments, we anticipate improved situation in the energy sector in 2025 as the El Nino induced drought eases (reviving hydro power generation) and some of the pledged energy projects are implemented. These risks, however, remain significant and may affect budget goals.

Mining tax regime is unchanged

Musokotwane revealed that government will continue to prioritize reviving Zambia's mining sector through a three-step strategy. This strategy includes resolving legal disputes to revive existing mines as was done with Konkola and Mopani Copper Mines, improving the investment climate to attract companies, and encouraging mineral exploration. Other notable developments include the revival of Shaft 28 in Luanshya, creating 3,000 jobs, and new investments in Lubambe Mine (USD 300mn) and Kalengwa Mine (USD 200mn). Additionally, Kitumba Mine in Mumbwa will generate 2,500 jobs, while the Mingomba Mine will attract USD 2bn and create over 1,000 jobs.

We?estimate?that over USD 7.2bn has been committed by various firms to investments in the copper mining sector since January 2024. Some projects have already begun, while others remain at the commitment stage. The Zambian Government's strategy to reach 1mn tonnes of copper production per annum by 2027 is achievable if these investments materialize, particularly with KCM (300,000 to 500,000 tonnes p/a), IRH's Mopani mine (200,000 tonnes p/a), and FQM's S3 expansion project. These commitments represent approximately 25.5% of Zambia's GDP, however, power shortages remain a critical challenge. With mining exploration continuing across the country including a nationwide geological survey which is currently underway, the government is optimistic about hitting the production targets. Copper production is expected to reach 822,661 tonnes in 2025 and eventually break into the 1mn tonnes threshold in 2027. This production target however will only be feasible to meet if the current power challenges are adequately met in the short to medium term.

Conclusion

The 2025 proposed budget for Zambia reflects a strategic approach to fiscal management and economic resilience amidst challenging circumstances. The government's commitment to reducing the fiscal deficit to 3.1% of GDP, following a higher-than-expected 2024 deficit of 6.4%, demonstrates a focus on improved revenue mobilization and expenditure rationalization. With total expenditure projected at ZMW 217.1bn and a targeted real GDP growth rate of 6.6%, the budget also outlines essential revenue and tax measures aimed at sealing leakages and enhancing collection efficiency. In light of the ongoing drought and energy challenges, the government's initiatives to bolster social protection and energy investments indicate a proactive stance toward fostering stability and recovery. Furthermore, significant advancements in debt restructuring are expected to ease fiscal pressures, allowing for more sustainable public service delivery. As Zambia navigates these economic challenges, the anticipated easing of drought conditions and the full realization of pledged energy investments could pave the way for renewed growth and enhanced economic stability by 2025. However, the energy and drought crises will continue to pose significant risks.