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Lusaka, 1 December 2010 Public Expenditure Review Workshop Outline Macroeconomic Constraints The Evolution of Fiscal Policy Composition of Public Spending Benefit Incidence of Public Spending Conclusions Macroeconomic Constraints Zambia has made significant strides on the macro economy over the last decade Growth has been the result of favorable external conditions but based on adequate economic policies Structural reforms, as well as fiscal, monetary, and exchange rate policies have resulted on a stable macroeconomic environment of low inflation Dependence on copper exports and government revenues pose a challenge Economy has been growing by about 6 percent in the last decade 7.0 6.0 Real GDP Growth (Annual percent change) 5.0 4.0 3.0 2.0 1.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f Inflation has fallen to single digits 35 30 Annual Inflation (percent) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f The Current Account deficit has been reduced 5.0 0.0 -5.0 External Current Account (percent of GDP) -10.0 -15.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f Evolution of Fiscal Policy Unsustainable high public (external) debt was caused by weak fiscal discipline and inefficient state-owned enterprises Privatization initiated a period of fiscal stabilization reforms in the early part of the decade Debt relief (HIPC and MDRI) in 2006 was the result of a strong reform program Higher fiscal revenues are needed to support government spending priorities (and lower donor support) Evolution of Fiscal Policy 2.0 0.0 -2.0 -4.0 Fiscal Deficit (percent of GDP) -6.0 -8.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f Evolution and Composition of Public Spending Overall public spending rose slowly through 2006 and slightly faster thereafter (falling in 2009) Spending rose by 63% in real terms from 2002 to 2009, but only from 20% to 21.5% of GDP. Spending does not account for aid (project grants) Budget execution has improved (budget cycle and capital spending) Limited availability of resources (both domestic and external) require greater efficiency (to do more with less) Evolution and Composition of Public Spending 20,000 18,000 16,000 14,000 12,000 under spending 10,000 8,000 Actual 6,000 Budget 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 Composition of Public Spending Education remains the largest sector Spending on transport (roads) has accelerated Health spending, which had recovered since 2006, fell slightly in 2009 Agriculture spending has increased, but two major programs (Farmer Input Support Program and Food Reserve Agency) account for most of it Spending on the Water sector remains low (considering the important effect on health) Composition of Public Spending (constant 2009 prices) 3,000 EDUCATION HEALTH 2,500 TRANSPORT (ROADS) AGRICULTURE 2,000 WATER 1,500 1,000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 Poverty and Inequality National poverty rates have fallen by a small percentage, from 68% in 1996 to 59% in 2006 Poverty remains very high in rural areas, at 77% in 2006, compared to 84% in 1996 But it has continue to fall in the urban areas, to 27% in 2006, from 41% in 1996 In addition to the rural-urban divide, inequality has actually increase (the Gini coefficient rose from 47.4 in 1996 to 52.6 in 2006) Poverty and Inequality Population by Consumption Quintile and Place of Residence, Zambia 2006 2,500,000 2,213,092 1,964,024 2,000,000 1,808,104 1,725,915 1,500,000 1,184,320 1,159,760 Rural Urban 1,000,000 618,667 500,000 536,155 379,167 132,950 0 Poorest 2nd 3rd 4th Richest Benefit Incidence of Public Spending Poverty reduction is a difficult goal to achieve through the budget process on an annual basis But government should be able to identify which expenditures have a positive impact in reducing some of the effects of poverty Governments usually concentrate in public goods such as education and access to health Equity analysis does not substitute for need to analyze efficiency of public spending (ex-ante and ex-post) Benefit Incidence - Education Education is the largest sector on government spending Data from 2006 shows that 32 percent of the poorest quintile of the 15-19 years old has not attended school (vs. o.6 percent of the richest) Total (primary and secondary) net enrollment rate for the poorest rural quintile is 66 percent, compared to 88 percent for the richest urban quintile Educational Outcomes Overall Enrollment Rate of Primary and Secondary Schooling by Consumption Quintile and Locality, Zambia 2006 100 80 66.4 69.9 73.7 75.7 77.9 81.5 80.4 83.9 87.5 81.9 60 Rural Urban 40 20 0 Poorest 2nd 3rd 4th Richest Benefit Incidence – Access to Electricity Only 20 percent of the total population has access to electricity, but only 3 percent of the rural population Compared to 51 percent of the urban households In equity terms, 64 percent of the richest quintile has access to electricity compared to 0.6 percent of the poorest quintile Benefit Incidence- Access to Electricity Access to Electricity for Lighting by Consumption Quintile and Location, Zambia 2006 100 76.8 80 64.0 60 Rural 44.6 Urban 40 Total 25.0 24.3 21.0 20 10.8 0.5 2.7 0.6 8.2 2.4 0.8 2.4 5.8 0 Poorest 2nd 3rd 4th Richest Benefit Incidence - Water Water services are dominated by various publicsector and quasi-public institutions Based on data of the 2006 LCMS, 65 percent of the poorest quintile uses water from an unprotected well or a river Compared to 72 percent of the richest quintile uses water from a public or private tap Benefit Incidence - Water Source of Water Supply by Consumption Quintile, Total 100% 80% 60% 40% 20% 0% Poorest River 2nd Well-unprotected 3rd Well-protected 4th Borehole Own tap Richest Public/other tap Conclusions Zambia has achieved significant gains over the last decade at the macroeconomic level Despite faster growth, government spending remains constrained (by resources and in its effectiveness) No significant results of government spending on reducing poverty (or inequality) Analysis of public spending efficiency limited by data availability, but more can be done