Public Financial Management Reforms in Zambia in the 21st Century

Introduction

In times of uncertainty, citizens and corporations look to their governments for interventions ranging from stimulus packages and new policies to providing relief for the most vulnerable members of society. Public Financial Management (PFM) becomes ever more crucial to ensuring the effective mobilisation of resources and facilitating the necessary interventions so that economies like Zambia’s grow more resilient over time.

Unfortunately, Southern Africa was already the worst-performing region in Africa in terms of economic growth - even before the current health and economic crisis. The African Development Bank’s 2020 African Economic Outlook, Southern Africa analysis demonstrated that growth was already slowing from 1.2% to 0.7%. Zambia has not been immune to these trends with an estimated average annual growth of just 2% in 2019.

Disruption in China and other major manufacturing hubs is having a spillover effect on global supply chains. The consequences are clear in Zambia: the tourism and airline industries are amongst the worst affected. The pressures on the global economy have driven most commodity prices down and with mining the largest source of foreign exchange in Zambia, generating almost 70% of total export receipts, the impact is already apparent. Mining is also an important source of formal employment, accounting for 25% of private sector employment and 10% of total formal sector employment. A great many jobs are at risk.

Early warning signs As early as 2003, the World Bank warned that “the challenges faced by Zambia in public expenditure management have been long-standing and will require targeted efforts as well as a strong degree of political will to address.”

Since then, donors have funded the Public Expenditure Management and Financial Accountability (“PEMFA”) Program commencing in 2005 and ending in 2012, at an estimated cost of USD 75 million. Some of the targeted reforms under this project included improvements to revenue administration, internal audit functions, public procurement, as well as the implementation of the Integrated Financial Management Information Systems (“IFMIS”).

An independent evaluation of the implementation of the PEMFA program in July 2010 indicated that it was difficult to prove a direct correlation between the PEMFA reforms and any improvements in local PFM. A lack of government ownership, bad management design and unrealistic timelines and scope were to blame, amongst other factors.

In 2014, the World Bank financed the Public Financial Management Reform Program Phase I project (“PFMRP”) which considered various aspects of the PEFMA program design including the program documents and analysed program data to gather insights about elements of past projects that were either a success or a failure. Concluded in 2018 at a total cost of USD 22 million, the project was a welcome development since Zambia had been experiencing fiscal challenges since 2010. The PFMRP focused on several areas, including:

Activities related to planning and budgeting, including the revision of the PFM legal framework,
Strengthening IFMIS and cash management activities,
Strengthening Zambia Public Procurement Authority (ZPPA) oversight,
Training auditors and strengthening internal audit and control systems,
Increasing the effectiveness of the Zambia Revenue Authority (ZRA),
Tax policy formulation in the Budget Office and
PFM intervention on emerging issues.

"The pressures on the global economy have driven most commodity prices down and with mining the largest source of foreign exchange in Zambia, generating almost 70% of total export receipts, the impact is already apparent."

Outcomes of PFM projects The projects resulted in various reforms that are meant to achieve better governance and transparency in the PFM environment:

ZPPA Act (2008) One of the main objectives of the Act is to improve transparency and accountability in public procurement. The main reform that the Act introduced was the decentralisation of the procurement process to the procuring entities and the establishment of the ZPPA as the regulatory body that provides oversight by devising policies, standards and monitoring compliance.
The Public Finance Management Act (2018) This Act replaced the Public Finance Act (2004), which much like the ZPPA Act (2008), has an overarching objective of improving transparency and accountability in PFM. In addition, it also aims to improve revenue generation and resource allocation.
Other reforms include:

a) The operationalisation of the Integrated Financial Management Information System (IFMIS) and the Treasury Single Account (TSA) system; b) The obligations of the Treasury to set revenue targets for all MPSAs and empowers the Secretary to the Treasury to act on non performing Controlling Officers and Controlling bodies; c) Rules with regards to the management and disposal of public assets and stores and d) The Auditor General’s scope of audits extended to value for money and other specialised audits.

4. The Introduction of technology In a quest to further support the objective of achieving improved transparency, accountability and improved resource allocation, the Government of the Republic of Zambia implemented the following technology-based platforms:

IFMIS: This Information system is targeted to improve expenditure controls and fiscal reporting among MPSAs;
Government Procurement System: Aimed at achieving end-to-end automation of the procurement process to further improve efficiency and transparency in the whole process and
Electronic Fiscal Devices and Tax Invoice Management Systems: Allows ZRA offices to monitor the sales of businesses connected to this system in almost real time.

The story in 2019 and beyond Revenue collection has greatly improved during the period of donor intervention and reforms. Domestic revenue has increased, on average, year-on-year at a rate of 17% from 2015 to 2018. Revenues and grants exceeded target by 9.1% in the period from January 2019 to August 2019.

Another positive result is the reduction in financial mismanagement. The Auditor General’s report indicated a reduction of 79% from ZMW 939 Million in 2015 to ZMW 193 Million in 2017 in the value of financial mismanagement.

In his maiden budget speech, the Minister of Finance, Hon Dr Bwalya N’gandu, acknowledged Zambia’s declining economic performance and outlined measures aimed at reducing the fiscal deficit, the pace of debt accumulation and the dismantling of domestic arrears.

The majority of the measures, which are all the reforms referred to above, have been talked about for some time and it is imperative that the Government commences implementation. For instance, whilst the Government implemented the Public Finance Management Act in 2018, the accompanying legislation has yet to be enacted. On the expenditure front, measures announced included:

Effective management of the public service wage bill and other expenditure areas such as subsidies;
Minimising the cost of running the Government;
Halting the accumulation of domestic arrears and prioritising the dismantling of current stock;
Increasing the use of Public-Private Partnerships;
Rescoping road projects and
Revising the Public Procurement Act to provide for reference pricing and oversight for high value procurements.

For the reforms to achieve their intended purpose, more solutions and interventions are required to control expenditure. Considering the impact of the current health and economic crisis, the Government will have to make some tough choices, including where to realise more value and where to cut expenditure.

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