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Government Revenue Stabilisation in Primary-Producing Countries: a Model for Zambia

Published online by Cambridge University Press:  11 November 2008

Michael W. Bell
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Extract

A common problem in primary-producing countries is that commodity price instability causes substantial variation in government revenues. A conceptually simple yet rarely used domestic policy measure intended to smooth annual fiscal receipts is the establishment of a development stabilisation fund. The need for such a fund in Zambia and its modus operandi are discussed in the context of a review of budgetary performance since 1965. A simulation suggests that substantial smoothing could be achieved, but that the fund could not overcome a prolonged depression of copper prices such as occurred in the years after 1975.

Type
Articles
Information
The Journal of Modern African Studies , Volume 21 , Issue 1 , March 1983 , pp. 55 - 76
Copyright
Copyright © Cambridge University Press 1983

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References

page 55 note 1 All the information and data used in this article have been taken from official government publications and other published sources.

page 56 note 1 Jolly, Richard and Williams, M., ‘Macro-Budget Policy in an Open Export Economy: lessons from Zambian experience’, in East Africa Economic Review (Nairobi), 4, 2, 12 1972, pp. 1–27.Google Scholar

page 56 note 2 Unless otherwise stated, ‘least-squares’ growth rates have been used in this article. The growth rate, r, of a variable, X, is given by r = antilog b –1, where b is the estimated slope coefficient in the regression of the logarithm Xt on t, i.e. log Xt = a+bt+ut (a and b are the regression coefficients, and Ut is an error variable). This method is intended to give a more accurate picture of growth over an extended period in which major variations can occur in any given year. The common alternative, based on the geometric mean, takes account ofonly the initial and final value of a series. There are, however, limitations to the least-squares method which are not explored here.

page 60 note 1 Further detailed accounts of various aspects of the Zambian economy at different stages of its development may be found in Baldwin, R. E., Economic Development and Export Growth: a study of Northern Rhodesia, 1920–60 (Berkeley, 1966),Google ScholarElliott, Charles (ed.), Constraints on the Economic Development of Zambia (Nairobi and London, 1971),Google ScholarHarvey, Charles, Macroeconomics for Africa (London, 1977),Google ScholarDaniel, Philip, Africanisation, Nationalisation and Inequality: mining labour and the copperbelt in Zambian development (Cambridge, 1979),Google Scholar and Fry, James, Employment and Income Distribution in the African Economy (London, 1979).Google Scholar

page 60 note 2 Table 1 differs from official publications in that it clearly identifies net short-term lending and other ‘below-the-line’ accounts and funds as items that require government financing. Thus the overall deficit appears in most years as being somewhat larger than that formally presented by the Ministry of Finance. Also, unlike the methodology used by the Bank of Zambia in its Annual Report, ‘book transactions’ relating to certain asset transfers between the Government and parastatals are left in the summary accounts. Both variations are made to reflect more accurately the level of resort to short-term borrowing facilities and their causes.

page 61 note 1 The recurrent revenue as a proportion of G.D.P. for 1978 (unless otherwise indicated) ranged from under 20 for India (10·6 in 1977), Peru (15·8), Tanzania (17·4 in 1976), Chile (18·3 in 1975), and the U.S.A. (19·8), to under 30 for Kenya (21·6), Zaïre (23·1), Italy (24·4), and Sweden (27·8), to a high of 33·5 for the United Kingdom. Calculated from International Monetary Fund, International Financial Statistics Yearbook, 1979 (Washington, D.C., 1980).Google Scholar

page 62 note 1 Government of Zambia, Second National Development Plan (Lusaka, 1971).Google Scholar

page 67 note 1 Jolly and Williams, loc. cit.

page 68 note 1 Government of Zambia, Third National Development Plan (Lusaka, 1979), pp. 47–8.Google Scholar

page 69 note 1 Mineral tax is paid on the basis of self-assessment in monthly instalments with a lag of 6–8 weeks, and any necessary adjustments are made at the year-end. Company income tax is assessed during a given tax-year on the basis of earnings in the company's financial year which ended in the previous tax-year.

page 71 note 1 At no time since independence has non-mineral revenue been sufficient to finance recurrent expenditure, and it is unlikely to be achieved in the near future. Nevertheless, it remains a useful long-term objective.

page 71 note 2 See Bell, Michael W., ‘Primary Production in an Unstable Economic Order: the Zambian economy, 1965–1978’, University of Aston Management Centre, Working Paper No. 197, February 1981, pp. 47–61, for a discussion of technical aspects of the simulation of the operation of the fund. The data have been updated in this article, although the underlying principles remain unchanged.Google Scholar

page 72 note 1 Ibid.

page 72 note 2 If the fund were established it would be essential that projections be highly accurate. This article does not attempt to suggest models for projecting copper prices, but many institutions do provide such figures, including the World Bank's annual commodity price forecasts.

page 72 note 3 The formal method of testing for the success of the fund in stabilising the Government's borrowing was the use of the coefficient of variation of the time series of the short-term borrowing requirement over the period 1966 to 1981. The coefficient of variation is defined as the standard deviation of the series divided by its mean. In Table 3 the coefficients of variation were 1·3996 and 1·0952 in columns (1) and (2), respectively.

page 73 note 1 The accumulated losses of the Zambian Consolidated Copper Mines (successor to Roan Consolidated Mines and Nehanga Consolidated Copper Mines) reduce its tax liability to the extent that even if prices were to recover, the Government would receive little or no revenue.

page 76 note 1 It should be noted that at least part of this effect is due to the implicit assumption that the financial assistance used for the establishment of the fund would have been in addition to actual aid disbursements – i.e. other commitments would not have been reduced.

page 76 note 2 Government of Papua New Guinea, Mineral Resources Stabilisation Fund Act (Port Moresby, 1974).Google Scholar