The implications of nominal exchange rate movement for fiscal outcomes in Zambia

The aim of this project is to analyse the fiscal implications of the exchange rate movement in Zambia.  While the determinants of the exchange rates have been sufficiently analysed in Zambia as part of the previous IGC study, very little research has delved to study the fiscal implications of the exchange rate on Zambia which is a major policy challenge for the government of Zambia. Recent exchange rate swings have yielded concern with regards to effective planning related to the effects of currency depreciation and its volatility. This study will not only add to the literature on public finance and exchange rate movement in Zambia, but also provide additional exchange rate module that could be use with the current applied macro model by the Zambian Ministry of Finance that will be helpful for a quicker more in-depth analysis of exchange rate movement and the macro economy. The project therefore proposes exploring and adapting a macro-micro simulation framework to link high-level interactions between budget/exchange rate outcomes to more detailed budget components.

In estimating the implications of movements in exchange rate  on fiscal outcomes, the study will specifically seek to address the following questions:

1. Revenue - The impact of exchange rate changes on the main trade (export and import) taxes; and on domestic revenues (PAYE, CIT, VAT etc)
2. Expenditure - The direct impact on capital and current expenditure (based on import content) and the indirect effects (based on estimates of price effects and other relevant variables) as well as the impact on the cost of debt servicing, both external and internal.
3. Deficit–The impact of currency changes on the deficit and its financing, over and above that estimated in revenue and expenditure above.