By Bennie Mundando
GOVERNMENT says it has developed a domestic arrears dismantling strategy whose major components are dismantling and halting the accumulation of new arrears.
According to the Economic Recovery Plan (ERP) 2020 – 2023, Government said over the past five years, it had accumulated significant domestic arrears mainly due to revenue shortfalls, financing challenges, and weaknesses in the commitment control systems.
It said the stock of domestic arrears had risen from K641.2 million at end-2014 to about K27.7 billion at end-2019.and that the bulk of the arrears related to Value Added Tax (VAT) refunds, road and other capital expenditures, pension obligations, and agriculture subsidies.
It said the arrears, especially to local suppliers of goods and services to the Government and local contractors, had led to a tightening of financial conditions and constrained the growth of private sector credit.
It said the arrears had contributed to a rise in non-performing loans, posing a threat to financial system stability adding that there was also the risk of the increase in rent-seeking and collusion as suppliers sought to accelerate payment or circumvent expenditure controls.
It noted that similarly, as suppliers suffered from liquidity challenges, there were knock-on effects from lower profits and reduced employment and that suppliers ended up reducing or withholding payment of taxes and social security obligations to offset the delays in receiving funds owed to them by Government.
“In view of the accumulation of arrears, Government has developed an arrears dismantling strategy.
The major components of the strategy are dismantling the arrears, and halting the accumulation of new arrears,” reads the ERP in part.
It said the dismantling of arrears will require regular stock-taking and validation of arrear claims and that this will also need prioritisation of arrear clearance based on defined criteria which took into consideration the socio-economic impact, age, cost, risk, currency, and creditor and liquidation of arrears based on the set principles and prioritisation criteria
On halting the accumulation of new arrears, Government said this will enhance the credibility and realism of the budget through the Medium Term Expenditure Framework (MTEF) adherence to commitment control systems adding that by halting VAT arrears, it will prevent the build-up of arrears by improving, forecasting, and ring-fencing of funds.