Budget Address By Hon. Emmanuel Kasonde, M.P.
Minister of Finance and National Planning
Delivered to the National Assembly on Friday, 1st March 2002
1. Mr. Speaker, Sir, I beg to move that the House do now resolve into Committee of Supply on the Estimates of Revenue and Expenditure for the year 1st January 2002 to 31st December 2002, presented to the National Assembly in March 2002.
2. Mr. Speaker, Sir, I am a bearer of a message from His Excellency the President recommending favourable consideration of the motion that I now lay on the Table.
3. Mr. Speaker, Sir, this Government continues to believe that broad-based and sustainable development lies in empowering the people. With this belief, this Budget provides an opportunity for all of us to take stock of what Government has achieved over the past ten years, to recognise the shortcomings and, with courage, humility and willingness to change, rededicate ourselves to realising the potential of our people. This is the essence of the “New Deal”. In this regard, the theme for this year’s Budget is “Food Security through Production and Job Creation”.
4. Mr. Speaker, Sir, before I proceed, allow me to place on record my profound gratitude to my predecessor for laying a firm foundation from which I can build. May I also express my deep gratitude to the many organisations and individuals for the valuable contributions towards the preparation of this Budget. Above all, I wish to thank the Zambian people for the patience they have shown in the face of the inevitable difficulties that have arisen in the process of restructuring our economy.
5. Mr. Speaker, Sir, my address this afternoon consists of six parts. In Part One, I give an overview of the performance of the global economy during the past year. In Part Two, I discuss developments in the Zambian economy during the same period and this is followed, in Part Three, by an outline of Government’s economic policies for 2002. In Parts Four and Five, I present details of the 2002 Budget and the supporting revenue measures, respectively. Finally, in Part Six, I give my concluding remarks.
PERFORMANCE OF THE GLOBAL ECONOMY IN 2001
6. Mr. Speaker, Sir, in 2001 the world economy registered slower growth, with real output growth falling to 2.4 percent compared to 4.7 percent in 2000. The deterioration in growth was driven by low consumer and investor confidence and weaker global demand that was compounded by the tragic events of September 11 in the USA. This slowdown in the world economy was accompanied by a precipitous decline in the volume of world trade to a growth of merely 1.0 percent in 2001 from 12.4 percent in 2000. However, inflationary pressures remained subdued in both advanced and developing countries.
7. Mr. Speaker, Sir, the sluggish growth in the world economy emanated, largely, from advanced economies, where output slowed to 1.1 percent compared to 3.9 percent the previous year. In the USA, growth in output slowed to 1.0 percent compared to 4.1 percent in 2000, while in the European Union and Canada growth slowed to 1.7 and 1.4 percent compared to 3.4 and 4.4 percent, respectively. In the case of Japan, economic growth declined by 0.4 percent compared to the growth of 2.2 percent recorded in 2000. Inflation in advanced economies remained unchanged from its 2000 level of 2.3 percent, while movements in the major exchange rates remained moderate, with the US dollar appreciating moderately against the euro and the yen.
8. Mr. Speaker, Sir, developing countries and countries in transition also registered lower economic growth. Growth in the transition economies declined to 4.9 percent in 2001 from 6.3 percent in 2000, while growth in developing countries declined to 4.0 percent from 5.8 percent. Consistent with this slowdown in economic growth, the volume of trade also declined. For countries in transition, export growth declined to 7.8 percent from 16.3 percent, while import growth declined marginally. In the case of developing countries, export growth declined to 3.4 percent from 15 percent, with import growth falling to 5.0 percent from 16.1 percent in 2000.
9. Mr. Speaker, Sir, Africa’s economic performance was, however, more positive. Economic growth rose to 3.5 percent in 2001 from 2.8 percent in 2000, whilst average annual inflation improved to 12.8 percent from 13.5 percent. Unfortunately, the global economic slowdown, especially in Africa’s key trading partners, namely, the European Union and Japan, not only dampened the growth potential of the region, but also contributed to the fall in the volume of exports from Africa, from 7.3 percent in 2000 to 1.5 percent in 2001.
10. Mr. Speaker, Sir, the decline in world trade precipitated by the world economic slowdown, significantly lowered commodity prices for developing countries, with agricultural raw materials and base metals being the most adversely affected. As an illustration, the decline in global industrial production resulted in average copper prices declining by 6.1 percent to US 77 cents per pound from US 82 cents per pound in 2000.
11. Mr. Speaker, Sir, prospects for recovery in the global economy remain subdued following the September 11 events in the USA and their aftermath. Given these prospects, policy makers and other stakeholders will need to make concerted efforts, not only to manage unfolding risks, but also to create the necessary opportunities for economic recovery and growth.
12. Mr. Speaker, Sir, with the foregoing, I now turn to review the performance of the Zambian economy in 2001.
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PERFORMANCE OF THE DOMESTIC ECONOMY IN 2001
13. Mr. Speaker, Sir, Government’s macroeconomic policy objectives in 2001 were to achieve a 5 percent growth in real Gross Domestic Product (GDP); reduce end-year inflation to 17.5 percent; limit the domestic fiscal deficit to 0.75 percent of GDP; and increase official gross international reserves by US $150 million. We also aimed to increase core social sector spending to over 37 percent of discretionary expenditure and raise domestically financed capital expenditure to 15 percent of revenue. Reflecting higher than programmed wage adjustment to public sector workers, the target for the domestic fiscal deficit was revised upwards to 3.3 percent of GDP during the year.
14. Sir, these objectives were predicated upon increased investment in the mining and tourism sectors, a stable exchange rate, stable energy and food prices, and appropriately tight fiscal and monetary policies.
15. Mr. Speaker, Sir, higher than anticipated expenditures on food imports and wage adjustments to public service workers, in the latter part of the year, resulted in us not being able to meet our targeted domestic fiscal deficit of 3.3 percent of GDP. Other contributing factors were expenditure overruns on the elections, hosting of the OAU Heads of State and Government Summit, and higher interest payments on domestic debt. Further, the shortfall in pledged balance of payments support put additional pressure on the economy. Out of the pledged amount of US $207 million in balance of payments support, only US $75 million was received, which resulted in us not being able to meet our gross international reserves target.
16. Mr. Speaker, Sir, our macroeconomic performance was commendable despite the domestic expenditure pressures, the slowdown in the growth of global output that generated lower demand and lower prices for copper and other primary commodities, significant shortfalls in external support, and high staple food prices. For the second consecutive year, real GDP growth was positive, with preliminary data indicating growth of 5.2 percent in 2001, exceeding the target by 0.2 percentage points. In addition, the end-year inflation rate declined to 18.7 percent from 30.1 percent, broadly in line with our target of 17.5 percent. Relative stability was also restored in the foreign exchange market, with the end-year Bank of Zambia Kwacha mid-rate appreciating by 8 percent against a depreciation of 58 percent in 2000, reflecting tight financial policies.
17. Mr. Speaker, Sir, the high growth in GDP was driven by the mining, tourism, construction, and wholesale and retail trade sectors. Other sectors that contributed to real GDP growth were manufacturing, and electricity, gas and water.
18. Mr. Speaker, Sir, while all the other sectors of the economy performed well, the performance of the agriculture sector was disappointing. Value-added in the agriculture, forestry and fishing sector declined by 2.6 percent in 2001 compared to a growth of 1.6 percent in 2000. As a result, its share of total GDP declined to 15.9 percent from 17.2 percent in 2000. The reduction in value-added in the agriculture sector was mainly attributed to poor input availability and excessive rainfall experienced in some parts of the country. Consequently, the country’s food security position deteriorated and this necessitated the importation of maize and maize meal.
Mining and Quarrying
19. Mr. Speaker, Sir, the mining and quarrying sector grew by 14.0 percent in 2001, up from 0.1 percent in 2000. As a result, its share of overall GDP increased to 6.9 percent from 6.4 percent in 2000. The continued recovery in the production of copper and cobalt, arising from re-capitalisation in the mines, accounted for this growth. This recovery in mining sector output was recorded against a background of cessation of operations at Roan Antelope Mining Corporation of Zambia (RAMCOZ), a major accident at Nchanga Open Pit of Konkola Copper Mines (KCM) in April 2001, and a drop in the average world prices of copper and cobalt of 6.1 percent and 31.3 percent, respectively.
20. Mr. Speaker, Sir, in the tourism sector, value-added increased by 24.2 percent compared to 12.1 percent in 2000. This was largely attributed to a 16.9 percent increase in the number of tourist arrivals, 13.1 percent increase in employment as well as 39.2 percent and 61.4 percent increases in room and bed occupancy rates, respectively. This impressive performance was largely attributable to the total eclipse of the Sun and the hosting of the OAU Heads of State and Government Summit.
21. Additionally, Government policy to zero-rate hotel accommodation under VAT in the Livingstone District Area, and the development of infrastructure, including the rehabilitation of the Livingstone International Airport, contributed to increased value-added in the tourism sector. Furthermore, international flight frequencies increased to 67 from 51 flights per week in 2000. Direct revenue earnings from services offered by enterprises in the sector, such as, accommodation, travel, tours and car hire rose to US $117.1 million from US $111.0 million in 2000.
22. Mr. Speaker, Sir, the manufacturing sector posted a growth of 5.8 percent compared to 3.5 percent in 2000. Growth in the sector was mainly driven by increased value-added in the wood and wood products sub-sector by 9.0 percent, textile and leather industries sub-sector by 6.8 percent and food, beverages and tobacco sub-sector by 5.1 percent. The increase in the food, beverages and tobacco sub-sector was largely driven by increased sugar production to meet export demand, following the launch of the COMESA Free Trade Area (FTA).
23. Mr. Speaker, Sir, value-added in the construction sector grew by 11.5 percent in 2001 compared to 6.5 percent in 2000. The increase in value-added was mainly on account of increased activity in the area of infrastructure development, such as, housing, buildings, major road works, feeder roads and on-going construction works at Chirundu Border Post.
Wholesale and Retail Trade
24. Mr. Speaker, Sir, the wholesale and retail trade sector continued to flourish in 2001. Value-added increased by 6.0 percent from 2.3 percent in 2000. Growth in the sector arose from increased domestic consumer demand and increased activities in the manufacturing and mining sectors.
Electricity, Gas and Water
25. Mr. Speaker, Sir, the electricity, gas and water sector grew by 12.5 percent from 1.1 percent in 2000. The major source of this growth was the increased generation of electricity arising from higher demand from the mining sector and exports of electricity to countries in the region, notably, South Africa and the Democratic Republic of Congo.
Privatisation and Parastatal Reforms
26. Mr. Speaker, Sir, a total of 8 units were privatised in 2001. Notable among these were, Kagem Mining Limited, Dunlop Zambia Limited, Lublend Zambia Limited and Lunsemfwa and Mulungushi hydropower stations. In addition, significant progress was made towards the concessioning of Zambia Railways. Four bids were received and negotiations are proceeding with the preferred bidder. The remaining companies, under the ZPA portfolio, were at various stages of preparation for privatisation.
External Sector Developments
27. Mr. Speaker, Sir, the external sector environment was less favourable than expected, with our terms of trade deteriorating by 3.8 percent compared to an improvement of 3.9 percent in 2000. Preliminary data indicate that the current account deficit worsened to US $743 million in 2001 from US $608 million in 2000. This was mainly due to the increase in the value of merchandise imports, particularly in the mining sector, which outpaced the increase in the value of merchandise exports. The value of merchandise imports increased by 28.1 percent to US $1,253 million, while merchandise exports increased by 16.8 percent to US $871 million.
28. Mr. Speaker, Sir, as alluded to earlier, the slowdown in the global economy, which was exacerbated by the September 11 tragedy in the USA, had a dampening effect on the growth of our export earnings through the drop in the prices of primary commodities. The average realized prices of copper and cobalt fell by 6.1 percent and 31.3 percent to US 77 cents per pound and US $11 per pound, respectively.
29. Sir, notwithstanding the drop in the prices of both copper and cobalt, the volume of exports of these commodities increased. The volume of copper and cobalt exports increased by 26.7 percent and 37.8 percent to 296,926 metric tons and 4,721 metric tons, respectively.
30. Mr. Speaker, Sir, preliminary figures indicate that non-traditional exports registered strong growth in 2001, with earnings increasing by 13 percent to US $282 million. Accounting for this strong performance were horticulture, gemstone, cotton and sugar exports.
31. Mr. Speaker, Sir, one important source of financing the current account deficit was the increased net private capital inflows, which grew by 29.5 percent to US $281 million in 2001. The overall balance of payments, though widening by 14.7 percent to US $428 million, was consistent with our projections.
32. Mr. Speaker, Sir, total external debt stock at the end of 2001 stood at an estimated US $7.3 billion from US $6.3 billion at the end of 2000. The increase of about US $1 billion in the stock of debt was mainly due to Paris Club creditors not granting us the expected debt relief totalling over US $770 million under Naples and Cologne Terms. The balance of US $230 million was due to increased external borrowing by the private sector, mainly in the mining sector. Had the Paris Club relief been extended, Zambia’s total external debt stock would have been reduced to US $5.9 billion.
33. Mr. Speaker, Sir, in 2001 my predecessor informed this august House that Zambia reached Decision Point under the Enhanced HIPC Initiative in December 2000. Following this, it was our expectation that all creditors, particularly bilateral and multilateral creditors, would immediately thereafter extend interim debt relief. As it turned out, many of the creditors, especially Paris Club creditors, are yet to deliver their expected interim debt relief.
34. Mr. Speaker, Sir, under the HIPC Initiative, Zambia should have signed the Eighth Agreed Minute in 2001 with her Paris Club creditors which should have triggered debt relief of US $770 million mentioned earlier. Unfortunately, this was not done due to the creditors having not responded to our request for deeper relief.
35. Mr. Speaker, Sir, allow me to pay tribute to those creditors, including the International Monetary Fund (IMF), the World Bank, the African Development Bank, Canada, France and the United Kingdom, which have actually delivered interim debt relief. I am appealing to those creditors who are yet to extend debt relief to Zambia to do so as soon as possible. In this regard, allow me to register our appreciation for the recent debt rescheduling granted by Japan.
Poverty Reduction Strategy Paper
36. Mr. Speaker, Sir, an Interim Poverty Reduction Strategy Paper (I-PRSP) was finalised at the end of July 2000. Based on the priorities outlined in the I-PRSP, the 2001 Budget included some specific poverty reduction expenditures amounting to K352 billion, while the PRSP was being developed. The draft PRSP was completed in September 2001. This draft PRSP was prepared through broad-based consultations across the country involving diverse stakeholders, including the civil society, the academia, NGOs and traditional leaders. The draft paper was presented to a national stakeholder summit in mid-October, 2001. Following this summit, further work was undertaken to incorporate the comments from the various stakeholders and the draft is now being finalised for submission to Cabinet.
37. Mr. Speaker, Sir, our Poverty Reduction Strategy is a careful blend of interventions in the economic, social and cross-cutting areas. The primary goal is to achieve sustained annual economic growth of between five and eight percent in the medium-term, which will allow for increased real spending on poverty reduction programmes. In this regard, four sectors, namely; agriculture, tourism, manufacturing and mining were identified as having potential to reduce poverty on a sustainable basis. Strategies to unlock this potential include investment and export promotion, public spending on infrastructure development and the maintenance of a stable macro-economic environment.
Budget Performance in 2001
38. Mr. Speaker, Sir, fiscal policy in 2001 was aimed at increasing productivity and promoting economic growth. This was to be achieved by directing resources to growth-supporting infrastructure and poverty reduction programmes. Additionally, the ceiling on the domestic fiscal balance was to be limited to 3.3 percent of GDP in order to support the year-end inflation target of 17.5 percent.
39. Mr. Speaker, Sir, the higher than planned expenditures on the public service wage bill, tripartite elections, hosting of the OAU Heads of State and Government Summit and domestic interest as well as the shortfall in balance of payments support led to a fiscal deficit of 4.7 percent of GDP. This was higher than the targeted deficit of 3.3 percent of GDP, despite the good revenue performance that was above target by 5.3 percent. Domestic revenues amounted to K2,509 billion while expenditures were K3,025 billion.
40. Mr. Speaker, Sir, a total of K186 billion was spent on poverty reduction programmes. These expenditures were concentrated on rural development programmes that included the construction of feeder roads, rural electrification, irrigation and control of livestock diseases. Some of these funds were also directed at increasing the availability of educational materials, vocational skills, primary health care, purchase of drugs, malaria control programmes and water and sanitation facilities. Overall, HIPC Initiative expenditures amounted to 52.8 percent of the budgetary provision, reflecting difficulties in finalising financing arrangements and the need to put in place an appropriate monitoring and accounting mechanism.
41. Mr. Speaker, Sir, in line with our commitment to provide adequate resources to the social sectors, all the budgeted amounts from domestic resources for education, health and water and sanitation were disbursed. This was to enable the Ministries of Education and Health, and their grant-aided institutions to maintain the provision of services to the public. I will ensure that the allocations to the social sectors in this Budget are again disbursed in full to improve service delivery to the people.
Monetary and Financial Sector Developments
42. Mr. Speaker, Sir, monetary policy in 2001 was directed at reducing end-year inflation to 17.5 percent, restoring stability in the foreign exchange market, and consolidating further the gains made in reducing systemic risks in the financial sector. Achieving these objectives required a tightening in monetary policy and limiting the domestic fiscal deficit to 3.3 percent of GDP. Of particular concern, was the need to arrest the sharp increase in money supply growth and the depreciation in the exchange rate that characterised the fourth quarter of 2000. Further, reforms in the supervision of the financial sector were also envisaged, particularly those aimed at enhancing the supervision of both the bank and non-bank financial institutions.
43. Sir, the overall performance of the monetary and financial sector in 2001 was broadly in line with the set objectives. Annual inflation, at 18.7 percent, was 11.4 percentage points lower than the 30.1 percent recorded in 2000. The inflation outturn was particularly encouraging when one considers that maize prices more than doubled during the fourth quarter of the year, compared to the corresponding period in 2000. Money supply growth decelerated to around 11 percent compared to a growth rate of 74 percent in 2000. Relative stability was also restored in the foreign exchange market, with the Kwacha appreciating by around 8 percent against the US dollar compared to a depreciation of 58 percent in 2000.
44. Mr. Speaker, Sir, the favourable inflation outturn reflected the implementation of tight monetary policy during the year. Similarly, the relative stability in the exchange rate was due to measures taken to streamline the auction of foreign exchange. In addition, increased earnings from the newly privatised mines contributed to the stability in the exchange rate. However, both nominal and real interest rates rose during the year, reflecting the higher fiscal deficit and the tightening in monetary conditions.
45. Mr. Speaker, Sir, the performance in both the bank and non-bank sectors in 2001 was mixed. Although overall performance in the banking sector in terms of capital adequacy, asset quality, and earnings was satisfactory, there were some setbacks. During the year, one bank was closed following protracted financial difficulties and the inability of its shareholders to re-capitalise the bank. Another bank had its operating license suspended for three months but was subsequently re-opened.
46. Sir, in the non-bank sector, the performance of leasing companies in terms of their capital adequacy, asset quality, and earnings was also satisfactory. However, the performance of other non-bank financial institutions, such as, the building societies, was not satisfactory, and was compounded by an inadequate regulatory framework to closely supervise them. With the enactment of the Banking and Financial Services Act 2000, most non-bank financial institutions are now governed by the Act. In this regard, the Bank of Zambia established a new department to effectively supervise non-bank financial institutions.
Capital Market Developments
47. Mr. Speaker, Sir, in 2001 the Lusaka Stock Exchange (LuSE) continued to focus its activities towards deepening the market and increasing participation. To this end, LuSE stepped up its awareness campaign among corporate entities and the general public regarding available and potential investment options and instruments for raising capital.
48. Sir, although the LuSE All Share Index declined by 0.6 percent due to a drop in some share prices, some encouraging developments occurred in 2001. Turnover increased by 650 percent to K189.7 billion from K25.3 billion the previous year. Similarly, market capitalisation, although declining by 1.2 percent in Kwacha terms due to exchange rate appreciation, grew by 5 percent in US dollar terms, to US $248 million in 2001. Furthermore, net foreign capital inflows increased significantly to US $7.5 million from US $0.9 million in 2000.
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ECONOMIC POLICIES FOR 2002
49. Mr. Speaker, Sir, built on the foundation of a developing private sector, Zambia has, in recent years, made significant strides in achieving positive economic growth, consolidating macroeconomic stability, and creating a solid base for poverty reduction. However, today, these gains are threatened by three grave challenges.
50. Sir, first, in the mining sector, the decision by the Anglo American Corporation not to provide additional capital required in Konkola Copper Mines, has cast a dark cloud over our economic prospects that seemed so bright just a few months ago. Second, in the agriculture sector, our failure to achieve self-sufficiency in food production and enhance food security, on a sustained basis, is an indictment on our inability to harness our abundant water, arable land and human resources. Third, is the HIV/AIDS pandemic and related diseases that threaten to erode the very fabric of our society.
51. Mr. Speaker, Sir, the resolution of these challenges demands of us, cool heads and resolute hearts, a willingness to work together, and an unwavering commitment to act in the best interest of all the people of Zambia. Sir, it is imperative that we act judiciously and that we act quickly. In doing so, our actions should be guided by: first, the belief that the challenges we face, although grave, are not insurmountable; second, that the private sector remains an indispensable partner in meeting these challenges; and third, that our actions must be sustainable and aim at safeguarding and enhancing macroeconomic stability and economic growth as well as reducing poverty.
52. Mr. Speaker, Sir, consistent with the theme for this year’s budget, “Food Security through Production and Job Creation,” and taking into account the above challenges, particularly the developments in the mining sector, our macroeconomic objectives for this year are as follows: achieve real GDP growth of at least 4 percent, lower annual inflation to 13 percent by the end of the year, limit the budget deficit to 3 percent of GDP, and increase our gross international reserves by US $129 million.
53. Mr. Speaker, Sir, our targeted real GDP growth of 4 percent will enable us maintain the positive trend in real per capita incomes achieved over the last two years. This growth assumes a recovery in agriculture and continued growth in the tourism, manufacturing, wholesale and retail sectors, amongst others.
54. Mr. Speaker, Sir, we are also determined to sustain the gains made in reducing inflation in 2001. In this regard, while maintaining budgetary allocations for poverty reduction programmes, we are determined to reduce the budget deficit. It is important to note that a lower budget deficit will require that Government limits its borrowing from the banking system, which will support a reduction in the current high levels of interest rates and avoid crowding out of private sector investment.
Monetary and Financial Sector
55. Mr. Speaker, Sir, last year we were able to achieve a substantial reduction in inflation and restore relative stability in the foreign exchange market. It is our intention to consolidate these gains, by further lowering inflation to 13 percent by end-2002 and to single-digit inflation thereafter as well as ensuring that the foreign exchange market remains stable.
56. Mr. Speaker, Sir, the recent developments in the mining sector, referred to earlier, have impacted negatively on expectations in the financial sector and more generally, threaten to undermine confidence in the economy as a whole. The measures Government will take are aimed at ensuring that the mining sector continues to contribute positively to Zambia’s economic development. It is our sincere hope and belief that local and international financial institutions as well as other co-operating partners will play a positive role in this process.
57. Mr. Speaker, Sir, interest rates remain high, constraining efforts to increase investment and output in the productive sectors of our economy, particularly in agriculture, which is characterised by very high risks. By limiting the budget deficit to 3 percent of GDP, the need for bank financing will be considerably reduced and this should support a reduction in interest rates.
58. Mr. Speaker, Sir, given the importance attached to agriculture, the Bank of Zambia will reduce the effective Statutory Reserves Ratio for commercial banks lending to the agriculture sector. We expect that these benefits will be passed on to farmers through a reduction in lending rates. The Bank of Zambia will also explore other ways of lowering interest rates in general.
59. Mr. Speaker, Sir, in the coming years Government will strive towards a balanced budget. This will lower inflationary pressures in the economy, encourage savings and make resources available for private sector investment. It will also mean that debt service obligations will fall, thereby releasing more resources for wealth creation and poverty reduction programmes.
60. Mr. Speaker, Sir, as alluded to earlier, at the end of last year, the Bank of Zambia strengthened its capacity to supervise the financial sector by creating a department for non-bank supervision. This year the Bank of Zambia will step up its supervision of the financial institutions, including those for micro-finance, by developing regulations and strengthening on-site and off-site supervision.
61. Mr. Speaker, Sir, to address continuing problems posed by foreign exchange bureaux operating outside their core business of being simple money-changers, I shall issue a Statutory Instrument to streamline and regulate their operations. I also expect that the continued reduction in inflation and the maintenance of stability in the foreign exchange market will further support the deepening of the capital and financial markets in general.
62. Mr. Speaker, Sir, with the enactment of the Prohibition and Prevention of Money Laundering Act, in 2001, the regulatory authorities are now legally equipped to deal with the scourge of money laundering and related vices. I expect effective cooperation among the regulatory authorities so as to rid society of this vice.
63. Mr. Speaker, Sir, in light of the challenges I have highlighted, the overall monetary policy stance will remain tight. Furthermore, the Bank of Zambia will continue to develop its indirect instruments of monetary policy so as to support the achievement of our monetary and financial policy objectives.
64. Mr. Speaker, Sir, Government will take the necessary measures to ensure that we reach the Completion Point in 2003 under the HIPC Initiative, at which point Zambia’s major creditors are expected to cancel a large part of our debt stock. This therefore requires that Zambia adopts and implements the Poverty Reduction Strategy Paper (PRSP), improves social sector outputs, and remains on course with the Poverty Reduction and Growth Facility (PRGF) in 2002.
65. Mr. Speaker, Sir, this year, Government will in addition, endeavour to conclude HIPC Initiative agreements with the Paris Club creditors and multilateral financial institutions, including the International Bank for Reconstruction and Development (IBRD) and the European Investment Bank (EIB). In this regard, I wish to appeal to our co-operating partners to support our efforts to reduce poverty and to promote growth and development by timely delivery of their pledged financial assistance.
66. Mr. Speaker, Sir, Government will step up reduction of domestic arrears to Public Service retrenched workers and the Public Service Pension Fund. In addition, Government will meet its current statutory contributions to the Pensions Fund, so as to avoid accumulation of arrears. On the other hand, Government will also enhance collection of funds from all its debtors.
67. Mr. Speaker, Sir, in order to reduce the stock of domestic debt and interest costs to the Treasury, Government will systematically scale down its borrowing, particularly through Treasury bills and Bonds, over the medium-term.
68. Mr. Speaker, Sir, Government is seriously concerned with the steady accumulation of arrears arising from contracts for roads and other large capital projects. Government is particularly concerned about the interest charged on outstanding payments and penalties. To avoid this, contracts for construction will not be signed without adequate provision in the Budget.
69. Mr. Speaker, Sir, availability of term financing, especially at affordable cost has continued to be difficult in our country. One important way of addressing this matter is through the development of capital markets. As a practical step, Government will, as soon as possible, develop and issue Institutional Investment Guidelines on best practices in investing in stock markets.
Privatisation and Parastatal Reforms
70. Mr. Speaker, Sir, Government will continue with structural reforms to improve efficiency in the economy. In particular, divestiture of Government interests in parastatal companies will continue in order to allow for more private sector participation. Furthermore, to ensure compliance by purchasers of privatised companies to the commitments made in the sales and purchase agreements, Government will strengthen the post-privatisation unit at ZPA to undertake post-privatisation monitoring.
Export Processing Zones
71. Mr. Speaker, Sir, Government will continue to support diversification of our export base. To facilitate export diversification, the Export Processing Zones Act was passed in 2001. The Ministry of Commerce, Trade and Industry will work out the detailed modalities of implementing the Act.
Public Service Reform Programme
72. Mr. Speaker, Sir, Government is committed to streamlining the operations of the Public Service so that the service is responsive to the aspirations and needs of the people of Zambia. In this regard, the Public Service Reform Programme (PSRP), that was embarked on in 1993, aimed at rationalising public expenditure and improving the delivery of services, will continue.
73. Mr. Speaker, Sir, in 2002 Government will continue to build capacity, including training, in order to improve public service delivery as provided for under the Public Service Capacity Building Project (PSCAP). In addition, we will complete the design and start the implementation of the Integrated Financial Management Information System (IFMIS) and develop and adopt a Medium Term Expenditure Framework (MTEF) that will provide for strategic management of public resources.
74. Mr. Speaker, Sir, in order to improve administration and service delivery, Government shall revise and put in place a new Disciplinary and Code of Conduct for the Civil Service. The Public Service Regulations and the Financial Regulations will be reviewed and amended as a matter of urgency. Furthermore, Government will expedite the finalization of the Decentralisation Policy that will form the framework for effective devolution of powers to local authorities. Further, Government is working out measures to improve the financial base of councils.
75. Mr. Speaker, Sir, at the official opening of this Session of the National Assembly, His Excellency the President tasked me to come up with a three-year transitional economic plan by June 2002. This is to be done with a view to institute five-year Development Plans from 2006 onwards.
76. Sir, the Ministry of Finance and National Planning will implement this directive through the newly established Department of Planning and Economic Management. This Department has the responsibility, through consultative processes, of preparing a Long-Term Development Vision, which will guide the formulation of future Poverty Reduction Strategy Papers encompassing the Public Investment Programme framed within the resource constraints of the Medium Term Expenditure Framework. These, in turn, will provide the context within which annual action plans and budgets will be formulated and implemented.
77. Mr. Speaker, Sir, Zambian agriculture is heavily dependent on rainfall, resulting in food shortfalls as rainfall patterns change. This is unacceptable, especially when the country is well endowed with water and arable land resources, which currently are under utilised. To reduce shortfalls in crop production and enhance national food security, Government will:
(a) direct resources into construction of dams, especially in drought prone provinces, to facilitate irrigation while at the same time encourage private sector investment in irrigation;
(b) contract large-scale farmers to produce maize under irrigation to meet the impending maize shortfall this year; and
(c) develop appropriate technologies for small-scale farmers and access affordable draught power and associated equipment to enable them improve efficiency and productivity and achieve food security.
78. Mr. Speaker, Sir, small-scale livestock farmers have been adversely affected by the prevalence of animal diseases that have decimated their livestock, thereby robbing them of their only means of survival. To eradicate animal diseases and turn Zambia into an exporter of livestock and related products, Government is taking measures to control animal diseases in areas with high potential for livestock production.
79. Mr. Speaker, Sir, as outlined by His Excellency the President, in his Opening Speech to Parliament last week, agriculture marketing has been a problem, following the liberalisation of the agriculture sector and the collapse of government-supported agriculture marketing institutions. Our small-scale farmers in outlying areas have not been availed a market for their crops thereby discouraging them from engaging in production for the market. To increase food production and the incomes of our farmers and to stop supporting production in other countries through importation of maize, Government has decided to establish a Crop Marketing Authority (CMA) through an Act of Parliament.
80. Sir, the CMA will be a buyer of last resort for selected crops in outlying areas, especially those not serviced by the private sector, at a price that would enable farmers to, at least, recover their cost of production. In addition, it will maintain a national strategic food reserve and will procure and distribute agriculture inputs in the targeted areas. For the Authority to be effective and provide services to more farmers, this Government will foster the culture of loan repayments in the agriculture sector. Meanwhile, the Food Reserve Agency will be phased out as it has regrettably failed to execute its statutory functions of buyer of last resort and keeper of strategic food reserves.
81. Sir, Zambian agriculture has been struggling to compete regionally and internationally due to, among other factors, high costs of production. To increase the competitiveness of Zambia’s agriculture, I have taken additional fiscal measures in this budget to reduce production costs. With regard to small-scale agriculture, Government will assist farmers to access inputs at affordable prices.
82. Mr. Speaker, Sir, although agriculture exports have increased over the years, there is still potential for Zambia to export more agricultural products. To increase exports of agricultural products, Government will support out-grower schemes for exportable high-value cash crops.
83. Mr. Speaker, Sir, as His Excellency the President stated in his Opening Speech to Parliament last Friday, Anglo American Corporation’s decision not to proceed with further investment in KCM has posed a serious threat to the Zambian economy and the lives of Zambians. Government takes this matter seriously and is, therefore, taking the necessary measures to ensure that KCM remains a going concern.
84. Mr. Speaker, Sir, the Government Task Force examining options for resolving the problems at KCM in the wake of Anglo American Corporation’s announcement of its possible withdrawal, is continuing its work. In the event that the Task Force recommends a cash injection from Government, I will return to Parliament with additional revenue measures to raise the required funds later, as I have not provided any funds for this purpose in the Budget that I present to you today.
85. Mr. Speaker, Sir, I must add that consistent with its privatisation policy, Government firmly believes that the solution to KCM problems and other such enterprises lies, first and foremost, in the hands of the private sector. The focus of Government actions will, therefore, be towards providing the necessary support for the private sector to play its expected role effectively.
86. Mr. Speaker, Sir, in the light of uncertainties in the mining sector, Government will be taking measures to diversify the economy in general and the mining activities in particular, within the shortest possible time. More specifically, Government will encourage private sector initiatives through provision of geological, geophysical, and geochemical data on a countrywide basis. In addition, Government is taking measures to reduce production costs for the mining companies and the business community.
87. Mr. Speaker, Sir, the tourism sector has in recent years experienced a renaissance with increased tourist arrivals and earnings. Given the immense tourism resource base that we have, it is clear that this sector can contribute even more to foreign exchange earnings, economic growth and poverty reduction.
88. Mr. Speaker, Sir, Government’s strategy in 2002 will, in addition to maintaining existing incentives, improve infrastructure, such as, roads, airports, telecommunication facilities and security. Furthermore, Government will continue to encourage community participation in the preservation of our wildlife and natural resources and facilitate the flow of private sector investment in the sector and also the introduction of new tourist products. In this respect, the Tourism Development Master Plan will be finalized this year.
89. Mr. Speaker, Sir, the HIV/AIDS pandemic remains one of the world’s biggest challenges, and it is imperative that we re-double our efforts in combating it. In this vein, Government established the National HIV/AIDS/STD/TB Council with the responsibility to coordinate the national effort to fight the pandemic. It is important that all of us realise that the fight against this pandemic is not for Government alone but for all citizens.
90. Mr. Speaker, Sir, Government is concerned that the majority of patients are unable to access HIV/AIDS drugs and the scourge has contributed to an increase in the incidence of other related diseases, as well as the number of orphaned children. On its part, Government has, therefore, allocated resources to reduce the rate of infection, and improve access to HIV/AIDS drugs.
91. Mr. Speaker, Sir, to effectively monitor the incidence and prevalence of the HIV/AIDS pandemic, Government through the Ministry of Health, in collaboration with the Central Statistical Office, is undertaking a nationwide study to accurately determine the magnitude of the problem. The results of this study will be made public by the end of the year and will form the basis for informed decisions and interventions to fight the scourge.
92. Mr. Speaker, Sir, good governance is a vital pre-requisite for a vibrant economy and a citizenry that can pursue their livelihoods free from any arbitrary use of power. This Government is committed to good governance, which embraces the key principles of the rule of law and separation of powers. Amongst other things, this means equality before the law and genuine respect for human rights as set out in our Constitution. Checks and balances between the three arms of Government will be observed to ensure accountability and transparency.
93. Mr. Speaker, Sir, as part of the good governance programme, Government will strengthen institutions that promote and safeguard good governance by improving their allocations in the budget. Furthermore, to enhance transparency and accountability in Government operations, cash releases to spending agencies will be published regularly and in a timely manner. Spending agencies will in turn be expected to send expenditure returns on a regular and timely basis to the Ministry of Finance and National Planning.
94. Mr. Speaker, Sir, as regards the rule of law, I wish to repeat the policy of this Government, that anyone who owes Government money, will be required to pay back in full, irrespective of who they are. Defaulters will be pursued through the courts of law.
THE 2002 BUDGET
95. Mr. Speaker, Sir, in 2002 Government proposes to spend a total of K5,676.8 billion, which is 35.5 percent of GDP. Of this amount, K3,429.7 billion or 60.4 percent will be internally financed. The remaining K2,247.1 billion or 39.6 percent will be externally financed.
96. Mr. Speaker, Sir, reflecting Government’s commitment to poverty reduction, the proportion of the domestic budget allocated to economic and social sectors has been increased from 43.5 percent in 2001 to 46.5 percent in the 2002 Budget.
97. The detailed 2002 expenditure estimates is as follows:
|Of which||Wages & Salaries (inc. other emoluments)||1,118.0|
|Recurrent Departmental Charges||434.6|
|RDCs in Poverty Reduction Programmes (inc. K25 billion top-up to drugs)||29.8|
|Grants and Other Payments||419.3|
|Of which||ZRA Grants to District/Mission Health Boards/Universities &University Bursaries Foreign Financed Grants and Other Payments Other||80.0 73.8 30.8 234.7|
|Of which||Pension Arrears Public Service Pension Fund Board (Grant)||48.0 10.0|
|Non RDC Poverty Reduction Programmes||420.2|
|Of which||Subsidised Fertilizer and Input Packs Out-grower Schemes Feeder Roads Public Welfare Assistance Scheme and Basic Education Bursaries Rural Housing for Teachers & Health Workers Other||160.0 15.0 27.8 17.0 38.0 162.4|
|Of which||Domestically Financed Capital Foreign financed capital||479.8 1,750.2|
|Constitutional & Statutory Expenditure||916.7|
|Of which||Domestic Debt Service Foreign Debt Service Other Contingency||500.0 366.0 25.0 25.7|
98. Mr. Speaker, Sir, of the total expenditure, K450 billion has been specifically targeted to finance new or enhanced activity in priority poverty reduction programmes. These have been identified in close liaison with stakeholders on the basis of the draft PRSP. Government is constituting a HIPC Initiative monitoring committee comprising stakeholders, including non-governmental organisations and professional bodies, to monitor the use of HIPC Initiative resources. In addition, in the spirit of accountability and transparency, an annual report on the use of these resources will be prepared for public information and discussion.
99. Mr. Speaker, Sir, agriculture is the prime engine for achieving broad-based economic growth and poverty reduction. It is also of vital importance in attaining food security at both household and national levels. Reflecting the importance that Government attaches to the sector, the allocation for agriculture related expenditures has almost been trebled in this year’s budget, from K88 billion in 2001 to K231 billion in 2002. This increased allocation is targeted at both new and existing programmes that have the potential to increase productivity in the sector and raise income levels.
100. Mr. Speaker, Sir, to increase agriculture production, particularly among small-scale farmers who are in the majority, I have provided K100 billion to facilitate the supply of 80,000 metric tonnes of fertilizer for the 2002/2003 season. In addition, I have provided K50 billion as a subsidy on the fertiliser sold to targeted small-scale but-commercially-viable farmers, with each expected to grow one hectare of maize. The Ministries of Finance and National Planning, Agriculture and Co-operatives, and Community Development and Social Services will jointly work out the implementation modalities for the exercise in readiness for the next farming season.
101. Mr. Speaker, Sir, I have provided a further K10 billion as a grant to vulnerable-but-productive small-scale farmers for the distribution of input packs to enable them to grow food crops for their sustenance. This is a continuation of the programme that was started last year and has assisted many vulnerable households to improve their food security.
102. Sir, the Food Reserve Agency (FRA) has an outstanding debt of K112 billion, relating to the 2001/2002 season. In this year’s Budget, I have only allocated K30 billion towards the reduction of this debt. The Food Reserve Agency has been instructed to recover the balance and all other outstanding debt owed to it from previous seasons before the Agency is phased out.
103. Mr. Speaker, Sir, as regards securing affordable agricultural inputs for our farmers in the medium-term, I have allocated K20 billion to revive the activities of Nitrogen Chemicals of Zambia (NCZ). This money will be used to provide working capital to resume production of fertiliser and explosives for the agriculture and mining sectors, respectively, and allow for the re-organization of the company. This action should also reverse the decline in the fortunes of Kafue town and safeguard employment for the remaining workforce of the company. I appeal to both the management and workforce of NCZ to work closely together to ensure that the plant has a commercially viable future that can safeguard jobs and provide valuable inputs for two of our key sectors at affordable and competitive prices.
104. Sir, in addition, to encourage productive self-employment in rural areas, I have allocated K15 billion to support out-grower schemes. Small-scale farmers, by working alongside large commercial farmers growing cash crops, such as, paprika, tobacco, coffee and cotton, can benefit from improved input supply, extension services and marketing arrangements.
105. Mr. Speaker, Sir, in order to encourage large-scale investment in commercial farms, I have allocated K2.5 billion for the demarcation of land into farm plots for large-scale investors and for advocacy.
106. Mr. Speaker, Sir, to enhance livestock production and crop yield, promote irrigation and increase fish stock, I have provided K21.9 billion. This amount will go towards animal health care programmes, the construction of dams for irrigation, seed multiplication and fisheries development programmes. In addition, K6.0 billion has been allocated for the Rural Investment Fund and K4.3 billion for the improvement of infrastructure in resettlement schemes in all the nine provinces.
107. Mr. Speaker, Sir, under the Poverty Reduction Programmes, K27.8 billion has been allocated for feeder roads and K1.5 billion for canals. In addition, K5 billion has been allocated to the Rural Electrification Fund, over and above the K10 billion to be raised through excise duty on electricity.
108. Mr. Speaker, Sir, in addition to the feeder roads programme that I have already mentioned, investment in rehabilitation and development of economic infrastructure is vital to achieve growth. In this respect, I propose to spend K161.8 billion of domestic resources on trunk roads, bridges and pontoons in 2002. Within this figure, K67 billion will be from the fuel levy for road maintenance.
109. Mr. Speaker, Sir, in order to ensure national food security, I have provided K48 billion to facilitate importation of food to meet the expected shortfall in maize supply. Part of this money will also be used to contract farmers to immediately grow maize under irrigation, which will be available for consumption this year and also to purchase maize from small-scale farmers in outlying areas during the normal harvest period for the 2001/2002 crop season.
110. Mr. Speaker, Sir, I have provided K2 billion for the establishment of the Crop Marketing Authority, which will be the buyer of last resort, especially in outlying areas and will maintain a national strategic food reserve.
111. Mr. Speaker, Sir, as part of our poverty reduction strategy, Government has maintained its commitment to the provision of social services, especially health and education. I have raised the allocation to the health sector to K314 billion from K199 billion in 2001. Similarly, the allocation to education and training has been raised to K505 billion from K338 billion in 2001.
112. Mr. Speaker, Sir, I have allocated K5 billion under the Poverty Reduction Programmes for bursaries for basic school students from vulnerable households. This is in addition to K12 billion allocated to the Public Welfare Assistance Scheme that operates both health care cost and primary school cost schemes to assist vulnerable people to have access to these services. To rehabilitate universities, colleges, schools and hospitals, I have allocated K33.5 billion. A further K53.8 billion has been allocated to the two universities for grants and bursaries.
113. Mr. Speaker, Sir, as part of Government’s effort to retain teachers and health personnel in rural areas, I have allocated K38.0 billion specifically for construction of housing for teachers and health personnel in these areas. This will encourage the retention of key staff in rural schools and health centres so that rural communities can also have access to basic health and education services.
114. Mr. Speaker, Sir, within the health sector, K50 billion has been allocated for essential drugs, of which K12.5 billion is for drugs to fight the HIV/AIDS scourge. I have also provided a further K5 billion to support the Roll-Back Malaria Campaign.
115. Sir, as Honourable Members are aware, good health is closely related to a clean environment and access to potable water. I have, therefore, allocated K13.3 billion under the Poverty Reduction Programmes to improve the water supply for rural and peri-urban areas as well as prisons.
116. Mr. Speaker, Sir, in order to relieve the hardship faced by public sector workers retrenched in previous years, I have provided K80 billion for retrenchment packages to clear most of the outstanding payments. The total outstanding amount, as at 31st December 2001, is K118.8 billion for 12,317 workers. However, in the event that revenues come in above target, I intend to allocate more resources for this purpose.
117. Mr. Speaker, Sir, at the time of the privatisation of the major assets of ZCCM, Government undertook to meet ZCCM’s external and domestic obligations. Government has so far paid K499 billion to ZCCM trade creditors against an initial claim of K653.7 billion. In this year’s Budget, owing to revenue constraints, I have only provided K50 billion for ZCCM trade creditors.
118. Mr. Speaker, Sir, paying debt service obligations is the first call on revenue. In this regard, I have provided K500 billion to meet interest payments on domestic debt.
119. Mr. Speaker, Sir, to allow Government to meet its commitments while at the same time consolidating the macroeconomic gains made in 2001 and allowing allocation to poverty reduction/growth enhancing programmes, I propose to run a deficit of K488.3 billion or 3.0 percent of GDP in 2002.
120. Mr. Speaker, Sir, the details of the revenue estimates to finance the above expenditures are as follows:
|Direct Taxes Company Income Taxes Pay As You Earn Other Income Taxes Mineral Royalty Tax Tax Arrears||243.0 764.0 131.5 3.0 3.0||1,144.5|
|Excise Taxes Fuel Levy Other Excises||67.0 365.0||432.0|
|Trade Taxes Import Tariffs Import VAT||344.0 647.0||991.0|
|User Fees & Charges Vehicle Licences & Fees||31.6 30.4||62.0|
|TOTAL DOMESTIC REVENUE||2,941.5|
|Project Financing Budget Financing||1,991.0 256.0||2,247.0|
|TOTAL REVENUE AND FINANCING 5,188.5|
121. Mr. Speaker, Sir, the tax system is an important tool for the achievement of national development. A good tax system should be fair to all taxpayers and be easy to administer. This is why we have committed ourselves to the constant process of reforming our tax system over the past ten years. However, even as we proceed with these reforms, we must not forget that the ultimate objective of the tax system is to yield sufficient resources for Government to finance development and other expenditures. This year, emphasis will be on stimulating growth whilst ensuring that Government has adequate resources to sustain its operations.
122. Mr. Speaker, Sir, Government recognizes the burden that taxation places on our citizens, especially those in the formal sector. The low-income group are the ones mostly affected as the purchasing power of their pay has been greatly eroded by inflation. To cushion the effect of inflation and increase take home pay for the low-income group and fixed income earners, I propose to increase the tax free income threshold for individuals from K1,440,000 to K1,800,000 per annum so that a person earning K150,000 per month or less will not pay income tax. I propose to remove the 10 and 20 percent tax bands so that all income above K1,800,000 per annum will be taxed at the rate of 30 percent. In addition, I propose to increase the tax credit applicable to persons with disabilities from K1,200 to K18,000 per annum as further relief on their income. The expected revenue loss from these measures amounts to K11.95 billion.
123. Mr. Speaker, Sir, to encourage companies to employ persons with disabilities, I further propose to increase the deductible amount for companies that employ persons with disabilities from the current K240,000 to K500,000 per annum for each such person employed. This will also take into account the effects of inflation on the allowable tax deduction, as this has not been adjusted for some time. The expected revenue loss from this measure will be K100 million.
124. Sir, currently, interest earned on Government Bonds is not taxable while that earned on Treasury bills is taxable. In order to address this discrimination, I propose to introduce a tax on interest earned from Government Bonds at a withholding tax rate of 15 percent and this will become a final tax. I estimate that this measure will raise K12 billion.
125. Mr. Speaker, Sir, upon retiring, an employee is currently entitled to 50 percent of their pension in a lump-sum payment and the other 50 percent is paid on a monthly basis. For tax purposes, relief is currently provided up to a maximum of K1 million. To assist the retirees, I propose to increase the commutable amount, from an Approved Pension Fund, from the current K1 million to K5 million. This measure will result in a minimal revenue loss.
126. Mr. Speaker, Sir, in the same vein, I propose to increase the exempt portion of terminal benefits from K3 million to K5 million in order to provide further relief to retiring employees. The expected revenue loss from this measure amounts to K100 million.
127. Mr. Speaker, Sir, the state of dwelling structures provided for most farm workers leaves much to be desired. This runs contrary to our wish as Government to ensure that Zambians from all walks of life are provided with decent housing. In order to encourage our farmers build better houses for their farm workers, I propose to increase the farm dwelling allowance from the current K1 million to K5 million to take into account the effects of inflation on the cost of building materials. The farm dwelling allowance is the amount spent on construction of workers’ houses that is allowable against profits for tax purposes. The allowance was last adjusted in 1997. This measure will result in a minimal revenue loss.
128. Mr. Speaker, Sir, education passages applicable to children of expatriates are presently exempt from tax. This implies that companies that pay for passage of children of expatriates studying abroad will be allowed the cost of passage as a deduction against profits. However, the cost of passage, if paid for children of Zambians, would be disallowed. This provision was introduced to attract expatriate personnel during the times when Zambia did not have sufficient numbers of qualified personnel. Clearly, the trend has since changed and we now have a lot of qualified Zambians. It is, therefore, outdated and unnecessary to maintain this discriminatory provision. In view of this, I propose to remove the exemption on education passages applicable to children of expatriates. This measure is expected to raise K200 million.
129. Mr. Speaker, Sir, as I mentioned when I discussed the state of farm dwelling structures, Government remains committed to the availability of affordable decent housing for Zambians. This was the spirit in which we provided a scheme for extending relief on mortgage interest to low-income earners who had obtained mortgages from commercial institutions and were paying market rates of interest. However, it has become apparent that the major beneficiaries of this relief are high-income earners who have been provided with mortgages by their employers at subsidized interest rates. In order to reverse this inequitable trend, I propose to remove the relief provided on mortgage interest, as it is not benefiting the intended group. This measure is expected to raise K100 million.
Concessions to the Mining Industry
130. Mr. Speaker, Sir, currently there is discrimination in the taxation of mining companies. Konkola Copper Mines (KCM) and Mopani Copper Mines (MCM) enjoy favourable taxation regimes that are better than other mining companies. Government will soon carry out a comprehensive review of the taxation of the mining sector as part of the process of resolving the current problem. As an initial step towards levelling the playing field, I propose to extend the following relief to other mining companies who are involved in copper and cobalt production other than KCM and MCM:
a) A reduction in the corporate income tax rate from 35 to 25 percent;
b) A reduction in the Mineral Royalty Tax from 2 to 0.6 percent on the gross revenue of mineral revenue produced in mining areas, which will be defined explicitly for this purpose; and
c) No payment of withholding tax on dividends, royalties and management fees to shareholders or their affiliates, and on interest payments to shareholders or their affiliates, including any lender of money to the affected mining companies.
131. In extending this relief, I have confidence that the mining companies in the country will join hands with us in sustaining the fortunes of the mining industry, which will continue to be a major player in the economy.
132. Mr. Speaker, Sir, all the above measures will take effect on 1st April 2002.
Value Added Tax
133. Mr. Speaker, Sir, last year customs duty was removed on mosquito nets in order to reduce the cost of basic malaria prevention. This was in line with the Abuja Declaration on Roll-Back Malaria of removing all forms of taxation on malaria control strategies. As a follow up to this important initiative, I propose to exempt treated and untreated mosquito nets, insecticides and equipment used in the treatment of mosquito nets. The removal of VAT on mosquito nets will further cushion the cost of basic malaria prevention. The estimated revenue loss of this measure is K2.6 billion. This measure will become effective on 1st July 2002.
134. Mr. Speaker, Sir, the threshold for VAT registration has not been revised since the introduction of VAT in July 1995. As a result, the threshold has been eroded by inflation, leading to the VAT register holding a large number of non-performing suppliers. I propose to increase the statutory VAT registration threshold from K30 million to K100 million. I envisage the removal of non-performing suppliers from the register to free administrative resources into enforcement and better management of active suppliers that contribute significantly to VAT revenue. Those suppliers below the threshold will be eligible for voluntary registration. The revenue implication of this measure is a minimal loss. This measure will become effective from mid-night tonight.
135. Sir, I also propose to make voluntary registration for VAT renewable every 12 months. The majority of the non-performing suppliers on the current VAT register are below the statutory threshold and are therefore registered under voluntary registration. In order to realise the administrative benefits expected from the proposal to increase the statutory registration threshold, applications for renewal of voluntary registration will be subjected to thorough scrutiny to ensure that all conditions for voluntary registration are met. The revenue impact of this measure is neutral. This measure will become effective from mid-night tonight.
136. Sir, I further propose to provide for cancellation of dormant traders from the VAT register. This measure will help in the tidying up of the VAT register by removing missing traders or businesses that are no longer actively trading, instead of them submitting nil returns or accumulating penalties for non-submission of returns. However, once these businesses resume active trading, they will be able to apply for registration. The revenue impact of this proposal is neutral. This measure will become effective from mid-night tonight.
137. Mr. Speaker, Sir, the Value Added Tax Act presently allows VAT input tax to be claimed within a period of three years after a transaction has occurred. This opens up opportunities for fraudulent claims of input tax. In order to mitigate this risk and protect Government revenue, I propose to reduce the period within which input tax may be claimed from 3 years to 1 year. The revenue impact of this measure is neutral. This measure will become effective from 1st April 2002.
138. Sir, I also propose to make it mandatory for businesses to attach schedules of all input tax claimed to their VAT returns. This is intended to reduce false input tax claims, speed up the processing of VAT refunds, reduce the number of visits to suppliers’ premises and enhance enforcement capacity through office-based verification thus saving valuable resources for both the taxpayer and the tax authority. The revenue impact of this measure is neutral. This measure will become effective from 1st April 2002.
139. Mr. Speaker, Sir, we have made major strides in computerising and integrating the tax administration system. In order to increase the accuracy of assessments and enable easy tracking of documents across all tax types, I propose to allow the Commissioner General to include a requirement for applicants for VAT registration to have a Taxpayer Identification Number (TPIN). This measure will become effective from mid-night tonight.
Customs and Excise
140. Mr. Speaker, Sir, the excise duty levied on diesel fuel and petrol is 45 percent. This, coupled with a 15 percent fuel levy brings the maximum duty payable on both products to 60 percent. Sir, Members of this august House, will agree with me that fuel, particularly diesel, is a major input in production throughout the economy. For our agriculture sector, diesel is a critical input for achieving increased production and distribution of produce. Similarly, our mining sector is dependent on high consumption of diesel to carry out production. In view of its importance in the economy, the need to lower the high cost of production, and to improve the competitiveness of our industries, I propose to reduce the excise duty on diesel from 60 percent to 45 percent. Government expects this benefit to be passed on to consumers through reduced pump prices. This measure will entail a revenue loss of K28 billion.
141. In the same regard, Sir, electricity is a critical input in production, and a basic consumption good for many households. For the mining sector, which is a major part of the economy, electricity constitutes a significant portion of the costs of mineral production, while agricultural production and agro-based industries also heavily depend on electricity. I, therefore, propose to reduce excise duty on electricity from the current 7 percent to 5 percent. Sir, in making this reduction, I have retained the 3 percent levy for the Rural Electrification Fund, which is an important tool for ensuring that more of our people have access to electricity. Once again, Government expects this benefit to be passed on to consumers through reduced electricity bills. I expect this measure to generate a revenue loss of K8 billion.
142. Mr. Speaker, Sir, I have repeatedly stated Government’s commitment to ensuring growth in our manufacturing industry. A strong manufacturing industry provides a firm basis for overall economic growth. Last year, we reduced the excise duty on clear beer from 100 percent to 85 percent on the basis of a guarantee from the industry that there would be no loss of revenue from the levels projected in 2001. I have been satisfied with the yield of excise duty from the clear beer industry, which exceeded guaranteed levels in 2001. On this basis, I am convinced that further relief to the industry is justified. I, therefore, propose to further reduce the excise duty on clear beer from 85 percent to 70 percent. This reduction is subject to a guarantee that there will be no loss of revenue from the projected levels in 2002.
143. Mr. Speaker, Sir, I am mindful that we cannot resolve the significant challenges our industries face in one stroke. However, with these measures, I am confident that we have gone some way in dismantling the high cost structure of our industries. I, therefore, hope that we will see a corresponding response to these measures in our productive sectors.
144. Mr. Speaker, Sir, our commitment to supporting and strengthening the manufacturing sector requires us to ensure that our trading regime provides optimum conditions for trade. In this regard, we constantly review our customs tariffs in conjunction with industry and other stakeholders. I, therefore, propose to reclassify and re-categorise certain goods with a view to lowering the duty rates. This will mainly apply to selected inputs in the manufacturing sector. This measure will cost the Treasury about K2.8 billion.
145. Sir, as stated earlier, malaria remains a major killer-disease in Zambia. I further propose to remove duty on the fabrics used in the manufacturing of mosquito nets and suspend duty on insecticides used in the treatment of mosquito nets. Both measures will lead to a minimal revenue loss.
146. Mr. Speaker, Sir, in order to mitigate the revenue losses arising from the measures I have outlined, I propose to introduce excise duty on cosmetics and perfumes at the rate of 20 percent. This measure is expected to raise K2.5 billion.
147. In addition, I propose to introduce a 5 percent excise duty on imported motor vehicles. The revenue gain is estimated at K8 billion.
148. Mr. Speaker, Sir, all the above measures are effective from midnight tonight.
149. Mr. Speaker, Sir, I propose to carry out amendments to the Customs and Excise, Value Added Tax, and Income Tax Acts in order to update, strengthen and remove ambiguities in certain provisions of tax legislation. These measures are revenue neutral.
150. Mr. Speaker, Sir, motor vehicle registration has not been comprehensive in recent years. This development and the associated fall in revenue collection can be attributed to various factors, the biggest being lack of accountability and aggressiveness towards registration and revenue collection. In view of this, and in order to protect public revenue, I propose that the Zambia Revenue Authority be appointed sole agent for the collection of fees on motor vehicle registration. This measure will become effective on 1st July 2002.
151. Mr. Speaker, Sir, the Appropriation-In-Aid system was established to provide an incentive for Government Departments and Statutory Bodies to collect more revenues. This has not worked effectively because in most cases, the system is benefiting the respective ministerial headquarters and not the collecting departments. Ministries have also not been reporting correct figures to the Ministry of Finance and National Planning resulting in under reporting of non-tax revenues. I, therefore, propose to abolish the Appropriation-In-Aid system, so that all the revenue collected by Government departments is deposited into control 99 and properly accounted for. Ministries will be funded in the normal way. This measure will take effect from mid-night tonight.
152. Mr. Speaker, Sir, the New Deal is not and will not be a mere political slogan. It must be translated into practical actions that can rejuvenate and diversify our economy and restore prosperity and hope to our people.
153. The New Deal means human-centred development, defined in terms of benchmarks that measure material improvements in people’s lives, not just in terms of macroeconomic targets set for the economy as a whole.
154. It means good governance, based on strengthened governance institutions, heeding the checks and balances between the three organs of State. It also means strict observance of the rule of law so that power is used to advance the welfare of the people, not arbitrarily for the benefit of a small elite at the people’s expense.
155. It means advancing the national interest, pragmatically accepting that Zambia is part of the global village and must interact with the rest of the world in ways that will benefit all Zambians.
156. Mr. Speaker, Sir, the 2002 Budget has set the stage for giving practical expression to the New Deal. It sets a firm foundation for continued economic growth and meaningful poverty reduction through the development of a vibrant private sector working in partnership with Government to place Zambia in competitive as well as comparative advantage in regional and international markets.
157. In agriculture, by providing affordable fertiliser to small-scale farmers and input packs to vulnerable rural agriculture households, it ensures that Zambians will be food secure and better fed. By reforming crop marketing arrangements, with the establishment of the Crop Marketing Authority and district bulking, it ensures that Zambians can market their produce. By encouraging large-scale investment in commercial farming and out-grower schemes, more opportunities will be created for productive employment and self-employment in our rural areas. By reducing taxes on diesel and electricity, and by providing concessionary financing to our commercial farmers, we will be able to reduce their production costs making them competitive in regional markets.
158. In education and health, by providing bursaries for basic school students and free health and education services to the most vulnerable, through public welfare assistance, our people will have improved access to education and health. By providing better housing for teachers and medical personnel in rural areas, an increased number of such staff can be retained in the rural areas and be better motivated. By rehabilitating health and education infrastructure and enhancing the budget for drugs, including for retroviral drugs to combat HIV/AIDS, the quality of service provision will improve.
159. Sir, for a poor country, this new administration has made a wonderful start.
160. This is the New Deal! This is the future of our nation! This is your Government at work!
161. Mr. Speaker, Sir, I beg to move.