2007 BUDGET ADDRESS BY THE MINISTER OF FINANCE AND NATIONAL PLANNING 

Friday, 9th February, 2007

The House met at 1415 hours

[MR SPEAKER in the Chair]

NATIONAL ANTHEM

PRAYER

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ANNOUNCEMENT BY MR SPEAKER

EXPENDITURE OF REVENUE AND EXPENDITURE 2007 COMMITTEE

Mr Speaker: Hon. Members are reminded that, as part of the Parliamentary Reforms, the Estimates of Revenue and Expenditure are referred to the Expanded Committee on Estimates, comprising the Committee on Estimates, all Chairpersons of Portfolio Committees and the Chairperson of the Public Accounts Committee for their consideration. This procedural arrangement will apply to the Estimates of Revenue and Expenditure for 2007.

Alongside the foregoing, the House will continue with the debate on the general policy of the Budget and other business that will be brought before it.

The Expanded Committee will be expected to present their report to the House on Wednesday, 28th February, 2007.

Thank you.

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BUSINESS OF THE HOUSE

The Vice-President (Mr R. Banda): Mr Speaker, I rise to give the House some idea of the business it will consider next week.

Sir, on Tuesday, 13th February, 2007, the business of the House will begin with Questions, if there will be any. This will be followed by presentation of Government Bills, if there will be any. On this day, the House will also consider the Second Reading of the two Bills that were referred to the Committee on Economic Affairs and Labour and Committee on National Security and Foreign Affairs for examination, namely, the National Payments System Bills and the Prohibition of the Development, Production, Stockpiling and the use of Chemical Weapons Bill. Thereafter, the House will consider the Motion of Supply on this year’s Budget.

On Wednesday, 14th February, 2007, the business of the House will commence with Questions, if there will be any. This will be followed by presentation of Government Bills, if there will be any. After that, the House will consider private Members’ motions, if there will be any. The House will then continue with the debate on the Motion of Supply from the Estimates of Revenue and Expenditure for this year.

On Thursday, 15th February, 2007, the business of the House will begin with Questions, if there will be any. This will be followed by presentation of Government Bills, if there will be any. Thereafter, the House will continue with the policy debate on the Motion of Supply.

On Friday, 16th February, 2007, the business of the House will begin with the Vice-President’s Question Time. Then, the House will consider Questions, if there will be any. This will be followed by presentation of Government Bills, if there will be any. Sir, after that, the business of the House will be the continuation of the debate on the Motion of Supply on this year’s Estimates of Revenue and Expenditure.

Mr Speaker, I thank you.

Hon. Government Members: Hear, hear!

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MOTION

BUDGET ADDRESS

The Minister of Finance and National Planning (Mr Magande): Mr Speaker, 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, 2007 to 31st December, 2007 presented to the National Assembly in February, 2007.

Mr Speaker, I am the bearer of a message from His Excellency the President recommending favourable consideration of the motion I now lay on the Table.

Mr Speaker, on 28th September, last year, the Presidential, Parliamentary and Local Government elections were held throughout the country in a calm and peaceful atmosphere.

Hon. Government Members: Hear, hear!

Mr Magande: During the campaign, Mr Speaker, political parties had to sell their manifestos to the Zambian people. The re-election of the MMD into Government reflects not only the endorsement of the policies of the New Deal Administration, but also a vote of confidence in the leadership of His Excellency the President, Mr Levy Patrick Mwanawasa, SC.

Hon. Government Members: Hear, hear!

Mr Magande: Given this fresh mandate, the New Deal Government will continue to work tirelessly to improve the lives of our people and, therefore, has the resolve to pursue its economic agenda with renewed vigour to steer our country to greater heights.

Mr Speaker, hon. Members, the Budget Address enables the Government to review economic performance, identify challenges facing the nation and outline policies for meeting these challenges. Some of the major challenges include the consolidation of the macro-economic stability and sustained growth in the economy. I wish to report that we have laid a strong foundation to meet the above challenges.

Mr Speaker, Sir, having achieved relative macro-economic stability and positive economic growth, it is paramount that these achievements are translated into improved standards of living for our people. To achieve this, there is need for improved service delivery, hence the theme for this year’s Budget, and I quote: ‘From Stability to Improved Service Delivery’.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, this Budget has been drawn from the Fifth National Development Plan (FNDP) and has benefited greatly from the consultative process with the general public, business community, trade unions, civic and religious organisations, professional associations and indeed our co-operating partners. This underlines the Government’s will to consult on issues of national importance. May I, therefore, take this opportunity to thank individuals, various organisations and Government officials who have contributed to the formulation of this Budget.

Sir, I start my address in Part I by briefly reviewing the performance of the global economy during the past year. The performance of the domestic economy during the same period is reviewed in Part II. This is followed in Part III by an outline of Government’s economic and social policies for 2007. In Part IV, I present details of expenditure and the supporting revenue for the 2007 Budget, respectively. Finally, in Part V, I give my concluding remarks.

PART I

PERFORMANCE OF THE GLOBAL ECONOMY IN 2006

Mr Speaker, the global economy was projected to grow by 5.1 per cent in 2006 compared to 4.9 per cent recorded in 2005. This growth was led by the United States of America at 3.4 per cent, Japan at 2.7 per cent and the Euro area at 2.4 per cent. Further, emerging markets continued to grow rapidly at 7.3 per cent with China sustaining growth of around 10 per cent. Africa grew at 5.4 per cent with Sub-Saharan African countries growing at an average rate of 5.2 per cent.

Mr Speaker, oil prices in 2006 increased significantly, partly as a result of buoyant global economic activity. The petroleum spot price rose to a record high of over US$76 per barrel. This rise in prices was due to increased demand and the uncertainties in some major oil producing countries.

Sir, non-oil commodity prices, particularly that of copper also had a phenomenal increase in 2006, mainly spurred by demand from China which accounted for about one quarter of the total world demand for copper, aluminium and steel. The average price of copper rose to US$3.05 per pound in 2006 from US$1.67 per pound in 2005. These developments in the global economy had a positive effect on Zambia’s terms of trade as the increase in oil prices was outweighed by the increase in copper prices.

PART II

PERFORMANCE OF THE DOMSTIC ECONOMY IN 2006

Macro-economic Performance

Mr Speaker, let me now highlight the performance of the domestic economy during 2006.

Sir, the economy continued to perform well with the preliminary real Gross Domestic Product (GDP) growth estimated at 5.8 per cent from 5.2 per cent recorded in 2005. This performance was against the target of 6 per cent set for 2006. Growth was largely driven by the mining, construction and transport sectors. Other sectors that registered positive growth were agriculture, tourism, manufacturing, wholesale and retail trade and the services sector.

Mr Speaker, inflation fell to its lowest level in the last 30 years.

Hon. Government Members: Hear, hear!

Mr Magande: The annual rate of inflation was 8.2 per cent by December, 2006 compared to the annual target of 10 per cent and an out turn of 15.9 per cent in 2005. These positive developments are due to continued implementation of prudent monetary and fiscal policies coupled with increased food production.

Hon. Government Members: Hear, hear!

Mr Magande: This is reflected by the Government’s containment of domestic borrowing within the set target of 1.6 per cent of GDP.

Mr Magande: In fact, by the end of the year, domestic borrowing was only 1.5 per cent of GDP.

Hon. Government Members: Hear, hear!

Mr Magande: Sir, the level of Government borrowing not only eased pressure on inflation and interest rates, but also helped to contain the interest cost on the domestic public debt.

Mr Speaker, Zambia’s external position continued to improve as reflected in the build up of the Gross International Reserves (GIR) to two months of import cover in 2006 from 1.6 months of import cover in 2005. Similarly, the current account deficit as a percentage of GDP excluding grants reduced from 11.8 per cent in 2005 to 2.3 per cent in 2006. The reduction of the current account deficit was due to increased export receipts arising from the record high copper prices and increased export volumes.

Sir, in addition, the historic debt relief received in 2006 and the increased budgetary support from our co-operating partners helped to strengthen the country’s external position.{mospagebreak}

SECTORAL PERFORMANCE

Agriculture

Mr Speaker, the agriculture, forestry and fishery sectors continued to perform well in 2006, registering a growth rate of 2.4 per cent. Excluding forestry and fishing, the agriculture sub-sector grew by 3.9 per cent. This was mainly on account of increased production of crops. In particular, a bumper harvest of 1.4 million metric tonnes of maize was recorded during the 2005/2006 farming season compared to a production of  866,000 metric tonnes in the previous farming season.

This is as a result of not only the favourable weather and increased credit, but also attributed to programmes, such as, the fertiliser support, food security pack and out-grower schemes which have boosted production of food and cash crops among the 800,000 small-scale farmers.

Hon. Government Members: Hear, hear!

Construction

Mr Magande: Sir, preliminary data indicate that the construction sector registered growth of 9 per cent. This, however, was a slow down compared to the growth rate of 21.2 per cent in the previous year. Growth in this sector was driven by housing, road construction and indeed other civil works. The increasing demand for cement has led to investments of US$170 million, which will increase production of cement in the next 3 years to over 900,000 tonnes per year.

Manufacturing

Mr Speaker, the manufacturing sector in 2006 grew by 3.3 per cent compared to 2.9 per cent in 2005. Growth was mainly driven by the food, beverages and tobacco sub-sector, which grew by 4.5 per cent in 2006 compared to 3.6 per cent in 2005. Positive growth was also recorded in the chemicals, rubber and plastics, fabricated metal products, base metal products and the paper products sub-sectors mainly on account of increased domestic and external demand.

Mining and Quarrying

Mr Speaker, the mining sector continued to perform well in 2006. Preliminary estimates indicate that real GDP growth in the mining and quarrying sector increased to 11.8 per cent from 7.9 per cent in 2005. This was largely on account of the rise in mineral production. Copper production, for example, increased by 7.9 per cent from 459,324 metric tonnes in 2005 to 492,016 metric tonnes in 2006. Cobalt production, however, reduced from about 5,537 metric tonnes in 2005 to 4,658 metric tonnes last year. Indeed, we had to sit down to direct employment in the mining industry which has risen and is now close to 50,000 employees.

Hon. Government Members: Hear, hear!

Opposition Members: Question.

Tourism

Mr Magande: Mr Speaker, the tourism sector continued to record positive growth with an increase in investment and tourist arrivals. The number of tourist arrivals in 2006 is estimated to have increased by 3.1 per cent to 670,000 from 650,000 arrivals in 2005. Earnings from this sector are estimated at US$176.7 million in 2006 compared to US$164.8 million recorded in 2005. The growth in this sector has continued to be driven by improved infrastructure and marketing as well as private sector investments.

Energy

Mr Magande: Mr Speaker, preliminary data shows that the energy sector registered a growth of 11.3 per cent in 2006 compared to 5.4 per cent in 2005. This was on account of increased electricity generation following the completion of rehabilitation and upgrading of machinery at the Kariba North Power Station.

Sir, the Government continued with the Rural Electrification Programme and forty-three projects across the country were financed. As a result, thirty-five basic schools, five clinics and health centres, five other public facilities, such as, court houses and markets and over 380 houses were electrified.

Hon. Opposition Members: Load shedding.

Mr Magande: Mr Speaker, the supply of petroleum products in 2006 was stable. The Government put in place measures to ensure that the shortage experienced in 2005 following the disruptions at the INDENI Refinery did not recur. Overall, there was a notable increase in the levels of diesel and Jet A1 fuel consumed when compared to the volumes of 2005. This was due to the increased demand from mining activities in the country.

Transport and Communications

Mr Speaker, preliminary data indicate that the transport and communications sector grew by 13.4 per cent in 2006 compared to 11 per cent in 2005. All the sub-sectors, namely, communications, roads, rail and air transport recorded strong growth due to increased economic activity in other sectors.

Domestic Debt

Mr Speaker, the stock of domestic debt increased by 24.2 per cent to K7,687 billion by the end of 2006 from K6,189 billion at the end of 2005. As a share of GDP, the stock of domestic debt in 2006 was 20.2 per cent compared to 19 per cent in 2005. The increase in the stock of domestic debt was largely on account of the expansion in the stock of Government securities, domestic arrears, awards and compensation.

Mr Speaker, the stock of Government securities increased by 25.7 per cent to K6,706 billion from K5,337 billion the previous year. The increase was mainly due to restructuring part of the debt owed to the Bank of Zambia into Government securities.

Sir, domestic arrears recorded a slight increase of 1.8 per cent during 2006. In the same period, awards and compensation rose by 5.7 per cent. However, pension arrears recorded a decline of 6.6 per cent due to the Government’s commitments to dismantle the arrears as soon as possible.

Mr Kambwili: Questionable. Balechula ba retiree.

External Debt

Mr Magande: Mr Speaker, 2006 saw Zambia benefiting from additional external debt relief, which led to a significant reduction in the debt of foreign stock. The relief was granted largely by the International Monetary Fund (IMF), the World Bank and the African Development Bank (ADB) under the Multilateral Debt Relief Initiative (MDRI). Preliminary information is that the country’s external debt stock stood at US$635 million by the end of December, 2006, which is a reduction of 86.7 per cent from the end of 2005 debt stock of US$4.5 billion.

Hon. Government Members: Hear, hear! 2:0

Mr Magande: This year, foreign debt service will be US$33.9 million against the pre-HIPC and pre-MDRI figure of US$373.2 million in 2004. Indeed, Zambia is no more a Heavily Indebted Poor Country. We have graduated.

Sir, this debt relief will generate substantial savings in terms of debt service, which will accrue to the nation over the next twenty years when we should have been paying these debts. These savings will be available to finance both private and public development programmes, thereby advancing the country towards the realisation of the Millennium Development Goals and our Vision 2030.

External Sector Developments

Mr Speaker, in 2006, the country’s external sector continued to record significant improvements, with the trade balance recording a surplus of US$1,176 million compared to a surplus of only US$10 million the previous year. The improvement in the external sector performance was on account of a rapid increase in export earnings relative to imports.

Sir, total export earnings grew by 77.3 per cent to US$3.9 billion in 2006 from US$2.2 billion in 2005. This was mainly on account of an increase in the international price of copper to record levels, coupled with the growth in copper export volumes. Export earnings were further enhanced by the 29.3 per cent growth in non-traditional export earnings to US$754.9 million from US$576.7 million. This was induced by the favourable economic environment in the country and a lot of export promotion efforts.

Mr Speaker, while exports grew rapidly in 2006, imports only increased by 22.7 per cent to US$2.7 billion from US$2.2 billion in 2005.

Mr Kambwili: Too much.

Mr Magande: The rise in imports was mainly due to continued investment and expansionary activity in the mining sector.

Mr Speaker, the current account deficit was financed by external capital inflows in the form of foreign direct investment amounting to US$338 million, project grants of US$293 million and portfolio inflows of US$146.6 million. Increased external capital inflows rose largely from the growing investor and donor confidence following the improvement in Zambia’s overall macro-economic performance.

Hon. Government Members: Hear, hear!

Mr Kambwili: Theories.

Monetary and Financial Sector Developments

Mr Magande: Mr Speaker, the end-year consumer price inflation reduced to 8.2 per cent from 15.9 per cent achieved in 2005 and was well below the target of 10 per cent set for 2006. This out turn was a milestone as it was the lowest inflation rate achieved in more than three decades.

Hon. Government Members: Hear, hear!

Mr Magande: This occurred against a back drop of the persistent rise in oil prices on the world market and rapid growth in money supply. These inflationary pressures were mitigated, to a large extent, by stable food prices due to the bumper maize harvest.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, the rapid build up of foreign reserves and the higher than programmed external budget support led to the injection of excess liquidity in the economy. This caused a challenge in the conduct of monetary policy by the Bank of Zambia. To contain this liquidity, the Bank of Zambia intensified its open market operations, which were augmented by the sale of Government securities. In addition, as I have already indicated, the Government converted part of its non-marketable liabilities to the bank into marketable Treasury bills and bonds to be used in open market operations.

Mr Speaker, in 2006, the composite weighted average yield rate on Treasury bills and Government bonds declined. The average Treasury bills yield declined from 16.7 per cent to 9.8 per cent while the composite Government bond yield rate declined from 23 per cent to 12.6 per cent. Falling inflation and the continued high demand for Government securities by both local and foreign investors explain this drop and yields.

Sir, in line with lower inflation and yields on Government securities, the average commercial banks’ lending rate further declined to 27.9 per cent in December, 2006 from 35.9 per cent in December, 2005. Although interest rates are falling, the current levels are still too high. Commercial banks should, therefore, further reduce their interest rates in line with inflation and other macro-economic developments.

Interruptions

Mr Magande: Mr Speaker, the foreign exchange market was characterised by general depreciation of the Kwacha against major currencies with intermittent volatility. In order to moderate the volatility and maintain stability in the value of the Kwacha, the Bank of Zambia intervened by way of purchasing and selling foreign exchange in the market. Overall, the average inter-bank mid-exchange rate depreciated by 20.5 per cent from K3,428 per US dollar in December, 2005 to K4,132 per US dollar in December, 2006.

Capital Market Developments

Mr Speaker, capital markets continued to perform well. This is evidenced by the growth in the market capitalisation of 52 per cent compared to 11 per cent in 2005 to end the year at K13 trillion or US$3.2 billion. As a share of Gross Domestic Product, market capitalisation was 33.7 per cent. In addition, the number of listed companies on the Lusaka Stock Exchange (LUSE) increased from 13 in 2005 to 15 during the year.

Sir, there was a significant improvement in foreign portfolio investment in 2006. The net portfolio investment position improved by 49 per cent from US$5.3 million in 2005 to US$7.9 million in 2006. This improvement was due to favourable economic environment coupled with good publicity and visibility that the Lusaka Stock Exchange has enjoyed from publications such as The Standard and Poors’ World Stock Exchange Hand Book.

Foreign Financing

Mr Speaker, in 2006, a total of US$560.5 million was received as foreign financing. Of this amount, US$155.5 million was disbursed as direct budget support. This amount was US$29.9 million higher than the programmed budget of US$125.6 million. With regard to project support, preliminary data indicate that US$405 million was disbursed compared to US$423 million disbursed in 2005.

Sir, may I, on behalf of the Zambian people, and indeed on my own behalf, take this opportunity to thank our co-operating partner for continuing to support our social and economic development agenda.

Hon. Government Members: Hear, hear!

Mr Magande: This, once again, underscores the confidence that our co-operating partners have in this Government capacity in implementing national programmes.

Hon. Government Members: Hear, hear!

Hon. Opposition Members: China.

Hon. Government Members: Taiwan.

Mr Magande: Sir, notwithstanding the current support, the 2006-2010 Fifth National Development Plan has an estimated financing gap of K2,982 billion over the plan period. This mainly comes from the priority sectors of agriculture, education and skills development and health. In order for the Government to meet the objectives outlined in the priority sectors including the theme of this Budget, I wish to, once more, appeal to our co-operating partners to scale-up support in line with the joint assistance strategy for Zambia.{mospagebreak}

SOCIAL SECTOR DEVELOPMENTS

Education

Mr Speaker, in line with the Government’s commitment to improve service delivery in the education sector, 7,100 new teachers were recruited in 2006 with the majority placed in rural areas.

Hon. Opposition Members: Question.

Mr Magande: In addition, the Government made significant progress in infrastructure development by constructing forty-six portal frame schools with a total of 250 classrooms. Other school infrastructure, such as, classrooms, teachers’ houses, laboratories and water reticulation systems were also rehabilitated.

Hon. Opposition Members: Where?

Mr Magande: Sir, preliminary data indicate that pupil enrolment in basic schools increased by 13.1 per cent to 2,848,357 in 2006 from 2,519,141 pupils in 2005. The net enrolment ratio for girls was marginally lower than that of boys in all the provinces. However, the completion rates at the basic school level increased from 11.4 per cent in 2003 to 17.7 per cent in 2006 for girls and 17.4 per cent to 20.1 per cent for boys.

Health

Mr Speaker, the Government has remained committed to providing quality health services for the citizens. In this respect, a total of 744 front line medical personnel were recruited, twenty health posts were completed out of fifty-three that were under construction and the procurement of medical equipment and drugs continued as planned. In addition, the Government commenced the construction of twenty health centres and five district hospitals at Chadiza, Mumbwa, Kapiri Mposhi, Samfya and Shang’ombo.

Hon. Government Member: Hear, hear!

HIV/AIDS

Mr Magande: Mr Speaker, the Government, in 2006, made considerable progress in the implementation of the free anti-retroviral policy. In this regard, over 75,000 Zambians are on free ARV drugs. In addition, the public sector work place programme has reached 17,290 employees while the civil society and private sector have increasingly been participating in HIV/AIDS activities.

Sir, in order to increase awareness and mitigate the impact of HIV/AIDS on the affected households, the Government intensified Voluntary Counselling and Testing (VCT) services. In this respect, the number of VCT sites increased from 450 in 2005 to 600 in 2006.

Hon. Opposition Members: Only?

Mr Magande: In addition, the Government scaled up services in the prevention of mother-to-child transmission of HIV by covering all the districts in the country.

Structural Reforms

Mr Speaker, the implementation of the Financial Sector Development Plan continued in 2006. The key milestones achieved were the enactment of the Micro-finance Regulations and the granting of a license to a Credit Reference Bureau agency. The other milestone achieved was the completion of the national survey on the demand and supply of financial services in Zambia covering the whole country. The results of the survey will provide the basis for developing specific products to enhance access to financial services.

Mr Kambwili: Sale of ZANACO.

BUDGET PERFORMANCE IN 2006

Mr Magande: Mr Speaker, performance of the budget in 2006 was characterised by revenue shortfalls, which indeed negatively affected budget execution. Preliminary figures on the total revenue and grants for the year show that receipts amounted to K8,240.9 billion, which was 8.4 per cent below the budget estimate.

Sir, of the total revenue and grants, domestic revenues amounted to K6,600.7 billion against the target of K6,959.8 billion. This was mainly on account of under collection on domestic value added tax and excise duty. Other tax types were generally on target. Grant receipts amounted to K1,640.1 billion out of which K523.3 billion was direct budget support. Direct budget support receipts were above target by 8.5 per cent. This reflects the decision by most co-operating partners to increasingly provide programme grants as opposed to project grants as a result of their growing confidence in the Government’s fiscal management.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, on account of shortfalls in revenue, expenditures were below target by 13.3 per cent. Total expenditures amounted to K8,618.1 billion against the target of K9,942.4 billion. However, I wish to report that in spite of these limitations, cash releases for poverty reducing programmes were broadly within the budget targets.

Mr Speaker, current expenditures accounted for 85.1 per cent while the balance of 14.9 per cent was absorbed by capital expenditures. Domestically financed expenditure for poverty reducing programmes amounted to K2,347.8 billion, representing 92 per cent of the targeted amount of K2,554 billion. This is a reflection of the Government’s commitment to reducing poverty and uplifting the standard of living of the people.

Mr Speaker, with regard to domestically financed expenditure on various functions of the Government, preliminary data indicate that budgetary expenditure for general public services stood at K2,655.4 billion against the target of K3,860.9 billion. This was mainly on account of savings from domestic and external debt service arising from debt relief, lower interest rates and indeed the appreciation of the Kwacha.

Sir, expenditure on public order and safety and defence stood at K1,168.2 billion against the budget of K1,042.4 billion and was above target by 10.8 per cent. This, as everybody will recall, was necessitated by the need for reinforcement of the security wings in order to conduct peaceful 2006 tripartite elections.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, expenditure on economic affairs amounted to K784.3 billion against the target of K916 billion and was below by 14.4 per cent while environmental protection expenditure fell below target by 41.7 per cent. Expenditure on road infrastructure of K505.5 billion was below the target of K882.0 billion. However, expenditure in agriculture was above target by K17.2 billion. Among the key programmes were the Fertiliser Support Programme and the Strategic Food Reserves. Expenditure on the Fertiliser Support Programme was K193.1 billion against the target of K198.8 billion while expenditure on Strategic Food Reserves was K140.0 billion against the target of K50 billion.

Mr Sikota: This was an election year.

Mr Magande: Indeed, I hear Hon. Sikota saying that this was an election year. I wish we could stop eating during elections.

Laughter

Mr Magande: Sir, by the end of 2006, 98.6 per cent of the budget allocation for social sector spending had been released. Total disbursements to this sector amounted to K2,042.7 billion against the target of K2,071.5 billion, reflecting still Government’s commitment to improving service delivery.

Mr Speaker, a total of K603.1 billion was released to the health sub-sector against the target of K570.3 billion and was 5.8 per cent above target. This was mainly for the recruitment of additional front line medical personnel, purchase of drugs, medical equipment, infrastructure development and rehabilitation.

Sir, disbursements to the education and training sub-sector amounted to K1,269.6 billion. This represents 96.5 per cent of the budget allocated to this sub-sector. These resources were used mainly for the recruitment of additional teachers. Other key areas of intervention were the procurement of educational material and rehabilitation and building of school and college infrastructure, including teachers’ houses in some of our rural areas.

Hon. Government Members: Hear, hear!

Hon. Opposition Members: Where?

Mr V. Mwale: In Zambia.{mospagebreak}

PART III

ECONOMIC AND SOCIAL POLICIES FOR 2007

Macro-Economic Policies for 2007

Mr Magande: Mr Speaker, His Excellency the President, recently launched the Fifth National Development Plan for the period 2006 to 2010 and Vision 2030 as the beacons for the country’s future development efforts. The plan outlines the country’s policy interventions, strategies and programmes. The principal objective of the plan is to accelerate economic growth so as to create jobs and broad based wealth. In this regard, the macro-economic policies in 2007 have been set within this overall goal of the plan. The Government will, therefore, align public expenditures with the objectives and priorities of the Fifth National Development Plan. Further, the Government will continue to focus on consolidating the macro-economic achievements of the last five years.

Sir, the Government’s macro-economic objectives for 2007 are as follows:

(a) achieve a real GDP growth rate of 7 per cent;

Hon. Opposition Members: Question.

Mr Magande: Mr Speaker, we aim to:

(b) reduce inflation to 5 per cent;
(c) reduce the Government domestic borrowing to 1.2 per cent of GDP; and
(d) raise gross international reserves to at least 2.5 months of import cover.

Hon. Government Members: Hear, hear!

Mr Magande: Sir, economic growth in 2007 will be predominantly driven by private sector investments in the key sectors of agriculture, mining, manufacturing, construction and tourism. The Government will support growth by accelerating the implementation of structural reforms and investing in key infrastructure, such as, roads.

Mr Speaker, at the launch of the Fifth National Development Plan, His Excellency the President implored the private sector to participate in implementing the plan. The Government is, therefore, committed to facilitating a business and investment climate that will spur private sector development by continuing with the structural reforms.

Mr Kambwili: Professional insurance.

Fiscal Policies

Mr Magande: Mr Speaker, the 2007 Budget objectives will continue to focus on contributing to macro-economic stability, fiscal discipline, directing public resources to priority areas and expanding the revenue base. In this regard, the Government will constrain the domestic borrowing to 1.2 per cent of the GDP in order to limit the domestic debt and also leave room for the private sector to borrow from the commercial market. Limited Government borrowing will also contribute towards reducing inflation and interest rates.

Sir, in addition, the Government will continue to exercise strong control on its expenditures by reducing non-priority expenditures. The resources from debt relief provided under the MDRI and the HIPC Initiative will be directed to priority areas of agriculture, health, education and infrastructure in line with the Fifth national Development Plan.

Budget Execution

Mr Speaker, to enhance budget execution in 2007, the Government will strengthen Treasury management and expenditure monitoring systems. My ministry will take the following actions:

(e) advise ministries, provinces and spending agencies to request for funds as and when they are required;

(f) inform ministries, provinces and spending agencies of the resources to be disbursed for them to adequately prepare to implement their respective programmes;
(g) require all ministries, provinces and spending agencies to prepare monthly reports on the utilisation of public funds;

(h) consolidate reports from ministries, provinces and spending agencies on the utilisation of resources and disseminate them to the general public;

(i) publish the release of resources by the treasury to developmental programmes on a quarterly and in certain cases, monthly basis; and

(j) undertake periodic and detailed public expenditure reviews.

Sir, these actions will widen stakeholder involvement in budget implementation and give an opportunity to all stakeholders to be fully involved in the monitoring and evaluation of development projects.

Further, Mr Speaker, the new Division for Planning and Economic Management that was created recently will, among other functions, play a pivotal role in the monitoring and evaluation of project and programme implementation.

Monetary and Financial Sector Policies

Mr Speaker, the Bank of Zambia will continue to pursue appropriate monetary policy in order to achieve the inflation target of 5.0 per cent. This will be complemented by prudent fiscal policy of the Government.

Sir, the Government remains committed to a flexible exchange rate regime. In this regard, the Bank of Zambia will confine interventions in the foreign exchange market only to smothering fluctuations and building up international reserves.

Sir, in order to ensure that commercial banks are adequately capitalised and enhance financial stability, the Bank of Zambia increased the minimum primary paid up capital for commercial banks in December, 2006 from K2 billion to K12 billion. This measure took effect in January, 2007 and affects all commercial banks.

Mr Speaker, in the same vein, the start up capital for the deposit taking leasing institutions was increased to K1.5 billion from K250 million while that of development finance institutions is now K7.5 billion.

Debt and Aid Policies

Mr Speaker, following the significant the significant reduction of external debt due to debt relief, the Government will focus on maintaining debt sustainability. In this regard, the strategy will be to rely on foreign grants to support development programmes and where such grants are not sufficient, we will seek concessional loans if possible.

Sir, the Government policy on domestic debt is to maintain it to sustainable levels. To achieve this, as already indicated in my speech, the Government will reduce domestic borrowing, curtail the accumulation of new debts and try as quickly as possible to clear the existing arrears in a phased fashion.

KEY SECTOR POLICIES AND INTERVENTIONS

Agriculture

Mr Speaker, in 2007, the Government policy will focus on the increased investment in agriculture, particularly, in irrigation development, livestock disease control, farm mechanisation and extension services.

Mining

Mr Speaker, the Government will continue to promote both large and small-scale mining by providing a conducive business environment, up-dating current legislation and providing more geological information to allow for extensive exploration work.

Sir, for small-scale mining, the Government will provide support to this sector given its potential in employment creation and poverty reduction. In this regard, through the existing mining revolving fund, small-scale miners will continue to be assisted with funds for, among other things, hire of plant and equipment.

Mr Speaker, on the regulatory and legal front, the Government will, this year revise the Mine Health and Safety Policy. This is in order to ensure a safe and health working environment to minimise the incidence of accidents in our mines.

Manufacturing

Mr Speaker, the manufacturing sector continues to be one of the priority growth sectors in OUR country. This is because it provides forward and backward linkages with other sectors, such as, agriculture, fisheries, livestock, mining and forestry. In this regard, the Government will continue to provide incentives to unlock the potential of this sector in order to provide value addition.

Energy

Mr Speaker, the Government sees energy as a critical element for accelerated economic growth. In this regard, the Government will ensure that the sector’s performance is able to meet the growing demand for energy.

Sir, it has been projected that by 2008, demand for electricity in the region will outstrip current supply if generation capacity is not increased. In this regard, the Government will continue with the rehabilitation and the refurbishment of hydro power stations and rehabilitation of transmission and distribution systems. In addition, the Government is promoting the construction of new hydro power stations through public-private partnerships. We, therefore, welcome the signing of a pact between the Zambia Electricity Supply Company Limited (ZESCO) and Tata Africa Holdings for the construction of a US$150 million hydro power station at Itezhi-tezhi. I am sure, Hon. Beene must be smiling.

Mr Beene: Hear, hear!

Mr Magande: The project is expected to generate about 120 mega-watts of power once completed.

Mr Speaker, in the petroleum sub-sector, the Government seeks to ensure adequate supply of petroleum products. To this effect, the Government has put in place measures to build strategic reserves and recapitalise the INDENI Oil Refinery for it to operate efficiently.

Sir, the Government has also constituted a ministerial committee to spearhead the process of carrying out exploration work on petroleum products and gas in the North-Western Province.

Hon. Member: Hear, hear!

Mr Magande: The follows the positive indication arising from tests that were carried out some time back. The Committee will, during the course of the year, intensify its work so that interested companies can be invited to carry out further drilling and exploration works.

Social Sector

Mr Speaker, in the social sector, focus will be on improving the provision of public services in the areas of health, education, water and sanitation. In the health and education sub-sectors, this will be done through recruitment and retention of teachers and front line medical personnel as well as investment in infrastructure and procurement of education materials. In the water and sanitation sub-sector, the Government will improve access to safe drinking water and basic sanitation in most of the rural, urban and peri-urban areas.

Policy on HIV/AIDS

Mr Speaker, the HIV/AIDS pandemic sadly continues to affect the productive age group leaving a generation of orphans and vulnerable children, widows and widowers. The pandemic continues to reverse the gains in human development that has been made in the past years and, indeed, this frustrates the deliveries of services in the country.

Sir, in 2007, the Government will continue to focus on a multi-sectoral response, improved service delivery and support research into the cure for HIV/AIDS which also includes the uses of traditional remedies.

Hon. Members: Hear, hear!

Structural Reforms

Mr Magande: Mr Speaker, structural reforms will continue with the implementation of the Public Expenditure Management and Financial Accountability (PEMFA) reforms, Public Service Management (PSM), Decentralisation Private Sector Development (PSD) and Financial Sector Development Plan (FSDP). Under PEMFA reforms, the focus in 2007 will be on enhancing compliance with internal controls and strengthening the capacity of institutions of good governance, such as, this important National Assembly, Office of the Auditor General and the Zambia National Tender Board. The key components on enhancing internal controls are the commitment control systems and Integrated Financial Management and Information Systems (IFMIS).

Sir, with regard to PSM, the focus will continue to be on right sizing pay reforms, service delivery improvement, payroll management and establishment control. In the area of PSD, the Government will speed up the process of improving business facilities and economic diversification. In addition, the Government intends to establish three more offices of the Patents and Companies Registration in Eastern, Southern and Copperbelt provinces.

Similarly, the focus under the FSDP will be to continue with the process of expanding financial intermediation and access to financial services in all the districts of this country.

Mr Speaker, with the launch of the Decentralisation Policy in 2004, the Government has continued to progress towards the devolution of functions to the local levels. 
With this devolution, certain functions in some ministries will move to the district level by the end of 2007. An intergovernmental fiscal transfer system through which funds shall be transferred to the district councils has been designed.

Hon. Members: Hear, hear!

Mr Magande: To this effect, this budget has provided for the restructuring, recurrent and capital grants to assist district councils achieve solvency, fund retrenchments and ensure that they do not get back into the debt trap. The Government intends to continue with the decentralisation sensitisation process so as to ensure that each and every Zambian is not left behind in this important national process.

Sir, following the enactment of the Zambia Development Agency (ZDA) Act, the Government operationalised the ZDA in January, 2007. The ZDA will, among other things, address the high cost of conducting business in Zambia. It is expected that the processing of various business formalities such as licensing will be simplified.

Mr Speaker, the Government is establishing Multi-Facility Economic Zone (MFEZ) in order to diversify the economy and promote exports. I wish to report to this august House that two locations in Lusaka and Chambishi on the Copperbelt have already been identified. The Japanese Government, through the Japanese International Development Agency (JICA), has since engaged a Malaysian consultant, to develop the Lusaka MFEZ. The Chambishi one will be developed by the Chinese …

Interruptions

Mr Magande: … and is poised to attract fifty enterprises …

Interruptions

Mr Magande:...  Mr Speaker, in view of the popularity of what I said, I will repeat.

Hon. Government Members: Hear, hear!

Mr Magande: The Chambishi one will be developed by the Chinese …

Interruptions

Mr Magande: … and it is poised to attract fifty enterprises with an estimated investment of US $800 million over the next four years.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, in these zones, the Government will offer incentives both Zambian and foreign firms in order to promote manufacturing and stimulate export activities, technological development, skills transfer and job creation.

Mr Speaker, we have never had one investor promising to invest that kind of money in Zambia. We, therefore, appreciate this as it is going to change how we deal with business.

Hon. Government Members: Hear, hear!{mospagebreak}

PART IV

THE 2007 BUDGET

Mr Speaker, before I get into the details of the 2007 Budget, I wish to remind this august House that the resources available are limited. This calls for prudence in the allocation of these resources to priority areas. Among the challenges in resource allocation is the need to avoid spreading resources too thinly across districts or programmes if impact has to be felt. In this vein, we need to complete on-going programmes before embarking on new ones and also learn to preserve the assets that we already have. This, therefore, calls for boldness in the allocation of resources to only few programmes that we can complete.

Mr Speaker, for 2007, the Government proposes a budget of K12,042.4 billion or 26.6 per cent of the Gross Domestic Product (GDP) projected at K45,282 billion in this year. Of this Budget, K8,668.1 billion or 72 per cent will be financed by domestic resources while the balance of K3.374 billion or 28 per cent will be from external sources.

Hon. Government Members: Hear, hear!

EXPENDITURE MEASURES

Sir, of the total budget, K9,053.3 billion or 75.2 per cent will be spent on current expenditures while K2,117.5 billion or 18.1 per cent will go towards capital expenditures. With regard to Constitutional and Statutory Expenditures, K811.6 billion or 6.7 per cent of the Budget id being proposed, a major component of this will be on debt service.

Mr Speaker, with regard to current expenditures, the Government has allocated K3,496.2 billion or 29 per cent of the Budget for personal emoluments and K3,045.5 billion or 25.3 per cent of the Budget for recurrent departmental charges. A further K2,259.5 or 18.8 per cent of the Budget has been provided for Grants and other payments.

Sir, of the total allocation towards the capital expenditures, K1,086 billion will be financed from the domestic resources while K1,091.5 billion will be financed from external sources. Of the total amount on domestically financed expenditure, K216 billion has been allocated for Financial Restructuring and K111.1 billion for various enterprise development funds.

Mr Speaker, the following is the proposed Budget by economic classification:

 PROPOSED BUDGET BY ECONOMIC CLASSIFICATION

 K’Bn  % of Total Budget
CURRENT EXPENDITURE 9,053.3 75.2
Personal Emoluments 3,496.2 29.0
Public Service Reform 
Programme 102.7 0.9
Recurrent Departmental
Charges 3,042.5 25.3
O/W Constitutional Review Process 202.6  1.7
Arrears 151.1  1.3
GRANTS AND OTHER PAYMENTS 2,056.9 17.1
O/W Public Service 
Pension Fund    266.0  2.2
Zambia revenue Authority   197.0  1.6
Education     436.6  3.6
Health     326.6  2.7
Constitutional Review 
Process 202.6 1.7
Fertiliser Support Programme 150.0 1.2
Strategic Food Reserve 205.0 1.7
CAPITAL EXPENDITURES 2,177.5 18.1
Domestically Financed 1,086.0 9.9
O/W Roads 365.6 3.0
Financial Restructuring 216.3. 1.8
Development Funds 111.1 0.9
Foreign Financed 1,091.5 9.1
CONSTITUTIONAL AND 
STATUTORY EXPENDITURE 811.6 6.7
Domestically Financed 656.6 5.4
Foreign Debt (Interest and Amortisation) 129.3 1.1
Constitutional Posts 25.8 0.2
TOTAL 12,042.4 100.0

As you will notice, Mr Speaker, the allocation for Constitution Review is equivalent to the allocation for the Strategic Food Reserve.

Mr Speaker, in respect to constitutional and statutory expenditures, K656 billion has been allocated to interest payments on Government securities, K129 billion for external debt servicing and K25.8 billion for constitutional posts.

Expenditure by Function

Mr Speaker, let me now give an analysis of the expenditure by function. This expresses the broad social and economic objectives that the Government aims to achieve through the various types of expenditures across all heads. Under this classification, a function groups all expenditures directly related to the function regardless of which Ministry, Province or Spending Agency is carrying out the activity.

2006 2007

% of % of
   Allocation Total  Allocation Total
Budget By Function (K’ Billion) Budget  (K’ Billion Budget
 
General Public Services 4,188.9  40.9  4,0229.9  33.4
O/W General Government 
Services   2,876.6  28.1  2,557.3  21.2
O/W Debt and Investments 1,380.9  13.5  1,267.3  10.5
Defence   654.9  6.4  798.2  6.6
Public Order and Safety 391.7  3.8  451.9.  3.8
Economic Affairs  1,844.8  18.0  2,326.2  19.3
O/W Agriculture & Fishing 580.0  5.7  1,062.9  8.8
Transport (roads, rail, air) 904.5  8.8  920.0  7.6
Environmental Protection 43.3  0.4  103.3  0.9
Housing and Community
Amenities  292.0  2.9  787.4  6.5
Health   1,098.4  10.7  1,294.0  10.7
Recreation, Culture & 
Religion   29.7  0.3  106.7  0.9
Education  1,647.4  16.1  1,808.4  15.0
Social Protection  45.7  0.4  343.5  2.9
Total 10,236.8 100.0 12,042.4 100.0

GENERAL PUBLIC SERVICES

Mr Speaker, the Government proposes to allocate K4,022.9 billion or 33.4 per cent of the Budget for General Public Services, which is a decline of 7.5 percentage points from the 2006 budget of 40.9 per cent. This is in line with the Government policy to direct more resources to poverty reduction programmes. Of this amount, 63. 6 per cent has been provided for general Government service, 17.3 per cent for centralised Government services and the remainder to cater for executive and legislative Government functions.

Sir, the Government has provided K2,557.3 billion or 21.4 per cent of the Budget for general Government services. A key element of this function is debt and investment management whose allocation is K1,267.3 billion or 11 per cent. Of this amount, K656.6 billion will cater for interest payments on Treasury bills and bonds while K449.5 billion is for arrears owed to suppliers of goods and services, road contractors and utility providers. An amount of K129.3 billion for 1.1 per cent will go towards paying of the external debt and this, when compared to  that of 2005, is down from K378 billion which was 3.7 per cent of the budget. Obviously, this shows a significant reduction from the previous years and is, indeed, a true reflection of the positive effects of debt relief received both under the MDRI and the HIPC initiatives.

Mr Speaker, the Government has allocated K318.1 billion to the executive function which includes the local government administration at 32 per cent of the allocation. The Government intends to speed up the implementation of the Decentralisation Policy through rationalisation of expenditure between central and local government and the transfer of resources from resources from the Central Government to the local authorities. As a first step to the process, K102.7 billion has been provided in this year’s Budget. This includes a recurrent grant amount of K50 billion, K25, billion for restructuring grant, K17.7 billion for grants in lieu of rates and K10 billion for conditional capital grants.

Sir, the Government will continue with the Constitution Review Process in 2007. In this regard, as already indicated, K1.7 per cent of the Budget or K202.6 billion has been allocated for this process.

Economic Affairs

Mr Speaker, the Government process to spend K2,236.2 billion or 19.3 per cent of the Budget to the Economic Affairs Function. Of this amount, 45.7 per cent has been allocated to the Agriculture and Fishing sub-sectors. 39.6 per cent to the transport sub-function and the rest to tourism, fuel and energy, mining and communication sub-sectors.

Agriculture and Fishing

Sir, the Government proposes to spend K1,062.9 billion or 8.8 per cent of the Budget on the Agriculture and Fishing sub-function. Of this amount, K205 billion is for the Strategic Food Reserve Programme to facilitate purchase of maize and other crops from small-scale farmers. In addition, K150 billion is for the Fertiliser Support Programme for the coming season. Other areas of interventions will include K37.5billion for Irrigation Development, K20 billion for Agriculture Infrastructure Development and K47.5 for Livestock Development. Further, provisions have been made of K40 billion for agriculture services and technological development and K25.7 billion for fisheries development.

Transport (Road, Rail Air and Water)

Sir, in the transport sub-sector, the Government proposes to allocate K920 billion or 7.6 per cent of the Budget. An amount of K787 billion has been directed to road infrastructure development, rehabilitation and maintenance. Of this amount K204 billion has been set aside for district roads, K156.1 billion for trunk roads, K111.5 billion for construction and rehabilitation of bridges, – and I am sure most of us are aware that due to the heavy rains, this would require quite rapid action – K107.7 billion for urban roads, K63.6 billion for reader roads, K106.8 billion for main roads and K7.3 billion for road authorities enforcement and the rest for various road activities.

In addition, Mr Speaker, the Government proposes to spend K11.4 billion for the rehabilitation of airports which includes K8.5 billion for the extension of the runway at the Livingstone International Airport. A further amount of K8.7 billion has been set aside for the construction of the Chipata-Muchinji Rail Line

Hon. Members: Hear, hear!

Social Sector

Mr Magande: Mr Speaker, in line with the theme of this Budget, the Government proposes to spend K3,552.6 billion or 36 per cent of the Budget in the social sectors. Of these resources, 41.7 per cent is for education, 29.8 per cent for health, 18.1 per cent for housing and community amenities while the remainder is for culture, social protection and recreation.

Education

Mr Speaker, the Government has allocated K1,808.4 billion or 15 per cent of the Budget to this function.

The key programmes to be implemented will include the recruitment of an additional of 4,000 new teachers, rehabilitation and construction of basic school and rural teachers’ housing as well as purchase of school requisites.

Mr Speaker, in addition, K187.2 billion or 10.4 per cent of the last allocation has been provided for early childhood development and basic education, K62.5 billion for high schools, K292.6 billion for tertiary education out of which K130.9 billion is for technical and skills training.

Hon. Government Members: Hear, hear!

Health

Mr Magande: Mr Speaker, the Government proposes to allocate K1,294 billion or 10.8 per cent of the Budget to the health sector.

Hon. Government Members: Hear, hear!

Mr Magande: Of this amount, K1,036.8 billion is for public health services whose key programmes will include primary health care, secondary health care, community health care and HIV/AIDS including the prevention of mother-to- child transmission.

In addition, the Government will recruit an additional 1,900 front line medical personnel in order to help reduce the gap in the health sector.

Hon. Government Members: Hear, hear!

Housing and Community Amenities

Mr Magande: Mr Speaker, the Government has allocated K787.4 billion or 6.5 per cent of the Budget to the housing and community amenities sector. Out of this, K334.1 billion is earmarked for water supply and sanitation programmes, which will include provision of boreholes, water wells in rural, urban and peri-urban areas. In addition, K23.1 billion has been allocated for housing development while K15.3 billion has been allocated to community development.

Social Protection

Mr Speaker, the Government proposes to spend K343.5 billion or 2.9 per cent of the Budget on social protection. This includes K266 billion for grant payments to the Pension Fund and for dismantling the pension arrears. The remainder has been directed to other social programmes such as the Public Welfare Assistance Scheme, street children activities and youth development programme.

Public Order and Safety

Mr Speaker, the Government proposes to spend K451.9 billion or 3.1 per cent of the Budget towards public order and safety. Of this amount, K344.2 billion or 71 per cent has been provided for police services.

Mr Speaker, it is the intention of this Government to improve the accommodation for the police services and as such, K30 billion has been set aside for this purpose.

Hon. Government Members: Hear, hear!

Mr Magande: Other allocations include K58.5 billion for prisons, K45.9 billion for immigration, passport and registration and the remainder for the law courts and fire services.

Environmental Protection

Mr Speaker, the Government proposes to allocate K103.3 billion to the environmental protection function. Of this amount, K24.9 billion has been allocated for pollution abatement, K10 billion for waste management while K43.9 billion is for other environmental protection activities.

Revenue Estimates and Measures for 2007

Hon. Members: Hear, hear!

Mr Magande: Mr Speaker, you will recall that during the official opening of the First Session of the Tenth National Assembly in October, 2006, His Excellency the President, Mr Levy Patrick Mwanawasa, SC, indicated that the concern regarding high taxation would be considered in the 2007 Budget.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, in coming up with tax measures for 2007, the Government has to carefully balance the demand for tax relief and the dictate of the national development programme.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, the Government expects to raise a total of K12.042.4 billion which obviously balances with the expenditure that I have already announced. Out of this amount, K8,125 billion or 67.5 per cent will be generated locally while K3,374 billion or 28 per cent will be sourced externally. The balance of K543.4 billion or 4.5 per cent will constitute the 1.2 per cent of the Gross Domestic Product as domestic borrowing by the Government.

Mr Speaker, the summary of the estimates of revenue and financing to support this year’s expenditure is as follows:

 (K’billion)

Total Tax Revenues 7,807.4
Direct Taxes 3,440.1
Company Income Tax 935.1
Pay As You Earn 2,088.3
Withholding and other income taxes 339.3
Mineral Royalty Tax 77.3
Excise Taxes 1,103.8
Fuel Levy 220.8
Other Excise 883.0
Domestic VAT 669.1
Trade Taxes 2,594.4
Import Tariffs 830.0
Import VAT 1,762.1
Export Duties 2.3
Non-Tax Revenue 317.5
User Fees and Charges 159.2
Dividends, Interests and Other levies 41.2
Exceptional Revenue 117.4
Domestic Borrowing 543.4
Total Domestic Revenue and Financing 8,668.1
Total Foreign grants and loans 3,374.0
Grants 2,257.1
General Budget Support 630.2
Swaps to Education and Health 411.8
MDRI Resources 199.1
Foreign Financing 1,116.9
Project loans 826.3
Programme Loans 290.5
Total Revenue and Financing 12,042.4

REVENUE MEASURES

Direct Taxes

Mr Speaker, there are concerns that disposable income for workers in formal employment is low because of the high Pay As You Earn.

Hon. PF Members: Hear, hear!

Mr Magande: To address these concerns, the listening Government proposes to adjust the pay regime to provide for a minimum tax-exempt income of K500,000 per month from the K320,000 per month.

Hon. PF Members: Awe!

Mr Magande: This is an increase of K56 per cent.

Hon. Government Members: Hear, hear!

Mr Magande: In addition, the Government proposes to reduce the top PAYE tax rate from 37.5 per cent to 35 per cent while the lower positive rate has been reduced from 30 per cent to 25 per cent.

The following shall be the proposed PAYE regime:

Existing System
                                       Rate
 Income Bands                %

0-K320,000 per month     0
K320,001-K1,142,000 per month    30
K1,142,001-K5,706,000 per month   35
Above K5,706,000 per month    37.5

Proposed System
                                    Rate
 Income Bands              %

0-K500,000 per month 0
K500,000-K1,200,000 per month 25
K1,200,000-K5,200,000 per month 30
Above K5,200,000 per month 35

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, the above adjustment will give more disposable or take home income to the workers and make the personal income tax more progressive.

Hon. Government Members: Hear, hear!

Mr Magande: The estimated revenue loss arising from this measure is K211.7 billion, which will now be available for spending by the workers and hopefully, on productive ventures.

Hon. Members: Hear, hear!

Mr Magande: Mr Speaker, the Government also proposes to increase the tax credit applicable to persons with disabilities from K36,000 to K72,000 per annum. The measure will result in a revenue loss of K1 billion.

Mr Speaker, in order to ensure that workers have sufficient resources at the end of their active employment, the Government proposes to increase the exempt portion of terminal benefits from K10 million to K20 million.

Hon. Government Members: Hear, hear!

Mr Magande: The 100 per cent adjustment will result in an estimated loss of 4.1 billion.

Mr Sichilima: It is okay.

Mr Magande: Mr Speaker, the Government proposes also to increase the allowable pension contribution amounts from K15,000 to K60,000 per month in order to give the relief on pension contributions. The measure will result in an estimated revenue loss of K7 billion.

Mr Speaker, currently, if a person has income from emolument, it is taxed under the PAYE regime. However, if the same person also earns business income, the business income is added to the emoluments and both are taxed under the PAYE regime. This has resulted in some tax payers, particularly, individuals who are in employment and are also engaged in some other business not declaring their business income in order to avoid being taxed at the higher PAYE regime rate.

The Government therefore, proposes to amend the law to allow individuals who are earning such business income so that the two incomes are separated and taxed separately. That is, the business income will be taxed under turnover tax while the emoluments will be taxed under PAYE. The measure is aimed at encouraging declaration of any business income earned by small-scale entrepreneurs many of whom are in this House, who may also be earning personal emoluments.

Hon. Government Members: Kambwili!

Mr Magande: Mr Speaker, the mining sector continues to be the anchor of our economy. At the time copper prices were on the international market low, mining companies were offered concessions in order to make their projects viable. Now, that the prices are high, there is need to review these concessions so that the nation can benefit from the increased earnings from the mining industry.

Hon. Members: Hear, hear!

Mr Magande: In this regard, the Government proposes increase of the tax regime for the mining sector as follows:

(a) increase the company income tax for the mining sector from 25 per cent to 30 per cent;

(b) increase mineral Royalty from 0.6 per cent to 3 per cent of growth value for base metals and from 2 per cent to 3 per cent for precious metals; and

(c) re-introduce withholding tax on dividends, interest, royalties, management fees and payment to affiliate or sub-contractors in the mining sectors at the standard rate of withholding tax of 15 per cent.

Mr Speaker, the Government will soon engage mining companies with existing development agreement negotiations so that there is mutual consent by contracting parties to revise the tax regime to the new rates that I have just announced.

Mr Speaker, financing investment by equity is very difficult and, therefore, many companies rely on financing significant proportions of their investment by loan. It has been observed that the current debt equity ratio of 2 to 1 is very restrictive by international standards. Mining companies requiring large resources for investment in Zambia have been affected by this reflection. The Government, therefore, proposes to relax this restriction for mining companies on the choice between equity and debt in financing their investment under what we call the Thin Capitalisation rule from 2 to1 to 3 to 1.

Mr Speaker, the Government proposes to amend the law so that the 15 per cent withholding tax currently paid by companies on interest earned on Government Bonds should not be final. The interest earned on Government Bonds will now be taxed at the applicable corporate rate.

This measure will not only broaden the tax base, but also align the treatment of interest earned on Government instruments for the other types of interests such as interest earned on people’s accounts. From this measure, the Government expects to raise K21 billion.

Mr Kakoma: It is okay!

Sir, the Government proposes to introduce a 3 per cent advance tax, which will be levied on all commercial imports.

Hon. Government Members: Hear, hear!

Mr Magande: This measure will help to broaden the tax base by capturing business importers who are evading tax. The Government expects to raise K19 billion from this measure.

Hon. Government Members: Hear, hear!

Mr Magande:  Sir, all the above measures will take effect from 1st April, 2007.

Hon. Government Members: Hear, hear!

Value Added Tax

Mr Magande: Mr Speaker, there have been demands, even currently, I can hear Hon. Matongo agitating that VAT should be reduced downwards from 17.5 per cent. Having carefully considered this matter, it became evident that, at the moment, the number of vatable goods and services was still too limited.

Interruptions

Mr Magande: Yes, and any downward adjustment on these limited goods would result in a significant loss of revenue.

Hon. Government Members: Hear, hear!

Mr Magande: However, as we make adjustments and broaden the base, consideration will be made to adjust the rate. For now, it remains only 17.5 per cent.

Laughter

Mr Magande: Mr Speaker, currently, interest on a finance lease attracts VAT while that on a loan from a commercial bank does not. In order to introduce consistency in the VAT treatment between a loan and a finance lease, the Government proposes to exempt interest paid on finance leases for VAT purposes.

Mr Speaker, presently, petrol used in business is not allowable as an expense for VAT purposes. The Government, therefore, proposes that VAT registered suppliers be allowed to claim 20 per cent of the input tax paid on petrol to reduce the cost of doing business.

Hon. Government Members: Hear, hear!

Mr Magande: Sir, the revenue loss as a result of this measure is K8 billion. Currently, businesses below the VAT threshold of K200 million are not allowed to register for VAT. This has constrained a number of them from transacting with registered suppliers, therefore, impeding their growth. The Government, therefore, proposes to re-introduce voluntary registration for small businesses that will meet the specified requirements.

Mr Speaker, as part of the Government’s efforts to broaden the tax base and generate more revenues, the Government proposes to standard-rate magazines. The estimated revenue gain from this measure is K2 billion.

Sir, the Government proposes to amend the VAT Act to ease the VAT administration with respect to Minimum Taxable Values (MTVs) by removing the requirement to legislate MTV prices of specified goods. The Government also proposes to add talk time and mineral water to the MTV schedule. This measure will secure revenue for the Government for products that have a long chain of distribution. The revenue gain is estimated at K1 billion.

Mr Speaker, the above measures will take effect from mid-night tonight.

Interruptions

Customs and Excise

Mr Magande: Mr Speaker, in order to reduce the cost of energy, the Government proposes to reduce excise duty on electricity from 5 per cent to 3 per cent.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, the 3 per cent is being retained for the Rural Electrification Fund, which is an important tool for ensuring that more of our people have access to electricity. The estimated revenue loss is K10.9 billion.

Mr Speaker, in order to mitigate the revenue losses arising from the many concessions I have already mentioned, the Government proposes to increase excise duty on cigarettes from 115 per cent to 145 per cent or K90,000 per mille.

Interruptions

Mr Magande: Mr Speaker, in addition, the Government proposes to introduce a specific import duty of K15,000 per mille. From these measures, the Government expects to raise K57.5 billion.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, the Government proposes to increase excise duty on clear beer from 70 per cent to 75 per cent and also in selected motor vehicles by 5 percentage points. The estimated revenue gain from these two measures is K19 billion.

Mr Speaker, the measures I have just announced will be effective from mid-night tonight.

Interruptions

Concessions under the Zambia Development Agency (ZDA) Act

Mr Magande: Mr Speaker, in my 2006 Budget Speech, I announced tax measures under the Zambia Development Agency Act. However, these were not incorporated in the tax legislation because the ZDA Act had not been enacted at the time of presenting the Budget. Now that the ZDA is operational, the Government proposes the following incentives in order to encourage investment.

(a) Zero per cent tax rate on dividends for companies operating in the priority sector and/or MFEZ under the ZDA Act for a period of five years from the year of first declaration of dividends;

(b) Zero per cent on profits made by companies operating in the priority sector and/or MFEZ for a period of five years from the first year profits are made. For years six to eight, only 50 per cent of the profits should be taxed and for years nine and ten, 75 per cent of profits will be taxed;

(c) Zero per cent import duty rate on all raw materials, capital goods, machinery including trucks and specialised motor vehicles for five years for enterprises operating in the MFEZ; and

(d) Deferment of VAT on machinery and equipment including trucks and specialised motor vehicles imported for investment in MFEZ and/or priority sector.

Other Measures Under the Mines and Minerals Act

Mr Magande: Mr Speaker, currently, Section 9 of the Mines and Minerals Act provides that the development agreements override any law or regulation. In order to ensure that development agreements are subordinate to the law and are biding only to the extent and confines of the law, the Government proposes to make amendments to Section 9. The Government also wants to explicitly provide that there shall be no fiscal terms or tax schedules provided in any development agreements and that all fiscal matters should be provided for in the respective tax codes and only the cross referenced in the development agreement.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, this is aimed at preventing any attempts to provide or negotiate any fiscal terms outside the tax law.

Interruptions{mospagebreak}

HOUSE KEEPING MEASURES

Mr Magande: Mr Speaker, the listening Government, as Hon Kakoma says, proposes to amend the Customs and Excise Act, Income Tax Act, Value-Added Tax Act and the Mines and Minerals Act so as to update, strengthen and remove ambiguities in certain sections of these pieces of legislation.

Mr Speaker, in line with the Harmonised Coding and Description System Convention of the World Customs Organisation, the Government proposes changes to the Customs and Excise Tariff Book in accordance with the 2007 version of the said convention, which undergoes revision every five years. These measures are revenue neutral. They are just for housekeeping. 

PART V

CONCLUSION

Mr Magande: Mr Speaker, the relative macroeconomic stability achieved in the recent years has created the much-needed environment conducive for sustained economic growth. For a continuous period of the last five years, Zambia’s economy had maintained an annual growth rate of over 5 per cent.

Hon. Government Members: Hear, hear!

Mr Magande: Sir, to achieve higher growth rates, it is important that the macroeconomic stability is firmly entrenched, consolidated and supplemented by the application of our mental and physical capacities so that we rearrange and improve our work culture.

Hon. Members: Hear, hear!

Mr Magande: Mr Speaker, in launching the Fifth National Development Plan and Vision 2030, we, the Zambians have set ourselves goals for accelerated development of our country.  We must now individually commit ourselves to achieving these goals by setting individual targets of our contribution to the realisation of the national goals.

Sir, it is for this reason that our macroeconomic policies will continue to focus on empowering individuals so that they effectively participate in national development. The macroeconomic fundamentals are meant to create space and opportunities for individuals. The Government-of-the-day is there to ensure the observance of individual rights as they go about with their private business.

Mr Speaker, in the last two years, we have received substantial debt relief from the international community. The fiscal space that has resulted from the debt relief has made it possible for the Government to start increasing allocations and spending in priority sectors of education, health and agriculture. This year’s Budget is also addressing the concerns related to the housing situation for our law enforcement officers.

Mr Speaker, we are providing resources for the restructuring and improvement of operations of local authorities as an important step forward towards capacitating the key operatives in decentralisation. This year has also marked the resumption of the provision of grants in lieu of rates to our district councils. It is my hope that our local authorities will begin to make some noticeable contribution towards the effective service delivery to their communities.

Mr Speaker, we are reforming the tax system with the objective of broadening the tax base, lowering the tax rate and having a transparent and well administered tax system. However, I wish to point out that it is only by broadening the tax base that much more relief can be provided to many of the current tax payers while ensuring increased revenues to the Government to continue implementing important development programmes.

Mr Speaker, the Government will, this year, continue to make extensive consultations on broadening the tax base, especially with regard to bringing more sectors of the economy into the tax net.

Mr Speaker, we have also taken important steps to address the imbalances with fiscal regime in the mining sector. The objective of the Government is to have a fiscal regime which ensures that Zambia remains an attractive investment destination while also ensuring that a reasonable share of the mineral revenues accrue to the Zambian people by way of individual incomes and revenues to the Treasury. The reform of the mining fiscal regime will now restore credibility and predictability in this sector which is essential for sustained development.

Mr Speaker, the Government will soon be inviting the holders of existing development agreements to negotiate the fiscal terms in these agreements in line with new regime. This, again, is a clear demonstration of the commencement of the New Deal Administration to the rule of law and respect of the sanctity of agreements.

Hon. Government Members: Hear, hear!

Mr Magande: Mr Speaker, we do not do things by whims. I therefore, call upon the mining companies to embrace these reforms so that we make Zambia truly a centre of excellence in mining.

Mr Speaker, I now turn to one issue that is of great concern to many stakeholders and indeed, to many in the Government. This relates to the implementation of the budget and its impact on the lives of the ordinary people.

Mr Speaker, there is indeed need to substantially improve upon budget implementation if we are to realise the development goals as outlined in the Fifth National Development Plan.

Mr Speaker, in many instances, it is not the lack of resources that has affected development outcomes, but rather, a lack of efficient and effective implementation of these programmes when the available resources have not been applied judiciously and purposefully. Someone somewhere has corruptly approved or certified the outcome instead of demanding quality goods and services from the private or Government supplier.

Hon. Members: Hear, hear!

Mr Speaker, the limited resources, which we have, where they have not been applied judiciously and purposefully, someone somewhere has corruptly approved and certified the outcome. Instead of demanding quality goods, they have paid for inferior goods and services. This goes for the private sector as well as the Government.

Mr Speaker, this year, in Government, we shall pay particular attention to ensure that there is more fiscal and monitoring prudence and discipline. The outcome should be better and effective implementation of the development programmes and service delivery. This is in line with the theme of this Budget, which is ‘From Stability to Improved Service Delivery’.

Mr Speaker, controlling officers in Government departments play a critical role in the successful implementation of developments programmes and delivery of quality Public Service. The oversight arrangements for controlling officers with regard to budget execution and fiscal prudence will further be strengthened this year to ensure that there is effective implementation and visible outcome.

Mr Speaker, monitoring of budget implementation should, however, not only be left to those in Government.

Hon. PF Members: We come in?

Mr Magande: No!

All analyses indicate that there is need to change the mindset of many Zambians by culture remodelling if we are to attain the goals of the Vision 2030. All stakeholders, including local communities, non-governmental organisations, business community and Members of this august House must take up the responsibility of developing this country by supervising Government programmes that use public funds.

Mr Speaker, I beg to move.

Hon. Members: Hear, hear!

Mr Misapa (Mporokoso): Mr Speaker, I thank you for the opportunity to move a vote of thanks and the adjournment motion on the Budget Speech delivered by the hon. Minister of Finance and National Planning on Friday, 9th February, 2007. It is indeed, a great honour and privilege for me to undertake this important assignment.

Hon. Government Members: Hear, hear!

Mr Misapa: Mr Speaker, let me begin by congratulating the hon. Minister of Finance and National Planning for a very well delivered speech on the Budget for 2007.

Hon. Members: Hear, hear!

Mr Misapa: Mr Speaker, for us in MMD, the speech by the hon. Minister is a blue print for the fulfillment of the contract that we, once again, renewed with the people of Zambia on the 28th September, 2006.

Hon. Government Members: Hear, hear!

Mr Misapa: Mr Speaker, on that day, the people of Zambia gave the MMD the mandate to preside over the affairs of this country. The challenges facing the people of Zambia are many and daunting. Our people demand good roads, schools and adequate medical facilities. They need food, clean water and adequate shelter.

Laughter

Mr Misapa: Mr Speaker, we have the responsibility to provide all this. It is in this vein, Sir, that I would like to urge the hon. Minister of Finance and National Planning to bring to this august House, as soon as possible, the necessary legislation to put into effect the main provisions contained in his speech, to enable us fulfil our mandate from the people of Zambia.

Laughter

Mr Misapa: Mr Speaker, there are many issues raised in the speech. I wish, in this regard, to give an opportunity to hon. Members of this House to study the Budget Speech so as to be able to make meaningful and informed evaluation for the people of Zambia who brought us to this august House.

I, therefore, beg to propose that the debate on this motion be adjourned until Tuesday, 13th February, 2007.

Mr Speaker, I thank you.

Hon. Members: Hear, hear!

Ms Imbwae (Lukulu-West): Mr Speaker, I beg to second the motion by the hon. Member for Mporokoso, Hon. Misapa, that the debate on the motion moved by the hon. Minister of Finance and National Planning be adjourned until Tuesday, 13th February, 2007.

Mr Speaker, I sincerely thank you for the privilege to second the motion. I am sure that the House will agree with me that the issues raised by the hon. Minister of Finance and National Planning, in his speech, are very serious matters that affect the lives of all Zambian people and should not be politicised.

Hon. Government Members: Hear, hear!

Ms Imbwae: Zambia belongs to all of us. Therefore, matters of livelihood and welfare of all Zambians are non-partisan and should not be treated lightly.

Mr Speaker, while I expect an explosive debate on the motion when the House reconvenes next Tuesday, the challenge before this august House to avoid mere rhetoric and partisan approach to serious issues such as the one the hon. Minister of Finance and National Planning has raised in his speech this afternoon.

Mr Speaker, I agree that the House needs time to study the speech and exercise their minds on matters raised in the speech. I, therefore, stand to support the motion to adjourn debate on the motion to Tuesday next week.

I thank you, Sir.

Hon. Members: Hear, hear!

Question put and agreed to.

ADJOURNMENT

The Vice-President (Mr R. B. Banda): Mr Speaker, I beg to move that the House do now adjourn.
Question put and agreed to.

________

The House adjourned at 1631 hours until 1430 hours on Tuesday, 13th February, 2007.