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.  

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.  

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.  

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.

 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.  

 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.

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.  

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.  

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.  

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.  

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.  

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.