1. 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 1^st January, 2004 to 31^st December, 2004 , presented to the National Assembly in February, 2004.

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

3. Mr Speaker, the Budget for 2004 is anchored on the premise that the empowerment of the Zambian people must be the only reason for all our development endeavours. This will secure sustained and broad-based development, which will create wealth, reduce poverty and raise living standards of all the citizens. Government therefore recognises that it must constantly evaluate its performance, identify the shortcomings and re-dedicate itself to ensuring the realisation of the full potential of the Nation’s greatest asset: the Zambian people.

4. With this premise in mind, in the 2004 Budget, the Government has focused expenditures on areas that will directly involve and benefit the people and curb waste within the public sector. Only by observing prudence in expenditure can the limited resources be directed at priority investments, which will reduce poverty and create wealth. Thus, the theme of the 2004 Budget is “Austerity for Posterity” by which I mean, the observance of fiscal prudence and postponement of needless present consumption in order to secure our future sustained prosperity.

5. Mr Speaker, before proceeding further, I wish to pay tribute to my predecessor Mr Emmanuel G. Kasonde, for initiating the budget reforms from which this budget has been framed. Allow me to also thank the many individuals and organisations who made valuable contributions towards the preparation of this year's Budget. Through a number of seminars, we were able to interact with the many stakeholders who made comments on the resource envelope and the intended utilisation of the limited resources.

6. Mr Speaker, the 2004 Budget has been formulated in the context of the Medium-Term Expenditure Framework (MTEF) for 2004-2006, thus placing the annual budgeting cycle in a more strategic context. Further, all spending agencies have used the Activity Based Budgeting (ABB) procedures to explicitly link their budget allocations to service delivery and outputs. While we have experienced teething problems in this reform of our budgeting process, it is nevertheless a great step forward. It makes the budgeting process more transparent while making the Executive Wing of Government more accountable to this august House and indeed to the Zambian people as a whole. In this regard, the 2004 Budget provides much more information which will allow Honourable Members to constructively debate the Budget allocations.

7. Mr Speaker, my address this afternoon consists of five parts. In Part one, I give a brief on the performance of the global economy during the past year. In Part Two, I discuss developments in the Zambian economy during the same period and this is followed in Part Three, by an outline of the Government’s economic policies for 2004. In Part Four, I present details of the 2004 Budget and the supporting revenue measures. The final part consists my concluding remarks.

PART I

PERFORMANCE OF THE GLOBAL ECONOMY IN 2003

8. Mr Speaker, the global economy continued to recover in 2003 reflecting the expansion of activity and investment in the United States of America, Japan and some emerging markets. Recovery in the Euro Zone was hampered by the strong euro. Macroeconomic conditions were favourable with inflation remaining subdued, and interest rates remaining low.

9. In the commodity markets, prices for crude oil and non-fuel commodities showed an upward trend in 2003. Fuel prices increased largely due to the slower than expected recovery in Iraq ’s oil production and the pick up in demand in US economy. As for copper, which is Zambia ’s principal export commodity, the average price at the London Metal Exchange rose from US 68 cents to 83 cents per pound by the end of 2003. However, world prices of agricultural commodities, which are the major exports of many developing countries, declined.

10. Sir, the global economy is estimated to have grown by 3.2 percent in 2003, up by 0.2 percentage points when compared to 2002. Growth rates of 1.8 percent, 5.0 percent, and 4.9 percent were recorded for the advanced economies, developing countries and countries in transition, respectively. The strengthened consumer and business confidence together with easier monetary, fiscal and financial conditions boosted growth in the United States . However, labour markets remained subdued and high unemployment levels persisted.

11. Mr Speaker, monetary conditions in 2003 were generally conducive with inflation falling below 2 percent for the second year running in advanced economies. This was the lowest level for 30 years. In developing countries, inflation was projected to fall to 5 percent, also a historical low. Inflation in countries in transition was relatively high at 9.7 percent.

12. Mr Speaker, in line with the increase in global output, world trade continued to increase, although at a slower pace than in 2002. The volume of world trade increased by 2.9 percent in 2003 compared to 3.2 percent in 2002.

13. Mr Speaker, Africa recorded a Gross Domestic Product (GDP) growth of 3.7 percent. This was the third consecutive year that the region registered a positive growth. Debt relief under the global Highly Indebted Poor Countries (HIPC) Initiative and improved macroeconomic policies aided growth in a number of African countries.

14. Mr Speaker, despite growth in Africa being resilient, it is still far too low to meet the United Nations Millennium Development Goals (MDGs) by 2015. For Sub-Saharan Africa, growth will need to be above 7 percent a year, if the number of the poor is to be halved by the year 2015. In this regard, the New Partnership for Africa ’s Development (NEPAD) has been formulated as a comprehensive strategy to address Africa 's development problems.

PART II

PERFORMANCE OF THE DOMESTIC ECONOMY IN 2003

Macroeconomic Performance

15. Mr Speaker, our macroeconomic targets for 2003 were to achieve a growth in real Gross Domestic Product of at least 4 percent; reduce the average annual inflation rate to 17.9 percent; build up gross international reserves equivalent to 1.9 months of imports, ensure food security; reduce poverty levels; reduce domestic borrowing to 1.55 percent of GDP and reach the Completion Point under the enhanced HIPC Initiative. The attainment of the growth objective was based on the projected recovery of agricultural production and a favourable performance of the mining, manufacturing, tourism and service sectors.

16. Mr Speaker, preliminary data show that the growth target was achieved as real Gross Domestic Product grew by 4.3 percent in 2003. This expansion in growth was mainly attributed to the recovery of agricultural output from the effects of the 2002 drought. This growth which is higher than the population growth rate of 2.4 percent presupposes a reduction in poverty. The country attained food security and prices of maize, the staple crop, dropped drastically during the year.

17. Mr Speaker, annual inflation fell from 26.7 percent at the end of 2002 to 17.2 percent at the end of 2003, largely due to the fall in food prices following the bumper harvest. However, non-food inflation increased in 2003 to 21.7 percent from 17.2 percent in 2002. This outcome was largely attributed to several factors, including the strengthening of the South African Rand, the currency of the major source of our imports and the upward adjustments in prices of petroleum products. Further, the build up of international reserves at 1.3 months of imports was less than the target of 1.9 months due to reduced balance of payments support.

18. Mr Speaker, it is a well-known fact that the country failed to reach the HIPC initiative Completion Point due to the budget overrun that arose largely from the higher than programmed civil service wage award during 2003. The country is again under an observation period with the International Monetary Fund (IMF) that could lead to a programme with them during the latter part of the year. I shall give more details on this later in my address.

19. Mr Speaker, domestic borrowing at K1,047 billion, about 5 percent of GDP, exceeded the target of 1.5 percent. This out-turn was largely due to the higher than budgeted expenditures on the 2003 civil service pay award and housing allowances as well as spending on retrenchment packages for RAMCOZ employees. In addition, the shortfall in balance of payments support necessitated increased borrowing from the domestic economy to maintain expenditure programmes.

Sectoral Performance

20. Mr Speaker, below I give the performance of five major sectors. However, these are not the only ones that contributed to the growth of the economy in 2003. The transport sector, financial and insurance services, the real estate sector, wholesale and retail; and electricity, gas and water also experienced growth.

Agriculture

21. Mr Speaker, the performance of the agriculture, forestry and fishing sector was favourable during the year. Value added increased by 5.0 percent from K411.7 billion in 2002 to K432.5 billion in 2003. This was due to the favourable weather conditions for crops and the timely provision of inputs. Government also facilitated private sector investment, especially in the cultivation of cash crops such as cotton, paprika and tobacco. Furthermore, ZESCO developed a scheme that reduced electricity tariffs by 50 percent for irrigation farming. Sir, these factors led to an improvement in the country's food situation.

Mining and Quarrying

22. Mr Speaker, the mining and quarrying sector continued to grow mainly due to increases in copper production coupled with favourable international metal prices. Growth of 3.3 percent in 2003 was, however, lower than that recorded in 2002 when production increased rapidly following new investments after the privatisation of most of the mines.

Manufacturing

23. Mr Speaker, value added in the industry increased from K289.4 billion in 2002 to K307.6 billion in 2003, representing a growth of 6.3 percent. The growth in the sector was largely from the food, beverages, tobacco, textiles and leather sub-sectors. The strong correlation between agricultural production and agro-processing should be fully exploited as it will generate high levels of employment.

Tourism

24. Mr Speaker, the tourism sector continued to register positive growth in 2003. Preliminary data show that the number of tourist arrivals increased from 565,081 in 2002 to 577,526, representing a 2.2 percent increase. Average room occupancy rates rose to 53.2 percent from 50.4 percent, while the bed occupancy rate rose to 44.1 percent from 43.3 percent. Similarly, the level of employment also rose by 9.4 percent to 16,548 in 2003.

Construction

25. Mr Speaker, the construction sector continued to register a strong positive growth in 2003 with value added increasing by 13.9 percent. Infrastructure projects such as road rehabilitation works, residential and commercial construction works drove this growth.

Privatisation and Parastatal Reform

26. Mr Speaker, in 2003, the Government continued cautiously with the privatisation policy and parastatal reforms. The major development was the concessioning of the operations of Zambia Railways Limited to a consortium comprising the New Limpopo Bridge Project Investments and Spoornet, both of South Africa . The concession will run for a period of 20 years.

27. The commercialisation of ZESCO was started, and the company embarked on new investments from commercial borrowings. Negotiations for the sale of 49 percent of the shares of the Zambia National Commercial Bank commenced and hopefully, a deal will be concluded soon.

Domestic Debt

28. Mr Speaker, the total stock of domestic debt increased by 28.6 percent from K4.9 trillion at the end of 2002 to K6.2 trillion at the end of December, 2003. This rise was largely attributed to the increase in the stock of Government securities caused by the financing of the higher than programmed fiscal deficit. However, the Public Service Pensions Fund arrears reduced to K263 billion from K270 billion.

External Debt

29. Mr Speaker, at the current level, Zambia 's external debt continues to be unsustainable. In 2003, Zambia spent US $113.1 million in debt service and when write-offs are included, this still left a debt stock of US $6.5 billion. This highlights the need for deeper debt relief and indeed debt cancellation from our cooperating partners.

30. Mr Speaker, currently, co-operating partners have indicated their willingness to give additional and substantial debt relief once the country reaches the HIPC Initiative Completion Point. To reach the Completion Point, the country must have a Poverty Reduction and Growth Facility (PRGF) with the International Monetary Fund (IMF). The targeted date for the Completion Point, scheduled for end December 2003, was not achieved as Zambia did not graduate to a new Poverty Reduction and Growth Facility (PRGF).

31. Mr Speaker, the country is now under a Staff Monitored Programme (SMP) which will be assessed sometime in April. Depending on the performance, the IMF will consider and approve a new PRGF. Satisfactory performance during a six months period will then qualify Zambia to reach the Completion Point.

32. Sir, the Government is working hard to ensure that Zambia reaches the Completion Point by the end of this year. Substantial progress has been made towards implementing measures for reaching this goal. Some of the triggers include a bias to allocating the limited resources to the education and health sectors. Attaining the Completion Point will enable the country to benefit from a reduction of US $3.8 billion in the stock of debt. This will eventually result in savings which will be directed at more poverty reduction and wealth creation programmes.

External Sector Developments

33. Mr Speaker, preliminary information indicates that the external sector performed better than expected in 2003. The country's terms of trade showed a 7.0 percent improvement as against a minus 7.1 percent in 2002. The up-turn in the terms of trade was largely due to increased metal prices.

34. Mr Speaker, the favourable terms of trade had a positive influence on the current account balance, which narrowed to minus US $628 million in 2003 from minus US $652 million in 2002. This was due to a 21.9 percent increase in the value of merchandise exports to US $1,117 million. Merchandise imports rose by 15.3 percent to US $1,388 million.

35. Sir, another factor that raised the value of total exports was the strong growth in the exports of non-traditional products, whose earnings increased by 14.0 percent to US $407 million. Accounting for this strong performance were increased exports of scrap metal, cotton lint, copper rods, tobacco and gas oil. This increase is a sure sign that we can do much more in export diversification as non-metal exports and tourism receipts now account for 40 per cent of export earnings.

36. The most significant sources of financing for the current account deficit were the high level of net private capital inflows and project grants, which amounted to US $153 million and US $240 million respectively. The overall balance of payments deficit, which narrowed by 15.1 percent to minus US $325 million, was better than anticipated.

Monetary and Financial Sector Developments

37. Mr Speaker, the main focus of monetary policy in 2003 was to achieve an end-year inflation target of 8.0 percent. In order to achieve this target, money supply growth was to be restricted to 6.6 percent. This required limiting domestic borrowing to 1.5 percent of GDP and achieving stability in the foreign exchange market and the financial system.

38. Sir, in 2003, the end-year inflation fell to 17.2 percent from 26.7 percent in 2002. Despite this significant reduction, the inflation out-turn was still higher than the target. This was due to a 23.4 percent growth in money supply which was higher than programmed largely due to increased Government borrowing from the banking system.

39. Mr Speaker, during the year, the yield rates on Government securities continued to decline. The composite weighted average yield rate for all Treasury bill portfolios decreased to 15.0 percent from 33.1 percent at end-December 2002. Similarly, the composite weighted-average Government bond yield rate declined to 24.8 percent from 45.0 percent recorded at end-December 2002. It was expected that yield rates would adjust in line with inflation.

40. The Bank of Zambia also completed the conversion of Kwacha statutory reserves on foreign currency deposits into US dollars. In addition, the Bank of Zambia reduced the statutory reserve ratio on both Kwacha and foreign currency deposits to 14.0 percent from 17.5 percent.

41. Mr Speaker, following the decrease in yield rates on Government securities, and reserve ratios, the lending rates of commercial banks also declined. The weighted average base lending rate dropped to 37.7 percent in December 2003 from 42.5 percent in December 2002. While this gesture from commercial banks is acknowledged, I wish to implore commercial banks to reduce their lending rates even lower and faster.

42. Sir, in line with our commitment in last year’s Budget to maintain a competitive exchange rate, the Bank of Zambia, in conjunction with other major stakeholders, set up a broad-based inter-bank foreign exchange market. This action enhanced the role of the market and addressed the shortcomings that characterised the previous trading system.

43. Sir, these changes in foreign exchange operations contributed to the stability of the exchange rate of the Kwacha against the US dollar. The Kwacha depreciated by only 7.5 percent in 2003 compared with a depreciation of 13.2 percent recorded in 2002.

44. Mr Speaker, the overall financial condition and performance of the banking sector, during 2003, was satisfactory. The sector maintained adequate capital and reserves, while asset quality, earnings and liquidity were also satisfactory. Sir, with regard to the non-bank financial institutions sector, the overall performance of the leasing, micro finance and bureau de change institutions was considered fair. However, the performance of some non-bank financial institutions was unsatisfactory largely due to liquidity problems and inadequate capital. To address this, the Bank of Zambia is closely supervising the operations of these institutions.

45. Mr Speaker, in 2003, the Bank of Zambia and other stakeholders, including Government started developing a comprehensive medium-to-long term Financial Sector Development Plan (FSDP). The main objective of the plan is to develop an efficient financial system adequate to meet the challenges of development of the economy.

46. Mr Speaker, it is envisaged that the plan will, inter alia, foster a more reliable and stable provision of services to the lower income groups. The non-bank financial institutions are expected to contribute greatly to poverty reduction in the country after the implementation of the plan.

47. Mr Speaker, to strengthen the micro finance sector, the Bank of Zambia has together with stakeholders been formulating regulations to govern operations in this sector. Micro finance operations will go a long way in making credit and other financial services more easily accessible to low-income groups.

Capital Market Developments

48. Mr Speaker, in 2003, the performance of the stock market was favourable. All performance indicators at the Lusaka Stock Exchange (LuSE), namely: market capitalization, number of trades, volume, turnover and the total number of companies on the stock market showed an upward trend. Market capitalization went up by 209 percent to US $768 million as at end-December 2003 from US $246 million as at end-December 2002. Similarly, the volume of shares increased by 280.9 percent to 311,443,174 shares from 81,755,945 shares as at end-December 2002.

49. The number of trades increased by 34.4 percent from 1,565 at the end of December 2002 to 2,103 at the end of December 2003. Similarly, the turnover value increased by 1.9 percent to US $10.9 million from US $10.7 million. In terms of the number of companies listed and quoted on LuSE, there was a marginal increase in the period under review. Currently the number of listed companies is 11 while the number of quoted companies is 10.

50. Mr Speaker, reflecting this favourable performance of the stock market, the LuSE All Share Index reached an all time high of 414.0 points in December 2003, up from 336.6 points in December 2002.

51. Sir, foreign participation on the LuSE increased in 2003 compared to 2002. Net foreign capital inflows were positive at US $2.25 million compared to an outflow of US $0.26 million in 2002.

Foreign Financing

52. Mr Speaker, in 2003, Balance of Payments support was substantially lower than expected. Out of a programmed amount of US $111 million only US $56.8 million, representing 50.5 percent, was received. The low level of expected programme financing was a result of some donors withholding disbursement due to the fact that Zambia did not reach agreement on a new PRGF programme. With regard to project support, a total of US $347.7 million was received, of which US $183.1 million came from multilaterals while US $164.6 million came from bilateral donors.

53. Mr Speaker, I would like to point out that while we had difficulties in receiving adequate Balance of Payments support from some of our cooperating partners, we continued to receive significant resources for capital projects. Among the major projects undertaken in 2003 with donor support were the Chirundu Bridge , the Kabwe-Kapiri Mposhi road, the Lusaka city roads, the Lusaka-Mongu road, the Mongu–Kalabo road, the Livingstone-Sesheke (Nakatindi) road and the Katimamulilo Bridge . Further, a major water and sanitation project for Copperbelt towns continued in 2003. In addition, substantial donor resources were received for enhancing social service delivery, capacity building and combating the HIV/AIDS pandemic.

54. Sir, last year the Government strengthened development cooperation with cooperating partners. Agreement was reached on a framework that would help facilitate the provision of direct budget support and strengthening of sector wide approaches. Sir, we and our cooperating partners recognise that direct budget support will only be effective when there is progress in implementing the Public Expenditure Management and Financial Accountability Reforms (PEMFA) and in particular the Integrated Financial Management Information System (IFMIS).

55. In 2003, the final design of the IFMIS model was completed and procurement of the hardware and software was initiated. Sir, last year also witnessed concerted efforts with our cooperating partners to improve the management and coordination of aid. To this effect, a memorandum of understanding was signed between the Government and some of the donors on Harmonisation In Practice (HIP) aimed at enhancing aid effectiveness and efficiency.

Budget Performance in 2003

56. Mr Speaker, I wish to inform the Honourable Members that while good performance was recorded in terms of revenue collection in 2003, expenditure performance was most unsatisfactory. This was evidenced by higher than programmed expenditures on Personal Emoluments and Recurrent Departmental Charges (RDCs) against under-expenditure on Poverty Reduction Programmes (PRPs). >>>>More Details