Copy Of Budget
Today Finance Minsiter Herbert Murerwa announced the budget. True to expectation the hard drinking former diplomat did not offer any real solutions to the country’s bleeding economy. ZimJournalists Arise sources who were in parliament today, say it seems the Minister blamed Gideon Gono for all that is going wrong.
It seems no love is lost between the two.
Sources say the opposition was denied the opportunity to raise debate, with parliament clerk Austin Zvoma adjourning parly. ZimJournalists Arise is publishing the entire budget in two parts starting from today
Part One
I. MOTION
1. Mr. Speaker Sir, I move that leave be granted to bring in a Bill to make Provisions in connection with Revenues and Expenditures of the Republic of Zimbabwe and to make Provisions for matters ancillary and incidental to this purpose.
II. INTRODUCTION
2. Firstly, Mr Speaker Sir, I wish to start my Budget speech by acknowledging the valuable support and cooperation that I continue to receive from Parliament in the formulation and implementation of the National Budget.
3. This is consistent with Government’s commitment for improving the budgeting process by involving a wider range of stakeholders, including those at grassroots levels. Such involvement guarantees the ownership of the Budget by all stakeholders and is critical for sustaining consensus over the implementation of announced policy measures.
4. It is against this background that my Ministry undertook a nationwide consultative outreach programme aimed at involving the public as much as possible in the Budget formulation process. My Ministry benefited tremendously from the input of stakeholders to which Government attaches great value.
5. The central message from these consultations evolved around the following challenges among others:
· Ever-increasing prices;
· Continued distortions in the pricing of key commodities and utilities;
· Unemployment and rising poverty levels;
· Foreign exchange shortages;
· Low industrial capacity utilisation;
· Underutilised allocated land;
· Inadequate measures to deal with rising levels of corruption in both the public and private sectors;
· Deteriorating provision of basic public services;
· Poor maintenance of infrastructure;
· Inconsistent policy pronouncements;
· Declining clarity over the role and accountability of the key institutions of Government;
· Perceptions of lack of commitment to effectively deal with the challenges facing the economy; and
· Increasing indiscipline.
6. One of the consequences of the above challenges, Mr Speaker Sir, is the emergence of very large income disparities, with the majority of the lowest paid workers earning below the Poverty Datum Line.
7. The deterioration in the welfare of our people has seen their capacity to access basic healthcare services, education, housing and other amenities collapse overnight, under the prevailing hyper-inflationary environment.
8. This, Honourable Members, is happening at a time when a small proportion of the population is now accumulating wealth overnight, in part benefiting from the price distortions arising from some of the policies and facilities meant to protect the very poor.
9. In this environment, the country continues to experience loss of critical skills, the dominance of the informal sector in the economy, declining capacity utilisation and de-industrialisation. These are some of the challenges that the Budget will have to address with ‘head-on’.
10. Regrettably some of the wealth accumulation is a direct product of the prevailing indiscipline in our economy. We have amongst the citizens, individuals benefiting from abuse of public resources and thereby contributing to unnecessary public expenditures and economic hardship.
11. Mr Speaker Sir, we therefore need to declare war against indiscipline, and in this War, the Budget will not be found wanting. We will therefore need to review and strengthen the legislation and penalties for economic crimes.
12. Mr Speaker Sir, Honourable Members will be aware of the partnership with the private sector in the context of the National Economic Development Priority Programme (NEDPP). The thrust of the NEDPP is the implementation of Quick Win programmes and projects, whose objective is to stabilise the economy and lay the foundation for sustained economic growth.
13. The 2007 National Budget will play its critical role of addressing stakeholder concerns, support the NEDPP measures, foster macro-economic stability and restore business confidence.
14. Mr Speaker Sir, it is no secret that the country remains under siege, facing sanctions from the West, characterised by lack of balance of payments support, lines of credit, foreign direct investment and deliberate efforts to undermine our economic turnaround initiatives.
15. This makes it vital that we employ innovative tactics to survive in this environment, taking advantage of our abundant natural resource endowment and reliable cooperating partners.
16. Mr Speaker Sir, the 2007 Budget will be guided by the Results Based Budgeting principles adopted by Government in 2005. Hence, the expenditure allocations for the coming year are related to the anticipated and time-framed deliverables during 2007. I am happy to note that submissions from line Ministries now take the Results Based Budgeting format on board.
17. The setting of specific deliverable targets for the respective line Ministries under the 2007 Budget should also assist to ‘turn the tables’ on the major inflation drivers under Ministries’ domains through active focus on productivity and close monitoring at the Ministry level. In this regard, the Budget will ensure that Ministries focus on their roles and responsibilities in fighting the overall inflation levels.
18. Mr. Speaker Sir, Honourable Members will be aware that the implementation of our Currency Reform exercise on August 1, 2006 resulted in the revaluation of the currency with the removal of three zeros from the old bearer cheques and the introduction of a new set of bearer cheques. Hence, in my presentation, all domestic currency statistics reflect the revalued currency.
19. Mr Speaker Sir, my presentation will cover the fiscal performance up to October 2006 and the estimates to year end. I will also touch on the economic challenges we are facing as a Nation.
20. Mr Speaker Sir, allow me to first of all give a brief overview of the Global Economic Outlook, as well as a review of recent Domestic Economic performance and projections for 2007.
21. My outline of the Fiscal Outturn during 2006, will be followed by the 2007 Expenditure Bids by line Ministries, before I turn to the Thrust and Priorities for the 2007 National Budget, and my Revenue Proposals.
III. GLOBAL ECONOMIC OUTLOOK
22. Global economic performance remained strong in 2006, with emerging markets experiencing rapid growth, against the background of strong non-oil commodity prices, especially minerals. Performance was most notable in China whose growth is forecast to remain high at about 10% in 2006 and 2007. In India, growth is expected to remain at 8% percent in 2006, down slightly from 8.5% in 2005.
23. Thus global growth of 5.1% is forecast in 2006, up from the 4.9% realised in 2005. Global economic growth is forecast to slightly drop to 4.9% in 2007.
24. Economic growth in the United States is expected to increase marginally to 3.4% in 2006, compared to 3.2% in 2005. This is being driven by consumption and residential investment.
25. Economic recovery in Japan is continuing, with growth forecast to increase to 2.7% in 2006, after recording a growth of 2.6% in 2005.
26. In the Euro zone, a 2.4% economic growth is expected in 2006, up from 1.3% in 2005.
27. The strong recovery in Europe and an upswing in the Japanese economy will play a critical role in sustaining global economic growth.
28. Developing economies continue to grow, underpinned by fiscal consolidation, market-oriented reforms, increased foreign investment inflows and greater exchange rate flexibility.
29. In Sub-Saharan Africa, a 5.2% growth is expected in 2006. An upswing in economic growth to 6.3%, is expected on the back of increased oil output in Nigeria, Angola and Equatorial Guinea.
30. In Southern and Eastern Africa, growth of over 5% is expected in 2006. The region should benefit from recent efforts to further deepen regional integration and the opening up of markets through Free Trade Areas. In this regard, it is important that our business community be ready to take advantage of the opportunities that arise from deeper regional integration.
31. Strong global economic growth, especially in China and India, has continued to support the high international prices of primary commodities, especially copper, gold and platinum. Although oil prices have been coming down, the price still remains volatile.
32. In May 2006, gold and platinum prices reached record levels of US$722 per ounce and US$1328 per ounce, respectively. Brent crude oil prices reached a record high of US$79 in August.
33. The threat of protectionist pressures, coupled with volatile oil prices, remain major risks to global growth.
IV. RECENT ECONOMIC DEVELOPMENTS
Overall Economic Activity
34. Mr. Speaker Sir, the Zimbabwean economy is expected to register a lower decline of 2.5% in 2006, compared to the 3.8% decline registered in 2005. This is on the back of the overall economic reversal of the downward trend experienced in agricultural production over the past few season.
35. The combination of a good weather outturn, coupled with the consolidation of our Land Reform Programme contributed to the anticipated 6.4% growth in agriculture in 2006.
Graph 1: Percentage Growth of Major Sectors 2001 to 2006 (est)
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36. The economy is projected to grow marginally by between 0.5% to 1% in 2007. This is due to the anticipated improved performance in agriculture and mining. The performance of the manufacturing sector continues to be negatively affected by low capacity utilisation and is expected to decline by about 7% in 2006. The sector is projected to decline at a lower rate of 2% in 2007.
Agriculture
37. Agriculture is anticipated to grow by about 6.4% in 2006. This, however, is lower than the original projection of a growth of 23%. The deviation is largely on account of lower than anticipated maize and wheat production.
Graph 2: Agricultral Output Growth 2001 to 2006
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38. Mr Speaker Sir, the outlook for agriculture for the 2006/07 season is promising, given Government’s efforts to ensure adequate and timely supply of critical inputs such as seeds, fertiliser, fuel and chemicals. These efforts by Government, in partnership with key private sector stakeholders, has seen better coordination and supply of inputs and will result in increased productivity and better yields.
39. Early preparations and the timely provision of inputs create greater scope for farmers to adequately plan and hence, the increase in expected crop hectarage. The on-going rehabilitation of the greenhouse facilities is supporting the revival of the horticulture sub-sector.
40. Mr Speaker Sir, against this background, and also taking account of forecasts by the Meteorological Department of a near-normal rainfall season, agricultural output is expected to register a growth of 9.4% in 2007.
Mining
41. Mr Speaker Sir, record high international mineral prices have seen improved foreign exchange realisations from mineral exports. Gold prices have risen to over US$600 per ounce, while copper and platinum prices have risen above US$7 000 per ton and US$1 200 per ounce, respectively. Similarly, nickel prices have more than doubled to over US$30 000 per ton.
42. However, the lack of extensive mining recapitalisation at existing mines and investment in new mining exploration programmes has remained a major constraint to the expansion of mining operations. This has been compounded by disruptions to power supplies, coupled with rising mining production costs which affect viability.
43. The spiralling cost of capital items, due to inflation, is being exacerbated by the rising parallel market exchange rates at which most imported items are priced.
44. The other serious challenges still facing the mining sector are the continued leakages in our mineral exports, especially gold and diamonds. Owing to the above challenges, gold deliveries declined by 24%, from 10 552.04 kgs in the period January - September 2005, to 7 991.57 kgs in 2006.
45. Asbestos production declined slightly from 93 326 tons by September 2005 to 82 252 tons for the same period in 2006. However, platinum production increased marginally from 3 563.34 kgs in 2005 to 3 822.77 kgs in 2006.
Graph 3: Minerals Growth 2001 to 2006
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46. The law enforcing agents, together with the Reserve Bank should strengthen measures to address leakages in the mining sector. Policies to improve viability in the mining sector will be vigorously pursued by Government. This should support the revival of mining production, which is projected to decline by 14.4% in 2006.
47. In this regard, realising higher gold production and deliveries will require an appropriate exchange rate regime which ensures viability, on the back of all time high international mineral prices. Furthermore, the setting up and taking over of some gold milling centres by Fidelity Printers and Refinery should contribute towards reducing leakages in gold export receipts.
48. In coal mining, the recent recapitalisation at the Hwange Colliery Company has started to bear fruit. As a result of this recapitalisation, the mining company has been able to open the new Chaba Mine and commence operations at the 3 Main underground mines.
49. Monthly coal production, is therefore projected to double by December 2006 to 425 000 tons, enabling the company to meet local demand of 412 000 tons and to resume exports.
50. Overall, mining output is estimated to grow by 4.9% in 2007.
Manufacturing
51. Mr Speaker Sir, price distortions, foreign currency shortages for the importation of essential raw materials and spares, energy shortages and declining real disposable incomes continue to depress production in the manufacturing sector. The sector is estimated to decline by 7% in 2006.
Graph 4: Growth in Manufacturing 2001 to 2006 est
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52. The inability by most manufacturers to source foreign exchange for importing raw materials from the inter-bank market has meant that they have increasingly relied on the parallel market, where the exchange rate is significantly depreciated. This has forced companies to incur higher production costs, which are ultimately passed on to consumers as higher prices. This has contributed to the escalation of higher inflation.
53. The shortage of foreign exchange to import adequate raw has compromised industrial capacity utilisation. Most companies continue to operate below 30% capacity which means higher production unit costs. This, against a background of rising demand, has contributed to price escalations.
54. Mr Speaker Sir, measures to ensure growth in the economy’s industrial base have included support for distressed companies, Import Substitution and Value Addition.
55. Schemes already in place include the $5 billion Fund to resuscitate distressed companies, which is being managed by the Infrastructure Development Bank. The Bank is also managing the $500 million Value Addition and Import Substitution Fund.
56. This, coupled with the initiatives to vigorously promote toll manufacturing, should also see an improvement in industrial capacity utilisation. These measures, including an exchange rate regime which guarantees the viability of exporters, should assist to reverse the decline in industrial production. The manufacturing sector, Mr Speaker Sir, is projected to decline by 2% in 2007.
Tourism
57. Vigorous marketing and promotional initiatives in Asia and the Middle East markets are starting to pay dividends as reflected by the increase in tourist arrivals from these regions. Growth of the regional and domestic tourism markets has also supported growth in the tourism industry.
58. In response to these marketing efforts, tourist arrivals during the period to September 2006, grew by 45% to 1 596 489 over the same period in 2005. The positive outturn to September 2006 reflects a 52% growth in tourist arrivals from African countries, mostly Southern Africa. Tourist arrivals are expected to grow by 23% for the year, with growing numbers coming from Asia.
Chart 1: Growth in Tourist Arrivals to September 2006
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59. As the tourism sector recovers there is need to plug all leakages of foreign exchange earnings. This should reverse the mismatch between increasing tourist arrivals and revenues.
Transport
60. The economy is benefiting from improved performance and capacity of the National Railways of Zimbabwe (NRZ), against the background of concerted efforts by the Board, management and client stakeholders. This has seen significant refurbishment of locomotives and wagons, allowing the NRZ to generate enough revenue to sustain its operations, including liquidating statutory obligations for tax, pension, and medical aid contributions.
61. Sustaining this turnaround, will require further support in the rehabilitation of infrastructure, signalling equipment and the improvement of locomotive power and rolling stock capacity. Already, the NRZ is taking advantage of Government’s Look East Policy in upgrading the Harare-Mutare, Bulawayo-Victoria Falls and Bulawayo-Chiredzi lines.
62. Road transport capacity has also benefited from improved fuel availability, from the Direct Fuel Import facilities, as well as the other facilities being coordinated by the Reserve Bank.
Inflation Developments
63. Mr Speaker Sir, inflation remains one of the major challenges facing our economy. Year on year inflation rose from 613.2% in January 2006, to reach a peak of 1 204.6% in August. In September it however declined to 1 023.3%, before the rise to 1 070.2% in October 2006.
Graph 5: Year on Year (YOY) Inflation & Money (M3) Supply Growth in 2006
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64. Such high levels of inflation have resulted in the erosion of disposable incomes and worsened poverty. Savings have been severely affected, with pensioners unable to make ends meet. On the other hand, the competitiveness of our exports has been eroded significantly by such high levels of inflation.
65. Some of the major drivers of inflation remain:
· The impact of public sector borrowing requirements, for budgetary financing;
· Quasi-fiscal activities funded through the Reserve Bank;
· High money supply growth;
· Corruption;
· Increase in parallel market activities;
· Foreign exchange shortages;
· Inflation expectations;
· Price distortions and behaviour of economic agents; and
· Structural supply bottlenecks.
Graph 6: Average Year on Year (YOY) Inflation, Money Supply (M3)
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66. Mr Speaker Sir, high levels of inflation have become increasingly self-sustaining through the breeding of expectations of even higher levels of inflation. In such an environment producers are now adjusting their prices on the basis of their expectations of the cost of replacing stock.
67. Similarly, salary and wage settlements are being driven by high inflation and inflationary expectations as workers aim at avoiding further erosion of the purchasing power of their incomes.
68. This behaviour is contributing to the prevailing vicious wage-price spiral – where high inflation prompts high wage demands, and vice versa.
External Sector
69. Mr Speaker Sir, our Balance of Payments (BOP) position continues to be under severe pressure, against a background of declining exports, absence of BOP support, lines of credit and foreign direct investment.
70. Reflecting this, a current account deficit of US$543.3 million is projected in 2006 as both manufacturing and mining performance remain depressed. With agriculture and tourism still to fully recover, their contribution to export growth remains limited.
71. In 2006, mineral, manufactured and agricultural exports are projected to decline by 0.2%, 10.5% and 6.3%, respectively. As a result, exports are estimated to decline by 6% in 2006.
72. Imports, which increased marginally by 0.2% in 2005, driven by increased food, electricity, fuel and manufactured imports, are however projected to decline by 1.6% in 2006, against a background of foreign currency shortages.
73. On the capital account, net inflows amounting to US$298.4 million are envisaged. Foreign direct investment into mining and some of our Parastatals under the Look East initiatives are the major factors contributing to the positive capital account balance
External Debt
74. Mr Speaker Sir, Zimbabwe remains committed to honouring all its external loan obligations. The severe BOP position, partly arising from sanctions, however, limits our ability to meet our external loan obligations.
75. As a result, of the total external debt outstanding amounting to US$4.1 billion at end of October 2006, external payment arrears total US$2.2 billion.
V. FISCAL DEVELOPMENTS IN 2006
76. Mr. Speaker Sir, Honourable Members will recall that the 2006 Original Budget, together with the Supplementary Budget I presented to the House on July 27, provided for total expenditure and net lending of $451.1 billion, revenue of $250 billion, and a deficit of $201.1 billion or 18.7% of estimated GDP.
77. Actual Budget performance to October 2006 shows total expenditure and net lending at $263.2 billion, against revenue of $229.1 billion. Given projections for the last two months of 2006, total revenues will rise to $351.6 billion.
78. This, Mr. Speaker Sir, would reduce the budget deficit outturn to $99.5 billion, implying a much reduced 2006 fiscal deficit of 9.2% of estimated GDP.
79. Improved revenue collections, largely on account of higher inflation, have not been translated into improved service delivery and project implementation, given the cost escalations which adversely affected the delivery of public services.
Revenue Performance to October
80. Revenue collection to October remained in line with the revised revenue targets and on course at $229.1 billion, against the background of tighter enforcement of compliance by ZIMRA. Tax revenue accounted for $220.9 billion of this. Non-tax revenue to October 2006, comprising mainly of fees, charges, and the 7.5% civil servants pension deductions, contributed $8.2 billion.
81. The improved collection is due to increased enforcement of compliance by ZIMRA. This has resulted in significant increase in the number of PAYE and corporate returns being filed. Value Added Tax and Customs Duty have also significantly increased.
82. Value Added Tax collections amounted to $61.5 billion, translating to 27.5% of total revenue, against a target of $49.2 billion. VAT on local sales amounted to $42.3 billion, and that on imports, to $18.3 billion. Improved VAT collections were attributed to price increases of goods and services, as a result of the current hyper inflationary environment, and were also complemented by the August 2006, movement in the official exchange rate used in valuation of imports. VAT collections are expected to end the year at $100 billion.
83. Individual Pay As You Earn (PAYE) tax collections amounted to $58.1 billion or 26.3% of total revenue, against a target of $34 billion and are expected to end the year at $80 billion. The positive performance of PAYE reflects the award of higher than anticipated salary and wage settlements in both the private and public sectors.
84. Customs duty collections amounted to $26.7 billion or 12.1% of total revenue, against a cumulative target of $23 billion. This improved performance is partially attributed to the upward movement in the exchange rate, which impacted on the value of imports. Customs duty collections are expected to end the year at $40 billion.
85. Corporate profits were constrained by low capacity utilisation arising from increased costs of production and shortages of foreign currency for the importation of raw materials and equipment. Cumulative collections for the period amounted to $38.3 billion or 17.3% of total revenue, against a target of $31.9 billion and are estimated to be around $55 billion by year end.
86. Tax revenue collections from domestic dividends and interest were $19.9 billion or 9% of total revenue, and are expected to end the year at $22 billion. Major contributors to this revenue head were shareholders’ tax, at $12.9 billion, followed by tax on interest of, $7 billion.
87. Carbon tax contributed $2.9 billion, while other income taxes contributed $2.2 billion to overall tax revenue as at the end of October 2006. The other income taxes were dominated by Withholding Capital Gains tax, which raised $1.8 billion, and other Capital gains taxes which contributed $366.4 million.
88. The tobacco levy, however, raised only $50.9 million. This subdued performance was against the background of the challenges facing some of the new tobacco farmers. These relate to limited expertise, which contributed to the fall in yields. However, quality and quantity of product delivered to the auction floors should improve in the coming season benefiting from this year’s early provision of inputs.
89. Excise duty collections performed above expectations at $7.5 billion to the end of October 2006 and are projected at $12 billion by year end. Alcoholic beverages continue to be the major contributor to this revenue head, benefiting from the frequent increases in the prices of alcoholic beverages and relatively stable demand.
90. Excise duty on beer accounted for $4.5 billion, followed by that on tobacco, $2.3 billion, & wines and spirits, $812.1 million. The 5% excise duty on second hand vehicles generated $370 million, while non-alcoholic beverages contributed $483.3 million to excise duties.
91. ‘Other taxes’ collected over the ten months to October 2006, contributed $3.9 billion to total tax revenue, with stamp duties remaining the major contributor at $2.1 billion. Escalations in property values in a hyper inflationary environment, coupled with increased activity on the stock market, are underpinning stamp duty collections.
92. The banking levy realised $827.3 million, followed by withholding tax on tenders, $448.4 million, and the road access fee, $374.8 million. However, the contribution of presumptive tax to ‘other taxes’ remained relatively small at $112.8 million.
93. Overall revenue performance in the last two months of 2006, is expected to remain on course. The traditional year-end bonus payments, coupled with corporate tax payments should augment revenue collections during this period. Corporate tax payments under the contemporaneous tax system, wherein tax is payable in the fiscal year in which profits are generated, has greatly increased revenue under this sub-head.
Expenditure Performance to October
94. Total Budget expenditures and net lending for the ten-month period to October 2006 amounted to $263.2 billion, against a target of $321.7 billion.
95. Mr Speaker Sir, allow me to outline the performance of the key expenditure heads.
Employment Costs
96. Employment costs for the period under review amounted to $85.7 billion, against a target of $76.3 billion.
97. This expenditure overrun is a result of reviews of public service incomes undertaken in January and May 2006, which were meant to cushion civil servants in the prevailing hyper inflationary environment. This also necessitated further review of housing and transport allowances with effect from October 2006.
98. Notwithstanding the above income adjustments, remuneration levels for the civil servant remain relatively low. This is compromising not only the capacity of Government workers to afford such basic necessities such as transport, accommodation, food, and medical service, but also the ability of Government to retain and attract skilled and experienced personnel.
Pension Payments
99. In addition to reviewing salaries and allowances for civil servants, Government further reviewed pension benefits in January and May 2006. The reviews resulted in Pension payments of $16.9 billion, against a target of $15.1 billion. This enabled us to provide some cushion for retirees, as incomes were being eroded by inflation.
Goods and Services
100. High inflation also impacts adversely on the capacity of Ministries to procure goods and services. This necessitated the provision of additional resources through the Supplementary Budget, mainly on account of increasing costs on transport, telecommunication, and utilities.
101. Overall expenditure for goods and services, at $109.7 billion, exceeded targeted expenditure by $118.4 billion.
Capital Expenditures
102. Implementation of capital projects has also been affected by cost escalations arising out of hyper inflation. This has undermined our efforts to raise the Capital Budget to the levels targeted by Cabinet of over 30% of overall Budget expenditures.
103. Cumulative capital expenditure to October 2006, amounted to $52.6 billion, against a target of $72.9 billion.
Lending
104. Total net-lending as of October 2006, amounted to $873.8 million, against a target of $1.1 billion. Local Authorities remained the major beneficiary of Budget on-lending during 2006.
105. Delays in the submission of programme of works by some targeted beneficiary Local Authorities limited the extent of the upgrading of sewer and water reticulation facilities in our urban centres.
Quasi-Fiscal Expenditures
106. Mr Speaker Sir, Honourable Members will be aware that, in light of the scarcity of resources within the Budget envelope, some of the funding requirements for public and private sector projects were taken up by our Central Bank over the last three years. The emergence of some new priorities soon after the approval of the 2006 Budget, which could also not be met within the Budget envelope, exacerbated the situation.
107. Honourable Members will also be aware that the quasi-fiscal expenditures directly linked to price distortions and Government departments will ultimately be serviced by the tax-payer, hence, the need to fully reflect such expenditures in the Budget.
108. Such quasi-fiscal expenditures have risen to levels that are now undermining our turnaround efforts by systematically increasing the growth of money supply and therefore fuelling inflation, in addition to other negative effects on the economy.
109. These negative effects include instances where the quasi-fiscal expenditures did not achieve the desired supply response, owing to the abuse of availed facilities by some beneficiaries and the lack of deterrent measures.
110. In this regard, combating inflation will require the phasing out of all quasi-fiscal operations and adequately providing resources for prioritised expenditures within the Budget. This is also consistent with accountability and transparency over the allocation of public resources. Fulfilment of this requirement also assists the Nation to appreciate the totality of public sector expenditures and borrowing.
111. Hence, consistent with our Constitution and the Audit and Exchequer Act, beginning 2007, all such and any other additional public expenditures will be strictly and adequately reflected through the budgetary process.
112. Mr Speaker Sir, the stock of quasi-fiscal expenditures at the beginning of November 2006, amounted to $372.9 billion. Of this amount, $60.4 billion are quasi-fiscal expenditures for 2005, while $8.4 billion is for the fiscal year 2004. This leaves the quasi-fiscal expenditures for the current fiscal year at $304.1 billion as at November 2006.
Import Payments
113. Of the total quasi-fiscal expenditures, $103.4 billion is related to Reserve Bank foreign exchange provision for various import programmes.
114. In this regard, fuel imports accounted for $49.4 billion. GMB imports for seed, grain and fertilizer absorbed another $25.5 billion. Payments for electricity imports, as well as other ZESA imports totalled $13.3 billion. Air Zimbabwe foreign exchange requirements accounted for $8.4 billion.
Agriculture Support Facility
115. In the absence of strong banking sector financial lending to the agricultural sector following the land reform, financial support for agriculture under the Agricultural Sector Productivity Enhancement Facility (ASPEF) amounted to $101.2 billion.
116. Of the total ASPEF amount, $60.4 billion went to farmers. Food security accounted for $18.7 billion, while the winter wheat programme benefited to the tune of $21.5 billion, with the balance spread between tobacco support, Agribank and the Agricultural and Rural Development Authority (ARDA).
Maize & Wheat Purchases and Subsidies
117. Furthermore, in the absence of the review of the Grain Marketing Board (GMB) maize and wheat selling prices at a time when the producer prices had been adjusted upwards, quasi-fiscal expenditures were also incurred. As at mid November 2006, support for maize and wheat purchases amounted to $33.5 billion.
Exchange Losses
118. Distortions in the exchange rate, which stakeholder consultations suggest need to be corrected, have also contributed to us incurring quasi-fiscal expenditures. In this regard, total exchange losses were $75.0 billion.
Tobacco, Gold & Cotton Support
119. The distortions in the exchange rate necessitated support prices for some exporters. In this regard, quasi-fiscal support expenditures benefited gold producers and tobacco farmers who received subsidy payments of $8.9 billion and $20.8 billion, respectively. Similarly, cotton farmers had received subsides amounting to $0.7 billion by November 2006.
Parastatals & Local Authorities
120. Mr Speaker Sir, a significant amount of the quasi-fiscal operations were incurred in support of the Parastatals and Local Authorities Re-orientation Programme.
121. This intervention was against the background of declining capacity to deliver basic public services, largely associated with poor corporate governance and management structures. Sub-economic tariffs exacerbated the situation.
122. Almost all of our Parastatals and Local Authorities benefited from this Programme, with draw-downs totalling $17.8 billion by November 2006.
Productive Sector Facilities
123. The deteriorating macro-economic environment also had adverse effects on manufacturing and mining sector, necessitating the introduction of concessionary facilities.
124. In this regard, a total of $0.1 billion was extended to resuscitate and capacitate distressed companies in manufacturing and, mining sectors.
Troubled Banks
125. Mr Speaker Sir, Central Bank measures to deal with the issue of problem banks and financial institutions have been with us for the last couple of years. In the process of restoring the integrity of the banking sector, insolvent institutions could not be salvaged.
126. Recapitalising those banks and institutions requiring liquidity and additional capital injection saw a number of troubled banks access the Troubled Banks Facility. Total support provided under this window amounted to $3.2 billion as at mid November 2006.
Loans to Government Departments
127. A number of critical Government programmes and projects also benefited from quasi-fiscal expenditures. In total, over $7.7 billion was extended to Government departments for various projects for the Ministry of Local Government, Public Works & Urban Development, the Zimbabwe Republic Police, road maintenance and upgrading.
Domestic Debt
128. Mr Speaker Sir, the level of public domestic debt, which had remained relatively stable during the first half of the year, has since been increasing rapidly against the background of increased expenditure demands on Government.
129. Total domestic debt declined from $15.9 billion in December 2005, to $14.9 billion by the end of April 2006, against the background of tight expenditure management.
130. However, domestic debt increased to $46.1 billion by the end of June, largely driven by the review of civil service wages in May. By September, domestic debt had risen to $119.4 billion, reflecting the impact of high inflation on Government operations and programmes. However by October 2006, domestic debt had fallen to $97.8 billion.
131. In the prevailing hyper inflationary environment, the money market has largely operated at the short end. Reflecting this, Treasury Bills of under one year maturity continue to account for most of the public domestic debt at 76.2%, while 181-day paper accounted for 23.7%. Recourse to the highly inflationary overdraft facility with the Reserve Bank has, however, remained limited.
132. With over 98.5% of domestic debt being short term Treasury Bills of less than one year, the restructuring of domestic debt to long term paper becomes necessary. Such restructuring will reduce the interest burden to the fiscus.
Budget Outturn Including Quasi–Fiscal Expenditures
133. Mr Speaker Sir, I have already highlighted the need for us as a Nation to take a holistic approach in accounting for budget expenditures. This entails incorporating into the Budget, quasi-fiscal outlays incurred on behalf of Government by the Reserve Bank.
134. In this regard, I project the 2006 Budget expenditures to remain within the $451.1 billion envelope approved by Parliament under both the original Budget presentation in December last year and the Supplementary Budget of July this year.
135. Quasi-fiscal expenditures are projected to end 2006 at $372.9 billion. Incorporating these quasi-fiscal expenditures in the 2006 Budget outturn increases overall Budget expenditures to $824.0 billion.
136. Mr Speaker Sir, such a high level of expenditure, against the anticipated revenue outturn of $351.1 billion would imply a Budget deficit of $462.9 billion (excluding interest payments).
137. As a proportion of GDP, this represents an unsustainably high Budget deficit of 43.0% of GDP, excluding interest. Such a high Budget deficit underpins the very high money supply growth rates of over 1 000% and the hyper inflation this Nation continues to experience.
138. Mr Speaker Sir, dealing with this challenge will require the adoption of bold expenditure management measures on our part.
139. Mr Speaker Sir, I now turn to the Expenditure Bids of Ministries for the 2007 Budget.
VI. EXPENDITURE SUBMISSIONS FOR THE 2007 BUDGET
140. Mr Speaker Sir, my Ministry received from Ministries and Government Departments, various expenditure submissions for resource allocations, under the 2007 Budget.
141. High inflationary expectations appear to underlie most of the expenditure submissions from Ministries, given this year’s experience. This reinforces the challenge before us of reversing the prevailing high inflationary expectations by adopting and implementing a credible and sustainable dis-inflation programme. Such a programme should be anchored on the complementarity between Fiscal and Monetary policies.
142. Honourable Members, for us to achieve single digit inflation, we will as a Nation, have to make sacrifices and endure some pain. We cannot run away from this fact, which I would like all of us to appreciate and acknowledge.
Overall Bids
143. The total 2007 Budget expenditure bids of line Ministries and Departments amount to $24.0 trillion. This request excludes interest payments that will accrue from the domestic borrowings required to finance the Budget deficit. These expenditure bids represent a growth of 5 313% over this year’s anticipated expenditure outturn. The comparable overall revised Budget for 2006, following the Supplementary Budget, is $331.4 billion, also excludes interest.
Capital
144. Bids for the Capital Budget in 2007 amount to $10.9 trillion, up 9 687% on this year’s projected expenditure outturn of $112.3 billion.
145. Given the above scenario, I have therefore, rationalised the expenditure bids by Ministries and Government Departments in line with our NEDPP priorities, ongoing Government projects and the capacity of the Budget to finance them in a manner that is consistent with our inflation targets.
146. Mr Speaker Sir, I now turn to the Thrust and Priorities of the 2007 Budget, which as I have already indicated will be presented along the principles of Results Based Budgeting which Government adopted in 2005.
VII. THE 2007 BUDGET THRUST AND PRIORITIES
147. Mr Speaker Sir, as we move forward, it will be critical that the 2007 Budget expenditure levels be consistent with a credible anti inflation programme, targeted at drastically reducing money supply growth. This is the only way we will begin to have a firm hand in containing inflation, a prerequisite for building confidence and dealing with high inflation expectations.
148. A comprehensive package to re-enforce policy measures to restore macro-economic stability will therefore encompass the following:
· Consistent fiscal consolidation and expenditure restructuring focusing on capital development, health and education;
· Phasing out quasi-fiscal operations and allocating all resources through the National Budget;
· Elimination of wholesale subsidisation;
· Dis-inflation monetary policy and interest rate management framework targeting reduction in money supply growth;
· An appropriate exchange rate regime and incentives to ensure exporter viability;
· Unlocking Balance of Payments support and external lines of credit;
· Unlocking foreign exchange resources from the Diaspora;
· Curbing foreign exchange leakages in the economy;
· Removal of price distortions and conclusion of a Social Contract binding Government, business and labour;
· Enhancing agricultural production to ensure food security;
· Promotion of mining and tourism development;
· Supporting import substitution, value addition, toll manufacturing and SME development;
· Enhancing infrastructure development;
· Strengthening and streamlining National Social Protection Safety Nets and Programmes; and
· Supportive Parastatal and Local Authorities structural reforms.
149. Central to fiscal and monetary policies complementarity will be the targeting of money supply growth to levels consistent with inflation targets, guided by a consistent monetary policy targeting framework, with quasi-fiscal expenditures curtailed and provided for in the fiscal budget. This will require us to ring-fence the existing stock of quasi-fiscal expenditures and confine them.
150. Experiences elsewhere have demonstrated that policy reversals and the abandonment of policy initiatives mid-stream, only serve to defer and magnify the level of pain endured in the implementation of the necessary corrective policy measures.
151. Piecemeal approaches and half-hearted implementation of critical policies will not deliver. The need for a credible and consistent Macro-economic Policy Framework aimed at reducing inflation and realising macro-economic stability cannot therefore be over-emphasised.
Macro-Economic Policy Framework
152. The Macro-Economic Framework for 2007 consistent with the restoration of macro-economic stability will include the following:
· Fiscal consolidation characterised by an increase in the proportion of the Capital Budget to 24.4% of expenditures and lowering the Budget Deficit (excluding interest) to 17.6% of GDP.
· A dis-inflation programme targeted at reducing inflation from current four digit levels to 350-400% by December 2007 and subsequently to under 10% by December 2008.
· Reflecting all quasi-fiscal expenditures in the 2006 Budget.
· Phased amortisation of the quasi fiscal outlays through the fiscal Budget over three years starting in 2007.
· Phasing out quasi-fiscal activities and allocating all Government expenditures through the Budget.
· The promotion of a more intimate complementarity between fiscal and monetary policies.
· Support of interventions that free up the supply side of the economy from price distortions which in the past have undermined economic growth.
· Real GDP growth target of between 0.5% to 1% in 2007.
· Removal of distortions in the foreign exchange, fuel and other commodities markets which will be part of the process towards the elimination of parallel market activities.
· Stabilising incomes and prices under the auspices of the Incomes and Pricing Commission, supported by a Social Contract.
· Strengthening and streamlining Government’s Social Safety Nets Programmes targeting the vulnerable.
Budget Framework for 2007
153. Mr Speaker Sir, the Budget Framework for 2007 is premised on the following assumptions:
· Inflation target of 350-400% by December 2007;
· A real GDP growth of up to 1% and the respective nominal GDP level of $8.5 trillion;
· Budget Deficit of 17.6% of GDP excluding interest;
· Budget revenues targeted at 35.3% of GDP, implying revenues of $3.0 trillion;
· 2007 expenditure target of $4.6 trillion excluding interest;
· Provision of $100 billion for the phased amortisation of quasi-fiscal operations;
· Targeting Capital Budget to 24.4% of total expenditures or $1.5 trillion and in line with the NEDPP objectives, prioritise the completion of ongoing projects.
154. The 2007 Budget Framework is therefore premised on the economy’s capacity to finance Government expenditures, and provides an overall envelope of $6.2 trillion. This is also consistent with an inflation target of 350 – 400% by December 2007. Failure to contain expenditures within the economy’s financial resource capacity would entail higher inflation, compromising prospects for economic recovery and growth.
Monetary Targeting Framework
155. In order to achieve the inflation targets in the Budget Framework, it is imperative that greater focus be placed on the containment of monetary expansion, complemented by consistent and mutually agreed mechanisms of determining prices and incomes.
156. Pursuant to this, Treasury and the Central Bank have agreed on a new Monetary Targeting Framework, under a dis-inflation programme.
Monetary Policy Anchor
157. Under this dis-inflation programme, Treasury and the Reserve Bank have agreed on the targets for annual money supply growth consistent with the reduction in inflation. The Reserve Bank is therefore expected to meet the following annual money supply growth and inflation targets:
Table 1: Annual Money Supply Growth and Inflation Targets
Money Supply Growth Inflation
December 2007 415-500% 350-400%
December 2008 under 65% Under 10%
158. In order to support the Reserve Bank achieve these monetary anchor targets, Government borrowing requirements will be met from resources outside the Reserve Bank, and no Government Ministry, Department, Parastatal or Local Authority will seek funding directly from the Reserve Bank. Hence, all such funding requests to the Reserve Bank, more so when such expenditures are not reflected in the National Budget, will be rejected.
159. Similarly, Treasury will stay within its statutory limits and will only borrow should the eventuality arise.
160. To this end, the Reserve Bank will deepen its liquidity management interventions, supported by the phasing out of its quasi-fiscal operations from January 2007, with those directly related to price distortions and Government operations being transferred to the fiscal Budget.
Quasi-Fiscal Expenditures
161. Quasi-fiscal expenditure interventions by the Reserve Bank on behalf of the fiscus will be regularised through the Budget by absorbing, on a phased basis, amounts due from Government. These components of the quasi-fiscal outlays will be amortised through the fiscal Budget over the next three fiscal Budgets.
162. I therefore propose to allocate $100 billion under the 2007 Budget towards the repayment of some of our quasi-fiscal outlays that were effected by the Reserve Bank in support of Government programmes. This is in line with our Monetary Targeting Framework, as well as the realisation of transparency in accounting for all Government expenditures in totality.
163. Mr Speaker Sir, let me point out that of the total quasi-fiscal outlays, not all of the obligations will be transferred to the fiscus. Quasi-fiscal expenditures related to allocations made to farmers, private sector companies, Public Enterprises and Local Authorities will be recovered from the beneficiaries of these outlays.
164. In this regard, a Technical Committee comprising Treasury, Ministry of Economic Development and the Reserve Bank has been set up to follow up on these outlays to ensure that the beneficiaries repay the facilities availed.
Pricing Practices
165. The realisation of the inflation and growth targets implied under the above Macro-economic and Budget frameworks will not be without pain. The support of business, labour and other stakeholders, underpinned by a mutually Shared National Vision remains critical for success.
166. In its absence, mistrust among stakeholders prevails. At the same time, widespread speculative practices by producers underpinned by high inflationary expectations and indexation aligned to parallel market activities are perpetuated and drive inflation higher.
167. Clearly, Mr Speaker Sir, such practices are largely driven by self interest, devoid of any commitment to a common Vision.
168. This often prompts ill-timed and often contradictory policy pronouncements and decisions which, not only impact negatively on confidence, but also increases uncertainty among economic agents. A notable example would be resorting to the re-introduction of unsustainable price controls which, however, can only worsen the supply situation.
169. This makes it vital that we develop consensus over pricing frameworks, under which the practices of enterprises are rooted. This should be supported by ethical and prudent business behaviour.
Incomes Determination
170. It will also be necessary that we extend this consensus to influence expectations that guide the determination of Incomes, by ensuring that all stakeholders participate in sharing the costs and benefits involved in the quest for the recovery of our economy.
171. Mr Speaker Sir, I therefore propose the development of mechanisms covering the determination of both prices of goods and services and incomes of workers. Under this, trigger mechanism arrangements, as well as frequency of prices and incomes adjustments, would be mutually agreed upon under the auspices of a Prices and Incomes Stabilisation Programme. I accordingly propose to set aside an amount of $715.6 million for the set up and operational expenses for the programmes.
Productive Sectors Support
172. Mr Speaker Sir, I have also made reference to the positive correlation between improved supply side response and a reduction in inflation. In this regard, over and above the factors highlighted in the foregoing, it is imperative that the 2007 Budget incorporates measures to support the productive sectors of the economy.
173. Cognisant of this, Government remains committed to supporting improved capacity utilisation in the productive sectors of the economy. Targeted sectors include agriculture, manufacturing, mining and tourism.
Agricultural Finance
174. Mr Speaker Sir, Honourable Members will be aware that the backbone of financial support to agriculture, following our implementation of the Land Reform Programme, has remained with Government, directly through the Budget, as well as under the Reserve Bank’s Agricultural Sector Performance Enhancement Facility.
175. I have already alluded to the $76.7 billion agricultural support in 2006 under the Reserve Bank’s ASPEF window, which is part of our quasi-fiscal expenditures through the Reserve Bank. Direct 2006 Budget disbursements in support of improving production in the agricultural sector totalled $40 billion.
176. This includes $2.4 billion availed for the tobacco crop and $14.2 billion for the 2006/07 summer crop.
177. Government, however, has no capacity to meet the total financing requirements of the agricultural sector. Government will continue to play its part, and expects greater involvement of the private sector including the banking community. Historically, the banking community has funded the operations of commercial farmers.
178. Under the auspices of the National Economic Development Priority Programme, the private sector is being encouraged to go into the production of their requirements of feedstock for processing such as wheat and soya bean. I would like to challenge the private sector to fully participate in this programme in the forthcoming season.
179. Mr Speaker Sir, the banking community had raised concern with security of tenure as a major factor limiting its capacity to support farmers. The issuance of 99 year leases to some of the A2 farmers by His Excellency the President on November 9, 2006 should allay these fears, and introduce an environment conducive for banking sector involvement in the financing of agriculture. Already, 275 of the first 346 applicant A2 farmers to the Land Board have become the first beneficiaries of 99 year leases.
180. Mr Speaker Sir, 99 year leases guarantee beneficiaries possession of the farms for the next 99 years. A2 farmers’ payment for improvements made by previous owners, including those they also make, enhances the available collateral for borrowing from banks and other lenders.
181. Mr Speaker Sir, the 99 year leases can be registered with the Deeds Office as in the case of title deeds, thereby enabling banks to recoup their money from the lessee or any other person to whom the lease might be transferred. The land, however, remains State property and can only be transferred with the consent of the State.
182. A1 model farmers will also soon be assured of security of tenure through the issuance of usufruct permits, which give the legal right to use and derive benefit from State land.
183. Mr Speaker Sir, these provisions make the lease agreement the ultimate security of tenure as provided for by our Laws. Hence, the 2007 Budget support to agriculture takes account of banks’ increased participation through the re-introduction and opening of facilities and windows closed due to fears over security of tenure from the onset of the Land Reform Programme. The mobilisation of resources through the banking sector will be under the guidance of the Reserve Bank.
Extension & Irrigation Rehabilitation & Development
184. Mr Speaker Sir, the above arrangements should allow Government to focus its interventions at rigorous extension support, rehabilitation and development of irrigation infrastructure. I, therefore, propose to allocate a total of $46.6 billion in support of mobility and operational expenses of AREX, Veterinary and Agricultural Engineering. I also propose to allocate an amount of $6.2 billion for agricultural training through various Agricultural Colleges falling under the Department of Agricultural Education.
185. Mr Speaker Sir, I further propose an allocation of $33.8 billion targeted towards irrigation rehabilitation and development.
186. I am further proposing a Budget provision of $60.2 billion for Agricultural support with respect to grain, tobacco, and livestock production for the 2006/07 season, the 2007 winter wheat crop and the requirement of the earlier part of the 2007/08 agricultural season. This intervention will augment ASPEF resources.
Viability of Agriculture
187. Mr Speaker Sir, ensuring that the farmer positively responds to all this support necessitates our full appreciation of the other constraints in agriculture. Some of the constraints evolve around creating the environment for the sustainable viability of the producer.
188. Government will, therefore, timeously monitor and review agricultural producer prices, balancing this against changes in costs of production and reasonable rates of return for the farmer.
Farmer Organisations
189. Furthermore, it is important that we support and utilise the expertise of farmer organisations under the Agrarian Land Reform Programme, especially in the distribution of inputs and exchange of farming skills and experiences.
190. The Ministry of Agriculture is urged to support and build capacity of registered farmer organisations. This should enable farmer organisations to be more effective and to add value to the farmer. The disbursement details will be given in due course.
Mining
191. Mr Speaker Sir, Government needs to support the mining industry take advantage of the firm demand and prices of minerals on the international market. Most critical would be the efforts to address the high costs of production affecting the viability of the sector.
192. Recognising the mining sector as a major source of inputs for our manufacturing sector and an earner of foreign exchange, it is necessary that we begin to increase our interventions in the sector along the same lines as in agriculture. Inadequate support has meant that such facilities as the Mining Industry Loan Fund remain quite under-capitalised to the extent that it fails to make any meaningful impact on the sector. I therefore propose to allocate $2.1 billion to the Mining Industry Loan Fund.
193. It is also critical that the relevant mining authorities always have properly coordinated early response mechanisms to deal with situations of illegal activities that undermine the realisation of foreign exchange.
194. Notable examples include the protection of deposits of diamonds and other precious minerals currently under siege from illegal miners in the Marange area.
195. To curtail leakages of minerals and to harness foreign currency earnings from the mining sector, I propose that, with immediate effect, all unregistered small scale mining operations be registered with the Ministry of Mines and Mining Development and all major mining zones declared ‘protected areas’ manned by security forces.
196. I, therefore, welcome the measures taken to ring-fence and protect the Marange diamonds deposit, which include support for improved technical expertise in diamond evaluation and putting up security structures in the area.
197. The capacity of the Ministry of Mines and Mining Development is set to be enhanced given the allocation I hereby propose an allocation of $4.9 billion, for acquisition of technical equipment and operational mobility of the technical departments of the Ministry.
Tourism
198. Mr Speaker Sir, the tourism sector which is facing challenges ranging from negative portrayals of the country, to erratic fuel supplies, has been identified under the NEDPP as one of the sectors with a quick turnaround potential. In support, Government is upgrading and improving key infrastructure facilities such as airports and dry-land border posts, among others.
199. Furthermore, Government is supporting initiatives by the tourism industry for the rehabilitation of our tourist facilities, as well as ensuring sustainable energy supplies. I am therefore proposing to allocate $10.4 billion for the completion of various tourism infrastructure projects in the Gonarezhou Trans-frontier Park.
200. Meanwhile, the Zimbabwe Tourism Authority is finalising details of establishing a Tourism Development Fund to support all critical tourism projects.
Value Addition & Import Substitution
201. Mr Speaker Sir, Government acknowledges the challenges that continue to hamper capacity utilisation in the manufacturing sector, resulting in the non-availability of some commodities on the market. Hence, our interventions and strategies also need to target the sector along the same lines as in agriculture.
202. Mr Speaker Sir, our interventions have focused firstly on capacitating companies to increase output. This should reverse some of the situations where capacity utilisation in industries had severely declined, consequently creating huge import demand pressures for commodities that could actually be produced locally.
203. Secondly, Government is supporting the re-orientation of our industries’ production patterns through promoting value addition and processing raw materials into finished goods in order to increase export realisations.
204. This is being complemented by support for companies that, where applicable, capitalise on excess capacity by entering into toll manufacturing arrangements. Already, there are nine companies that are engaging in toll manufacturing at various levels, with another nine ready to start. These are benefiting from support from the Reserve Bank, as well as ZIMRA concessions on the operation of bonded warehouses for the imported raw materials.
205. Facilities already in place, and which require further support, include the resuscitation of distressed companies, of which a concessionary $5 billion Fund is being managed by the Infrastructure Development Bank.
206. Mr Speaker Sir, of these resources, disbursements have gone smoothly with $3.3 billion having been drawn down as of end of October 2006. Through this intervention, 23 firms mainly in the manufacturing and export sectors were bailed out resulting in 10 000 jobs being saved. Applications for the remaining $1.7 billion are at various stages of consideration.
207. Budget support for distressed companies can, however, only be a short term phenomenon. We will, therefore need to take measures to improve the business trading environment through addressing factors causing financial distress and affecting the viability of industry. Central is the improvement in the macro-economic environment characterised by low inflation and stable interest rates.
208. Furthermore, the 2006 Budget availed $500 million to the Infrastructure Development Bank to establish the Import Substitution and Value Addition Fund. In this regard, 15 projects in agriculture, manufacturing, mining and tourism have been initiated and are at various stages of implementation.
209. I am, therefore, proposing additional financial support for Import Substitution and Value Addition Programmes amounting to $6.8 billion in the 2007 Budget.
210. Such financial support should be complemented by policies that promote investment, Value Addition and Import Substitution, as well as the continued viability of exporting and the removal of other distortions undermining sustainable business activity.
Energy Supply
211. Mr Speaker Sir, the difficult foreign exchange environment makes it necessary that we maximise the limited foreign exchange we have through better coordination of fuel procurement.
212. Currently, there are too many individual fuel importers. Such a situation is eroding the benefits of centralised bulk procurement and increasing the cost of procurement through the use of road transportation, instead of the pipeline. This is also causing serious damage to the road network. These high transport costs are ultimately being passed on to the consumer.
213. Our efforts to maximise on fuel procurement should be complemented by further support for the development of alternative sources of energy, such as bio-diesel, ethanol, solar, wind, etc. Already, a Solar Energy Policy document is in place. I will therefore be providing resources to support the commercialisation of these projects, some of which are being undertaken to by our technical colleges.
214. With regards to electricity generation and supply, appropriate pricing structures still remain to be put in place. An Inter-Ministerial Committee has been established to look into the pricing structure of electricity.
Price Distortions
215. Mr Speaker Sir, the removal of price distortions in the economy is critical to improving the operational environment for the business sector, guaranteeing their viability and the sustainability of production and achieving macro-economic stability.
216. In such a dynamic macro-economic environment, Government is closely monitoring the emergence of price distortions and undertaking regular corrective review of prices and marketing arrangements.
Grain Selling Prices
217. Consistent with this, Government recently reviewed the producer prices for maize and wheat to $52 450.30 and $217 913.40 per tonne, respectively in order to guarantee the viability of farmers. This is being followed up by corresponding review of the GMB maize and wheat selling prices to millers, already approved by Cabinet.
218. Details of the new maize and wheat selling prices to 218. Details of the new maize and wheat selling prices to millers will be announced by the Minister responsible for Agriculture, following the normal stakeholder consultations.
219. The implied subsidies per tonne of $51 400 for maize and $204 700 for wheat, at the current GMB selling prices of $600 and $12 300 respectively, distort consumption patterns and create room and opportunities for speculative and rent-seeking behaviour.
220. Given the prevailing GMB selling prices of maize and wheat to millers, the overall subsidy for this year’s maize and wheat crops would amount to $26 billion and $53 billion, respectively. These amounts had to be borne out of the 2006 Budget and the Reserve Bank. Such levels of untargeted and wholesale subsidies undermine the capacity of the Budget to intervene in other critical areas.
221. It is only through the removal of the existing mismatch between the buying and selling prices of these commodities that the requirements of this nature can be shifted away from the fiscus. I am confident, Mr Speaker Sir, that this can be avoided in 2007 by the adoption of prices that guarantee the viability of farmers and ensuring the ability of the Grain Marketing Board to finance and maintain the Strategic Grain Reserve.
222. I propose to set aside $70 billion to meet the funding gap that may arise for payments to grain producers.
Fuel
223. The fuel market remains characterised by different prices for liquid petroleum products, notwithstanding recent efforts to unify petrol and diesel prices. This has perpetuated rent seeking behaviour in the pricing of fuel products, with some of the cheaper NOCZIM fuel ending up being resold at a premium on the parallel market by those able to access it.
224. The removal of the distortions inherent in the above arrangement therefore necessitates that bold measures be taken to unify fuel prices. This should be supported by ensuring that those able to utilise free funds to import fuel are permitted to do so at a reasonable return. Further, review of fuel prices should be in line with the already agreed price trigger mechanism arrangements.
225. Mr Speaker Sir, Government has made strides towards the production of alternative sources of fuel. I propose to allocate resources amounting to $10 billion for further capitalisation and operational expenses of the development of bio-diesel and liquid fuel from coal. Thereafter the two projects will be financed through private sector investments since they are commercial by their nature.
Local Authority & Public Enterprise Tariffs
226. Mr Speaker Sir, price distortions, alongside mismanagement, poor corporate governance and an inadequate legal framework, are also contributing to the serious deterioration in Local Authorities and Public Enterprises’ service delivery.
227. In the absence of Budget capacity to provide for the revenue shortfalls, delivery of such basic services as water, energy, sewerage waste management, refuse collection and infrastructure maintenance of roads, traffic lights and public lighting can no longer be taken for granted.
228. This has left some Local Authorities and such Parastatals as ZINWA in situations where they continuously call on the fiscus and the Reserve Bank to support procurement of daily consumables such as chemicals for water purification, as well as meeting their salary obligations.
229. Cognisant of this, measures are being instituted to address the anomaly under which the cash recoveries from the delivery of services by Local Authorities remain inadequate to cover costs.
230. This is covering the review of pricing structures for rates, water, electricity and other tariffs in line with inflation developments, to augment the economic and efficient operation of Local Authorities and Public Enterprises.
Foreign Exchange Generation
Ring-fencing Export Generating Sectors
231. Mr Speaker Sir, the experience over the past few years has amply demonstrated the need for a vibrant exporting sector in supporting the turnaround programme.
232. Inherent in the prevailing multiple export support arrangements is failure to fully and consistently compensate all earners of foreign exchange for rising domestic production costs. In this environment, generating additional foreign exchange remains one of the biggest challenges to economic recovery.
233. Against this background, Government remains alert to the loss of exporter viability caused by the continued rise in the costs of production, necessitating urgent need to ring-fence export generating sectors. These sectors include manufacturing, mining, tourism, tobacco, horticulture and cotton.
234. Hence, Mr Speaker Sir, the Reserve Bank will implement an exchange rate framework that converges the existing duality in the foreign exchange market, through a combination of rapid dis-inflation and fair compensation to exporters and other generators of foreign exchange.
235. The Reserve Bank Governor will unveil the exchange rate framework, in his forthcoming Monetary Policy Statement.
Non-resident Remittances
236. Mr Speaker Sir, the Reserve Bank has already identified Non-Resident Remittances as an important potential source of foreign exchange if properly managed through schemes supported by fiscal and monetary incentives.
237. Appropriate supportive measures, targeted at supporting investment and other foreign exchange inflows from non-resident Zimbabweans, are also going to be unveiled by the Governor in due course. These will be reviewed regularly.
Strategic Partnerships
238. The injection of foreign exchange into the economy will materially enhance economic recovery prospects. Such an injection would allow for foreign exchange reserves build up and enable the country to begin to deal with its external payment arrears, putting the country firmly on the path to restoring its credit worthiness.
239. Mr Speaker Sir, last year, we identified strategic partnerships through the privatisation and commercialisation of a number of Public Enterprises, under some of our Look-East Policy initiatives, as a potential source of generating significant foreign exchange. High potential ‘quick wins’ include the National Railways of Zimbabwe, Tel-One and Net-One, Air Zimbabwe, and the Zimbabwe Iron and Steel Company.
240. Regrettably, Mr Speaker Sir, we have so far only been able to make minimal progress, if any. Moving forward with this process will require that we put in place a comprehensive framework with set targets and identify the potential enterprises and timeframes.
241. I will, therefore, be appraising Honourable Members on a regular basis on progress on the privatisation and strategic partnerships for the Parastatals.
Management of Public Enterprises
242. Mr Speaker Sir, I have already raised the need for regular review of tariffs to economic levels, and embarking on strategic partnerships as part of the interventions to effectively deal with the inefficient operations of most Parastatals.
243. Over and above this, widespread cases of inefficient operations, inconsistent with our other efforts to reduce inflation and improving economic performance, will have to be addressed. Central to this would be the improved accountability of management and boards of Public Enterprises.
244. Mr Speaker Sir, respective Ministers have played a part in the prevailing operational inefficiencies of some Public Enterprises. On one extreme, is routine interference which undermines the accountability of the governance structures implied under the various legislation establishing our Parastatals. On the other, are situations of abrogation on legislated responsibilities, paying no attention to the ‘goings on’ in the Parastatals we are supposed to supervise.
245. Cases where boards and management sit back in the midst of serious operational deficiencies while waiting for Government intervention bear testimony to this.
246. Most Parastatals continue to operate for years without any proper accounting systems, notwithstanding that each Minister responsible for a particular public enterprise is required to table annual audited accounts of the particular parastatal in Parliament at least six months after the end of each financial year. Furthermore, key Parastatals are also operating without boards and substantive chief executive officers.
247. Mr Speaker Sir, it is high time that management and boards are made accountable through performance agreements and accorded the space to run these Public Enterprises as viable commercial entities.
Environmental Sustainability
248. Mr Speaker Sir, in my nationwide pre-Budget consultations, stakeholders raised concern that ineffective monitoring and enforcement of regulations on the protection of the environment has become a major threat to environmental sustainability.
249. Illegal mining activities such as gold and diamond panning, veld fires, rampant poaching, water bodies pollution by industries, improper cultivation practices, and wanton cutting of trees in the newly resettled areas were all cited as causing tremendous damage to our environment.
250. On timber estates, illegal occupations, often responsible for numerous large forest fires and the destruction of plantations, are also playing their part in rapid environmental degradation right under our noses. Furthermore, uncontrolled logging activities are also resulting in deforestation.
251. This is also viewed as contributing to the changes in the weather pattern, with the Southern regions of our country becoming drier as the rainfall levels decline with each passing season.
252. In this regard, the Budget is supporting the Environmental Management Agency, established as a successor to the Department of Natural Resources, mandated by Government to oversee the sustainability of the environment.
253. I therefore propose to allocate $25.8 billion in order to enhance the capacity of the Agency to enforce environmental protection.
Social Service Delivery
254. Mr Speaker Sir, the adequate provision of social services, at both Central and Local Government levels remains a priority for the Budget.
255. Hence, fiscal interventions to arrest and reverse some of the declining provision of basic services are necessary. Innovative financing strategies to broaden the sources of financing beyond Government also need to be explored.
Health
256. Mr Speaker Sir, the persistent high inflationary environment, coupled with the shortage of foreign currency and manpower, is compromising provision of quality health service to the people. Improvement in levels of funding for medical drugs and supplies as well as hospital and clinical equipment remains critical.
257. I therefore propose to allocate a sum of $590.1 billion towards the public health delivery services. The amount proposed includes $345.5 billion for funding of central hospitals and $9 billion preventives programmes which include Immunisation, TB and Malaria. Employment costs constitute 14.5% of the proposed Vote allocation.
258. Development and rehabilitation of health service infrastructure, including clinics, mortuaries and equipment accounts for $39.7 billion.
Access to Education
259. Mr Speaker Sir, it remains necessary that Government shares the direct costs of tertiary education with the beneficiaries. This also improves accountability among students in tertiary institutions, as well as ownership of the institutions’ facilities.
260. Honourable Members would have noted the many instances where, surprisingly, even well endowed parents display inability to pay tertiary education fees when they were able to get their children through ordinary and advanced level education without State assistance.
261. Government has therefore put in place mechanisms that embrace means testing, for support to students under tertiary training institutions. Means testing will now draw input from school authorities, both primary and secondary to improve on reliability of assessments of students to be targeted.
262. Quality primary and secondary school education, a right of every child, appears to have been negatively affected by inadequate funding over the last few years. Through the Annual Budget and contribution of partners, including parents, it will be important that due attention is given to the revitalisation of the education system.
263. In this, the 2007 Budget, I propose to allocate an amount of $7.6 billion in relation to tuition and learning materials at schools. This allocation will be disbursed on the basis of improved per capita rates.
264. Mr Speaker Sir, I also propose to allocate an amount of $4.0 billion for the maintenance of schools in rural areas, targeting at least four schools per District. In addition, I propose to allocate an amount of $8.2 billion for the construction of schools, the objective being to phase out hot sitting in some schools as well as promote access to education by children in newly resettled areas.
265. To arrest the deterioration of assets and facilities at public institutions such as schools in rural areas, it has become necessary that we create a facility that enables access and quick disbursement of resources for minor repairs and maintenance. Government already operates a Building Grants facility to support and compliment efforts by communities and private organisations in constructing schools infrastructure.
266. I am aware that our communities fail to fully benefit from facilities of this nature that Government oftens puts in place due to lack of information on how they can access such facilities.
267. Mr Speaker Sir, I propose to allocate an amount of $2 billion for minor repairs and maintenance through the Rural Capital Development Fund which is represented in our Rural Districts. In the case of schools, Schools Development Authorities/Committees can access the resources on the basis of written applications directly to the respective District Education Officers responsible for Buildings. The District Education Officers will be responsible for submissions to the Rural Capital Development Fund.
268. For support regarding construction of education facilities, I propose to allocate $3 billion for facilities at both primary and secondary level. While administration of Building Grants remain with the Ministry of Education, Sport and Culture, modalities for applying and accessing resources should change as proposed above.
269. Guided by the need to enhance supervisory capacity of the Ministry of Education, Sports and Culture, I propose to allocate an amount of $6.0 billion to enable the Ministry procure vehicles for this purpose.
270. Mr Speaker Sir, for overall education delivery, the proposed allocation amounts to $721.9 billion, out of which $48.8 billion stands for administrative and teaching and learning expenses as well as capital transfers towards projects at State Universities.
Security
271. Mr Speaker Sir, it remains critical, given global security developments, that we ensure adequate funding is availed for the maintenance of peace, law and order as well as security. To this end, I propose to allocate a sum of $255.7 billion for recurrent expenses, excluding employment costs, and $60.8 billion, for the Police, Army, Airforce and Prison Services.
272. Mr Speaker Sir, the Nation remains endeared to friendly countries, which remain in support of our efforts towards training and re-equipping our Forces.
Combating Indiscipline & Corruption
273. Mr Speaker Sir, the stakes on the fight against indiscipline and corruption must be stepped up. We, therefore, have to set aside adequate resources in support of the institutions of Government responsible for fighting corruption and combating the rising prevalence of indiscipline in the economy. This is manifested through economic crime and rampant abuse of scarce public resources and other ills that threaten the very fabric of our society.
274. Over and above declaring war against indiscipline and corruption, the successful waging of this War will require that we also strengthen the laws and institutions dealing with economic crimes with a view to introducing harsher penalties, including the forfeiture of ill-gotten assets.
275. Pursuant to this, I propose to allocate funds towards supporting surveillance units with powers and skills to expose abuse of such assets as fuel, motor vehicles, subsidised grain, inputs, veterinary drugs, among others.
Public Service Conditions
276. Mr. Speaker Sir, the availability of the critical human resource skills is central to public service delivery and implementation of public projects.
277. The erosion of real incomes in the prevailing high inflation environment has left Government with largely an unmotivated and poorly paid public servant.
278. Government continues to lose skilled manpower, trained at great cost in all the critical areas, including health, education and technical fields.
279. Mr Speaker Sir, it is therefore imperative that the 2007 Budget builds Government’s capacity to retain and attract specialised and strategic skills, so as to capacitate institutional ability to fully implement National programmes.
280. In the prevailing hyperinflation environment, some of the necessary measures should include timely review of conditions of service, taking account of requests by the Public Service Associations for smaller but more periodic adjustments, as opposed to larger infrequent ones.
281. I propose that the review of the remuneration of civil servants be done on a quarterly basis in line with the inflationary developments in the economy. I therefore propose to set aside an envelope of $1.4 trillion for the 2007 Public Services Employment Costs.
282. In order to ensure the attainment of quarterly adjustments in a manner that curtails inflation, Treasury will limit disbursements out of this envelope to an average $40 billion per month, across the Public Services, during the first quarter of 2007. I therefore urge teams to the Public Service Joint Negotiating Council to be guided accordingly.
283. The significant provision, which represents a 1 205% growth over the 2006 provision, is motivated by the need to address the brain drain that is crippling the operations of Line Ministries hence the deterioration in service delivery. While this resource envelope will not fully reverse the erosion of civil service incomes, the capacity of the economy to sustain the current civil service structure is the determining factor.
Non-monetary Benefits
284. Mr Speaker Sir, I have also taken note of the requests to augment non-monetary benefits of the civil servants, as part of the efforts to cushion them from the effects of the erosion of disposable incomes.
285. In this regard, support for such non-monetary benefits as access to housing and transport, will facilitate the provision of decent accommodation and affordable transport for lowly remunerated public servants.
286. I, therefore, propose to allocate $3 billion towards the expansion of the Public Service Housing Loan Scheme.
287. I also propose to allocate $852 million towards the Civil Servants Vehicle Loan Scheme.
Skills Retention
288. Mr Speaker Sir, notwithstanding the above Budget provisions to cushion civil servants through the review of conditions of service during 2007, additional intervention measures are still necessary to curtail further loss of skills.
289. Honourable Members will agree with me and acknowledge that the ultimate solution remains stabilising the macro-economic environment and realising sustainable growth.
290. In the transition, however, further Budget support for the Skills Retention Fund should go someway towards alleviating the brain-drain in some of the critical areas of the public sector.
291. Hence, I propose to allocate $5.5 billion to the recently launched Skills Retention Fund for the benefit of targeted critical skills in the Public Service. This will allow scope for the provision of premiums to be paid to expertise in key posts and professions. The funding requirement for this initiative is much higher and, to this end, Government will solicit for contributions from friendly cooperating partners.
Pension Reform
292. Mr Speaker Sir, I have previously alerted the House that we also have a serious and growing pension payments.
293. The resources being raised from the contributions of serving members is inadequate to cover retirees’ pension payments. This has limited our capacity to fully index to two thirds of a serving member’s current salary. A sustainable arrangement would be the introduction of a Defined Contribution Pension Fund Scheme.
294. Mr Speaker Sir, beginning January 1 2007, all the pension deductions will be set aside for the establishment of the above Fund as a prelude to this. We still, however, need to provide funds to meet due pensions under Constitutional and Statutory appropriations.
Housing Delivery
295. Mr Speaker Sir, housing is a basic necessity which can empower and enhance the social security of households, as well as stimulate our construction and other related sectors.
296. However, with average small stands costing anything above $3.5 million, and a three bed-roomed house in the high density area costing around $30 million, it is becoming increasingly unaffordable for the average family to purchase property.
ZimJournalists Arise will publish Part Two of the 2007 Budget tomorrow.
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