Republic of Zambia

Ministry of Finance and National Planning

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Statement by the Minister

Dr. Situmbeko Musokotwane
In winding up the Debate on the Motion of Supply for 2009

Parliament Building
18 February 2009
Madam Speaker
I thank you for the opportunity to wind up
the debate on the motion that I introduced in
this house on the 30th of January, 2009. I
also wish to thank all members that
contributed to the debate.
Once again I recognise the difficult
circumstances prevailing at the time that I
have started to serve. But, Madam Speaker,
with the support of this House, especially
that from my colleagues in government and
the entire nation, I feel very much
strengthened. Together therefore, our
combined efforts can move this nation
forwards. My contribution to this joint effort
is the experience I have gathered over the
years, working closely with previous
Ministers like Honourables Ronald Penza,
Emmanuel Kasonde, Katele Kalumba and
indeed my predecessor, who I served as
Secretary to the Treasury. In this sense
therefore I can also claim recognition, along
with the others, for successes that our
economy has achieved in the past as well as
for the shortcomings of course.
Madam Speaker, it is not possible to respond
to each and every issue that has been raised.
Let me however focus on three themes
which arise from the issues which were
frequently raised. These are as follows:
1. Not enough financial resources have
been allocated in the budget to meet
specific needs
2. The budget policies and measures
do not respond adequately to the
challenges posed by the global
economic crisis.
3. Inadequate and unjust reduction in
the tax burden
Let me start with the first theme, Madam
Speaker.
Many members Madam Speaker complained
that the resources allocated for certain needs
and wants in the budget are inadequate.
Nearly everyone that spoke, for example,
complained that the Constituency
Development Fund (CDF) was inadequate.
For others, it was the Fertilizer Support
Programme or FSP that was deemed in
adequate and yet for others, it is the funding
for roads in their constituencies that is
considered inadequate. The list, Madam
Speaker is endless.
Madam Speaker, it is true that the money is
in many instances inadequate. What I find
disheartening, Madam Speaker is the
impression created by some members that
the limited funding provided is done
deliberately. The real reason is that the
national financial base is extremely small,
even when we add the contributions from
our donors.
Recall Madam Speaker that I announced a
K15 trillion budget for 2009 for our country.
Here are a few comparative statistics to
illustrate just how small the Zambian
national budget is. The budget for the city of
London is K 95.4 trillion. For the city of
New York it is K225 trillion. Even more
revealing, the budget of Harvard University
in the USA exceeds that of the entire
Republic of Zambia at K18 trillion.
It is out of this small national budget,
smaller than that for Harvard University, that
our country must finance all her national
requirements such as schools, health
facilities, our legistilative house and
processes, the civil service, defence, three
public universities, the judiciary, diplomatic
missions and so and so forth. Clearly then,
the situation is not easy.
The only solution to the problem of a small
budget Madam Speaker is to get to work and
increase our resource base several folds
over. Two routes are possible to achieve
this. Firstly, we can improve our
effectiveness in collecting revenue. The
government will continue to push hard on
this. However, Madam Speaker, this route
has limited scope for making that critical
difference that we seek. Economists measure
the efficiency in tax collection by the so-
called tax to GDP ratio. In the lay man’s
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language, this is the ratio of tax collected for
every unit of income made in the country.
The higher the ratio, the better the collection
efficiency.
At 17.8 percent of GDP our tax collection
effort is in fact better than that of many of
our peers in the region. Clearly therefore,
the more fundamental problem we face is
that of growing the taxable capacity and less
so for the efficiency in tax collection. This is
evident when you move around the country.
Many of our towns are in fact just cost
centres because they contribute little or
nothing to the Treasury. On the other hand,
they need amenities such as schools,
hospitals, electricity, roads and so on. Our
challenge is to turn all these places into
centres of real production – through modern
industries and farms, not through the
rampant informal sector whose capacity to
pay taxes is limited.
This is why in the 2009 budget Madam
Speaker we have put aside resources for
schemes such as Kasaba Bay, Nansanga
Farm Block, livestock disease free area,
multi facility economic zones and others.
These schemes are the backbone of our
future economic growth. They will grow our
financial base over time as similar initiatives
get replicated to other parts of the country.
From this side of the house, there are two
clear messages on growing our financial
base. Firstly, those who are trying to
underplay the potential of the development
initiatives we have announced in the budget
must think again. The government on its part
is convinced that the route it has chosen is
the correct one. I find it disturbing,
therefore, that some of us can scorn
government’s plan to develop the Kasaba
Bay area as a thriving tourist area. This area
has all the necessary elements for success
such as water body, beach, and wildlife and
so on. And yet our critics know of less
endowed areas even in our region that have
become very successful tourist centres.
The second message is that the budgetary
resources earmarked for the economic
development initiatives must proceed
because they are establishing the base for
our future economic growth and enhanced
tax revenue. The expenses incurred in
developing these initiatives is the seed we
need to plant now to enable us have
increased financial harvest in the near future.
But, Madam Speaker, what I have outlined
is the solution for the medium and long
term. What do we do about present day
inadequacies of financial resources? There is
little we can do except to intensify improved
revenue collections and to spend this money
as wisely as possible.
In the particular case of the CDF Madam
Speaker, the government will make an
amendment to the 2009 budget at an
appropriate time to enhance it. However, it
is impossible to get to one billion Kwacha
for each constituency in one go. The
enhancement of CDF is only possible
because other lines in the budget have to be
reduced.
But this should not be at the expense of
abandoning the economic development
initiatives announced in the budget which, as
indicated earlier, are the seeds for future
revenues for our country. Compromise is
therefore necessary and I am therefore
proposing that CDF be now at K600 million
per constituency up from K400 million in
2008. Reaching K1 billion should therefore
be seen as a process towards this target.
Madam Speaker, let me turn to the second of
my three themes which was raised by many
honourable members. This was the
allegation that the 2009 budget has not
addressed the threats to our economy arising
from the global economic crisis. Madam
Speaker, questions were raised about the
need for a stimulus package for our country
akin to what is being introduced in the USA,
China and other countries.
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Madam Speaker, it is important that as we
agitate for schemes to respond to the global
economic crises, we should also reflect
deeply on the nature of this crisis and then
relate it to our own specific circumstances.
This is the only way to intelligently design a
response strategy.
Madam Speaker let’s consider a few facts
about the crisis. In the industrialized world,
the major cause of the crisis is that
consumers have drastically reduced their
expenditures, leaving many firms with no
markets. They are not spending because
banks have reduced their lending.
In the countries in question, Madam
Speaker, most items including small
household goods tend to be bought on credit.
It follows that when banks reduce credit to
consumers, the latter will also reduce their
spending. Madam Speaker, consumers have
also reduced their spending because they
have become cautious. Their preference has
shifted towards saving rather than spending
because they are not sure whether they will
still have a job or not in the near future.
Madam Speaker, the stimulus package may
provide a solution towards the crisis because
public spending is expected to perform two
functions, namely helping to repair banks so
that they can lend to consumers and
investors again. The package also helps by
augmenting the subdued spending by the
private sector. This stimulus package is
appropriate under those circumstances.
Madam Speaker, please also remember that
in these economies, the stimulus package
finds an already existing productive
infrastructure whose only problem is
collapsed demand for their goods and
services. The stimulus then works by
restoring consumer confidence.
Let me add Madam Speaker that the public
spending under the stimulus package is
financed by massive borrowing by the
government. In the case of the USA the
amount involved is nearly $800 billion. The
borrowing is only possible if the government
has the borrowing capability both in the
domestic and foreign financial markets. This
capability varies across countries, with the
USA leading the pack.
The USA government borrows mostly from
external sources to fund its deficit. This is
possible largely because the dollar is the
prime reserve currency of the world. As
other countries accumulate international
reserves, they buy US Treasury bonds as
part of their foreign exchange investments
and the US government uses the proceeds of
those bonds to expand their deficit. Other
industrialised countries have less scope to
behave like the American government. This
is one important reason why their stimulus
packages have been more modest.
Back home Madam Speaker, the main thrust
of our economic crisis has not originated
from reduced spending due to a local credit
crunch or reluctance by consumers in our
country to spend. Rather, the predominant
channel by which the global economic crisis
is influencing us is through reduced incomes
from our main export commodity, copper
whose price has fallen. Mining companies
with high costs have as a result seen their
viability eroded and many jobs have been
lost. In turn jobs have also been lost in
companies whose fortunes are closely tied to
those of the mining sector. More jobs may
be lost if the price of copper declines to
much lower levels.
Further revenue from mining taxation has
declined, affecting government’s ability to
carry out development projects.
Under these circumstances, our main
appropriate response to the global economic
crisis cannot be a stimulus package premised
predominantly on restoring consumer
confidence, at least for now. However, in
some limited extent that is reflective of our
capacity, the 2009 budget has its own
stimulus. The domestic borrowing this year
has widened to 1.8 percent of GDP from 1.4
percent last year and this has helped to
finance the economic infrastructure
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mentioned in the budget. I must here add,
Madam Speaker that part of this expanded
borrowing includes the K319 billion from
the Treasury Mineral Royalty and Windfall
Taxes Account at Bank of Zambia which
was collected in 2008. We have also reduced
taxes, again measured to our capacity. More
than this is currently beyond our capacity
because we do not have that borrowing
capacity associated with the USA.
Madam Speaker, our, main response must
instead aim at achieving two important
objectives. Firstly, it must stabilize or even
improve the business environment for the
mining industry so as to minimize possible
further job losses in the sector. It is such job
losses that can induce a secondary impact of
the crisis since the lost purchasing power of
the miners negatively affects local
industries. Secondly, the country must take
more urgent and stronger practical steps to
hasten economic diversification to lessen
dependence on copper.
Let’s then get deeper and examine the
measures taken to moderate the effects of
the economic crisis on our mining industry.
For the mines that have already closed such
as Luanshya, discussions are underway with
other potential investors to revive them. The
government intends to conclude these
discussions as quickly as possible so that the
miners get back to work. On the fiscal front
under the 2009 budget, the following
mitigation measures have been proposed:
• Removing the windfall taxes on
copper incomes while retaining the
variable income tax. I shall return to
this matter later during my remarks
• Reducing the customs duty on heavy
oil fuel, a major fuel in the mining
industry, from 30 percent to 15
percent.
• Introducing VAT deferment on
copper concentrate imports. This
measure has made our expanded
smelting capacity at Mufulira,
Nchanga and Chambishi attractive
for ores from other countries. This
will enhance job creation.
What about the measures planned in the
2009 budget for economic diversification?
In the budget speech, I outlined the
following measures, sector be sector:
Agriculture
• The fertilizer support program, the
enhanced livestock disease
prevention program, transport
provision for extension workers,
irrigation fund and zero rating VAT
for basic agricultural machinery will
benefit small and medium scale
farmers
• The irrigation fund will benefit
commercial farmers also. Further,
the creation of at least one disease
free zone somewhere in the country
will open the Zambian beef industry
to export markets. This will benefit
both large and small scale farmers
depending on the design and
location of the zone.
• The establishment of infrastructure
in the Nansanga Farm block will
benefit small scale, medium,
commercial and estate agriculture.
As I stated in the budget address, the
government vision about this block
is to have an area like Nakambala
Estate, except more than ten times
its size, with the necessary
infrastructure for agriculture. All
sizes of farmers will co - exist inside
the block producing different types
of produce both for the local and
export markets. In the coming few
years, other farm blocks like
Kalumwange in Kaoma and Luena
in Kawambwa will be provided with
similar infrastructure
Tourism
For tourism, Madam Speaker the following
is planned under the 2009 budget
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• For the Kasaba Bay and the
surrounding area, the Mbala Airport
will get a face lift; the Kasaba Bay
airstrip will receive a face lift,
power will be connected to Kasaba
Bay and the Mpulungu to Kasaba
Bay road will be done.
• For the Luangwa National Park
area, funds have been provided for
the improvement of the Chipata
Mfuwe road and the Mfuwe Airport
terminal will receive a face lift
• For the Livingstone area, the road
from Zimba to the tourist capital is
being worked on to improve road
accessibility. Within the vicinity of
the tourist capital itself, government
has provided money to open up
space for more hotels, conference
and entertainment centres.
Manufacturing and Other Sectors
• The government has provided
various tax incentives on top of
many others which have been
provided over the years. In
particular, custom duty on various
construction equipment has been
removed or reduced so that
contracting capacity, which has
become inadequate in recent years,
can be encouraged to grow
• The government has provided
incentives for the private sector to
establish industrial parks in response
to the shortage of space for building
factories in large cities like Lusaka
• The program for the multi facility
economic zones has started
In all the sectors of intervention, Madam
Speaker, two things will happen. Firstly, the
processes for establishing and running
businesses will be simplified so as to reduce
red tape. Secondly, the Ministry of
Commerce Trade and Industry has been
given adequate resources to strongly market
the investment opportunities that are being
created.
Madam Speaker, some Honourable
Members did question this approach.
Whence comes the wisdom of imagining
that foreign investments will come into
Zambia at a time like this in the world, they
asked. In any event, they continued, why
focus on foreign investment at the expense
of the local people?
The responses are as follows: With regard to
willingness of capital to flow into Zambia, it
must be remembered that even at a time
such as this one, there are still people and
institutions with money to invest. We know
this because ZDA and line ministries receive
inquiries all the time. If only we can manage
to attract even a modest investment inflow
of $1 billion per annum, the impact on our
small economy in the next five to ten years
will be impressive.
A simple illustration of this is to imagine the
presence of a village in the vicinity of a
large city that is undergoing economic
problems. If for some reason, the village
attracts K50 million each year as investment
from the city, which is possible given the
size of a city even when it faces economic
problems, that village may end up
experiencing an economic boom. The city in
this illustration is the global economy. The
village is Zambia.
On the accusation that the government is
paying more attention to foreign investors,
nothing can be further from the truth. All the
incentives that government has in place are
applicable to both local and foreign
investors. In addition to these, Zambians do
have other advantages such as access to
cheaper credit such as the Citizens
Empowerment Fund.
But also, and without any shame or apology,
as one Honourable Member urged us during
the debate, Zambians should embrace
foreign direct investment, FDI. With more
than 300, 000 youths coming on the labour
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market each year, and these numbers will be
increasing due to the current demographics,
Zambia cannot afford to wait for enough
jobs to be created by local entrepreneurs
only. When the unemployed look for jobs,
the least thing they look for is the origin of
the provider of a job. The most critical
consideration is always the availability of a
job.
As we continue to promote citizens
empowerment therefore, let’s not forget also
that empowerment has different meaning to
different persons. I believe that at this stage
of our development, the most critical form
of empowerment for the vast majority of our
people is employment opportunities. We
should therefore not stand in the way of
getting our people employed, regardless of
the origin of the employer.
Madam Speaker, the shunning of foreign
investment in Africa since independence is
one of the most critical elements explaining
the little development our continent has
made in comparison to other developing
areas of the world, especially Asia which
took the opposite approach. As a result, we
increasingly saw high tech items such as
computers, television sets, radios,
telephones, etc all belonging to foreign
firms, setting up in Asia to produce for the
world markets. Such firms have helped to
create jobs for thousands of youth, lifted the
technological skills of the local people and
generally led to the advancement of these
economies.
The initiatives that this government is
putting in place to create infrastructure like
MFEZ and farm blocks, etc that attracts both
local and foreign investments must therefore
be seen in this light so that we re-align our
approach to development to the present
realities of the global economic village.
What do our colleagues, Madam Speaker
find objectionable about taking the route that
successful economies have taken in this
world?
The final theme I wish to tackle is that
regarding the unfair distribution of the tax
burden. An example that was frequently
mentioned is the feeling that we have not
done enough to reduce PAYE for the
workers. Another example that was also
mentioned by a number of us was that in
abolishing the windfall revenue tax for the
mines, we have let them off the hook while
retaining excessive tax burdens on the
workers. Let me tackle the tax issues using
these two examples.
On the PAYE, Madam Speaker, let me start
off by stating a proposition that is self
evident, namely that in giving tax
concessions in any fiscal period, and the
Treasury has a limit in how far it can go
because, as we heard from many members,
demands for expenditure on diverse items
still exist. Once the quantum of the revenue
loss due to concessions is established, we
must then think of how to best distribute this
benefit to society.
An important stake holder in this
distribution is the working class who stand
to benefit through reduced taxes, no matter
how small. We have provided for this class
of people in the 2009 budget. In fact the
PAYE reduction has absorbed most of the
tax concessions we have made in 2009.
Extending the tax free threshold to K1
million per month would have cost us K322
billion as opposed to the K101 billion that
we are foregoing at K700, 000 month. This
would have compromised other necessary
expenditure required for our future
wellbeing.
But there are other important stakeholders
with legitimate clams to tax concessions.
For example, there are miners who are
currently working but may lose their jobs in
the near future because of the global crisis.
Tax concessions have been given to their
employers as government’s contribution to
the minimisation of job losses in the mines.
Also, some people have already lost their
jobs, either in the mines or elsewhere. They
need alternative livelihoods now. To
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partially cater for them, we have had to lose
revenue by giving up VAT revenue on
agricultural implements and machines.
In short, it cannot just be workers who must
benefit from reduction in taxes. The payers
of PAYE must share that cake of tax
concessions with other important stake
holders in our economy. I therefore urge all
Members of this House to accept what has
been provided for PAYE reduction in the
2009 budget.
On the windfall revenue taxes, let me state
that government is fully committed to the
principle that enable Zambians to benefit
more out of their copper resource if its
prices escalates beyond some level. Two
taxes were introduced by government in
2008 for this purpose – the windfall revenue
tax and the variable income tax. Essentially,
the difference between the two is that the
former is a tax on gross revenue attributable
to the threshold high price for copper.
Companies paying this tax are not allowed
to take out the costs associated with the
marginal increase in revenue due to the high
price before assessing the taxable income.
The variable income tax, on the other hand,
allows for costs to be deducted before
arriving at the taxable income.
The windfall revenue tax’s strongest
attribute is that companies must pay it
whether they declare profits or not because
it is a tax on gross revenue rather than on
profit. The variable income tax on the other
hand is payable depending only whether the
company declares profits or not.
The weakness of the windfall revenue tax
arises from the fact that it is imposed
without allowing for costs of production to
be deducted before tax. Sir, with this regime
and when metal prices are above US $3.50
per pound, the higher rate of 75 percent of
windfall tax will be triggered. Under such
circumstance, the marginal tax rate will be
about 107.1 percent. In simple terms,
Madam Speaker, this means that as the
companies get revenues of $1 from
increased prices above $3.50 they will have
to pay $1.07 in taxes. This is clearly not
intended, and it demonstrates that the current
tax system with windfall taxes cannot attract
investment.
Madam Speaker, at the time when your
Estimates Committee will be considering the
Income Tax (Amendment) Bill, I will make
a detailed presentation on the windfall tax
system to the Committee. I will also be able
to give simulations that will highlight the
disadvantages of the Windfall tax when
compared to the variable profit tax.
Madam Speaker, some Honourable
Members asked why the windfall tax must
be dropped now when the price of copper is
too low to attract it anyway. This tax has
affected attraction of new investments and
the expansion of existing investments as it is
now viewed to be punitive. For example,
Mopani Copper Mines suspended the
sinking of the new Synclinorium Rock
Hoisting Shaft in Kitwe, which should have
extended the life span of the mine. It is
therefore necessary to resolve this matter
now because its presence affects current
investment decisions, which of course has
bearing for jobs in the future.
Sir, I note the concern as to whether variable
profit tax can still capture the intentions for
which the windfall tax was introduced and
whether or not there is capacity at the
Zambia Revenue Authority to enforce this
tax. The Government appreciates these
concerns.
Madam Speaker, with the assistance from
our cooperating partners, the Government
has embarked on a vigorous training
programme at the Zambia Revenue
Authority in tax enforcement and in
particular enforcement of transfer pricing
provisions. Already, the Zambia Revenue
Authority with some consultants from
Norway is currently undertaking a
comprehensive technical and financial audit
of the mining companies. Any mining
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company found wanting will obviously face
the force of law.
Madam Speaker, on the issue of ensuring
that tax arrears are paid by all the mining
companies that did not pay their liabilities,
the Government is committed to this cause
and there are enough legal provisions to
ensure that this is done.
Madam Speaker, I now wish to conclude by
recapping some of the key points that I have
made. Firstly, our national financial base is
extremely small to cater for our needs as a
nation. We need to push hard to attract
investments in the country to be able to
improve. Secondly, the global crisis is going
to make matters even harder unless we
respond adequately to it by taking measures
to protect our key mining sector and to
encourage the emergence of stronger non
mining industries. The 2009 budget has
taken decisive steps in this direction. This is
true on the expenditure and revenue side. As
the government moves in this direction, I
wish to appeal to Zambians reject those who
preach gloom and despair. No nation has got
it easy in this world because they all have
their own problems. But they move forwards
because they always have hope and they are
willing to try out new things and move
ahead.
I thank you Madam Speaker.