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Minister of Finance - Mid Term Fiscal Policy Review
July 27, 2006
Presented to House of Assembly Thursday July 27, 2006

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INTRODUCTION

1. Mr Speaker Sir, as I highlighted in my 2006 National Budget Statement in this House, addressing the prevailing challenges facing our economy requires that we have a shared Vision, and the Commitment to realise it.

2. The National Economic Development Priority Programme (NEDPP) offers a platform and opportunity for participation by all stakeholders, including grassroots levels, in the formulation and implementation of the necessary policy measures through the National Economic Recovery Council (NERC). It is, therefore, vital that the private sector, parastatals, Local Authorities and other stakeholders fully participate in the implementation of the Programme.

3. In this regard, the major policy imperatives and priorities in dealing with our challenges remain credibility and consistency of policies, and their timeous implementation.

4. Among our challenges are:

corruption
rising inflation,
declining savings and investment,
inadequate foreign exchange - affecting import capacity,
erratic fuel supplies, and
interruptions to electricity supply.

5. Inflation remains our biggest challenge - affecting savings and investment, undermining day to day business activity, as well as creating price instability in the conduct of ordinary transactions.

6. It has also eroded the purchasing power of our domestic currency, adversely affecting the livelihood of the ordinary household as standards of living fall and basic social services become unaffordable.

7. Furthermore, high inflation is also affecting our export competitiveness and hence undermining our capacity to generate the much needed foreign currency.

8. It is, therefore, important that the measures contained in both the Medium Term Fiscal Policy Review and the Monetary Policy Statement target inflation reduction and other measures that strengthen our economic turnaround efforts, consistent with the objectives of the NEDPP.

9. In this regard, Mr Speaker Sir, I will outline in this Medium Term Fiscal Policy Review, economic and budgetary developments during the first half of 2006, pressures on the Budget, sectoral challenges and the necessary supporting measures to deal with them.

10. The prevailing high inflation environment has also translated into increased operational costs for Government Ministries, and additional resources will be required to meet them, therefore, making a Supplementary Budget unavoidable.

11. Allow me, however, first to briefly touch on the developments in the international and regional environment.

GLOBAL & REGIONAL ECONOMIC DEVELOPMENTS
12. Mr Speaker Sir, notwithstanding record high oil prices and natural disasters, global economic performance exceeded expectations, with world output expected to rise by 4.9% in 2006, compared to 4.8% in the previous year. Higher growth is projected for emerging and developing economies - notably China, India and Russia - which are anticipated to record an overall growth of 6.9%, which is lower on last year's growth of 7.2%.

13. Emerging market and developing countries benefited from their continued implementation of stable domestic macro-economic policies, as well as the resultant increase in investment inflows. This has tended to ameliorate the negative impact on growth implied by high oil prices.

14. In Asia, the 2006 growth is projected at 8.2% led by China (9.5%) and India (7.3%). This robust growth is driven by strong domestic demand, rising current account surplus, and recovery of the information technology sector. Elsewhere, in Latin America growth is aided by booming commodity prices and notable reduction in debt ratios.

15. In oil producing countries, the benefits of rising oil prices continue to boost fiscal and external current accounts, thereby facilitating growth in those countries.

16. In Sub-Saharan Africa, the highest growth rate in three decades is expected at 5.8% in 2006, up from an estimated 5.5% in 2005. This is backed by rising capacity utilisation especially in oil producing countries, improved prices for non-fuel commodities, such as metals and improved macro-economic and structural policies.

17. In the SADC region, most countries are expected to register positive growth rates, with GDP growth projected at 4.4% this year, up on last year's 4.3%.

18. Notwithstanding record high international oil prices, underlying inflation remained low across most countries. In 2005, and the first quarter of 2006, core inflation in developed countries averaged around 2.3%, while that for other emerging and developing economies averaged 5.4%. High productivity and improved macro-economic policies in most developing countries accounted for the low inflation.

19. Average inflation in Sub-Sahara Africa was 10.7% in 2005 and is expected to be stable at around 11% this year, partly on account of higher oil prices. The majority of SADC countries have managed to maintain their inflation rates below 20%.

ECONOMIC DEVELOPMENTS DURING THE FIRST HALF OF 2006
20. Mr Speaker Sir, let me now turn to our own economic developments during the first half of 2006. Allow me, however, to first highlight on the economic outturn for 2005.

Outturn for 2005
21. The past year, 2005, was characterised by a number of macro-economic challenges coupled with drought, foreign exchange shortages and a surge in international oil prices. Their adverse effects, together with rising inflation, undermined the performance of the major sectors of the economy, with real GDP declining by about 2.7%.

22. Agriculture fell by 12.1%, due to delayed availability of some inputs, such as fertilizers and chemicals. The mining sector also underperformed by 13.8%, while manufacturing sector, however, registered a positive 3.2% growth. Factors contributing to this included the improved foreign currency availability under the Auction system and the availing of concessionary funding under the Productive Sector Facility. This supported firms' access to affordable working capital.

23. Year on year inflation, which had declined from 133.6% in January to 123.7% in March 2005, reversed this trend, ending the year at 585.8%.

24. This was against the background of rising public sector borrowing requirements and money supply growth, drought and rising international energy prices, thereby worsening inflation expectations.

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