CONTENTS
GOVERNMENT BUDGET 2002
INTRODUCTION
World Economic Outlook
Regional Integration Arrangements
PART 1 REVIEW OF THE ECONOMY
External Programmes of Support
Economic Performance in 2001
Monetary Developments
Exchange Rate Developments
External Debt
PART II-THE POVERTY REDUCTION PROGRAMME
The Transition Phase
Monitoring and Evaluation Strategy
PART III-INSTITUTIONAL REFORMS
PART IV THE FISCAL YEAR 2002 BUDGET
Fiscal Year 2001 Outturn
Changes to the Budget Presentation-The Medium-Term Expenditure Framework
Objectives of the Budget 2002
Medium-Term Macroeconomic Framework
Medium-Term Competitiveness Strategy
Projected fiscal year 2002 Fiscal Position
Expenditure Priorities
PART V-TAX CHANGES AND OTHER PROVISIONS
Boosting Personal Incomes
Agricultural Activity
Standard Assessment
Restructuring Import Taxes
Duties on Cigarettes
PART VI-MONETARY AND FINANCIAL POLICIES
Money Laundering
PART VII-CONCLUSION
LIST OF ANNEXES
ANNEX 1: BUDGET PROFILE, 2001-2004
ANNEX 2: MEDIUM - TERM EXPENDITURE FRAMEWORK-INDICATIVE CEILING BY SECTOR AND ACTIVITY, 2002-2004
ANNEX 3: DEVELOPMENT ESTIMATES BY PROJECT AND MINISTRY, 2002-2004
ANNEX 4: SELECTED ECONOMIC AND FINANCIAL INDICATORS, 2001-2004
ANNEX 5: GROSS DOMESTIC PRODUCT AT CONSTANT 1990 PRICES BY KIND OF ACTIVITY, 2001-2004
ANNEX 6: OUTSTANDING EXTERNAL DEBT BY CREDITOR
ANNEX 7: BALANCE OF PAYMENTS, 2001 - 2004
ANNEX 8: FIRST SCHEDULE -INCOME TAX RATE, 2002
ANNEX 9: STANDARD ASSESSMENT, 2002
MR. SPEAKER, HONOURABLE MEMBERS
I rise to move that the Bill entitled ''An Act to provide for the service of Sierra Leone for the year 2002'' be read the first time.
INTRODUCTION
Mr. Speaker, Sir
2. Budget time is a time to take stock of the economy and the government's work in the past year. This year is an especially opportune time to look back and see how far we have come, as well as look forward to where we are heading for the future. In this regard, we are all happy to know that the reactivation of the disarmament process throughout the country since May 2001 rekindled the opportunity for peace and reconciliation.
3. The ensuing peace has, however, brought with it daunting challenges. These include reducing widespread poverty, resettling the nearly half of the population that is displaced, reintegrating disarmed and demobilised ex-combatants back into society, rebuilding the damaged physical and social infrastructure and reducing the huge domestic and external debt burden. No doubt, the provision of support to rehabilitate the livelihood and guarantee the security of returnees will enhance the opportunity for reconciliation and the shift to longer-term development. Despite these challenges following ten years of a brutal conflict, we will be starting on a good footing in 2002 as our economy in 2001 has outperformed expectations.
World Economic Outlook
Mr. Speaker, Sir
4. The recent World Economic Outlook by the International Monetary Fund (IMF) shows that the prospects for 2001-02 have weakened further, and downside risks have been exacerbated by the terrorist attack in September in the United States. Growth projections for almost all regions have been reduced, reflecting a variety of factors, including the greater-than-expected impact of the global slowdown in a number of regions; a delayed recovery in the United States; weakening domestic demand growth and confidence in Europe; and the continued decline in information technology spending.
5. Prospects for most developing and transition countries have also deteriorated. Projected growth in Africa has also been reduced, although it is still expected to be higher than in 2000, aided by improved weather and an easing of security problems in several countries. Removing barriers to trade, however, could significantly, boost the long-term prospects of developing countries, increasing annual GDP growth by an additional 0.9 percent over the long run. However, many sub-Saharan African countries continue to experience large deficits, in part driven by weak non-fuel commodity prices, high oil prices, and still high external debt servicing costs.
6. With past experience suggesting that slowing growth is likely to have a disproportionate impact on the poor, the global effort to reduce poverty becomes an even higher priority. Prospects for poverty reduction in the long term, however, remain favourable as growth is projected to substantially reduce the number of people living on less than US$1 per day in the developing world.
Regional Integration Arrangements
Mr. Speaker Sir,
7. The Agreement establishing the West African Monetary Zone (WAMZ) and the statutes of the West African Monetary Institute (WAMI) were adopted in Bamako in December 2000. The West Africa Monetary Institute (WAMI) is a transition institution to undertake preparatory arrangements for the setting up of the West African Central Bank by early 2003. A single currency for the zone comprising, Nigeria, Ghana, Guinea, Sierra Leone, Liberia and the Gambia, is expected to be introduced in 2003.
8. The benefits of the single currency include the elimination of currency trafficking along border towns in the sub region, and the denomination of prices of goods in a common unit. For informal sector operators who trade in the sub region, the common currency will lower the transactions costs and losses associated with currency fluctuations. The West African Central Bank will enhance the credibility of financial policy through the imposition of strict rules of monetary management and thereby instil the required financial discipline that will attract inflows of foreign capital for investment in the sub-region. Capital markets will also be opened up among member-states.
9. These benefits will, however, not come without short-term costs. In particular, tough policy adjustments are needed to meet the convergence criteria, including budget deficit and inflation targets. Furthermore, individual countries will no longer have the option of using monetary and exchange rate policies for solving temporary liquidity problems. Such instruments will be used based on regional considerations. In the longer term, the potential benefits of a larger market for trade and foreign exchange management and a more coordinated environment will enhance investment and growth in the zone.
PART I - REVIEW OF THE ECONOMY
Mr. Speaker, Sir
EXTERNAL PROGRAMMES OF SUPPORT
10. I would like to inform the House of the recent programmes approved for Sierra Leone this year by our major development partners. First, on September 20, 2001, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement for Sierra Leone under the Poverty Reduction and Growth Facility (PRGF) for SDR 130.84 million (about US$169 million) to support the government's three-year economic programme. Second, on September 25, 2001, the Executive Directors of the International Development Association (IDA), the soft window of the World Bank, approved the Interim Poverty Reduction Strategy Paper (IPRSP) prepared by Government as well as the Preliminary Document under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The Executive Board of the World Bank is also expected to approve a second Economic Rehabilitation and Recovery Credit (ERRC II) of about US$45 million during December 2001.
11. Following the approval of the PRGF programme, a number of other multilateral financial institutions as well as bilateral organisations including the African Development Bank, the Islamic Development Bank and the Arab Bank for Economic Development in Africa (BADEA) have since approved various budgetary and other project support programmes to Sierra Leone. The Department for International Development (DFID), UK and the European Union have continued to provide budgetary support to government. On behalf of the Government and people of Sierra Leone, I would like to express our gratitude to these institutions and our other development partners, especially the Department for International Development, UK, the European Union, and the United Nations Development Programme and related agencies for their continued assistance in support of our development aspirations.
ECONOMIC PERFORMANCE IN 2001
Gross Domestic Product (GDP)
12. The progress in disarming and demobilising ex-combatants contributed significantly to improvements in economic performance during the year. The pace of economic activity continues to expand. All sectors enjoyed higher growth in 2001. Real GDP is estimated to rise by at least 5 percent in 2001. At 7 percent, growth is projected to be highest in the manufacturing and handicraft, finance, insurance, real estate and transport and communications sectors. The growth in the transport and communications sector has mainly come from increased access to telecommunication services. There has been a fast expansion in mobile cellular and Internet services. The agriculture sector overall is projected to have performed well and is expected to achieve a real growth rate of about 6.0 percent, partly on account of the timely delivery of critical farm inputs to resettled farming communities.
Domestic Prices
13. Developments in the foreign exchange market continue to dictate the trend in domestic prices. The shortfall in projected donor inflows coupled with the sluggish performance of the agricultural export sector and the increased import requirements to match the expansion resulted in an excess demand for foreign currency. Consequently, the rate of exchange of the Leone to the United States dollar depreciated by about 21.5 percent by October 2001, while the year-on-year inflation rose to 6.0 percent as at September 2001, compared to 2.3 percent in the same period of 2000. In a bid to make the consumer price index more realistic and representative of the entire economy, the Central Statistics Office (CSO) extended the compilation of the index to Bo and Kenema during 2001.
Monetary Developments
14. Monetary developments were greatly influenced by the government's fiscal programme for 2001. There was huge reliance on domestic sources to finance the budget deficit owing to delays in the release of external budgetary support. Hence, Government's indebtedness to the banking system increased significantly resulting in a further increase in the growth of broad money. Broad money grew by 24 percent by September 2001. Furthermore, after fluctuating in the first quarter of the year, interest rates on government securities have remained relatively stable during the rest of the year.
15. In the banking sector, the assets and profitability of the commercial banks grew during the period. The commercial banks have reopened some of their branches in Freetown and the provinces. In addition, some of the banks have improved their services to customers by introducing Automatic Teller Machines (ATMs). Deposit rates have risen to mobilise savings while prime lending rates have been reduced to encourage private sector borrowing.
Exchange Rate Developments
16. As noted earlier, the weak official export earnings and late disbursements of programmed external support resulted in an erosion of reserves and this was reflected in some depreciation of the official exchange rate during the year. Although initial gains were recorded in January this year, the inability to match supply with the demand for foreign currency as economic activities expanded gave rise to a rather unsettled market. However, the Foreign Exchange Auction, which was established as a means of stabilising and converging exchange rates, emerged as the reference rate for the pricing of all foreign exchange transactions. The sustainability of the auction created a means of confidence followed by a convergence and narrowing of spreads across foreign exchange rates.
External Current Account Balance
17. The performance of the export sector improved remarkably over the period, on account of increased receipts from diamond exports. The revitalisation in diamond exports could be attributed to improved access to the mining regions, coupled with the requirement for the issuance of certificates of origin. However, the agricultural sector is yet to contribute significantly to export revenues, as it remains sluggish.
18. Import payments on the other hand, continued to increase, especially for petroleum products, rice, building materials, machinery and transport equipment, and a variety of other consumer items. As a result, the current account deficit widened during the period from US$ 100 million in 2000 to US$107.8 million in 2001.
External Debt
19. Paris Club creditors agreed on October 16,2001 with the Government of Sierra Leone to a restructuring of its external debt, following the approval of a PRGF Facility by the IMF. The agreement was concluded under the so-called "Naples terms". The debt relief led to the immediate cancellation by Paris Club Creditors of about US$72 million of our external debt and a reduction of debt service due to Paris Club creditors. Despite this, our total external debt remains high at about US$1.25 billion.
PART II - THE POVERTY REDUCTION PROGRAMME
THE TRANSITION PHASE
Mr. Speaker, Sir
20. The Government's two-stage strategy for poverty reduction was announced during the launching of the Interim Poverty Reduction Strategy Paper (IPRSP) during July 2001. The strategy involves a transition period, 2001-02 that will focus on the following key priority areas: the reestablishment of personal and state security and the maintenance of law and order; improving the living standards of the most vulnerable groups including returnees, internally displaced persons (IDPs) and other war victims; addressing urgent rehabilitation and reconstruction requirements; and capacity building in many areas, all in the framework of continuing macroeconomic stability. In the medium term phase (2003-2005), Government will address longer-term development challenges and these will be spelled out during the preparation of the full Poverty Reduction and Strategy Paper (PRSP) when security and accessibility would have improved considerably throughout the country.
Monitoring and Evaluation Strategy
21. Government recognises that effective monitoring and evaluation is fundamental for ensuring that budgetary allocations are fully translated into outputs and outcomes. In this connection, Government has developed a participatory outcome monitoring system to monitor and evaluate the progress of implementation and impact of the anti-poverty strategy. This is particularly important in the context of the use of potential HIPC resources for poverty reduction programmes and activities. The monitoring process will assess improvements in service delivery, using quantitative and qualitative indicators defined in consultation with civil society. It will also assess the efficient and effective utilization of public resources that are allocated to both urban and rural communities.
22. To this effect, in August 2001, Government commissioned the Public Expenditure Track Survey (PETS) Task Team to conduct an Expenditure Tracking Survey for expenditures incurred during the first half-year of 2001. The results of the survey revealed significant gaps in some key ministries in the disbursement of public resources to rural areas. It also shows some variances between budgetary allocations and actual expenditures in many departments due partly to the stringent tendering procedures for procurement as well as the emphasis on transparency. The survey also confirmed that slow disbursement or non-disbursement of donor funds for many development projects in the rural areas greatly affected implementation of these projects.
PART III - INSTITUTIONAL REFORMS
Mr. Speaker, Sir
23. Government will accelerate the implementation of the Civil Service Reform Programme and local government reforms from 2002 onwards to improve the capacity and efficiency of the public sector to deliver services, especially in rural areas. In this regard, a civil service reform coordinator has been appointed and the Establishment Secretary's Office will be transformed into a Personnel Management Office (PMO). The General Orders are also being revised while work is in progress to develop a new training policy and performance assessment system.
24. A National Commission for Privatisation (NCP), has been established to implement the Public Enterprise (PE) divestiture programme. In line with best practice, the Commission will act as the prudent ''shareholder'' of all public enterprises in the government portfolio with a mandate to manage enterprises through its delegates under its sole supervision and control.
25. The Government has established a National Social Security and Insurance Scheme to strengthen existing state and traditional sources of support for retirees in both the public and private sectors. The scheme, expected to commence in January 2002, would provide pensions on retirement, invalidity and death benefits to all private and public sector workers. The Social Security Act 2001 provides for a joint contribution rate of 15 percent (10 percent by the employer and 5 percent by the employee) of the insurable earnings of the members of the scheme.
26. A unified and autonomous National Revenue Authority (NRA) has been established and is expected to commence operations by July 2002. To ensure coordinated implementation, a Development Team was appointed with a mandate to implement the tasks recommended for the establishment of the NRA. Draft legislation on the NRA has been prepared and will soon be submitted to the House.
27. Government has established a Poverty Alleviation and Strategy Coordinating Office (PASCO) for the preparation of the full Poverty Reduction Strategy Paper (PRSP). The preparation of the full PRSP will be undertaken through a multidisciplinary, integrated and coherent approach with the participation of all stakeholders, including our development partners, involved in poverty reduction efforts. When completed, its approval by the Executive Boards of the IMF and World Bank would allow Sierra Leone to benefit from substantial reduction of its stock of external debt through enhanced debt relief.
28. The Government has also approved the conduct of a National Population and Hosing Census over the next two years. The Central Statistics Office (CSO) is already steadfastly implementing pre census activities including the setting up of a Census Secretariat and on-going training provided in cartographic and mapping exercises.
29. The National Long-term Perspective Studies (NLTPS) on Vision 2025 will provide the framework for the formulation of plans and programmes that would respond to the desires and aspirations of the people of Sierra Leone. The first phase of the process is now nearing completion. The various scenarios, which have been derived from the visioning process, will be presented to a cross section of the population for validation.
30. The Government is strengthening its institutional capacity to monitor the use of donor funds. In this regard, Government, with support from the UNDP, is establishing a comprehensive database on aid flows within the Integrated Approach for Aid Coordination (IAAC) framework. To this effect, Donor Assistance Database (DAD) software has been installed to facilitate the tracking and utilization of international assistance. Government will also continue to strengthen the institutional arrangements to facilitate the implementation of the NGO Policy and Guidelines. With effect from January 2002, all Non Governmental Organisations (NGOs) granted duty free privileges are required to submit their requests for such concessions together with a work plan of activities for the year.
PART IV - The FISCAL YEAR 2002 BUDGET
Mr. Speaker, Sir
Permit me to move on now to the Budget for the fiscal year 2002.
FY 2001 BUDGET OUTTURN
31. Before I do so, I would first like to recap on the FY 2001 Budget and touch on the changes made to improve the presentations of the Budget in the Budget Book.
Revenue
32. Total domestic revenue collected for 2001 is in excess of target. Revenue increased from a target of Le185 billion to about Le204.7 billion. Hence, the revenue to GDP ratio increased from 12.3 percent of GDP to 13.6 percent of GDP. The rise in collections from the Customs and Excise Department contributed to the over performance in revenue due partly to the reduction in duty free concessions, amounting to about Le45 billion by end October 2001 compared to Le80.9 billion in 2000. Thanks to the complementary efforts of the Ministry of Development and Economic Planning, the implementation of the revised administrative guidelines on duty free concessions is yielding dividends. The Income Tax Department also exceeded its revenue target for 2001. However, Grants for budgetary support fell short of the budgeted amount by about Le41.2 billion due to the non-disbursements of projected donor resources.
Expenditure
33. Total Expenditure and Net Lending is provisionally estimated at Le448.8 billion. Of which, Personal Emoluments, Le111.6 billion, Goods and Services, Le128.7 billion, the Security Sector, Le52.5 billion, subsidies to the National Power Authority, Le3.1 billion. The provisional outturn for wages and salaries exceeded its yearly target of Le100.3 billion, excluding an amount of Le6.8 billion paid as arrears to teachers. Annex 1 provides a summary of the provisional outturn of revenues and expenditures for fiscal year 2001.
Budget Deficit
34. Due to the significant shortfall in budgeted donor inflows and the excess expenditures for wages and salaries, the overall budget deficit, excluding grants, amounted to Le244.1 billion or 16.2 percent of GDP. The basic primary balance, estimated at Le76.2 billion or 5.1 percent of GDP, is lower than the ceiling due to the over performance in domestic revenues. However, bank financing increased significantly to Le33.1 billion or 2.2 percent of GDP.
CHANGES TO THE BUDGET PRESENTATION - THE MEDIUM-TERM EXPENDITURE FRAMEWORK (MTEF)
35. The budget process for fiscal year 2002 continued to enhance and consolidate the participatory process. Consultative Workshops and sector discussions were part of the process of making choices on expenditure priorities and resource allocation for the 2002 budget. For the first time in our history, budget discussions with line ministries were conducted with the involvement of community leaders including representatives of Paramount Chiefs and Members of Parliament.
36. The MTEF process is aimed at promoting sectoral planning and budgeting over a three-year horizon, channelling resources to key priorities, and promoting efficiency and effectiveness of public expenditures. Also, it aims to ensure firm adherence to the established expenditure control and commitment process to prevent the recurrence of domestic and external payment arrears and contain the need for domestic and external borrowing to sustainable levels. In this connection, Government recognises that there is a need to strengthen accountability systems not only to ensure that funds are properly utilised for the benefit of Sierra Leoneans, but also to ensure that public officers take responsibility for the results of their decisions.
37. To enhance budget management and accountability, a number of measures are being instituted and will be implemented during 2002. These include, the formation of community budgetary oversight committees in all the regions, involving a wide range of stakeholders in the budget process, and ensuring the periodic publication of information on budgetary provisions and service delivery at the local level. New systems of monitoring and reporting on the use of funds as well as a wider circulation of the financial orders and store rules will form part of these changes. To increase efficiency in public expenditure, the procurement function will be reformed and decentralised at the regional level.
OBJECTIVES OF THE BUDGET 2002
38. Let me now move on to the FY 2002 Budget proper. The main thrust of the 2002 budget is two-fold: at the macro level, to position Sierra Leone for a new era of growth, by increasing our competitiveness and attractiveness not only to business as a place to invest in, but also to individuals as a place to live and work in; and at the micro level, to give every individual the wherewithal to weather this difficult but necessary period of transition in the post conflict period to a new stage of economic growth, to assist promoting business in getting established, enhance institutional capacity building and restructure our economy.
39. The central theme of the Budget for 2002 is, therefore, to position Sierra Leone for a new era of growth. The Budget is aimed at boosting business and providing benefits for everyone. By making the necessary changes to our economy, we hope that all Sierra Leoneans could stay united and succeed together.
THE MEDIUM-TERM MACROECONOMIC FRAMEWORK, 2002-2004
40. The government's medium-term quantitative objectives are to a) achieve a growth rate in real GDP of about 6.7 percent, b) limit inflation to an annual average rate of about 5 percent per year; c) raise gross foreign exchange reserves to the equivalent of over two months import cover by 2004. Growth will be boosted by the recovery of the mining and agricultural sectors, and by the pick-up in reconstruction and rehabilitation activities. Low inflation is to be attained through the pursuit of prudent macroeconomic and financial policies.
41. The external current account is projected to widen to about 38 percent of GDP in 2002 before declining to about 17 percent in 2004 as export growth accelerates and import growth slows. Reflecting the rise in public and private investment, the ratio of investment to GDP is projected to a peak of 29 percent in 2002 and remains above 20 percent through 2004.
THE MEDIUM-TERM COMPETITIVENESS STRATEGY (MTCS)
42. The development of the private sector is an important part of the Government's poverty strategy to stimulate recovery and growth. What the government can and will do, however, is to continue to ensure an environment that is pro-business; that encourages individual effort; and that drives innovation. In this connection, Government appointed a Professional Review Team (PRT) comprising of representatives from Government, the private sector and the University. The PRT will undertake an in-depth study of the competitiveness of our private sector and recommend strategies aimed at creating a favorable environment for increased private investment and savings, as well as removing constraints that prevent the Sierra Leonean private sector from being competitive, at least, in the sub region.
43. In pursuance of its mandate, the PRT conducted a rapid assessment survey of selected business enterprises as well as site visits to key institutions involved in the private sector. As a follow up to these activities, the PRT organized the first National Economic Consultative Forum on private sector development in November 2001 to evolve a consensus on the formulation of a participatory strategy for the growth and development of the private sector. The initial findings from the survey show that the formal private sector is relatively small and weak in relation to size of establishment, and investment and technology adoption and innovation. The survey also shows that the competitiveness of the private sector is negatively affected by the high cost of public services, especially utilities. High taxes, high lending interest rates and unavailability of foreign exchange resources were also identified as a deterrent to investment.
44. It is hoped that on completion of its work, the report of the PRT will form the basis for the adoption of a National Competitiveness Strategy and a reform agenda for private sector development. In the meantime, the immediate objective of government is to support the private sector to become a powerful "engine of growth" and a central pillar for increasing incomes and consequently poverty reduction on a sustainable basis. Government efforts will, therefore, be geared to promoting micro-finance development in order to create employment and raise incomes in both the formal and informal sectors.
PROJECTED FY 2002 FISCAL POSITION
I will now touch on the FY 2002 fiscal position.
45. Projected domestic revenue for FY 2002 is estimated at Le230.4 billion or 13.7 percent of GDP. Loans and grants for budgetary support are projected at US$60.8 million. Recurrent and domestic development expenditures are budgeted at Le394.5 billion and Le11.3 billion respectively. Total expenditure is Le606 billion or 36.1 percent of GDP. Contributions to social security for government employees will total Le12.5 billion.
46. Based on these projections of domestic revenue, expenditure and grants and loans, the budget deficit is projected at Le375.6 billion or 22.4 percent of GDP. The basic primary balance is projected at Le89.9 billion or 5.4 percent of GDP. The budget profile for 2002 is also attached as Annex 1.
Expenditure Priorities
47. As in previous years, the largest share of the Government's FY 2002 expenditure budget is for the social sector, which accounts for 35.8 percent of total non-salary, non-interest recurrent expenditure. It increases from Le54.5 billion in 2001 to Le61.5 billion in 2002. Education, Health and Social Welfare will all get substantial increases in their budget allocations, reflecting provisions for expanded services to all regions of the country. The provision to Education is increased from Le30.7 billion in 2001 to Le36.4 billion in 2002 and for Health from Le 16.6 billion in 2001 to Le18.6 billion in 2002.
48. In Health, the increase in allocation is to enhance expenditures to implement the critical poverty activities announced in the 2001 budget, including free maternal and child health care, the school health and expanded immunisation programmes, and the purchase of drugs and medical equipment. In Education, the increased allocation will enhance expenditure to cater for the universal free primary education through the provision of additional teaching and learning materials for primary school pupils, the payment of examination fees and the provision of subsidised textbooks to all secondary schools. In recognition of the financial burden facing parents, Government will, from 2002 onwards, fully fund the fees for all pupils in government and government-assisted schools for all national school examinations, the National Primary School Examination (NPSE), the BECE and WASCE. In Social Welfare, the enhanced provision is to cater for the reintegration of street children, war affected children and the empowerment of women.
49. The next largest sector is the security sector. We will continue to invest heavily in the security of our nation and in building ties with other countries. This sector takes up 12.3 percent of the total recurrent expenditure budget, of which the Police (Le11.8 billion), and Military (Le36.8 billion). This is money required to guarantee our peace and security, for without it, we would not have secured homes and economic growth.
50. Economic development, including the economic sector and domestic development spending, is the third largest sector. The economic sector, including agriculture, takes up Le24.2 billion or 6.1 percent of the total recurrent expenditure budget. As indicated above, the provision for domestic contribution to the development budget is Le11.3 billion to fund a number of projects including the regeneration of local communities, the reconstruction of prisons and fire force substations, feeder roads development and the Juba-Sussex road. This represents our requirements to continuously invest in basic infrastructure and creation of new economic activities. The development estimates by project and ministry is provided in Annex 3. As far as relaunching the whole agricultural sector is concerned, Government is considering the establishment of independent agriculture authorities throughout the country. The Ministry of Agriculture, Marine Resources and Forestry will announce details of this scheme in due course.
51. The provision for the administration sector is Le27.7 billion or 7.0 percent of the total recurrent expenditure budget. Government's policy is to keep central administration small and let operational ministries have the bulk of the resources.
52. The provision for wages and salaries is increased from a target of Le111.6 billion to Le132 billion or 33.5 percent of the total recurrent expenditure budget. The increase in the provision for wages and salaries is mainly to cater for the payment of social contribution by government for its employees; a 5 percent enhancement to pay for government employees social security; the expansion of the activities of the Anti Corruption Commission; the strengthening of the Audit Service Board; the restructuring in the grades for the police; the recruitment of about 250 police officers to enhance their deployment in the regions; and recruitment under the Military Reintegration Programme. In recognition of the expected increase in pupil enrolment in the school system throughout the country by September 2002, a provision for the recruitment of new teachers will be provided from the expected HIPC resources. In the meantime, I must stress that there is no provision in this budget for the recruitment of new teachers prior to September 2002. Details of expenditure by ministry and category are provided in Annex 2.
PART V - TAX CHANGES AND OTHER PROVISIONS
Mr. Speaker, Sir
Let me now turn to the proposals for tax changes and other provisions
Boosting Personal Incomes
53. To reduce the tax burden for individuals, as well as reward individual effort and enterprise, Government has decided to raise the minimum threshold for income tax and reduce the top marginal tax rate. The threshold for income tax is raised from Le800, 000 to Le 1,000,000 while the top marginal rate of tax for employees, self-employed and property owners is reduced from the current 40 percent to 35 percent from April 1, 2002. The net effect of these changes to the individual tax regime is to make all taxpayers better off. The new income tax rates are attached in Annex 8.
54. The above measures will result in a revenue loss to government of about Le3.5 billion. To minimise the impact of the revenue loss, employers are required to submit monthly PAYE spreadsheets with payment of tax deduction required from January 2002.
Corporate Tax
55. The rate of corporate rate tax remains unchanged at 35 percent.
Agricultural Activity
56. As a demonstration of the Government's commitment to enhancing food production, the exemption granted under the provisions of the Income Tax Act 2000 in respect of agricultural activity will now include rice production. Hence, with immediate effect, the income earned from rice farming will be exempted from tax for a period of ten years from the date of commencement of the activity for both incorporated and unincorporated businesses. It is hoped that this measure will encourage greater private sector activity in rice production to reduce our dependence on rice imports.
Standard Assessment
57. In order to bring in line the payment of taxes from the class or description of persons that fall under the Standard Assessment schedule to personal income tax payers, the rates under this category are revised from April 1, 2002. The revised rates are provided in Annex 9. In line with this effort, the Income Tax Department is being strengthened to intensity efforts to collect revenue under miscellaneous taxes, especially the entertainment tax.
Restructuring Import Taxes
58. Government recognises that to create an enabling environment to promote competition and exports, there is need to further rationalise our tariff policy with the ultimate objective of aligning our rates to member states, especially within the Second Monetary Zone.
Import Duty
59. Firstly, in line with the pro-poor expenditure policies that I have announced earlier, Government has decided to reduce the import duty rate for social products, including all basic educational materials, and pharmaceutical products for primary health care and agricultural machinery and inputs to 5 percent from 20 percent. To enhance the efficiency of our local industries and boost exports, the duty rate of 5 percent applicable for all raw materials, as defined in the Tariff Code, for industries with a market share of sixty percent or more of the market for that product is abolished. However, these industries will continue to pay domestic sales tax on output.
60. The import duty rate on rice and baby food rice remains unchanged at the special rate of 15 percent. The import duty rates for intermediate and final products also remain unchanged at 20 and 30 percent respectively.
Sales Tax
61. The rate of sales tax remains at 20 percent for all products that it applies.
Excise Tax
62. Excise tax is now applicable only to tobacco products, petroleum products and alcoholic beverages. Thus, the excise tax applicable to luxury and related goods is abolished. However, the rate remains at 30 percent.
63. The changes in the application of import taxes announced above are effective from today. Overall, these changes in import taxation will result in a reduction of the average effective tariff rate from about 27.7 percent to about 25.5 percent. Revenue loss to government is estimated at about Le8.0 billion. It is hoped that the changes to the rates for social products and the products manufactured by qualifying industries will result in a proportionate reduction of the market prices of these goods. Full details of the revised tariff rates are obtainable from the Customs and Excise Department.
Duties on Cigarettes
64. As part of Government's efforts to reduce the wide scale smuggling of cigarettes, rates of duty applicable in neighbouring countries will now apply to cigarettes imported into Sierra Leone from January 2002. The new rates can be obtained from the Customs and Excise Department.
PART VI - MONETARY AND FINANCIAL SECTOR POLICIES
65. The Bank of Sierra Leone will continue to pursue monetary policy aimed at maintaining a single digit inflation rate. Greater efforts will also be made to get the non-bank sector to finance the budget deficit. The Bank will continue to monitor the foreign currency open positions of commercial banks to ensure a stable foreign exchange market. The Bank will also continue to regulate and supervise the Financial Sector.
66. The issuance of the Banking Regulations 2001, which are an accompaniment to the Banking Act 2000, will enhance the Bank's role in the supervision of commercial banks. These regulations raised the minimum paid-up capital for commercial banks to ensure that participants have adequate start-up capital to withstand shocks in the industry. The Other Financial Services Act, 2001 that was enacted in July 2001, empowers the Bank of Sierra Leone to regulate and supervise other financial services, which are growing in quantity and complexity in the economy.
67. The financial system continues to deepen through the establishment of new financial institutions. Not long ago, we witnessed the establishment of the First Discount House and the Home Finance Company. Currently, applications for new banks are in the pipeline and rural banks will be revitalised during 2002.
68. For our post conflict economy, the catalytic role of an efficient capital market in mobilising resources for reconstruction is of paramount importance. To this effect, the Bank of Sierra Leone, in collaboration with the West African Institute for Financial and Economic Management (WAIFEM), organised an in-country workshop on capital markets. The workshop was attended by a number of participants from the private sector. Government is studying the recommendations from this workshop while serious consideration is being given to the establishment of a Stock Exchange.
MONEY LAUNDERING
69. There is widespread concern about the grave dangers posed by money laundering and other financial crimes to the stability and integrity of the fragile financial system in the West African sub-region. As a follow up to an antecedent crime, money laundering is closely related to illicit trafficking in narcotics and human beings, illegal mining, and other crimes.
70. Financial crimes such as foreign exchange malpractices, bank and tax frauds impact negatively on the health and development of any financial system. In this regard, Government will mount public campaigns to enlighten, sensitise and educate the public on the mechanisms and effects of money laundering. Government will also enact legislation to criminalise money laundering.
PART VII - CONCLUSION
Mr. Speaker, Sir
71. As I indicated above, the objective of Budget 2002 at the macro level is to position our country for the challenges of the new millennium, including our membership of West African Economic Union and coping with developments in the global economy. The zero rating of raw materials for qualifying industries and the reduction in rates for agricultural inputs and machinery is to help industry improve its competitiveness in the sub region and to boost exports. However, to enhance our competitiveness, innovations and new ideas will play an important role in creating wealth for companies in Sierra Leone, and consequently, for Sierra Leone as a nation.
72. Though businesses are important, even more important are our people. As I mentioned earlier, the objective of this budget at a micro level is to help every one make a successful transition following years of conflict. The government is lending a helping hand to those who wish to help themselves. We are therefore implementing a series of measures to ease the financial burden on individuals; on parents, by paying the costs for education and health of their children. This is why we are investing nearly Le36 billion in the education of our children and in continuous training through the recent creation of polytechnics. Government is also investing about Le19 billion for the health of our children and pregnant women. Equally important, Government is putting aside about Le12 billion for social security, as an investment to cater for the old, elderly and retirees. We are also cutting income tax rates while raising the tax threshold on income. This package of measures has been intentionally designed to be progressive, to benefit the less well off more.
Mr. Speaker, Sir
73. To conclude, let me reiterate that there is a place for everyone in Sierra Leone, and every one will benefit from our good governance. It will take effort and even a fair amount of difficulty to reach where we, as a nation, want to get to. This Budget serves to encourage everyone to stay united and succeed together. I, therefore, commend it to the House.
I THANK YOU AND WISH YOU ALL A PEACEFUL NEW YEAR