eBusiness Weekly
Persistence Gwanyanya
It is now very clear for everyone to see that only long term solutions can deliver Zimbabwe from its economic ills, which are largely permanent and structural in nature. While there appear to be understanding of the urgency of economic reforms by Treasury, it seems we underestimated the depth of our challenges, ostensibly because we suppressed the economy for too long, through unsustainable subsidies, including currency subsidies-exchange rate parity (1:1) and managed foreign currency allocation system. All these are stop gap measures, short term fixes and half backed solutions, which, ironically, got us nowhere but deeper into the hole.
Its unsurprising that we missed all key macro-economic targets in 2019 as the economy adjust to its true position following the implementation of economic reforms, which started in earnest in October 2018. Inflation, which was projected to average 22,5 percent is now estimated at more than 350 percent; exchange rate at around US$1:ZWL21 is way off the initial target of US$1:ZWL3.5. All these necessitated the supplementary budget of ZWL10.5billion from initial budget of ZWL8.2billion. Resultantly, economic growth for 2019 was revised from 3.1 percent to a decline of 6.5 percent, external shocks from drought Cyclone Idai contributed. So it’s only fair to conclude that we carry the burden of the past.
A key take away from budget is that it’s now time to conform the reality, bite the bullet and deal with our real challenges, not symptoms. That’s why Treasury insisted in currency reforms, even with minimal fundamentals and without the necessary external support, which all countries going through the same process would ordinary access. Now, it’s time to work on those fundamentals needed to sustain our currency, which is still in its infancy-production, productivity, employment and formalisation. Life has taught us that a return to own currency is extremely difficult, as we normally wait for fundamentals, which, ironically will never be achieved. Despite the current challenges, Treasury seems to press ahead with reforms, but tuning on to the stimulus gear and abandoning austerity measures. Whilst the temptation to conclude that the projected increase in budget to ZWL$58.6billion was necessary to stimulate the economy, it is still very low at US$3.66billion (at 1:16). It’s actually half about a quarter of the expenditure bids of about ZWL $136 billion, which ably demonstrate the need to grow the cake.
Due to revenue constraints, Treasury had to rationalise expenditure to ZWL63.6billion, resulting in a small deficit of 1.5 percent, which is within line with TSP target. However, funding of our budget remain very unsustainable, largely from taxation (more than 90 percent) mainly exercise duty on fuel, Value Added Tax (VAT), 2 percent Intermediated Money Transfer Tax (IMTT). As such it’s now time to shift our focus from currency and monetary issues to production, productivity and employment creation. Just as you can’t expect a car without an engine to drive, without production and productivity it’s extremely difficult to sustain a currency. Without jobs our unemployed population have no option but to enterprise around currency as a source of living. That’s why Treasury is quite keen to support mainly the youths and women who are more vulnerable groups of the society. The Youth Employment Tax Incentives (YETI) and the National Venture Capital Fund for ZWL500million are plausible initiatives aimed at promoting youth employment and entrepreneurship, while women continue to be supported through various the financial institutions.
While the thrust by Treasury to use the incentive system to promote production elsewhere in the economy is in line with international trends and thus commendable, it’s important to interrogate why there has been low uptake of Special Economic Zone facility by the business community. Surely the are other factors beyond incentives that we need to deal with.
Production shall be hitched on effective exploitation the resources commanded to our care by the Creator. Due to its close link with the manufacturing sector, prioritisation of agriculture is expected to provide necessary impetus to reboot the production and support the re-industrialisation drive. The agriculture sector used to supply an estimated 60 percent of the raw materials consumed by the manufacturing sector. In line with the current trends we should shift our focus from primary agriculture to an agro-business models, which emphasise value chains. The required improvement in productivity will be driven by the support to irrigation, farm mechanisation as well as other key projects, which have been allocated an amount ZWL1.9billion. Unlike under the previous COMMAND Agriculture model and consistent with the migration towards private sector, agriculture will be funded by banks, through the SMART concept, with Central Government only coming in to provide guarantees. This model is more effective and less risk as funding will be under commercial basis.
The success of the agribusiness model is important for employment creation and resuscitation of our manufacturing sector, which used to contribute about 25 percent of GDP at its peak in the late 90s, but is now contributing about half that amount. The manufacturing sector, which is seen as an engine of growth and employment creation, is currently struggling to recover due to a myriad of challenges, chief among them being shortage of capital, which is itself traced to the unconducive investment environment. As if acknowledging that the improvement of business environment is beyond economics and finance, Treasury is beginning the show inclination towards supporting our institutions which support this imperative. Key among them is the Auditor General’s office, which has been key in exposing the profligacy in Government and independent Commissions which are key to promotion of good governance.
While recognising the potential of the mining sector to turnaround the economy, there is need to fully understand the challenges faced by this sector, which may limit its contribution to recovery. In view of current power challenges and capital constraints, the projection of US$12billion contribution of the mining sector in 2023 seems over ambitious. The current performance of the sector ably demonstrate the impact of the power and currency management system. The required investment may require some external flow of capital which will be hinted by the business environment and off course, global economic and financial conditions.
Even the projected contribution of the Tourism sector, which is also expected to anchor recovery looks overambitious in the current environment. Similarly the projection of US$10billion contribution to the GDP seems overambitious. What all this tells you is it’s easier to come up with projections but implemental and practical solutions to achieve the same. Quite often we are affected by administrative incompetence, bureaucracy, inefficiency, corruption and general business environment, all of which need to be tackled head on.
As we analyse the budget we should not forget its impact on the ordinary person in the economy, who is currently worried about economic implosion. A budget that ignores the plight of the working population mainly civil servants falls short of expectations. Whilst the proposed review of taxable incomes is commendable, they still fall short of the worker’s requirements. The minimum taxable income has been review from ZWL$ 700 to ZWL$ 2 000 per month whilst tax bands have been adjusted to begin at ZWL$2 001 and end at ZWL$50 000, above which the highest marginal tax rate of 40 percent will apply, with effect from 1 January 2020. The 2 percent IMTT tax free threshold was adjusted from ZWL10 to ZWL100 and maximum tax payable of ZWL10 000 to ZWL15000 with values not exceeding ZWL1 250 000 effective 01 January 2020.
Due to the poor provision of public utilities-water and electricity- the ordinary person in the street has lost of security. Treasury has to intervene, and support these providers of these public utilities, who are struggling to collect fees, from the constrained population, noting that everyone is paying taxes through the 2 percent IMTT. The facility of ZWL8.09billion for energy infrastructure is necessary for the resuscitation of our outdated energy infrastructure, which is failing to cope with the energy demand of the country. Similarly, support of infrastructure to the extent of ZWL2.6billion, which is seen as a fulcrum for economic recovery, is commendable.
However, given the amount of capital required its necessary that we improve our business environment to attract the private sector, which can also work government through Joint Ventures (JVs), Private, Public Partnerships (PPs) among others. As we talk about infrastructure and utilities it’s important to mention that the progress towards parastatal and state enterprises reforms has to be expedite as they continue to milk the fiscus.
The budget reflects an economy in a transition stage, which carries the burden of the past. Whilst we have not yet gotten to Canaan, we are definitely out of Egypt. The journey is not going to be easy but we can abandon it, we have to endure and build on the progress made so far. There is definitely more that needs to be done especially in the areas of corruption, profligacy and revenue leakage to support the reform initiatives.
Importantly, economic and financial solutions are inadequate to solve the Zimbabwe problem today. There is also need to resolve the political impasse as well growing distrust and entropy between Government and its citizens.
Persistence Gwanyanya is a Charted Banker, Economist, Banker and Trade Finance Specialist who also founded the Bullion Group. For feedback email [email protected] <mailto:[email protected]> or whatsApp +263773 030 691
