eBusiness Weekly
Elias Pacheso
2019 is a year many Zimbabweans would like to forget in a hurry. Following the implementation of austerity measures, the liberalisation of the foreign currency markets, prices skyrocketed and high inflation returned, bringing back memories of 2008. It is against this backdrop that the Minister of Finance and Economic Development Mthuli Ncube presented his 2020 National Budget statement.
It is refreshing to note that the Ministry of Finance has a full grasp of the challenges facing the Zimbabwean economy many of them feeding off each other. Pressure on wages remains high and the environment is delicate. Managing these economic challenges clearly requires a balancing act. You will see in the budget an attempt to reduce the tax burden on consumers and corporates but you will appreciate that faced with rising costs and a clear focus on reducing the budget deficit, including curtailing its financing through domestic borrowing and money printing, the Minister had very little room to manoeuvre.
That the economy is expected to contract by 6.5 percent in 2019 came as no surprise, owing to a bad agricultural season that will see the country importing more food, a phenomena that has started to regularly happen in Zimbabwe over the years. Reading the budget statement, one gets a feeling that the country is poised for tougher times before things get better. Though he indicated that he had lifted his foot of the austerity pedal off, his desire to see controlled expenditure was unmistakable which is exactly what this economy needs to create solid building blocks for fully economic recovery.
Ministries were chided for unbudgeted expenditures and if the Finance Ministry gets its way, the fruits of tightening the belt will eventually come through. Realising the unsustainability of blanket subsidies or incentives, the Minister pointed out that focus will now be placed on directing the subsidies and targeted expenditure to the vulnerable groups. Unfortunately, this is easier said than done and more work will be needed to ensure that clear systems are put in place in managing these often complex exercises. Directing resources where they are required or deserved has never been one of the country’s strong points. Policy reversals and adjustments often derail reforms reducing their impact. The strengthening of the country laws such as the PFMS Act and the consolidation of revenues through the Financial Management Information System (IFMIS) is also a welcome move and one that will pay off in the future.
To his credit the Minister is trying to force down the bitter pill of reform and slowly the building blocks of a market led economy are shaping up the economy. Electricity tariffs, fuel prices have been adjusted and are close to regional comparatives, something that has not been experienced in years. One thing is, however, clear, Zimbabweans have not seen the full effects of these adjustments and should brace up as further price adjustments of previously subsidised goods such as bread, mealie meal and cooking oil come into effect with the removal of subsidies that where being extended through the Grain Marketing Board. While these adjustments are painful it is clear that these measures are necessary.
That line Ministries requested for a whooping ZWL 136 billion and only received ZWL 63 billion is also not surprising. There is simply no capacity to finance these requests in the economy. The Minister is expecting a revenue outturn of ZWL 58 billion and a budget deficit of ZWL5.2 billion or 4 percent of the Gross domestic product. Sticking to this target will be crucial to ensure that the country avoids additional inflationary pressures stemming from its financing. With resources already tight in the private sector there is risk of further crowding out investors and reducing private sector participation.
If any lesson is to be learnt from previous budgets, it is that the country’s continued over reliance on rain fed agriculture needs to be addressed once and for all, if the country is to move forward. Zimbabwe still relies on primary sectors such as Agriculture and Mining which are all prone to commodity price shocks. In the Agriculture sector for example if the rainy season turns out to be lower than normal, the economy will continue to suffer, affecting growth. Increased focus on attracting investing in new industries and irrigated crops is therefore needed to ensure that the country makes use of its numerous water bodies to grow food and generate additional revenue outside its traditional mainstay sectors. The plugging in of leakages in the mining sector is also needed and the Minister highlighted that more effort will be put towards this area, a welcome development.
The country’s financial services sector has seen significant innovations in the last few years which have pushed the use of electronic money. However, the demand for cash remains high as a result of the level of informal activities in the economy. Cash shortages are being addressed by the introduction of new notes into circulation something which the government hopes will reduce price instability through an unstable exchange rate. A call was made by the Minister to Banks to raise saving rates to attract deposits. All successful economies require a high savings rate, which often translates to increased investments by locals. Despite the current economic challenges its encouraging to note that Banks remain well capitalised and continue to underwrite meaningful business.
Some of the measures announced by the Minister which further strengthen the country financial sector include the doubling of the capitalisation of Banks from ZWL100 million to ZWL200 million, effective December 2020. A significant development that affects the smooth functioning of the country financial markets and particularly its participation on international financial markets was also highlighted by the Minister. Banks are likely to spend significant amounts of money ensuring that their systems are up to speed with the latest know your customer, anti-money laundering and financing of terrorism screening. Zimbabwe has complied with 33 out of the 40 that govern the conduct of international financial transactions.
It goes without saying that this is an important area which will require government’s full attention in light of the fact that the country requires foreign capital to flow into the country to support private and public projects. The introduction of an independent Financial Intelligence Centre outside the Central Bank needs to be expedited in line with International best practise and will go a long way in raising the appeal of local financial market internationally. The revision of the country’s capital market laws is also welcome to will continue to strengthen the markets.
Any policy pronouncement must leave investors with confidence that an economy is on the mend. This budget is good first step towards rebuilding trust in the process. The Minister spend a lot of time focussing on increased productivity and numerous targeted incentives, which shows the extent to which he consulted with stakeholders. On the other hand the country’s over reliance on things it has little control over such as rain fed agriculture needs to be dealt with in the long term to detangle the budgeting process from Agriculture.
While we cannot discuss all the measures highlighted in the budget in summary the statement was on the whole positive considering the environment and goes someway to introducing some relief to consumers through the modest tax relief. Value added tax was reduced from 15% to 14.5% effective January 2020. With backdrop of the 2% transaction tax, further tax relief will be required in the future no doubt. One cannot underestimate the challenges facing the economy and one hopes that the rainy season will be better than the last one.
New initiatives such as the introduction of innovation hubs and the availing of resources to small business is critical towards building new industries and driving much needed job creation initiatives. However what remains key as with the previous budgets is the importance of strict implementation and execution. The country has not done well in the past when it comes to the execution of well thought policies. Fiscal discipline and the control of money supply remains important in the fight against inflation which remains the major source of currency instability.
