eBusiness Weekly
Martin Kadzere
Zimbabwe’s budget deficit could hit 10 percent of Gross Domestic Product this year due to a shrinking tax base caused by wider effects of the poor agricultural season brought on by the drought, veteran economist Professor Gift Mugano has said.
Adding to the woes are low global commodity prices, which have led some mining firms, particularly in the platinum sector reporting reduced profits and resorting to job cuts.
The Government forecasts a budget deficit of $4,3 trillion, representing 1,5 percent of GDP. It plans to bridge the gap through domestic and external borrowing.
Prof Mugano warned that the effects of the drought will severely impact tax revenue collection due to the critical role agriculture plays in Zimbabwe’s economy.
He also said low commodity prices were reducing revenue for mining firm and causing job cuts, which shrinks the tax base from both individual income and corporate taxes.
High taxes are also discouraging spending, reducing aggregate demand and shrinking the tax base further, particularly the VAT and the Intermediated Mobile Money Tax.
This creates a vicious cycle, as employers facing lower demand are forced to scale down and cut jobs, further eroding tax base from workers and the corporates.
“From my own analysis, this year’s budget deficit will be quite unprecedented, to the region of 10 percent to the GDP and that will push us into serious exposure in terms of our debt position because it has to be financed by borrowings,” said Prof Mugano.
He said considering sources of Government income, especially taxes, challenges related to drought and the external shocks would significantly impact revenue collection.
“Agriculture is the backbone of Zimbabwe’s economy, driving activity in service and manufacturing sectors,” said Prof Mugano. “Think of transportation, wholesale, retail, education and healthcare – they all rely on a thriving agricultural sector.
“Manufacturing also depends heavily on agriculture for raw materials (around 70 percent), while simultaneously supplying inputs and supporting mechanisation.
“The drought now disrupts this vital connection between agriculture and other sectors.
“For example, the usual movement of goods between farms, factories, hotels, etc, facilitated by the transport sector, is significantly limited. This means the Treasury misses tax collection opportunities due to the lack of agricultural activity.
“Similarly, fuel consumption drops and the manufacturing sector receives less raw materials, leading to further tax losses across various sectors,” added Prof Mugano.
Prof Mugano noted that falling commodity prices was dealing a double blow to Zimbabwe’s finances. Firstly, they reduce foreign currency earnings from exports.
Secondly, as revenue declines, the tax base shrinks, limiting its ability to raise funds.
“The external shocks emanating from the decline in commodity prices will have a serious dent as far as the receipts of foreign currency are concerned,” said Prof Mugano.
“When the revenue is going down, the fiscal space where the Treasury should be taxing is also shrinking.
Furthermore, importing food to address the drought related shortages would drain foreign currency reserves, further restricting its circulation within the economy.
Zimbabwe has essentially dollarised, with more than 85 percent of the transaction in forex.
“We are draining that money (foreign currency) out of the country as we are importing food so the circulation of the foreign currency again is limited,” said Prof Mugano.
He noted that with large companies resorting to staff layoffs, that signaled a broader trend of workforced reductions across industries. This inevitably shrinks the tax base, further straining Government revenue at a time when it is already under pressure.
“Wages are also going to be lost…in essence the aggregate demand is going down.
Exacerbating the situation is the current high tax regime implemented by the Treasury.
This applies across the economic spectrum, including the informal sector’s presumptive tax.
However, raising taxes beyond a certain point can be counterproductive. It discourages investment and incentivises businesses to operate informally, ultimately shrinking the tax base and reducing overall revenue collection,” said Prof Mugano.
Other economists concur with Prof Mugano, adding that the re-dollarisation of the economy has exacerbated the challenge. “With many transactions now occurring outside formal channels, the tax base is further eroded,” economist Carlos Tadya said. “We need to address the high level of informality and incentivise businesses to transact formally to ensure a sustainable tax base,” he added.
He said electronic transactions in US dollars remain limited, with most transactions still conducted in cash. This, coupled with the lack of fiscalised tax devices in many informal businesses, hinders the Government’s ability to capture taxes effectively.
Some companies are reportedly resorting to paying cash wages, further facilitating tax evasion.
While the Government introduced a presumptive tax in US dollars to capture revenue from the informal sector, its effectiveness is hampered by the very nature of these businesses. Enforcement is difficult due to the informality and many activities may not even generate enough income to reach the taxable thresholds.
Prof Mugano said Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, along with the Reserve Bank of Zimbabwe (RBZ), faced a daunting challenge of collecting enough revenue to keep the Government afloat.
“Perhaps no year has demanded more critical thinking and strategic planning than this one,” he said.
