Fundamentals still sound so fix the details

29 Jul, 2022 - 00:07 0 Views
Fundamentals still sound so fix the details

eBusiness Weekly

The fundamentals of the Zimbabwean economy are still looking very good, Finance and Economic Development Minister Mthuli Ncube reported yesterday when he delivered his mid-term fiscal statement and a supplementary budget that, in nominal terms, doubles spending and doubles tax revenue, a result of the high inflation we are presently suffering.

On the fundamentals the figures still look very good, even when the supplementary budget is approved. In the first half that tight fiscal discipline that has been a hallmark of the Second Republic was maintained, despite a lot of pressure globally and locally and in fact his tiny permitted deficit in the budget at the end of last year was even tinier, not much more than half the size.

He is being slightly more expansive in the second half of the year, although we have all come to expect actual performance by a strong-arm Treasury is better than the budget, since the Minister appears to hate over optimistic forecasts and hoping for the best and instead gives himself a little bit of slack to cope with what might come up.

But even so the predicted deficit while larger in percentage terms is still tiny.
One interesting point in the revamped budget is what is termed compensation, basically the civil service salaries. Prof Ncube has been keeping compensation at below 40 percent for most of his time at the helm of the Treasury, and then been able to push capital spending far harder.

This year he is being more generous to the workers. Pay actually forms 53 percent of the extra he is seeking, and the net result when you look at the who revised budget is that compensation now rises to around 44 percent. All things considered this was necessary since the revisions appear to still be below inflation, so the need to keep the State employees functioning has meant they need a larger slice of the tax revenue.

This does not mean that civil servants will be earning moderately over twice their January salary in December. The increments in Government come, as in the private sector, in far more moderate increments during the year. Some indication of what the civil service package might look like at year end comes from the Minister’s bid to increase the tax free portion of an annual bonus five-fold, with the figure usually set to ensure that just about every civil servant, at least at the skilled levels, gets a totally tax-free bonus.

Pay forms such a large component of both private sector and Government spending, that cash flow becomes critical. The normal sequence in an inflationary economy is that prices rise first, generating the cash flow; then the private sector salaries rise, and the extra PAYE and VAT from their income and spending then provide the cash flow for the Treasury to pass to the civil service pay packets.

The critical point to note is that why the supplementary budget just about doubles 2022 spending, the extra comes in the second half of the year. This means spending in the second half will be running near three times spending in the first half.

He has backed off spending on some other areas, although by the look of it not the major Government spending programmes, to ease up the pay percentage.

The fact that under the new budget while Primary and Secondary Education retain their top slot, the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development is only 3 percent behind. This, as the Minister raced to explain, was because of the Agriculture bit of the ministry and the money it needs for the inputs that now underpin so much of Zimbabwe’s upgraded agriculture sector and the money it needs to buy the resulting harvest from the farmers.

While most of the harvests are then sold at reasonably fair prices to the private sector, although sold by monthly orders in most cases rather than all at once, there is a degree of what some would term a subsidy and what others would term pump priming. The basic justification for this spending is that it is a lot cheaper than importing food and has the additional benefit of getting a lot of rural families off the dole, or food aid, and into earning their own living.

Out of the $100 billion for the ministry, some are major operational expenses, such as employing that very large contingent of field workers plus the need to upgrade and maintain irrigation schemes. But there are a few scores of billions for the complex finances, and with that sort of money sloshing around there is obviously need to maintain the strongest possible control of that spending and prevent any corruption-related siphoning of the money.

This will require strict enforcement of the rules for who gets inputs for free, and how much, and how those inputs are actually used on the farms of the recipients rather than sold or passed along to some relative. The marketing side is less open to corruption, although farmers believe there are some dirty deals involving middlemen, and again it will be necessary to ensure this very large sum of money is being used for exactly what Treasury will be paying out.

Most private businesses have an active internal audit department and when there are opportunities for misuse of cash, such as the successful farming schemes entail, then perhaps the same high standards of continuous audit are needed there as well.

The tax reforms were less than most people were pressing for before he stood up. He has doubled the width of the tax bands below the maximum rate, now only applicable on pay over $1 million a month, but when you look at inflation rates this tends to imply he is taking a larger share of the national GDP, although not that much larger.

It appears that his fiscal rectitude is still right up there in front. He is also, from the beginning of next year, pushing up the royalty payments for platinum to the African standard of 5 percent, which does not seem that unreasonable although the original 10 percent before they were cut to 2,5 percent was not reasonable. And as lithium starts becoming a major export mineral a 5 percent royalty does not seem on the high side.

Royalties are about the only way to tax mining companies as most countries have discovered. With all the deductions and the transfer pricing arrangements at the height of the zero-royalty era, it is very difficult to prove that a flourishing and expanding mining company has ever made a profit. Australia after chasing companies down a number of blind alleys went back to royalties and the rest of us have followed suit. We just need to set them at viable and fair levels.

The other major fundamental is the balance of payments. Exports and imports are both rising, although exports are finally rising significantly faster although there is still a deficit on the trade account. Once the inflows of remittances, aid money and other sources are added in, there is a surplus on the current account, although regrettably this surplus is roughly what net exporters are likely to stuff into their nostro accounts to boost their reserves.

As we have suggested several times, the main currency problem we face in Zimbabwe is not the actual balance of payments, where the fundamentals are first class, but in how we manage the inflows. We continue to maintain three separate pools: surrendered export earnings, retained export earnings and the free funds, largely the remittances. The actual percentages into each pool, if only slightly out of kilter, can create the problems we see.

This problem is a surplus in the retained earnings pool that locks up a lot of cash, and a deficit in the surrendered earnings pool that is then filled with the free-funds pool via the black market. Changes are coming after appropriate notice, but we still have this complication of the triple pool. Reforming into a single pool is something that very few desire, for obvious historical reasons, but the system does need less rigid walls between the three.

The upshot of the outlook and the budget is that with the fundamentals remaining fixed, the problem lies in the detail, and that is where the authorities need to keep digging and tweaking.

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