eBusiness Weekly
Clive Mphambela
Seven months following the establishment of the new Government, and 26 weeks after the Minister of Finance, Hon Patrick Chinamasa unveiled an ambitious 2018 budget that received mixed reactions from many quarters; it is time to assess progress.
Notwithstanding the impending elections in just over a month’s time, we must still put into perspective a few issues that should be the subject of detailed and critical analysis. In an ordinary year, the market would be expectant of a Mid Term Fiscal Policy Review. As of now we are not sure whether with elections at the end of July, there will be a public review of the country’s fiscal performance over the past six months.
There is general agreement that in the context of the new economic order which is being pushed by the country’s President, many of the positives from the 2018 economic outlook budget have already been exhaustively discussed. However many aspects outlined in the budget still have not quite yet lived to expectations.
In December 2017, Minister Chinamasa presented what many agreed was a very pro-business budget which strongly advocated for the re-engineering of the investment climate in Zimbabwe, aimed at creating fertile conditions for attracting sustained investment flows.
The measures that he proposed, have been speedily implemented to the letter, and have gone a long way in setting conditions that are now allowing the economy to re invent itself.
The indigenisation laws have been reviewed, removing the 49 percent cap on foreign shareholding in local companies, save for those wishing to get involved in mining of Platinum and Diamonds. Indeed, Government has stated that even for those wishing to invest in the extraction of these two strategic minerals, there was active engagement to possibly review the 49/51 percent requirements in the near future once adequate consultations have been done.
However, whilst the 2018 budget generated a lot of excitement, as we turn over into the next six months, we need to reflect on whether the government is delivering on its well meant promises.
Have budget deficits, inflation been tackled?
Minister Chinamasa identified inflation as a real risk.
However, his budget was completely silent on what he intended to do about the incipient inflationary pressures in the economy. This suggested to me two things at the time. There was one part of me that realised that he had no real plans to tame inflation, which was a bit worrisome given the damage that inflation can afflict on an economy such as ours.
People have very long memories and it is only a few short years since Zimbabweans came out of the painful decade of madness which ushered in dollarisation in 2009. By his own admission, it was the successive budget deficits that were fuelling price dislocations in the economy.
It was natural therefore to fret over the Finance Minister’s $5,7 billion 2018 expenditure plan, which he attempted to balance out with a $5,1 billion revenue base, and a $672 million budget deficit leave many economists wondering.
Whilst official statistics have already been released for government revenues (for the first quarter of 2018), data on government expenditure has not yet been availed to the market with the latest available data being as of December 2017. I can therefore not make any value judgments on weather fiscal deficits are on the increase on have been brought under control
According to ZIMRA, not only have both gross and net revenue collections for the first quarter of 2018 surpassed set thresholds targets, but they have also registered significant improvements from last year’s collections for the comparative period. Gross collections were 8,1 percent above the target of $1,029 billion, with collections amounting to $1,113 billion. This trend is expected to have accelerated in second quarter, 2018 due largely to the enhanced effective use of automation, a greater effort in stamping out leakages due to corruption, and the proliferation of electronic transactions in the economy.
After deducting total refunds of $55,19 million for the quarter, net collections stood at $1,058 billion, which translates, to 2,74 percent above the expected $1,029 billion. Refunds for the quarter consisted of VAT Refunds ($54,25 million), Customs Duty Refunds ($0,139 million) as well as Rummage and other refunds ($0,80 million).
Net revenue collections therefore, improved by 27,97 percent from the $826,63 million that was realised during the first quarter of 2017. Major contributors to revenue were Excise Duty (21 percent), Net VAT on Local Sales (19 percent) and Individuals (18 percent).
One can also be forgiven to postulate that the rising threat of inflation in the economy has certainly had a positive spin on government tax revenues, particularly VAT, and perhaps Minister Chinamasa will intend to ride out his budget deficits.
Tax revenues are projected to go up by 17 percent from $3,688 billion projected for 2017 to $4,306 billion in 2018 driven largely by grown in taxes on goods and services, i.e VAT. This suggests the minister knows very well that in the absence of increased sales volumes, which are unlikely when prices are rising as fast as they are doing, prices will have to rise even faster.
This in my view will trigger an inflation spiral in the economy. As prices rise, volumes could likely fall, making businesses unwilling or even unable to invest into increasing capacity in the face of increasing costs. Wage demands will also increase in the economy, disincentivising companies from taking on new hires. As inflation picks up, so will the demand for hedge tools, such as foreign currency.
In short, rapidly rising inflation will be bad for business and confidence during 2018 and beyond!!! I conclude that if the inflation risk is no t dealt with in practical terms, it will dramatically undermine the good intentions that government has. Will government master the political will to rein in inflation?
Civil service and parastatal reforms
During his budget presentation, we recall Minister Chinamasa making several bullish statements on Government’s desire to restructure the civil service. His wide-ranging efforts which targeted public enterprise reforms. The nagging question now is, has this reform agenda been followed through?
My take is not much has happened on this front largely due to some of the practicalities. Firstly, it is not easy to retire a civil servant, financially that is. Government would have to face a huge upfront cost in terms of lump sum pensions. It is an accepted reality that part of the reasons why some Government employees have served well beyond their retirement ages is because Government was trying to manage its cashflows.
The sudden mass retirement of civil servants would mean that a significant outlay has to be made from current resources to fund pension drawdowns. This money is still not available.
The minister said clearly that government intends to ensure that personnel being retired will have access to resources to start sustainable economic projects. These funds were not provided for in the 2018 budget and it is not surprising therefore that the reality is: no retrenchments so far.
On state enterprise reforms, we also foresaw some obvious challenges.
Most of these entities are bankrupt or heavily in debt and can ill afford severance packages. This especially so given the high salaries that these institutions pay. Given the close relationships that currently exist between the politics of the land and the “strategic” nature of some of the state owned enterprises, it was unlikely for any major shakeups to be effected before a critical election.
The SOEs made a whopping $270 million loss in 2017. It is conceivable that a large chunk of these losses comprise business costs totally unrelated to productivity, but to the pursuit of strategic political interests. It was expecting too much for the Government to demonstrate the political will to close off the leakages from SOEs, from which significant political mileage is being derived?
It therefore stands to be seen whether the minister will still follow through on his statements that public enterprises, including local authorities, should “ cease to exist just to pay salaries and wages, and incur financial deficits.”
The same restructuring agenda should be extended to those Government regulatory agencies that seemingly exist for the sole purpose of collecting revenues from business and the public, without visible services being offered.
The foreign currency and cash crisis has not yet been fully addressed.
While Minister Chinamasa’s budget set the right tone with his aim to improve the economic environment, there was no visible or deliberate effort to outline proposals aimed at improving foreign currency inflows.
The minister did not attend to the issues around cash shortages and bond notes, perhaps deferring the monetary authorities.
It remains clear to many that the monetary-based export incentive is inflationary and has contributed to the inflammation key economic variables such as the exchange rate, impacting the cost and pricing structures in the economy.
The government’s cosmetic proposals and cursory solutions to the problem, namely prioritising foreign currency allocations to producers of essential goods and services; exercising flexibility in the issuance of import licences to those with “free funds”, in order to avert shortages of essential goods not produced locally have not yielded any positive results.
Minister Chinamasa should have been more forceful as currency and cash problems will not simply go away by themselves. Parallel market rates will continue to rise unless we figure out a way return to the system where some 30 percent or so of transactions in the economy are in actual real US dollar notes, which are in continuous circulation.
There is urgent need for new and concrete proposals for restoring and maintaining the integrity of the multicurrency system by revising the export incentive scheme. This remains a major point of policy failure so far and a major economic obstacle going forward.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.
◆ The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.
