Eric Bloch Column

Fiscal policy review  another damp squib

By Eric Bloch

WITH the never-ending distress of the Zimbabwean economy, enduring and worsening for the greater part of the last nine years, few had any strong expectations th

at last week’s mid-term fiscal policy review would contain anything substantive to reverse the economic decline.


Nevertheless, hope allegedly never dies and despite the generally pessimistic lack of expectations, many still harboured some slight hope that the review would credibly herald some positive developments. That hope was not to be fulfilled.


At the outset of the 2006 mid-term fiscal policy review statement of the Minister of Finance, Dr Herbert Murerwa, to parliament on July 27, hopes and expectations were reinforced by a succinct, realistic recognition of the immense challenges confronting Zimbabwe and its economy.


The minister noted that the challenges included corruption, rising inflation, declining savings and investment, inadequate foreign exchange (affecting import capacity), erratic fuel supplies and interruptions to electricity supply.


In particular, he emphasised: “Inflation remains our biggest challenge — affecting savings and investment, undermining day-to-day business activity, as well as creating price instability in the conduct of ordinary transactions.


It has also eroded the purchasing power of our domestic currency, adversely affecting the livelihood of the ordinary household as standards of living fall and basic social services become unaffordable. Furthermore, high inflation is also affecting our export competitiveness and hence undermining our capacity to generate the much-needed foreign currency.”


Inevitably, the minister could not tabulate each and every challenge and some of the notable omissions from his recounting of the threats and constraints confronting the economy were the accelerating collapse of the infrastructure as a whole (he making reference only to the electricity supply impediments), the pronounced, almost nationwide poverty, the ongoing “brain drain” and consequential intensifying lack of skills availability, unsustainability of national debt, continued strained relationships with most of the international community and an almost total inability of the government that he serves to recognise and acknowledge unpalatable realities. (As evidenced, for example, only two days previously, by the president’s yet again contentions that Zimbabwe is the victim of “illegal sanctions” imposed by the European Union and the USA. As recorded, ad nauseum, the sanctions imposed are not economic in nature and not in breach of any law and, therefore, are not illegal!)


Although Murerwa was wholly correct insofar as the challenges that he did identify were concerned, it was nevertheless disturbing that he had clearly been provided some wholly outdated data, and it is impossible to formulate constructive policies if they are founded upon disinformation.


He tried to suggest that government was finally achieving substantial recovery in the agricultural sector. He projects growth of 23% in 2006 and, in part, founded his projection upon an expectation of an increase in production of maize from 750 000 tonnes in 2005 to 1,7 million tonnes in 2006.


Admittedly, that was the wishful thinking that emanated six months ago from the Minister of Agriculture, but within the agricultural sector it is well-known that there is not the remotest possibility of attaining that forecast.


In fact, even the Ministry of Agriculture has revised its projection, the recent estimates flowing from it and the Grain Marketing Board being in the range of 1,35 million tonnes.


Various international monitors concerned with the pre-empting crises of famine have projected that the commercial maize crop of 2006 will not exceed 1,05 million tonnes.


In light of the revised Ministry of Agriculture projections, a Ministry of Finance estimate of 1,75 million tonnes can only be a source of future embarrassment to that ministry.


In like context, Murerwa stated that the 2006 winter wheat crop is expected to yield about 220 000 tonnes against 135 000 tonnes in 2005.


But only three weeks ago the Ministry of Agriculture stated that in consequence of belated receipt of inputs, the crop was unlikely to exceed 165 000 tonnes, which is little more than a third of the national need!


The minister did note correctly the marked continuing decline in tobacco production but stated that “efforts to improve the preparations for this year’s tobacco crop have therefore been made”.


However, one essential issue has not been addressed. That is the ongoing instability within the agricultural sector.


When the president opened parliament last week, he stated: “Government will not hesitate to deal firmly with all cases of indiscipline on the farms” but, as yet, farm invasions continue.


The president also referred to “99-year leases to be issued in due course” and Murerwa spoke forcefully on this critical issue.


He said: “Farmers make meaningful investment where security of tenure is guaranteed. To further facilitate the participation of financial and other institutions in the funding of agriculture, government will shortly issue transferable 99-year leases.”


However, like statements have been made by numerous government spokesmen over the last two years without anything yet occurring. Moreover, drafts of 99-year leases that have come forth from government contain provisions enabling the state to peremptorily revoke leases.


If such provisions are contained in the leases, then the incorporation of transferability clauses will have no effect in providing collateral security to lenders, or in motivating investment by the farmers, for they will in practice have no security of tenure. In such event, all the expectation of agricultural upturn will prove naught but a mirage.


Thus, although the minister must be commended for unhesitatingly identifying some of the very many, major challenges which obstruct the path towards economic well-being, those challenges cannot be successfully overcome unless the other challenges are also realistically recognised and addressed — not only by the minister, but by the government as a whole.


As the track record of such recognition and action is abysmal, the mid-term fiscal policy review did not instil any confidence that that will now occur, and also could not, and did not, fuel any sense of reassurance that hopes of recovery will be fulfilled. In this respect, the review proved to be the expected damp squib.


But it was also a damp squid insofar as the proposed fiscal measures are concerned. It was inevitable that with the rampant hyperinflation that has prevailed in Zimbabwe since the 2006 budget was formulated in October/November 2005, actual expenditure will have exceeded budget, and a supplementary budget would be required to allow for not only that expenditure excess, but also increased expenditure during the remainder of 2006.


None can justifiably blame the minister for that. However, two factors of the mid-term fiscal proposal can only be considered to be highly disappointing.


The first is that the individual’s income tax threshold is raised from $7 million per month to only $20 million per month. With the poverty datum line (PDL), for a family of five at the end of July being at, or above $70 million, it would have been not only reasonable to assume, but also compassionate of government to have set the threshold at no less than $35 million (which assumes two equal income earners in each family).


The second is that although very obviously and unavoidably the minister has to generate additional revenue inflows, he is doing so in ways which will fuel inflation.


His fiscal measures include, from September 1, an increase in the Noczim Debt Redemption Levy from $110 per litre on diesel and petrol to $25 000 per litre.


At the same time the level of carbon tax will rise from $1 000 to $5 000 per litre.


These measures will have a sharply adverse impact upon inflation, for fuel is a cost component of every facet of economic activity. All enterprises will yet again have to increase prices to recover the added fuel costs whilst commuters will be faced once again with fare increases.


The alternatives to greater revenue generation by direct and indirect taxation include enhanced revenues as a result of more vibrant economic activity, but that requires constructive efforts by government, oft promised but yet to be seen, or the determined reduction of expenditures which this government is clearly unwilling to pursue, no matter how the Minister of Finance may commend such actions to his colleagues and the president.


The bottom line of the 2006 mid-term fiscal policy review is that it can in no manner aid economic recovery or alleviate the hardships of an impoverished populace.