Sting in the tail

By The Tetrad Group

WHILE most analysts were still busy trying to come to grips with the somewhat dodgy figures in Tuesday’s mid-term fiscal policy review, the Central Statistical Office (CSO) dropped an inf

lation bombshell behind them just a day later.

If the Finance minister had any inkling of what was in store he certainly gave little or no hint of it in his statement, citing only the June figure of 164,3% and concluding with a repetition of his view that “inflation remains a major obstacle to the realisation of the country’s full productive potential”.

After the CSO’s revelation that the July figure leapt to 254,8%, with a month-on-month rise of 47,1%, 13,5% percentage points above the previous record monthly increase of November 2003, all that can be said is that hardly anyone would dare contradict the minister’s sentiments in this respect.

However, projections in the review did not appear to take into account a year-on-year rate of inflation at the beginning of the second half of the year of 90,5 percentage points, or 55%, above that at the end of the first half.

There will be some really serious discrepancies to account for when the budget for 2005 as a whole comes to be compiled towards the end of the current calendar year.

Even if the mid-term figures can be accepted as a half reliable pointer to the likely outturn to the overall budgetary outcome for the year, which looks unlikely, it is clear that the resurgence of inflationary pressures are but one of several major problems impeding the realisation of the economy’s productive potential.

A major stimulant to the spiralling prices is undoubtedly the fall in domestic production. Although the minister still clings to the hope that there will be positive, albeit lower than forecast growth in GDP in 2005, all the available evidence points to yet another year of significant economic contraction.

This is likely to take real national output down to nearly half what it was six years ago. One reason for this downward trend is the inability of producers to access more than a small fraction of the foreign exchange needed to sustain output. The auction figures show that just over 7% of bids have been met since the end of June compared with 27% in the corresponding period last year. Output must be falling across the economy, yet supplementary estimates provide increased public sector spending of $3,4 trillion although the minister admitted that in the absence of foreign funding the widening budget deficit had to be financed entirely from the domestic market.

With falling real output and rising expenditure the budget deficit for the first half of this year was put at $5,7 trillion compared with the original estimate of $4,5 trillion for the whole year. This was despite his refusal to provide any further funds to the line ministries this year and the implementation of certain measures to increase revenue. The after shock on output, income and employment is certain to be felt increasingly over the next few months.

The reduction in revenues is more a reflection of declining economic activity rather than failure on the part of Zimra. Increasing VAT and surtaxes is counterproductive and will not make up for the shortfall, nor will introducing new taxes.

More than likely these will actually cause a reduction of the total amount collected in the long-term. What is needed is a conducive environment for doing business such that companies are profitable (more corporate tax), workers are adequately remunerated (more PAYE), and thus spend more which means more VAT.

Of more serious implication to the financial sector, particularly the stock market, is the introduction of a 10% withholding tax on the sale of marketable securities. At the moment every trade attracts an additional 4% cost to both the seller and the buyer, split evenly between the government and the stockbroker. From September 1, on the sale of securities the government will get 12% (2% stamp duty plus 10% withholding tax) and the broker 2%; makes a lot of sense doesn’t it?

Whilst working for the development of one’s country is what many are expected to do, the above scenario means Zimbabwe probably scores another first by being the only country in which the government earns more on a financial transaction than the agent or intermediary. The logic has left many so astounded that there hasn’t been any trading on the stock market in the past two days.

The other imponderable was the new directive on the insurance sector and pension funds to calculate the prescribed asset ratios of 25% for short-term insurance companies, 30% for long-term insurers and 35% for pension funds at market value, which in any case changes almost daily.

In essence, what this implies is that by September 30, most pension funds would need to have liquidated at least a third of their assets, which are not prescribed, mainly shares and properties.

The insurance and pension fund sectors are the main players in both the stock and property market, meaning that there will be no buyers for the properties and shares, unless of course if foreigners seize the opportunity to get these assets at basement bottom prices – unlikely in current circumstances.

This again will be contrary to the spirit of the statement which seeks to preserve the country’s sovereignty by directing that all foreign investment will be through joint ventures, in which foreigners will own 40% and locals 60%. Thus for a US$100 million project (Zesa coal project for example) the foreigner will inject US$40 million and the local partner will weigh in with US$60 million, in a country as short of foreign currency as we are?

This comes in the wake of local consortia, even a state institution like the Zimbabwe Investment Trust, failing to raise funding for 15% of Zimplats and Mimosa. Make sense of it if you can!