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Eric Bloch Column

Budget intensifies economic woes

WHEN the Minister of Finance, Herbert Murerwa, presented his Mid-Term Fiscal Review and 2005 Supplementary Budget to Parliament last week, he did so in an environment of desperate hopes that he would be announcing substantive acti

ons to aid the long-talked about, but as yet mythical, economic turnaround.

The widespread poverty and economic distress, closure of businesses, massive shortages of essential commodities, hyperinflation and many other ills, have provoked a crisis of expectations. Those expectations centred upon the minister announcing measures that would be complementary to the monetary policies set out three weeks earlier by the governor of the Reserve Bank. They centred upon deep-seated anxieties that the fiscal policies, appropriately aligned with the monetary policies, would vigorously attack the pronounced inflation afflicting Zimbabwe, would dynamically incentivise investment, job creation and export growth, and would demonstrate a belated determination of government to pursue good economic governance.

At the commencement of his presentation, it appeared that the hopes of the populace were about to be fulfilled. The minister’s introductory remarks evidenced awareness of the troubled state of the Zimbabwean economy. He noted that: “Inflation, relative to that of our trading partners, is unacceptably high. Similarly unemployment also remains a major challenge, while foreign exchange constraints continue to undermine the full recovery of business activity.” Admittedly those words implied some, albeit inadequate, economic recovery, whereas the reality is that the economy is still in decline. Nevertheless, the minister at least recognised some of the major economic ills, and that was reinforced by his statement that economic turnaround “will require the consistent implementation of policies and measures to achieve macro-economic stability, coupled with concerted efforts in support of both domestic and foreign investment”.

Unfortunately, that reality of the troubled economic circumstance, and some of the very necessary actions to be pursued, dissipated almost immediately for, after his introductory comments, he then tried to review the current state of the economy. However, he did so without the realism of his opening comments. Acknowledging that the November, 2004 budget statements projection of economic growth of over 3,5% was not attainable, he revised it to a growth of under 2%. In the private sector almost all are agreed that the economy has been, and is continuously, contracting. The 2005 agricultural outturn has been abysmal, allegedly due to the drought but, in practice, due to inadequate planting as a result of the replacement of many productive farmers with unproductive squatters, as a result of insufficient availability of funding, as a result of widespread vandalism of irrigation systems and other essential farming infrastructure, and as a result of grossly belated availability of inputs.

Mining has been severely retarded, mainly due to unrealistic exchange rates in the first seven months of 2005, and manufacturing has been brought to its knees by rampant escalation of operating costs, unmatched by exchange rate movement. All those factors must result in negative growth of at least 2% in 2005, unless there is an almost immediate, massive economic turnaround.

Regrettably, there is very little if anything, in the enunciated fiscal policies, and the budgetary proposals, to inspire any hope of that occurring. The minister very correctly noted the consequences of unchecked governmental expenditure trends. Disclosing that government had a deficit of $5,7 trillion in the first half of 2005, as against a budgeted deficit of $4,5 trillion for the entire year, he noted that a continuing higher than projected fiscal deficit would “not only undermine the inflation target, but also the financial resources available in support of the productive sectors and infrastructure development”. He supplemented this by claiming that: “Government has declared inflation as our number one enemy” and that, therefore, the budget “has to play its central role of ensuring that we fight and win the battle against inflation and support efforts being made to stabilise the economy”.

But despite this recognition of the very necessary, he proceeded to table budgetary proposals diametrically opposed to bringing down inflation and achieving economic stabilisation. The highly prejudiced proposals include not only increasing the Value Added Tax (VAT) rate by a sixth, from 15% to 17,5%, but also subjecting many products previously not subject to VAT to tax at that rate, including tea, butter, powdered and canned milk, fresh meat (other than beef), processed meats, and diverse fresh vegetables.

VAT applies to all, including the estimated then 9 million Zimbabweans who are already struggling to survive, at levels below the poverty datum line. Driven only by the perceived need to generate more revenues for the state, the minister intends to compound the destitution of the majority of the population by a substantial increase in the VAT rate, and a widening of the VAT net of products. So, not only are economic factors impacting adversely upon inflation, but the state is directly intensifying inflation with greater consumer taxation.

This disastrous impact upon the poor is to be compounded further through the imposition of a “presumptive tax” on commuter omnibuses. Those with a carrying capacity of 15 to 24 passengers, and taxi cabs, are to pay $6 million per quarter, whilst those who can carry 25 to 36 passengers will pay twice that amount, and those carrying greater numbers will pay $18 million per quarter. It is inevitable that transport operators will recover such taxes in the fares charged by them, resulting in yet another burden for the struggling populace.

The minister also announced that: “Arrangements are at an advanced stage to introduce tollgates on the country’s major highways, and in entries into the major cities, including the Harare-Gweru, Harare-Masvingo, Masvingo-Beitbridge, Harare-Mutare, Gweru-Bulawayo, Harare-Nyamapanda, Harare-Bin-
dura and Bulawayo-Victoria Falls Highways”. While this intent is commendable to the extent that is stated that the revenues will fund the “ongoing dualisation, road infrastructure maintenance and development”, it can only be acceptable if the toll payable will not apply to heavy duty vehicles conveying goods within Zimbabwe (other than those only transitting Zimbabwe to more distant destinations).

If the toll does apply to such vehicles, that addition to transportation costs will inevitably need to be recovered in the selling prices of the goods, thereby causing yet further inflation.

Expressing the incontrovertible fact that increased governmental expenditure and consequential borrowings are catalysts for inflation, the minister stated that “in view, of the limited financial capacity of the economy, additional expenditures can only be financed through rationalisation within the existing budget envelope” and that, therefore, he proposes to finance “additional expenditures from reallocation of funds from the various sub-heads of the 2005 budget”, over and above raising additional revenues. Notwithstanding that intent, he still expects government’s borrowings to increase by $1,6 trillion, which will be yet another inflationary trigger.

Despite all his recognition of the ravages of inflation, he has — with one minimal exception — “deferred review of tax thresholds and brackets to the 2006 budget. That one exception is raising the tax-free threshold for employed persons from $1 million to $1,5 million per month. Bearing in mind that the PDL for a family of five is now in excess of $5 million per month, this one concession is niggardly in the extreme. Even if both spouses in a family are gainfully employed, their combined tax thresholds will only be $3 million, which is very markedly less than the PDL.

The famed, fictional Robin Hood was admired for his redistribution from the rich to the poor, but the government of Zimbabwe’s fiscal policies and taxation measures result in the poor becoming poorer.

Furthermore, at variance to expressed intents of increasing the sources of revenues, the minister is motivating yet further “brain drain” from Zimbabwe by introducing provisions that recipients of part of remuneration in foreign currency will have to pay tax thereon in foreign currency. Many of the highly skilled have remained in Zimbabwe, despite the appalling economic environment, because of their receiving some foreign currency-based income. If that is now diluted, they will depart for environments more conducive to them. How is economic turnaround achieved without the requisite skills base?

Economic turnaround also requires a vibrant stock exchange to facilitate investment, but the taxation proposals include reinstatement of Capital Gains Tax (in the form of a withholding tax) on quoted securities. That, over and above inflation-driven economic decline, can only result in a far less virile stock exchange than heretofore.

So disastrous is the Supplementary Budget that parliamentarians should, irrespective of party, unhesitatingly reject it. With the constraints imposed upon him by the president and the cabinet, Minister Murerwa must have had very little room to manoeuvre, and one must sympathise with him for the impossible fiscal hurdles that confront him, but the message must be sent to government as a whole — the Supplementary Budget is an economic disaster.

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