Eric Bloch: Biti’s Unenviable Task

WHILST congratulations are justly due to Tendai Biti on his appointment to one of Zimbabwe’s most important ministerial posts, he is also entitled to commiserations and intense support.]

With the Zimbabwean economy in an extremely distraught state, and a bankrupt fiscus, the task confronting him is a most unenviable one.

The population is filled with hopes and expectations that the new “inclusive” government in general, and the Minister of Finance and his colleagues in economically-related ministerial posts in particular, will rapidly lead Zimbabwe out of it’s economic morass, vigorously guide and steer Zimbabwe along a path of economic recovery, and restore wellbeing for all.

And yet, doing so will not be easy for them, for the depths to which the economy has descended are immense.

Much determination and innovativeness, and willingness to effect changes to previously destructive policies, will be prerequisites for economic transformation.

It is widely rumoured that one of Biti’s first actions will be to present a revised 2009 National Budget to parliament.

Although the Budget presented by then Acting Minister of Finance, Patrick Chinamasa on January 29 had some very positive elements, equally there were many facets which were unrealistic and unattainable, and would be constraints upon the desperately needed economic recovery.

In addition, some very necessary policies and actions were glaringly absent from that Budget.

The appointment of Biti affords the opportunity to make essential changes to that Budget.

In formulating a revised Budget, it is of utmost importance that the minister found it upon realities, and not wishful thinking.

One of the grievous defects of the recently tabled Budget was the assumption that the Zimbabwean economy will enjoy a 2% real growth in 2009, and that assumption provided the foundation for projections of fiscal inflows.

But the prospects of such growth are minimal. Estimates place the contraction of the economy in 2008 at 13-15%. Shrinkage in 2009 will not be as horrific, but to envisage a transition from such gargantuan negative growth to positive growth is illusory.

This is especially so when consideration is given to the very poor outturn to the 2008/9 agricultural season, to the fact the manufacturing output has contracted from 75% of productive capacity in 2002 to less than 10% in 2008.

Many manufacturing entities have not yet resumed production in 2009, and numerous mines have either suspended production, or considerably reduced their output.

These circumstances must mean that government’s revenues in 2009 will be less than projected. If there is to be any possibility whatsoever (as unlikely is that is) of achieving the projected “balanced Budget”, Minister Biti is going to have to effect some major cuts in governmental spending.

The minister also needs to revise some of the taxation measures announced in the 2009 Budget, including:

The waiver of customs duties on essential basic commodities (such as maize meal, sugar and cooking oil), granted to June 30, needs to be extended until year-end.

On the one hand, there is no prospect of any substantive increase in domestic production of such commodities until 2010 and, on the other hand, the 90% of the population struggling to survive below the Poverty Datum Line (PDL) will not experience relief from that struggle within the next four months.

Whilst it was very commendable that Acting Finance Minister Chinamasa wished to protect Zimbabwean industry from unequal import competition, the modification of duty rates was far too broad and wide-ranging, impacting adversely upon many non-luxury, essential products not manufactured in Zimbabwe.

Concurrently, adequate protection was not accorded many other Zimbabwean produced goods, which continue to face inequitable price competition from imported products. A comprehensive, constructive review of customs tariffs and duties is very necessary.

Insofar as income tax is concerned, it was most regrettable that the 2009 Budget failed to align tax rates, thresholds and bands with those prevailing elsewhere in the region.

Zimbabwe has suffered an intense brain drain, crippling commerce and industry and all other sectors of the economy. Many factors have caused, and continue to cause, that brain drain, which is ongoing, but they are considerably exacerbated and reinforced by the magnitude of Zimbabwean taxation.

It is also unjust that lesser income tax will be payable on remuneration received in foreign currency than as applies to remuneration receivable in Zimbabwean currency.

Why should employees fortunate enough to be paid in foreign currency be additionally beneficiated by lesser taxes?

This is devoid of equity, and the tax bands and rates applicable to Zimbabwean currency remuneration should be synchronised with those applicable to foreign currency remuneration.

There is much merit in government seeking to accelerate its revenue receipts, but it has “gone overboard” in requiring businesses to pay VAT by the third day of the month, and by further provisional payments on the 15th day of the month.

The former date does not practically allow adequate time for enterprises to complete their monthly financial records (in fact they would still be awaiting bank statements and supplier invoices and statements), enabling them to render timeously and correctly their VAT returns and payments.

Moreover, any business effecting sales on credit terms would not yet have received payment from customers.

Thus, the businesses will have to employ yet further working capital, usually at great cost, in order to fund the monthly and provisional VAT payments. 

Prescription for monthly payment of VAT by the 15th day of each month would have been more realistic.
Bearing in mind the massive impacts of hyperinflation, and the progressive elimination of 25 zeros from Zimbabwean currency, the 2009 Budget would have been, and still could be, an opportune time for declaration of a tax amnesty for past tax offences.

This would markedly reduce the burden upon Zimra of pursuit of past tax compliance, and would be a tremendous motivator for increased future compliance, with substantial fiscal benefits.

Tragically lacking from the 2009 Budget were meaningful investment and export incentives, save for the tourism sector. Substantial, constructive incentives would be very considerable stimuli for the economy and for its recovery, whilst being of no real cost to the fiscus. 

Minister Biti now has the opportunity to remedy this glaring omission.

Another major omission was the absence of any provision to honour compensation debts in terms of Bilateral Investment Protection Agreements. If Zimbabwe is to attract the extensive investment that would be a key catalyst of economic recovery, it must be seen to respect and comply with agreements it has entered into.

Clearly there are other matters which will also require Biti’s attention, including drastic reduction of government expenditure, accelerated privatisation of parastatals and concurrent rehabilitation of economic infrastructures, legislating effective Reserve Bank autonomy, and many other issues.

ERIC BLOCH

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