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Biti faces herculean task

THE Minister of Finance Tendai Biti, in his imminent mid-year Budget review, is confronted by a most unenviable, near impossible task.  He was one of the key architects of the desperately needed economic turnaround that tentatively began in 2009. 

To no small extent it was government’s fiscal policies last year that slowly set the economy upon transformation from its decimated circumstance. 
To no small extent, Biti was the driver of those policies.  As a result, by the end of last year, Zimbabwe was no longer plagued by the hyperinflation that characterised 2008, and instead witnessed deflation.

 

The shortage of goods and commodities which had become the norm ceased, and instead Zimbabwe’s shops were filled with products.  Zimbabwe, which had become an international investment pariah, was transformed into a desired investment destination for many.

 

These were but a few of the characteristic of the economic metamorphosis, and minister Biti was a key contributor to the changes.

But then, tragically, the positive changes were not only put on hold, but were progressively reversed.  The endless wrangling within the so-called “inclusive government”, and failure to fully implement the global political agreement (GPA), the ongoing violent invasion of farms (not only unimpeded by the authorities, but encouraged by high-ranking ministers such as Didymus Mutasa, in contemptuous disregard for Zimbabwe’s courts), the foolhardy Indigenisation and Economic Empowerment legislation, and diverse other acts of omission and commission in various avenues of  government, grossly undermined the economic recovery.  Once again the economy contracted.  Yet again Zimbabwe became increasingly perceived as an undesirable investment destination, and desperately needed international lines of credit were withheld.

Against this background the unfortunate Minister of Finance has to deliver a mid-year Budget review, incorporating fiscal policies needed not only to address the state’s virtual bankruptcy, but also a return to the path of economic recovery.  The task is near-impossible, unless he can prevail upon his recalcitrant political “colleagues” to belatedly do the opposite of almost all that they have been doing.  However, some avenues are available to him which, although they cannot suffice to bring about the entirety of the necessary transformation, could at least assist such transformation.  These include:

Pressing for the long overdue privatisation, in whole or in part, of various parastatals to restore viability to their operations while relieving government of diverse fiscal commitments.  Zesa, TelOne, NRZ, Air Zimbabwe, Zisco and the CSC, amongst others, have no prospect of regaining viability, and of providing the effective service delivery that is a prerequisite of the economy, unless they have financial, technological and other inputs from strategic partners.  Zimbabwe has talked of such privatisation for much more than a decade, and it is time for talk to become action.

 

Stimulation of investment, which requires not only government’s political environment policy changes which must give substantive assurances of investment security, but also requires meaningful investment incentives.

 

These should include initial periods of tax exemption, inclusive of exemption for a specified period from witholding taxes on remittances of technical and management fees, royalties and dividends.  Giving such exemptions is without real cost to the fiscus for, if the investments are not made, then there would be nothing to be subjected to such taxes!  Concurrently, investors must be assured that they will not, subsequent to effecting the investments, be subjected to sudden further taxes or other inputs (such as the recurrent threats of vast increases in mining royalties, wholly unjustified when you consider the immense direct and indirect fiscal inflows emanating from mining, as well as enormous other economic benefits).

The tax threshold and tax bands applicable to individuals require realistic upward movement on the one hand in alignment with the Poverty Datum Line, and near essential living costs above that level, and on the other hand not to exceed those prevailing elsewhere in the region.  Taxation at, or below, regional levels is essential if the Zimbabwean brain drain is to be reversed, and if worker productivity is to be remotivated.

The minister needs to rationalise competition between local manufacture and imports by using import duties to ensure “a level playing field”, countering unrealistic export subsidies by competitor countries (especially some of those in the Far East, some giving subsidies as great as 180% of labour content of the exports).  Concurrently, fair export incentives, within the constraints of the General Agreement on Tariffs and Trade, should be accorded Zimbabwean exporters.

If Zimbabwe’s manufacturing sector is to be able to provide much-needed credit to wholesalers, and they to retailers and also retailers to customers, and if service providers are to be able to do likewise to all economic sectors, the prescribed payment of Value Added Tax (Vat) by the tenth day of each month must be revised. Businesses cannot afford to pay Vat before receiving payment from customers, and therefore cannot afford to extend credit to them, and yet such credit would stimulate economic activity, would help counter money market illiquidity, and assure increased industrial productivity.  Admittedly, government has urgent cash flow needs, but it is still better off receiving taxes later than for the economy to be constrained and yield lesser taxes.

Similarly, the current Quarterly Payment Date income tax requirements require revision, limiting payment obligations to actually generated taxable revenues.

The minister would also be well advised to legislate a tax amnesty for periods up to December 31 2008.  Having regard to the three currency redenominations, encompassing the slashing of 25 zeros, and the subsequent demonetisation of the Zimbabwe dollar, the efforts of the Zimbabwe Revenue Authority on pre-December 2008 tax investigations is an exercise in futility, whilst also impacting very negatively on  managerial resources needed to counter prevailing adverse economic circumstances.  The time expended by Zimra on such investigations could then be more constructively applied to ensuring current compliance.

Similarly, expedited resolution of taxation issues could be achieved if, as is the case in many other countries, Zimbabwe had a “small claims court” to deal with taxation disputes of limited magnitude.
Yet another issue that the minister needs to address constructively is the recapitilisation, and settlement of debts of the Reserve Bank of Zimbabwe, thereby restoring central bank credibility and efficacy of operations.

Indisputably, the minister has innumerable other critically important issues to address, and Zimbabwe must hope and pray that not only he, but government as a whole, will now take the necessary actions for Zimbabwe once again to set foot on the economic recovery path.

Eric Bloch

 

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