THE year 2013 has not been a stroll in the park for households, corporates and the government. The first quarter of the year saw the Confederation of Zimbabwe Industries (CZI) disclosing that capacity utilisation dropped to 40% from 47% in the last quarter of 2012.
Report by Victor Makanda
Financials released for the year-ended December 31 2012, which showed declining profitability, also cemented the fact that the economy is depressed.
Government revenues in the first quarter of 2013 underperformed at US$765 million compared to the targeted US$825,3 million. The trade deficit in the same period stood at US$1,06 billion due to higher imports and low export earnings.
Households were not spared as month-on-month inflationary pressures were witnessed after the March 9 excise duty hike on fuel. Month-on-month inflation stood at 0,21% in March compared to 0,07% at the beginning of the year –– a two-fold increase.
Furthermore, the Ministry of Finance (MoF) even hinted during the March 2013 state of the economy report that the 5% GDP growth projection might not be achieved.
It remains to be seen if this is a new trend for government missing its targets after achieving a 4.4% growth in 2012 compared with the anticipated 9.4%. This is not a good way to begin the year.
In such trying times, government is expected to revive the economy through a number of policy options from fiscal and monetary policy tools.
Not much can be done on the monetary policy front as Zimbabwe has no control over the currencies it uses. Periods of recessions and depressions are cyclical events which even the United States, the world’s largest economy, has witnessed before. The game changer under such circumstances will be the way in which the government formulates its policies.
For instance, over the past five years the US Federal Reserve has been injecting money in the economy so as to stimulate growth post the global financial crisis of 2007-2008. Unfortunately, the same cannot be said locally as the MoF has instituted unfavourable policies for business over the past three months that not only affect the corporate world but individuals as well.This is in a bid to raise money for the government.
In its state of the economy report on March 9 2013, government hiked excise duty on petrol and diesel by 20% and 25% respectively, all in the name of raising funds for the referendum and elections. In the week ending May 3, the MoF was quoted saying “…the duty raise on March 9 will only raise US$50 million by the end of the year; it is meaningless because we require the money now.”
Election funding is necessary but policymakers should also consider the adverse impact on the consumer and the business world. While US$50 million may be a drop in the ocean when focusing on elections, the impact of the tax hike on consumers and corporates is huge.
Furthermore, on the same day, government announced the issuance of 365-day Treasury Bills worth US$20 million apiece to Nssa and Old Mutual for the same purpose of funding elections.
The issue was successful, with the MoF in its publication for the month of March announcing it was mulling a similar initiative to be passed on to other stakeholders. Delta Corporation and other corporates under the auspices of CZI were mentioned. Generally, government uses moral suasion in order for corporates to support such issues.
Forced support on such issues may scare away actual and potential investors.
In addition, the combined US$40 million from Nssa and Old Mutual crowded-out private sector investments and dried up the already dire financial system, something the MoF admitted.
As if that was not enough, telecommunication licence fees for fixed and mobile operators were hiked to more than US$100 million. The government will from June 30 2013, through the Ministry of Transport, Communications and Infrastructure Development, issue new 15-year licences under the Converged Licensing Framework at a fee of US$180 million.
Raising licence fees should be done by government as part of its regulatory role rather than for the purposes of raising election funding. For example, the Reserve Bank of Zimbabwe’s 2012 hike in the minimum capital requirements for commercial banks from US$12,5 million to US$100 million was meant to foster financial stability in the system.
Such a move does not entirely frighten investors compared with raising licence fees for the sole purpose of funding political events.
Last week press reports intimated the MoF might soon raise mining royalties to US$132 million for elections. The rationale for the introduction of mining royalties was premised on the government no longer opting to take the debt option from corporates.
For a predominantly commodity-based economy as Zimbabwe, hiking fees may reduce minerals output, which together with the current soft commodity prices reduces exports earnings and mining sector growth.
Business interests and political interest normally do not mix, as those in office usually push for policies that benefit the masses at the expense of business.
The benefit to the masses will only be temporary as eventually, when companies suffer, so do the masses and the economy at large. Policymakers are normally encouraged to focus on formulating policies that result in business growth and profitability.
Such policies may include tax holidays and tax cuts, just to name a few. Tax hikes ideally yield positive results in periods of economic expansion compared to the stagflation that the economy is experiencing at the moment.
The MoF can take a cue from the supply-side policies by the 40th US President Ronald Reagan dubbed “Reaganomics” where he said; “government’s view of the economy could be summed up in a few short phrases –– if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”
Government should realise it is difficult, if not impossible, to fund its operations purely from taxes. There is need to mend relations with the international community. Getting funding from other countries is also a temporary solution.
Ultimately, there is need to fix the economy so that the tax base grows and government can fund its spending. Such moves will see government not salivating on the few hard-earned dollars that corporates are struggling to make.