The overdue 2014 Mid-Year Fiscal Policy Review Statement – ‟Towards an Empowered Society and a Growing Economy” – was finally presented to Parliament on Thursday, September 11, 2014 by the Minister of Finance and Economic Development, Honourable Patrick Chinamasa.
The Statement provides a gloomy picture of the deepening economic situation in the country as reflected in the on-going liquidity crunch.
The projected rate of growth of the mining sector, which had driven the economic rebound since 2009 was revised downwards from the initial 10,7% to -1,9% for 2014 due mainly to weak international mineral prices, frequent power outages, obsolete equipment and inadequate funding for recapitalisation.
Projections are that mineral prices which eased during the second quarter of 2014 will maintain their downward trend to year end due to weakening global demand and improved supply.
There is no respite for the de-industrialisation process that has characterised the economy since the 1990s owing to persistent challenges arising from antiquated and obsolete machinery, influx of imports, high cost of borrowing and weak demand associated with the prevailing liquidity constraints.
Weak domestic demand continues to be reflected by deflationary trends in prices, with annual inflation decelerating from 0,4% in January to -0,5%, -0,9%, -0,3%, -0,2% and -0,1% in February, March April, May and June, respectively, and is projected to average about 0,02% in 2014.
As a result of weak commodity prices, the external sector continues to be depressed, with total exports of US$1,2 billion during the period January to June 2014, 20% lower than the US$1,5 billion of the corresponding period in 2013.
The mining sector maintains its dominant position, accounting for 52% of total exports, followed by agriculture (including tobacco and horticulture) at 21%, manufacturing at 13%, services (including transport and tourism) at 11% and others at 3%.
During this first half-year period, exports to South Africa continue to dominate, accounting for 62%, followed by Mozambique (22%), Belgium (5%) and Zambia (4%).
While total imports during the first half of the year at US$3 billion are 23,1% lower than the corresponding level for 2013 of US$3,9 billion, they are still too high, especially relative to exports.
Owing to a slowdown in imports, the trade balance of US$1,8 billion recorded for the period January–June 2014 is lower than the US$2,4 billion of the same period in 2013.
Much of the imports are consumption goods, with food, tobacco and beverages accounting for 16% of all imports, yet these commodities can be produced locally.
South Africa is the main source of imports at 42%, followed by Singapore at 18%, China at 5%, and United Arab Emirates (3%).
With an unsustainable external debt overhang of US$8,8 billion as at end June 2014, Zimbabwe is in debt distress, with the country struggling to meet debt servicing obligations and in the process accumulating external payment arrears since 2000.
Of this external debt stock, public and publicly guaranteed debt stands at US$6,9 billion, 51% of GDP.
The proportion of the external debt that is being fully serviced is the private sector debt, which amounts to US$1,9 billion.
Of the US$6,9 billion public debt, 79,7% (US$5,5 billion) are arrears, with the remaining 20,3% constituting penalty interest and other charges.
It is projected that public and publicly guaranteed external debt will further increase to US$7,2 billion by December 2014.
While total banking sector deposits increased by 4,9% from US$4,73 billion in December 2013 to US$4,96 billion as at end June 2014, however, the bulk of the deposits are short term and transitory in nature.
Even so, the challenge relates to non-performing loans (NPLs), which increased from 15,9% of total credit in the banking sector in December 2013 to 18,5% in June 2014.
To deal with this threat, the Monetary Policy Statement of August 2014 announced the setting up of a Special Purpose Vehicle, the Zimbabwe Asset Management Corporation, whose mandate is to buy NPLs from banks on commercial terms.
The fiscal and monetary policy statements may well contradict each other. For instance, whilst the exchange control and the ZSE set foreign investor participation in local entities at between 40-100%, the Zimbabwe Investment Authority (Zia) and Indigenisation Acts provide a threshold of 49%.
Such fragmented pieces of legislation create administrative challenges, and send conflicting information to potential investors, and hence the need to synchronise them and establish an investor-friendly environment.
As a result of these contradictions, Zimbabwe only attracted foreign investments worth a paltry US$400 million in 2013, compared to US$1.7 billion for Zambia and about US$5,9 billion for Mozambique.
In terms of public finances, and in particular revenues, the mid-term fiscal policy review notes that the first half of the year was characterised by revenue under-performance.
Revenue collected during the period January-June 2014 of US$1.735 billion, fell short of the target of US$1,847 billion by 6,1% (US$112 million).
The revenues also fell short of the level of US$1,827 billion collected during the corresponding period in 2013.
Tax revenue contributed US$1,629 billion (93,9%), while non-tax revenue accounted for US$106 million (6,1%).
The breakdown of revenues by source suggest that the single largest source is value added tax (26%), followed by individual income tax (25%), excise duty (14%), corporate income tax (10%), customs duty (8%), other taxes (7%), non-tax revenue (6%), and mineral royalties (4%).
Tellingly, while revenue heads dependent on consumption of taxable commodities, such as value added tax, excise and customs duty under-performed by US$106,7 million, US$56 million and US$19 million, respectively, corporate tax fell short of the target by US$17,7 million, while mineral royalty payments had a negative variance of US$10,8 million; Pay as You Earn (Paye) — income tax on individuals — exceeded the target by US$83,5 million.
Critically, the Zimbabwe Revenue Authority resorted to garnishing orders among other measures to recover unremitted tax from the private and public sector, broadening the net to include those previously not covered, including the informal economy.
While revenues underperformed during the first half of 2014, the same cannot be said of expenditures (including loan repayments), which amounted to US$1,953 billion, against a target of US$1,848 billion during the same period.
The overspending was mainly on account of additional employment costs and loan repayments.
While the targeted breakdown of expenditures was such that 72,8% was earmarked for employments costs, 14,9% for operations, 11,9% for capital expenditure and 0,4% for interest, the outturn was 76,1% (employment costs), 7,5% (operations), 6,2% (capital expenditure), 0,9% (interest) and an unbudgeted for 9,2% for loan repayments.
Clearly, employment costs did not only increase further, but severely constrained allocations for operations and capital expenditure.
The revised projected spending on employment costs has been increased to around US$3,2 billion by year end, as opposed to the Budget estimate of US$2,998 billion. Cumulative expenditures on operations and maintenance for the period January-June 2014 amounted to US$147,3 million, against planned expenditures of US$236,2 million.
Whereas the targeted capital expenditure for the first half of 2014 was set at US$185,8 million, the actual outturn was US$121,3 million. For that, government still owes contractors US$146 million for work done as at June 2014.
As the mid-term fiscal policy statement acknowledges, failure to pay outstanding obligations undermines the capacity of the contractors to perform additional works, and may result in some being sued by creditors.
This expenditure mix is not only unsustainable, but runs in the face of the conditions of the staff monitored programme signed with the IMF in June 2013 and the targets announced in the 2014 budget statement.
The overrun of US$75,2 million on employment costs was due to the review of salaries effective January and implemented in April 2014 as government sought to appease the restive civil servants that it had promised PDL-linked wages during the 2013 election campaign.
Furthermore, overruns in expenditures during the first half period of 2014 were also on account of payments of US$11,9 million for loan repayment defaults by the following:
Ziscosteel (US$3,9 million)
Industrial Development Corporation (US$2,2 million);
Farmers’ World (US$5,9 million) which had been guaranteed by government.
Public enterprises are also singled out as their persistent under-performance and deficits remain “…the albatross around the neck of the fiscus.”
This underperformance is attributed to “…weak corporate governance systems and resistance to reform proposals by management.”
The statement observes that there are even attempts to utilise public pension contributions under Psmas to settle accumulated Zimra tax obligations of individual members of management and their boards.
The challenges bedevilling public enterprises are identified to include;
Unsustainable salaries, allowances and benefits for board members, chief executives and other top managers at the expense of service delivery;
Weak oversight on public entities under line ministries’ purview;
Absence of boards to give direction to a public entity, with some operating this way for long periods;
Corrupt practices through diversion of resources, interference on recruitment, selection, staffing and firing of employees;
Failure to recover debts from customers which has undermined efforts to raise working capital and payment of creditors.
The call is made, as in past budgets, to implement sustainable and practical strategies to turn-around the fortunes of such entities and wean them from recourse to the fiscus.
Given then that the underperformance of public enterprises has been highlighted ever-since the Esap period, without any resolution, it would appear that there is no political will to address this problem.
Public enterprises have also been centres of rent-seeking and patronage, hence the lack of progress in addressing well known challenges.
In view of the slowdown in GDP growth and the associated reduction in revenue collections, depressed exports and high imports, and the liquidity crisis experienced during the first half of the year, the 2014 Budget macroeconomic framework had to be adjusted to the new realities.
GDP growth for 2014 was therefore revised downwards from 6,1% to 3,1%, taking into consideration the under-performance of mining and manufacturing.
The budget review was also necessitated by the need to raise additional revenue to cover emergent demands estimated at around US$951,3 million.
In essence, the mid-term fiscal policy review is about mobilising additional resources in order to meet the planned and additional expenditures for 2014, implying the most important aspect of the review are the revenue measures adopted. While the statement also highlights the objective of putting in place measures to invigorate domestic industry, these remain marginal and of no real consequence as they do not deal with the most binding constraints afflicting industry, which include working capital constraints, low local demand, competition from imports, antiquated machinery and machine breakdowns, power and water shortages, shortages of raw materials and high cost of doing business.
The raft of revenue measures proposed by government in the mid-term fiscal policy review, and in particular the excise duties on fuel and telecommunications airtime (voice and data), as well as the customs duty of handsets, are retrogressive, and anti-poor as they increase the tax burden on the already overtaxed Zimbabweans.
It is an established fact that such indirect taxes are regressive in that they are indiscriminate, universally applying to the rich and the poor, the haves and have-nots.
Moreover, the excise duty on fuel has a ripple effect on the whole pricing structure and system given the transportation of virtually all commodities.
The challenge is also that the formal sector of the economy has collapsed, with 84% of all jobs informalised and 77% of the employed persons in Zimbabwe earning gross monthly primary incomes of less than US$350 compared to the Poverty Datum Line (PDL) of US$514,24 for a family of five in 2011, resulting in households selling financial assets more than they were buying them (dissaving) to fund current expenditures since incomes fell short of current consumption expenditures.
Yet government is failing to deal with areas of revenue leakages, especially with respect to diamonds, an area that has been raised in all budget statements since 2009, and yet no action is taken to address this area of resource capture and rent-seeking.
The Commissioner General of Zimra, Gershem Pasi recently bemoaned the lack of transparency and accountability around areas of decentralised revenue collection with respect to revenues from police road blocks, Zinara tollgate fees and the Registrar-General’s office.
He was widely quoted in the official press advising government to address this splintered approach to revenue collection that leaves the consolidated revenue fund short-changed.
While the easy target is to raise taxes, there is no political will to deal with expenditures, especially to reprioritise and enhance their efficiencies.
The focus on raising taxes without enhancing productive capacity and productivity amounts to nothing short of milking the cow without feeding it, especially given the regressive nature of indirect taxes.
Zimbabwe continues with its unsustainable strategy that is tantamount to “majoring on minors and minoring on majors” as political expediency continues to take its toll on the economy.
An abridged ZCTU analysis on the mid-term fiscal policy review.
Eric Bloch, the regular columnist for this page is not feeling well. Therefore he could not provide us with material. We sincerely apologise for the inconvenience caused. — Editor.