Weak economic recovery means it is becoming increasingly difficult for the government to make its books balance.
Confronted with protracted illiquidity, weak aggregate demand and waning tax revenues, Zimbabwe’s fiscal framework continues to show signs of strain.
As expected, and in line with the strain, Finance minister Patrick Chinamasa last week revised downwards the country’s economic growth rates when he presented the mid-term fiscal policy statement.
National treasury now expects the economy to grow by 3,1% this year compared with 6,1% initially projected. Underperformance in the mining and manufacturing sectors was given as the major reason for the downward revision.
Consequently, government revenues are now expected to be 7% lower, at US$3,85 billion, from a previous target of US$4,12 billion.
The current account deficit due to soft commodity prices which lowered export proceeds is now expected to widen by 42% from US$2,47 billion to US$3,51 billion.
The GDP downgrade, lower revenues, ballooning trade deficit, debt distress, among other indicators, point to fiscal slippage.
Against this background, the Chinamasa dipped heavily into his fiscal tools and made various tax hikes, both in excise duty on local products and customs duty on imports, primarily aimed at boosting revenues rather than stimulating sustainable growth.
Furthermore, they were aimed at curbing the influx of imports in line with his frequent quotations in the public media blasting the “import mania” of the local populace particularly for consumptive goods rather than capital goods.
Whilst revenue boosting measures may be significant in oiling government operations already bloated by a huge wage bill, will they translate into real economic recovery in the prevailing environment?
Does Zimbabwe need protectionist measures as a way of reviving local industry especially the customs duty hike on motor vehicles? Such fundamental areas left more questions than answers from the 145 paged mid-term Fiscal policy statement.
In an environment where aggregate demand is weakening, there appears to be an increasing need to concentrate on measures that stimulate economic activity rather than restraining it. The mid-term policy by the National Treasury from this perspective was short term in nature as it did not come up with sustainable solutions to addressing this area. Key focus must be on reviving strategic sectors in the economy as a way of improving national output.
One possible way is strengthening the ability of the government to unlock long-term affordable capital for these sectors. This can be achieved by the government coming up with clear investor friendly policies whose underlying objective is that of encouraging and fostering property rights.
As long as this is not tackled, the recovery in the economy may take longer than expected and this may result even in the revised 3,1% target proving unattainable. If policymakers grasp this concept only then can Zimbabwe attract some of the foreign direct investments inflows which are finding their way into Zambia, Mozambique, Botswana, just to name a few.
In addition, some of the measures, such as the excise duty hike on fuel, may only squeeze the consumer and corporates leading to an overall reduction in revenue.
Consumption by households and investments by corporates are critical pieces in growing national output. Yet the increase in excise duty on fuel may adversely fuel cost-push inflation in an environment characterized by company closures, an increase in unemployment and static and/or declining disposable incomes.
Cost push inflation will result in higher prices to consumers thus reducing their consumption. This has for the past months seen most consumers now preferring basics ahead of luxuries. For businesses this increases their cost of production and may lead to consumers resorting even more to imported goods. Hence further reduction in demand and profitability.
There is thus a need for policymakers to find sustainable ways of reviving demand which will ultimately lead to an increase in job creation, increased investment and profits ultimately increasing money in government coffers.
Some of the measures include subsidies, tax exemptions and urging formalisation of businesses for corporates whilst for individuals’ tax cuts and raising the tax free threshold may provide a good starting point. Nonetheless, with the rate at which government coffers are dwindling, this may possibly be a route that the policymakers may not want to pursue.
With respect to curbing imports into the economy, government may need to first address the critical issues relating to capacitating local industry.
Most of the recently proposed measures were myopic and a scapegoat for simply raising revenues rather than curbing imports.
Addressing local production boils down to the same point of capacitating them through affordably priced finance. This will help in breathing life into capacity utilisation for most sectors and also for harnessing new technology rather than relying on antiquated equipment. Such measures are more appropriate especially in the motor industry where capacity utilisation was stated to be at 1%.
Simply hiking duty will not deter locals in their vehicles purchases as locally assembled vehicles have always remained relatively expensive even when a 100% duty hike is factored in. This scenario is not only true for the motor industry but for most sectors as Zimbabwe has lost its edge against regional peers and now regarded as a high cost producer for most products.
Overall, there is a greater need for the authorities to take valiant steps in addressing key anomalies in the economy. One would have expected the minister to focus on correcting the liquidity shortage rather than focussing on revenues measures which only impact on recurrent expenditure and neglect capital formation.
Reducing the government workforce and ridiculously high ministerial perks may be some of the short term appropriate measures to consider.
The authorities may also need to consider the importance of households in stimulating economic activity and by so doing avoid the need to hike fuel and voice and data airtime when consumers are already squeezed.
Assuming nothing changes by year end, then all economic agents may need to brace for further revenue boosting measures which in the long run will only push the economy further into depression.