Minister of Finance and Economic Development, Patrick Chinamasa presented his 2015 national budget last Thursday against a background of significantly weakening economic fundamentals,
severe company closures, an escalating debt overhang, depressed aggregate demand and growing levels of poverty. It also came against a backdrop of a widening current account deficit, slowdown in capacity utilisation, dwindling fiscal revenue flows, banking sector liquidity challenges and rising non-performing loans and widening stress conditions across most sectors. This has made his job an unenviable one.
As expected, Chinamasa bemoaned that the macroeconomic outlook remains very subdued due to a number of downside risks which include the likelihood of amid season dry spell, rising non-performing loans which may restrict increased lending and the effect of the remaining sanctions, the continued depreciation of the South African Rand against the US dollar and continued decline in international commodity prices which are likely to put pressure on the current account.
The economy has indeed reached a plateau in terms of growth and the falling growth in government revenues are good enough evidence to show that economic growth has indeed platued. The economy is stuck in an untenable low equilibrium position characterised by low capacity utilisation, low wages, low levels of employment and low investment rates, and this is evidently not sustainable.
Based on the 2015 GDP growth projection of 3,2%, revenues of US$4,1 billion are anticipated. This translates into about 28,1% of nominal GDP of US$14,594 billion. Expenditures of US$4,115 billion are accordingly targeted, giving a small deficit of US$15 million.
The most worrisome factor is that sub- Saharan Africa’s average GDP growth is almost double the expected growth of the Zimbabwean economy in 2015 suggesting that the country’s wheels of economic growth are lagging behind. One would have hoped that following several years of economic decimation, the economy would sustainably grow by margins of 7-8% to catch up.
The continued skewness of the budget towards recurrent expenditure is clearly not developmental and does not support future growth as it crowds out the capital outlays. In simple terms, the size of the government, which directly translates to the level of budgetary demands, is too big for the size of the economy. From the budget, it seems the fiscal authorities though they note this as a huge challenge, they seem not to have any other solution to it other than waiting for the economy to grow and subsequent revenue growth. This may be understood from the view point that the majority of civil servants are in education and health sectors, and it may not be appropriate to downsize those critical sectors. However, one wonders, how the country managed to survive with a US$1 billion budget in 2009, which makes us increasingly vulnerable with a US$4,1 billion budget barely six years later in an environment that is more or less deflationary. What we note is that as the government purse improved over the years, so did the expenditures on employment costs. One, therefore, wonders whether our real problem is revenue (budget size) or it is the failure to contain expenditure.
Total revenue collections to GDP stands at 28,1% and that makes Zimbabwe one of the most taxed countries in sub-Saharan Africa. Our budget size is almost neck to neck with the Zambian budget yet the Zambian economy is almost twice the size of the Zimbabwean economy. This may suggest that the Zimbabwean economy is more resilient in that regard.
However, unconfirmed statistics suggests that 50% of retail sales are on imported goods. Given that 80% of the budget is going towards employment costs, it is most likely true that the bulk of the budget paid to civil servants is being spent outside the country.Working markets should have generally about 70% of their consumer products on the shelves from the local producers and only 30% imported.
Emphasis should be on value addition and local production to create jobs rather than relying on cheap imports thereby creating jobs for other markets. This has been identified as a critical cluster in the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimAsset), which is good and commendable, like wise a vivid implementation path is critical if this is to succeed.
In order to reverse the industry collapse and job losses, the government is increasingly taking a protective approach, which may be commendable given the many years of industrial decimation and decline. However, protectionist policies should be viewed as a temporary remedy and should therefore be time bound in order to avoid harbouring industrial inefficiencies. The duties enacted are mostly for 12 months, a period too short for the policy to take effect. We are, therefore, likely to see a continued outcry from industry for protection in the 2016 national budget. Protection through duties should also be coupled with supply side support but that remains a problem since the capital budget is very small and also not generating any surpluses as a result the government is incapacitated to perform any quantitative easing. The government should instead put emphasis on reforms that will create the proper environment that enables the private sector to access credit.
Despite these tax relief measures which are commendable, Zimbabwe still remains one of the most taxed countries in sub-Saharan Africa (28% of GDP).
A progressive reduction of the tax burden is therefore critical in the successive fiscal policies. The other critical positive to note is the noble attempt to broaden the tax base by including tobacco farmers and also strengthening the administration of presumptive taxes on commuter omnibus operators. Everyone, whether big or small, formal or informal, has an obligation to contribute to the national revenues.
Though Chinamasa attempted to tackle some salient matters, the hard issues remained unaddressed. The 2012/13 Global Competitiveness Report of the World Economic Forum noted that: “Surprises, however, arise not from the rankings, but rather from the policy disconnect; specifically the unwillingness of policymakers to tackle the challenges identified, opting rather to focus on soft factors which do not necessarily add value in lifting competitiveness rankings.” This still holds today.
To unleash new momentum into this economy, fresh capital is required. Zimbabwe requires substantial capital flows to underpin economy wide recapitalisation, overhaul the antiquated machinery which are teeming in our factories, replace technologies of decades ago with new technologies and revamp our infrastructure.
This, therefore, suggests an urgent need for a national strategy to attract Foreign Direct Investment (FDI). Government and the private sector must jointly develop and execute the strategy in order to attract foreign investment in more conscious and directed efforts towards industries that have bigger multiplier effects on key aspects such as employment creation and foreign currency generation.
As such, the fiscal policy should have set the pace and basis of engaging the international investors in a more business friendly manner. This can only be demonstrated by serious doing business reforms and in particular dealing with the confusion surrounding the indigenisation drive.
Another critical factor which successive budget statement since time immemorial have not managed to seriously deal with is the review of the operations of parastatals to make them more efficient so as to reduce the burden of utility costs in the financing model of companies. The inefficiencies and resultant costliness of utilities are leading constraints particularly to the ailing industry.
The industry would have been better off if utilities were efficiently provided. Economies are made of the combined behaviours of their people and stakeholders. Notwithstanding the challenges our economy faces regarding inadequacies relating to our tangible economic enablers such energy shortages, constraints in the supply of clean water as well as generally failing critical infrastructure, investor confidence, though intangible, remain a key economic enabler which, if left unattended to, may render futile all our efforts towards restoring our economy to its former glory.
The minister should have spent time addressing those areas that have been at the centre of erosion of both local and foreign investor confidence, which developments have resulted in industry failing to attract fresh capital to replace currently obsolete equipment and machinery in order to improve productivity, capacity utilisation, competitiveness and indeed contribution to national revenue.
Local and foreign business people with interests in Zimbabwe, and even several well-known international publications, have attested to the fact that business confidence has been and remains the major factor constraining significant capital inflows into country in the form of FDI as well as portfolio flows.
Furthermore, chief among the factors negatively affecting investor confidence have been lack of policy clarity and transparency regarding such key economic issues as implementation of the indigenisation and economic empowerment laws especially in the sensitive banking sector, among others, absence of government decisiveness on the resolution of both the country’s domestic and international debt as well as the continued less than satisfactory record, at least in the eyes of the international community, regarding Zimbabwe’s adherence to the widely held virtues of upholding property rights and effectively enforcing commercial contracts. These remain key parameters. Though they are hard to address, they define the future of this economy and the destine of the generations to follow.
This article was written by Kipson Gundani, Chief Economist of the Zimbabwe National Chamber of Commerce.
The views expressed in this article are however entirely his and should not be associated with the ZNCC or any other organisation he is linked to.
These articles are coordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society (ZES). Email; Kadenge.firstname.lastname@example.org cell +263 772 382 852