HomeAnalysis2020 budget hits, misses

2020 budget hits, misses

Victor Bhoroma..analyst

Zimbabwe’s 2020 National Budget was presented amid high expectations from the market on the urgent need to turn around the fortunes of the waning economy, restore incomes, and improve productivity and aggregate demand on the market.

The government expects the economy to recover swiftly from the -6,5% projected this year to 3% growth in 2020. Treasury pointed out that growth will be supported by better rainfall which will boost agriculture output by 5% and improve electricity generation at Kariba Power Station.

Treasury says growth will also be supported by improved macro-economic stability, recovery in aggregate demand, increased foreign currency availability and better business confidence. Tax and non-tax revenue collections are projected to be ZW$58,6 billion while expenditure is budgeted at ZW$63,6 billion, leaving a budget (fiscal) deficit of ZW$5 billion.

As has been the case since 2014, expenditure is set above the collectable tax revenues and the government has to rely on debt to fund its consumption. Treasury pointed out that the budgeted fiscal deficit is 1,5% of the anticipated gross domestic product (GDP), implying that the country’s GDP is projected to be around ZW$333,3 billion (about US$20,8 billion) in 2020. Treasury had earlier rebased GDP figures for 2018 from US$18 billion to US$25 billion.

Despite anticipating an increase of more than 300% in tax revenue collections for 2020 (Clearly buoyed by high inflation rate), the government expects inflation to be below 10% by the end of March 2020 and drop to 2% by December 2020.

Sizeable allocations in the budget went to education with the Primary and Secondary Education ministry getting ZW$8,5 billion, while Higher and Tertiary Education got ZW$2,2 billion. Health and Child Welfare received ZW$6,5 billion, Defence ZW$3,11 billion, Home Affairs received ZW$2,8 billion, Public Service ZW$2,4 billion and Agriculture ZW$1,9 billion. The government alluded to various challenges that hamper production in the local economy such as electricity and foreign currency shortages, droughts and high inflation rate which erodes incomes.

It would therefore be realistic for the government to predict an economic recovery based on addressing these challenges, which are causing the economic decline.

The budget struck a few right chords for the local economy and key among these is the review of the Intermediated Money Transfer (IMT) from 2% on all electronic transactions above ZW$20 to transactions above ZW$100. Corporate Income Tax has also been reduced from 25% to 24%, while the Value Added Tax (VAT) registration threshold has also been reviewed from ZW$60 000 to ZW$1 000 000 in light of the prevailing inflationary environment. Customs duty on alternative energy sources such as wind, solar and gas has been totally scrapped from 40% and this is expected to reduce electricity demand on the national grid while also promoting investment in renewable energy.

The tax-free threshold for labour has been reviewed upwards from ZW$700 to ZW$2 000 while all bonus payments below ZW$5 000 will be excluded from tax. The last intervention is meant to cushion the hard hit civil servants who are expected to earn a bonus starting this November.

The introduction of the Youth Employment Tax Incentive of up to ZW$500 per month for every employee recruited under the age of 30 will go a long way in the prioritisation of youths on new jobs, provided local production recovers on the back of increase in aggregate demand in 2020.

In terms of key road infrastructure, Treasury proposed to ring-fence 5% of excise duty revenue collected on fuel towards the construction and rehabilitation of Beitbridge-Chirundu highway. The move is thus sustainable and utilises domestic resources for infrastructure development.

The 2020 budget also had positives in terms of reducing poverty with the allocation of ZW$1,32 billion for various social protection programmes such as food deficit mitigation, Basic Education Assistance Module, food for work and income generating projects. The introduction of the National Venture Capital Fund of ZW$500 million is a step in the right direction in terms of creating jobs for youths and funding grassroots income-generating projects in the country.

It is expected that the fund will be disbursed through independent financial institutions to cover all provinces and not be distributed along political lines.
The ZW$200 million budgeted for free sanitary pads for young girls up to Advanced level will marginally cushion rural households that stand to benefit.

However, it is essential for the government to consider wholesale reforms that address living standards of these rural or urban households so that they can fend for themselves sustainably, and remove the burden on government to save their dignity yearly.

One way of doing this is to competitively remunerate civil servants, curb inflation which erodes incomes and pay competitive prices for agricultural produce such as maize, considering the fact that agriculture is the key income generating activity for entirely all rural communities.

Selected manufacturers on the market also got relief through extension of rebates and suspension of duty on key imports. The benefactors include the motor vehicle industry and transport sector, furniture manufacturers, dairy and raw wine industry, clothing and language wear manufacturers.

Tour operators and other tourism players also stand to benefit from capital equipment tax rebates and suspension of duty on motor vehicles used for touring and car hire. The launch of the Export Revolving Fund worth US$20 million is instrumental in export development and financing for small to medium exporters in the economy.

Nevertheless, the government should take cognisance of the fact that most of these manufacturers are hamstrung by foreign currency, electricity and fuel shortages which increase the cost of production. Added to it is the volatility of the local currency and drop in aggregate demand which impact on long term business prospects, and return on investment for local and international investors.

After identifying the challenges that are impacting local production and signaling the end of the partially implemented austerity reforms, it was expected that Treasury would pump more resources into electricity generation with funding for Harare, Bulawayo and Munyati power stations. These would be supported by investment in renewable energy through solar farming at Gwanda and Insukamini power stations among others.

It is worth noting that renewable energy projects are capital intensive and still have storage issues. Renewable energy projects are best undertaken through public-private partnerships (PPPs), as such a competitive tariff on electricity is key in realising energy self-sufficiency for both installed capacity on the old power stations and new investments in renewable energy by the private sector.

The drop in mining production and export value is connected to resentment over the export retention thresholds that the miners are getting from the Reserve Bank of Zimbabwe (RBZ).

A review upwards of 70% retention is essential so as to improve mining production and curb rampant smuggling of precious minerals such as gold and diamond. It is estimated that Zimbabwe loses more than US$2 billion from gold smuggling to South Africa and other markets every year.

That figure is enough to shore up the country’s export receipts and stimulate the local economy if channeled to the formal market. The country is also bleeding from the smuggling and under-declaration of chrome among other minerals, and measures to curb such criminal activities spearheaded by foreigners are key in improving export receipts.

Overall, the budget sounded more like a recycled wheel with expenditure set above budgeted tax revenues, meaning that the government will continue to print money and borrow to plug the budget deficit thus continuously fuel inflation.

It is inevitable that inflation will render the budgeted figures insufficient midway into 2020 unless fiscal and governance reforms are religiously implemented to reduce government spending and improve confidence in the market.

The authorities also forecast agriculture growth year in year out premised on better rainfall despite evidence that Zimbabwe’s rainfall patterns have deteriorated due to climate change. Agricultural prospects are therefore hinged on harnessing irrigation farming through small irrigation equipment and solving the land tenure issue that negatively impacts private sector investment in agriculture.

A resurgence in agriculture is a resurgence of local manufacturing and employment creation for related value chains such as financial services and the transport sector. Foreign currency shortages will also be topical in 2020 and the market yearns for better management of available resources to oil the interbank market while also prioritising producers that add value to the local economy instead of importers of finished commodities or offshore expenditure on travelling and other lifestyle related overheads for government officials.

Lastly, growth in aggregate demand for the local economy is critical and can only be solved through an increase in consumer disposable incomes (via controlling inflation and currency stability). This has proved to be mission impossible for government as it cannot stop consumption-induced money printing, hence it all points to an aluta continua on the macro-economic front from 2019 into 2020.

Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or follow him on Twitter: @VictorBhoroma1.

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