Mid-term budget hits, misses

THE 2020 Mid-Term Budget and Economic Review was delivered amid high inflation levels and declining economic productivity that has been worsened by the Covid-19 pandemic.

Victor
Bhoroma
analyst

The Zimbabwean economy is projected to shrink by 4,5% by the Treasury department, two percentage points higher than the -6,5% realised in 2019. The forecast is very much on the optimistic side, considering the adverse predictions from global institutions such as the World Bank which expects the economy to contract by 10%, the International Monetary Fund (IMF) which predicts a negative 7,4% and the African Development Bank (AfDB) which expects a drop of 8,5%.

The London-based Economist Intelligence Unit (EIU) sees the economy contracting by 15,5% in line with the leaked government letter to international financial institutions, which pointed out that the economy is likely to shrink by up to 20% in 2020.

The sectors to register the worst decline include real estate and construction (-13,2%), manufacturing (-10,8%) and distribution, tourism and restaurants (-7,4%). Despite notable improvements in power supply, the economy is still facing the same headwinds that caused instability in 2019. Key among these economic headaches is the runaway inflation which is hovering above 737% for June 2020.

Inflation has rendered the Zimbabwean dollar an undesirable currency in the economy while decimating incomes for labour and various businesses at the same time. Other headaches include foreign currency shortages and inefficient foreign exchange market, fuel shortages, low levels of confidence in government policy, high levels of corruption and the high cost of doing business locally.

The mid-term budget managed to score the following positives considering the complexity of reforms that are required to bring economic stability:

No supplementary budget

The budget review did not propose extra spending by line ministries and government departments. It was noted that as of June 2020, various ministries had spent only 46% of their budget votes, leaving 54% unused. The avoidance of the supplementary budget seems unrealistic, considering the rate of inflation.

However, the recently announced ZW$18,2 billion stimulus package is a supplementary budget in itself, considering that it is 31% of the originally budgeted revenue for 2020 and it cuts across most ministries which are yet to exhaust their budget votes.

The attained cumulative revenue for January to June was ZW$34,2 billion (more than the budgeted ZW$32,1 billion), thanks to the high inflation rate. A supplementary budget would have put more burden on the taxpayer while increasing the budget deficit for the year.

Tax-free threshold adjustment

The review of the tax-free threshold from ZW$2 000 to ZW$5 000 per month will help cushion a majority of workers who have slipped into abject poverty. The cost of living has skyrocketed to over ZW$8 726 for the month of June 2020 and a number of workers in the private sector and public sector still earn below that figure.

The government realised the impact of inflation on income and the hope is that, going forward, civil service salaries will be adjusted regularly with the change in inflation. The private sector is guided by the remuneration of civil servants and the budget sets the tone for this.

Tax incentives

The exemption of Value-Added Tax (VAT) for domestic tourists will be key in boosting domestic tourism and provide a lifeline to the tourism and hospitality sector who have been severely hit by Covid-19 travel restrictions. Foreign arrivals are expected to decline by more than 60% in 2020, thus domestic holidaymakers have to make up for a portion of missed revenues so as to save jobs in the sector.

Equally positive are the incentives to investors on the Victoria Falls Foreign Exchange (VFEX) where investors will be exempt from paying corporate income tax and capital gains withholding tax on disposal of shares listed on the bourse. The incentives may generate investor interest despite the recent government announcements and the absence of guarantees to property rights for the jittery international investors.

The mid-term budget, however, had a number of shortcomings and grey areas which are outlined below:

Lack of urgency on ZSE suspension

It is now 30 days since the Zimbabwe Stock Exchange (ZSE) was suspended abruptly without regulatory clarification to the hundreds of foreign and local investors who hold assets on the bourse.

The suspension has dealt a major blow to future prospects of attracting foreign investment into the economy while negatively impacting the cash flows of the active counters and institutional investors such as pension administrators and insurers. The two-week time lag for the full investigation shows a lack of urgency on economic reforms and underlines the dangers of knee- jerk policy political announcements.

Misleading budget surplus

The declared budget surplus of ZW$800 million gives a façade of shrewd economic management despite the fact that it ignores the total neglect of civil servants’ welfare, poor service delivery in public hospitals and, most importantly, infrastructure maintenance and development shortcomings.

Out of the budgeted ZW$12 billion, infrastructure spending accounted for only ZW$2,1 billion in the period under review. Zimbabwe has a serious infrastructure deficit on roads and transportation, ports of entry, water and sanitation, health care and information communication technology. Countrywide, citizens have to travel long distances to fetch clean water and drinking water from unsafe sources. The surplus is also misleading as it ignores the actual cost of consumption subsidies to the taxpayer for commodities such as fuel, cooking oil, mealie-meal and wheat that have resulted in abnormal growth in money supply and parallel funding through the central bank.

2% tax on foreign payments

The government has its concerns on the rise in US dollar transactions as a result of re-dollarisation.

However, taxing foreign currency transactions adds fuel to informalisation and increased use of cash instead of the recommended electronic means. It also shows a policy somersault from the incentives provided to foreign currency account (FCA) holders a few months back.

The Intermediated Money Transfer Tax (IMT) in foreign currency adds a significant cost to businesses which would ordinarily bank their proceeds locally, hence companies will trade in cash and avoid banking their proceeds to save on IMT tax.

Debt repayment plan

The budget highlighted that total public and publicly guaranteed (PPG) external debt stood at US$8,094 billion as of December 2019. The figure does not reflect the debt contracted in the last six months and ignores interest accrued on the guaranteed debt for that period as well. This means the actual debt position is obscure and was deliberately omitted from the budget.

Domestic debt stood at ZW$12,89 billion as of May 2020. Missing from the mid-term budget is the debt repayment plan for both domestic and foreign debt, considering Zimbabwe’s poor credit ratings.

ZW$18,2 billion stimulus package

The budget was mute on the amount disbursed so far under the ZW$18,2 billion stimulus package and this makes it difficult to track the authenticity of the disbursements to various beneficiaries and the impact of the stimulus on the economy.

The economy is in dire need of financial packages, especially the tourism and hospitality, manufacturing and distribution sectors that have been heavily battered by the coronavirus restrictions.

Overall, the mid-term budget sounded overly optimistic on the country’s growth prospects in 2020 and 2021 amid the worsening economic conditions on the ground. The expectation that inflation will gradually decline to 300% is rather ambitious, considering the incessant growth in money supply from parallel funding at the central bank.

Decline in inflation rests solely on the success of the foreign exchange auction system in providing incentives to foreign currency holders and decentralisation of the system to commercial banks. The central bank has been very reluctant to let the market determine the true foreign exchange rate and has a conflicted interest on the auction rate. Likely pressures on the budget will also emanate from the need to avert starvation, considering the fact that maize produced (908 000 metric tonnes) is more than 50% below national demand.

Restive civil servants will also test the government’s resolve in refusing remunerating them in US dollars, with health workers very much at the forefront of those demands. Therefore, it remains to be seen if the avoided supplementary budget will not crop up through parallel funding operations and if the budget surplus is fiction or reality.

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

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