Key expectations for the 2021 budget

Victor Bhoroma:analyst

ZIMBABWE’S 2021 national budget will be presented this November, with a lot at stake in terms of improvements in public service delivery from the government. The budget comes when the economy is gradually recovering from the Covid-19 induced business shutdown and when partial dollarisation is helping to recalibrate the economy from years of currency distortions, costly consumption subsidies and high levels of inflation.

The market has seen some measure of price stability in the last four months due to the tightening of money supply and channeling of foreign currency towards the auction market.

However, civil service wage disputes have grounded the education and health sectors to a halt at a time when poverty levels have risen sharply. Similarly, inflation still remains very high with year-on-year inflation for September recorded at 659%.

The International Monetary Fund (IMF) expects the Zimbabwean economy to decline by 10,4% in 2020 before registering a 2,5% growth in 2021. The World Bank projects a 10% contraction in 2020, before recovering to 2,8% growth rate in 2021.

In 2019, tax and non-tax revenue collections were projected at ZW$58,6 billion while expenditure was budgeted at ZW$63,6 billion, leaving a budget deficit of ZW$5 billion. However, high levels of inflation meant that the government has so far collected ZW$84,97 billion in nine months from January to September 2020. Revenue projections for the whole of 2020 are therefore expected to eclipse ZW$140 billion (US$1,72 billion).

This means that the treasury has lost more than 50% of the tax revenue it collected in 2017 and 2018. Critically, the economy sank deeper than the official government figures in the last two years.

Covid-19 has severely battered the local economy, with the Tourism and Hospitality sector writing down over US$1 billion in foreign earnings. Similarly other key sectors such as retailing, transportation and distribution, real estate and manufacturing have also lost millions due to trade restrictions and economic shutdown.

Recurring economic constraints for Zimbabwe include successive droughts and low productivity from agriculture, high levels of inflation (from unrestrained money supply), power and foreign currency shortages, overregulation, currency distortions and policy inconsistencies. As such expectations are very high that the budget will address the following thorny aspects:

Civil service remuneration
The past two years have seen a serious wage compression for the civil service with entry level (B1) civil servants currently earning ZW$11 350 (US$140) if the Covid-19 allowance of US$75 is factored in. This means that most civil servants cannot afford the consumer food basket of six which costs ZW$21 000 (US$258) as of September 2020. The Total Consumption Poverty Line (TCPL) for a family of five cost ZW$18 000 (US$221) in the same month, this means that by Zimbabwean standards almost all civil servants are living in abject poverty.

The government has been on record to sell its budget surpluses or achieving revenue collection targets in a declining economy. The budget should therefore address civil service remuneration gaps and conditions of service so that service delivery is restored in key sectors such as education and health care. Without fully addressing remuneration aspects, Zimbabwe will continue to lose its highly trained personnel in all government departments and the private sector as well.

Social safety nets
Recurring droughts, high inflation and rising unemployment levels have triggered an increase in extreme poverty levels in the last two years. The World Food Programme (WFP) estimates that over 7,7 million Zimbabweans are in need of food aid before the harvest season begins in March 2021.

The World Bank predicts that the number of people living in extreme poverty is projected to increase from 6,6 million in 2019 to 7,6 million (50% of the Zimbabwean Population) in 2020.

Economic decline has seen an increase of informalisation with most jobs in the Small to Medium Enterprises (SMEs) lacking job security, income consistency and insurance.

With this in mind, treasury needs to increase its budget allocations for health and child care, basic education, social amenities, disability benefits and other facilities for the socially vulnerable such as children and pregnant women. These social services will also need to factor in poor urban households who have been affected by Covid-19 lockdowns and increase in unemployment.

Similarly, there is need to allocate more funding towards water provision in Harare and Bulawayo where more than 2,5 million residents do not have access to safe drinking water.

Zimbabweans have been calling on government to significantly reduce its military expenditure and increase spending on social services.

Economic incentives
The economic decline witnessed in 2020 required a generous stimulus package for the economy especially for sectors severely battered by the pandemic such as tourism and hospitality.

However there has been no trace on the benefactors of the ZW$18 billion (US$222 million) stimulus package announced by the government in May 2020 with the Confederation of Zimbabwe Industries (CZI) and Zimbabwe National Chamber of Commerce (ZNCC) not aware of any beneficiaries.

Government claimed that over ZW$6 billion (US$74 million) had been directed towards farmers, though this was never verified or audited. To boost economic productivity and reduce the cost of doing business, treasury needs to reduce Excise Duty paid on fuel and reduce the Value Added Tax (VAT) rate.

Tax incentives should also be considered for the tourism and hospitality sector to promote domestic tourism (in light of income erosion), curb destination costs and attract foreign tourists as foreign travel restrictions are being lifted. It will take months before hotels, gaming, travel and tours and leisure services get the pre-Covid tourist numbers, hence incentives are key in getting retrenched workers back to work in resort hotspots such as Victoria Falls, Kariba, Mutare, Nyanga, Vumba, Matopos and others.

Infrastructure

The state of public infrastructure has never been as dire as it is now. Years of underinvestment in the country’s railway network, highways and urban roads, energy generation plants, sports facilities, border posts, water and sanitation facilities has left the country behind in terms of infrastructure standing in Southern Africa.

In the first half of 2020, only of ZW$2,1 billion was invested in infrastructure development out of the budgeted ZW$12 billion. To address this infrastructure deficit, treasury needs to set up an explicit public-private partnership (PPP) Act that addresses thorny aspects such as repayment terms and remedy for contractual disputes among other aspects so as to attract private sector funding.

The expectation from the budget is that more than 30% of the budget is directly channeled towards infrastructure projects such as city dams and water projects. To address the poor state of urban roads, the government needs to consider reverting back to permitting urban councils collection of vehicle term licenses, under a transparent mechanism where funds are ring fenced from councils’ abuse on recurring expenditure. Toll fees can be channeled towards rural district council roads and highway maintenance.

Debt management
Currently there is no clarity on the up to date levels of foreign debt, domestic debt and debt contracted by the central bank to finance the auction system and other quasi fiscal operations in the last three years. Treasury is expected to state these figures and the repayment terms for the benefit of the taxpayer.

Similarly, there is an urgent need for a debt repayment plan especially on foreign debt assumed by the central bank from various local producers in 2019. The debt is affecting raw material imports and new lines of credit. Zimbabwe has not tabled any credible debt repayment plan since the Lima agreement fell through.

Overall the upcoming budget needs to break away from the past budgets where more taxes are loaded on the tax payer while billions are allocated to military expenditure at the expense of critical services such as education and health care. The Covid-19 pandemic and global economic decline also calls for economic stimulus through tax cuts and various other supply side policies aimed at reducing the cost of doing business.

Zimbabwe’s tax model needs to be simplified and remodeled to boost exports and local production instead of importing finished goods from China, Singapore and South Africa. Public service delivery can only be efficient if civil servants are rewarded with living wages that are adjusted in line with inflation and increase in revenue collections by the treasury.

Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.