Last week, Professor Mthuli Ncube presented the 2021 national budget, his third as finance minister. The budget has an expenditure ceiling of ZW$421,6 billion with about ZW$390,8 billion expected to come from revenue receipts. The balance of ZW$30,8 billion will be raised through domestic borrowing using market operations like Treasury Bills and bonds. Of the total budget, ZW$131,6 billion will be capital expenditures while recurrent spending will take ZW$290 billion with employment costs taking a lion’s share at a tune of ZW$142,6 billion.
The interesting part of this budget is that it is a 136,19% increase from the revised 2020 budget. The current budget was initially proposed with an expenditure ceiling of ZW$63,6 billion financed by revenue receipts worth ZW$58,6 billion. However, exchange rate instability has caused inflation to wreak havoc. Prices of basic goods have risen beyond the reach of average citizens as salaries have remained largely stagnant.
Inflation wiped consumer incomes while on the other hand the government saw its revenue collection ballooning. Zimbabwe Revenue Authority (Zimra) is surpassing its set targets every quarter. So far its net collections are ZW$13,88 billion, ZW$20,11 billion and ZW$57 billion in Q1, Q2 and Q3 respectively.
The widening gap between cost of living and salaries has prompted a revision of the 2020 budget as cost-of-living adjustments were offered in line with inflation developments. Recently, a 40% salary hike was instituted where the least paid government employee earns ZW$14 000. In the revised budget, the Treasury now expects to spend about ZW$162,4 billion in 2020.
In 2021, Prof. Ncube sees the possibility of astronomical revenue inflows premised on the recovery of the economy. He expects Gross Domestic Product (GDP) to rise 7,4% in 2021 from a dip of -4.1% this year. The minister also expects exchange rate stability to hold such that the annual average inflation rate will hoover below 135% with a month-on-month rate below 1%.
Optimism is good for the country but it is worrying to note that government projections are mostly detached from reality as they are influenced by politics. The positive projections are overstated while those with negative bearing are understated. To start with, the Transitional Stabilisation Programme (TSP) (2018-2020) has failed to attain its target average growth rate of 9% and inflation rate of 5% per year. When the programme was launched, it was clear that there were already premiums on local currency indicating exchange rate instability, acute forex shortage and electricity challenges among other factors.
The National Treasury has revealed that the economy was down by 6% in 2019 and will be down by another 4,1% in 2020. However, some local as well as those internationally recognised institutions like the African Development Bank and International Monetary Fund (IMF) expect the economy to have shrunk by at least 10% in 2019 and by between 8% and 10% in 2020. The Covid-19 pandemic coupled with exchange rate instability, high inflation, forex shortages and drought for the most part of 2020 has weighed down on economic activity. Businesses are stressed as no significant stimulus package was available during the peak of lockdown and consumer spending reached new lows thanks to high prices.
Will the economy recover in 2021? Yes, it is my submission that we are poised for a recovery but not of Ncube’s magnitude. This recovery is hinged on expectation of normal rainfall, recovery in commodity prices, manufacturing as well as tourism. The United Kingdom (UK) has already approved use of Pfizer-BioNTech covid-19 vaccine and the US is expected to follow suit. There are also other vaccine candidates such as Moderna. This vaccine news is helping to propel markets especially commodities which were hard hit. Locally, stabilising exchange rate, forex accessibility on the auction and moderating prices are helping companies and consumers to produce and consume again.
For an economy coming from a very low base, a strong growth of 7%+ should be anchored on more macro pillars including investment. However, the budget is set to be fully financed using domestic resources albeit the economy will be coming from two-consecutive recessions. Also, Zimbabwe is held ransom by the existence of strong structural rigidities inter alia price distortions, weak institutions and high prevalence of corruption.
The country is in a real debt trap. Total public and publicly guaranteed debt is at 78,7% of GDP which is above Sadc threshold of 60% and even local threshold of 70%. External debt stands at US$8,2 billion as at end of September which was an increase of US$100 million from 2019 level. The irony is that 77% of external debt is in arrears.
Zimbabwe is currently ineligible to access funding from international finance institutions (IFIs) as a result of debt defaulting in the past. Loans from IFIs came at a cheaper rate of interest. Also, the negative country perception and risk as a result of economic sanctions and political instability is taking a toll on foreign direct investment (FDI). FDI is key for the growth of developing countries due to high prevalence of financial repression. Financial repression describes measures by which governments channel funds from the private sector to themselves at extremely low interest rates. Consequently, a government stifles growth with such subtle tools.
Therefore, it is urgent for the government to pursue a debt repayment plan and or restructure. Over-reliance on domestic borrowing crowds out private investment. However, the 2021 budget gives no strategy on dealing with this debt issue. At the moment, the government is just paying token payments to its creditors while the debt is ballooning.
Given the above, there is no way out when it comes to financing government programmes for Mthuli other than the old tactic of piling more taxes on the citizens. In 2019, facing revenue shortages, the minister introduced an unpopular electronic tax now well-known as the 2% tax. This tax saw government revenue skyrocketing as the economy has moved to a cashless society. In 2020, the 2% tax contribution is on a downtrend as RBZ has instituted daily mobile transaction limits, a move to reduce parallel market liquidity.
The budget is anti-poor as the Treasury chief has devised a new tax on Micro, SME and Informal operators to enhance revenues. All traders on designated business centres like the Gulf Complex in Harare will have to part way with an equivalent of US$30 per month. These people have other expenses to take care of including payment of VAT or 2% tax when transacting. Also, the minister reviewed upwards other presumptive taxes on self-employed and a levy on Petroleum Imports of US$0,05. The move will have negative implications on the pump price which will be borne by the final consumer. The main tax relief offered by this budget for the formal working class is a review of the tax free threshold from the current ZW$5 000 to ZW$10 000. However, as at October, the poverty datum line (PDL) for an average family of five stood at ZW$18 000 while the government is paying its employees as low as ZW$14 000. Over 6 million Zimbabweans live in poverty. This tax free threshold becomes insignificant.
Usually when the cost of living is high and when trying to come out from a deep recession, the government should reduce taxes and raise its spending (expansionary fiscal policy). Ncube is raising his spending, financing it through raising taxes. I agree that there are bold moves needed to propel this country on a growth trajectory but policies should also prioritise the welfare of citizens.