REVISITING 2017 NATIONAL BUDGET:

The two devils which will continue to pose a threat to economic turnaround in 2017 and beyond are incessant budget deficits and trade deficits. These devils are symptoms of a lack of productivity.

WHAT is key is to come up with strategies aimed at triggering national productivity. The 2017 National Budget carries some policy measures aimed at addressing national productivity. In this week’s issue I will dwell on some of these policy measures as they appear in the current budget.

The budget noted that the number of producers in the milling industry continue to shrink, from 368 in 2007 to 37 in 2016 due to competition from wheat flour imported from the region under bilateral trade arrangements.

Against this background, the minister of finance proposed to amend bilateral rules of origin on flour, to the effect that the preferential treatment is granted to flour milled from wheat grown in the country. Further, the minister proposed the removal of wheat flour from the Open General Import Licence (OGIL).

With respect to the dairy industry, in order to augment supply of raw milk through the importation of milk powder, the minister of finance, over and above the Government protectionist approach to the sector since 2013 and the recent Statutory Instrument 64 (SI 64) which has seen the removal of dairy products such as yoghurts, flavoured milk, ice cream and cheese, among others, from the OGIL, proposed to review the ring-fenced milk powder requirements for the year 2017.

With respect to the textile sector, the budget notes that the textile manufacturers are currently operating at capacity utilisation levels of between 30-35percent. According to the budget, growth of the sector has been hampered by competition from imported fabrics as the retail sector exploits loopholes in the tariff structure in order to avoid duty and tax.

For instance, manufacturers of blankets have particularly been negatively affected by imports of semi-finished blankets, whose process of manufacture involves minimal value addition of cutting and trimming.

Against this background, in order to level the playing field for the local industry, the budget proposed to increase customs duty on selected fabrics. In the clothing and furniture manufacturers, the minister underscored that this will continue to access fabrics duty free, under the clothing manufacturers rebate. Furthermore, in order to enhance competitiveness of the sector, with effect from 1 January 2017, the minister proposed to avail additional raw materials under a rebate of duty on selected fabrics.

Still in the clothing sector, although significant progress has been made in the clothing sector, especially on export of finished articles, imports of clothing items, in particular, school uniforms, continue to threaten the existence of small enterprises.

The manufacture of uniforms has, for a number of years, provided income for small enterprises that operate as co-operatives. In order to provide safety nets for the SMEs and aid production, with effect from 1January 2017, the minister proposed that school uniforms be removed from the OGIL.

With regards to the printing and packaging industry, the budget notes that the printing industry has begun to make inroads into production, as a result of support measures that have been put in place by Government.

However, imports of printed and packaging material continue to increase,hence the need to support the industry through reduction in the cost of production. Against this background, with effect from 1 January 2017, the minister proposed to increase the list of raw materials that are used in the printing and packaging indus- try that are eligible for importation under manufacturers’ rebate.

The budget notes that soap manufacturers are under siege from foreign competition. In order to level the playing field between imported and locally produced soap, Government, introduced a specific duty of US$0,50 per kg of soap.

In order to further reduce the cost of production, thereby enhancing competitiveness of locally manufactured soaps, with effect from 1 January 2017, the budget proposed to avail additional raw materials which include fatty acids, palm stearine and palm kernel oil under a manufacturers’ rebate.

Duty rebates for the importation of pulp, glue and virgin tissue used in the manufacturing of sanitary wear were also proposed to take effect from 1 January 2017. This is of course aimed at enhancing the competitiveness of locally produced sanitary wear products.

On wines, the budget notes that wine distillers import raw wine in order to augment local production which is currently subdued. Imported raw wine, however, attracts customs and excise duty at the point of importation. After processing into potable wine, it is, further,subject to excise duty at wholesale price. There is, thus, an element of double taxation on raw wine, which discourages value addition.

Imported wines, on the other hand, attract customs and excise duty at the point of importation, thus, creating an uneven playing field between imported and locally produced wines. To address this anomaly, the minister proposed to suspend excise duty on importation of 30 000 litres of raw wine under a ringfenced facility for approved manufacturers for a period of one year beginning 1 January 2017.

In the process, according to the minister of Finance, the wine manufacturers will be closely monitored, in order to ensure that they continue to support the growth of vineyard farmers, through contract farming and local purchases of raw wine.

In a spirited effort to drive foreign direct investments to argument production and exports, the minister proposed a raft of tax incentives for Special Economic Zones.

These measures are proceeding the enactment of the Special Economic Zones bill late last year.

The proposed to provide tax incentives as follows: ◆ On Corporate Tax, companies are exemption from Corporate Income Tax for the first 5years of operation. Thereafter, a corporate tax rate of 15 percent applies. ◆ On Special Initial allowance, Special Initial allowance on capital equipment to be allowed at the rate of 50 percent of cost from year one and 25 percent in the subsequent two years. ◆ On Employees’ Tax, Specialised expatriate staff will be taxed at a flat rate of15percent. ◆ On Non-Residents Withholding Tax on Fees, the minister proposed exemption from Non-residents tax on Fees on services that are not locally available. ◆ With respect to Non-Residents Withholding Tax on Royalties, companies are exempted from Non-Residents tax on Royalties. ◆ With regards to Non-Residents Withholding Tax on Dividends, companies are exempted from Non-Residents tax on Dividends. ◆ With respect to Customs Duty on Capital Equipment, Capital equipment for Special Economic Zones will be imported duty free. ◆ On Customs Duty on Raw Materials, Inputs which include raw materials and intermediate products imported for use by companies set up in the Special Economic Zones will be imported duty free. In order to protect the local industry, the duty exemption will, however, not apply where such raw materials are produced locally. These tax incentives, according to the budget, will apply in demarcated geographical areas and are restricted to production for export. These measure takes effect from 1 January 2017.

All these measures in the current budget are key in fostering production. I must say, the Minister Finance tried his best to influence production from the fiscal policy point of view. It is therefore important that we apply them now since we have begun the new fiscal year.

However, I have few areas of concerns which Government must take care of in the course of 2017. These are continuous removal of products under OGIL, raids of business accounts by Zimbabwe Revenue Authority (Zimra), incessant budget deficits and need for key infrastructures in SEZs.

Whilst the removal of products from OGIL has genuinely helped to spur production and growth in some companies, there are also visible ugly faces which manifesting the form of shortages and high prices in particular. Continuation of the SI 64 and moreso the inclusion of additional products especially now as business is calling for its expansion need to be done taking cognisant of the regional and multilateral trade agreements we have signed. We need to also take into account the production capacities of the local companies.

More smartly, we must always pair the policy reform with other associated production enhancing measures.

For example, it will not help to place products on SI 64 and fail to facilitate foreign exchange for importation of key materials.

My take is that we must now move away from SI 64 to promulgation of local content regulation which has a production enhancing effect, encompasses the entire economy as opposed to the SI 64 and is in sync with both regional and multilateral trade agreements.

On Zimra raids, whilst Zimra has an undisputed mandate of implementing fiscal policy measures through revenue collection, it must do so with moral suasion of saving the economy and hence must have flexibility in carrying out its mandate.

The Ministry of Finance must support Zimra in this regard. There are diverse situation obtaining in our economy. On one hand some companies are clearly in arrears with Zimra and are struggling to clear the debt.

The same company regardless of its standing is still playing a key role which has a multiplier effect in the economy through employment creation and provision of market for companies in the value chain and other downstream effect. In this case should Zimra goes ahead to garnish the account notwithstanding the fact that Zimra had given the same company an opportunity to make payment plans which failed to materialise?

In a normal business environment Zimra should garnish the account but we are not operating in an abnormal environment.

On another hand, let us consider a situation where one company has rendered services to say a client but the payment has not come through but in the meantime based on the expected revenue the company now owes Zimra some tax obligations as in case of the fiasco which happened in the medical sector.

Should Zimra just go ahead and garnish the accounts and let the businesses closes because it has a mandate of collecting revenue?

I know that in these particular cases Zimra will probably rush to brush this argument from face value. We must think with high level of pragmatism to save the economy otherwise these measures the Minister of Finance has proposed will come to nothing.

With regards, SEZ infrastructure, SEZs have failed dismally in a number of African countries including Zimbabwe (when we implemented Export Processing Zones) but witnessed significant success in countries like Rwanda and Mauritius. One of the key reason why SEZs failed in Africa and succeeded in some is issues regarding infrastructures. Demarcated SEZs areas must be equipped with necessary infrastructures like uninterrupted supply of electricity and water, provision of roads, sewer systems and information communication technologies to mention but a few. We need to work on this.

On budget deficit, Government expenditures have been exceeding revenue since 2013 thereby building a cumulating budget deficits which is now running into billions of dollars. Just 2016 budget deficit, according to the budget, was around $400 million.

Painfully, the 2017 budget predicts another $400 million budget deficit by the end of this year and further budget deficit of $400 million per year in 2018 and 2019 (these are rounded figures).

Since we don’t print money, these deficits will be funded from the banking sector. This will result in funds which are supposed to be used for production going out to meet Government obligations (crowding out effect) thereby posing threat to the survival of the economy.

We will continue to witness shortage of money, failure to pay for imports requirements and reversal of the possible gains of tax measures from the current budget. From where I sit, I see two possible gateways.

One, the minister of finance must rationalise the public service wage bill and the entire Government must support him on this. We can ignore addressing the wage bill but reality has is catching with us. It is simple economics that if you are running a tuck-shop and your wage bill is now 90 percent of total expenditure you are out of business. The right thing to do if one is to stay in business is to cut the wage bill .

Two, the Ministry of Finance with the support of Zimra must come up with practical taxes for the informal sector. The levels of presumptive taxes charged to this sector is still very high there encouraging them to evade tax.

My suggestion is that the Ministry of Finance must come up with a nominal fee for the informal sector like $20-$50 per year (depending on the type of business) which one has to pay whether he or she makes profit or not thereby putting away the need for preparing profit and loss account. This will be easy to enforce and at the same time will encourage compliance. Zimra will actually collect more revenue than they are doing. ◆ Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness Strategy. He is a Senior Lecturer at Zimbabwe Ezekiel Guti University and Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or gmugano@gmail.com