Budget statement review

MINISTER of Finance and Economic Development Professor Mthuli Ncube last week presented the 2019 National Budget statement. It’s primary objective is to stabilise the economy by targeting the “twin deficits” of fiscal and current account, which have become major sources of overall economic vulnerabilities, including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.

From a diagnostic point of view, the minister got our problems right and his prescriptions, which are outlined here, were well thought.

Prof Ncube committed that Government embarked on a policy stance to gradually reduce the Budget deficit to single digit level, hence, targeting 5% of GDP for 2019; 4,1% in 2020 and 3% in 2021. In the same vein, he underscored that Government has committed to reduce recourse to the Central Bank lending from the 20% of previous year’s revenues statutory limit, to a maximum of 5% confined for purposes of smoothening cash flow mismatches. In order to meet this target, the minister came up with practical expenditure containment measures, addressing current account imbalances, reforms, fiscal incentives and austerity measures.

Expenditure containment measures

With effective from 1 January 2019, Government is introducing a 5% cut on the basic salaries for Principal Directors, Permanent Secretaries and their equivalents, Deputy Ministers, Ministers and the Presidium.

This is also extended to basic salaries of those in designated posts in State Owned Enterprises (CEOs, Executive Directors and equivalent grades), including Constitutional Commissions and grant aided institutions. This is an excellent move.

Government also committed to pay civil servants’ bonuses.

However, in order to reduce the burden on Treasury, the civil service bonus will be computed based on the basic salary only (excluding housing and transport allowances) and will be paid in 2018.

Government has also resolved to reduce the number of foreign missions, thereby optimising the utility value realised from the remaining missions as well as avoiding accumulation of arrears and embarrassing evictions of our diplomats.

Government will retire 2 917 Youth Officers by end of December 2018.

Officials who reached 65 years of age will also be retired. This was long overdue.

Current account deficit

Government noted with concern the fact that Zimbabwe exports are largely uncompetitive due to cost and inefficient production.

In addition, the country relies on primary commodity exports, which are of less value compared to high value processed goods. In addition, the import bill has been dominated by a wide range of imports, some of which are not critical or strategic.

In addressing this anomaly, Prof Ncube announced a number of industry support measure which inter alia include: ◆ Fabrics that are not locally produced will qualify for the clothing manufacturers rebate, with effect from 1 January 2019. In order to support the dairy sector resuscitation strategy, Government proposed to increase the ring-fenced milk powder requirements for 2019, with effect from 1 January 2019. In order to reduce the cost of production for the baking industry, thereby minimising price escalation, Government proposed to introduce duty free importation of raw materials under a Manufacturers Rebate, with effect from 1 January 2019. In order to mitigate against potential shortage of poultry products as a result of the Avian Influenza and restore viability of the industry, Government proposed to ringfence duty free importation of fertilized eggs for the year 2019, with effect from 1 January 2019. In order to enhance competitiveness of locally manufactured fertiliser, Government proposed to ring-fence duty free importation of raw materials, with effect from 1 January 2019, for a period of twelve months

Reforms

The 2019 Budget proposes speeding up of ease of doing business reforms, including the long awaited operationalisation of the Zimbabwe Investment and Development Agency (ZIDA). In the same vein, Government announced that it will finalise setting up of a Commodities Exchange, hence opening up space to private sector players and shifting the burden from the fiscus as well as spearheading the parastatal reforms.

Austerity measures

In order to redirect use of the scarce foreign currency to the productive sectors of the economy, Government proposed that customs duty on motor vehicles be levied in foreign currency with effect from 23 November 2018. This measure will also apply on all import VAT and Surtax.

Government noted with concern that notwithstanding the fact that companies are appointed as agents that collect revenue on behalf of Government, some companies are not remitting VAT in the currency of trade and are taking advantage of the arbitrage opportunities on the informal market.

In order to contain such practices, Government proposed to compel companies that collect VAT in United States dollars or any other currency to remit VAT using the same mode of payment. This measure will apply on all other taxes.

With effect from 1 December 2018, the minister proposed to increase excise duty on diesel by 7 cents per litre and 6.5 cents for petrol.

This is meant to reduce the arbitrage opportunities.

This will obviously result in an increase in the price of fuel but in the spirit of raising revenue and mitigating arbitrage opportunities, which have come on the back of the low real prices in comparison with regional peers, this measure is in order.

Overall, the Budget contained the right solutions for this economy.

Prof Ncube even linked his budget to the Transitional Stabilisation Programme, which is key in policy implementation. Dr Mugano is an economist. He holds a PhD in Economics and is a Registrar at Zimbabwe Ezekiel Guti University. Feedback: gmugano@zegu.ac.zw; Cell: +263 772 541 209