The Zimbabwe Independent

Govt’s revenue enhancemen­t measures vs citizens’ welfare

- Respect Gwenzi ANALYST

Recently, 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 an 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 earn ZW$14 000. In the revised budget, Treasury now expects to spend about ZW$162,4 billion in 2020.

As for 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. Also, the Minister 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 worrisome 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 Program (TSP) (2018-2020) has failed to attain its target average growth rate of 9% and inflation rate of 5% per year. When the program was launched, it was vividly clear that there were already premiums on local currency indicating exchange rate instabilit­y, acute forex shortage and electricit­y challenges among other factors.

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, Internatio­nal Monetary Fund (IMF) expect the economy to have shrunk by at least 10% in 2019 and by between 8% and 10% in 2020. Covid-19 pandemic coupled with exchange rate stability, 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 availed during the peak of lockdown and consumer spending reached new lows thanks to high price levels.

Will the economy recover in 2021? Yes, it is my submission that we are poised for a recovery but not of Prof Mthuli’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-BioNT ech covid-19 vaccine and the USA 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 hardly 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, 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 2-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 of the matter is that 77% of external debt is arrears.

Zimbabwe is currently ineligible to access funding from internatio­nal financial 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 stifle growth with such subtle tools.

Therefore, it is urgent for the government to pursue a debt repayment plan and or restructur­ing. 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 Prof 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 equivalenc­e 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 5 stood at ZW$18 000 while the government is paying its employees as low as ZW$14 000. Over six million Zimbabwean­s are in poverty. This tax free threshold becomes insignific­ant.

Usually when the cost of living is high and trying to come out from a deep recession, the government should reduce taxes and raise its spending (expansiona­ry fiscal policy). Prof Mthuli 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 welfare of citizens.(Please note this is a repeat).

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligen­ce, economic and equity research. —

 ??  ?? Finance minister Professor Mthuli Ncube
Finance minister Professor Mthuli Ncube
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