Economies, equity notes: The Zimbabwe syndrome
THE Minister of Finance and Economic Development presented the 2022 Mid-Term Budget and Economic Review on July 28 2022 that provided an update on the performance of the economy and the progress on the 2022 budget implementation during the first half of the year.
e presentation was done under the 2022 Budget theme “Reinforcing Sustainable Economic Recovery and Resilience”.
Morgan & Co Research notes that the 2022 National Budget was premised on revenue collections of ZW$850,8 billion (16,8% of GDP, US$1,7 billion at US$1:ZW$494 auction rate) and expenditures of ZW$968,3 billion (target budget deficit of ZW$76,5 billion/ 1,5% of GDP).
e unaudited outturn during the first half indicates revenue collections of ZW$506,6 billion, against expenditures of ZW$534,5 billion, resulting in a budget deficit of ZW$27,9 billion, against a target deficit of ZW$45 billion.
Development partners complemented fiscal resources with an amount of US$190 million having been disbursed towards various projects and programmes.
Of this amount, bilateral partners contributed US$164 million and multilateral partners US$26 million.
Expenditure dynamics
e minister of Finance and Economic Development indicated that several constraints emerged during implementation of the 2022 Budget such as:
•Requirements
to review salaries to improve the welfare of civil servants; Increase in requests for funding, including for unbudgeted expenditures; Depreciation of the local currency (ZWL) and erosion of budget provisions; Increases in international prices of fuel and other critical raw materials, among other key services that have rendered most budget allocations inadequate; and Rescoping of critical components in some projects due to unforeseen circumstances. As a result, cumulative expenditures for the first six months of the year amounted to ZW$534,5 billion, against a target of ZW$431,2 billion, resulting in a 19% overrun.
Of this amount, recurrent expenditures amounted to ZW$393,1 billion, against a target of ZW$286,5 billion.
In terms of composition, compensation of employees comprising the wage bill, salaries of staff at extra-budgetary institutions and pensions dominated the expenditures at 36%, followed by use of goods and services at 25% with capital expenditures at 25%.
Our concerns around the national budget include (i) a lean tax base given the rapid informalisation of the economy, (ii) the fact that revenues are not growing in line with inflation and (iii) the skew towards re-current expenditure (employment costs).
Supplementary budget,
Given the inflationary pressures, revenue collections to year end are now projected at ZW$1,7 trillion, while expenditures are now estimated at ZW$1,9 trillion.
is is against the approved Budget of ZW$968,3 billion, entailing additional spending of ZW$929 billion.
is is largely a reflection of inflationary pressures in the domestic economy. e bulk of the Supplementary Budget (53%) is going towards employment costs to cushion public servants against increasing cost of living.
e balance of the additional resources is going towards meeting government consumables (18%), capital projects (19%) and social benefits (7%).
Key revenue measures
e minister of Finance and Economic Development proposed a platinum royalty rate of 5%, in line with other platinum producing countries in Africa, effective 1 January 2023. e royalty rate of 5% will also apply on lithium with effect from January 1 2023.
e Tax-Free reshold on local currency remuneration was reviewed from ZW$300 000 to ZW$600,000 per annum and the tax bands adjusted to end at ZW$12 million from the current ZW$6 million per annum, above which tax will be levied at a rate of 40%, with effect from August 1 2022. e local currency tax-free bonus thresh•old
reviewed from ZW$100 000 to ZW$500 000, with effect from November 1 2022.
A Rebate of Duty on equipment for use in scientific research imported by institutions approved by ministries responsible for Health, Mining, Agriculture and Higher and Tertiary Education introduced.
VAT registered operators now provided with the option to pay duty in foreign currency to facilitate offsetting of output and input tax in the same currency.
Current account
Merchandise exports and imports increased by 33% and 15% to US$3,517 billion and US$3,747 billion respectively, during the first half of 2022, compared to the same period in 2021.
Exports are expected to reach US$7,3 billion in 2023, spurred by increases in mineral receipts benefitting from the mineral commodity price boom, as well as increases in agriculture and manufactured exports.
On the other hand, merchandise imports are also projected to reach US$8,1 billion driven by fuel, machinery, and raw material imports.
Overall, the country’s balance of payments remains favourable with a current surplus of US$387,1 million having been registered during the first half of 2022.
e positive current account performance is envisaged to continue for the remainder of the year to close at US$366,3 million on the back of strong export performance and resilient remittance inflows.
The debt overhang
Public and publicly guaranteed debt currently stands at ZW$1,3 trillion and US$13,153 billion comprised of domestic and external debt, respectively.
Such high public debt relative to GDP affects Zimbabwe’s international financial credibility and hence its ability to unlock credit and investment.
In addition, it has a negative effect of crowding-out resources from the private sector. e government has however developed the Arrears Clearance, Debt Relief and Restructuring (ACDRR) Strategy aimed at restoring debt sustainability and has started token payments to creditors to re-engage international financiers.
Zimbabwe’s creditors, include the World Bank, AfDB, European Investment Bank and other multilateral and bilateral lenders.
at said the predicament is that the country is failing to unlock external funding to support local production, mainly because of the debt overhang.
Inflation developments
Global tensions have caused major supply disruptions and led to historically higher prices for most commodities. e price of Brent crude oil is projected to average US$100/bbl in 2022, a 42% increase from 2021 and its highest level since 2013.
Non-energy prices are expected to rise by about 20% in 2022, with the largest increases in commodities where Russia or Ukraine are key exporters.
Wheat prices are forecast to increase by more than 40% this year, reaching an alltime high in nominal terms.
Domestic headline inflation steadily accelerated from 60,7% in January to 257% in July 2022, partly due to external factors which impacted negatively on import prices of raw materials, food, fertilisers, and liquid fuels.
Domestic adverse inflationary pressures through forward pricing and sustained depreciation of the exchange rate were additional drivers of inflation.
Downside risks to inflation and exchange rate stability going forward include:
•driving
Continued geo-political tensions that are
the surge in international food and oil prices (imported inflation);
Growth in broad money driven by excessive liquidity held by banks despite reserve money being targeted at 0%; Adverse inflation expectations; Speculative tendencies; and
Continued arbitrage in the economy.
Inflation and exchange rate forecasts
Morgan & Co Research maintains a strong view that Zimbabwe will witness foreign inflation spill overs throughout 2022 given that the country is largely import-dependent.
A sharp increase in international food and oil prices has started to feed into domestic consumer prices.
Price level risks also remain elevated in 2023, bearing in mind that there could be unplanned government expenditures as the country moves into electioneering mode.
Political interests will always take centre stage, and this could lead to budget overruns.
We therefore envision a deteriorating exchange rate on the back of an increase in money supply. We also note that the following conditions that point to waning confidence in the local unit (ZWL) as set out by the International Accounting Standard (IAS 29) Financial Reporting in Hyperinflationary Economies remain prevalent in the domestic economy;
•wealth e general population prefers to keep its
in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
•amounts e general population regards monetary
not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency; Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
Interest rates, wages and prices are linked to a price index; and
•years e cumulative inflation rate over three
approaches, or exceeds, 100% We have modelled inflation using a simple linear regression.
is is a statistical method that involves the study of the relationships between two continuous (quantitative) variables.As part of our research, we have carried out a scenario analysis to come up with estimates for inflation and the exchange rate. is is the average scenario, based on the assumption that M3 (Money Supply Growth-MoM) will grow at a monthly average of 16,32% up to December 2023.
In this scenario, inflation peaks to 475,7% in March 2023 and settles at 290,2% in December 2023. e parallel market exchange rate forecast for December 2023 is ZW$2,269/USD
e worst-case scenario considers the most serious or severe outcome that may happen on the monetary front in Zimbabwe. is could take the form of:
Geo-political risk pass-throughs;To Unplanned government expenditures; and