The Sunday News
Dr Bongani Ngwenya
Preamble
THE economic operating environment in Zimbabwe, since the adoption of the multi-currency regime has been characterised by a number of challenges.
Some of the major challenges were addressed in last week’s Economic Focus. These include the rapid deterioration in external sector position on account of growing import dependence against a background of poor export performance, subdued foreign capital inflows, an external debt burden, frequent power outages on the back of progressive deterioration in generation infrastructure, a limited fiscal space, low domestic output and de-industrialisation, and slow savings and money supply growth and a growing non-performing loan problem in the banking sector.
These factors have all contributed to worsening the liquidity problem in the economy and has rendered the banking sector unable to continue to underwrite business, worsening the domestic investment and output position of the country.
After many years of falling domestic output and hyperinflation prior to 2009, our economy has been experiencing a fragile recovery.
During its decade-long economic downturn, the country’s external position deteriorated sharply, with the country unable to meet many of its external obligations and accumulating arrears, that currently stands at estimated $8,368 billion (as at September 2015), according to the Finance Minister Patrick Chinamasa’s budget statement. Out of this, $1,290 billion is domestic debt, while $7,078 billion is external debt.
The jump start in economic recovery and growth from the severe recession and hyperinflation has so far been consumption-led, as evidenced by a recurrent negative balance of payments since adoption of multi-currency regime, which is estimated at marginal improvement in the year 2016, however, remaining around $2,6 billion.
The import bill still runs too high for a small economy such as Zimbabwe.
However, Zimbabwe’s export sector, in particular mining, could potentially recover quickly and provide much needed fiscal revenues to a cash-strapped Government with large external obligations.
Zimbabwe continues to run large current account deficits financed by short term and volatile capital inflows and accumulation of arrears. It is evident that Zimbabwe is in debt distress: external debt — of which about 64 percent corresponds to external arrears, and remained at $7,078 billion as highlighted above, with respect to 2015, translating to about 151 percent of 2015’s GDP.
Minister Chinamasa in his annual budget speech announced a projection of revenues of $3,85 billion for the year 2016, against a total projected budget expenditure of $4 billion in 2016, creating a finance gap of $150 million to be funded largely through borrowing on the domestic market.
In the continued declining or marginal foreign direct investment inflows since adoption of multi-currency regime, and falling domestic investment and output, the Government has to think seriously about ways of increasing the taxation base. The formal income taxation base and fiscal space continues to narrow, as more companies shut down, throwing hundreds of individual tax payers out of employment, and corporate tax revenues declining.
Informal Sector Financial Resources Harnessing
The economy has been undergoing significant structural transformation in the past decade, which has seen the formal sector being replaced by a growing informal sector.
This transformation of the economy towards informalisation implies that the traditional business models cannot continue to be applied hence the need to adopt new mechanisms that are best able to serve the emerging business model in Zimbabwe, that is, that of informalisation.
The fundamental question is: Does any significant scope exist for informal sector taxation in Zimbabwe? Notwithstanding the challenges that go with informal sector taxation.
The argument is, yes there exists the scope for informal sector taxation in Zimbabwe. There is a lot of money circulating in the informal sector in this country, evidenced by the assets of wealth that the informal sector participants possess.
On 4 April, 2014, the Herald published a very interesting article: $7 billion circulates in informal sector. The following is a brief quote from that article. “At least US$7,4 billion is circulating in the informal sector and Government has taken a deliberate move to formalise operations in that market in fulfilment of the Zimbabwe Agenda for Sustainable Socio-Economic Transformation, provisions . . . ” “Small and Medium Enterprise and Co-operative Development Minister Sithembiso Nyoni said the fiscus was losing substantial amounts of money from this untapped sector and formalising such activities would go a long way in achieving this objective”. “At least US$7,4 billion is circulating in this sector. Just imagine if the 2,8 million people were to pay US$1 per month, what that would contribute to our fiscus.”
At the moment, the informal sector is taxed on presumptive tax regime. This seemingly large tax revenue potential is found to be thinly spread among the increasing informal potential participants in the informal sector.
Presumptive tax collections have been running at an average of less than one percent of the total revenue taxes collected since the adoption of the multi-currency regime.
Short-to-medium term measures should focus on strengthening the existing taxation regime and mechanisms for fostering the formalisation of the informal sector.
This may require, among other things, a need to further exploit personal income taxes other than PAYE and also tighten the administration of VAT, which apparently is the most broad-based tax.
The continued informalisation of the economy means that in the long run, the Government cannot ignore the informal sector’s tax potential, so the taxation regime would have to be streamlined, simplified and designed in such a way that it encourages informal sector to graduate into the standard taxation regime, at the same time increasing the penalty of non-compliance.
The argument is, what would be most feasible and probably prudent in both the short-to-medium and long term is not the introduction of new taxes, but rather the strengthening of current and existing tax regime and mechanisms that would foster the formalisation of the informal sector.
In conclusion, there is strong perception that taxing the informal sector is very difficult for the following reasons: lack of availability of information on informal sector operators, manpower levels, ability to launch education and awareness campaigns, and corruption.
Taxation is an information game. In other words, without information, the process of identifying taxpayers and ascertaining tax liabilities becomes very difficult. In the absence of information, taxpayers do not know what taxes they should pay and how these taxes are to be paid.
There are no registers of informal sector traders in Zimbabwe. In the absence of vital statistics such as registers of informal enterprises and their bank accounts (for those that have them), there has been a tendency by tax authorities of focusing only on those informal activities that are either clearly visible or those that are easy to tax.
While Zimra has an office to deal with large taxpayers (who make up the bulk of payments), it does not have any dedicated office for the small taxpayers as is the case in some developing countries. The cost of continued shrinking Government revenues and persistent or recurrent budget deficit significantly outweigh the challenges of informal sector taxation.
In fact, what choice does the Government have?
The writer is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business [email protected]/[email protected].
