The Sunday News
By Admire Maparadza Dube
IN of the Covid-19 pandemic we all expected the Minister of Finance and Economic Development, Professor Mthuli Ncube, to present a supplementary budget, but he did not.
What he presented, however, justifies the absence of the supplementary budget. He reported that line ministries have hitherto spent only 46 percent of their budgetary allocation.
So, seeing as that we are midway through the year it does make sense to evaluate and assess the budget as opposed to introducing a whole new budget in the form of a supplementary. The veracity of his figures though is a whole other matter.
Still on Covid-19, the health care sector is, of course at the moment, one of the most tested sectors in the country lacking adequate equipment and consumables and personnel absenting themselves from work in industrial actions one after another.
The announced budget review offered health care workers tax exemptions, but the question on everyone’s mind now is that, is this enough to get the health sector back to work? Let me start by saying, empirical studies all over the world have proved definitively that a nation’s productivity is a function of its health.
The simple equation being “improved health delivery= an improved GDP.” Case in point is the Abuja Declaration of 2005, signed by all but one, African Heads of States, which notes that “malaria has slowed economic growth in African countries by 1.3 percent per each year.”
The Organisation for Economic Co-operation and Development (OECD) puts the combined nominal Purchasing
Power Parity GDP of Africa as a whole at US$6.36 trillion. So simple arithmetic will show that annual loss in Africa to malaria alone is US$82.7 billion! That’s an indication of the indispensability of health to a nation’s growth.
In Zimbabwe the whole service delivery is facing challenges. It is not just one disease or one department but sector wide. So the powers that be should really appreciate that all other technical interventions to halt inflation and stimulate the Zimbabwe economy will certainly need the health sector back at work. An effective dialogue with the sector personnel is needed to ascertain what that “enough” salary number will be.
Immediately I then want us to turn to the budget surplus, what does this mean, seeing that the budget is silent on issues of remuneration that were mentioned in public? For the period January to June 2020, the Minister said, a budget surplus of around $800 million has been realised.
This is a net figure as it takes account of the outstanding payment. If your question is pertaining to actual salary increment announcement (or lack thereof) I will speculate here that it may have been to do with inflation management.
Firstly, it is elementary knowledge in Economics that injecting sudden cash volumes into the economy without any corresponding increase in base productivity will most certainly lead to a demand-pull surge in inflation digits. As it is, he announced that Zimbabwe’s manufacturing sector will contract by 10.8 percent in 2020, against the initial projection of -1.9 percent.
With a projected fall in inflation the option was to increase employee remuneration inflation adjusted or arrest the inflation itself so it falls down to the people’s salaries.
Secondly, to stem supply push inflation, the Minister, perchance, is hoping to engage that surplus to stimulate industrial activity through capital projects, like infrastructural development as compared to consumptive salary increments.
This may also have downstream benefits as employment numbers and other offshoot businesses may be boosted as a direct result of these projects.
The 200km dualisation of the Harare-Beitbridge Road and university student accommodation projects that he mentioned come to mind. I should hasten to add though that if that is what is informing his decisions then there is a need for a social contract with the affected parties, as any austerity measure indeed needs.
For there to be universal ownership, and therefore support, by all stakeholders there needs to be engagement as compared with a top down approach which may not fly without collective appeal. He spoke of “fiscal restraint.”
That phrase certainly calls for consensus because as we all know it is the masses being called to tighten their belts.
Projections of the growth of the economy was at three percent now projections are that the economy will contract at minus four percent and it is the feasibility of this assertion which I turn to next, seeing as that the whole world at the moment is in some sort of recession due to Covid-19.
Projections, by their nature are a shoot-in-the-dark then hope, kind of business. In finance, however, we use past experiences and present indicators to come to the closest informed judgement so all things being equal the aim is often not far from the mark.
The projection of negative four percent maybe very conservative for a country such as Zimbabwe beset with a myriad of socio-economic challenges.
More stable economies like Singapore which has for the past decade consistently averaged + two percent growths annually has plunged into recession with a record GDP plunge of 41.2 percent.
The same story is replicated in various forms all over the developed world so to anticipate a mere contraction of minus four, I think is being optimistic.
On revenue, the Government has been losing a lot of inflows due to the currency changes.
Fiscal US$ receipting was always going to be the way to go to plug revenue loss and to be able to tax in hard currency so as to generate US$ inflows to augment part of the Civil Service wage bill which is now in US$.
Resources will forever be scarce. That is the fundamental question the study of economics tries to rectify as it studies the allocation of these resources against competing needs.
So “enough”, the resources will definitely be not. Having said that, it is imperative that I bring to your attention that Zimbabwe’s scenario is even more difficult in that Foreign Direct Investment is expected to recede this year.
We will note though that he introduced a two percent levy on all electronic transactions to collect more tax in forex and promulgated the Foreign Exchange Auction to enhance efficiency of forex allocation and transparency, while discouraging speculation. His intentions are clear and therefore I understand them on this.
We now turn to discuss the tax threshold upward revision. There’s been a positive affecting of remuneration through further widening of tax bands.
The tax-free threshold is to be reviewed from $2 000 to $5 000 per month. The tax bands to be adjusted from 1 August 2020 to begin at $5 001 and end at $100 000, above which the Highest Marginal Tax rate of 40 percent will apply.
We cannot factually say the budget is silent on issues of remuneration. That is net more money in employees’ pockets. Over that, the Covid-19 allowance in US$ component is free of PAYE tax. But more perhaps could have been done.
The crux of the matter is that every Zimbabwean employee at present is nostalgic about dollarisation era salaries so what is more in the Zimbabwe dollar terms will always be viewed as less if juxtaposed with US$ salary rates of yesteryear and found wanting.
The Minister points out that mining is most likely to become the Government’s biggest source of revenue. It’s good and bad news. Mineral resources are at record highs in the global market and Zimbabwe is mineral resources rich. Gold just recently hit all-time record highs of above US$1 900 per ounce.
The story is the same on major metals like copper and silver as well prices touching record highs, falling slightly because of subsiding industrial activities due to Covid-19 induced global shut downs but recently increasing again to almost former levels.
The bad news is that we have become overly dependent on one goose to lay the national golden eggs, as the proverbial saying goes. One sneeze in the mining sector and the whole nation will catch the cold. We will need to diversify and quick.
As at 31 May 2020, total foreign currency inflows amounted US$2.35 billion, against foreign payments amounting to US$1.55 billion. That has entailed a positive balance of payment as mineral prices are record high and local consumers are not as liquid current to import at the rates they used to.
The minister said this account surplus will be maintained and projected in 2020 to be positive USD$1.2 billion and credited containing non-essential consumptive imports.
Tourism, agriculture and manufacturing have borne the brunt of Covid-19 devastation. Foreign Direct Investment (FDI) has waned and is forecast to fall by 40 percent to US$150.4m this year from the US$249.5m recorded last year.
This leaves mining to fend for the bigger chunk of the budget revenue as even foreign remittances into the country are projected to decline by 4.9 percent to US$877 million in 2020, from US$921.7 million in 2019, as major source economies, such as South Africa, here in the UK, and the US go into recession this year.
At present mining contribution to total exports stands at around 68 percent. We are bound, at some point, to believe these numbers as Zimbabwe has been ranked number three in Southern Africa in terms of budget transparency by the Open Budget Survey of 2019 with a budget index score of 49.
The ranking simply means the country’s Finance Ministry ranked third in Sadc for figure transparency and honesty. In the review, use of drones at border posts was specifically mentioned, to plug revenue loss. What more can be done to reduce revenue loss especially at border posts?
More policing and security? Having worked for the Zimbabwe Revenue Authority at some time in my career I would say I answer this question personally as well as professionally. Information dissemination is essential to nip revenue loss in the bud.
Yes drones and the like will mitigate importation of undeclared goods and contraband but this is physical intervention and requires deployment of scarce resources, when mental intervention will do the job more efficiently.
By that I mean most people who attempt to smuggle, when asked why they did it they mostly respond that they feared excessive duty. But most goodS they smuggle are covered under monthly duty-free rebates and daily remission allowance limits so will escape customs duty anyway.
Even for those that have to be taxed the rates are much cheaper (commonly five percent to 15 percent) if commercial Bills of Entry are used and Tariff Codes employed.
Some do not need to pay duty at all as long as they use Bills of Entry and satisfy origin requirements covered by Bilateral and Multilateral agreements between countries and Economic blocks membership, like Comesa where origin of imports is verified. Yet others are totally covered by local laws and instruments to be tax free, like agricultural implements.
Certainly the cost the importers pay professional smugglers and the risks they take going into the bush avoiding official ports of entry are in the main for lack of knowledge and this has as a result seen the Zimbabwe Revenue Authority dedicating resources against the smuggling tide where mere information distribution would have done the job more efficiently.
Now we discuss the emotive topic inflation.
The June inflation figures according to Zimstat stand at 31.6 percent and the projections in the budget review is that inflation will be at 300 percent at year end. In his midterm budget review, Prof Ncube says the overall economy is forecasted to contract by 4.5 percent in 2020 and then he says it will recover by 7.4 percent in 2021. Perhaps he is privy to more information that makes him bullish about the economy and optimistic that inflation will decline.
Also, the banking sector remained adequately capitalised, with aggregate core capital of ZWL$10.74 billion, as at 31 March 2020. Banks being symptomatic indicators whenever an economy is ailing, in this case it may breed confidence that Zimbabwean banks did not show so much as a hiccup amid the challenges.
Hence the optimistic outlook by the minister on inflation and growth. The Government has also embarked on the formulation of the National Development Strategy (NDS): 2021-2025, which is the first of two medium term development plans guiding the country’s development trajectory towards Vision 2030.
However, from what is in the public domain, like reduced productivity, ebbing FDI, the non-cancellation of Zimbabwe’s debts to multi-lateral lenders, among other challenges, Zimbabwe still has some work to do. To add to that, Covid-19 and its ravaging socio-economic effects may still be with us up to end of 2021.
The Spanish Flu of 1918 continued killing and disruptions for close to two years so it is not entirely misplaced to think the same may happen with Covid-19. As a cliché goes, let us wait and see.
The writer, Admire Maparadza Dube ([email protected]) is a financial analyst, banker, MSc, CFA, PhD Student.
