Reflections on Budget Statement

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Minister Chinamasa presents the Annual Budget Review

Tinashe Nyamunda The Economy Corner
This article reflects on the Budget Statement presented last week by Minister of Finance, Patrick Chinamasa. The annual budget review for 2016 and the 2017 outlook presented last week provides the public with an opportunity to take stock of the country’s development trajectory.

Given the crisis that has endured for the better part of the last two decades, I am left with mixed feelings about what was achieved in the past year and not entirely confident of prospects for sustainable economic improvement in the coming fiscal year if certain fundamentals are not addressed. What follows is my assessment of selected aspects of what was presented.

The revenue out-turn was US$3,5 billion, generated from income tax, consumption tax, value added tax, personal income tax and excise duties: producing a shortfall of some US$350 million.

Worryingly, corporate tax constituted only 10 percent despite exports in mining amounting to over US$2 billion. I have raised concerns about this industry in this column because I think it does not quite contribute as much as it should despite immensely benefiting from irregular and poor regulation of its operations.

Over US$600 million is instead raised from excise duties which are very high and causing many challenges for ordinary importers in Zimbabwe, particularly those bringing in vehicles. To some extent, there is an element of the ordinary citizen, the poor heavily subsiding the hugely benefiting corporations.

Worryingly, US$3,21 billion, about 91 percent of this revenue is directed towards Government’s employment costs bill. This leaves very little for other Government priorities such as service delivery.

This means that the Government will not have enough to meet its other obligations such as service delivery. No wonder different departments of the civil service have at times been forced to reschedule payment debts for its workers; it just won’t have the money.

The Government’s only option would be to borrow, in part, through issuing Treasury Bonds which are unsustainably high, amounting to US$2,1 billion in 2016.

The dilemma the Government faces is maintaining recurrent debt through these Treasury Bills as a cushion against inflation in any illiquid economy. This partially explains why the Reserve Bank is forced, after also considering the Balance of Payment Deficit (discussed below) to limit money supply in the economy.

Although Minister Chinamasa correctly argued in his statement that liquidity constraints are not unique to Zimbabwe, he must admit that they are certainly severe to the extent of compromising the ease of doing business, an aspect he is also concerned on improving.

Under the constrained financial/fiscal capacity of the country, many citizens, for example in agriculture, but also those pursuing livelihoods in all sorts of informal sector activities endured hardships and continued under very difficult economic challenges to support their families.

Farmers who took advantage of the rains, including some who benefited from various other private and Government schemes managed to produce both subsistence and commercial crops that should provide some relief for their families, including substituting grain imports given the 2,2 million tonnes of maize that is available for purchase by the Grain Marketing Board.

Tobacco farmers also delivered an improved yield, and in spite some facing challenges in accessing their funds/proceeds from sales because of banking and liquidity challenges, contributed towards import revenue of US$933 million of the projected US$1,16 billion, modestly supported by of just over US$50 million.

This helped to boost mineral exports which accounted for US$2,2 billion and the manufacturing exports totalling US$183 million. Even with these developments in tobacco and gold, the total exports only marginally increased to US$3,7 billion in 2016 in comparison to US$3,6 billion in 2015.

Of course there were other notable positives such as the completion of the Tokwe Mukosi Scheme and efforts to increase power generations through a number of projects being undertaken by the State.

Although very crucial developments, the expected downside is that all these and other infrastructural programmes fall to the expenditure side of the budget and it may be well before their start generating any real revenue. But these developments fall far short of the infra-structural needs of the country given the deleterious state of roads, rail and other service delivery aspects of supply of water and refuse collection among others.

Despite the positive story of tobacco and the grain surplus the Government is celebrating and hoping to expand under command agriculture, the overall picture is concerning.

Against export revenue of US$3,7 billion is an import bill of US$5,2 billion (although this dropped from US$6,1 billion in 2015 attributed, in part to Statutory Instrument 64). But this import bill does not account for illicit outflows of capital.

Ultimately, the economy still continues with a serious balance of payment deficit which adds to inflationary pressures which are only contained by maintaining current conditions of illiquidity by constraining money supply (which could only realistically be met through increasing the issuing of bond notes) despite high demand.

These numbers tell a bleak story for the prospects of the coming fiscal year which will be characterised by election campaigns as the chief priority of political protagonists. A combination of recurrent debt, budget deficits and negative balance of payments all continue to constrain any capacity for the improvement of the general welfare of the country.

The rains may have brought some much needed relief, but the numbers still don’t add up to a positive outlook for the economy. But I will continue to argue that the country does not need any miracle to recover. The capacity lies there within the country as the minister himself suggested.

In my view, and as I have reiterated elsewhere, the elephant in the room remain some political elite, in collusion with big mining capital who continue to benefit from the irregular regulation of the economy.

The deficit funds, in my view, if properly raised from proper restructuring in crucial areas in mining (the most obvious example being the infamous loss of US$13 billion of diamond revenue between 2009 and 2015), reigning in on Government expenditure and other co-ordination efforts, can certainly be met.

But this require collective co-ordination commitment between the Finance portfolio and other crucial line ministries to reign in an economy that has been poorly structured and being bled for the better part of the last two decades.

Even with measures to bring down expenditure in a bloated government (many know the extent and implications of this) debt financing will continue to strain the fiscus.

Never mind the fertile atmosphere for corruption, externalisation, smuggling and numerous other challenges that will continue to be a scourge if these very basic economic fundamentals are not addressed.

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