The Sunday Mail
Persistence Gwanyanya
The recently announced National Budget Statement reveals an economy in bad fiscal space and in need of urgent intervention.
Weighed by fiscal imbalances, the economy is currently experiencing economic instability, typified by currency volatility.
In a bid to set the platform for a robust economic recovery as espoused by the Transitional Stabilization Program (TSP), Treasury is prioritising stabilisation measures.
Consistent with this thrust, Treasury emphasised the need for the Government to complement its revenue generating efforts, which will be anchored by the new transactional tax system and rationalisation of expenditures.
This is necessary to reduce fiscal imbalances and set the platform for currency reforms.
Needless to mention that a permanent solution on our currency problem is seen as a pre-condition for confidence rebuilding, which is key to attracting the much needed investments into the country.
For improved results and accountability, this budget was based on an output rather than input principal.
The fact that Professor Mthuli Ncube largely picked his austerity measures from previous year’s budget amply demonstrates their soundness.
Lack of coordination and implementation weighed down the target to reduce budget deficit from around 14 percent of GDP then to the target level of about 4 percent in 2018.
Achievement of the revised target 11,7 percent of GDP will also depend on effective coordination and implementation.
It is regrettable that we have been missing our targets for a long time, which makes the whole budgeting process appear like an academic exercise.
We hope for an improvement as a result of the new results based approach.
Austerity measures will largely take the form of reduction in the wage bill, parastatal reforms, reduction of Government support programs and more operational efficiency.
In what could be viewed as a way to show commitment to the implementation of austerity measures, senior Government officials, including the President and Cabinet Ministers, will have their basic salary cut by 5 percent from the beginning of next year.
However, there is still scope to reduce the wage bill to the recommended 60 percent of the budget through reduction of allowances that make up about 40 percent of it.
Parastatal reforms will see about 41 State enterprises being privatised, partially privatised through joint ventures or liquidated, among other measures.
The urgency of this imperative cannot be over-emphasised as State entities, which made a combined loss of US$270 million in 2016 at time when 70 percent of these were technically insolvent, are overburdening the fiscus.
In line with the thrust of creating a private sector driven economy, Government support for programs such as the Command and Presidential Input Scheme, which chewed about $1 billion last year, will be gradually reduced as private sector participation increases.
In the same vain, the Zimbabwe Asset Management Company (Zamco), which has so far acquired more than US$1 billion non-performing loans, will no longer be acquiring any new NPLs.
A reduction in these commitments will go a long way in reducing expenditure overruns, noting that Government borrowed about US$4 billion through mainly Treasury bills (TBs) in a space of a year to support these as well as election related expenses of about US$1 billion.
Other expenditure reducing measures such as the rationalisation of service missions, public service retirements, and implementation of the biometric register for civil servants, effective management of vehicle fleet, reduced foreign trips and retirement of 2 917 youth officers will see a reduction in the budget deficit to 5 percent of GDP.
Whilst the reintroduction of an auction based system of issuing TBs and bonds was necessary to improve transparency and price efficiency, it is important for Parliament to effectively exercise its role in safeguarding against statutory breaches relating to national debt and overdraft on RBZ.
Government’s overdraft on RBZ currently stands at US$2,5 billion or 60 percent of previous year’s revenue, which represent a breach on the statutory limit of 20 percent.
Similarly, there is still a high possibility that the country will remain in breach of debt to GDP ratio limit of 70 percent by year end even after the rebasing of the economy to US$24,6 billion from US$21 billion as total debt is expected to close the year at US$18 billion.
The extension of revenue collection efforts into the informal sector through the newly introduced 2 percent Intermediate Money Transfer Tax is expected to boost revenue flows into Treasury.
For an economy such as ours, which is believed to be the most informalised in Africa and probably second such economy in the world, at 61 percent, with between US$2billion and US$7 billion estimated to be circulating in the informal sector, the new tax system is seen as more efficient and effective.
However, it was necessary to adjust other tax heads such as Pay as You Earn, which mainly apply in the formal system, to lessen the tax burden on the affected and thus encourage increased formal sector participation.
The review on the tax-free threshold from US$300 to US$350 as well as widening the tax bands from US$351 to US$20 000, above which income is taxed at the highest marginal tax rate of 45 percent, is, in my view, inadequate.
The Minister should have considered an upwards review of the minimum taxable amount under Intermediate Money Transfer Tax from the current US$10 as well as a reduction of the maximum tax from the current level of US$10 000 to lessen the tax on the poor and reduce inflation risk.
At US$17,69 billion as at August 2019, national debt remains an albatross around the country’s neck.
Domestic debt, which was not a challenge for a long time, rose from nowhere in 2012 to US$9,54 billion. It’s financing, through mainly TBs and overdraft on RBZ which stood at US$6,2 billion and US$2,5 billion in August, is the main challenge.
The increase in currency instability could be traced to excessive money supply growth, which is not supported by foreign currency in circulation.
Inspired by the performance of the savings bond, which managed to raise about US$1,5 billion, so far Treasury intends to issue an appropriate savings bond to mop up excess liquidity in the market.
External debt, which stood at US$8,14 billion in August 2018, is equally a problem given the foreign currency challenges.
However, it is quite comforting that Professor Mthuli Ncube has already indicated that the multi-lateral institutions, who are preferred lenders, are happy with the current efforts to resolve their outstanding balance of US$2,6 billion.
However, debt is not a viable growth strategy for the country today.
It is worrying that the exchange rate and price volatility is driving the economy towards de-dollarisation. As this unfolds before our eyes, Treasury will now collect tax in the same mode of payment as the underlying transaction, which is not in harmony with the bond concept which recognizes the existence exchange rate peg.
As foreign currency problems persist, Treasury has affirmed its commitment to maintain the multiple currency regime, ostensibly to cushion the poor, through prioritisation of foreign currency allocations towards essentials.
The formation of a Foreign Currency Allocation Committee is seen as a measure to improve transparency in the allocation of this scarce commodity.
Equally, the levying of foreign currency duty on motor vehicles as well as an increase in exercise duty on diesel and paraffin by 7 cents per litre and 6,5 cents on petrol, is seen as a measure to preserve foreign currency as these two are seen as major consumers of foreign currency.
Austerity is a euphemism for pain, so we have to endure the pain before things get better.
Persistence Gwanyanya is an economic and financial expert. For feedback WhatsApp +263 77 3 030 691 or email [email protected].
