Source: Ministry of Finance 2020, Budget Growth Projections
Finance minister Mthuli Ncube announced the 2020 National Budget on Thursday and many are still reconciling its main takeaway points.
No game-plan for energy
Turning to the capital-intensive energy sector, Ncube said government has budgeted ZWL$8.4 billion for the expansion of Hwange Thermal Power Station which has been on and off the grid during the greater part of the year.
In our view, Hwange thermal is not only environmentally unfriendly but also long overdue to be mothballed. The frequency of breakdowns on the country’s second largest power station calls for an immediate action to build a new plant. But the question is who will finance the project. The Chinese are now overstretched and may not be ready to commit. With exports falling, pressure on the little foreign currency reserves will escalate in the coming year as government will continue to rely on imports from the region. While we acknowledge that Kariba hydro may return to near optimal levels by mid-December, we are of the view that the current power crisis will continue in the coming year due to underperformance of other plants.
In the past government has splurged millions into projects that turned out to be monumental blunders. Thanks to cronyism, the Dema emergency diesel power plant is lying idle and no one seems to care.
Smart command agric not necessarily smart
Ncube said agriculture will this year be financed by the private sector. He said Command Agriculture, an import substitution scheme bankrolled by government would be abandoned for a new model he termed smart agriculture. Reading in between the lines, one can see that government remains the main benefactor of the programme given that it will act as guarantor due to issues relating to security of tenure for newly resettled farmers.
We anticipate high default levels due to both internal and external factors. Firstly farmers understand how emotive the land question is and how government would want to paint a rosy picture. So in the event of defaults government will just assume the debt as domestic debt. Secondly, Zimbabwe generally has low yields per hectare and agriculture is generally not commercially viable for most farmers.
Early New Year’s present?
Mthuli Ncube announced government’s plans to cut value added tax (VAT) from January to stimulate consumer demand amid indications that the economy will this year contract by up to 6.5 percent.
The Finance minister also proposed cutting VAT to 14.5% from 15% effective January 2020. He also proposed lowering the corporate income tax rate to 24% from 25%, a development that reflects on the low compliance levels by companies.
Looking closely at the budget, we can conclude that the fiscal statement presented was expansionary as government comes in terms with the reality of a floundering economy. Treasury has no budgetary support to finance a litany of projects such as agriculture, new subsidies on basic commodities among others. In light of this we expect fiscal deficit to GDP to be in the 10 percent range.