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Wednesday, 13 November 2019 09:34

Too early to talk about growth, Mr. Minister

As it becomes increasingly clear that Zimbabwe’s economy is heading south and prospects of meeting growth targets set out in the Transitional Stabilization Programme appear dim, Finance minister Mthuli Ncube brew a shocker ahead of the 2020 National Budget that the fiscal policy document will focus on productivity, growth and job creation.

Wait a minute. How he would do that would be the most logical question that begs an answer. Let us take you aback. Barely a month after being appointed head of treasury, Ncube promised to wave the magic wand and turn around the economy. That was a strong statement which not only spoke about his predecessor but was also loaded with self-praise.

Now, barely a year after President Emmerson Mnangagwa appointed his first cabinet after the 2018 elections, Zimbabwe appears to be on auto-pilot. Key economic indicators such as inflation, unemployment and exports are not projecting a rosy picture. Gold output has been plummeting due to poor policies that fuel side marketing and tourist arrivals have also declined.

Zim Gold Output in Quarters

Data derived from Chamber of Mines

Zimbabwe has become a case study for economics students as well as international financial institutions. Essentially, it has become an experiment for Ncube who de-dollarized 10 years after dollarisation despite the absence of key fundamentals to support the introduction of a domestic currency. Studies by monetary experts such as Steven Hanke have shown this.

The Finance minister is probably seeing Zimbabwe’s growth through rose-coated lenses. He has rebased the economy in the past, blacked out the publication of inflation figures and has trumpeted his exploits in reducing the budget deficit. In fact he sees deficit closing the year at 4 percent of the budget size. Time will tell.

Early this year, Ncube bragged that Zimbabwe had registered a budget surplus and international creditors were pleased with this achievement. In reality though, what is a budget surplus when hospitals have no basic drugs such as painkillers and when the value of the domestic currency loses up to 80 percent within the first 60 days of its reintroduction.

Zimbabwe is suffering from a confidence deficiency and government is not doing much to address this. A week before the announcement of the budget, President Mnangagwa increased the number of government ministers when he appointed deputy ministers of Finance and Foreign Affairs. A new ministry was also formed.

For a government that asked its citizenry to tighten belts and endure austerity measures, this flies in the face of authorities who preached fiscal consolidation.

Secondly the false start to the new bank notes and coins is also dampening confidence in the financial services sector. Banks only started dispensing the units on Tuesday despite an earlier announcement that this would be done a day earlier. To make matters worse, the $2 bond coins were printed in 2018, raising questions on why government took this long to introduce them into the market.

Expectations

That the domestic economy is facing serious headwinds stemming from a devastating drought, rising inflation and erratic fuel and power supplies, is now an open secret.

For an economy with no budgetary support and a high rate of tax incompliance, the Budget should answer how the Finance minister will strike a balance between the needs of hungry servicemen and those of capital projects. In our view the Health and Education ministries should be well funded for Zimbabwe to achieve current and future development goals.

Zimbabwe wants to dream again and policies that support entrepreneurship should be in place among other measures.

Ncube’s ambitious plan to create jobs in an environment where there is rising inflation and low business activity due to factors such as lack of capitalization, could be a fait accompli.

zim inflation Oct 2019

In our view, we contend that the Finance minister should shift focus from agriculture to mining particularly gold, coal and chrome. Legacy issues around agriculture make it difficult for the sector to attract significant funding to mechanize in line with modern trends.

Normalising relations with IFIs and establishing partnerships with states that play a greater role in advancing Zimbabwe’s economic interests should also be top on the agenda. As it stands, it’s still a long way to go before Zimbabwe can start talking of job creation. Let’s go back to the basics first. It’s the politics that need to be addressed first before the economy can tick.

Data derived from: Chamber of Mines Zimbabwe

 

Published in econometer
Wednesday, 18 September 2019 13:55

Treasury in a fix as High Court outlaws 2% tax

High Court judge, Justice Happias Zhou yesterday set aside Statutory Instrument 205/2018 which gave legal effect to the Intermediated Money Transfer Tax which is commonly known as the 2 percent tax on all electronic transactions.

Last October Treasury introduced the tax to widen revenue streams and narrow fiscal deficits. Years of fiscal indiscipline left government walking on a tight fiscal rope. With no budgetary support government has struggled to finance capital expenditure and fund social spending. Official figures show that as of January this year, government was collecting nearly $100 million a month from this tax.

The introduction of the tax immediately attracted public outrage after prices of basic goods and services shot up the roof. Authorities said revenue collected from the tax would be vital in upgrading the country’s infrastructure. There were few takers on this narrative.

Pro-democracy activist, Mfundo Mlilo through his lawyer Tendai Biti challenged the lawfulness of the statutory instrument, which was also widely criticised for being inflationary.  Before this latest development the High Court in February reserved ruling in an application by pro-democracy activist Mfundo Mlilo, who is seeking an order to suspend the imposition of the two percent electronic transactions tax introduced by Finance minister Mthuli Ncube last year. Law experts argued that the statutory instrument should have been debated in Parliament.

Zimbabwe annual inflation for June this year reached 175.66 percent this year, the highest in 10 years and this has piled pressure on authorities to tame the soaring prices. As prices soared so did political temperatures. Government, which introduced austerity measures in its 2019 National Budget was left with limited fiscal space when civil servants pushed for a salary hike.

The High Court ruling comes nearly a week after the Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement.

The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The central bank said it would drip-feed new notes into the economy to ease cash shortages on the market.

To arrest rising inflation the RBZ, among other measures introduced high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, Zimbabwe’s economy continues to face structural deficiencies and headwinds which stifle domestic production. As bureaucrats at the Finance ministry burn the midnight oil, crafting the 2020 National Budget, we anticipate that government will increase taxes to offset losses resulting from the High Court order.

Published in econometer