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.
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.
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.
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.
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