By Victor Bhoroma

Zimbabwe’s national budget for 2021 is expected to be presented within the coming 30 days amid fears of a resurgence in high levels of inflation. The country’s annual inflation dropped from 363% recorded in January to 55% recorded in October, making it the most significant achievement by monetary authorities in the past 10 months. However, month on month inflation for September increased to 4.7% due to money supply growth. Moreover, the government started enforcing Statutory Instrument (SI) 127 of 2021 again after a period of relative stability and calm. The regulation compels businesses to sell products or quote them using the ruling auction rate which is pegged by the central bank and it sets penalties for businesses that refuse to accept payment in local currency at the ruling auction rate. By enforcing this regulation in a market where foreign currency is in short supply, the government is pushing producers and retailers to constantly increase Zimbabwean Dollar prices in tandem with the parallel market rates. This is causing the current increase in prices for basic goods and services.

2021 Budget

For 2021, the government projected to spend no more than ZW$421,6 billion (US$5,1 billion) which was 17,6% of Gross Domestic Product (GDP), up from the ZW$162,4 billion (US$1,98 billion) of 2020. Revenues projections were set at ZW$390.8 billion (16.4% of GDP), resulting in a budget deficit of ZW$30.8 billion (1.3% of GDP). Out of the ZW$421,6 billion budget, capital expenditure constituted ZW$131,6 billion (US$1,6 billion and 5.5% of GDP), while recurrent expenditure figure was ZW$290 billion (US$3,5 billion and 12.1% of GDP) with employment costs projected at ZW$142,6 billion (US$1,74 billion and 5.9% of GDP).

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The African Union (AU) Declaration of 2009 stipulates that African countries must spend at least 9.6% of GDP on infrastructure, while the Abuja declaration of 2001 requires governments to commit 15% to health care.

Actual Performance

In the 6 months to June 30, the government collected ZW$198,20 billion (With ZW$189,97 billion collected from taxes) and spent ZW$197,60 billion resulting in a book surplus of ZW$570 million. However, the tax collection agency (Zimbabwe Revenue Authority) has a net tax collection figure of ZW$195,176 billion for the same period. Civil service expenditure was ZW$80 billion, Social benefits and Subsidies accounted for ZW$14,5 billion and ZWL$2,9 billion respectively. Infrastructure development projects totaled ZW$21,2 billion, even though billions have been allocated to the Emergency Road Rehabilitation Programme 2 (ERRP) in the last 4 months. More importantly, the government collected foreign currency taxes worth US$698.5 million during the period and the forecast is that for 2021, foreign currency revenues will eclipse US$1,5 billion.  With such tax collections in hard currency, Zimbabwe should now have a debt repayment strategy for its external debts.

With the economy expected to register a 7.8% growth rate (5.1% by IMF prospects), treasury should announce a budget that creates domestic demand, sets the agenda for reindustrialization and improve competitiveness in light of Africa Continental Free Trade Area (AfCFTA). Below are some of the aspects that need to attention from treasury.

Addressing the cost of fuel The pump price of fuel at US$1.40 per litre for petrol and US$1.32 per litre for diesel makes Zimbabwean fuel the most expensive in Southern Africa while ranking it high amongst the most expensive in Africa.

The government is making a giant killing on Import & Excise duty levied on fuel. Duty accounts for US$0.32 for every litre of fuel imported via the government owned pipeline and US$0.37 per litre for fuel imported through road haulage. The ZINARA Road levy (US$0.06), Debt Redemption Levy (US$0.057), Carbon Tax (US$0.04) and other taxes are then added on top to take the total taxation to US$0.50 per every litre consumed locally. Businesses in the petroleum value chain especially the thriving retailers, will then pay ZERA license fees and additional taxes levied on operating income. The cost of fuel heavily feeds into the cost of production across every sector and reduces competitiveness for Zimbabwean products on the local market against imports. It means Zimbabwe will continue to be a lucrative destination market for merchandise produced in South Africa, Zambia and other SADC countries which are landing in the local market at cheaper prices than locally manufactured products. Similarly, export trade in value added commodities cannot grow with such cost barriers. The current taxation levels on fuel are excessive and not in sync with trends in the SADC market for landlocked oil importing countries such as Zambia, Swaziland and Malawi. As such, the budget needs to address the cost of fuel by reducing Import & Excise Duty paid on fuel to about US$0.20 per litre, Carbon Tax to US$0.01 and ZINARA Road Levy to below US$0.03 to manage the cost of production in the economy.

Civil Service Remuneration

Morale remains extremely low among the 400 000 plus civil servants on the government payroll with serious brain drain happening in critical sectors such as health and education. The government recently awarded a 45%-50% salary increment that resulted in the lowest paid civil servant (B1 grade) being paid ZW$28,600. The above entry level salary equates to US$295 if the soft-pegged auction rate is used and US$150 if the widely quoted parallel exchange rate is used. It is critical to point that the consumer basket is informed by the parallel market exchange rates especially rentals, insurance, health care and school fees. The poverty datum line as measured by the Zimbabwe National Statistics Agency (ZimStat) is now at ZW$7,118 for one person and ZW$42,708 for a family of six (6). This means civil servants cannot afford a decent life from their salaries and are therefore involved in other income generating activities using government resources and they are forced to engage in corruption to make ends meet.

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There is now an urgent need to utilize foreign currency tax revenues to award civil servants and pensioners a decent living wage that is in sync with the actual cost of living (as measured by the government). The low morale in the civil service is affecting service delivery across all government departments and is entrenching a dangerous culture of corruption in the economy. The culture has become so endemic that entirely every public service rendered in government departments requires a bribe. The country’s credit market is also undergoing resurgence due to re-dollarization and it will benefit immensely from an increase in disposable income for those employed.

IMMT Tax Review

The Intermediated Money Transfer Tax (IMTT) is a transaction tax accrued at various levels by businesses. Since the tax is also levied on formal businesses that pay corporate tax, the budget should make the transaction tax be deductible from corporate tax or Value Added Tax (VAT) as is the case with other transaction taxes. This will provide relief to all hard pressed tax compliant businesses.

Incentivizing exports

Zimbabwe is set to increase its export earnings from the US$4,4 billion realized in 2020. However, the country’s reliance on raw commodity exports is thwarting economic growth and diversification.  Exporters pay up to 45% cumulatively in taxes and lose 20% of their real export earnings due to exchange rate disparities between the formal and parallel market rates. To provide incentives to exports, export surrender requirements need to be reviewed or at least the Auction platform should be market determined (Not pegged by the government). Exchange rate distortions are threatening the viability of manufactured exports.

The budget is largely expected to maintain various incentives to local producers such as rebate of duty on fertiliser and shoe manufacturers, and suspension of duty on motor vehicles imported by Safari Operators and buses for Tour Operators in tourism. It remains to be seen whether the 2022 budget will speak to the Vision 2030 aspirations of transforming the economy through value chains, value addition and beneficiation.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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