Mthuli faces a herculean task

LIVINGSTONE MARUFU AND CLOUDINE MATOLA

Finance, Economic Development, and Investment Promotion Minister Professor Mthuli Ncube faces a daunting task when he presents his fiscal policy statement later this month—a herculean task as he attempts to extricate the ailing economy from its woes- surrounded by a  bleak outlook characterised  by the adverse impact of expanding  corporate graveyard, crippling power outages, a plethora of taxes, weakening  local currency and shortages of foreign currency, Business Times can report.

It also comes at a time when the economy is suffering from high unemployment  rate coupled with unstable currency and exchange rate, unsustainable expenditure, plunging production levels, healthcare sector crisis and mounting debt.

Companies are crumbling as they struggle to stay afloat due to increased cost pressures on raw materials brought on by currency fluctuations. They are also unable to meet their tax obligations and are downsizing or collapsing due to the hostile operating environment. With a shrinking tax base, this portends disaster for the Treasury. Professor Ncube is running out of choices as the reality of falling income, primarily due to declining corporate tax contributions, comes in. To bite the bullet, Professor Ncube must come up with tough reforms necessary to turn the tide as he has no room to manoeuvre on increasing or introducing new taxes on struggling and largely already overtaxed businesses to the bone.

As they contend with unfavorable macroeconomic issues like a heavy tax burden, liquidity issues, exchange rate volatility, waning domestic demand, and shrinking profit margins, businesses are likewise in a perilous position.

Other challenges in the economy include low industrial, little investment inflows, high cost of doing business and poor infrastructure.

They said Professor Ncube should also reign in the government’s huge debt and expenditure.

Another big headache is on how to deal with government workers, who he should ensure are remunerated decently.

Most of them have declared incapacitation and are threatening to go on industrial action.

The issue is that the country’s fiscal space remains severely limited largely  as a result of poor performance of revenue inflows against the background of rising recurrent expenditure and a shrinking tax base.

They said Professor Ncube ought to recommend policies and actions to revitalize the flagging economy.

The budget will also be judged on how it deals with State entities.

The bailout of perennial loss-making parastatals is expected to be one of the  topical issues Professor Ncube needs to address.

According to analysts, Professor Ncube ought to make difficult choices and alter the narrative of State  entities. In order to ensure that State entities that have been draining the public coffers through constant bailouts become financially self-sustaining, they urged Professor Ncube should develop drastic  plans to revamp them.
The government should sell some parastatals as soon as possible in order to alleviate the fiscus of the burden of ongoing bailouts, since the fiscus is already overloaded with debt.

However, the analysts wonder who would want to purchase them in their current condition.

These economic challenges could worsen and cause serious problems.

Consequently, many businesses have been left in distress as a result of its frustration at being unable to predict and manage Zimbabwe’s unstable and toxic economy, which has persisted in its cries for help.

Industry and commerce are at crossroads as a result of the deteriorating economic climate, which business leaders have described as VUCA, an acronym for volatility, uncertainty, complexity and ambiguity.

They are currently living on the margins, which jeopardises their survival.

Consequently, the VUCA environment has forced Zimbabwe companies to engage in illegal business practices including the use of forward pricing, a move which has resulted in prices of goods skyrocketing and the depreciation of the local currency, in anticipation of an upward exchange rate movement.

In response to that the Government is taking more aggressive action against companies that manipulate currency and continue to operate using the black market exchange rate.

Infact, the Government has threatened  to revoke operating licences for business entities manipulating  the official foreign currency rate, thus fuelling the high parallel market exchange rate.

In it’s  position paper to the Treasury this week,the Zimbabwe National Chamber of Commerce (ZNCC) said the 2% tax on electronic transactions, the Intermediated Money Transfer Tax (IMTT),which has been  piling misery on citizens, should be scrapped as it is hurting the economy.

“The goals of financial inclusion initiatives will not be reached with IMTT in force. The IMTT was reported to have contributed 3.4% to the total revenue during the first half of the year.

Comparatively, IMTT contributed about 8% of the revenue during the first half of 2022 and 6.7% during the same period in 2023.

The IMTT coupled with other taxes charged on  bank transactions such as withdrawal levies force people to transact hard cash thereby  reducing the amount of  cash collected via such means,” ZNCC said.

” The IMTT has an incremental effect on the cost build up of the players in the supply chain, from the producer to the wholesaler, then to the retailer to the consumer. Adding value added tax, the total tax charged will be 17%.

Our position is that IMTT is destructive as it is working against the government’s thrust to promote the use of electronic means of payment and financial inclusion drive.

Therefore, it should be removed entirely taking into consideration it’s dwindling contribution to the government’s revenue,” reads part of the submissions.

Banks too, are affected by the IMTT’s effect on both US$ and ZiG transactions.

In its submissions, the Bankers Association of Zimbabwe (BAZ) said  the punitive IMTT has forced depositors to shun banking for cash transactions outside  the formal channels.

“We advise the Treasury to reduce IMTT on both ZiG and the US$ transactions.

The rate of 2% on electronic transactions has exacerbated disintermediation, promoting use of cash by the transacting public and discouraging the use of formal channels.

IMTT increases the cost of doing business therefore discourages informal businesses from conducting business formally,” BAZ said.

To widen the tax base, BAZ is advising the authorities to address high informality in the economy.

“The Treasury should consider tax incentives and breaks for small businesses as well as the simplification of the registration process,” BAZ said.

The miners are calling for the authorities to reduce punitive taxes on mining activities.

The Chamber of Mines of Zimbabwe (CoMZ) said the Treasury should consider the reduction of taxes in the mining sector amid falling commodities prices.

“The fiscal framework for the mining industry is suboptimal,citing a multiplicity of taxes, high royalty, beneficiation taxes,  special capital gains tax, high fees and levies.

The miners indicated that the effective tax for the industry is too high and should be addressed,” CoMZ said.

Business executives are worried that  the ballooning debt , which stands at  around US$21bn, is impending progress.

“The government should finalise the arrears clearance and debt relief strategy which hinges on the continued strengthening of cooperation with International Financial Institutions (IFIs), negotiating for arrears clearance and debt relief and restructuring with the debtors,” BAZ said.

According to ZNCC, Zimbabwe should apply for  a relief on debt service.

” The move might be more cost-effective than writing off the debt altogether.

However, the long objective is to reduce the ratio of public debt to the Gross Domestic Product while examining  the inflation targets,” reads part of ZNCC position paper.

Business leaders said the country’s recurring expenditure is a cause for concern.

“A major issue for Zimbabwe concerns public investment and how it is financed amidst absence of external budget support.

Overreliance  on domestic resources mobilisation in a largely informal economy stifles the complying businesses over 20% of the total operating businesses.

This establishing the diaspora bond is critical  in unlocking funding for the long term public investments,” ZNCC said.

Economist ,Vince Muswere, told Business Times, a market leader in business, financial and economic reportage that: “Currency volatility and liquidity are two critical issues which need to be resolved. Dollarise the economy and support business.”

Enock Rukarwa, an investment expert, told Business Times that the local tax system is already burdening formal business operations excessively.

“The current tax regime locally is already elevated, in terms of its burden to formal business operations.

However, it’s unfortunate that we have a government that is also grappling with funding its construction projects, agricultural subsidies and power related expenditures.

An efficient way of taxing the informal sector or promoting economic formalization should be a key theme for the 2025 national budget to broaden the taxable market.

“Another way of dealing with government capacity issues in terms of economic involvement is to reduce its hand for private participation on non- public goods and semi-public goods. Public private partnerships and Built -Own -Transfer arrangements are low hanging fruits to soften tax appetite and capacity issues from a government perspective,” Rukarwa told Business Times.

Economic  analyst, Victor Boroma, weighed in saying: : “There is  greater need to cut non-core government expenditure especially foreign and domestic travel costs. This reduces need to abuse central bank overdraft facility, print money or other inflationary financing methods

There is also a need to declare the country’s total and up to date public debt. Furthermore, there is a need to table a more sustainable Public -Private Partnership (PPP) to facilitate infrastructure funding by private players.”

Speaking this week at the Zimbabwe National Defence College in the capital Harare, Professor Ncube said the 2025 national budget would seek to strengthen the economy in order to make it resilient  to most domestic and foreign shocks.

“We are focusing on resilience because we have been impacted by climate changes this year, so investing in sectors like irrigation, more in drought-resilient seeds and cropping, conservation agriculture in the form of Pfumvudza/Intwasa, and also focusing on insurance products for farmers. All those are key aspects of building resilience,” Professor Ncube said.

Additionally, he said the Treasury would also invest in building currency resilience to anchor growth and stability, while simultaneously ensuring that exports grow.

According to Professor Ncube, the rest of the economy grew positively this year, with the exception of agriculture, which was the only sector to show negative growth.

“The ICT sector, tourism, and accommodation are growing above 10%. But also, we expect agriculture to lead the recovery next year when we are expecting good rains. We expect the sector to grow at about 13% (in a positive direction), and none of the sectors will record a negative rate of growth. So next year, we expect the economy to grow at 6%,” he said.