Finance Minister Mthuli Ncube last week delivered a highsounding expansionary budget for fiscal year 2020 but critics say it lacked any attempt to meaningfully resolve the country’s current economic crisis.
While the finance minister expects a strong fiscal stimulus to kick in and support recovery in economic activity, critics say he failed to deal with problems that will slow down an overheating economy characterised by a runaway government spending and severe economic downturn. Economic activity has declined sharply and inflation is at its highest since 2009. In October, annual inflation was estimated at around 600%.
Month on month inflation shot to about 39% from about 18% the previous month. And there is evidence that the economy will likely shrink further next year, according to analysts. At the crux of Ncube’s budget, total revenues are expected to hit ZWL$58.6bn, with total expenditure estimated at ZWL$63.6bn, leaving a financing gap of about ZWL$5bn. But as the government has a reputation for overspending, with more than ZWL$10bn, it is now seeking condonation over its unauthorised spending.
Last week, the government published its Financial Adjustment Bill HB19 of 2019 in which it is seeking to offload more than ZWL$10bn. Ncube, however, indicated that in order to avoid an undesirable impact of deficits and improve macroeconomic stability, the 2020 macro fiscal framework exposes a low budget deficit of around 1.5% of GDP to reach an expenditure of ZWL$63.6bn.
This will be a reduction from the 4% of GDP in 2019. Ncube said spending outside the budget and macro-economic shocks in 2019 disrupted the attainment of some of the Transitional Stabilisation Programme targets.
He said refraining from unbudgeted operations and borrowing from the central bank would therefore constitute a key obligation for both the Treasury and the central bank authorities. Another key issue in the budget was that the government had been funding the procurement of grain at market price while selling it to grain millers at subsidised price.
This, according to Ncube, was open to abuse and placed a huge burden on the fiscus and would now be done away with. Therefore, subsidies on maize and wheat would be removed from January 2020, a move meant to cut costs. But analysts said this would likely drive up the cost of grains for the already hard-pressed Zimbabweans as the prices of grain would be left to the market. This means the population will be at the mercy of market forces.
This also means the prices of basic commodities such as bread and mealie meal may go up again as a result. The issue of parastatal reforms has been outstanding for a long time now. Despite pronouncements, the government has been hesitant to follow its words into action, resulting in the failure to either reform loss-making state enterprises or sell them to the private sector. It means Ncube failed to relieve the fiscus of the burden of perennial bailouts to state entities through his 2020 budget statement.
Although the finance minister said the budget was pro-poor, Peter Mutasa, the president of the Zimbabwe Congress of Trade Union, said the budget was not pro-poor in “many respects”. “It can only be pro-poor when we taste it.
Currently, we can’t pay breakfast, can’t pay school fees, these were the issues that we wanted in the budget. But, there is nothing,” he said. “We were looking at a number of people dying because of the austerity. It’s huge numbers. Everything is elite, it’s bookish. For now, this budget is not speaking to the expectation of labour. We were expecting a paradigm shift and we didn’t hear that,” Mutasa added.
Writing on Twitter, the economist Nigel Chanakira said the budget was not pro- poor, pro-youth and pro-infrastructure rehabilitation. “The poor will get poorer for yet another while. Attempts to stimulate the economy are evident but the elephant in the room remains the limited capacity to stabilise the exchange rate which has triggered hyperinflation. There is much that remains to be done.”
The finance minister predicted a 3% economic growth next year, meaning he has trimmed down his initial 4.6% growth forecast. The economy is still expected to contract by 6.5% this year, the first recession since 2008. The IMF however expects it to fall by 7.1% this year, and a modest recovery of 2.5% next year.
Analysts, however, say the economic prospects remain fraught with uncertainty.
The Reserve Bank governor, John Mangudya, said: “What I discovered in this country is that walking the talk is a problem. The plan is just a plan; implementation has been the missing link. We now need to commit to this so that it comes to fruition. We need to grow the economy because Vision 2030 doesn’t come cheap. When I read the budget, the departure from austerity to production is critical at the moment.”
Tax free threshold has been raised to ZWL$2,000 from ZWL$700. Tax bands will now begin at ZWL$2,001 and end at ZWL$50,000, above which the highest marginal tax rate of 40% will apply with effect from 1 January 2020. The tax free bonus has been raised from ZWL$1,000 to ZWL$5000, with effect from 1 November 2020. But the controversial 2% tax which started all the deep troubles the population has seen since October 2018, remains.
However, the tax free threshold was increased from ZWL$20 to ZWL$100 and the maximum tax payable per transaction by companies also went up from ZWL$15,000 to ZWL$25,000 for transactions with values over ZWL$1.25m. Value added tax (VAT) was cut from 15% to 14.5%, with effect from 1 January 2020. Ncube said this would stimulate aggregate demand. The corporate income tax rate went down from 25% to 24%, with effect from 1 January 2020.
Fungai Vongai, the director of EY associates, said it was likely that additional tax would be paid as the economy had become hybrid where the US dollar and Zim dollar are used.
“The pay as you earn (PAYE) tax free threshold moved from ZWL$700 to ZWL$2,000. This is a notable increase of 186%,” Vongai said. “However, it does not relate to inflation, that’s where you have noise from the employees. Our assessment is its ok but not talking to inflation. The tax free threshold has moved upwards to ZWL$5,000. It’s a notable increase but not reflecting the rise of inflation. Our assessment is that a bit more should have been done so that it talks to the current economic situation or inflation.”
Economist Tapiwa Mashakada expressed concern over the government’s increased spending. “Be that as it may, net credit to the government is increasing .What signal is this giving,” Mashakada asked. “I didn’t see any policy to stabilise reserve money and broad money. Total gross domestic product is ZWL$340bn and revenue is expected to be ZWL$58bn. We need to apply our minds. Tax free bonus is too little because of hyperinflation.”
Mashakada said the reduction in the corporate tax from 25% to 24% and VAT to 14.5% was tokenism and insignificant. But the economist, Clever Mumbengegwi, praised Ncube though he said there were still issues with the budget.
“It is fragile because it came about through discretionary measures. The elephant in the room is the policy reforms which I think is the key to getting management of the economy on stable footing,” he said. “The other thing is that although we introduced the Zimbabwe dollar, it’s a fact that we have a dual currency in the economy. Every time pricing is done, there is a US dollar price index at the back of their mind.”
Mumbengegwi said there is need for international engagement to solve the forex problem. “To me, these (reengagements) have started to take a back seat. This economy, to me it’s like a prisoners’ dilemma, where we have the political line dominating strategy.”