Pareto Optimality: National Treasury “better off ” but consumer demand contracts…

Batanai Matsika

The Zimbabwe Revenue Au­thority (ZIMRA) has released its 1Q 2019 revenue report indicating an 83.82% surge in net collected revenues to $1.94bn. The positive per­formance is attributed to the significant contributions from Intermediate Money Transfer Tax (IMTT), Corporate In­come Tax and Excise Duty. IMTT realised $282.84m against a target of $150m and grew by 5333.99%. Further, Excise Duty was the biggest tax head contributor at 29% to net collections. The per­formance comes after govern­ment hiked the price of fuel in mid-January to reflect the sig­nificant increase in the excise duty rate.

While these revenue num­bers come as good news to National Treasury which is now operating in a surplus, we see a state of pareto optimality in the broader economy. Pa­reto optimality is an economic state where resources cannot be reallocated to make an eco­nomic agent better off without making at least one economic agent worse off. It implies that it is almost impossible to effect a change in economic policy, without making at least one economic agent worse off. The increase in fuel prices and the introduction of the 2.0% tax has made the general populace worse off given the contrac­tion in consumer purchasing power. We contend that there has been a transfer of wealth from the general populace to the government. For com­panies, the implication has been an increase in the cost of production. The net effect is a general increase in prices as businesses has pushed the costs to final consumers.

Overall, the current-tax re­gime does not assist companies to boost productivity while it has also constrained consumer demand. That said, the win­ners on the Zimbabwe Stock Exchange (ZSE) will be those companies that are linked to government spending activity (agriculture-related funding programmes) such as SeedCo and Zimplow. Further, con­struction materials stocks are set to benefit since the expec­tation is that an improvement in revenue collection will cre­ate more room for government to invest in critical infrastruc­ture projects such as transport (roads, rail and air), water (dams and piping) and elec­tricity generation.

We have analysed the his­torical relationship between Capital Expenditure and Gross Domestic Product (GDP) for Zimbabwe as illustrated be­low;

We highlight that Zim­babwe’s Gross Fixed Capital Formation (GFCF) is below most countries in the world as well as in Sub Saharan Africa (SSA). For example, Rwanda and South Africa have a GFCF above 20%. Zimbabwe will have to play catch up by in­creasing infrastructure spend­ing. The huge infrastructure backlog as well as the hous­ing deficit estimated

as c1.5m units presents opportunities for companies such as Pro­plastics, Turnall and Masimba Holdings. Of interest is Tur­nall Holdings which has re­turned to profitability and is trading on a PER (Hist.) of 8.5x (Proplastics 15.8x).

Author – Batanai Matsika Head of Research – Morgan & Co +263 78 358 4745bata­nai@morganzim.com

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