By Persistence Gwanyanya Correspondent
It is now very clear for everyone to see that only long-term solutions can deliver Zimbabwe from its economic ills, which are largely structural in nature.
While there appears to be an understanding of the urgency of economic reforms by the treasury, it seems we underestimated the depth of our challenges, ostensibly because we suppressed the economy for too long, through unsustainable subsidies, including currency subsidies — exchange rate parity (1:1) and managed foreign currency allocation system.
All these are stop-gap measures, short-term fixes and half-baked solutions, which, ironically, got us nowhere, but deeper into the hole. It’s unsurprising that we missed all key macro-economic targets in 2019 as the economy adjusted to its true position following the implementation of economic reforms, which started in October last year.
Inflation, which was projected to average 22,5 percent is now estimated at more than 350 percent, the exchange rate at around US$1: $21 is way off the initial target of US$1:$3.5.
All these necessitated the supplementary Budget of ZW$10, 5 billion from the initial budget of $8, 2 billion.
Resultantly, economic growth for 2019 was revised from 3, 1 percent to a decline of 6, 5 percent, external shocks from drought and Cyclone Idai contributed. So it’s only fair to conclude that we carry the burden of the past.
A key take away from the Budget is that it’s now time to confront the reality, bite the bullet and deal with our real challenges, not symptoms. That’s why treasury insisted on currency reforms, even with minimal fundamentals and without the necessary external support, which all countries going through the same process would ordinarily access.
Now, it’s time to work on fundamentals needed to sustain our currency, which is still in its infancy — production, productivity, employment and formalisation. Life has taught us that a return to our own currency is extremely difficult, as we normally wait for fundamentals, which, ironically, will never be achieved.
Despite the current challenges, Treasury seems to press ahead with reforms, but tuning on to the stimulus gear and abandoning austerity measures.
While the temptation to conclude that the projected increase in Budget to ZW$58, 6 billion was necessary to stimulate the economy, it is still very low at US$3, 66 billion (at 1:16).
It’s actually about a quarter of the expenditure bids of about ZW$136 billion, which ably demonstrate the need to grow the cake. Due to revenue constraints, Treasury had to rationalise expenditure to ZW$63, 6 billion, resulting in a small deficit of 1, 5 percent, which is in line with the TSP target.
However, the funding of our Budget remains unsustainable, largely from taxation (more than 90 percent) mainly excise duty on fuel, Value Added Tax (VAT), two percent Intermediated Money Transfer Tax (IMTT).
As such, it’s now time to shift our focus from currency and monetary issues to production, productivity and employment creation. Just as you cannot expect a car without an engine to drive, without production and productivity it’s extremely difficult to sustain a currency.
Without jobs, our unemployed population has no option, but to enterprise around currency as a source of living. That’s why Treasury is keen to support mainly youths and women who are more vulnerable groups of the society.
The Youth Employment Tax Incentives (YETI) and the National Venture Capital Fund for $500 million are plausible initiatives aimed at promoting youth employment and entrepreneurship, while women continue to be supported through various financial institutions.
While the thrust by Treasury to use the incentive system to promote production elsewhere in the economy is in line with international trends and thus commendable, it’s important to interrogate why there has been low uptake of the Special Economic Zone facility by the business community.
Surely there are other factors beyond incentives that we need to deal with. Production shall be hinged on the effective exploitation of resources commanded to our care by the Creator.
Due to its close link with the manufacturing sector, prioritisation of agriculture is expected to provide the impetus to reboot production and support the re-industrialisation drive.
Agriculture used to supply an estimated 60 percent of raw materials consumed by the manufacturing sector.
In line with current trends, we should shift our focus from primary agriculture to agro-business models, which emphasise value chains.
The required improvement in productivity will be driven by support to irrigation, farm mechanisation as well as other key projects, which have been allocated $1, 9 billion.
Unlike under the previous Command Agriculture model and consistent with the migration towards the private sector-led economy, agriculture will be funded by banks, through the SMART concept, with Central Government only coming in to provide guarantees.
This model is more effective and less risky as funding will be on commercial basis. The success of the agribusiness model is important for employment creation and resuscitation of our manufacturing sector, which used to contribute about 25 percent of GDP at its peak in the late 90s, but is now contributing about half that amount.
The manufacturing sector, which is seen as an engine of growth and employment creation, is struggling to recover due to a myriad of challenges, chief among them being shortage of capital, which itself can be traced to the unconducive investment environment.
As if acknowledging that the improvement of the business environment is beyond economics and finance, Treasury is beginning to show an inclination towards supporting institutions which support this imperative.
Key among them is the Auditor-General’s Office, which has been key in exposing the profligacy in Government and independent commissions which are key to the promotion of good governance.
While recognising the potential of the mining sector to turnaround the economy, there is need to fully understand challenges faced by this sector which may limit its contribution to recovery.
In view of current power challenges and capital constraints, the projection of US$12 billion contributions of the mining sector in 2023 seems over ambitious.
The current performance of the sector ably demonstrates the impact of the power and currency management system. The required investment may need some external flow of capital, which will be hinted by the business environment and of course, global economic and financial conditions.
Even the projected contribution of the tourism sector, which is also expected to anchor recovery, looks over-ambitious in the current environment.
Similarly, the projection of US$10 billion contribution to the GDP seems over-ambitious. What all this tells you: it’s easier to come up with projections than implementable and practical solutions to achieve the same. Quite often we are affected by administrative incompetence, bureaucracy, inefficiency, corruption and general business environment, all of which need to be tackled head-on.
As we analyse the Budget, we should not forget its impact on the ordinary person in the economy, who is currently worried about economic implosion. A Budget that ignores the plight of the working population mainly civil servants falls short of expectations.
While the proposed review of taxable incomes is commendable, they still fall short of the worker’s requirements.
The minimum taxable income has been reviewed from $700 to $2 000 per month whilst tax bands have been adjusted to begin at $2 001 and end at $50 000, above which the highest marginal tax rate of 40 percent will apply, with effect from 1 January 2020.
The two percent IMTT tax-free threshold was adjusted from $10 to $100 and maximum tax payable of $10 000 to $15 000 with values not exceeding $1 250 000 effective 1 January 2020.
Due to the poor provision of public utilities — water and electricity — the ordinary person in the street has lost security. Treasury has to intervene and support these providers of these public utilities, who are struggling to collect fees from the constrained population, noting that everyone is paying taxes through the two percent IMTT.
The facility of $8, 09 billion for energy infrastructure is necessary for the resuscitation of our out-dated energy infrastructure, which is failing to cope with the energy demand of the country.
Similarly, support of infrastructure to the extent of $2, 6 billion, which is seen as a fulcrum for economic recovery, is commendable.
However, given the amount of capital required its necessary that we improve our business environment to attract the private sector, which can also work with Government through Joint Ventures (JVs), Private, Public Partnerships (PPPs) among others. As we talk about infrastructure and utilities it’s important to mention that the progress towards parastatal and State enterprises reforms has to be expedited as they continue to milk the fiscus.
The Budget reflects an economy in a transition stage, which carries the burden of the past. Whilst we have not yet reached Canaan, we are definitely out of Egypt.
The journey is not going to be easy, but we cannot abandon it, we have to endure and build on the progress made so far.
There is definitely more that needs to be done especially in the areas of corruption, profligacy and revenue leakage to support the reform initiatives.
Importantly, economic and financial solutions are inadequate to solve the Zimbabwe problem today. There is also a need to resolve the political impasse as well as growing distrust and entropy between Government and its citizens.
Persistence Gwanyanya is a Chartered Banker, Economist, and Trade Finance Specialist who also founded the Bullion Group. For feedback email email@example.com or WhatsApp +263773 030 691