Zimbabwe: 2014 Budget - Chinamasa's Daunting Task

FINANCE minister Patrick Chinamasa's long-awaited 2014 national budget will only be effective if backed by financial resources and sound economic policies, economists say.

The country's capacity to meet budgetary obligations hinge on its ability to secure foreign funding given the current liquidity crunch locally, Econometre Global Capital (Econometre) researcher Takunda Mugaga told the Zimbabwe Independent in an interview yesterday.

Mugaga said Chinamasa should address issues of employment as the unemployment rate is estimated above 80%, the current account deficit, as well as bring clarity to the issue of return of the local currency.

"We need sound export promotion strategies in order to close the huge gap between imports and exports," he said. "He also has to set up necessary conditions for the return of the local currency."

Mugaga said Chinamasa needs to clarify how government is adopting the Reserve Bank of Zimbabwe debt.

On expenditure, independent economist John Robertson said Chinamasa must put politics aside and tackle the budget economically in respect of the bloated civil service wage bill and the huge expenses incurred to sustain the current cabinet.

"He should simply push for cutting cabinet expenditure and civil service wage bill especially given that there are 7 000 youths improperly employed by the Ministry of Youth Development, Indigenisation and Empowerment," Robertson said.

"Such a move will show those who are supposed to be funding us like the International Monetary Fund that he is serious. We don't have money so we have got to behave in such a way that attracts money from whoever is supposed to assist us."

He said Chinamasa must come up with policies that promote employment creation as well as the ability to raise revenue.

He added there was little economic activity, adding Chinamasa would be tempted to increase tax, thereby stifling industry further.

Robertson said policies that attract investors were required to stimulate a chain reaction that starts with investor confidence, followed by foreign investment inflow and employment creation.

"Why should anyone invest when the government has already said 'we will take half of your capital'?" asked Robertson.

Bulawayo-based economist Eric Bloch said over and above fiscal management and taxation policies already addressed, Chinamasa should relook the new Income Tax Bill, currently awaiting presidential assent.

The new Bill says the only expenditure, which may be deducted in the determination of taxable income is such expenditure as has been made in the production of income.

"This is a grossly ill-considered policy change, for the non-deductibility of expenses such as insurances, subscription to business associations and business publications, bad debts, repairs and maintenance, and the like, are essential expenditures for most taxable income generators, albeit that they do not directly and identifiably relate to any specific taxable income generations," Bloch said.

Last month, the Zimbabwe Artisanal and Small Scale for Sustainable Mining Council (ZASMC) called on Chinamasa to reduce mining royalties in the national budget this month.

ZASMC president Wellington Takavarasha said the steep royalties of 7% discouraged its members from effectively carrying out their operations.

The Zimbabwe National Chamber of Commerce (ZNCC) also called on Chinamasa to assure the nation that there will be no immediate return to the Zimbabwe dollar or resorting to any local currency as a pre-condition to boosting waning investor confidence.

ZNCC said issues relating to currency reforms were very crucial in determining the nature, tenor and quantum of foreign investments and foreign lines of credit which the country needs.

Analysts say Chinamasa also needs to restore the central bank's lender-of-last-resort status and ensure there is a functioning interbank market in a bid to address banking sector liquidity challenges.

Apart from the absence of RBZ's lender-of-last-resort status, the troubled central bank is crippled when it comes to monetary policy intervention.

For instance, the central bank cannot do simple things expected of it when signs of a recession appear such as coming up with a stimulus plan to kick-start the economy.

Other central banks tend to intervene through quantitative easing, an economic euphemism for printing money, bond and Treasury bill issues in instances such as Zimbabwe's. But the use of multi-currencies means Zimbabwe has to rely on foreign direct investment (FDI), diaspora remittances, lines of credit and other sources of liquidity.

With heightened investment security fears after Zanu PF and President Robert Mugabe won the July 31 general elections, economists do not see FDI flowing into the economy soon.

The banking sector, which is supposed to spur the economy through loan financing, is in a precarious state in terms of liquidity. Analysts fear more indigenous banks could fall after Trust Bank was closed last week.

Almost 83% of banks' total deposits are transitory, showing serious vulnerabilities.

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