20 December 2013

Zimbabwe: Chinamasa Budget Offers No Hope, No Rescue Plan

opinion

Finance Minister Patrick Chinamasa yesterday presented a US$4,1 billion budget which offers the country no hope as no serious measures were proposed to spark a sustainable resurgence in the economy already sliding back in the aftermath of disputed general elections in July which gobbled US$175,5 million.

Premised on what analysts say are flawed assumptions and unrealistic growth projections, Chinamasa's budget has no stabilisation thrust or a set of measures to stabilise and stimulate economic recovery. Analysts say there was nothing in it to engender public confidence and stem the drop in business confidence.

While it proposes keeping the multicurrency system, a US$150 million to US$200 million fund for the recapitalisation of the Reserve Bank so that it performs its role as the lender-of-last-resort, providing liquidity to banks, and also setting a US$100 million interbank market fund, as well as lending to various productive sectors and emerging economically active groups, including a US$100 million line of credit to artisanal small-scale miners to boost production and tapping into the unbanked to deal with the liquidity crunch, the reality is it offers no fiscal space for social and capital projects amid indications the wage bill could consume up to 80%, leaving just above US$400 million for other economic activities.

"The only plan the government has is to spend, spend and spend, but where will the money come from?" one analyst asked. "Chinamasa offered no rescue plan and thus no hope beyond proposals to dole out to different areas, including political constituencies to protect the ruling party's social base. That was very irresponsible."

Chinamasa said the wage bill chewed 75% of the 2013 budget, an indication the country is surviving virtually on 25% of resources for social expenditures and capital projects.

While Chinamasa alluded to problems besetting the economy such as high consumption, liquidity constraints, low financial intermediation, high debt overhang and resultant expensive lines of credit, food insecurity owing to low productivity, low investment, climate change-induced droughts and erratic rainfall distribution pattern, as well as lack of industry competiveness due to obsolete equipment and outdated technology, he did not proffer solutions to limit their impact on his projections.

Even though he conceded the current account deficit was widening due to the faster growth of imports hurting the economy, Chinamasa neither introduced meaningful incentives to boost exports nor explained how government would help companies retool to make them more competitive.

The country's unsustainable import bill lies at the heart of the current liquidity crunch and reflects the depth of the economic problems.

Total exports for the period January to October 2013 stood at US$2,8 billion, against US$3,2 billion realised during the same period in 2012. The declining growth in exports is a reflection of the overall slowdown in real economic activities. By the end of 2013, exports are projected to reach US$4,4 billion.

Total imports for 2013 are expected to reach US$7,7 billion, while in 2014 US$8,3 billion is forecasted for imports. This means since imports are growing rapidly against the sluggish growth in exports, the current account deficit will continue to widen to US$3,8 billion. This deficit has already surpassed the original projected shortfall of US$2,5 billion for 2013.

This situation shows the country is struggling to compete. The appreciation of the real exchange rate suggests that the price structure of the economy has shifted against tradable products, as capacity constraints are hampering the domestic supply response to the strong spike in domestic demand that followed 2009 stabilisation.

Although the distribution sector has filled the gap instead, supplying imported goods, keeping prices of tradables at low levels and contributing to a widening current account deficit, this is contributing to the continued de-industrialisation in the economy.

Analysts say government must focus on increasing productivity because the multicurrency precludes monetary policy interventions.

Short-term protectionist measures, which some are advocating in industry, can lead to short-term gains at the expense of medium-term recovery.

The 2014 budget comes against a background of limited budgetary resources. Based on the projected nominal GDP of US$14,065 billion, the budget would be premised on revenues of about US$4,120 billion, representing 29,3% of GDP, up from the expected US$3,722 billion by end of 2013. The US$4,1 billion is against bids from government departments totalling about US$8,9 billion.

Even though government is already running a growing deficit after abandoning cash-budgeting, and the tax base is shrinking amid company closures and retrenchments, Chinamasa sees tax revenues constituting US$3,8 billion, with the balance of US$296 million being non-tax revenue. About US$96 million is seen coming from diamond dividends and US$115,7 million being revenues from investments and property.

Of the total budget, current expenditures will account for US$3,6 billion, of which employment costs will require at least US$3 billion, representing about 73% of the total budget. Against such a background, a mere US$492 million remains available for capital projects during 2014.

While the 2013 budget provided for total revenues of US$3,9 billion, of which tax revenue was projected at US$3,6 billion, with non-tax revenue of US$213,6 million, total revenue collections during the year up to November amounted to US$3,360 billion, against a target of US$3,395 billion, showing a negative variance of US$35 million.

Chinamasa contends the negative variance could have been much higher had it not been offset by the once-off unbudgeted non-tax collections from the renewal of licencing fees from mobile telecommunication companies, whose business licences generated US$145,5 million.

In the absence of non-tax revenues such as mobile telecommunications fees witnessed in the 2013 budget, it's not clear how US$296 million would be raised for 2014.

Former Finance minister Tendai Biti said besides Chinamasa's "smoke-and-mirrors" budget, his remarks on indigenisation wiped out all the positive signals he had sent. "It's the wrong approach at the wrong time," said Biti. "That is very regrettable."

Biti said there was no clear explanation on how the US$4,1 billion budget would be funded given that the country already had a US$130 million deficit on the 2013 budget as at October 30. "Where are the revenues that are going to finance next year?" he asked, adding "in that respect it's a smoke-and-mirrors budget. It's fictitious".

Biti said the budget was anti-poor. "Things like taxing mobile phone transactions and so forth are anti-poor," he said. "They can get away with taking over the government debt because they have got the majority in parliament, but to address liquidity problems we need billions so US$100 million is a drop in the ocean."

Analysts say Chinamasa failed to inspire confidence on the economy.

"The budget does not go to the heart of the issues affecting the economy," analyst Kevin Msipha said. "It reflects the inherent unwillingness to administer harsh medicine. The government presently presides over a highly inefficient economy and complains of a lack of fiscal space, but then displays no appetite to rein in expenditure.

"There is a huge variance on the growth projections from last year vis-à-vis the actual figure. Given that realisation, one would think that this year's projections would be more realistic. This shows that there is no connection between what they want and the results."

Economist John Robertson said while Chinamasa's budget had good elements, his position on indigenisation was retrogressive. He said while the minister appears to recognise the need for foreign investment, his stance on indigenisation would undercut investment.

"He has done the country a disservice because investors were hoping for a real change on indigenisation," Robertson said. He added Chinamasa's economic growth projection of 6,1% was unrealistic given the situation on the ground.

"Industry capacity utilisation is low, mining is not performing according to expectation and the situation is expected to persist into 2014," he said.

Tax expert Tendai Mavima said Chinamasa's decision to introduce an additional road levy of two US cents per litre on petrol and a US cent per litre on diesel to raise funds to service the Development Bank of Southern Africa loan to rehabilitate the Plumtree-Mutare road puts a further burden on motorists who are already paying toll fees.

"They should have just said we will take a percentage of the toll fees and use that for rehabilitation," he said. "It looks like two cents but the fuel cost will go up and on the value chain some items will go up by 5 cents or 10 cents and this will just push inflation up unnecessarily."

Mavima also said the decision to introduce new taxes on diamond miners was counter-productive and could affect investors in the long-run in terms of their capacity to retool and make profits.

"Remember they already pay Vat (value added tax), profit tax, income levies and so forth, so we should be careful not to get to the point where you are almost taxing anything that gets into their hands," he added.

Chinamasa said the largest contributor to government revenues has been the value added tax with 29% followed by paye at 20%.

However, Mavima applauded Chinamasa's decision to scrap duty on capital equipment, saying the move would stimulate productivity. The minister was silent on the issue of taxable bonuses and minimum taxable income, apparently giving the impression the status quo stands.

"At times you don't need to change things for the sake of changing, which I think is good," he said.

MDC-T Zengeza East MP Alex Musundire said Chinamasa's budget was full of faulty assumptions and gaps.

"It is not good to make a budget on far-fetched assumptions, for instance basing support from international monetary institutions and good rainfalls," he said.

"He also did not give a clear direction how the liquidity issue and structural economic problems will be addressed."

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