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Zimbabwe Finance Minister Trapped on Budget Issue

Published on Saturday 17th July 2010

The Minister of Finance, Tendai Biti, presented the Mid-Term Fiscal Policy Review to Parliament yesterday.

Although the nation expected a lot from the Minister especially with respect to the debilitating liquidity challenges, it was clear that he had limited fiscal space due to the non-performance of the vote of credit (donor funds) and the inability to sell Chiadzwa diamonds.

The vote has not performed because international financiers are citing outstanding debts and political issues as reasons for their reluctance to support the southern African country.

The International Monetary Fund, for instance, wants Zimbabwe to fully settle arrears to the Poverty Reduction and Growth Trust amounting to SDR 89,4 million or about US$140 million.

On the political front, the major bone of contention pertains to the outstanding issues to the Global Political Agreement. International financiers and donors want these issues addressed before they can come to the party. These issues have seen, the government for the first time in many years, failing to come up with supplementary budget but only a realignment of budgets.

In his 2010 National Budget Statement presented on December 2 last year, the Finance Minister provided for a total expenditure of US$2,25 billion of which US$1,44 billion would be generated locally. The remainder -- US$810 million -- would come from donors.

However, only US$207 million had been realised by June 30. This non-performance of the vote of credit is now going to see total budget being maintained at US$2,25 billion.

However, good performance on the revenue side has seen total revenue for the year being revised upwards to US$1,75 billion thereby reducing the budget deficit to US$500 million or 9,6 percent of GDP.

The liquidity crunch that has caused stagnation in capacity utilisation for almost a year now has seen the minister revising economic growth forecasts downwards. For instance, GDP that had been initially expected to grow by seven percent has now been revised down to 5,4 percent due to downgrades in manufacturing, mining and tourism. Mining is now expected to register a 31percent growth from the previous 40 percent while manufacturing growth forecast is now down at 4,5 percent from 10 percent while tourism is expected to growth by 3,5 percent instead of 10 percent.

Construction is expected to grow by 1,5 percent, transport and communication by three percent and public administration two percent, while electricity, gas and water production is forecast to shrink by 1,8 percent.

Agriculture sector growth, however, has been upgraded to 18,8 percent from the previous 10 percent due to a rebound in tobacco production.

Tobacco output which had initially been forecast to stand at 77 million kilogrammes has since been revised upwards to 114 million kilogrammes. Maize output rose by three percent to 1,33 million tonnes, while beef production rose two percent to 95 000 beasts.

The reaffirmation by the minister of the continued existence of the multi-currency system until 2012 is a positive development indeed as it will make planning by the business community easier knowing that they will continue to use a stable currency regime.

The gradual phasing out of the zero import duty on basic commodities is also commendable as this will help in the fight against inflation. The minister did not remove the duty on basic food staffs.

The increase in direct taxes to 28,9 percent from 19 percent in 2009 is a positive development indeed.

Direct taxes are taxes on income and wealth. This means direct taxes are taxes on production as income and wealth can only be earned by engaging oneself in productive ways.

An increase indicates an increase in economic activity and vice-versa.

On the other hand indirect taxes are placed on goods and services.

Since indirect taxes are paid only when a particular purchase is made, they are therefore taxes on consumption. In this regard Zimbabwe is slowly moving away from being a nation of consumers to a nation of production because direct taxes are rising.

The structure of the budget whereby a greater proportion of the expenditure goes to recurrent expenditure and less for capital is still a cause for concern.

A capital budget that is continuously being squeezed by the recurrent expenditure budget does not promote national investment through gross fixed capital formation.

The budget ceases to be growth promoting and the fiscal policy will definitely fail to positively impact the macroeconomic objectives.

There is need to invest in infrastructure to provide an enabling environment for business to thrive so that the tax base and tax revenue rise and makes it easier to finance the secondary deficit which is created by expenditure on capital projects. In the revised 2010 National Budget, the capital budget stands at 18 percent of total expenditure leaving recurrent expenditure at a staggering 82 percent although it is an improvement over the 2009 capital budget of 4,4 percent.

The sad thing is that a greater of the recurrent expenditure are employment costs like wages and salaries.

Given that these costs are non-discretionary, the minister has little room to manoeuvre which means we are likely to see the same structure being perpetuated in the 2010 National Budget and beyond.

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