Thursday, December 17, 2009

The Zimbabwe Budget

Although the Minister of Finance has presented a cautiously optimistic Budget, the level of dependence on the Vote of Credit, or donor funding, places some of the intended expenditures in doubt, specially if the donors show the same level of reluctance that they have sown in 2009. The degree to which Zimbabwe is deserving of help appears to be the deciding question. If Zimbabwe’s political developments remain as slow and cumbersome as they have been in 2009, the Budget is unlikely to achieve any of its already limited targets.I hope the attached paper on the subject will be helpful
Zimbabwe’s 2010 Budget
Assumptions that significant improvements will be achieved in the rates of economic growth in Zimbabwe’s principal productive sectors in 2010 underpin the Budget figures. While some of these might be readily achieved, given the low base from which the growth will be measured, they appear to be out of line with the projected Budget revenue and expenditure figures.
Other figures suggest that exaggerated claims have been accepted and that the authorities have been persuaded that the levels of investment funding needed to support this growth will be found.
In the adjacent table, the projected increase in revenue, at 38,5%, is very high compared to the 10% increases expected from agriculture, manufacturing and tourism. Hopes that tax revenues from mining will close the gap do not allow for the very long lead times between starting a mining project and receiving a taxable income flow from the new mining operations.
More seriously, higher royalties and proposed taxation increases are likely to considerably dampen the enthusiasm of those who might have brought investment funds to support new ventures, while expansion plans at the existing mines can expect to remain affected by the limited supply and high cost of local bank finance as well as the higher taxes.
The 38,5% tax revenue increase is also out of line with the projected increase in export revenues of 11,3%, but the tables in the Estimates of Expenditure show that the projected revenue increases are expected to arise almost entirely from P.A.Y.E., Value Added Tax and Excise Duties.
The P.A.Y.E. projected increase of 80,75% appears to be based on hopes that more employees, including those working for the Public Sector, will be paid amounts above the tax-free threshold of US$160 per month, but claims that increased manufacturing capacity utilisation will be achieved also imply increased numbers of employees.
Excise tax payments are expected to rise by a significant 264%, mainly because of an increase in the rate on spirits from 20% to 40%. However, customs duties are expected to fall by 4,4% and the Minister of Finance confirmed his earlier decision to suspend the collection of duties on basic consumer goods. He argued that benefits enjoyed because of the availability of goods at competitive prices far outweighed the facts that cheap imports have flooded the market and that we are now effectively exporting labour.
Company tax revenue is expected to decline as many companies will be carrying forward tax losses and those incurring capital costs to restore production volumes will take advantage of capital allowances. Company tax payments are expected to fall almost 33% to US$78,6 million.
The table shows evidence of a significant recalculation of Zimbabwe’s nominal Gross Domestic Product, the original estimate of US$3 462 million, dated March 2009, having been increased to US$5 179 million by October 2009. This is an increase of almost 50%, but undisclosed adjustments appear to have permitted the annual change to the October 2009 figure to be recorded as a 4,7% increase.
Measurements of GDP are difficult at the best of times, but when official production records are not maintained, when about half the economy goes “underground” and when the officials themselves authorise the use of multiple exchange rates, the effective confiscation of foreign currency balances as well as savings, GDP figures become the result of much more guesswork than calculation.
The reason why our Ministry of Finance is guessing at a bigger GDP number would appear to be an effort to get the Budget expenditure as a percentage of GDP down to around 40%. On the basis of the earlier GDP estimate, expenditure would have come close to 65%, at which level any argument that the country had reasonable recovery and growth prospects would have been easily dismissed.
However, the more hopeful GDP estimate does not amount to a firm enough basis from which to claim that growth will be forthcoming. Neither the working capital, nor the investment funding needed to restore competitive efficiency to most of Zimbabwe’s manufacturing, mining and agricultural capacity is available. This is because the banking sector remains one of the more severe casualties of a process that destroyed the collateral value of vitally important fixed assets, a process that was brought to a head by hyperinflation and the destruction of the country’s currency.
Bank deposits in Botswana today total more than five times the amount in all of Zimbabwe’s banks, even though Zimbabwe has more than five times Botswana’s population.
At this level, business activity in Zimbabwe is severely constrained and unless bank liquidity can be dramatically improved, many of the projected improvements will not take place.
Some businesses that were hoping for capital injections from abroad have been dismayed by repeated affirmations that indigenisation plans are to go ahead, despite all advice to the contrary. Those investors who are eager to make investment capital available have held back on finalising arrangements unless the opportunity offers prospects of very quick returns, but in such cases the activities are mostly commercial, rather than industrial, and mostly involve the importation and distribution of imported goods.
Most of these businesses employ very few Zimbabweans and most are likely to externalise their profits. This they will continue to do until genuine respect is shown towards the investors whose confidence is essential to each and every facet of the hoped-for recovery outlined in the Minister’s speech. He bases this recovery on the following assumptions:
· GDP growth rate will be 7%, supported by –
· Higher investment inflows
· Access to grant finance
· Growth in tax revenue as a percentage of GDP
· Capital inflows that will compensate for the loss of savings
· A fast recovery in export earnings
· A rapid recovery of local capacity to reduce need for imports
· Improving political stability, and
· The measures agreed by the Government of National Unity will be achieved.
Unless Government actions and policy choices are seen to be demonstrating its determination to improve the prospects of medium to long-term investors, none of these assumptions will come within reach quickly enough to make a useful difference in 2010.
However, the Minister does recognise that many hazards lie in the path to success. He identifies the following:
Zimbabwe’s failure to meet repayment obligations has lowered the country’s credit worthiness
Corruption, arbitrage, rent-seeking activities have taken Zimbabwe down to number 122 of 128 countries measured on the corruption index
Four million Zimbabweans are now earning a living in the Diaspora
Regional economies have failed to integrate their markets
Too small a percentage of women have acquired influence in economic and political affairs
At less than 10%, Zimbabwe’s Savings Ratio is far too low to sustain economic growth. A ratio of at least 25% is needed
Zimbabwe has become unable to compete for direct foreign investment

He might also have mentioned many more, a few examples of which are:
Zimbabwe has insufficient money to fund normal economic activity
Zimbabwe hopes things will come right even if it does not attend to the mistakes that made things go wrong
Zimbabwe’s growth forecasts are based on figures that mostly illustrate increasing usage of decreased capacity
Zimbabwe’s economic problems will not be overcome before the country has adopted much more suitable political policies, backed by a sound Constitution that reinstates and guarantees property rights.

While reading through the Budget speech and studying the Estimates of Expenditure, it is difficult to find evidence that Government is taking fully into account the extent of the damage suffered by the economy in the past decade, or the degree to which this has undermined the capacities of its productive sectors and population.
For all but a few people, promises of economic empowerment have led to deeper levels of poverty and increased dependency on patronage, a package that might be described as the very antithesis of empowerment.
The Minister’s cautious attempts to apportion extremely limited revenue resources clearly had no chance of satisfying the levels of demand, but as a indicator of the depth of dishonesty that has been virtually institutionalised by those still wielding authority, the Minister’s efforts were the subject of viciously disparaging attacks during the just completed Zanu PF party congress.
Unfortunately, this carefully orchestrated conflict between members of the Government of National Unity will impact severely on the Budget’s prospects of realising even its limited objectives. The so-called Vote of Credit, which is the sum needed to close the gap between revenue and expenditure, has to be obtained from external donors because Zimbabwe’s capital market has yet to be revived. However, the donors will show themselves – again – to be extremely unwilling to release funding to a Government that consistently fails to deliver on its most basic promises.
For 2010, the Vote of Credit amounts to US$810 million, which is 36% of proposed expenditure. It has yet to be secured. For 2009, the Vote of Credit was US$391 million, or 27,3% of expenditure. In his Budget speech, the Minister admits that only US$35 million of this had been made available to Government by the end of October, and says that the balance was disbursed “directly to programmes and projects outside of Government budget expenditure frameworks”. This suggests that the donors felt they would be unwise to put their trust in a conflict-riven administration.
If, for the same reason, Government again receives less than a tenth of the Vote of Credit funding being sought in 2010, its prospects of satisfying the needs of Zimbabwe’s deeply stressed population will miss their targets by an even wider margin.
When assistance is needed because of the effects of self-inflicted problems, donors have every reason to demand that beneficiaries first become deserving of their support by abandoning the policies that caused the difficulties. Zanu PF’s passionate defence of these very policies at its party congress a few days ago would appear most likely to cause every donor to again avoid contact with the authorities, if it continues trying to assist. Some might even be persuaded to simply remove Zimbabwe from their list.
The graphs below illustrate some of the Budget’s main features.
John Robertson
December 16 2009

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