The 2011 Budget Statement

The 2011 Budget Statement


Initial Observations

Zimbabwe’s economic challenges are fully identified by the Minister of Finance in his Budget speech, and he classifies them as separate from the political, social and institutional challenges. The Minister’s selection shows that he has chosen to analyse the situation on an appropriately broad canvas.

In listing the economic challenges, the Minister might have been tempted to join the dots that link all of these to the very specific government policy choices that did the damage. These he did not mention, but they are the policies that –

Forced the closure of Zimbabwe’s biggest productive sector;

Destroyed most of the jobs in the country’s biggest employment sector;

Scaled down the revenues from what were Zimbabwe’s largest generators of foreign exchange;

Drastically reduced the previously dependable flow of locally-produced agricultural commodities to Zimbabwe’s manufacturing sector;

Wiped out the collateral value of the fixed assets that had previously secured the biggest proportion of bank credit offered to the whole business sector, and

Forced the dramatic shrinkage of the tax revenues around which the Minister now has to construct the national Budget.



If the Minister was so tempted, he managed to resist the urge to link these appallingly bad policy choices to the economic consequences that, in his Macro-economic Framework section, he listed in such detail:

Lack of Fiscal Space;

Absence of Alternative Instruments other than the Fiscus;

Lack of Foreign Direct Investment;

Lack of Liquidity;

Infrastructure;

Labour Market Inflexibility;

High Cost of Utilities;

Energy;

Skills Gap;

Lack of Absorption Capacity;

Debt Overhang;

Management of Public Resources;

Capacity stagnation;

Low Aggregate Demand;

Low wage equilibrium, and

High unemployment.



Government has always made the points that the policies were chosen for political reasons and that no economic considerations will ever be permitted to challenge these powerful political imperatives. From these points come the aggressive responses to any who dare to question the decisions.

Perhaps it is for political reasons that the Minister feels obliged to avoid mentioning any of the obvious steps that will have to be taken if Zimbabwe is ever to stage a recovery. Unfortunately, if this is the case, the country will have to brace itself for a further extension of this already painfully long misunderstanding of the wealth creation process.

As the mere mention of policy reversals has gained the status of blasphemy, perhaps the Minister felt it would be safer to list the political challenges, perhaps in the hope that the linkages will become self-evident.

But while only the last two of those he chose to highlight have any bearing at all on the claimed precious political advantages delivered at such extraordinarily high economic cost, even they are not cited as targets for a policy revision. Could it be that for ordinary Zimbabweans the political advantages either never materialised, or soon disappeared without trace?

Political challenges around Government of National Unity

Discord in the Government of National Unity;

Lack of certainty on the tenure of the Government of National Unity;

Global Political Agreement contestation and outstanding issues;

Democracy and rule of law deficit;

Cyclical and turbulent nature of the country’s politics;

Zimbabwe’s isolation and lack of integration;

Lack of finality on the land reform programme;

Lack of definition of a clear land tenure system;



Without question, the political structures in Zimbabwe are a shambles, but Zanu PF is in no doubt that Land Reform has reached finality. The party would also claim that the tenure system has been settled: all the land has been declared to be the property of the state.

The Minister does accept (para 513-4) that land must be marketable if the private financing of agriculture is to return, so he proposes to make the 99year leases “registrable and executable”, but any thought of restoring private ownership rights seems still to be off limits.

Whether a free, fair and open market for leases will develop and whether the banks will trust the party not to threaten the dispossession of any whose loyalty is questioned has yet to be seen.

On the social challenges, the Minister could have pointed out that most of the social problems he identifies stem directly from the massive downturn in the country’s economic performance. He saw these challenges to be:

Poverty and unemployment;

Huge numbers of vulnerable, including households with chronic illnesses, child headed households;

• Weak social delivery in education and health where there is a –

High number of school drop-outs;

High infant mortality rate;

• Low quality of life; and

67% of the population draws water from unprotected sources,

46% of the population have access only to unimproved toilet facilities.



Among the other social challenges he does not mention is the staggering dependency burden of every Zimbabwean who has a steady job, or the appalling examination pass rates of school children, the politicisation of the rural schools, the exploitation and indoctrination of young Zimbabweans at political youth camps and the need for nearly every young Zimbabwean to emigrate if he or she wants to find a proper job.

On the institutional challenges, the Minister draws attention mostly to State-run institutions, but the private sector does not escape notice. He draws attention to the –

Lack of competitiveness;

Huge bureaucracy and red tape;

High cost of doing business;

No public confidence in public institutions e.g. parastatals and government departments;

High levels of leakages and arbitrage;

Polarised spaces in particular in the media (even churches are not spared); and

Huge levels of mistrust in both public and private spaces.



In his 250-page Budget Statement, the Minister makes many additional references to numerous shortcomings, but the extent of the dilution of the ideas within the impressive range of observations on other matters seems likely to remove the focus from these issues. This seems likely to be the case specially in the Parliamentary debates that should precede the votes that have to be cast to approve or reject the Estimates of Expenditure.

On the forecasts of revenue inflows, the Minister is expecting the collection of taxes to increase by 25,5% to US$2,7 billion.

Expenditures, in the near-absence of access to both domestic and foreign loans, will have to be within the US$2,7 billion limit. The Minister now accepts that the lenders and donors to specific Zimbabwean beneficiaries are managing the disbursal of the foreign funding themselves, so it is not being channelled through government ministries.

The cost of employing public sector workers in 2010 is expected to come to US$1 billion and provision has been made for this to rise to US$1,4 billion in 2011, implying a 40% increase in total incomes. However, changes are to be made to pension contributions, as the current sums being collected have to fund the pensions being paid to those who qualify, and they need US$237 million a year, compared to the US$192 million being collected. A decision was taken in 1999 to convert the government pension scheme from a defined benefit to a defined contribution arrangement, but it was never implemented. It is now to be introduced.

Another proposed change that will absorb part of the 40% increase in remuneration packages is a decision to have government employees contribute 20% of the cost of their membership of their medical aid scheme. Previously the fiscus paid the membership costs in full. A further cut in take-home pay will come from the fact that many state employees will find that the salary increase has moved them into the tax net.

This table records the recent trends and shows the figures that are currently expected to surface in 2011:

2009

2010

2010

2011

Growth

Zimbabwe's Budget

Revised

Original

Revised

Current

Rate

Framework 2010

Estimate

Estimate

Estimate

Projections

Projected

Revenue US$ 'm

1 040

1 440

2 152

2 746

27,6

Expenditure US$ 'm

1 431

2 250

2 258

2 746

21,6

6 210

6 716

6 716

9,3

4,7

8,1

8,1

20,0

26,0

32,0

28,0

40,5

33,6

37,4

-391,0

-810,0

0,0

107,2

Overall Balance % of GDP

6,3

12,1

0,0

Vote of Credit

391,0

810,0

360,2

500,0

107,2

Exports US$ 'm

2 006,4

2 018,0

2 540,0

2 790,2

0,6

Imports US$ 'm

3 659,8

3 498,0

4 043,6

4 042,5

-4,4

Exports % of GDP

35,0

36,3

37,8

38,0

Imports % of GDP

64,0

62,9

60,2

55,1

Annual Inflation Average

-5,5

5,1

4,8

4,5

Agriculture % Growth

10,0

10,0

33,9

19,3

Mining % Growth

2,0

40,0

47,0

44,0

Manufacturing % Growth

8,0

10,0

2,7

5,7

Tourism % Growth

6,5

10,0

10,0

6,0

A determining factor in the budget projections is the forecast 9,3% improvement in Gross Domestic Product, which is also thought to be coming off an 8,1% increase in GDP in 2010.

Neither figure is particularly extravagant, considering the low base from which they are emerging and the considerable amount of under-used capacity that can be found all over the country, but the beliefs that 8,1% was achieved this year and that 9,3% growth can be achieved in 2011 are based upon several optimistic assumptions.

For 2010, the main assumptions are that tobacco and maize production figures, 123 million kilograms and 1,3 million tonnes respectively, are correct, and that it is also safe to accept the frequently repeated claim that “capacity utilisation has increased from less than 10% to between 30% and 50%”.

The tobacco industry accepts that the crop was much bigger than first expected, but considerable evidence suggests that much of the tobacco sold was held over from the 2009 crop and passed off as current production, while another significant quantity was not grown in Zimbabwe, but was imported from neighbouring countries and passed off as Zimbabwean.

A third discrepancy is the purchase and re-offering of poorly graded and presented tobacco, which led to double-counting. Some industry analysts suggest that the 2010 crop might have been only 95 million kilograms.

Government is so eager to believe that Land Reform is working and the crop sizes are beginning to return to pre-1997 volumes that it has avoided questioning imports of maize that have been passed off as Zimbabwean-grown. However, the evidence that it has come from neighbouring countries cannot be disputed. Because of a long-standing ban, no seed for genetically-modified maize is allowed to be sold in Zimbabwe, but tests on maize bought from the Grain Marketing Board have shown that a sizeable proportion of their current stocks is GM maize.

On the capacity utilisation claims, the evidence of significant growth is very patchy. Manufacturing statistics suggest the possibility of 16% growth in 2010 over 2009 and gold production in the first eight months of 2010 was certainly more than double the output in the same months of 2009, but such increases do not tie in with the 300% improvement that are implied by claims that capacity utilisation has improved from less than 10% to around 40%.

More significantly, the constraints that were holding production back in 2009 are still very much in evidence in 2010 – the power cuts, water shortages, scarcity of bank finance, competition from South African and Chinese imports, lack of employment prospects, large retrenchment exercises and limited buying power.

Consumption appears to have been well maintained and the revenue receipts from tobacco, cotton, the Diaspora and thousands of market-gardening operations have kept many families going, but the Minister’s statistics show that 41% of the VAT collected was from the sale of imported items. As GDP figures measure production rather than consumption, Zimbabwe’s retailers might well have added more significantly to South Africa’s GDP than to Zimbabwe’s.

The table shows that the 2011 forecast revenue and expenditure figures are higher percentages of the forecast GDP figures than in earlier years, so these percentages will be even higher if the GDP forecasts cannot be achieved, so special attention is needed to overcome the constraints.

The Minister does make some forecasts on improvements to electricity generation that will take the country up to 75% of its requirements, compared to 56% in 2010, and he speaks of the coordinated efforts of the government and the banks to fund the 2010 / 2011 cropping season.

If they work, these measures will help, but proposed reductions in the 2011 import duties to be levied on clothing, footwear, blankets and travel goods will further reduce the competitiveness of all Zimbabwean manufacturers of these items. Local producers of packaging materials and poultry feeds will also face more competition from imports, also because of duty reductions.

These changes, together with the recent increases in industrial wages, might be enough to prevent the manufacturing sector from contributing to the hoped-for GDP growth and from attracting greatly needed investment inflows.

In essence, this budget has been assembled much more from wishful thinking and the avoidance of realities than from determined efforts to make Zimbabwe an attractive place to invest. Another year of difficulties seems inevitable.

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John Robertson November 29, 2010