Fuel prices are set to go up after Government raised excise duty on petrol and diesel by up to 7 cents per litre to reduce arbitrage opportunities by foreigners taking advantage of local currency disparities.
Presenting an $8,16 billion 2019 National Budget, which largely focuses on austerity measures to enhance revenue collection and contain excessive Government expenditure yesterday, Finance and Economic Development Minister Professor Mthuli Ncube, said the arbitrage opportunity had partly contributed to the increase in fuel imports, which reached $1,3 billion in October.
Foreigners convert hard currency on the black market to get huge premiums and use part of the proceeds to buy fuel here, for which Government needs forex to import.
The move, which takes effect on December 1, will see duty on diesel and paraffin increasing by 7 cents per litre from 33 cents, while duty on petrol will go up by 6,5 cents from 38,5 cents.
Fuel dealers are allowed to charge a margin of 7 percent on full on board (FOB) prices.
The duty increase is also part of broader measures by the Government to enhance revenue collection, which also entails payment of luxury motor vehicle import duty in foreign currency.
Businesses demanding foreign currency for goods and services will also be compelled to pay taxes in the currency of trade.
“The country’s fuel has become relatively cheaper compared to prices obtaining in the region. The increase in consumption is clearly unsustainable, considering that the available foreign currency reserves have to be shared among other critical priorities,” said Prof Ncube.
To redirect scarce foreign currency towards productive sectors, Prof Ncube announced a new policy position that requires payment of duty on luxury vehicles in foreign currency.
This takes effect from today.
“Government has, over the years, implemented demand management measures with a view to redirect usage of the scarce foreign currency to productive industries. Such measures include adjustments to the customs duty regime and control of imported goods through the licensing system.
“Despite some success, Government has, during the course of 2017 and 2018, witnessed a surge in the importation of non-productive goods, particularly motor vehicles.
“To redirect use of scarce foreign currency to the productive sectors of the economy, I propose that customs duty on motor vehicles be levied in foreign currency acceptable as legal tender, with effect from 23 November 2018,” said the minister.
Minister Ncube also noted that some companies appointed as agents to collect revenue on behalf of Government, were not remitting VAT in the currency of trade, taking advantage of the arbitrage opportunities on the informal market for currency.
“In order to contain such practices, I propose to compel companies that collect Value Added Tax in United States dollars or any other currency to remit VAT using the same mode of payment. This measure will apply on all other taxes,” said the minister.
The minister also proposed that directors or shareholders of companies that are wound up voluntarily to avoid payment of the taxes will be jointly and severally liable for the tax liability.
On the budget deficit, the minister said it will be cut to 5 percent of the gross domestic product next year, from an 11,7 percent forecast for this year through various expenditure cuts.
He projected total revenues at $6,6 billion; and forecast budget deficit at $1,57 billion or 5 percent of GDP in 2019. The Government intends to spend $2, 2 billion on capital programmes.
The budget deficit widened after the Government increased civil servants wages early this year and financed farming inputs under its agricultural support programmes.
The Government largely financed the State budget deficit through issuance of Treasury Bills, which created excess liquidity on the market and caused currency instability.
Next year, the minister said issuance of the TBs would be specifically to finance budget deficit.
Unrestrained Government expenditure and excess liquidity resulted in market distortions that pushed aggregate demand, demand for cash and instigated foreign exchange rate currency swings, which caused upward spiral in prices of goods and services.
“These have been at the core of money creation hence, resulting in inflationary pressures and currency instability,” Ncube said. “As such, the finance minister said going forward, “Public expenditures will have to be confined to the budgetary framework.”
The excessive government spending swelled the public debt to nearly $18 billion by end of August this years, with domestic debt accounting for 54 percent of the debt stock.
To rein in public spending, the Government will reduce recourse to the Reserve Bank of Zimbabwe lending from the 20 percent of previous year’s revenue statutory limit to 5 percent confined for purposes of smoothening cash flow mismatches.
The Government will also, with effect from January 1, 2019, introduce a 5 percent cut on basic salaries for all senior civil servants from principal directors, permanent secretaries and their equivalents up to deputy ministers, ministers and the Presidium.
This also extends to basic salaries of senior executive in state-owned enterprises.
Further, the Government has resolved to reduce the number of foreign missions, thereby optimising utility value realised from remaining foreign missions as well as avoiding accumulation of arrears and embarrassing evictions of diplomats.
In addition, the Government will retire workers who have reached 65 as well as nearly 3 000 youth officers while eliminating thousands ghost workers on the state payroll through rigorous biometric registration among other security measures.
The said containment of public expenditure is anticipated to free up more resources towards infrastructure development as opposed to consumptive spending, and cushion vulnerable groups, as the Government implements austerity measures.
Reducing budget deficit and limiting borrowing to sustainable levels, will also allow channelling of more resources to the private sector and support the overall strategy for a private sector led growth.
The Government will also move away from the tradition of assuming huge debts saddling underperforming parastatals and State enterprises, as part of measures to contain public expenditure.
In an effort to address the risk of a higher budget deficit for 2018 and 2019, Government introduced the 2 percent intermediated money transfer tax, effective 13 October 2018.
Minister Ncube said Government will maintain the multi-currency regime with the US dollar remaining the reference currency while on foreign currency allocation the minister suggested that the country gradually exits exchange controls.
He the government would build foreign reserves and mobilise lines of credit, as part of measures for value preservation under the multi-currency system. The minister said the government will establish a strong inclusive framework for forex allocation.