Zimbabwean economy largely positive, but structural issues need fixing

Prof. Mthuli Ncube

The 2021 Mid-Term Budget and Economic Review presented by Finance and Economic Development Minister Mthuli Ncube in Parliament last week points to some level of policy continuity and reflect improved fiscal management, market players have said.

The major highlight of the 2021 Mid-Term Budget and Economic Review is the absence of a supplementary budget and Minister Mthuli’s vow to stay the course through the implementation of existing policies.

With Zimra collecting more than expected revenue and the expenditure side staying below collections by as much as $570 million, Minister Mthuli did not seek additional resources for the 2021 National Budget.

Speaking at the post-Mid-Term Budget and Economic Performance Review hosted by Business Weekly in partnership with Zimpapers Television Network and the Confederation of Zimbabwe Industries (CZI) economist James Wadi said in maintaining a “status quo in respect of policy direction” the Fiscal Budget Review points “to some level of policy continuity”.

“No Supplementary budget for 2nd consecutive year — reflecting improved fiscal management,” Wadi said.

Crystal Candy Pvt Limited general manager Jimmy Psillos also acknowledged the positive trajectory that he described as “incredibly good news”.

“This is the second year in a row without a supplementary budget and it’s during a global pandemic, so how many other countries in the world have managed to do that?”

SME Association of Zimbabwe founder and  executive officer Farai Mutambanengwe, weighed in and said there is a rebound happening in the economy, which he attributed to reduced money supply growth and “improved stability on the policy front”.

While things indeed look well and up, both Mutambanengwe and Wadi pointed to some structural issues that need attention lest they derail progress made so far.

Mutambanengwe said whether or not the economy will see sustained growth depends on how issues such as the inefficient foreign currency market, where the premium between the official exchange rate and the parallel market rate is above 50 percent and growing, are tackled.

He also spoke of high taxes including the two percent tax, high transaction costs, interest and bank charges, high month on month inflation and policy shocks such as the introduction of Statutory Instrument 127 among other issues as impediments to sustainable growth.

Mutambanengwe’s recommendations were; “Address forex auction inefficiencies and move to the market related exchange rate in the shortest possible time, IMTT should become tax prepayment and deductible against one’s tax obligation. PAYE tax brackets need to be adjusted upwards, scrap 20 percent compulsory conversion on nostro accounts, regulate transaction charges, interest rates and bank charges as well as removing dissertations and arbitrage opportunities in the market.”

Wadi highlighted the structural shift to the economy as reflected by the GDP and export contribution by sector before and after dollarisation.

The manufacturing sector for example has gone through de-industrialisation and informalisation of businesses while lack of competitiveness eroded ability to export.

“As we deliberate the (2022) Budget Strategy, these are the things that we may need to re-establish ecosystem linkages between sectors so that we are able to utilise some of the raw materials that we produce locally and do the value addition that we need,” he recommended.

Wadi also pointed out declining employment levels as a cause for concern.

He pointed to the shift from PAYE dominating Zimra’s revenue collections, to dominance by corporate tax in the last couple of years as a sign that formal employment is shrinking.

Historically, the individual tax head also known as PAYE has always been the highest contributor to revenue ahead of VAT, and Company taxes.

Wadi said there is a possibility that the economy has seen increased informalisation or a considerable decrease in employment numbers.

“From a policy perspective, these are some of the things that we want to be able to steer the policy direction to say, let’s look at these intricacies and say what has caused this structural movement, does this trigger policy intervention so that we can intervene and take corrective measures”.

Wadi said apart from the worrisome employment levels, there is need for government to look at the tax brackets.

“The tax bands have not moved and what this may mean is that the majority of the beneficiaries might be pushed to higher tax brackets and then the impact would be sort of a knock-down effect on some of disposable income.”

On inflation, Wadi said going forward, the year-on-year inflation is going to be sticky.

“Beginning August, while month-on-month inflation could be in single-digit level, year-on-year inflation will become sticky downwards.”

The economy has already enjoyed the “dividend” of favourable base effects.

“Elevated US$ prices are a cause of concern as this makes the country a high-cost producer.”

“We need the policy to remain tight in managing the liquidity.

“What it may mean is revisiting our Reserve Money target and manage our liquidity without stifling the market.”

Wadi said there is a need to improve the auction system and remove arbitrage opportunities which distorts the exchange rate. – Business Weekly