Biti vs Mthuli: Parly debate transcript – former and current Finance Ministers go head-to-head on economic reforms

Tendai Biti and Mthuli Ncube

On Wednesday, October 31, Finance Minister Mthuli Ncube presented a ministerial statement on the state of the economy, and debated MPs in Parliament.

Below is a Hansard transcript of part of the debate, where former Finance Minister Tendai Biti and Ncube discuss Ncube’s reforms, Treasury Bills, debt relief, the 2% tax, and American economist Steven Hanke’s views on Zimbabwe’s inflation rate.

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HON. BITI:  Hon. Speaker Sir, my question is to the Minister of Finance and Economic Development.  In view of the fact that the biggest challenge we are facing is the challenge of over expenditure and budget deficit that is now over 25% of GDP; also, in view of the fact that Zimbabweans are actually overtaxed, the percentage of our revenue to GDP is over 30%. Why did the Minister introduce the transaction tax of 2% to the people of Zimbabwe when the challenge and obligation should be on expenditure retrenchment and not looking for more resources – [HON. MEMBERS:  Hear, hear.] –

THE MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT (HON. PROF. M. NCUBE):  Hon. Speaker Sir, I think that it is opportune that the Member of Parliament is a former Finance Minister and he has full knowledge of what it takes to run that office.  It requires determination, energy and focus and sometimes you walk on your own.  Let me come to the question.  When it comes to the strategy for reducing expenditure and increasing revenue, you need to be innovative but the ultimate goal is to reduce the budget deficit.

It is quite clear that the budget deficit is double digit, which is quite high by African standards and also by global standards.  As Treasury and the Minister of Finance, we are determined to cut this deficit down to single digit.  In the Pre-budget Strategy paper, I have given a trajectory as to how the evolution of the budget deficit will look like over the next three years towards that lower single digit figure of below 4%.  That is the roadmap to cut that down.

The strategy for reducing the deficit is twofold Hon. Speaker Sir.  One is to deal with expenditure control on the part of Government.  I have already explained that this I will deal with during the Budget Statement in terms of dealing with the Government wage bill and restructuring the Public Service.  Here I do not walk alone, there is the Chairman of Public Service Commission, the Minister of Labour and Social Welfare, all my fellow Cabinet Ministers and the President.  It is a concerted effort on how to handle the wage bill and the reform of The Public Service, cutting back on waste.  The issue of vehicles that we spoke about earlier; all of that will be dealt with in terms of expenditure control.

On the support for parastatals, you would see that in our figures, we had to lend them something like US$500 million, which explains the overrun in the budget deficit that Hon. Biti mentioned.  Again, we are accelerating the privatisation programme to make sure that those parastatals can be privatised as speedily as possible.  I will come to revenue in a moment.  I am still dealing with the cost containment measures.  Privatisation is very important Mr. Speaker Sir, to make sure that Zimbabweans can participate; parastatals can be listed on the Stock Exchange and diaspora can also invest in some of these companies.  Ultimately for Treasury and Government, we want to reduce the reliance of these SOEs on Treasury and that will help us curtail expenditure.

I switch now to the revenue side because we need both; cost containment and revenue side.  This is what has happened Mr. Speaker Sir over the last ten years; the economy has expanded.  That is why you noticed that a few weeks ago, we formally announced re-basing of the economy.  Officially, the size of the economy has moved from $18 billion to about $25 billion and that is a 40% increase.  This was not me, this is something that my esteemed Hon. Member knows about.  Every five years, countries re-base whether in Africa or wherever, I can name them.  It is normal and I can assure you that in another five years, we will re-base again.  So in short, the economy has expanded.  Just check the number of ‘mushikashikas’ as an indicator, on the road, you will agree with me that there is economic activity out there – [HON. MEMBERS:  Hear, hear.] –

Mr. Speaker Sir, not only the economy has expanded, the informal sector has grown substantially and there is scientific evidence to this effect.  The question is – how do you design a tax system that is inclusive – [HON. MLISWA:  Answer the question!] – That is what I am answering.

THE HON. SPEAKER:  Order, order!  With all due respect Hon. Mliswa, if you have got some supplementary question, you are allowed to do so.  Please do not disrupt the response.

HON. MLISWA:  I am sorry Sir but he is being academic – [HON. MEMBERS:  Inaudible interjections.] – He is being academic like a professor at Harvard.  He needs to give us the response – [HON. MEMBERS:  Hear, hear.] –

THE HON. SPEAKER:  Order, order!  Hon. Mliswa, do not contest the ruling of the Chair.  Hon. Minister, if you may conclude.

HON. PROF. M. NCUBE:  Thank you Mr. Speaker Sir. If I could proceed.  It was important at the beginning for me to explain the rationale behind the 2% tax and that was the build up for me to get to the answer.  When an economy is informalised Mr. Speaker Sir, one should design a tax instrument that is inclusive, that also touches on the informal sector. So, we decided to introduce an electronic transaction tax in the way that we proposed it but also we put exemptions because we are acutely aware that our population that is at the bottom of the pyramid, to use that phrase, transactions of $10 and below should be exempted, otherwise the tax becomes regressive. At the same time, we are acutely aware that corporates are also providing jobs. They are responsible citizens and they are paying taxes. There should be a cap on the amount of tax they pay overall through this 2% transactions tax.

There is also a list of other exemptions such as exemptions for instance for pensions, equity investments, money market and so forth. So, we believe that this tax will go a long way in making sure that we have an inclusive tax system. A tax system that will also help us stop the bleeding in terms of the size of the budget deficit and I will quickly switch to cost containment measures, that is cutting Government expenditure which I will announce at the time of the budget. I thank you Mr. Speaker Sir.

HON. BITI: I have a supplementary Hon. Speaker. Hon. Minister, for all intents and purposes, the country is in a recession. Therefore, introducing a tax and one that is so retrogressive, I say so because it treats everyone as equal; whether you are rich or poor, you will still pay the 2% transaction that is very cruel. So, you cannot introduce a tax and collect more when people are actually in a recession and need to spend. In addition to this, Zimbabweans have resorted to the use of alternative methods of payment including mobile phone transfers and electronic transfers because we cannot use our cash. Our cash disappeared because of the overdraft facility you were talking about. You cannot force us to use cashless money and then follow and tax. There is something cruel about that and you cannot do that.

THE HON. SPEAKER: Hon. Biti, you have made a statement but there is no question.

HON. BITI: The question is that why is the Government imposing this additional transaction tax when we are in a recession? Why are you imposing the transaction tax when you forced us to abandon the use of cash because of the overdraft facility that was implemented by the Government?

HON. PROF. M. NCUBE: Thank you Hon. Speaker and thank you Hon. Member for that supplementary question which will help clarify issues as I answer. First of all, Zimbabwe is not the first country in Africa or in the world to introduce this kind of tax. In other countries, the tax rate is even higher. It is much higher in other countries and 2% is not as high as in other countries. Secondly, the tax is not retrogressive. On the contrary, it is progressive and I will explain.

The previous tax did not take into account the value of the transaction and that is why we amended it. It was really by the fact that you pay the same amount per transactions regardless of the value. This time around, it is linked to value. So, it is progressive in that sense. We actually corrected a regressive situation and turned it into a progressive tax. Hon. Speaker, it is also not correct to argue that the economy is in a recession. The economy is not in a recession. There is a technical definition of recession which is two successive quarters at least of negative economic growth. I submit that we have not had two successive quarters of negative economic growth, neither do we expect future growth to be negative. On the contrary, we have increased our projection of economic growth to the order of 6%. Thank you Hon. Speaker Sir.

HON. PHULU: The supplementary is whether the Minister is saying Government policy is to tax poor people who for instance pay school fees using RTGs as opposed to those who can source actual cash and have more money and can pay their school fees in cash?

          HON. PROF. M. NCUBE: Clearly this new dispensation is not anti-poor. On the contrary, it is pro-poor. We have explained this in our vision 2030 where we say that one of those pillars is to achieve inclusive growth, which really means that we are sensitive to those, if I can use the term at the bottom of the pyramid in terms of income. The issue was really to make sure that those who are in the informal sector are netted in and also contribute to the fiscus and they become responsible citizens. After all, those who contribute to the fiscus also have better citizenry priorities. They demand better services and accountability. So, it is important that everyone contributes to the tax revenue.

Certainly we are pro-poor and you will see that when it comes to the budget. This year we are going to comply with the constitutional provision that 5% of the budget should go to the provinces. We hope that the Hon. Member within their provincial council will make sure those resources are applied properly to programmes that will uplift the poor communities around the country. One of the variables we will use in the allocation formula is poverty levels. We have got an up to date poverty map of Zimbabwe by province and by district and our allocation, that 5%, will be according to that poverty map. Thank you Hon. Speaker.

HON. BITI: Thank you Hon. Speaker. I have got a question to the Minister of Finance. You have indicated that you are going to move to a system where you auction Treasury Bills and my question is in light of the fact that there is clear evidence of increased revenue. You have indicated that ZIMRA has already met its target for year ending 2018. Why do you need to continue borrowing and why are you not pursuing fiscal consolidation? Why are you not abandoning Treasury Bills absolutely so that you live within your means because if your revenue is increasing, surely you do not need to borrow?

You also speak of a growth rate of above 6%. My question to is what is the component of the increase in revenue attributable to inflation, in this case hyper-inflation? All of us are going through shops and we are living hyper-inflation. Some Scholars for instance Prof. Steve Hanke are calculating our inflation to over 200% annualized. So, the growth you are projecting, what is the extent that is predicated on inflation?

On the debt question, you seem to suggest that you are going to find money to clear the arrears and my question is, what country is going to give you the almost US$2 billion that you would require to pay off the arrears to the World Bank? Finally, when the Minister came from Bali, he indicated that they were going to pursue HIPC but I find that a contradiction in view of the fact that you have rebased the economy to US$25 billion. Therefore, we are no longer low income country, which is the qualification for HIPC. You have to be a low income country. So, I find that a contradiction in that on one hand we are calling ourselves a middle income country but on the other hand we still see HIPC as an option because it is only available to low income countries. I thank you Mr. Speaker.

HON. NCUBE: Thank you Hon. Speaker Sir.  First of all, let me thank Hon. Biti for his questions. He wanted to know why we continue borrowing when in fact we have already met our revenue targets.  Actually we have stopped borrowing, we have not issued Treasury Bills since I took over and also this is in the light of my desire to make sure that we do not over borrow and there is no over issuance of Treasury Bills and certainly we begin to curtail expenditure.  It does not mean that we do not borrow in future.  In fact what we would like to do at some point is to be able to test the auction system with a small Treasury Bill issuance at some time in the future.  We need to find out if the system really works.  We have a market it clears and the pricing is below the 10% interest rate that has been applied to Treasury Bills so far.

He also asked about the debt clearance issue that I did mention sometime back coming from Bali that we will pursue the Heavily Indebted Poor Countries (HIPC) route, I never said that.  I said that the HIPC route is one of the options on the table, actually the reality is that the HIPC route, non HIPC route, quasiHIPC route, adhoc route, all it means they are other ways to restructure debt without using the HIPC route.  He is correct that HIPC route is reserved for poor countries, and given that we are rated a middle income country, we are not a poor country but it does not mean that we are not eligible for HIPC-like type restructuring.  That is why we are keeping this option on the table.

He also asked about the impact of inflation and growth on revenue collection; what is its impact.  Indeed, it has an impact. I can actually give you the exact figures offline or as a follow-up, I am happy to do that just to find out how that growth of 6% has impacted on revenue collection and how inflation equally impact has on revenue collection.  It is true that…

THE TEMPORARY SPEAKER: Order Hon. Minister

HON. BITI: On a point of order.  My point of order Hon. Speaker is, with respect, the Minister has not answered my questions.  So can I just restate them very quickly so that he can answer them?  On the question of debt clearance, I said you have indicated in your statement this afternoon namuhla, that you are going to try and clear the arrears that Zimbabwe has at the World Bank and African Development Bank.  I am saying given the quantum of that debt, and given the fragility of our own situation now, which country is prepared to lend us the money that Zimbabwe has to use to clear?

On the question of inflation, I said given the high rate of inflation which some people are putting at 158%, should you not revise your growth figures, because your growth figures are based on these inflation outcomes.  Your increase in revenue is coming from inflation.  People are paying more because of inflation, not because we are producing.  So when you celebrate the growth in GDP, you are in fact celebrating the growth in inflation, not the growth in real output, that is my question.

HON. PROF. M. NCUBE: Thank you Mr. Speaker Sir.  I thank the Hon. Member for restating his questions with clarity, before, it was not clear to me.  On the issue of debt clearance and which countries are going to help us, at the stage of clearing the AfDB and World Bank balances, the issue is not about being HIPC or non-HIPC, it is just about clearing that.  As to which countries; of course we will negotiate with the various countries who are shareholders in those institutions and of course the Paris Club countries.  We will negotiate with them, the G7, there are other members of European Union and in Europe who are willing to talk to us about this.  We have had a conversation with them already, so we will continue to explore with them as to whether they can give us relief, but there are countries that we are speaking to.

I cannot be specific; the discussions have just started and I will be able to shed more light in future.  On the issue of inflation, GDP growth is actually real GDP growth, net of inflation, it is not nominal GDP growth.  I want to make that clear, it is real GDP growth which already takes care of inflation.  As to whether inflation is being under measured, Stephen Hanke at the Cato Institute in the United States, that is not the case, there are many ways to measure inflation.  It depends on the purpose.  In most countries, the purpose of a specific methodology that we use is to be able to capture really the cost of typical basket for a household family and that requires that you use a weighted basket approach to measuring inflation.  That is what most countries do and that is what we are doing in Zimbabwe.

So, when we say inflation is of the order of whatever, it is based on this basket of consumption approach.  What other people do, they use all manner of high frequency data, leading indicator. Sometimes they just focus on housing alone as an indicator and other measures to measure the velocity in terms of increase of prices.  There are many ways to do it and the researcher that he is mentioning, Mr. Hanke, he has a specific way of measuring inflation.

My views are this; I do not keep arguing with him on his methodology, methodologies differ but really it is about the message that inflation is an evil that we must always watch out for and deal with.  For me this is the message not whether it is hyper or non-hyper inflation, but we have our methodology, tried and tested.  By the way Zimbabwe also subjects statistical measurement standards to those of the IMF, Afrixim Bank and World Bank.  There is a whole group around statics that measures the way or rather monitors the way statistics are presented and we comply with best practice globally in terms of whatever variable we issue out from ZIMSTATS.