Tendai Biti's dangerous fiscal cliff

You do not have to be Sherlock Holmes to see that wrestling on a cliff edge is dangerous. The hyper-critical minister from the MDC-T, Tendai Biti, is expected to fulfil the statutory requirements which his office demand when he presents the interim expenditure and revenue proposals to a nation with arguably one of the highest poverty levels in the world following years of economic stagnation and tense relations with the western community.

The policy document is expected to be used as a battle ground for the two leading political parties as legislators from the conservative Zanu PF are expected to develop a sharp tongue towards the document as a campaign gimmick. It will also be an opportune moment for Biti to remind the voters that unscrupulous farmers from the oldest political party cannot continue remaining as cry babies who demand government support with each passing fiscal year.

The cliff adds another huge uncertainty - discouraging companies from investing or hiring until they can see the future more clearly as the Indigenisation Bill, which is the most market rattling legal paper in the land, is conveniently under-mentioned every time a budget is announced. Tell us the truth Mr Biti, where is the bill taking us? If the total revenue collection for the first five months of 2012 is pegged at US$200 million, how can you expect us to eat what we kill when actually there is literally nothing we have killed?

The macro-economic framework for 2012 projects GDP growth of 9.4%, and an annual average inflation of 5%. This translates into a projected nominal GDP of close to US$12 billion. The envisaged growth rate is not possible without an active private sector and lively foreign direct investment. For instance, government funded capital development projects had been slackening as compared to those managed by the Infrastructure Development Bank of Zimbabwe [IDBZ], with the latter's projects showing higher capacity utilisation levels.

We believe the solution to the current liquidity crunch lies in a grand bargain that raises corporate taxes (preferably through base broadening reform) and curbs the growth of entitlements [i.e. public spending on political events such as elections, the constitution and endless bailout of run down parastatals] whose expenditure bill erodes 45% of the nation's GDP. The best solution would be to agree on some version of this grand bargain sooner rather than later. The outlines of a deal could be settled tomorrow, were both sides willing. But alas, they are not. Both parties have built their election campaigns around their opposing visions, and both hope to emerge from the election with increased leverage.

Time to Buy Time
Knowing well that both an election and a constitutional referendum cannot and will not be held this 2012, where is the Mid Term Budget Review directing us? The revenue targets had already been missed, rather than calling it a sinking tanker, it's a true case of a Titanic. As much as elections might not create the right atmosphere for investors, not holding them (elections) is equally catastrophic as there is so much dead wood in the bloated government which is tantamount to "double dipping" through both corrupt practices and undeserved allowances. The moral is clear: profligacy leads to economic chaos, political extremism and ultimately to catastrophe for all of Zimbabwe.

The Projected Highlights of the Mid Term Fiscal Policy Review might include:
Maintenance of the customs duty policy: The last budget statement for 2012 saw customs duty on raw materials being reduced as efforts to support the productive sector got underway. The duty which was reintroduced on commodities such as cooking oil, maize meal, flour, rice and salt will also remain as the call for survival of the domestic industry notably in production of basic commodities gains traction.

An election and constitutional referendum fund to be set up: It is certainly not an easy task as the two events alone can gobble up to US$250 million. However, the Minister is not expected to allocate any significant sum to either of the two.

Investments in power stations: The 2012 budget saw Hwange Thermal Power Station receiving US$30 million; Kariba Power Station US$3million; an amount of US$7.5million towards transmission and distribution costs; US$7 million for rural electrification and no funds were allocated for coal bed methane output. The ongoing power outages call for significant allocations and we do not expect the Treasury boss to channel any funds towards investments in power stations as resources do not seem to be permitting.

Management and streamlining of the wage bill: The recurrent expenditures remain a source of headache for this present government and employment costs are averaging US$161 million monthly against a budget provision of US$113 million. Such a situation where employment costs account for 63% of total expenditure is unsustainable as it leaves no space for capital expenditure projects which tend to attract investment. An average of 235 000 civil servants is too big a digit for the government to afford any salary increment, but a direct comparison with a foreign travel bill will show a government not committed to its employees' welfare. There is certainly no room for an upward review of salaries in this mid-term policy review, we believe. The equation paints a gloomy picture if one looks at it closely. It implies government is spending 63% of its budgetary resources on 1.78% of the population, while the remaining 98.22% have to share the balance of 37%.

Inflation management strategies: Zimbabwe's inflation levels remain within the SADC macro-economic convergence criteria thresholds. However the Treasury certainly does not possess the tools to manage the inflation dragon except to pray that the external shocks are not to directly impact on the price trends within the economy. For a nation which was in deflation hardly two years ago to have registered a recent 4% inflation rate is hardly acceptable as the potential threat of inflation is still real regardless of its single digit state.

Financing of agriculture: The minister is expected to unveil an Agriculture Financing Facility, which has potential to unlock additional funding arrangements by the private sector to satisfy agricultural sector requirements. The facility is expected to have complimentary features such as prescribed asset status, liquid asset status and also tax exemptions. This will have an effect of reducing the interest rate at which farmers will be borrowing for agricultural funding.

Capitalisation of the Reserve Bank of Zimbabwe: The US$100 million fund, jointly funded by some international financial institutions and a regional financier is on the cards as the inter-bank market remains crippled. It is proving that the government cannot help the situation at the apex bank as each and every passing policy statement remains a "promissory note" to capitalise the central bank.

Automation of tax administration services: There have been serious delays in the management of tax systems in Zimbabwe which had compelled most business players to avoid and evade paying tax as the process had been so strenuous. In this midterm budget statement, we expect the Treasury to introduce the complete automation of tax services. This will lead to fast clearance of goods, reduced interface between tax payers and the tax administrators minimising corruption.

Mining sector: An appropriate mineral taxation model that benefits the economy is what the nation expects from the 2012 midterm budget. Mining royalties have to be raised to an average of 12% from the current 7% for gold and to 15% for platinum from the existing 10%, as Zimbabwean minerals market is now more open to trading of the special gems. All illegal extraction of minerals should be brought to an end with an approach of 'use claims or lose them' being embraced. Allegations of politicians being accused of enriching themselves through a stranglehold on underutilised claims must not be allowed to continue.

The external debt burden: Zimbabwe's external debt as at the announcement of the last budget was at US$10.7 billion, which translates to 111% of Gross Domestic Product. This has continued to worsen the country's sovereign risk which had diminished chances of securing lines of credit at concessional interest rates. The regular visits by the Bretton Woods institutions into the country cannot be linked with any possibility of a re-engagement into the club of benefactors for debt forgiveness. Politics ahead of economic rationality has been allowed to define the status of Zimbabwe amongst other developing countries of the world and this is expected to continue in the foreseeable future. A comprehensive policy approach to solve the debt problem is what is required.

Examples are Greece and Italy which had significantly shifted politically due to unsustainable debt levels. Surprisingly, Zimbabweans are not approaching their debt problem with any sense of urgency as their belief is only politics, politics, politics and nothing else. We do not expect the Finance Minister to announce any policy measure to tame the external debt as the GNU has just run out of steam with most of its energy being directed to an uncertain election.

The different sectors of the economy demand substantial investments for them to significantly impact on economic growth. Mining is claimed to require at least US$4 billion; tourism needs US$1.2 billion; agriculture US$1.8 billion and the financial services sector about US$2 billion respectively. The pressing demand for limited resources remains a threat to economic recovery and the economy is bound to assume a u-shaped recovery to the preferred v-shaped scenario which is the only way to extricate the Zimbabwean masses from poverty.

The Consumer Price Index [CPI] remains a threat with food inflation maintaining a stubborn trend. The rate at which such prices are spiking up might be a testimony to an inaccurate manufacturing sector survey which was released late last year showing increased capacity utilisation of 57%. Most retail shops are filled with foreign products when statisticians are arguing that industry has significantly peaked with both power and water becoming scarcer. With the inflation rate at around 4% year on year according to official estimates, it is still below the regional average and the approaching festive season is to threaten the existing trend which had seen month on month rate declining of late.