Zimbabwe's economic woes self-inflicted

THE Zimbabwean economy is bedeviled with self-inflicted woes.

However, the economic tribulations largely emanate from government portfolios and their episodic fiscal blunders.

The fiscal roadmap and Transitional Stabilisation Programme presentations by the Ministry of Finance and Economic Development are a clear testimony that Zimbabwe's principal enemy is the central government's unrestrained borrowing.

Given that the political leadership and economic think-tanks are seemingly singing the same song (regarding the primary driver of our economic quagmire), it is time for proportionate and commensurate austerity measures to be executed.

By and large, it is anticipated that since we now have the precise problem diagnosis, the economic prescription should be aligned to the current economic ailment. Thus a misalignment between problem diagnosis and prescribed solutions is a recipe for future economic imbroglios.

A general snapshot position that the writer should quickly note down is that there is a grave misalignment between the economic problem at hand and the austerity measures introduced by the fiscal authorities. Fundamentally, the main quandary has been the central government's unrestrained spending whilst the proposed solutions are largely targeting the revenue side of the government budget.

Basically, the central economic austerity strategy should have been expenditure-reducing schemes which are buttressed by revenue-strengthening measures and the eagerly anticipated structural reforms. Regrettably, the proposed austerity measures are skewed in favour of excruciating revenue measures. Apparently, the fiscal authorities have resorted to over-taxing the already bleeding, haemorrhaging and meagre incomes of corporations and the enormously poor economic inhabitants.

The much-needed fiscal consolidation has been proposed as a futuristic reform agenda which needs cautious and calculated moves. The revenue austerity measures were however imposed on the masses. The general lack of consultation and fast-track regulatory amendments to instantaneously collect the two cents per dollar transaction tax is evidence of how lopsided the fiscal austerity measures have been. This is political hegemony at play. The fiscal authorities have once again conformed to the longstanding Zimbabwean leadership's strategy of dictating economic policies (given the limited degree of fiscal consolidation) and negating the much-needed expenditure reforms.

It can be argued that the austerity measures being proposed now, with the exception of the two cents-per-dollar transactional tax, are similar propositions that economists, industrial analysts and academics have always suggested way before we plunged into our economic coma. The bone of contention is largely on the ill-planned, ill-timed and obligatory transaction tax regime of 2% ($0,02) per every dollar. Let us delve into the assessment of the revenue reforms.

Revenue reforms

Basing on the International Monetary Fund's 2017 Staff-Monitored Report, statistical revelations show that Zimbabwe's revenue-to-GDP ratio is already high. This conclusion was based on a comparative analysis of low-income countries and comparative assessments on regional tax standards.

It is common knowledge that Zimbabwe is suffering from massive de-industrialisation, hence the degree of informalisation has remained the economy's leading scourge. Thus given the nature of the informal economy's unregulated transactions, the Ministry of Finance and Economic Development put forward a transactional tax regime whose intended purpose is to collect revenue from both the formal and informal market activities.

A tax on transactions is seen as an efficient way of enforcing tax payment from the informal sector in Zimbabwe's predominantly informalised economy. Additionally, given the liquidity crisis and a deliberate attempt to move away from a cash-dependent existence to the much more convenient mobile money and electronic transactions, the transaction tax is deemed to be a revenue maximisation grand strategy.

Naturally, informalised economies are often associated with significant illicit financial transactions and crimimal activities. As such, given the compulsory nature of the transaction tax, the Zimbabwean government is thus going to collect dirty money. For instance, the transaction tax can be collected on amounts being exchanged for illegal activities such as drug trafficking, human trafficking, prostitution, criminal activities and a variety of illicit underground economic activities (the parallel market). Thus ethical arguments against this tax can be used to invalidate this new regime.

What aggravates the ethics concern is that, in coming up with the new tax regime, the government did not appear to appreciate the fact that by their very nature, informal markets always establish informal means of making payments, meant to avoid the exorbitant formal tax regime. For instance, illegal activities usually end up being confined solely to cash-based transactions. In most cases this breeds a new problem of cash hoarding by these illicit dealers, thus creating a new form of financial haemorrhage. As a result, there are massive sums of cash circulating outside the formal banking system driven by the desire to evade being busted for illicit dealings.

The major defect of the transactional tax system was its disregard of the tax burden effect and the elasticity of demand and supply. Theoretically, the tax incidence depicts the distribution of the tax obligations which must be covered by the buyer and seller of a good or a service.

The probability at which each party endures the burden of tax shifts, depending on the associated price elasticity of the product or the service. This tax burden effect also hinges on the inherent supply and demand conditions of the good or service in question.

Practically, the new transaction system has brought a new wave of price erraticism. Yes, one might argue that the parallel market developments exacerbated the problem, but let's all remember that entrepreneurs view taxes as a cost of doing business. Consequently, when faced with a cost, businesses simply loads the additional cost into their pricing structures so as to maintain their profit margins. Hence, the new wave of price increases is largely a by-product of the tax burden effect.

Looked at practically, the business corporations are able to ride on the poor demand and supply (commodity shortages) situations of most goods and services through increasing their prices. Given the limited market competition, de-industrialisation and the dominance of imported goods, the consumer has been on the receiving end.

The double-barreled problems of a transactional tax and inflation are now gripping the economy with a vengeance.

The new Zimbabwean transactional tax system is record breaking. The new tax regime now envisages a government which collects an outrageously hefty tax, far outweighing the profits of legitimate business entities, such as banks, for instance. It is unfathomable that the fiscal authorities are collecting up to a maximum of $10 000 per transaction compared to a bank's $10 charge for processing a payment.

Banks make money through financial intermediation. Their maximum bank charges for Real-Time Gross Settlement or electronic money transfer transactions is limited to a maximum of $10. The Zimbabwean government is however demanding unimaginable amounts. The table above sums up how gluttonous the Zimbabwean government has become.

The table schematically shows that before the new transaction tax, government used to collect $0,05 per transaction while banks would charge between $5 up to a maximum of $10 per RTGS transaction. Given the new system, the government can now collect transactional taxes up to a maximum of $10 000. The transaction tax is not only limited to RTGS and EFTs, but holistically taxes all electronic funds and mobile money transactions.

The table above shows that the new tax regime is nothing but punitive to the transacting public. Yes, one might argue that members of the public's transaction volumes are within the $1 000 range but the bottomline is: how can fiscal authorities collect a tax of $20 while the banks themselves are pocketing $10 (RTGS) and $2 (EFT) bank charges respectively? Who is in business in this scenario? If banks could charge a maximum of $10 for whatever transaction amount and still post profits and accomplish shareholder value maximisation objectives, why would our government be so harsh to the citizenry?

Though the revised tax position has put a tax cap and isolated transactions which are exempt from taxes, the rate of taxation is still outrageously too high. For instance, corporations now need to have $10 010 (tax plus bank charges) reserved in their accounts for them to only pay a single supplier owing them any amount above $500 000.

What boggles the mind is: how sustainable is such a tax system, given that some businesses, especially fast-moving consumer goods (FMCGs) are high-volume, low mark-up business models which thrive on pushing volumes? Without a doubt, businesses will merely pass this tax burden to the final consumers hence the current wave of price escalations. Given the above-stated evidence, one wonders if Zimbabwe is really "open for business".

Fiscal authorities need to completely overhaul this new tax system, given that it is not only counter-productive but also an unethical practice for a government to collect a tax higher than bank charges. Additionally, the new transactional tax disregards the need to attract foreign investment. Imperatively, no foreign investor is willing to invest in such a gruesome tax regime.

Potential investors do not only make assessments of corporate taxes and other penalties directly linked to their business models. Due diligence is also given to the potential policy impacts of the tax system to the overall economic aggregate demand. Zimbabwe is currently agonising with an economic depression, as such, over-taxing the economy has the opposite effect of dampening the aggregate demand.

The rational economic expectation was for the government to revamp the aggregate demand through favourable tax incentives for both corporations and citizens in general. Such a development would bolster the ailing purchasing power of economic inhabitants (aggregate demand), thus acting as a lubricant to economic recovery. However, our fiscal authorities are undertaking contradictory strategies, further aggravating our current economic conundrums.

If the Zimbabwean government intends to buttress its revenue generation capacities, the focus should be on stratagems that address de-industrialisation and informalisation. Emanating from the lens of low-income country tax regimes, Zimbabwe is already heavily taxed, hence the main job of fiscal authorities should have been to reduce tax leakages and improve the transparency and accountability of the existing system.

Masamha is an independent economic and financial analyst. He holds a Master's degree in Finance and Investments with the National University of Science and Technology and a Bachelor of Commerce (Honours) degree in Finance with the same institution. A chartered secretary by profession, the author is a graduate member of the Institute of Chartered Secretaries Association of Zimbabwe. He also holds an Executive Diploma in Business Leadership and is a graduate member of the Zimbabwe Institute of Management. — pmasamha@gmail.com.