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2022 Post Budget Analysis

13 Dec 2021 at 09:11hrs | Views
Zimbabwe's Finance Minister: Prof Mthuli Ncube
The Zimbabwean government presented a ZW$927.3 billion budget (18% of GDP) for the 2022 fiscal year. The government expects to collect revenues totaling ZW$850.7 billion (17% of GDP), thus resulting in a budget deficit of ZW$76.5 billion which will be funded through issuance of treasury bills (TBs), utilization of the country's SDR allocation from the International Monetary Fund (IMF) and external loan disbursements (external debt). Treasury expects the economy to grow by 5.5% in 2022, which is a decline from 7.8% projected for this year. The growth is underpinned by anticipated above normal rainfall for the 2021/22 agricultural season (bumper harvest and stable hydroelectricity supply), higher commodity prices on the global market for Zimbabwe's exports and growth in various sectors of the economy. Zimbabwe receives 92% of its export income from raw (or semi processed) minerals and tobacco. Key risks for 2022 remain on currency instability and the resurgent COVID-19 pandemic which may call for a return to hard travel restrictions. On inflation, the government expects annual inflation to close the year at 58%, a significant increase from the initial projections of 10% at the beginning of the year. This points to anticipated growth in money supply and further depreciation of the local currency.

2021 Budget Comparison
For 2021, the government had projected to spend no more than ZW$421,6 billion which was 18% of Gross Domestic Product (GDP). Revenue projections were set at ZW$390.8 billion (16.4% of GDP), resulting in a budget deficit of ZW$30.8 billion (1.3% of GDP).

Special Drawing Rights (SDR) Facility
Zimbabwe is set to receive a total of US$958 million worth of SDRs from the International Monetary Fund, subject to exchange of those SDRs for hard currency with central banks from other IMF member countries. So far, treasury has withdrawn US$311 million from the facility, with most of the funds (US$144 million) going to the rehabilitation of the Harare-Beitbridge Highway and the remainder being allocated to COVID-19 vaccination programs (US$77 million) and agriculture social protection (US$80 million). Of the remaining amount, US$280 million has been set aside for foreign exchange reserves. The Auditor General (AG) is yet to publish reports of the utilization of these funds.

More Tax Burden
The budget introduced a new tax of US$50 on cell phone handsets which will be collected prior to registration of new handsets by Mobile Network Operators (MNOs). Previously handsets attracted a 25% customs duty, and this had seen the increase in mobile penetration rate and broadband access in the country.  The new tax will be passed onto consumers, thus pushing the price of cellphones up (cost of doing business locally) and creating remittance nightmares for MNOs. The government hiked withholding tax from 10% to 30% to push non-compliant businesses to get their tax clearance certificates on time. The increase of the tax in an economy where close to 75% of the economy is informal will lead to a blanket increase in prices of goods and services to cover for the amount withheld for non-compliant suppliers. The increase comes in the background of Zimbabwe Revenue Authority (ZIMRA) consistently failing to issue tax clearance certificates on time to various businesses and running behind schedule in processing tax rebates. It is now critical for the tax agent to automate the tax compliance process and reduce human interface to deal with deliberate bottlenecks in the system and corruption.

The government also increased excise duty on cigarettes from 20% and US$5.00/1000 cigarettes to 25% plus US$5.00/1000. The increase will dent prospects for local value addition considering that close to US$850 million of Zimbabwe's tobacco is exported in raw or cut reg form. To enhance value addition of tobacco and earn billions in Cigarette exports, the budget needs to provide incentives to local value addition and exporting by current producers. Zimbabwe's cigarettes are competitively priced in the African market and globally. There is also a new Excise Duty of US$0.05/litre on energy drinks. Revenues from the cigarettes and drinks taxes will go into a fund to fight non-communicable diseases such as diabetes and hypertension. The government made the right call as non-communicable diseases are a leading cause of high mortality rates locally.

Fringe labour relief

The government adjusted the tax-free threshold from ZW$10,000 to ZW$25,000 and widening of the tax bands to end at ZW$500,000 where a marginal tax rate of 40% will apply with effect from 1 January 2022. Equally, the tax-free threshold on US Dollar income was increased from US$70 to US$100. The marginal tax relief to labour will do little to quell the restive civil service in an environment where Total Consumption Poverty Line (TCPL) for November exceeded ZW$7556 per head. This means that a family of 5 now needs income of more than ZW$37,780 to be deemed not poor. Currently, the lowest paid civil servant (B1 grade) is being paid ZW$28,600 (About US$150 on the open market). The increase in tax free threshold will temporarily increase consumer spending power, just for a few weeks before inflation catches up and diminishes that buying power. However, the government made the right call in adjusting the tax-free bonus threshold from ZW$25,000 to ZW$100,000 to cushion labour after a tough second half of the year where purchasing power has diminished rapidly. Ideally, civil service salaries need to be reviewed every quarter in line with inflation trends or TCPL movements. It is important to note that government revenues increase significantly with advances in inflation, enough to exceed revenue targets.

Formal players in the economy would be disappointed to note that the Intermediated Money Transfer Tax (IMT) Tax threshold has not been reviewed upwards. Neither were there any efforts to make IMTT deductible form Value Added Tax (VAT) or Corporate Tax as is the case with other taxes. Similarly, business expected the government to address the challenge related to VAT exchange rate, as producers are owed millions as a result of ZIMRA failure to deduct input VAT from the output VAT.  

The government continued its hustling for foreign currency taxes without providing any incentives to exporters who are losing more 20% of their export earnings as a result of exchange rate disparities or paying a cumulative figure of 45% in taxes. The budget was expected to craft policy incentives to encourage exports, beneficiation and improve viability for current exporters who are overwhelmingly overtaxed.

Sinking in Debt
Public debt has increased to US$13.7 billion before the Global Compensation Agreement debt of US$3.5 billion to former commercial farmers is factored in. In 2015, the taxpayer assumed the Reserve Bank of Zimbabwe (RBZ) debt of US$1.4 billion and this year, US$3.3 billion in legacy debt has been added on the taxpayer as well. This is the price the country pays for the yesteryear fallacy of the 1:1 exchange rate era when the central bank fixed the foreign exchange rate on several occasions. These debts do not factor in the current central bank credit facilities especially with AfreximBank. The lender recently highlighted that it has extended credit worth over US$13 billion to Zimbabwe (largely the central bank). There is widespread vagueness on how the money was utilized and whether parliament had oversight on the total running debt incurred by the bank without legislative approval as required by the law of the land. It is worth noting that as of December 2017, the central bank external debt was US$733 million.

On paper, the government has made significant improvement in allocating more funds to infrastructure development, health, social services and health. However, a lot still needs to be done in prioritizing education and health care on disbursements of funds from treasury coffers. Selected ministries and departments get over 100% of their budget allocations within months while health, social services and education are sacrificed. As such the effectiveness of the budget is in the actual disbursements of funds not the face allocation. The government's appetite for foreign currency continues unabated. On the right hand the government is implementing US Dollar taxes (that are not payable in local currency) while on the other hand it is paying suppliers and civil servants in local currency using a pegged exchange rate. The budget statement denies widespread dollarization which has improved supply of goods and services in the market, domestic savings, private sector investment and reduced inflation. It remains to be seen how long the government denies the failure of the de-dollarization strategy.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email or Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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