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ZCTU input into 2010 fiscal review & budget

Zimbabwe Congress of Trade Unions (ZCTU) input into the 2010 Fiscal review statement and budget review 

1          Introduction 

While there has been a noted improvement in the performance of key sectors of the economy since the formation of the Inclusive Government (IG) in February 2009 that recovery remains generally tenuous and delicate amidst increasing downside risks emanating from the high country risk premium and inherent structural bottlenecks and institutional vulnerabilities.

These risks, bottlenecks and vulnerabilities have conspired to render the economic outlook highly volatile and unsustainable. Hence, it is imperative to consolidate macroeconomic stability by restoring the rule of law, bringing to a closure the land issue, and enhance fiscal space by among other things re-engaging the international community, adopting a sustainable debt strategy, restructuring state-owned enterprises. 

Enhancing fiscal space can be achieved by focusing on reprioritizing and enhancing the efficiency of expenditure and re-engaging the international community. As domestic revenues recover with growth, hopefully the country will be in a position to reduce its dependency on external assistance.

It is therefore critical that an exit strategy be developed so that the country is not dependent on external assistance in the long-term (aid obsolescence strategy). A critical component of the strategy to enhance fiscal space is the negotiation of the country’s debt based on the results of a national resource audit that includes an audit of the national debt, and the strengthening of debt contraction and management systems. 

It will also be vital to adopt a holistic approach to development, integrating economic and social objectives (pro-poor, inclusive growth and human-centred development) as well as create the basis for evidence-based policy making by enhancing national data collection, analysis and collation.

The strategic role of state in development needs to be strengthened as a basis for transforming it into a developmental state and promote good governance as well as expand and strengthen the national institutional framework for broad-based stakeholder participation in decision-making, implementation, monitoring and evaluation. 

It is also imperative to reform the country’s State-Owned Enterprises (SOEs) through a consultative stakeholder-driven approach. There is a need for policy certainty, consistency and broad-based consultations especially on the contentious issue of indigenization and empowerment regulations. 

Zimbabwe's Finance Minister Biti displays briefcase containing 2010 National Budget to the media in Harare.

2          Promoting a Pro-Poor and Inclusive Fiscal Policy Framework 

In the context of a dual and enclave economic structure it will be imperative that any future growth be pro-poor and inclusive. This can be achieved and enhanced by ensuring the ‘integrability’ of the poor in the growth dynamic. Economic growth must be translated into productive employment growth which is a key nexus between growth and poverty reduction. It has been demonstrated that economic growth does not necessarily ensure poverty reduction and development but only does so when it is accompanied by a rapid expansion of productive employment.

A number of nations that have successful poverty reduction credentials such as the East Asian tigers (South Korea, Hong Kong, Taiwan and Singapore) have also followed robust employment-creation strategies.  Economic growth is pro-poor (and inclusive) if it utilizes the factors of production that the poor possess. The poverty-reduction records of countries such as the High Performing Asian Economies (HPAEs) demonstrate that poverty reduction was greatest when economic growth made use of those assets. 

In Zimbabwe, like in most other developing countries, the majority of the poor live in rural areas and depend directly or indirectly on agriculture for their livelihood; the factor of production that the poor possess and use most is therefore labour. The informal economy also accounts for a great proportion of the poor people in Zimbabwe. Thus, pro-poor growth must be strategically focused on rural areas and the informal economy. It must also enhance incomes in agriculture and make intensive use of labour.

To make a significant impact on poverty, much greater emphasis must be placed upon improving agricultural productivity. To achieve high agricultural productivity, increased investment in agriculture (including basic and applied research, extension, irrigation, rural credit and expanding technological access to small-holder farmers) is urgently needed. In addition there is an urgent need to strengthen security and tenurial rights for land. 

To support the informal economy and integrate it into the formal economy investment in basic infrastructure such as roads and energy must be prioritized. Merely relying on the private sector will not be sustainable and successful. It is imperative that government be actively involved in these areas. Private-Public partnerships (PPPs) should be fully leveraged especially in the areas of infrastructure provision and rehabilitation.

Integrating the informal economy into the mainstream of the economy can also be achieved by consciously directing resources to uplift the marginalized groups (women and the youths) and underdeveloped sectors. Therefore, macroeconomic policy needs to be employment-oriented and gender-focused. In this regard, an employment-oriented fiscal policy has to be crafted on the basis of stakeholder-agreed priority areas. 

Ensuring pro-poor and inclusive economic growth requires that the people and their needs come first, implying a human-rights strategy to development. Thus, the prioritization of people and their basic needs (such as food security, healthcare, education, housing, transport, access to public utilities, decent jobs and infrastructure) should occupy pride of place in macroeconomic policy. 

3          Key Priority Areas 

In light of the scarce financial resources available to government there is a scope and need for the creation of fiscal space. 

3.1       Creating Fiscal Space 

Government can create fiscal space through reprioritization (and raising the efficiency) of expenditures. Reducing unproductive expenditures, particularly those of a recurrent nature, should be the first option. This can be achieved by cutting back on defence and internal security spending as well as reduced foreign travel and embassy expenses. The efficiency of expenditures can be enhanced through the rationalization of the civil service to remove ‘ghost workers.’

Ideally, the government should learn to cut its coat according to its cloth, which implies restructuring the government structure to reflect its resource base and agreed national priorities. Merely encouraging line ministries to live within their budgets in the midst of a bloated government structure will not work, as has been the case in the past. The nation will need to put the horse before the cart, by radically restructuring government structure. 

There is also increased scope for higher fiscal space from revenue mobilization. According to the World Bank between 1991 and 2008, taxation as a percentage of GDP (the tax ratio) averaged only about 7 per cent. In comparison, the average for low-income countries is 14.5 per cent, for low-middle-income countries is 16.3 per cent, and is 21.9 per cent for upper-middle-income countries.

For low-income countries, a tax ratio of 15 per cent of GDP should be seen as a minimum objective. In 2008, the World Bank’s Doing Business report ranked Zimbabwe 157th out of 181 countries in respect of the ease of paying taxes. Companies must pay 52 payments a year, involving 256 hours of work and an overall tax rate as a percentage of profits of 63.7 per cent. The 2010 edition has however ranked Zimbabwe 130th with a total tax rate at 39.4 percent from 51 payments involving 270 hours of work as at 1 June 2009. 

Empirical evidence strongly supports the simplification of tax systems. Countries with more tax payments per year have fewer formal businesses per capita and lower rates of business entry. Similarly, countries that make it easier to pay taxes also have higher rates of workforce participation in the formal economy as well as lower unemployment rates amongst women. It has been shown that burdensome tax systems hurt smaller businesses disproportionately, especially in the services sector, which is where most women work. 

There is also a need to simplify personal and corporate tax systems by reducing the number of tax rates and tax-relief measures, thus producing a system with low rates and a broad base. This can be achieved by combining taxes. Where the tax base is the same (wages, salaries, profits or property) it makes sense to levy a single tax.

Reducing the number of taxes both simplifies the payments system for businesses and the collection system for revenue agencies. Minor excise taxes and stamp duties that are costly to collect do not raise much revenue and distort costs and prices and should be abolished. 

The income-tax-free threshold of US$160 still remains low relative to the PDL. Ideally, it should be set at the PDL. It is also interesting to note that, while corporate tax has been reduced from 30 per cent to 25 per cent, individuals will be taxed at a punitive maximum rate of 35 per cent, down a little from 37.5 per cent.

This is unfair, since companies are in business to make profits, and most of their expenditures are tax-deductible; individuals, on the other hand, earn wages and salaries to make a living, not for profit. In essence, companies spend their earnings before they are taxed, while individuals are taxed first before spending their earnings. The position of the Zimbabwe Congress of Trade Unions (ZCTU) is that the tax rate should begin at 10 per cent and end at a maximum rate of 30 per cent. 

3.2       Sustainable Debt Strategy 

Given Zimbabwe’s high estimated external debt and high debt to export ratio of about 150 per cent, a sustainable debt strategy has been the subject of intense debate. Three debt clearance strategies have been proffered namely: applying for the Highly Indebted Poor Country (HIPC) status, debt restructuring/rescheduling and using revenue from our resources such as minerals. 

In spite of the improvements to the original initiative, the enhanced HIPC has had its fair share of problems. Progress has been much slower than anticipated. Indicators show that an increasing number of beneficiary countries are not likely to attain sustainable debt levels even after graduating from the initiative. 

There now seems to be an emerging consensus, however, that many African countries continue to suffer from a ‘debt overhang’, despite the HIPC initiative and various actions in the context of the Paris Club. The fact that even those countries that have reached the completion point will soon find themselves in an unsustainable debt situation points to the inappropriateness of the criteria applied in the debt sustainability analysis.

And the fact that several more debt-distressed African countries are not eligible for HIPC debt relief reflects the lack of objectivity in the eligibility criteria. 

The second option of debt restructuring/rescheduling entails Zimbabwe negotiating with its bilateral and multilateral creditors to have its debt rescheduled from into long term debt. This option however has the problem that most of the country’s debt has been owing for a long period of time and also the country has had a record of defaulting on its debt for a very long time (bad credit record). Hence, many creditors may not favour this approach.

Debt restructuring also does not lessen the debt burden but only procrastinates it. Hence, debt restructuring may not be a feasible and a good option. The third option entails using revenue derived from our resources such as minerals to retire the debt. However, in spite of boasting of abundant mineral wealth such as gold, diamond and platinum, the country has not been able to derive any significant economic and financial benefit from these mineral resources.

The nation continues to be prejudiced of significant mineral resources through the smuggling of mineral resources. There is a need for strong political will and commitment to deal with smuggling of mineral resources and other forms of leakages so as to harness the revenues towards economic development. 

Arrears clearance is a prerequisite for full engagement and the ability to borrow from the IFIs. Zimbabwe is currently not HIPC-eligible and, as the list was closed in 2005, the process would have to be reopened for Zimbabwe to be included. Zimbabwe should, however, pursue vigorously all the options for debt relief, including outright cancellation. From the outset it will be important that a clear legal framework and National debt strategy be developed.

The legal framework should clearly state who is able to contract new debt on behalf of the state, the purpose of the debt, the limit of the debt as well as spell out clearly the role of parliament in oversight functions among other issues. This will help to ensure effective and efficient utilization of present and future national resources so as to prevent waste. 

For effective debt management, it is crucial to have a firm political will and commitment to adhering to sound legal frameworks. In designing a debt strategy there is a need for close co-ordination and cooperation among different government agencies to ensure synergy with overall macroeconomic and developmental policies.

Social partners and civil society should also participate in the development of a debt management system. The debt strategy should include an audit (review) of each of the projects for which past loans were incurred. This would enable the government to truly verify the genuineness or otherwise of the debts and to see what percentage of the debt is odious. 

The national debt should also be treated and viewed as a symptom of the wider structural and political challenges inherent in the economy. Dealing with these challenges should therefore form an integral part of a sustainable debt strategy. The high country risk represents a major constraint to both sustainable poverty reduction and debt strategy. Without addressing this risk and the resultant uncertainty inherent in the economy, it will be difficult prevent future indebtedness.

The government should therefore simultaneously implement structural, political and sound economic policies as part of a sustainable debt strategy. Such a cocktail of reforms should address the poor state of infrastructure, enforce the rule of law and minimize the risks and uncertainties associated with the political and economic environment. 

3.3       Optimal Currency Reforms 

Zimbabwe can opt to continue with the de-facto dollarization regime, reintroduce the Zimbabwe dollar which will be underpinned by mineral resources or join the Rand Monetary Area (RMA) by adopting the rand. 

Although experience from other countries has shown that dollarization in itself is not a panacea to all the economic challenges facing the nation it however helps to lay a firm foundation for sustainable economic development. To date a number of notable achievements have been made owing to the introduction of dollarization which include: an end to hyperinflation, notable increase in capacity utilization by industry and growing confidence in the economy among others. In spite of these gains however, the economic environment still remains very delicate. 

In terms of the reintroduction of the Zimbabwe dollar certain benchmarks will need to be met. These benchmarks include: attaining a sustainable GDP growth rate of at least 7%; low and stable inflation and interest rates; reducing the high debt ratios to very low and sustainable levels; increasing the level of savings and investments to at least 25% of GDP; reducing the balance of payments deficit to less than 5% of GDP; increasing the export level to at least 25% of GDP; high levels of productive capacity; and financial and political stability among others.

The country will need to build up its foreign currency reserves to sustainable levels to anchor the Zimbabwe dollar. These foreign currency reserves will be used to defend the Zimbabwe dollar in the event of a currency or speculative attack. 

With the painful experience of the Zimbabwe dollar still fresh in people’s minds, it may take even longer to restore public confidence in the national currency. Hence, the reintroduction of the Zimbabwe dollar might result in further erosion of public confidence in the financial sector, a phenomenon which would precipitate disintermediation and a run on the banks as people take rational steps to protect their wealth, including shunning the banking system. 

The RBZ has been proposing the reintroduction of the Zimbabwe dollar that will be anchored on gold valued by an independent body comprising all stakeholders. This is akin to the Gold Standard This system however has a number of problems. First the monetary base (money supply) is determined by the supply or production of gold. Hence, there is a loss of control over economic policy and in particular over monetary policy as monetary policy will be determined by the rate of gold production.

If the rate of gold production slumps it will mean that the money supply will go down and this may induce a deflation and if the rate of production of gold goes up it will imply that money supply will go up which may induce inflationary pressures in the economy. This therefore leaves the economy susceptible to speculative attacks and recessions. 

Moreover, it is now believed that the use of the gold standard played a significant role in preventing governments from countervailing the Great Depression and played a catalytic role in transforming the recession of 1929 – 1931 into the Great Depression of 1931-1941. It has been found out that countries that were not part of the Gold Standard escaped the Great Depression unscathed and countries that left the Gold Standard in 1930 and 1931 suffered much less.

Another problem is that the value of the currency will be determined by the price of gold and hence swings in the price of gold will leave the currency volatile and thereby increasing exchange rate risks and volatility. This system also works better when other countries are part of it as this makes it easier for the process of self-correction to take place in the event of balance of payments surplus and deficit. 

Another currency option for Zimbabwe is to join the Rand Monetary Area (RMA) by adopting the South African rand. The RMA currently consists of Lesotho, Swaziland, Namibia and the Republic of South Africa. Under the terms of the RMA agreement the rand is the legal tender throughout the region although other countries have the right to issue their own national currencies. These national currencies should be fully backed by foreign exchange reserves. They therefore have limited control over their own monetary policy and financial system. 

Anticipated benefits from being a member of the RMA include: saving in currency conversion costs in all trade with South Africa and other countries in the RMA, reduction in transaction costs involved in cross-border trade; reduced foreign-exchange rate uncertainty and risk; gains from trade creation between Zimbabwe and other members of the RMA; opportunity for improvements in monetary policy and possibility of earning seigniorage.

The anticipated costs include: a loss of policy space with respect to the exchange rate, interest rates and money supply; possibility of asymmetric shocks; changeover costs; possible dispute over seigniorage apportionment; reduced opportunities for currency substitution could make policy less time-consistent; and possibility of intra-union factor immobility. 

Being a member of the RMA will not guarantee higher economic growth though unless the country deals with the structural and institutional bottlenecks inherent in the economy. Growth and development is essentially a function of economic, political, structural and institutional reforms. Another challenge will be the need to maintain adequate foreign currency reserves, this may prove difficult for Zimbabwe. 

Given the extensive trade and financial ties between Zimbabwe and South Africa, the rand will represent a credible monetary anchor. It has been proven empirically (Alesina and Barro, 2002) that countries that trade more with each other benefit more from adopting the same currency. Also, smaller countries should, ceteris paribus, be more inclined to give up their currencies. Empirical evidence on the relationship between currency integration and intraregional trade has concluded that using a common currency increases trade by up to three times (see Engel and Rose (2002). 

Therefore the greater the level of existing trade or the potential for increased trade between prospective members of a currency union, the greater the expected benefits will be. The SADC’s Regional Indicative Strategic Development Plan has set the goal of establishing a SADC monetary union by 2016 and a common currency by 2018.

However certain macroeconomic convergence criteria with respect to inflation, interest rates, budget deficits, national debt and exchange rates e.g. inflation should not exceed a predetermined threshold. When countries are targeting macroeconomic convergence there are likely to have different costs of adjustment. Therefore, it will be important to determine how these adjustment costs will be financed and who will finance them.   

4          Conclusion  

For the fiscal policy to be pro-poor it should have a pattern that directs resources disproportionately to the following: sectors in which the poor work (such as agriculture, construction and manufacturing); areas in which they live (such as underdeveloped regions); factors of production which they possess (such as unskilled labour) and outputs which they consume (such as food).

A pro-poor fiscal policy should also be employment-intensive while at the same time promoting macroeconomic stability. Sustained economic growth, in which poor women and men participate directly as both agents and beneficiaries, is essential for reducing poverty. 

Given that the national employment policy should be part of an overall development strategy that prioritizes the goal of creating decent work for all, this objective should be reflected – and, indeed, integrated – in all macroeconomic and sectoral policies if full employment is to be attained.

It has been demonstrated empirically that it is not only the quantity of growth that matters for employment; it is both sustained high levels of growth and employment intensity that make the difference. This has been a missing link, as past policies tended to be crafted in isolation from each other and, in recent years, as the objectives of employment creation and poverty reduction have been treated as a residual, stabilization has taken the centre stage. 

The demise of the formal sector, and the absence of supply-side incentives to resuscitate and engender inclusive, pro-poor growth, implies that the decent-work deficits that characterize the economy and entrench poverty and its feminization will abound. By focusing largely on the formal sector, which is male-dominated, past policies neglect the non-formal sectors that accommodate the majority of the population, and especially women. 

The government should deal with the inherited dual and enclave structure of the economy so as to unlock the potential of the economy to generate pro-poor and inclusive growth. Focus should be centred on increasing expenditures on infrastructure and basic social services (health and education), improving agricultural productivity and promoting private sector development as an engine for economic growth. It is important to strengthen the strategic role of the government as the driver and facilitator of sustainable development.  

Finally, it is important to ensure that there is synergy and harmony among the country’s economic policies namely the forthcoming medium term plan, the macroeconomic policy and budget framework 2010-2012 and the fiscal policy in order to optimise any economic payoffs.

Furthermore, the national employment policy framework should be at the centre and mainstreamed into all the economic policy strategies so as to ensure the employment-intensity of economic growth. An institutionalised framework for social dialogue should also be put in place so as to ensure effective stakeholder participation in economic policy formulation as opposed to the current ad hoc approach.