Patrick Chinamasa’s budget fails to resolve crisis

By Phillimon Mhlanga

Finance Minister, Patrick Chinamasa, last week delivered a high sounding national budget that critics said lacked any attempt to meaningfully resolve the country’s current economic crisis, characterised by runaway government spending and a liquidity crunch.

Both critics and business executives said Chinamasa had dwelt on problems that have characterised the national budget since he took over the Cabinet portfolio, when ZANU-PF assumed absolute control of the State following the collapse of an inclusive government after the ruling party’s landslide victory in July 2013 elections.

“There are still some pending issues from a very long time ago,” said Confederation of Zimbabwe Industries (CZI) president, Busisa Moyo.
“The implementation matrix (by government) is worrying.”

The outstanding issues, he pointed out, included parastatal reforms, as well as support to the business sector in the form of cheap funding to revive collapsing companies.

In fact, the issue of parastatal reforms has been outstanding for decades; despite pronouncements, government has been hesitant to follow its words with action, resulting in failure to either reform the loss-making State enterprises or sell them to the private sector.

Economist, Brians Muchemwa, said Chinamasa had abandoned his pledge to implement critical reforms over the years, and that this year’s budget statement was therefore mere political banter.

He said Chinamasa fully understood the problems the country was facing, but did not have the will to deal with them.

“In his budget presentation, he highlighted problems we have been hearing him (talk about) for two, three years or four years now. With all that understanding, we have more problems than happiness, unfortunately. We have had the same problems for years now,” said Muchemwa.

He said growth has been slowing down over the past four years, and Chinamasa has been running persistent budget deficits since he took over from former finance minister Tendai Biti, who was part of the inclusive government formed in 2009 to help repair the country’s economy.

“He has been talking about reforms in perennial loss-making parastatals and government entities, which continue hurting economic recovery through perennial dependence on the fiscus. Government has also been failing to deal with its huge wage bill,” said Muchemwa.

He said Chinamasa should take the bold decision to dispose of all loss-making State enterprises.

“The minister has presided over two serious issues during his tenure as Finance Minister. He dollarised this economy. I think it was a difficult decision to make. He is the same minister who has brought the bond notes, another difficult decision,” said Muchemwa, suggesting that selling or shutting down loss-making parastatals should be the easiest decision to take by Chinamasa.

“Now, I think it’s much easier to close loss making parastatals than dollarising the economy and bringing bond notes,” he said.

Bond notes, described by President Robert Mugabe as a surrogate of the US dollars, were introduced last month as a form of export incentive but have largely been used by government to inject liquidity into the economy and stem what government alleges is the export of US dollars from the economy.

Muchemwa said Chinamasa should do away with budget deficits, particularly when these are used to fund recurrent expenditure.

“This culture of high budget deficit is causing serious problems. There is no problem in borrowing by government but doing so to finance salaries is a huge problem. Government is borrowing more than 50 percent of bank deposits to pay civil servants. Government is not productive, meaning that that expenditure is wasteful. Government should reign in borrowing from the market. It’s not creating value but (that money) is going into the pockets of people. It’s not helping the economy, it’s not generating new jobs,” said Muchemwa.

Chinamasa said in his budget statement that total revenue would be at US$3,7 billion, with total expenditure estimated at US$4,1 billion, leaving a financing gap of US$400 million, representing about 2,7 percent of gross domestic product (GDP).

About US$3 billion would go towards salaries, he said.

He said the economy would next year grow by 1,7 percent after surviving contraction this year.

Although initial growth forecasts were at 1,2 percent this year, he had pared back the forecast to a slowdown of 0,6 percent.

The International Monetary Fund has also projected contraction this year.

He said agriculture and mining would drive overall growth at 12 percent and 0,9 percent respectively in 2017.

Chinamasa admitted the country was in an unsustainable economic position and government was not moving at the pace expected as far as the implementation of critical reforms was concerned.

“Yes our challenge is the pace for the implementation of critical reforms,” Chinamasa told captains of industry during a post-budget breakfast meeting last week.

“But don’t expect a big bang approach because that will be a blind approach. We need to do an audit first to know what has been happening.

Once we know, it informs the basis of action. In fact, changing the culture of a company is very easy. But it’s not as easy as to change the culture of government. To be able to make things happen, it takes a lot of time. Government is like an elephant and a company is like a rat. When both are running, the rat can quickly change the direction but the elephant, which is government in this case, cannot suddenly change the direction. It takes time because of bureaucracy,” Chinamasa said.

On the issue of the government wage bill, which represents 91 percent of government’s total revenue, Chinamasa said government could not afford to make its workers redundant because it did not have the money for packages.

He said the most feasible solution was “to broaden the national cake”.

Economist, Prosper Chitambara, said Chinamasa’s views were predictable, considering that government would be preparing for elections next year.

Chitambara said: “Government will spend more because we are just a year away from election. Normally, government tends to spend more just before elections in its bid for a new political mandate (so) forget about rationalisation of government workers.”
He said the economy should instead prepare for more borrowing on the markets by government to fund its budget deficit, which was likely to grow bigger than Chinamasa’s forecasts.

Although the budget deficit was projected at US$150 million this year, the outturn is expected at US$1 billion.

Now, if government could have such a huge budget deficit in a non-election year, the situation would be worse next year, warned Chitambara.

“(This) is not proper,” he said.

He also criticised the 2017 national budget for being “not pro-poor”.

“Pro-poor budgets allocate more resources towards social services such as health and education sectors. But look, the bulk of funds in the 2017 budget are being channelled towards financing employment costs. This is a consumption budget. With this, the minister is not increasing productivity. This is a recipe for disaster.”

Chinamasa also proposed a raft of new taxes to fund the budget amid dwindling revenues.

These include a five percent levy on airtime, which Chitambara said would burden the poor.

But this move could undermine the tax base as many people would switch to other platforms like Whatsapp, Skype or Facebook.

Chinamasa also proposed to increase road traffic fines by as much as 100 percent effective January 2017.

He also proposed to align excise duty on paraffin with diesel at a rate of US$0,40 per litre, starting January next year.

To enhance the attractiveness of the Special Economic Zones (SEZs), which were created by government in order to attract foreign direct investment and enhance the economy’s capacity to produce goods and services competitively, Chinamasa proposed tax incentives to those willing to establish businesses in the zones.

He indicated that businesses in the special zones would be exempted from corporate income tax for the first five years of operation while capital equipment for SEZs would be imported duty free.

Thereafter, a corporate tax rate of 15 percent would apply.

Tax experts said the budget statement appeared to be working against promotion of local production.

“I have a problem with dividend withholding tax. It’s going against the idea of promoting local production. I also have a problem with deemed dividend arising from the thin capitalisation rule and administration expenses; this is creating almost double taxation. There is need to address this,” said Rameck Masaire, a leading tax consultant.

Masaire added: “While the Finance Minister wants to have a big increase in tax base, there seems to be a gap between the SEZs Bill and the budget statement. There is need to address that.”

Chinamasa responded: “I have taken note of gaps that exist in Special Economic Zones and other tax issues. On the taxation of the multinationals, we realised that under our eyes, outflows were rampant. This was happening through consultancy, management fees that were paid not to independent companies but sister companies charging an arm and a leg on gross. It’s an area we need to continue looking at.” Financial Gazette