via ‘Mangudya bike-shedding’ – The Zimbabwe Independent February 12, 2016
As the economy continues to feel the pinch of tight liquidity, low productivity, de-industrialisation and lack of foreign capital to re-ignite the economy, the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya last week announced stringent measures, to tackle illicit money flows and capital flight.
Taurai Mangudhla
In his 2016 Monetary Policy statement, Mangudya announced cash withdrawals without one-day prior notice remittances would be capped at US$10 000. This comes after nearly US$2 billion evaporated from the capital-starved economy through externalisation last year.
Mangudya said out of the US$1,8 billion externalised in 2015, US$1,2 billion was siphoned out by corporates with outward individual remittances accounting for the balance. He added that government would operationalise an economic crimes court to plug revenue leakages.
While plugging revenue leakages is welcome in any economy, Zimbabwe’s mounting economic problems are not rooted in illicit financial flows. This has seen analysts likening Mangudya’s move to bike-shedding or Parkinson’s Law of Triviality especially at a time revenue collections are underperforming due to mounting challenges on industry.
According to economics literature, Parkinson’s Law of Triviality, also known as bike-hedding or the bike-shed effect and the bicycle-shed example, argues that members of an organisation give disproportionate weight to trivial issues.
It observes that a committee whose job was to approve plans for a nuclear power plant spent the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike-shed, while neglecting the proposed design of the plant itself, which is far more important but also a far more difficult and complex task.
In fact, the leakages seem to be inspired by a wrecked economy, hence the need for government to restore the country’s economic glory mainly through production.
Other sentiments are that Mangudya’s move is equivalent to treating the symptom and not the root cause or rushing to prepare for hosing down forest fires instead of stopping the child playing with a match box as structural economic problems such as low aggregate demand, informalisation of the economy, deflationary pressures and low foreign direct inflows are compounding the liquidity situation and retarding economic growth with latest tax figures from state revenue collector, the Zimbabwe Revenue Authority (Zimra), showing businesses are in distress.
Zimra’s annual revenue performance update for the year ended December 31 2015 shows Zimbabwean companies are feeling the pinch of economic challenges such as a negative foreign investor perception and tight liquidity conditions that have forced some players out of business with those remaining either struggling to stay afloat or unable to meet their tax obligations.
Companies and individuals are struggling to pay outstanding tax liabilities to government and are sinking deeper in arrears.
Industry distress, which forced Finance minister Patrick Chinamasa to revise economic growth projections from 3,2% to 1,5% and revenue collection targets from US$3,76 billion to US$3,46 billion in 2015, have also seen Zimra missing its annual tax collection targets for 2015 by US$220 million and falling 3% below 2014 figures at US$3,5 billion, an indication there is no fiscal space.
According to the annual tax report, the amount owed to government by the tax paying community had risen by close to US$600 million to US$1,97 billion in the 12 months under review due to growing distress among tax payers.
“This does not reflect inability to collect by Zimra which has been engaging the debtors. Instead, the rise in this figure reveals the level of distress within the tax paying community,” said Zimra.
Harare-based independent economist John Robertson said tackling illicit financial flows in Zimbabwe, though welcome, is not the solution to root causes of the country’s economic woes.
“The issues preventing the economy from revival are indigenisation and the land reform and these have harmed our economy in the second half of our independence which will be 36 years in April. The fact that any good is done by plugging leakages makes them (government officials) run away from telling us why the leakages are there,” said Robertson.
“These leakages are a secondary reaction caused by informalisation of the economy and other stresses to the economy. Most of manufacturing is not working and companies are shutting down and laying off thousands of workers, agriculture and now even mining is being affected and we remain so dependent on imports.”
Robertson argued that Zimbabwe destroyed its productive capacity to a point where it retards foreign investment inflow.
“Agriculture was a source of supply for a significant portion of our industry and when commercial agriculture was able to supply industry we had tremendous production in industry and a lot of jobs created also translating into taxes,” he said.
“Now people lost their jobs, they no longer have any income. Mangudya is missing all the points that really matter to the economy,” Robertson said, adding the country needs to rebuild productive capacity and improve its licencing processes across all sectors to make it efficient and affordable.
He said the country lost billions of potential taxes due to informalisation of the economy.
“If you go to the informal sector, you see people who want to remain small so that they don’t worry about regulators and that is a problem,” Robertson said.
“Now we have an economy full of small operators who might be able to feed themselves and nobody else.”
Zimbabwe National Chamber of Commerce (ZNCC) CE Chris Mugaga also said Mangudya’s focus on plugging leakages when tax revenues were dwindling due to challenges in industry was missing the point.
“Worrying about leakages is like having a father struggling to feed his family and punishing his child for throwing away left over food on the basis the family is starving,” said Mugaga.
He argued leakages are a characteristic of informalisation, adding the economic environment remains harsh for business.
“We are not looking at the challenges here, companies are folding and government might actually be losing a lot of tax from companies that are operating as opposed to those that are closing due to corruption,” Mugaga said.
“We need policy clarity and consistency and this is not achieved by explaining the policy frequently as is assumed by (Indigenisation minister Patrick) Zhuwao, the foreign investors need to clearly follow your intentions also based on your reputation and if they can’t trust you then they will stop investing or use every opportunity to externalise.”
COMMENTS