Chinamasa walks tight rope

via Chinamasa walks tight rope – The Zimbabwe Independent November 20, 2015

FINANCE minister Patrick Chinamasa is walking on a tight rope as he finalises his 2016 National Budget, due for presentation on Thursday next week, at a time revenues continue to dwindle.

Taurai Mangudhla

His task is no stroll in the park and his biggest headache, according to analysts, is making good on a promise to clear US$1,8 billon the country owes to multilateral creditors by mid-2016 and institute reforms that can convince cynical lenders and investors there is some form fiscal discipline.

The international community particularly investors, watch closely for policy reforms conducive to attracting foreign capital and a stable climate for investment.

Chinamasa also has to make allocations for usually neglected social services such as education, health and infrastructure whilst ensuring Zanu PF’s political interests are safeguarded in respect of timely civil service wage payments and even creating reserves for the 13th cheque.

This would happen at a time the public service wage bill, gobbling in excess of 80% of the budget, is sucking the economy dry amid recommendations for massive job cuts from the World Bank and IMF.
Already, a civil service audit report, has indicated government is considering implementing a raft of measures, which among other things, seek the rationalisation and abolishing of posts in the public service to save about US$400 million annually.

In his mid-term fiscal policy statement, Chinamasa set a target to reduce the wage bill to about 40% of the budget.

The treasury chief is expected by his principal and fellow cabinet ministers to come up with ways of increasing revenue collections despite a shrinking economic base as companies continue to downsize or shut down.

Latest figures released by Zimra for the third quarter of 2015 show a country in dire straits as net collections of US$878,22 million, which is 91,1% of the target of US$964 million. The revenue collector said there was a 0,71% decline in net revenue collections from the same period last year where US$884,46 million was realised.

The performance followed a 3,75% negative variance in individual tax targets, a 15,43% variance on Vat on local sales as well as negative 10,68% variance on customs duty. Company tax missed collection targets by 31,34% while mining royalties also missed the targets by 55,62%.

The decline in revenue collections and failure to meet targets has been attributed to a growing informal economy which is difficult to tax with government estimating small and medium enterprises account for about 40% of the country’s GDP.

Apart from increased informalisation of the economy, company closures took a toll on revenue collections and the country’s ability to generate taxes given that latest figures show industry capacity utilisation slid to 34, 3% in 2015 from 36, 5% last year.

The stressed industry is struggling to meet its tax obligations with Zimra figures showing the year 2015 started with a debt of US$1,4 billion which, after recoveries and new debts being raised, ended the third quarter at US$1, 9 billion clearly showing the extent to which economic woes has bedeviled industry.

ZNCC CEO Chris Mugaga said the 2016 budgetary demands are just too much for Chinamasa’s small pocket, the arrears clearance being his almost impossible task.

“The biggest question is how he is going to pay US$1, 8 billion and still support the budget,” said Mugaga in a telephone interview.

He said payment of the arrears should be treated as a top priority as it decides the fate of Zimbabwe’s re-engagement process with the multilateral lending institutions.

“Remember we were not forced to make this commitment, but it was voluntary so if Chinamasa doesn’t pay then we strain our relationship with these creditors,” said Mugaga.

Zimbabwe’s virtually broke government late October approved in cabinet an ambitious external arrears clearance strategy to pay off US$1,8 billion overdue to multilateral creditors by June next year in a bid to break its debt vicious cycle and secure at least US$2 billion in new funding to rescue a crumbling economy ravaged by recession.
Zimbabwe is currently saddled with a debt overhang of US$10, 8 billion accrued from both public and private sector borrowing.

The country has arrears estimated at US$1, 8 billion with its three preferred creditors, International Monetary Fund (IMF), World Bank (WB) and African Development Bank (AfDB) and has committed to repay these arrears by using its special drawing rights as well as securing new funding to clear the existing debt.

Apart from the arrears, Mugaga said Chinamasa faces tough political interests in respect of the civil service annual bonus. This comes at a time some hardliners in cabinet are opposed to reform on grounds it is tantamount to yielding to Western imperialist agenda.

The ZNCC executive argued Chinamasa’s authority is limited when it comes to the civil service bonus and wage reforms because of Zanu PF’s interests ahead of the 2018 elections.

Mugaga said Chinamasa may be tempted to somehow increase taxes at the risk of further hampering industry or perhaps use other methods such as increasing tollgates to increase revenues, adding that the national budget could remain stagnant at US$4, 1 billion due to lack of resources to fund growth as industry continues to struggle.
“I can say the budget will not change because there is just no money, the economy is getting more and more informal every day and Zimra is getting less to collect,” said Mugaga.

Independent Harare economist John Roberston said balancing arrears clearance and other normal budgetary demands, coupled with the need for sound policy reform was a herculean task for Chinamasa.

“Some of the reforms expected by the international community such as scrapping bonuses for civil servants and cutting the wage bill have almost been banned by President Robert Mugabe,” said Robertson, adding there is need for policy reform to inspire confidence in the economic turnaround strategy.

“We need real policy reform for example indigenisation should not be amended but repealed and the land needs to be back in the hands of good productive commercial farmers while ensuring the commercial value of land is restored.”

Robertson’s call for structural reform comes after the IMF demanded reforms such as reducing public employment spending, restoring confidence in the banking sector and improving the investment climate.