Chinamasa faces a herculian task

Source: Chinamasa faces a herculian task – The Zimbabwe Independent September 2, 2016

FINANCE minister Patrick Chinamasa next week faces an uphill task when he presents his midterm fiscal policy review statement as he needs to balance between raising revenue and public spending at a time industry is crumbling with companies unable to meet their tax obligations, downsizing or collapsing due to the hostile operating environment.

By Taurai Mangudhla

This spells doom for Treasury.

As the reality of dwindling revenues mainly on account of declining corporate tax contributions sets and sinks in, Chinamasa is increasingly running out of options.

To bite the bullet, he needs far-reaching reforms that have a material impact on the allocation of the dwindling resources as he has little room to manoeuvre on increasing or introducing new taxes in a struggling largely already overtaxed to the bone.
Against a backdrop of a shrinking tax and revenue base and profligate spending, his best card is to restructure government’s fiscal expenditure patterns by way of a civil service wage overhaul in the form of either salary or job cuts.

Government needs to comply with the International Monetary Fund’s recommendation for Zimbabwe to reduce its civil service wage bill to 40% of the budget from current unstainable levels where the wage bill gobbles in excess of 80% of the cash budget.

Reducing government’s expenditure on wages to 40%, which implies slashing salary costs by more than half, is a herculean task for the Finance minister as this flies in the face of populist policies and measures announced by Zanu PF during its 2013 election campaign trail.

More so, this will not only test his resolve to rationalise the wage bill but serves as a major test to government’s willingness to pursue radical reforms that overhaul government’s spending pattern which is currently heavily skewed towards consumption, while crowding out capital expenditure and social outlays.

If Chinamasa bites the bullet, he is going to be forced to retrench a huge chunk of government’s 550 000-strong public service which the past months has been struggling to receive salaries on time due to shrinking revenues, forcing the cash-strapped treasury to stagger pays.

Already, there are indications government is making good on its promise to cut wage costs. Civil servants have been asked to submit copies of their CVs as part of an internal audit that is expected to retire old workers.

According to latest figures obtained from Zimra, the economy continues to ride on choppy waters and, consequently, gross collections for the first half of 2016 amounted to US$1,65 billion, which is 6,03% below the target of US$1,75 billion, and also 9,31% below the same period last year as revenue collections continue to slide.

The dwindling revenues also come at a time mineral receipts for primary producers like Zimbabwe have also declined due to weakening commodity prices on the international market. The southern African nation has also been ravaged by a drought that has left four million in need of food aid.

The tax debt rose by 33,5% to US$2,63 billion by the end June 2016. Of this debt, said Zimra, US$1,45 billion was the principal, whilst interest amounted to US$641,51 million and penalties amounted to US$542,63 million.

“In terms of the origin mix, 14,5% emanated from parastatals, 8,58% from councils and municipalities, and the remaining 76,92% was from private entities,” said Zimra chair Willia Bonyongwe in the latest report for the period to June 2016.

Due to the economic tailspin, the government which initially projected the economy to grow by 2,7% in 2016 was forced to revise it downwards to 1,5%.

The Zimbabwe Congress of Trade Unions (ZCTU) recently said 229 companies from various sectors of the economy had shut down in the first half of 2016 due to a myriad of challenges including a debilitating liquidity crunch, low capacity utilisation and lack of cheap credit.

ZCTU said at least 148 companies had shut down in the second quarter of 2016 in addition to 81 companies which ceased operations in the first quarter of the year, leaving thousands jobless as the country’s economic implosion continues to take its toll.

Economist Evonia Muzondo said government currently in a crippling financial situation which puts Chinamasa under pressure to address or face potential dire consequences.

“The situation is made worse by the fact that more than 80% of the budget is going towards recurrent expenditure, mostly employment costs. This crowds out capital formation and also deprives much needed funding to critical areas like health, education and infrastructure development. This basically means that employment costs have to come down drastically,” said Muzondo.

She said although Zimbabwe’s macro-economic environment has deteriorated forcing struggling companies to streamline operations, while government is trying to swim against the tide.

“It is quite a contradiction that while government revenues have dwindled, staff numbers have actually increased and no staff rationalisations have been done,” she said.

“Suggested ways to cut the wage bill could include centralising recruitment, merging departments or streamlining roles and functions as well as enforcing early retirement but a holistic approach is needed which includes a full audit of the civil service and needs support from all government facets in order for it to be a success.”

Zimbabwe National Chamber of Commerce chief executive Takunda Mugaga said Chinamsa should mobilise for support within Zanu PF as well as in the private sector and international community to turn around the economy.

Mugaga said the Finance minister needs political will within his party to support civil service reforms.

“There is a political dimension to the issue and while noble, this could be suicidal for Chinamasa’s political career as it would result in a serious backlash internally given that there is already some polarisation,” Mugaga said, adding Zanu PF is unlikely to yield to demands for civil service reforms ahead of the 2018 elections.

“I do not foresee debate for civil service reforms yielding fruit before 2018 elections because of the issue of patronage and that party politics in Zanu PF takes priority. Already, the mood for elections is there and thus a lot of electioneering.

“Creating fiscal space is no doubt needed, but it is not easy.”