Declining tax revenues reflect a toxic business environment

Source: Declining tax revenues reflect a toxic business environment – The Zimbabwe Independent July 22, 2016

Indications by Zimbabwe Revenue Authority (Zimra) Acting Commissioner-General Happias Kuzvinzwa that the tax collector missed its target for the first half of 2016 by 12% as well as the sharp decline in foreign direct investment (FDI) inflows are indicators that the economy is continuously on a free-fall.

Kudzai Kuwaza

Figures released by Zimra for the first six months of this year show that government is persisting on a downward spiral, which has become the norm since 2013, crippling government financially.

“The gross collections were 3% below the target of US$892,88 million. This compares favourably with the first quarter revenue performance where gross collections were 9% below target,” Kuzvinzwa said last week.

In the first quarter to March, Zimra collected US$782 million against a target of US$861,83 million, missing the target by 9%. In the second quarter to June, Zimra collected US$866,96 million, a 3% variance from a target of US$892,88 million.

This shows that Zimra has so far collected only US$1,65 billion for the first half of 2016.

The revenue collection deficit is hardly surprising given that the economy is hard hit by a debilitating liquidity crunch evidenced by the acute cash shortage in the market, capacity utilisation of less than 35%, company closures and massive job losses.

According to the Zimbabwe Congress of Trade Unions, at least 229 companies from various sectors that include the construction and clothing industry have closed in the first half of this year resulting in the loss of hundreds of jobs. This adds to thousands of workers who were dismissed last year as a result of the July 17 2015 Supreme Court ruling that allowed employers to dismiss workers on three months’ notice without paying a retrenchment package.

The figures being bandied about of those affected by the court ruling range from 9 115 according to employers to around 30 000 according to trade unions.

Whatever the actual figure is, there is no doubt that the formal job market has been severely decimated contributing largely to the taxman’s failure to reach revenue targets. This has led to government’s failure to pay its 550 000-strong civil servants on time with Finance minister Patrick Chinamasa being forced to stagger the salaries.

That government is still paying last years’ bonuses seven months into 2016 speaks to the depth of the economic crisis.

The failure by government to meet revenue targets is likely to worsen relations with its workforce resulting in more work boycotts and in turn fuelling more protests which have rocked the country as the economic crisis worsens.

With civil servants continuing to gobble 80% of revenues as government shows no appetite to retrench its workforce, reduced revenues mean less money for other critical obligations such as capital projects.

The continued failure by government to meet revenue targets speaks to an economy in recession according to economist and Zimbabwe National Chamber of Commerce chief executive Chris Mugaga.

“There might be those who are still in denial but we are technically in recession,” Mugaga said. “This makes it impossible for Zimra to meet its targets.”

He pointed out that Zimra targets are below what the country needs for an economic turnaround adding that there is an urgent need to arrest corruption and institutional inefficiencies in state entities if revenue collections are to improve.

“That Zimra cannot meet its target is seen by the informal sector which is growing by the day. We are in a corner,” Mugaga said.

The parlous state of the economy is further reflected by the plunge in FDI inflows from US$545 million in 2014 to US$421 million last year which represents a drop of nearly 23%. This pales in comparison to other countries in the region with Mozambique receiving 3,7 billion in FDI, Zambia(1,7 billion) and South Africa (1,8 billion) which is more than three times Zimbabwe’s paltry inflows.

The reduced FDI inflows mean that prospects of creating employment remain dim. According to a survey by the Vendors’ Initiative for Social and Economic Transformation (Viset) conducted between February and April this year, at least 2 187 graduates in the country’s two largest cities are surviving on vending. The number of vendors is set to increase as the formal market remains constrained.

It is yet another reminder and evidence of a hostile business climate which requires government to speedily ensure structural and policy reforms. Even African billionaire Aliko Dangote has reportedly developed cold feet over his plans to invest in cement, power and coal projects.

Despite Mugabe’s efforts to clarify the toxic indigenisation policy earlier this year, eight years after he signed it into law, there are still concerns over the policy particularly on the 51/49 shareholding structure. Mugabe however dismissed these concerns last month as “nonsense” at the burial of former health minister Felix Muchemwa at the National Heroes Acre.

Economist and Buy Zimbabwe chairman Oswell Binha notes that both Zimra revenue collections and the county’s FDI inflows remain well below par.

“Both revenue collections and FDI inflows are not performing at optimum levels,” Binha said. “We are affected by issues of uncertainty. We need to ensure the predictability and bankability of our activities as a nation as a safeguard to attract investment. We need to act in a way that acknowledges that we need investment and not that investment needs us. We have the potential to treble our FDI inflows”

Binha said the failure by Zimra to meet revenue targets is a significant indicator of the extent to which “we have informalised the formal” adding that the taxman could not reach targets as organised businesses have failed to expand.

Economist John Robertson said the plunge in investment is as a result of the country’s unfavourable operating environment.

“It all points to the lack of understanding on how we have discouraged investment,” Robertson said, adding that the revenue deficit will have a dawn effect on the economy. He said with increasing unemployment due to dwindling investment levels, more and more people will turn to vending, depriving government of much needed revenue.

Robertson said although the government was working on the ease of doing business, its efforts were futile given the number of permits needed to operate in the country.