Fiscal policy falls short on policies to lure FDI

via Fiscal policy falls short on policies to lure FDI – The Zimbabwe Independent August 7, 2015 by Kudzai Kuwaza

THE Mid-Term Fiscal Policy Review Statement presented by Finance minister Patrick Chinamasa last Thursday failed to address underlying issues bedevilling the economy, notably structural problems and substantive policy reforms needed to attract foreign direct investment (FDI), analysts say.

While admittedly the trend is that the fiscal policy presentations have largely become a non-event, much was expected this time after recent bold pronouncements by Vice-President Emmerson Mnangagwa on the need for Zimbabwe to “bite the bullet” and make far-reaching reforms to rescue the economy, in an interview during a recent visit to China.

The appetite for what Chinamasa would serve had been further whetted by Economic Planning minister Simon Khaya Moyo’s declaration while addressing a National Defence Course last month that government was working on amending the indigenisation policy blamed for spooking foreign investors.

But, alas, Chinamasa did not even broach the controversial subject of indigenisation in his presentation despite numerous business delegations from various countries, which include European Union states like Britain and France, the United States, Scandinavian nations, Russia and China, expressing grave reservations over the policy.

This deafening silence on the empowerment policy which requires foreign companies to cede at least 51% equity to indigenous Zimbabweans sends all the wrong signals to would-be investors that have adopted a wait-and-see attitude at a time the country is increasingly lagging behind other countries in Sadc in attracting FDI.

According to the United Nations Conference on Trade and Development World Investment Report 2015, Zimbabwe remains an economic backwater, with paltry FDI inflows. The country’s 2014 FDI inflows of US$545 million paled in comparison to neighbouring countries in the Sadc region such as Mozambique, which received US$4,9 billion, almost nine times more, South Africa (US$5,7 billion) and Zambia (US$2,4 billion).

During his 2015 budget presentation last December, Chinamasa failed to address the concerns of investors and instead announced government was giving line ministers the power to approve indigenisation plans for sectors under their purview, with the Indigenisation ministry only issuing compliance certificates.
Economic commentators and investors raised fear this piecemeal review opened the door to rent-seeking venality by ministers.

This failure to address a critical issue presents a missed opportunity, according to economist John Robertson.

“The minister did not introduce any measures that are necessary for attracting investment,” Robertson said. “It was a missed chance to introduce policy changes to issues such as indigenisation and protection of property rights.”

In his mid-term review, Chinamasa said the wage bill was gobbling a humungous potion of revenue — more than 80%, the same percentage he gave when he presented the 2015 budget — thus crowding out critical infrastructure and social services spending.

This is despite his pledge then that government would work towards reducing the unsustainable wage bill. Seven months later the wage bill remains unchanged.

This raises serious doubts on whether government, known for its populist policies, has the political will to implement measures to drastically cut the wage bill from the more than 80% to below 40% of revenue.

Efforts to cut down on spending through suspension of civil servants’ bonuses for 2015 and 2016 were publicly shot down by President Robert Mugabe less than a week after Chinamasa made the pronouncement.

More than 75 000 ghost workers, most of them unqualified Zanu PF militias and supporters, were unearthed in the civil service through a comprehensive payroll and skills audit done in 2011 by Ernst & Young (India) on behalf of the Public Service Ministry.
The audit indicated that Zimbabwe’s civil service is in a shambles and has become a haven for mainly Zanu PF patronage.

However, Chinamasa recently said squabbles in the unity government (2009-2013) rendered it impossible to complete or implement the audit.

A government audit, which was carried out in March this year, revealed discrepancies that have been a burden on the wage bill, but dealing with discrepancies alone will not be adequate in cutting the wage bill as envisaged by Chinamasa.

Government this month suspended salaries for 3 000 civil servants whom it said must prove they are bona fide workers. However, Labour minister Prisca Mupfumira appeared to contradict Chinamasa by denying government would go the retrenchment route to lower employment costs.

Mupfumira said government was not looking at retrenching or firing people, but at “cost-cutting”. She didn’t explain how that could be achieved without trimming the civil service.

That has not stopped state entities such as the National Railways of Zimbabwe (NRZ) and Zimbabwe National Roads Administration from firing workers, taking advantage of a Supreme Court ruling allowing employers to terminate workers’ contracts on a three-month notice, without any retrenchment packages.

Chinamasa has said a cabinet wage bill committee set up this year will present “measures” to cabinet for consideration to cut the wage bill.

He added that cutting the wage bill is long-term, without giving timelines to the process which raises questions on government’s commitment to slashing the wage bill at a time revenues continue to shrink owing to company closures mostly precipitated by the liquidity crunch.

In his presentation, the Finance minister bemoaned that Premier Service Medical Aid Society (Psmas) is still paying management obscene salaries more than a year after government promised to clamp down on what became popularly known as Salarygate.

Economist Godfrey Kanyenze queried: “Why is Psmas still paying those kinds of salaries when the government can do something about it? The government is complaining about issues it can address. They (fiscal presentations) are now like a book of lamentations.”
He said the problem with Chinamasa’s fiscal presentations is that “rhetoric runs ahead of action”.

This certainly rings true when one looks at failure by government to privatise parastatals despite Chinamasa promising to do so in his budget presentations. It was no different last Thursday as Chinamasa failed to present any concrete plan to privatise the targeted state entities.

The state entities continue to be a huge burden on the fiscus with the likes of the NRZ and Air Zimbabwe mired in serious financial difficulties that have resulted in poor service delivery and failure to pay employees.

The parastatals earmarked for restructuring include the Agricultural and Rural Development Authority, Cold Storage Company, Grain Marketing Board, Air Zimbabwe, TelOne, Civil Aviation Authority of Zimbabwe, NRZ, Industrial Development Corporation of Zimbabwe, Zimbabwe National Water Authority and Zimbabwe Power Company.

Chinamasa also announced the ban on second-hand clothes and shoes. This could not come at a worse time when more than 9 000 workers have been rendered jobless after companies used the Supreme Court ruling to lay off workers.

This flies in the face of Zanu PF’s electoral promise in 2013 to create 2,2 million jobs — a clear indication that government remains clueless on the economy and, for most Zimbabweans, things will get worse before improving.