Zim budget targets in doubt: IMF

via Zim budget targets in doubt: IMF – DailyNews Live 16 July 2014 by Ndakaziva Majaka

HARARE – Zimbabwe’s 2014 budget targets are in doubt on the back of a weaker economic outlook, the International Monetary Fund (IMF) has said.

The global financier said the hard-pressed southern African nation faced rising wage pressures while it also has over expectation of the minerals sector performance.

In its annual Article IV consultation report, IMF said Zimbabwe’s total revenue target for 2014 is at risk following weak performance in the first quarter this year.

“The preliminary fiscal outturn for the first quarter show total revenues eight percent below budget projections,” it said.

“The agreed 14 percent increase to the overall wage bill is another source of stress to the budget,” the institution said, adding that “the need to rebuild depleted government deposits, amortise domestic and selected external debt, and modestly increase international reserves all raise the government’s gross financing requirements in 2014.”

“The wage bill continues to claim a disproportionate share of total spending, crowding out capital and social expenditures.”

“Progress on structural reforms, including measures to increase diamond sector transparency, has been slow.

“The Reserve Bank of Zimbabwe (RBZ) has intensified monitoring of troubled banks, but vulnerabilities persist,” it said.

The Bretton Woods institution also said the $4,12 billion, including $96 million in diamond dividends, total revenue target for 2014 would not be realised.

“The authorities’ 2013 budget was based on prudent revenue projections, including diamond dividends.

“Unlocking this revenue source will require full and prompt implementation of the measures   announced in the 2014 budget,” said IMF.

According to the IMF report, the measures include disallowing royalties as a deductible expense against taxable income, withholding a 2,5 percent depletion fee, withholding royalties on diamond sales (15 percent of gross sales), and withholding 15 percent of gross proceeds from diamond sales as interim (“special”) dividends for direct payment to the Treasury.

IMF also said the implementation of the 15 percent special dividend withholding has been suspended for now, pending further consultations with mining companies, which are resisting it on grounds that it would reduce their ability to invest in new production.

However, government awaits consultations and is keen to start collecting these dividends.

“As a result, the authorities still project diamond dividends of $82 million in 2014 (versus the original $96 million in the 2014 budget),” said IMF.

It said the 2014 budget is also facing headwinds due to sluggish growth and large salary increases for the civil service.

“The agreement on salary increases reached between the government and its partners in the National Joint Negotiating Council in January 2014 is estimated to result in a 14 percent increase in the overall wage bill this year (assuming broadly unchanged numbers of civil servants), exceeding both budget projections and inflation,” said IMF.

The organisation said excluding grant-aided institutions and pensions, the civil service wage bill is now projected to consist 53 percent of government expenditure in 2014.