Zimbabwe government operations grinding to a halt

via Govt operations grinding to a halt | The Financial Gazette by Shame Makoshori 10 Apr 2014

REVENUE being remitted to the fiscus has suffered a major knock in recent weeks owing to a worsening liquidity crisis that could result in government operations grinding to a halt unless Treasury secures a huge cash injection to avoid a catastrophe this second quarter, the Financial Gazette can report. Across all sectors of the country’s tottering economy, the trading environment has further deteriorated, with nearly all companies struggling to stay afloat due to depressed demand and the inability by cash-strapped customers to pay for goods and services on time.

The result has been an unhealthy working capital situation that has seen most companies lagging behind with payments for their raw materials and other inputs, salaries, medical aid and pension contributions as well as statutory payments such as taxes. Regardless, the taxman has been demanding his dues, thereby driving most companies to  brink of closure. The Zimbabwe Revenue Authority (ZIMRA) is now turning to desperate measures to collect every penny it can get to sustain government operations.

Instead of trimming its bloated waistline and adjusting its priorities to suit the tough economic conditions, government’s penchant for spending what it does not have continues unabated. Its expenditure far exceeds what it is generating in terms of revenue from penalties, taxes, grants, donations and foreign direct investments  hence sustaining its appetite for cash is presenting serious headaches for ZIMRA.

In an unprecedented but frank warning to the nation of how bad the situation is on the ground, ZIMRA commissioner general, Gershem Pasi, this week said the nation should brace for difficult times ahead due to a non-performing economy. ZIMRA’s revenue collection base has been shrinking on the back of company closures, worsening retrenchments and creative accounting being devised by taxpayers who are desperate to lessen the tax pressures on their businesses.

With fewer companies now contributing to the tax purse, ZIMRA officers are spending long hours camped at the few institutions that are still contributing to the fiscus. Where they would have dictated negative variances between what was declared and what should have been paid to government, the officers have wasted no time in imposing heavy penalties and garnishee orders to recover whatever would have been lost.

This is, however, escalating the collapse of businesses, since the penalties are too steep to be afforded by companies that are already haemorrhaging due to a difficult operating environment. Confederation of Zimbabwe Industries (CZI) president, Charles Msipa warned this week that the blitz could become the biggest threat to industries following years of liquidity problems and difficulties in accessing funding to retool industries and reboot working capital.

“If it was just a normal case of companies avoiding taxes that would be not be defendable since companies have a statutory obligation to pay taxes,” Msipa said. “What is very worrying is that government owes companies over US$90 million for goods and services supplied, and yet government says the same companies that have not been paid must pay taxes. I have proposed a moratorium for garnishes for companies that government has not paid,” he added. In the tourism industry, operators have raised the red flag after ZIMRA tightened the screws this month.

Government has introduced a 15 percent tax on foreign tourists while complementary tickets for hotel accommodation and meals will be taxed backdated to 2009.
Members of the Zimbabwe Council for Tourism (ZCT) cried foul saying this will affect the growth of the industry. “They introduced a 15 percent on the revenue that we generate from international tourists,” said ZCT chief executive officer, Paul Matamisa.

“Tourists were not paying this tax, but now everybody is taxable. But tourists make bookings in advance at rates that are applicable at the time of booking. Hotels cannot change the (rates) and they have to shoulder the costs. If we decide to pass on the costs, tourists will go to other destinations. Government should not increase prices for visitors, at least for ongoing contractual arrangements,” he said.

Zimbabwe National Chamber of Commerce president, Hlanganiso Matangaidze, said the chamber had sort audience with government because “the problem is cash flow, some companies are making profits on paper but they don’t have the cash. They have huge debtors’ books”. While ZIMRA officials acknowledge the difficulties industry is going through, they told the Financial Gazette this week that they were also under pressure from Treasury to apply the law and generate revenue needed to sustain government operations.

Government has pledged to pay civil servants a salary increase consistent with the poverty datum line estimated at about US$500 this month, which would be backdated to January. Delays in improving civil service pay and working conditions have stirred rising public hostility towards government and strained the social fabric within the lower ranks of the 236 000 strong struggling State workforce. President Robert Mugabe has since directed Finance Minister Patrick Chinamasa to ensure that funds are provided for to pay the salaries plus the back pay. As a result, Chinamasa has been leaning heavily on ZIMRA to increase revenues inflows.

Pasi, the ZIMRA commissioner general, is having a torrid time in dealing with his bosses at the Finance Ministry who are breathing hard down his neck.  He is getting phone calls from the Finance Ministry at least twice a day to check whatever would have trickled into ZIMRA’s coffers, sources say. Economists say the blitz could become the biggest threat to industries following years of liquidity problems and difficulties in accessing funding. In its report; “State of the Economy Report; February 2014”, government warned that structural shocks that have militated against growth have been gaining traction, and tepid growth could persist.

ZIMRA collected US$248 million in February but government spent US$265 million. This translated into a US$17 million budget deficit. On a year-on-year basis, revenues dropped by US$24,3 million to US$500 million in February, from US$524 million the same time 2013.

There has been a sharp drop in economic activity as highlighted by retreating consumer spending and continued decline in the manufacturing sector, where a further 15 firms collapsed in February in addition to over 700 last year. Deflationary pressures continued to affect consumer spending power. For example, demand dipped by up to 30 percent during the period, affecting sales and shaving US$3,6 million off State revenues between January and February, the report showed.

“It is a gloomy outlook,” said economist, Takunda Mugaga, head of research at Econometer Global Capital.

“Even on an optimistic scenario, we don’t see Gross Domestic Product growth above two percent this year,” he said.

“It can’t exceed that.”

“It is a cycle of depression, appetite for investment into Zimbabwe is very low, jobs data will remain low and we don’t expect long-term funding in the next 18 months.” Output from the pillar mining sector declined in February.

Zimbabwe had put the bets on a mining boom to revive the ailing economy after the depression. Gold output declined to 831,3 kilogrammes in February, from 926,8 kg in January. Nickel output dropped as large scale miners reviewed production, while international prices took a knock on revenues. The government aims to have the economy expanded by 6,1 percent in 2014 after experiencing a sluggish 3,4 percent growth in 2013.  But analysts say the target would be difficult to achieve.

“It is a sign of lack of a sustainable development strategy,” said Mugaga.

“People are eating from hand to mouth. It is an economy in autopilot. We need an SOS to be sent to politicians to change their strategy. We are not gnawing poverty levels and aggregate demand is doing down. But the price of utilities has been going up. This affects consumer spending.”

The slowdown has also been seen through the bloodbath that shook the stock market during the first quarter of the year, when stock prices plummeted with the bourse shedding US$643 million. The developments have been bad for an economy that has entered its 14th straight year of uninterrupted turmoil. There has not been any clear economic plan to revive the economy since ZANU-PF returned to power in July 2013, except the intensification of polices that deter investment.