Budget must stimulate economy: Analysts Minister Chinamasa
Minister Chinamasa

Minister Chinamasa

Business Reporters
FINANCE and Economic Development Minister Patrick Chinamasa is expected to present the 2015 National Budget statement today at a time the economy is facing serious liquidity constraints, low consumer demand, company closures and deflation.

Government has lowered economic growth forecast for 2015 from the initial projection of 6,1 percent to 3,2 percent.

The International Monetary Fund maintained forecast GDP growth rate at 3 percent. Growth decelerated from 10,5 percent in 2012 to 4,5 percent in 2013, due to weak demand for key exports and election-year uncertainties.

Economists said Minister Chinamasa should come up with measures that stimulate the economy. Industry is facing serious capacity issues, with productivity falling marginally from 39 percent in 2013 to about 36 percent this year.

Revenues continue to perform well below target, resulting in budget deficits that could put Government further into debt. Limitations in production and export performance mean the country continues to run current account deficits. Recurrent expenditure gobbles more than 90 percent of the budget, with over 78 percent going to salaries.

This has the effect of crowding out key expenditure programmes like education and health delivery.

The country relies mostly on imported goods, which have been draining out the little liquidity in the economy. The worsening liquidity situation in the country has spawned high interest rates and further constrained firms’ capacity to increase production.

High cost of labour, power deficits and shortage of water and raw materials have added to the high cost of production, also caused by antiquated equipment and old technology, which local firms cannot replace due to limitations around access to capital.

Faced by the huge public sector funding obligations, Government has continued to introduce taxes in an environment where there already was a litany of fragmented and high taxes, which has also added to the overall cost of doing business. Speaking to journalists in South Africa after the Zimbabwe Trade and Investment breakfast, Minister Chinamasa admitted that high taxes were some of the challenges he looked to address, as that was putting a lot of pressure on the people.

“The minister will need to come up with measures that stimulate production in the economy through measures that prevent dumping of goods and evasion of duties.

“Numerous and high taxes add to the high cost of doing business. While there is need to mobilise resources, we must not increase tax burden.

“Government must realign labour laws to prevailing conditions. It is difficult to retrench or streamline. We also need to plug loopholes at borders,” said Harare economist Mr Douglas Mahaso.

High taxes have further constrained the economy by dampening aggregate demand. The same tax regime has also a ripple effect on foreign direct investment. Investors are rational economic agents who will put their money in a low taxed economy. “At this point, what we need is to stimulate the economy in order to generate demand and attract more foreign direct investment,” economist Dr Gift Mugano said.

“Against this background, I hope the budget will revise downwards income taxes and also reduce the numerous taxes. In the same vein, in the spirit of supporting the establishment of Special Economic Zones, it is my hope that the minister will spell out tax incentives or tax holidays for areas designated as SEZs,” Dr Mugano said.

He said in order to support industrial competitiveness in the face of continuous company closures, resulting from the influx of goods coming from South Africa and other regional countries such as Zambia as well as global players such as China, the minister “must come up with a number of policy instruments such as duty drawback, import tariffs and local content rules.” These should be implemented judiciously.

The duty drawback schemes are used to enable exporters of manufactured goods to access imported inputs at world prices and thus increase their profitability, while maintaining the protection of domestic industries that compete with imports. The choice of export drawbacks is reinforced through international regulations, namely GATT, rules out the use of direct export subsidies, but allows the use of drawbacks.

Duties are initially paid as goods are landed. Refunds are provided upon shipment of export goods, which include dutiable components.

Within the provision of policy space in regional and multilateral trade agreements, Zimbabwe has flexibility of shelving 20 percent of its tariff lines under a sensitive list bracket, which will be excluded from trade liberalisation by charging high import tariffs.

Economists contend that these can take the form of contract farming in the case of agricultural sector. Surely it does not make sense for Zimbabwe to have agricultural produce such as potatoes and tomatoes being procured from Polokwane! “This does not only reverse the land reform, but also poses national security threats. For some economic sectors such as mining, local content can take place through giving tenders to local companies to supply mining requirements,” Dr Mugano said.

“This move will not only raise industrial competitiveness but will also improve liquidity because it reduces externalisation of money,” he said.

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