Expectations high ahead of Mthuli budget

EXPECTATIONS are high ahead of tomorrow’s 2019 National Budget presentation as it will either sink or swim the economy.

Going into the budget, there are three pressing issues that need to be addressed.

These are the multiple and over-the-top pricing of goods or services, the growing disparity between electronic and mobile money against the greenback, and the government deficit.

Multiple and high pricing

Ever since government announced a 2% tax on mobile and electronic transactions with no consultation and the separation of real time gross settlement (RTGS) balances from forex last month, prices have spiralled out of control.

This is because retailers and wholesalers have had to factor in the new tax and disparity between RTGS balances and foreign currency in meeting their suppliers to their cost structures, resulting in higher or multiple pricing for consumers.

As a result, the Zimbabwe National Statistics Agency recorded year-on-year inflation of 20,85% at the end of last month from the previous month’s 5,39%, the first official double digit inflation rate since the hyperinflationary period of 2008.

The multiple or three-tier pricing and hike in prices of goods or services in recent weeks has seen the Industry and Commerce ministry holding several crises meetings with industry players, but all ended in an impasse.

“They need to address the pricing issue … the pricing challenge we face today emanated from indiscipline from the government and what we are basically saying is that government can redeem itself,” Confederation of Zimbabwe Retailers president Denford Mutashu said.

“We hope they (Treasury) have a plan concerning the fiscal imbalance in the money creation of $9,6 billion in electronic money.”

Analysts say the creation of the increased RTGS balances was from the increase in Treasury Bills, as government wanted to finance its excessive expenditure, thus leading to the fiscal imbalance.

Why this has affected prices is that the RTGS balances far outweigh the economy’s foreign currency generation capacity, meaning it is virtually valueless, thus leaving international suppliers not to accept it.

Confederation of Zimbabwe Industries vice-president Henry Ruzvidzo said industry players could solve the pricing dilemma by having more foreign currency.

“What is going to happen as far as the currency is concerned, I think, that maybe comes with the solution to the other problems industry is facing, is dealing with the shortage of foreign currency in buying raw materials,” he said while addressing what he would like the budget to focus on.

“Also, there is the issue of competitiveness of our industry. The way currencies have been managed so far, we find ourselves in a very difficult situation and we really look forward to a solution. Of course, causing the current challenges is the government deficit that has been rampant in the past two years and we are hoping that will be addressed.”

As such, whether it is to recoup costs from the new tax or the growing disparity between electronic money and the United States dollar, retailers are forced to push the costs to the consumers or else go out of business.

United Kingdom-based financial services firm Fitch Solutions said: “As long as the current currency regime remains in place, we believe that constraints, including higher-than-reported levels of inflation and businesses’ inability to access imports, will constrain economic activity.”

Making matters worse is Treasury indirectly reaffirming that electronic and mobile money hold no value against hard foreign currency as the Zimbabwe Revenue Authority (Zimra) recently demanded that certain taxes be paid in forex despite government touting a 1:1 parity.

What this does is that foreign suppliers will continue to refuse local electronic balances, resulting in this form of money trading at a discount to hard currency.

As such, retailers and wholesalers who are import-dependent will continue to offer multiple and high prices to meet what their suppliers charge.

“If Zimra, as a government agency which is collecting money on behalf of government, is now requesting companies to remit in foreign currency, it is an open admission that the three-tier pricing is in force. They are actually approving that it is correct to charge in foreign currency or in different currencies,” Zimbabwe National Chamber of Commerce president Tamuka Macheka said.

Disparity between electronic and mobile money against the greenback

Financial expert Persistence Gwanyanya said the move by Zimra to charge taxes in foreign currency showed monetary authorities and Treasury were not in unison.

“We know the 1:1 and that is the official position of government. If I have got US dollars in my cash till or bond notes or RTGS balances, I can choose what I want to use because it is the same. The moment you want to differentiate, you are actually admitting the 1:1 no longer applies,” he said.

He said the moment one would want to differentiate between the electronic and mobile money and the greenback, it meant the former holds no value.

Since the separation of RTGS balances and foreign currency, the currency position has worsened, affecting mainly the cost of doing business, prices and trade.

“The issue of parity, they (Finance minister Mthuli Ncube and his ministry) have to come out clean in the budget to address it (the growing disparity) about what is the policy and the way forward,” Macheka said.

The economic principle, Gresham’s law, states that “bad money drives out good”.

What this means is that the budget needs to improve forex generation in the economy to ring-fence electronic money.

Currently, the country gets most of its foreign currency from exports, foreign direct investment (FDI) and diaspora remittances.

In terms of exports, the country is heavily import-dependent, which is why the budget needs to support productivity to improve exports.

“… we need to trade. Therefore, we also have to focus on creating an environment conducive for trade. Equal effort should, therefore, be put to support existing manufacturers in order for them to be able to export,” ZimTrade chief executive officer Allan Majuru said.

In that regard, he said the budget should focus on the streamlining of export procedures to enhance the ease of doing export business; putting in place of an export revolving fund which will allow exporters to access finance for recapitalisation; removing duty on inputs and raw materials for critical sectors such as horticulture and leather; and incentivising exports by lowering the preferential corporate tax threshold.

As of August 2018, the trade deficit was $1,6 billion, up 28% from $1,25 billion in the comparative 2017 period.

In terms of FDI, this has declined to an annual average of between $200 million and $300 million from an average of $500 million, as investors remain cautious over the current administration.

Also, diasporans have slowly reduced sending remittances back home as they do not enjoy voting rights, which stood at $440 million as at September 21, 2018, nearly half what it was in 2016 and 2017.

This is why the budget must cater for this group.

Government deficit

In September, the Parliament Budget Office predicted that government deficit would surpass a record $3 billion by year end on the back of increased civil servant wages unless they could control it.

However, the following month, Finance permanent secretary George Guvamatanga admitted to the Parliamentary Portfolio Committee on Budget, Finance and Economic Development that wages would, indeed, increase.

He said it would rise 16% to $3,7 billion by year-end and a further $3,9 billion next year.

This was from a 17,5% hike in civil servant wages in July and with Ncube promising bonuses recently, efforts to cut $200 million from the annual wage bill going forward may be in vain.


These three areas are what the budget should address in the short-term, though it will have to address other challenges too.

Macheka said other challenges included speeding up the creation of a one-stop investment shop, allowing for 5% of the gross domestic product to go to infrastructure development and moving to import substitution to reduce imports to retain forex.

Though the task at hand is difficult, the economic challenges, whether short-term or long-term, will need to be tackled.

Judgment over Ncube’s performance in the 2019 National Budget will be seen as early as Friday, as indications of the economy improving or worsening will begin to show.


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