Mounting fiscal pressure has consequently put enormous pressure on the taxman to rise to the occasion through increased taxation
Albert Norumedzo In the Money
As the country makes efforts to revive the ailing economy which has been at the mercy of a myriad of challenges, chief among them lack of investment and deteriorating industry capacity, capital investment by no doubt becomes of paramount priority.
In order to secure future economic growth and optimal capacity utilisation, there has to be investment in capital projects that cover a wide spectrum, from infrastructure, transport and distribution, financials systems and markets, ICT networks and telecoms to name but a few.
However, the current Government expenditure patterns betray the cause.
With the Government expenditure skewed heavily towards recurring expenditure at the expense of much needed capital investment, it becomes a cause for concern when fiscal pressure continues to mount on dwindling and inadequate fiscal resources.
At current levels of the Government expenditure, capital expenditure contributes approximately 3 percent while recurring expenditure swallows the lion’s share.
Mounting fiscal pressure has consequently put enormous pressure on the taxman to rise to the occasion through increased taxation efforts, the latest of which is the increase in duty for selected imports particularly motor vehicles, which is set to take effect on November 1, 2014.
In a normal economic setup, the Government should have diversified revenue sources that stretch beyond just taxation. Profitability of public enterprises and the Government projects have proved to be major contributors to the Government revenue in a normal economic setup.
Zimbabwe’s case, however, remains peculiar to that of a struggling nation wherein any Government fiscal demands seek solution from the taxman, who in turn finds ways to scavenge for whatever is left from the already burdened population. Zimbabweans are among the highest taxed citizens with tax brackets stretching to as high as 45 percent of earnings among other taxation faculties like VAT and customs duty.
However, tax is only enough to support the minimum recurring expenditure of the fiscal budget, particularly the civil servants wage bill, leaving very little for capital investments.
The further burdening of citizens with additional tax obligations can have serious self-defeating consequences as it weakens the consumer base and consequently affects corporate earnings.
Confronted with limited fiscal capacity and no external budgetary support, it becomes a move that defies economic logic to accommodate more fiscal demands in the form of a rising wage bill or other Government operational expenditures.
In its staff monitored programme, the IMF noted that the current fiscal expenditure patterns were unsustainable and to this effect made recommendations for the Government to reduce the civil service wage bill and set aside more funds for capital investment.
Import statistics from January to June 2014 show that more than 41 percent of the country’s import bill was for food and fuel while only 16 percent went towards machinery and equipment, with most of it in the form of basic excavation and earth moving mining equipment, machinery and equipment for the manufacturing sector remains primitive.
Import patterns show that the nation is living from hand to mouth, eating its entire kill with nothing being set aside to build future capacity in the form of capital investments.
When the nation is not producing enough to sustain its internal consumer demand, revenue leaks in the form of imports for goods and services that could otherwise be produced in the country, thereby supporting local Industry and enhancing the consumer base.
In the absence of significant capital investment, local industry will continue to be at the mercy of cheaper imports from other industrially viable countries like South Africa and other neighbouring countries, which have been attracted by the multi-currency regime, particularly the US dollar, which has been outperforming most of Africa’s regional currencies.
If the country continues on this path, the industry faces annihilation.
Recent experiences with the international community give testimony to the hard reality that the greater part of any direct investment into capacity building initiatives will be internally driven, high country risk, policy hurdles and sour bilateral relations with Europe have limited the number options available for industry revival.
While most of the surrounding countries have managed to attract significant foreign direct investment, Zimbabwe is finding it an uphill task to attract FDI. Zimbabwe attracted less than 1 percent of the $13 billion that made way into Sub-Saharan Africa. If the numbers are anything to go by, it’s going to be a while before the country can count on external capital flows to resuscitate the industry and key sectors.
With this view in sight, it becomes prudent to minimise recurrent fiscal expenditures and channel more funds towards capital investments aimed at reviving the country’s critical sectors.
At the current expenditure profile, which channels more than 70 percent of budget to recurring operational expenditure and a little less than 30 percent to capital projects, the country is making a thorny bed on which when the time comes, it shall have to lie.
Fiscal demands, if not reduced, should be at least suppressed at current levels, while ways to grow the current revenue flows extending beyond just taxation are exploited to the fullest potential.
In this regard, public entity efficiency and accountability becomes indispensable. Policy clarity and realignment to open the economy to potential investment flows also becomes of paramount importance. But before external support can be garnered, it is crucial to maintain a sustainable fiscal balance between capital expenditure and recurring operational expenditure.
Albert Norumedzo is an equity and alternative investment analyst