Chinamasa looks to 2016 and beyond

Patrick Chinamasa

On November 26, 2015, Finance and Economic Development Minister Patrick Chinamasa will present the 2016 National Budget Statement in Parliament. The following are excerpts of the Pre-Budget Strategy Paper (BSP), which has been made exclusively available to The Sunday Mail.
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The 2016 BSP is meant to facilitate stakeholders’ participation and debate on budgetary and macro-economic policy issues for the forthcoming 2016 National Budget.
The objective is to build consensus on specific issues to be addressed under the Budget.
These priority issues are modelled around the following four Zim-Asset clusters and two sub-clusters, namely: Food Security and Nutrition; Value Addition and Beneficiation; Social Services and Poverty Eradication; Infrastructure and Utilities; Fiscal Reform Measures; and Public Administration, Governance and Performance Management.
Furthermore, in line with the Zim-Asset clusters, the President unveiled a 10-Point Plan during his State of the Nation Address at the joint sitting of the National Assembly and Senate on 25 August 2015.
The Plan buttresses and further advances Zim-Asset’s objectives of achieving sustainable and inclusive economic growth, in particular the creation of jobs and its key facets are as follows:
Revitalising agriculture and the agro-processing value chain;
Advancing beneficiation and/or value addition to our agricultural and mining resource endowment;
Focusing on infrastructure development, particularly in the key energy, water, transport and ICTs subsectors;
Unlocking SMEs’ potential;
Encouraging private sector investment;
Restoration and building confidence and stability in the financial services sector;
Promoting joint ventures and public private partnerships to boost State-owned companies’ performance;
Modernising labour laws;
Pursuing an anti-corruption thrust; and
Implementation of special economic zones to provide impetus for FDI.
Debate on the National Budget will also draw from the 2015 Mid-Year Fiscal Policy Review Statement, with the objective carrying forward the unfinished agenda into 2016.
The 2016 BSP provides an overview of the economy and outlook projections up to 2018, reflecting the economy’s potential capacity as well as downside risks.
Overview and outlook
GDP: Overall economic performance in 2015 indicates modest growth particularly in the sectors of tourism, construction and communication, with some setbacks in agriculture and mining.
The initial growth target of 3,2 percent will be compromised primarily by the impact of drought. A combination of late rains and its uneven distribution not only resulted in about 20 percent of the area under cropping being written-off, but also adversely affected the quality of grains and cash crops.
Mining, which exhibited strong growth in the first quarter of 2015, in the second half of the year suffered declining international prices which undermined output particularly for nickel, platinum, chrome, coal, among other minerals.
This further emphasises the importance to keep momentum on beneficiation and value addition. With regards to industry, the thrust remains on enhancing the sector’s competitiveness. It is in this respect that from 2014, Government introduced fiscal interventions to support our firms, which consequently brought positive results in a number of subsectors including foodstuffs, textiles and clothing, leather, poultry and dairy, to name a few.
Further efforts to support industry through several measures on financing and improving supply and reliability of essential utilities such as energy and water should be able to revitalise our industry.
Government is engaging stakeholders to clarify and resolve misconstructions on indigenisation. This, together with progress already made on amending the labour laws, should see improved investment, raising capacity utilisation above current levels of 36 percent. Accordingly, in 2016, overall GDP is projected at 2,7 percent, riding on the recovery of agriculture and mining as well as positive performance in other sectors.
Prices
Annual average inflation remains on a downward trend, reflecting the dampening of inflationary pressures, on the back of weakening domestic demand and other external factors such as expectations of continued depreciation of the South Africa rand, coupled with further reductions in oil and world food prices.
Major price declines were most pronounced in food and non-alcoholic beverages; clothing and footwear; housing, water, electricity, gas and other fuels; communication; recreation and culture; restaurants and hotels; and miscellaneous goods and services.
For the rest of 2015, average inflation is projected at about -2,2 percent.
Indications are that during 2016, inflation will remain subdued at an average of -1,2 percent. Major factors that will guide medium-term price developments will be the rand/US dollar exchange rate, domestic demand, and international commodity prices.
Budget Framework 2012-2018
Based on a 2,7 percent growth in 2016, total revenues of about US$3 859 billion are anticipated, as indicated under the following Macro-Economic and Budget Framework.
The Macro-Economic and Budget Framework is premised on the following broad assumptions:
A stable macro-economic environment, with low inflation averaging -1,2 percent;
Embracing consistent and credible policies, which build confidence and attract investment to key productive sectors;
Strong global economic growth of around 3,8 percent in 2016;
Normal to below normal rainfall season;
Subdued international mineral commodity prices, implying low earnings from mineral exports and reduced viability for our mining houses;
Low international oil prices, implying reduced input cost on the part of our industry;
Moderate improvement in liquidity as well as availability of affordable financing; and
Positive development from the re-engagement process.
Fiscal space remains narrow, implying reliance on private sources for financing development projects and programmes.
Other downside risks requiring mitigation in order to attain our objectives and targets include potential economic slowdown in emerging markets; negative impact of climate change; subdued international commodity prices; and potential rise in interest rates in developed markets.
2016 and beyond
Agriculture and food security
Agriculture is a key to alleviating poverty and supporting other sectors, also providing employment and incomes to more than 70 percent of our population.
To sustain this critical sector, Government will pay more attention to adequate funding, mitigating the negative impact of climate change, and enhancing productivity and marketing of produce.
As already indicated in the 2015 Mid-Year Fiscal Policy Review, the 2015/16 agricultural programme targets 2,1 million hectares for grains – 1,7 million ha for maize and about 485 000 ha for small grains.
This requires estimated total financing of about US$1,7 billion, of which US$1,3 billion is for crops.
Government intervention will primarily focus on supporting about 300 000 vulnerable households through an inputs scheme.
Furthermore, Government will expedite clearance of arrears to both inputs suppliers and farmers.
The banking sector is expected to play a bigger role in financing agriculture, given the consensus over tight loan repayment mechanisms and the lowering of lending rates to a maximum of 18 percent, in line with the 2015 Mid-Year Monetary Policy Statement.
Already, the banking sector has mobilised about US$1 billion to support the upcoming season, with development partners complementing this.
Local companies have indicated capacity to fully supply required seed and compound fertilisers. The anticipated deficit of about 50 000 tonnes of ammonium nitrate fertilisers will be imported with Government extending duty-free importation.
Similarly, recent announcements on the reduction in fertiliser prices is commendable.
The implications of climate change are being severely felt across the world. Accordingly, this requires that mitigatory measures be embraced and strengthened to limit the adverse impact.
With regards to the 2015/16 rainfall season, forecasts from Sadc weather experts are normal to below normal rainfall.
Planting of early maturity varieties and ensuring early accessibility to inputs will be important.
Furthermore, structured investment in rehabilitation and development of irrigation systems should be prioritised.
Our current productivity, as reflected through low yields in crops such as cotton, maize, soya, wheat, among others, is grossly compromising farmer viability and competitiveness.
Low productivity is on account of financing, input availability, skills and mechanisation among other factors.
Enhancing productivity should be a priority for sustainable agricultural production in the country and this should be our thrust in the current season.
Lack of access to markets deprives farmers of competitive prices.
A competitive marketing arrangement such as the proposed operationalisation of the Agricultural Commodity Exchange and the Warehousing Receipt System complemented by an lT-based marketing system should be expedited.
Furthermore, Government should ensure a level playing field by closely monitoring imports such as horticultural products to promote local production and viability. Our livestock population remains well below potential, depriving the country in terms of nutrition, incomes and exports.
As indicated in the 2015 Mid-Year Fiscal Policy Review Statement, Government should continue establishing national breeding and multiplication centres in different ecological zones.
Mining
Despite the prolonged impact of declining international prices, mining continues to hold much potential.
In 2015, the sector exhibited moderate growth, primarily driven by increased gold, nickel, platinum and coal ouput.
Similarly, the policy thrust on minerals beneficiation and value addition is paying dividends as reflected through higher export earnings of refined gold, processed chrome ore and polished diamonds.
A roadmap on platinum processing has been developed and should facilitate commencement of domestic value addition from 2016. Establishment of special economic zones is underway and should promote value addition. Other priority areas which should be finalised in 2016 relate to amendments to Mines and Minerals Act, consolidation of the diamond sector, and review of the mining fiscal regime.
In addition, efforts on plugging leakages through close monitoring, enhancing oversight, transparency and accountability in the sector will be pursued.
Manufacturing
Manufacturing sector is recovering and projected to grow by 2,1 percent in 2016 owing to several measures by Government under Zim-Asset. In 2016, Government will continue to monitor and evaluate the impact of trade measures put in place over the past three years to support manufacturing. These include reduction and/or removal of duty on inputs into production and upward review of import tariffs and licensing requirements on finished imports which can be easily produced locally.
Ongoing rehabilitation of power stations and new investments in generation should improve power supply from 2016.
Equally important is implementation of special economic zones to attract increased investment into the sector, that way increasing capacity utilisation, exports and job creation. The amended Labour Act provides for much-needed labour market flexibility which promotes productivity, investment and competitiveness.
Operationalisation of the National Competitiveness Commission will be essential for improving the ease of doing business and reducing the cost of doing business.
Implementation of the Sadc Industrialisation Strategy, which emphasises commodity-based industrialisation, and establishing the National Productivity Centre will, also be prioritised in 2016.
SMEs, Women and Youth
SMEs – embracing the broad entrepreneurship of our women and youth, retrenchees, other individuals and interest groups – comprise the backbone of our economy.
Their immense contribution to job creation, household incomes, GDP, innovation, and social integration requires both public and private sector support.
It is estimated that SMEs account for about 90 percent of the country’s employable population or more than 5,8 million people. According to the 2012 Finscope Survey, SMEs contribute about 60 percent of the country’s GDP.
Accordingly, the Co-operatives Policy and Co-operative Societies Act, including the Savings and Credit Co-operatives, will be reviewed and, where necessary, amended to reflect current demands for SMEs. Similarly, appropriate entrepreneurship training will be extended to existing and aspiring entrepreneurs.
Government recognises that access to new markets and finance are the most pressing issues for SMEs, hence capitalisation of SMEDCO and engagement with financial institutions facilities are priorities.
Clustering SMEs and linking them with established companies provides scope for market expansion, access to inputs and technology and enhancement of entrepreneural skills. Above all, SMEs are encouraged to embrace ICT as a tool for sourcing vital information on entrepreneurship, markets, management, technology, finance and networking, among others.
Tourism
Tourism is a key growth driver, taking advantage of our rich natural and man-made attractions and the country’s peaceful environment.
The sector is set to grow by more than 4,7 percent in 2015, reflecting growth in confidence in Zimbabwe as a peaceful destination.
In the medium-term, tourism is projected to maintain moderate growth of above four percent.
Interventions on marketing, relaxing the visa regime, investment in tourism and related infrastructure, and promotion of the “Open Skies Policy” will be pursued in 2016.
Implementing the Tourism Special Economic Zone (the Northern Circuit) in the Victoria Falls area and finalising the National Tourism Master Plan will be integral programmes in promoting the tourism sector.
Construction
In 2015, growth for the construction sector has been revised upwards from 3,9 percent to seven percent, driven mainly by individual home-building and small-scale projects. Reflecting this surge is the increase in cement produced and sold in the domestic market, including other indicators such as imports of lime, cement plastering and bituminous substances, which increased on average by 15 percent.
In the outlook, the construction sector is projected to grow by 4,5 percent in 2016, benefiting from a number of pipeline projects particularly road, housing, power, water and mining.
Power
From the second half of 2015, power generation has been declining due to a number of factors which include declining water levels at Kariba Dam following the poor rainfall season. This, coupled with interruptions during rehabilitation works at Hwange and Bulawayo thermal power stations as well as system disturbances arising from technical faults, posed power generation challenges. While temporary interruptions from rehabilitation affect economic activities, these necessary works essentially improve power generation and supply and will be pursued. Ongoing work on Kariba South Extension and construction of Hwange 7 and 8, and other solar projects, will be accelerated to further improve power supply.
Development of mini-hydro power stations on all major dams in the country will also be prioritised.
Independent power producers are important in augmenting electricity supply. Government has so far registered about 20 IPPs and eight are operational.
In the medium-term, efforts will be directed towards reducing operational impediments to encourage IPPs.
Efficient transmission and distribution infrastructure reduces losses during wheeling of power from generating plants to consumers. As such, supporting rehabilitation and upgrading of transmission and distribution infrastructure will be prioritised to ensure reliability of power supply.
Total power supply will continue to be outstripped by demand, compelling institution of demand management measures, which will include use of efficient lighting systems, adoption of solar energy, as well as embracing of other energy saving equipment and habits.
Transport and communication
A well-performing transport and communication sector is vital for attracting investment, supporting productive activities and promoting overall economic development. The sector currently accounts for 10,4 percent of GDP. The country’s transportation network, although faced with a number of challenges, remains efficient with wide coverage save for railways.
However, with the emerging demands as the economy improves, it is essential that Government pays attention to challenges in the area of road rehabilitation, maintenance and dualisation, aviation infrastructure such as runways as well as the overhaul of the railway system.
Furthermore, in view of the huge resource requirement for such projects, joint ventures, public private partnerships and loan financing will be embraced as major financing options in the implementation of these projects.
The communication sector has witnessed rapid growth in the recent past, resulting in improvements in electronic, internet and voice penetration rates.
Notwithstanding this progress, the country still experiences a shortfall in Internet penetration and broadcasting coverage.
To catch up with the rapid global developments, the following programmes will be pursued:
Enhanced expansion of Internet and voice connections;
Digitalisation of broadcasting services;
Enhanced implementation of E-Government system;
Completion of current optic fibre backbone projects;
Establishment of Community Information Centres; and
Establishment of National Data Centres.
Social services
Guaranteeing quality social service delivery – particularly in health, education, social welfare, housing, and water and sanitation – is essential for fighting poverty.
Despite formidable strides, a lot requires to be done to improve our population’s welfare.
In the medium-term, focus will be directed at:
Resourcing health facilities at central, provincial, district, rural health centres and urban areas;
Unfreezing critical posts in both health and education;
Decongesting schools through construction of more schools;
Health and education infrastructure in new resettlement areas;
Enhancing development of water facilities in both urban and rural areas; and
Mobilising private resources for housing projects.
Public enterprises
The reform of public enterprises is essential for improving public service delivery and for enhanced contribution to GDP.
Of late, there has been insignificant progress in this area, making it a priority for the 2016 reform agenda.
Specific issues for consideration relate to restructuring, governance, accountability, costs rationalisation and the remuneration framework, among others.
Economic slowdown has negativeiy affected performance of public finances and balance of payments.
Consequently, this has meant low capacity to support service delivery and Zim-Asset implementation.
However, to augment domestic resources, Government is pursuing both domestic and external alternative financing for key Zim-Asset programmes.
Revenues
Cumulative revenue collections for January to August 2015 amounted to US$2,29 billion, against a target of US$2,5 billion.
For the rest of 2015, revenues are projected at US$3,69 billion against the original US$3,9 billion. Revenues in the medium-term are projected to increase marginally in line with expansion of the revenue base. In 2016, total revenues are projected at US$3,85 billion.
Measures will be put in place to strengthen revenue collection, plug revenue leakages, strengthen revenue administration and rationalise the tax expenditure regime in order to meet the target.
Overall expenditure for the first seven months of 2015 amounted to US$2,25 billion, militating against timely implementation of projects and programmes and payment of some overdue obligations.
As we look into 2016, focus will be on managing expenditures in line with revenue developments. Specific key areas include:
Striking a balance between current expenditure demands and necessary development programmes financing including infrastructure and priority social spending;
Improving social spending consistent with our commitments under the SMP;
Instilling financial discipline through strengthening the public finance management system; and
Prioritising clearance of arrears.
Education and skills
Government’s interventions in the education sector have primarily been emphasising the attainment of universal primary education, sustaining the gains on literacy levels as well as improving learning outcomes through investment in infrastructure and learning materials.
Zim-Asset’s value addition and beneficiation thrust requires Zimbabwe invests in human capacity development, emphasising production of learners with core competencies in the fields of Mathematics, Engineering, Science and Technology and ICTs.
Cognisant of the role education plays in socio-economic development and growth, the education sector will need to play a more transformative role.
In this regard, the review of curricula being undertaken by the Ministry of Primary and Secondary Education offers the opportunity to address skills shortages; improve quality and relevance of education; and promote social inclusion and cohesion through life skills. Government will continue to invest in improving competencies of teaching staff through on-the-job development initiatives and reducing the infrastructural deficit in the sector.
Social Issues
Social protection interventions will continue focusing on reducing household poverty, increasing access to child protection and basic education services, and providing crop input support to the vulnerable.
It is incumbent for Government to foster initiatives that meaningfully advance participation of vulnerable women and youths in productive economic sectors to reduce dependency on social welfare.
In addition, Government will need to reform existing social protection programmes, focusing on improving beneficiary targeting, the efficiency and effectiveness of resource usage, co-ordination of funds from stakeholders, and clarifying roles and responsibilities of all stakeholders to avoid duplication.
The Public Service, Labour and Social Services Ministry has already commenced reviewing the Basic Education and Assistance Module Operational Manual.
To improve access to quality healthcare services, the Budget will continue to focus on strengthening immunisation and nutrition services; improving availability of medicines; improving efficiency of services; promotion of health awareness campaigns, focusing on non-communicable diseases; and promotion of anti-malarial programmes.
Arrears
Non-payment of Government contractors and suppliers is extremely detrimental to growth of the private sector and overall economic transformation.
Elimination of domestic payment arrears remains one of the key interventions on the public finance front via enforcing the commitment control system; implementing the Budget as approved; and implementation of prepayment systems with regards to utilities.
Public finance and partners
Modernising our public finance management systems remains a cornerstone of our structural reform agenda.
Management of public finances for a more efficient and effective delivery of services and infrastructure development stands to benefit from institution of corrective measures that address observations made by the Auditor-General in her 2014 Audit Report to Parliament.
As alluded to in the 2015 Mid-Year Policy Review Statement, development partners play an important role in complementing Government efforts in health, education and agriculture, among others.
Government continues to engage development partners to channel assistance through national budgetary systems to harmonise and enhance aid efficiency and effectiveness. External debt payments remain a crucial credibility issue in our re-engagement process with creditors.
Honouring our obligations to creditors will be a priority as we re-engage creditors in order to normalise relations, enhance credit rating and that way, unlock new financing vital for developmental projects.
Outstanding arrears continue to impede access to external finance. The public debt amounts to US$7,1 billion (49,9 percent of GDP), of which US$5,6 billion (39,3 percent of GDP) are arrears.
In 2016, debt and arrears are projected to marginally increase to US$7,4 billion and US$5,7 billion respectively.
Government has embarked on re-engagement with creditors. Re-engagement with multilateral creditors involves implementation of the SMP agreed with the IMF, which is way into its conclusion phase, ending December 2015.
Much progress has been made on this front, with successful attainment of agreed targets with the IMF under both SMP 1 as well as the successor programme.
Adherence to the SMP will help Zimbabwe send clear and positive signals to creditors, international financial markets and development partners of Government’s strong commitment to implementing sound macro-economic policies.
This will engender confidence among creditors, development partners and investors. The key objective is to establish a track record of co-operation with creditors.
In 2016, re-engagement will continue with a view to moving a step forward by agreeing on a full programme and conclusion of an arrears clearance strategy to open avenues for new financing.
Financial sector
The financial sector, which provides a lifeline to other productive sectors, generally remains stable in spite of operating environment constraints.
This stability is a result of various Government initiatives and key stakeholders to instil sectoral discipline.
Government will continue to focus on corrective Statutory Instruments, including amendments to the Banking Act, to strengthen management, supervision and surveillance of financial institutions and depositor protection.
Attention will also be directed at essential issues such as adequate capitalisation of banks as well as managing non-performing loans.
Trade and FDI
In 2016, exports are projected at US$3,7 billion against imports of US$6,2 billion – a trade gap of over US$2,4 billion.
It will be necessary that we manage our imports in line with the Sadc Industrialisation Policy thrust, whilst at the same time instituting appropriate measures which promote exports, particularly value added and beneficiated products.
Policy clarity and consistency are integral in promoting FDI.
In 2016, FDI is projected to increase to US$614 million from US$591 million in 2015, benefiting from Government’s policy clarifications and re-engagement with creditors.
However, FDI inflows remain far too low relative to the investment requirements for Zim-Asset and levels flowing into regional counterparts. More attention will be paid to addressing the ease and cost of doing business, concluding outstanding BIPPAs as well as removing infrastructure bottlenecks, among other priorities.
Conclusion
The above issues and proposals are by no means exhaustive. Stakeholders are invited to make further relevant inputs, to enrich the 2016 National Budget.
Projections made under the Macro-Economic and Budget Framework 2016-18 are indicative and will continue to be reviewed, taking into account any new developments and proposals during formulation of the 2016 Budget. The public is also encouraged to visit the Treasury website (www.zimtreasury.gov.zw) for comprehensive fiscal and economic reviews and other policy documents.
Inputs may also be directly submitted to Treasury, e-mailed, or presented during the forthcoming public consultative meetings, whose details will appear in the public domain.