adminGift Mugano Business Correspondent
The Ministry of Finance in a crucial portfolio that sets the tone for the rest of the economy. Over the last five years the role of the Treasury was mainly one of stabilisation.It was merely of balance and checks without an offensive approach to dealing with fiscal issues.
Under this role, we have seen slowing down of Government public expenditure mainly on physical infrastructure as the lion’s share of the Budget went towards paltry civil servants’ salaries which were also a blow to stimulation of demand.
This has led to stagnation of the economy. New Finance Minister Patrick Chinamasa is coming at a time when the economy requires a paradigm shift in the fiscal policy.
This is coupled by the fact that on the international scene the wave of trade liberalisation is posing a serious threat to Government revenue and industrial closure which has a vicious cycle tracing back to the Government revenue.
It therefore means that he will need a tool box that contains short-, medium- and long-term strategies. With regard to short-term strategy, the Treasury chief must consider borrowing money from friendly countries to meet the fiscal requirements.
He can consider the use of minerals as collateral. This is a common strategy internationally. Our neighbour South Africa, which is Africa’s biggest economy, still goes out to borrow from nations such as Japan.
Recently, South Africa issued Samurai Treasury bills to mobilise funds for infrastructure development. As a result it is earmarking R3,2 trillion (which is three times its current budget) for infrastructure development in the next three years!
In the medium term to long term the country needs to consider improving the collection of revenue from alternative sources such as personal and corporate tax and excise duty in order to cushion itself against the revenue loss impact of trade liberalisation.
In addition, the country should reconfigure the income tax bands so that they become more progressive thereby raising more revenue.
Our fiscal authorities also need to consider VAT as an important trade policy instrument that can be used to mitigate loss of revenue due to trade liberalisation.
VAT has been a cash machine for a number of countries both in developed and developing countries. In Kenya, for example, VAT contributes over 45 percent of total revenue. This is necessitated by strong institutions.
In Zimbabwe, the trend on VAT collections had been worrying as statistics show that its contribution has been falling from 39,33 percent in 2009 to 28,16 percent in 2012.
It therefore means that in the minister’s tool box must contain a spanner or spanners that will tighten loopholes for tax evasion.
Measures in this regard include the strengthening and capacitating of Zimra and organising the informal sector.
The International Monetary Fund in its 2013 report reaffirmed its commitment to provide technical assistant to developing countries on data improvements, customs reform, and tax and tariff reform – including mitigating the revenue implications of trade liberalisation.
Zimbabwe can take advantage of this pledge. Capacity building from the IMF will also help the country to deal with other sources of revenue leakages outside the informal sector such rampant transfer pricing which is bedevilling Africa’s fiscal space and Zimbabwe is not an exception to this.
Digitalisation of Zimra is also necessary in dealing with tax evasion but its requires reliable electricity supply of which this is inevitable!
Organising the informal sector into clusters, the Government of Zimbabwe through its industrial policy may need to encourage the informal sector to form industrial clusters.
An industrial cluster involves the amalgamation of individual small enterprises into a formidable force. This has two clear benefits. Firstly, this will help them to build critical mass and help the formally weak informal trader to bargain with other established businesses on equal wavelength.
Hence, the informal sector is incentivised to comply with the move thereby making it easy to implement. Secondly, because the informal sector is now organised into a big entity, Government will find it easy to collect domestic taxes which were previously evaded by this sector such as Pay As You Earn (PAYE), VAT, corporate tax and excise duties.
Implementing presumptive taxes to the informal sector, some informal sectors are difficult to organise into a big entity such as vegetable vending.
These are hard to tax sectors and complicate tax replacement. In order to collect tax revenue from this sector whilst abiding with the principles of an efficient tax collection mechanism of simplicity, cost effective, easy to collect and easy to administer a presumptive tax would be ideal for this sector.
A presumptive tax is a lump sum tax paid by an operator during a period of time. The amount of presumptive tax is determined by Government based on the size of economic active undertaken by such businesses.
Traditionally, this is enforceable upon renewable of trading licences. Zimbabwe can adopt this method and allow it to be implemented by local authorities and city councils that then collect revenue on behalf of Government.
Presumptive tax has been successfully used in the transport business in South Africa, India, Belgium, Israel and China. Using sensitive lists to mitigate revenue loss, the agreement by member states to have a basket of sensitive products will help to reduce the revenue loss for Zimbabwe.
In this regard, Zimbabwe’s negotiators should push for sensitive products that will not be subjected to tariff reduction for some time.
This is crucial as it gives member states the needed policy space to develop their sensitive products.
My study have shown that Zimbabwe needs to consider putting motor vehicles, tobacco, wooden furniture, copper, iron and steel, transmission apparatus, mill wrappers, rice, rods for reinforcement and palm oil as part of its revenue sensitive products.
Inclusion of these products on sensitive list will in the short run to medium term help Zimbabwe to mitigate revenue loss while building its domestic tax revenue capacity.
Zimbabwe should also make use of the Comesa adjustment facility which is designed to assist member states that will incur adjustment costs due to tariff reductions.
The Comesa adjustment facility is provision given by Comesa Fund to member states which demonstrate loss of government revenue emanating from tariff alignments to the Comesa customs union.
Hence Zimbabwe stands a chance to benefit from the Comesa Fund if it provides bankable projects on infrastructural projects aimed at trade facilitation.
It is therefore prudent that the country start to draw money from this fund now. Zimbabwe may need lower its tariffs on imports in a gradual way so as to smoothen the fall in its budget revenues.
Let me end by summarising expectations from various stakeholders and demonstrate why we need a robust tool box!
- Businesses in construction are waiting for Government pronouncement a National Budget (capital budget) to boost their sales!Everywhere in the world, more than 90 percent of hardware sales comes from Government construction projects;
- Industry is waiting for funds to retool and for working capital with statistics pointing to a requirement of over US$2 billion per year!
- Energy and infrastructures requires not less than US$14,5 billion for revamp and meeting national demand;
- Civil servants are waiting! Traditionally, they set the benchmark for private sector salaries which means workers from the private sector are also waiting! There is no doubt that every country requires demand for growth. South Africa is buoyed by high expenditure;
- Agricultural sector also requires at least US$2 billion per year!
- IMF, World Bank and other multilateral financial institutions are waiting for payment of US$10,7 billion, which constitutes our national debt!
This is a mammoth task but achievable all that we need is to forget about elections now and work as united team and support the treasury boss!
Gift Mugano is an author and expert in International Economics and Development in Africa, PhD finalist (Economics) and a lecturer in International Trade and Finance at Nelson Mandela Metropolitan University. He is based in Port Elizabeth, South Africa. Email: [email protected]; mobile: +27 780 174 112 (slow tariff phase down).
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