Making sense of ZIMRA’s HY-1 revenue performance report

Collections are at an all-time high, in fact revenues from the first 6 months period of the year is marginally shy of that achieved over the whole of 2018. Almost all revenue lines are showing a strong outturn when compared to the same period last year and more importantly showing an outperformance to budget. It is against these budgeted levels that government prepares its fiscus budgets for the ensuing financial year. At a basic level an outperformance to budget would give government more fiscal space to increase spending or in the least, contain a fiscus deficit, assuming other factors are constant. ZIMRA collected a total of $5.2 billion in the first 6 months period of the year up from $2.4 billion in the same period last year, a growth of 109%. Equally the revenue was 21% ahead of target. So is this an impressive stastic as achieved by ZIMRA? It is indeed more than what meets the eye. A lot of economic variables with an impact on monetary value have shifted in Zimbabwe over the last 10 months and this means all other factors previously held constant, are no longer constant and therefore the underlying value of monetary assets could have potentially moved with these changes. There is therefore a need to adjust for these factors before arriving at the conclusion on whether the performance signifies real growth.

Let us attempt to look at some of the implications. In October of 2018, as fiscal authorities moved to tighten policy and buttress monetary policy measures, inflation consequently imploded. From a low of 5% a month earlier annual inflation rose to 21% in October which was a first in 9 years (dollarisation period 2009-2018). Inflation throughout the period had averaged below 3% and for over 2 years within that period, actually went through a deflationary period. The growth in average prices implied an erosion in the purchasing power of monetary balances and thus a reduction in their value by a commensurate measure. A dollar in October 2018 could no longer buy you an equivalent amount of goods as you would buy a year or a month earlier. Between October 2018 and June 2019, prices went up sharply in a series of movements in line with policy measures and at the end of the period inflation was up by 175% year on year. Looking at it in another way, this means one need almost 3 times the amount to buy the same quantity of goods in June as they did a year earlier. Or inversely, money lost value by over 60% and a dollar could now be close to 30c in value. In conclusion it is apparent that inflation has an impact of eroding the real value of monetary assets. In the case of Zimra, $5 billion collected over the 6 months period should be deflated by the average inflation rate over the period and the outcome would give a real outturn of below $2 billion which means collections are worse off in 2019 when compared to 2018.

Looked at in another way, the reporting currency between the periods changed with the changes in policy. For 2018, the reporting currency was the USD which is no longer the case for 2019 after the promulgation of SI. The revenues collected in 2019 would therefore need to be adjusted for the changes in currency using an exchange rate. Since February 2019, the exchange rate has weakened from 1:2.5 to 1:9. To compare like for like an adjustment of the $5 billion in collections would need to be effected and the resultant outcome is below a real income of USD2 billion. Again this shows an underperformance in 2019 compared to the same period last year. Perhaps one of the most interesting takes from the numbers is that the projected full year revenue target using a straight line, now stands at $10 billion up from circa $9 billion. The government had projected to carry through a deficit level of $2.8 billion by year end which implies a revised expenditure of $12 billion. Adding grants of circa $1.5 billion to the expected revenue inflates the total revenue to about $11.5 billion. This gives government more headroom to increase its targeted expenditure from the initial $12 billion which Mthuli Ncube promised to announce in his mid-term budget. We are now therefore likely to see a budget of close to $14 billion from the initial $8 billion presented in 2018 for the 2019 fiscal year. At $14 billion government would have created a deficit of $3.5 billion and assuming its estimate GDP is correct, a resultant deficit to GDP ratio of 5% will be in line with TSP targets. This headroom would give government the impetus to address the demand deficit in the economy through adjustment of civil service salaries and other excesses.

However, at the projected government revenue levels of ZW$10 billion at full year, a revenue to GDP ratio of 14% will have been attained. This level is way off the average rule of thumb ratio of 20%. To this writer it might be a combination of underperforming revenue (economic recession) and a possible overstated GDP. How did treasury arrive at the ZW$72 billion GDP mark. Did they simply assume an exchange rate of 1:3 to the 2018 GDP levels and took that to be the ZW$ GDP levels. Now what happens in 2019 when at full year we are supposed to value our produce at market. Assuming goods produced were constant on last year, it follows that this year’s value will be way below the prior year in nominal terms. This is so because last year produce, suppose it was 30 units selling at $1 each was loosely converted to from $30 to ZW$90. This year the 30 units will be valued at market, and to arrive at market it means using the prevailing inflation rate which on average has officially gone up by only 94% since December, the result will be a GDP of less than ZW$60 in nominal terms. It would follow then, that the 2018 GDP was overstated. To prove this, Zimbabwe on average collects 20% of GDP as revenue which by that measure would mean ZW$10 billion in ZIMRA revenue should be circa 20% of GDP giving us a GDP figure of ZW$50 billion.

If we assume that the GDP is not overstated and we take last year’s rebased GDP numbers as they are, it would imply that in 2019 the economy is in a deep recession which has adversely affected revenue performance in real terms. In agriculture for instance, staple crop output is down by at least 50% and tobacco is also marginally down. In the manufacturing sector, some companies are operating at below 15% capacity while in the energy sector, power generation is down by 70%. This points to a deeper economic recession. Delta, the country’s largest beverages maker reported a 57% decline in lager volumes in its first quarter but revenue went up, reflecting the impact of a combination of recession and high inflation which in short is stagflation.  Adjusting ZIMRA numbers for inflation and exchange rate dynamics surely points to the fact that the economy is in stagflation.

Respect Gwenzi

Respect is the Lead Analyst and Managing Director at Equity Axis. He has 8 years experience in respective fields of finance and media. Particular areas of expertise include Asset Management, Stockbroking and Financial Media. Respect is on a mission to change the course of Financial Media in Africa through digitalization

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