- Zimbabwe to grow by 4% in 2022
- IMTT on foreign currency transactions reduced to 2% from 4%
- VAT increased to 15%
Increasing economic activity in various key sectors of the economy such as, among others, mining, agriculture and construction coupled with cushioning the public service from global shocks and domestic macroeconomic hardships remain the key pillars of the 2023 national budget as the economy makes concerted efforts to remain on course in the country’s drive towards the attainment of an upper middle income economy status by 2030. The Minister of Finance and Economic Development (MoFED), Prof Ncube, delivered the much anticipated 2023 national budget statement which will run under the theme “Accelerating Economic Transformation.” The national budget comes at a time when the economy is half way through the implementation of the five year development plan which is running through to 2025, the National Development Strategy 1 (NDS1).
The minister further revised downward the GDP growth forecast for 2022, with the economy expected to grow by 4% from a mid-year projection of 4.6% and from an initial growth rate of 5.6% with the Sub-Saharan Africa region forecasted to grow by 3.6% in 2022. The downward revision in GDP forecast is now consistent with IMF, World Bank and AfDB forecasts which projected the country to grow by a conservative average of 3.5% in 2022. This is on the backdrop of domestic and global developments which have been exacerbated by the rising uncertainty regarding the Russo-Ukraine war which has disrupted global value chains. In addition, the slowdown in economic growth is reflective of, as highlighted by the Honorable minister, the effects on aggregate demand of the tight fiscal and monetary policies instituted earlier this year by government. However, it is imperative for the government to stay the course and remain disciplined as the country moves towards national elections in 2023 in order to ensure that all the goals set out in the budget can be realized as pre-electoral expansionary policies will be met by post-electoral economic recessions. In the outlook, the economy is expected to grow by 3.8% in 2023.
Total revenue collections for 2023 are forecasted to be at 18% of GDP which is about ZW$3,910 billion against total projected expenditures of ZW$4,246 billion implying a budget overrun of ZW$337 billion. The overall deficit of ZW$586 billion, including loan repayments of ZW$249 billion, is to be financed through the issuance of TBs, VFEX bonds and external loan disbursements valued at ZW$82 billion, ZW$95 billion and ZW$398 billion, respectively. Employment costs will account for a little over 50% of the total spending in 2023 reflecting a 10 percentage point increase from 42% in 2022 while capital expenditure will account for 16% of expenditures. The increase in the share of employment costs has been necessitated by government’s desire to cushion the public service from global and domestic shocks. Although the increase in employment costs is commendable, it is however above the international threshold level of 30% which tends to crowd out funds for other government projects and it is also telling of a bloated public service. On the other hand, the share of capital expenditure is a welcome development as the government steps up measures to modernize the economy and the ratio is comfortably above the South African benchmark level of 8.5%.
Tax policy measures.
The minister reduced the Intermediate Money Transfer Tax (IMTT) on foreign currency transactions by half from 4% to 2% after economy-wide economic and business outcry. The increase in the tax rate was a result of government’s efforts to promote the usage of the local currency in domestic transactions. However, the exorbitant charges on forex transfers had resulted in a largely cash-based economic society despite the availability of banking services and alternative payments and by implication greatly increased the risk of tax evasion as over 60%, and still on the rise, of the economy is informal. Such high taxes on local transactions, including the IMTT on local currency transactions, discourages formalization in the economy. Instead, businesses that are compliant in the payment of other tax heads should be exempt from paying this tax and consequently this incentive should in the long run encourage formalization and thus reduce the shadow economy ratio.
Value Added Tax (VAT), on the other hand, has been increased to pre-Covid levels of 15% from the 14.5% which had been introduced at the beginning of 2020 in the wake of the Covid-19 pandemic in an effort to stimulate the economy. The increase in VAT, which fairs comparatively lower than the regional standard of 16%, to previous levels is effective 1 January 2023. Although the increase in VAT will be partially offset by the decline in IMTT, VAT still remains a considerable drive in the pricing of goods and services in the economy.
Customs duty on basic commodities.
Minister Ncube has reinstated customs duty on the importation of basic commodities from neighboring countries after having maintained the suspension of duty on these commodities since last year although it faced resistance from the local firms. The suspension of duty was on the back of unjustified price increases by local industry and was thus a policy aimed at stabilizing prices in the economy. This is a welcome move by government which is both pro-business and industry as it seeks to promote local production and “brand Zimbabwe.” This however breeds inefficiencies and complacency from the local manufacturers due to this proverbial infant industry protection drive in the absence of outside competition. Of importance, the local industry will have to competitively price their products and restrain from rent seeking behavior and profiteering and ensure commodity availability. Furthermore, the government will have to support the local firms through disbursing foreign currency timeously on the foreign currency auction market to ensure smooth business operations.
Kariba’s usable water level fell to a critical 5.63% on November 21st 2022 compared to 26.88% in the comparable period prior year and has resulted in frequent nationwide power cuts in the last two months. The power cuts have over time been compounded by various challenges which include, but not limited to, obsolete equipment and infrastructure and inability to attract significant private sector investment. Against this backdrop, treasury has therefore given priority to the timely completion of the ongoing Hwange 7 and 8 power plant projects which are expected to both add 600MW to the national grid by 2023 first quarter. The minister committed to drawdown funds amounting to US$472 million from the China Exim Bank loan facility in order to facilitate ongoing works. In addition, ZESA will commit ZW$20.1 billion while government will make available ZW$3 billion towards the speedy completion of the program. The Hwange project expansion comes at a time when the economy is expected to record an increase in power demand in the coming fiscal years mainly from mining (which is expected to grow by 10% in 2022) and thus the project will go a long way in sufficing the power needs of the economy. However, the power utility should be in a position to charge economically optimal tariffs going forward, compared to the current suboptimal and uneconomical tariffs, in order to efficiently improve electricity generation and remain viable in the long term.