Shame Makoshori ,Chief Business Reporter
HISTORY is fraught with many examples of governments that collapsed after threatening business interests.
Remember the recent Kevin Rudd debacle — that vocal Australian Prime Minister whose downfall last month was at the behest of influential miners who pulled the plug on him after feeling threatened by what the Australian premier termed the Resources Super Profits Tax, which business viewed as hostile?
The message for those who work against capitalists is loud and clear: Don’t you dare threaten the wealthy and well oiled.
Rudd’s fallout with Australian mining tycoons appears to have provided useful lessons to Finance Minister, Tendai Biti whose Mid-Term fiscal review statement last week could best be described as pro-business.
The question is: Was it by coincidence that Biti outlined interventions in his statement last week that favoured business or could it be that the Finance Minister wanted to swing industrial sympathy in his favour knowing fully well that elections are around the corner?
Elections by their very nature require a lot of resources beyond what the Finance Act could provide. Business, in most countries — Zimbabwe included — normally fills the gap by sponsoring those seen as pro-capital.
Could it, therefore, be that Biti, a Movement for Democratic Change appointee, is looking beyond the 2010 National Budget? The answer may actually be grounded in the macro-economic matrixes of the country.
Zimbabwe’s economy has in the past suffered at the hands of politics. Previous budgets have tended to be insensitive to the requirements of business, resulting in a vicious economic recession that ended with the ditching of the local currency as a medium of exchange in favour of multi-currencies in February last year.
Biti, in the eyes of many, wants a clean break with the past.
While he might have raffled a few feathers in the mining industry given the robust way he intends to tackle taxation issues in a sector that has, in the past, enjoyed a relaxed taxation environment, the import of his fiscal policy review has resonated well with most industrialists.
Biti’s strategy prioritises capacity utilisation in industry by protecting domestic manufacturers from the corrosive effects of excessive importation of foreign products as well as creating new business opportunities in areas neglected by his predecessors.
The freight industry including the National Railway of Zimbabwe, a cry baby that has perennially depended on handouts from government, is set to benefit from the planned introduction of an electronic cargo tracking system next year. The system will ensure that goods passing through Zimbabwe, including second hand vehicles, do not end up finding their way into the local market.
All second hand vehicles are now required to be “shipped” once they touch the Zimbabwean soil rather than being driven, thereby creating a large scope of clientele for the freight industry.
“The electronic cargo tracking system is good because goods destined for other markets should not find themselves here,” said Ernst and Young tax consultant, Rameki Masaire.
He warned, however that government should guard against creating conditions that would impose barriers and high costs of doing business given that there are plans currently underway to integrate the region.
Zimbabwe is a member of the Common Market for Eastern and Southern Africa (COMESA) and the Sothern African Development Community (SADC) which all aim to create a seamless trading bloc in which access is duty free.
A raft of new measures, which include the imposition of duty on imported drinks, were among several policy realignments announced by Biti as he moved to protect local manufacturers from a flood of imports.
These measures may not necessarily be in sync with the spirit of COMESA and SADC.
Surprisingly, there were no sector-specific interventions for the embattled textile industry where at least 5 000 jobs have been lost in the past 15 months as a result of cheap imports from mainly China.
While Biti may want to lessen the burden on industry, his biggest challenge remains that of revenue generation. The bloated inclusive administration and its civil service have continued to chew the lion’s share from the little revenue available.
As it is, the inclusive government is budgeting a deficit in the region of 11 percent of the country’s Gross Domestic Product (GDP).
To generate more revenue for the fiscus, Biti is planning to milk the mining sector more. Out of the US$1 billion generated by the mining industry last year, a negligible US$45 million in corporate tax, Value Added Tax (VAT), Pay-As-You-Earn (PAYE) and royalties trickled into the government purse.
About US$650 million worth of mineral sales were reported in the first half of the year but statistics show only US$15 million found its way into State coffers.
According to Biti, this trend is unacceptable.
But even as he navigates through the difficult fiscal terrain where 62 percent of the US$143 million monthly revenue generated in taxes is directed at recurrent expenditure, Biti still saw it fit to forgive tax offences committed during the hyperinflationary era in order for business to start on a new page.
This has come as a major relief to business.
With inflation galloping at unprecedented levels in 2007 and 2008, Zimbabwe’s economy became the victim of underhand dealings, under-invoicing and tax evasion, among other vices, as companies battled to remain afloat. A few companies filed their tax returns at the height of the economic tsunami but merely “complied” out of courtesy as the numbers were grossly underestimated to lessen the tax burden.
Had Biti opted to pursue the outstanding taxes some of the companies could have filed for bankruptcy. The tax amnesty is therefore expected to save billions of United States dollars for industries to channel into their operations.
Biti also took the trouble to relax tax deadlines, which were causing companies serious headaches. Because of the devastating effects of hyperinflation, government had been forced to enforce tight tax remittance requirements with PAYE being remitted three days after the end of each month. VAT had to be remitted within 10 days of collection. Payment of PAYE has now been extended to the 10th and VAT to the 15 of every month.
Under normal circumstances, tampering with tax administration can cause massive upheavals in the ailing government system more so for Zimbabwe which is struggling for revenues to fund social services such as health, education, housing and power generation, which are still in the intensive care.
Government, which estimates it requires US$10 billion to stabilise the economy and rebuild its GDP to the US$9 billion achieved in 1996, is still under tremendous pressure to collect all revenues, as highlighted in the presentation, because the US$810 million in vote of credit that Biti had expected from donors to finance the US$2,2 billion national budget has all but failed to materialise.
In the meantime, the public health delivery system remains dire. At least 500 000 new patients are now in need of State-assisted life prolonging HIV drugs from about 300 000 last year. Power cuts have also become the order of the day in industry with the government admitting it no longer has the capacity to resolve the blackouts.
While economic and social pressures will remain inexorably high in the social cluster, the Finance Minister came up with a stop-gap measure for the power sector. That is the reason why even duty on solar systems, geysers and other energy appliances was scrapped as one of the first interventions targeted at the public.
But Biti failed to consider the predicament of the working class — the masses with the muscle to elect or reject aspiring rulers.
Zimbabwe’s 236 000 civil servants earning about US$165 per month are living on income four times lower than the US$500 breadline.
The trade union movement is riled by this insensitivity. They say the tax-free threshold, at US$175, is too low compared to regional trends.
Zimbabweans are among the most taxed in the world and arguably the least paid as well. New interventions to redress this inequity were therefore highly expected.
“The average minimum wage is US$165 meaning the majority of the country’s workforce is living in dire poverty, the adjustment (from US$160 to US$175) remains a far cry from what the workers were expecting,” Zimbabwe Congress of Trade Unions (ZCTU) secretary general, Wellington Chibebe, said.
“To further subject such an individual to income tax given the fact that they are already barely making ends meet is cruel.
“The ZCTU notes with concern that corporate tax remains unchanged with workers being taxed more than corporates.
“Corporate tax stands at 25 percent while an individual is taxed at a punitive maximum of 35 percent,” complained the trade unionist.
He added: “Companies are taxed on the profits they would have made while workers are taxed on gross earnings. Companies earn, spend and then get taxed. Workers earn, are taxed and then only spend the little that remains.”
Biti appears to be under pressure to balance between the demands of the International Monetary Fund (IMF), which is back in Zimbabwe with its conditionalities and the demands of the restive civil service, not to mention the need to redirect attention to social services.
The IMF withdrew balance of payments support from the country in 1998 citing Zimbabwe’s non-adherence with its economic prescription.
However, the government has, of late, been bending backwards to try and win back IMF’s support, which is considered to be a seal of approval on the country by other international lenders.
Health was the largest beneficiary of recent disbursements contained in the fiscal policy review, with US$127 million going into its coffers.
Other disbursements went to housing, strategic grain reserves purchases, water sanitation, agriculture and education. In all these cases, the money was far below actual requirements due to the liquidity crunch blighting the national economy.
Most of these disbursements were targeted at urban citizens. This means the extent of government interventions could take long for people outside big cities and towns to access.
Most Zimbabweans live on less than US$1 per day, walk long distances to hospitals and clinics because they have no money for transport, or when the money is there, the buses are just not there.
As African Business editor, Anver Versi, puts it in the Pan African magazine’s June edition, development is not development until it percolates right through to the people at the grassroots.
Biti however, believes despite a recent resurgence in inflation that has forced the revision of economic growth targets to 5,4 percent from 7,7 percent, the economy is on track to recovery although the colossal debt overhang remains a thorn in the flesh.
“The debt overhang affects our ability to access a huge part of development financing in Washington and Turin, most of it cheap money.
“It is imperative that we deal with the debt issue,” he said.
But whichever way one looks at it, there is no doubt that Biti had little fiscal space to manoeuvre. What he did last Wednesday is arguably the best any bright finance minister could have done under the circumstances.
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