4.2 THE MILLENNIUM BUDGET: A CRITICAL APPRAISAL
Presented by Dr. Godfrey Kanyenze, ZCTU Economist


• The Global Context
• The African Context
• The Zimbabwean Scenario
• REVIEW OF THE 1999 BUDGET
  • Budget Deficit
  • Public Debt
  • Public Enterprises
• THE 2000 BUDGET
  • Revenue and Expenditure Projections
  • Recurrent Expenditures
  • Public Sector Investment Programme
  • Financing the Budget Deficit
  • Financial Sector Reforms
• TAXATION PROPOSALS
  • Income Tax
  • AIDS Levy
  • Export Incentives
  • Growth Point Status for Small Towns
• SUMMARY

4.2 THE MILLENNIUM BUDGET: A CRITICAL APPRAISAL
Presented by Dr. Godfrey Kanyenze, ZCTU Economist

In any context, a national budget has to be:

• a part of an overall development context;

• a short-term instrument for operationalising medium or long-term development plans; and

• a mechanism for the realisation of national development objectives.

In the context of the Zimbabwean economy the budget is expected to address the following:

• improved conditions for economic and employment growth;

• sustainable macro-economic and sectoral policies and programmes;

• short-term imperatives for debt alleviation, inflation-containment and macro-economic stability;

• HIV/AIDS, social exclusion (e.g. need for land reform) and poverty reduction;

• tax systems that are adequate, bouyant, fair, elastic and growth-oriented;

• a public finance system that is equitable, fair and transparent;

• growing incomes, price stability,

• reduction of inequalities in access to means of production;

• savings and investment growth;

• an efficiently functioning banking and finance industry;

• adequate health and education; and

• structural imbalances, dualities and enclavities in the economy.

The Global Context

This millennium budget comes at a time when the world economy is experiencing favourable fortunes as shown by the statistics below:

• Global economic growth is expected to accelerate from an annual rate of real growth of 2.5% in 1998 to 2.8% in 1999 and 3.4% by year 2000;

• The volume of world trade is projected to grow from 3.3% in 1998 to 3.8% in 1999 and 5.8% by year 2000;

• World inflation is on a downward trend. Global inflation is projected at 1.7% by year 2000, while that for developing countries is projected to decline to 7% (from 52% in 1994) by the same period;

• For countries in transition, the rate of inflation has declined sharply from a high of 646% in 1992 to 21% by 1998.

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The African Context

• Even Africa is also experiencing similar good economic fortunes. Whereas real output grew at an annual average rate of 1.2% during the period 1991-94, it accelerated to an average annual rate of growth of 3.9% during the period 1995-98;

• Real economic growth for Africa is expected to grow from 2.8% in 1999 to 4.9% by year 2000. On the basis of this up-beat performance, the World Bank observes that: "For the fourth year in a row, most African economies continued to grow, despite the slowdown in world trade and re-emergence of civil conflict in several countries;

• First round effects of the Asian crisis were more muted on the continent than elsewhere, except for South Africa," (Annual Report, 1999: 30).

The Zimbabwean Scenario

• The economy is in a crisis; real economic growth continues to be erratic. Growth of real output decelerated from an annual rate of 7% in 1996 to 2% in 1997, 1.5% in 1998 and an estimated 1.2% by 1999.

• Comparing the period before ESAP to that during the economic reforms, annual average growth decelerated from 4% during the period 1986-90 to 1.5% during the reform period (1991-99).

• Inflation, which had been reduced from 42.1% in 1992 to 18.8% by 1997 rose to 31.7% in 1998 and the current historic high level of 69.7% (as at September 1999). High and rising inflation has largely been attributed to imported inflation arising from exchange rate depreciation and over-reliance on domestic borrowing to finance the high budget deficit. The resolution to print money to finance the deficit in recent years has also contributed to high inflation.

• The restrictive monetary policies have failed to sterilise the growth in money supply, owing largely to the high level of domestic borrowing to finance the budget deficit.

• Money supply has increased from 18.2% in June 1998 to 44.1% by June 1999 (the target was 18.9%). To restrain growth of money supply, government adopted tight monetary policies, with the bank rate being hiked from 39.5% in 1999 to 56.7% by August of that year. During the same period, statutory reserve requirements were increased from 25% to 30%. This resulted in punitive interest rates, with the commercial lending rates rising from 40.5% at the beginning of the year to the current levels in excess of 60%. At such rates, borrowing is no longer a viable option.

• Balance of payments problems that have bedevilled the economy since the last quarter of 1997 persist, inflation remains high, necessitating prohibitively high levels of interest rates.

• Unemployment is high, at more than 35%.

• Poverty is on the increase. A recent study by the Central Statistical Office (CSO) (1998) suggests that the incidence of poverty in Zimbabwe has increased from 40.4% in 1990/91 to 63.3% by 1995/96. The incidence of extreme poverty (households that cannot meet basic food requirements) increased from 16.7% to 35.7% during the respective periods.

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• Real wages have collapsed. Workers and households can no longer afford basic means and life is harsh. People are struggling for additional incomes through informal sector activities.

• Basic subsistence has been affected especially with regards to:
  1. Food;
  2. Accommodation;
  3. Education;
  4. Transport;
  5. Health; where a significant part of the health burden is being borne by workers and households through home based care for the sick. Households are playing an important role caring for the sick, buying medication, burying the dead and caring for orphans. Households need every income they can get to help in the fight against AIDS.

By way of summary, it can be concluded that in the context of a sustained economic recovery in Africa, the poor performance of the Zimbabwe economy suggests that the causes for the economic crisis are largely home grown (self-inflicted).

REVIEW OF THE 1999 BUDGET

Budget Deficit

• Whereas the budget deficit was reduced to 6.4% of GDP in the 1997/98 budget, it has deteriorated to a level representing 9% of GDP as at August 1999 ($13 billion when grants are excluded) against a target level of 5%.

• While government expects the budget deficit to fall to 7.5% of GDP during the current fiscal period, the fact that supplementary votes are still to be tabled implies that this may not be achieved.

• With net foreign financing falling short of target by $6.3 billion as at end of August 1999, owing mainly to delay and non-disbursement of donor funds, government raised $15.5 billion (against a target of $4.4 billion) from the domestic market. With the current high interest rates, this was done at a high cost.

Public Debt

As a result of extensive borrowings, Zimbabwe is in the throes of a debt trap, and the following statistics indicate that:

• As at end of 1998, the country's external debt amounted to $90 billion, while the domestic debt stood at $43 billion, resulting in a total debt of $133 billion.

• With an estimated 44% of total expenditure or 14% of GDP going towards interest repayments alone, substantial resources are tied up on servicing the debt.

• Domestic borrowing crowds out private sector investment. The ZIMPREST document suggests that 37 cents out of every dollar raised in revenue is going towards servicing the national debt.

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• As at end of June 1999, government debt amounted to $146 billion (67.7% of GDP). At current interest rates in excess of 60%, the servicing of the domestic debt is now problematic. The current budget expects the domestic interest bill to have risen beyond the initial estimate of $10 billion to $21.6 billion (37% of expected revenues).

• According to the budget statement, this will be addressed through „stringent budget discipline" and use of donor funds and the proceeds of privatisation to retire domestic debt.

This scenario implies that:

• Recourse to „stringent budget discipline" has become a catch-word in most recent budgets. However, rhetoric runs ahead of actual practice in these matters. Promises to provide compensation for the atrocities of the 1980s, to double salaries for doctors and improve working conditions and remuneration in the civil service by January 2000 bear evidence to this. Such promises, against a background of lack of funds shows that political expediency continues to overrun economic imperatives. This is what has created the current economic crisis, where unbudgeted payments to ex-combatants, the cost of involvement in the DRC war, among others, have strained the country’s resources and increased public debt.

• The real issues regarding restructuring of government to remove duplication and waste, by for instance, reducing the number of Ministries, abolishing unnecessary posts such as those for governors, deputy Ministers and so on do not seem to be considered as quite relevant.

Public Enterprises

The performance of public enterprises remains a cause for concern. Table 4.2 below summarises the performance of the eight major public enterprises during 1997/98.

• Clearly, the major loss makers are NOCZIM ($5.5 billion), ZESA ($2.2 billion), CSC ($900.6 million), NRZ ($703.1 million) and ZISCO ($688.4 million).

• According to the Government, the reasons for the dismal performance include "management inefficiencies, exchange rate depreciation, inadequate pricing policies, inappropriate investments and generally the unfavourable macroeconomic environment," (1998: 5).

• Corruption can also be added to the list.

• By end of June 1999, the major public enterprises had already accumulated losses amounting to $14.8 billion.

Table 4.2
Performance of the Eight Major Public Enterprises, 1997/98 (Z$ million)

Source: Ministry of Finance: Treasury Monthly Bulletin, Dec. 1998: 5.

• To arrest this situation, the budget statement indicates that a Cabinet Committee, chaired by the Vice President has recently been created to "monitor and supervise the performance of parastatals with a view to restoring financial viability to this sector," (page 13). In addition, the budget statement mentions that the Privatisation Agency will speed up privatisation, observing that over $5 billion will be raised from the accelerated sale of public enterprises and government shares over the next three years.

Following are the implications:

• Past experiences have demonstrated that the use of Committees or Commissions to deal with specific problems is more of a public relations exercise than a serious attempt to resolve problems. This is particularly so where such committees are wholly formed by Government. Even those with private sector involvement have been interfered with.

• The issue of privatisation should not be simply reduced to an accounting exercise based on the need to balance books. Thus, on the basis of an accounting exercise, the budget statement regards accelerated privatisation as the solution to the problem. The issue that concerns civil society in Zimbabwe is not so much the pace of privatisation, but rather the lack of transparency and the corruption that surrounds it. The issue of the Hwange thermal station, the privatisation/commercialisation of the Zimbabwe Broadcasting Corporation (ZBC), the telecommunications sector, among others, are recent examples of corrupt practices around privatisation. What is required more urgently is a more transparent process wherein civil society is also involved.

• The budget statement rightly applauds the establishment of the board of the National Investment Trust (NIT). What is baffling is the budget statement that "I am encouraged by the pace of indigenisation in sectors such as banking, insurance, transport, agriculture and construction. It is my hope that NIT will build on this momentum," (page 14).

• Indigenisation in Zimbabwe has become synonymous with the promotion of a certain elite. In this regard, there is nothing encouraging about this development. If anything, NIT should dismantle this and establish objective criteria for indigenisation. It is necessary to mention that those blacks like Nigel Chanakira, Strive Masiyiwa, among others who have made it in these sectors, have done so without any assistance or incentives from the State. In fact they had to overcome insurmountable hurdles, and in some instances the State tried to undermine their endeavours.

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THE 2000 BUDGET

Revenue and Expenditure Projections

In the 2000 budget, government expects to raise revenues to the tune of $87.3 billion, and anticipates expenditures and net lending to amount to $98.7 billion. This is expected to yield a lower budget deficit of $11.4 billion (3.8% of GDP). This low budget deficit is expected to derive from limiting borrowing to concessionary financing of the capital budget only, with recurrent expenditures met from the regular revenues. This is expected to result in a shift in expenditures towards social delivery over the next three years.

However, past experience suggests such expectations amount to wishful thinking. Already, the President has promised to compensate victims of the Gukurahundi era and to substantially raise salaries in the civil service. Such unbudgeted for items, especially in the context of up-coming elections, will result in a higher budget deficit than planned for. Even without the unbudgeted items, it is still inconceivable how the deficit can be reduced in one fiscal period from 9% to 3.8% of GDP. This is unrealistic, especially in the context of elections in the year 2000. Most unfortunately, the Minister even warned Parliamentarians that he will soon be coming to Parliament with supplementary votes for 1999, when he was already presenting estimates of expenditure and revenues for the year 2000, raising concern about planning on the part of the Ministry.

Recurrent Expenditures

• Recurrent expenditures have been budgeted at $90.7 billion (inclusive of the $33.6 billion for Constitutional and Statutory obligations). Of this amount, 19% goes to the two Ministries of Education, with 14% going towards wages, salaries and allowances.

• As has become the norm, the defense budget remains a cause for concern. With an allocation of $8.2 billion, it remains the second largest vote. Sixty-eight percent of the vote is for wages and salaries. The vote for defence is almost double that for 1999.

• Health was allocated $6 billion, against initial demands from the Ministry for $10 billion. Key Ministries were allocated paltry votes with $1.8 billion for Lands and Agriculture, $3.7 billion for Home Affairs, $1.8 billion for Public Service, Labour and Social Welfare.

• Recurrent expenditures continue to dominate the budget with 34% of total expenditures going to the wage bill, 29% being interest repayment, 5% pensions, 8% being grants and transfers. Wages and interest repayments account for 63% of the total votes, implying there is very little room for manoeuvre within the current structure of expenditures.

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Public Sector Investment Programme

The capital budget was allocated only $8 billion, a nominal increase of 20% from the 1999 budget. Of the total, $1.9 billion is expected from external resources. The allocation for the capital budget amounts to only 8% of the total votes, a decline from the 11% of 1999. Only $200 million was allocated for the land acquisition programme, $75.9 million to AGRITEX and $16.4 million to ARDA.

Financing the Budget Deficit

The budget deficit of $11.4 billion (3.8% of GDP) will be financed as follows: $1.5 billion will be raised from the sale of assets, $2.9 billion from external grants and the balance from the issuance of short to medium term paper on the domestic market. Again, the heavy reliance of the domestic market will continue to fuel inflationary pressures and, in the context of high interest rates, will be at high cost.

Financial Sector Reforms

The budget statement describes the financial sector as "...sound and vibrant," (page 27). This is not very accurate given the collapse of the United Merchant Bank, problems with other finance houses such as the Zimbabwe Building Society, which exposed the laxity in supervising the sector. Many banks are saddled with bad loans, involving top politicians and their „kith and kin". The situation is clearly far from „sound and vibrant."

TAXATION PROPOSALS

Income Tax

The budget proposes to alter tax bands such that tax payment starts with those earning $30,000 and end at $720,000 per annum. At the top level, income tax will be charged at 40%, plus a surcharge of 25% with effect from 1st January 2000. The statement also proposes to increase the tax-free bonus from $2,000 to $3,000 as from 1 November 1999. Additional tax concessions were provided for the elderly, whose credits were increased from $2,000 to $3,000. The credits for disabled and blind persons were also increased from $1,500 to $3,000 with effect from 1 January 2000. Furthermore, the amount deductible on pension receipts by pensioners was increased for pensioners above 60 years from $3,000 to $12,000 with effect from the same date. Tax for exemption for retrenchment benefits was also increased from $10,000 to $20,000.

Though welcome, the tax concessions are very marginal. For instance, ZCTU has argued that those who earn below the Poverty Datum Line (PDL) ($5,200 per month as at June 1999) should not pay taxes, and yet the threshold was raised to only those earning below $2,500 per month. The increase in stamp duty on ATM and cheque transactions from 15

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cents to 80 cents with effect from 1 January will further erode purchasing power. Why should people be penalised for accessing their hard earned and dwindling resources? The introduction of ad volorem duty on diesel (25%), leaded petrol (40%), unleaded petrol (45%), JET A1 (40%) and illuminating paraffin (20%), will further fuel inflation and erode buying power. These measures are regressive because they impact on all social classes.

AIDS Levy

In the budget, a new AIDS levy was introduced with effect from 1 January 2000. The AIDS levy will be based on 3% of PAYE and corporate tax. The Fund is proposed to be used to finance AIDS-related programmes. This levy is the most controversial item introduced in the 2000 budget. Like its predecessors, (such as the Drought and later Development Levy), there is no rationale for it. AIDS issues should be handled under the normal budgetary allocations. Creating special funds, without consultations, is extremely provocative. It was never properly explained how the Development Levy was used. In the absence of an accountable and transparent process, such Special Funds have been rejected in the past and there is therefore no basis for accepting them now. In the context of a government with a high propensity for unbudgeted for expenditures, where funds earmarked for the National Investment Trust (NIT) ended up being used for other things, workers will not accept the AIDS levy. They cannot afford to continue bearing a disproportionate burden of adjustment.

Export Incentives

New export incentives were introduced to replace those put in place in the 1999 budget. A manufacturer who increases export revenue by 20% during the previous year in terms of a recognisable hard currency will be taxed at 10 percentage points below the prevailing level of tax with effect from 1 January 2000.

This issue demonstrates the problems regarding lack of consultations and solid research before introducing measures in the budget. The incentives in the 1999 budget were difficult to implement, and now they are being replaced. This could have been avoided through thorough consultations and studies. However, their impact may not be substantial given that it is not incentives alone that will drive exports. A culture of exporting needs to be inculcated, new competitive capacities such as marketing skills, after-sale services, etc need to be developed. For this reason, ZCTU has always criticised the under capitalisation of ZIMTRADE.

Growth Point Status for Small Towns

• A number of small towns (Chinhoyi, Karoi, Chivhu, Marondera, Bindura, Mount Darwin, Mvurwi, Zvishavane, Mashava, Masvingo, Chiredzi, Hippo Valley, Gwanda, Plumtree, Nyanga, Rusape, Hwange, Lupane and Mhangura) have been accorded growth point status for tax purposes with effect from 1 January 2000. The reason given for doing so is that, "...most small towns have been receiving very little

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estment due to the unfavourable macro-economic environment," (page 35 of the budget document). If the problem is the absence of macroeconomic stability, the solution lies in stabilising the economy, and not down-grading these small towns. It is doubtful whether investors will „flood into" these towns because they now have growth point status, especially given that the growth points themselves are experiencing similar problems, if not worse. No study was undertaken and stakeholders were not consulted over this issue

SUMMARY

• The „millennium budget" has now been presented to Parliament. Like past budgets, there is no guiding vision that informs the budget, reducing it to a „groping in the dark" exercise. The budget has no stabilisation policy, no strategy is proffered to deal with inflation, other than merely acknowledging the problem and its implications.

• Nothing in the budget addresses the immediate challenges regarding land reform, there is no mention of the Poverty Alleviation Action Programme (PAAP), no strategy and resources are devoted to addressing unemployment and insufficient resources are allocated to the social sector. Instead, the budget introduces non-transparent, non-accountable Funds such as the AIDS Levy. Basically, the budget offers no hope for addressing the burning social and economic concerns of the people.

• The budgetary process continued with the traditional trend of being non-transparent, secretive and elitist. For instance, at a time when Zimbabweans wanted clarification regarding how much is being spent in the DRC war, the issue is not even mentioned. The nature and extent of supplementary budgetary allocations brought before Parliament at a later date confirms the non-transparent and non-accountable nature of the budgetary process. Shying away from addressing these urgent and pertinent issues will not make them disappear. On the contrary, the demands will certainly grow louder and the voices will become more vociferous.

• The budget is clearly a „do nothing" budget, which is not sensitive to the scale of the crisis afflicting the economy. Neither does government admit to have made mistakes of omission and commission. That is brought home painfully by the fact that most African countries are currently experiencing an economic recovery that is eluding Zimbabwe.

• An alternative budgetary process should begin by identifying key priorities, and on the basis of this, key operational issues such as the structure of government (how many Ministries and which ones are required), what posts are critical (do we need governors, deputy Ministers, Executive Mayors, Senior Ministers, Ministers Without (real) Portfolios, among others.

• As the situation stands, the budget issues are obviously beyond a Minister of Finance. The critical budgetary issues raised above imply that these should be addressed at a political level. Indeed, these issues have been raised in the consultative meetings that have been organised by the ZCTU and other bodies. The tendency to accommodate unbudgeted for items makes the budgetary process a futile and unpredictable exercise. In the final analysis, it is used as a vote-buying tool.

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• In this context, the „millennium budget" is as flat as it is directionless, ineffective and sterile in its failure to address real issues facing the people. The apparent lack of leadership, as demonstrated in the budget, confirms the observation that the Zimbabwean economy is on a „free fall". It is like a ship without a radar in a night without a star.

There was need to use the objectives of ZIMPREST as the benchmarks for the budget, since the budget marks the final phase of ZIMPREST. It would have helped to undertake a review of ZIMPREST to date; establish what has been done, and what remains to be done. This analysis would help identify weaknesses the budget has to address and the issues it has to focus on.

Similarly, no attempt is made to relate the 2000 budget to the desired outcomes under Vision 2020 and Government's various sectoral policy documents on indigenisation, employment, population, housing, industrialisation, land reform, poverty eradication, gender, social policy (mainly health and education among many others).

Furthermore, given the rhetoric about „national ownership" of development programmes, „people-driven strategies", human-centred development etc. (see ZIMPREST document), it would appear necessary to ensure that the very instrument of achieving these objectives (in this case the budget) is itself subject to the control and ownership of the people. However, the „millennium budget", like its predecessors, continues to be shrouded in secrecy. Copies of the budget statement and its accompanying documents were not available in sufficient numbers for the few organisations that queue every year to obtain copies of this „top-secret" document. Fewer documents were available this year and this really did not help. It would appear the relevant authorities consider it a favour to make these documents available.

There is no reference to most of the above policy concerns, let alone their adoption as guiding principles for the budgets and the allocation of votes. These are issues that could take pride of first place in any budget, and in fact the budget should be analysed on the basis of the extent to which it addresses these policy issues.