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Parliamentary Roundup Bulletin No. 23 – 2011
Southern African Parliamentary Support Trust
July 27, 2011

Introduction

The Speaker of the House of Assembly, Hon. Lovemore Moyo, made a strong press statement yesterday regarding disruptions of public hearings on the Zimbabwe Human Rights Commission Bill by rowdy political elements. The presentation by the Minister of Finance Hon. Tendai Biti on his Mid-Term Fiscal Policy Review Statement (MTFPRS) was the major highlight of the plenary business in the House of Assembly yesterday. A full summary of both events is given below, together with a snap commentary on the MTFPRS.

Press Statement by the Speaker of the House of Assembly on the Recent Public Hearings Disturbances

The Speaker of the House of Assembly, Hon. Lovemore Moyo, made a scathing press statement yesterday regarding disruptions of public hearings on the Zimbabwe Human Rights Commission Bill by rowdy political elements. He said “disruption of the proceedings of the Portfolio Committee on Justice, Legal Affairs, Constitutional and Parliamentary Affairs and the Thematic Committee on Human Rights joint inquiry of the public views and inputs on the Zimbabwe Human Rights Commission Bill are a serious cause for concern”.

Disruptions of the joint-committee’s public hearings in Chinhoyi, Masvingo and Mutare were repeated inside parliament building on Saturday 23 July 2011. The Member of Parliament for Hwange Central Constituency, Hon. Brian Tshuma and independent journalists were assaulted by the mob which had forced its way into the parliament building. In his condemnation of this act, the Speaker said “this act is unprecedented both in terms of its primitiveness and contempt for the authority and mandate of Parliament, as well as in its violation of the Privileges, Immunities and Powers of Parliament Act and the related Standing Orders of Parliament”. In particular, the Speaker pointed out that it was now public knowledge that these malcontents were “identified as ZANU PF activists who were dropped off at parliament …”

The Speaker also expressed his dismay at the apparent lack of security “to such an extent that honourable Members of Parliament are beaten up and harassed at their own workplace”. Thus, he called upon the law enforcement agents to “move with speed” and prosecute “the sponsors and the perpetrators of these crimes whose identities are known”. Hon. Moyo also urged members of the public that if they had some grievances in the manner in which parliament was conducting its business, to use civilized ways of channeling their complaints to parliamentary authorities.

The Speaker called upon leaders of the three main political parties to “rise above their party differences and give leadership in order to allow parliament to do its work uninterrupted”.

House of Assembly Plenary

Presentation of the Mid-Term Fiscal Policy Review Statement

The Minister of Finance, Hon T. Biti (MP), presented the Mid Year Fiscal Policy Review (MYFPR) to Parliament of Zimbabwe on the 26th of July 2011. The review is presented in line with the Public Finance Management Act [Chapter 22; 19], Section 7, which obligates the Minister to update Parliament regularly, on the state of the economy and government accounts for transparency. The Review provides a half year account of fiscal performance (expenditure and revenues), of government, and the outlook for the remainder of 2011.

The striking thing about the 2011 MYFR is that it marks a departure from tradition that had characterised Zimbabwe’s fiscal planning landscape under an unstable macroeconomic environment, which had accounted for a graduation of this into a mini Budget. It is purely a technical update on the budgetary performance for the year to June 30th, whilst giving direction on fiscal performance for the balance of the year 2011. It is thus a re-focused output with no major policy proposals apart from marginal movement on revenue measures.

2011 Mid Year Fiscal Policy Review Highlights

• GDP growth projections for 2011 unchanged at 9.3% buoyed by the strong performance of the agriculture and mining sectors;
• Budget maintained at original target of US$2.746 billion;
• No Supplementary Budget, until 3rd Quarter, once all cash flows and economic prospects for 2011 have been accounted for;
• Government introduces Budget Strategy Paper (BSP), to guide 2012 Budget and indicative fiscal planning for 2013, 2014 to buttress STERP, and MTP;
• Government likely to incur budget deficit of US$700 million owing to the civil servants salary hike;
• Multiple currency to run until 2015, whilst feasible currency regimes are explored;
• External Debt remains high at over US$7 billion or 170% of GDP;
• Zimbabwe remains the most heavily taxed nation in Sub - Saharan Africa (SSA) absorbing 30% of GDP, in 2010, against South Africa 27%, Kenya, 23%, Zambia, 17%, Mozambique 18%, and Uganda 13%;
• Employment Costs still account for a significant share of recurrent expenses at 61% of original US$2.746 billion envelope;
• Social service delivery, and Social Protection 5% and 1% respectively, with agriculture the economy’s backbone relegated to a percentage point, reflecting skewed priorities;
• Inflation to be kept in check and projected to close year at 4.5%;
• Customs duty free policy on basic goods reviewed with maize-meal now dutiable at 10%, and cooking oil at 15% on account of improved local supply capacity;
• Duty on raw materials and capital goods suspended to allow industry to re- tool, and restore competitiveness;

Critical Analysis of the 2011 MYPF:

Macroeconomic Projections: GDP growth has been bullish and though conservatively maintained at original Budget target of 9.3%. The growth is premised on strong recovery prospects in the mining sector 44%, and agriculture 19.3% that benefitted from government support. Agriculture prospects in the medium term have been brightened by the strong 2010 output performance that accounted for an upturn in maize of 9%, tobacco 44%, finger millet 34%, and soya beans, 20%. Modest growth is still anticipated in manufacturing 5.7%, tourism 6%, and transport 5.5%, whilst negligible recovery is focast for construction at 1%, and 2% for finance.

These sector growth figures point to a relatively fragile recovery path, with liquidity being the major constraint on the manufacturing, finance, and construction sectors. On balance the 9.3% GDP projection is realistic, particularly given that we are growing from a low base, having shed 40% of our national income during the recession period of 2000-2008.

Inflationary pressures seem under check, with year-on-year price levels thawing step-wise from 3.5% in January, 3% in February, 2.7% in March, and 2.5% in May, though edging up marginally to 2.9% in June. This remains in line with SADC single digit levels, with Zimbabwe’s inflation profile below the regional average for May of 7%. However, there is need to maintain caution, as the inflation outlook remains under pressure from the possible direction of the South African Rand, given that 60% of Zimbabwe’s trade and production function is linked to this currency.

Developments in the USA, particularly on the Debt plan, will also have a bearing on the stability of the US$, with both short and medium term impacts on prices. Crude oil prices have since breached the US$100 /barrel, on the back of the Middle East political tensions, (Libya), evoking possible challenges on price levels for net oil exporting countries such as Zimbabwe.

Budget performance Review: -

The 2011 Budget envelope of US$2.746 has been retained, particularly given a mixed performance profile for revenue collections for the year to June 30th. Original revenue monthly collections that had been set at US$230 million, have only been exceeded in June at US$277,3 million, whilst the rest of the months have performed below par, thereby denting the near term revenue outlook. By the 30th of June, 2011, government had spent 41.5% of the budget that is US$1.14 billion, against cumulative revenues of US$1.352 billion, implying a spending within fiscal capacity outturn for the period. During the period Diamond sales accounted for US$313.5 million, of which government sales accounted for 56% (US$174.2 million), whilst the balance was accounted for by the private sector.

Fiscal pressures remain abound, with the civil service wage bill being a major risk on fiscal performance in the medium to long term, particularly given a shrinking tax base, and an already heavily taxed society. Employment costs have risen steeply by 15%, from US$120 million to US$162 million monthly in July, obligating government to seek ways of raising the additional cash. These developments will thus stretch the employment costs for the year to December 2011, to US$1.8 billion, or a 29% spike from an original target of US$1.4 billion. This will push the proportion of employment costs to 66% of budget, from an original 61%, a figure that was already high, and unsustainable.

This is not desirable in development economics as it tends to crowd out meaningful investment capital, as it builds a consumptive and inflationary mode in public finance, hence compromising social service delivery and social protection expenditures, priority areas for restoring social infrastructure that was eroded during the crisis period of 2000-2008.

These fiscal pressures thus make it inevitable for the Minister to table a Supplementary Budget during the 3rd quarter of 2011. Revenue sources and options to fund these possible budgetary needs are limited, given that the tax burden is already high, and capacity utilisation across the economy is still constrained by liquidity challenges, making the short – medium term fiscal outlook gloomy. The Budget deficit has thus been revised upwards from US$500 million to US$700 million in anticipation of these unforeseen expenditures and budgetary pressures. It is also notable, that funding employment costs from revenue windfalls such as the diamond sales are unsustainable as they are susceptible to volatility, particularly given that the mining sector is still facing viability problems, and failing to attract fresh capital. This is likely to create a credibility crisis for government, unless more durable sources of funding are identified, and civil service rationalisation is implemented to contain recurrent expenses in respect of salaries and wages.

Introduction of a Budget Strategy Paper (BSP):

Government will commencing 2012 prepare a Budget Strategy paper to guide budgeting for the forthcoming year (2012), whilst providing indicative fiscal priorities for 2013 and 2014. This is a welcome fiscal planning tool that will give fiscal planning a medium-term perspective, and hence lock in credibility in public finance management.

This is in line with international best practices, and in Sub-Saharan Africa (SSA), countries like South Africa, Malawi, Uganda, Zambia, Ghana, and Namibia have such approaches to national budgeting. Some countries assign the name Budget Policy Paper, or Medium Term and Expenditure and Fiscal Framework (MTEF). It will make the budget a more predictable planning tool, and hence create a platform for an all inclusive and participatory budget framework in Zimbabwe, a major pillar for building a durable economic governance and democratic society.

Tax Policies and Measures:

The Minister introduced marginal measures to improve industry capacity utilisation. This year he did not come up with tax relief measures for workers, pointing to the re-focus in the MYFPR that would relegate such significant measures to the BSP, and the 2012 Budget formulation. The following notable measures were introduced:

Restoration of duty on selected basic goods:

Guided by improving domestic business conditions and an improvement in supply capacity, the Minister has restored duty on maize-meal 10%, cooking oil 15%, whilst maintaining a duty free regime for rice, salt, and flour. The improved maize and cereals crop for 2010, and the more than 60% retail shop restocking levels for maize meal and cooking oil from local brand sources could have driven this decision. This is most welcome, given that it will boost the supply chain from the farmers all the way through to manufacturing, and hence restore viability in the food stuffs sub-sector.

Duty free importation of raw materials and capital goods: Government has pledged to continue consulting on rationalising the tariff regime with a view to improving the costs of production, particularly given the high level of de -industrialisation that the economy experienced in that last decade. Currently a 5-10% threshold for duty has been maintained for capital raw materials and capital goods respectively, to encourage domestic production of raw materials, and capital goods, as well as encouraging re-tooling for industry. Industry has thus been invited to submit their proposals through the BSP for incorporation into the 2012 Budget, as efforts are maintained to improve the competiveness of local enterprise, given the strong prospects for a visible stabilisation in the domestic economy.

Protective duty for food processing sub sector:

The Minister has restored protection to this sector, whose value chain tends to account for a broad based production framework, cutting across horticulture, small scale dairy, and cereal production. It will thus have far reaching impacts on restoring farming in the medium to long term. Duties have thus been pegged at 25%, from the previous duty free regime. One hopes this give consumers the choice to once again switch to local traditional brands.

Duty on agricultural equipment:

Government has restored duty on agricultural equipment to improve local production. The suspension had been premised on the need to recapitalise the farming community. Duty has been pegged within a range of 5-15% for equipment.

Duty free regime for inputs imported for agriculture equipment manufacture:

At the same time government has also reduced the duty on inputs used to manufacture agriculture equipment, such as steel, and bolts among other items. Most of these are used in the manufacture of ploughs and harrows among other agro tools and equipment. Duty has been pegged within a wide range of 5-15% from a previous range of 15-25%, implying a marked reduction in production costs. This is likely to boost local production, and translate into lower prices for the equipment.

Duty on textiles, shoes, and electrical goods:

Government has introduced duty on clothing and textiles to stem the huge influx of second hand clothing. The measure which will also affect foot wear and leather apparel, will help restore some measure of protection to these strategic sectors which accounted for at least 160 000 employees during the pre Economic Structural Adjustment Phase of the early 1990s. The supply chain for these subsectors will also bring back on stream the cotton farmers, and cattle ranching, as key sources of feed stock, hence shoring up agricultural production.

Duty-free import for pre-paid electricity meters; with effect from 1 September, 2011 all pre paid electricity metres will be duty free. This is meant to help ZESA rollout an ambitious energy demand management programme to contain power outages in the country. If well implemented this can be an effective demand management tool that could rationalise use and availability of electricity in the country. What is important is that this will only address the demand side of energy, and hence making it imperative for ZESA to work towards more durable strategies to improve electricity generation, a major prerequisite for economic recovery, and eventual growth.

Medium- to long-term Economic Outlook

On balance this is good MYFPR which clearly details the budgetary performance for the year to June 30th, and outlook for the rest of the year. The macroeconomic projections of a 9% GDP that have been maintained are realistic given the limited space for a major rebound in industrial production, in the wake of a biting liquidity crunch. The maintenance of the multi - currency regime until 2015 is welcome, as it provides business with a reasonable latitude or time-horizon to plan in the medium term whilst a lasting solution is being explored. This will thus keep a check on inflationary pressures in the medium to long term.

Budgetary performance is on track, though likely to be derailed by the unbudgeted for salary hikes of July, 2011, that are likely to stretch targets by at least US$400 million for the year to December 2011. There is little room to manoeuvre on the revenue side, given a high tax burden of 30% of GDP, this then calls for a major rationalisation of government recurrent expenses. Salaries are taking up 65% of the US$2.746 billion budget, and this is unsustainable for a country with such a GDP. There is need for government to exercise caution on funding salaries from windfall revenues that they could instead use to build reserves initially, whilst gauging their reliability in the medium to long term. This will thus remain the major fiscal risk in 2011 and beyond, unless the economy grows phenomenally to absorb the costs, which are already diverting resources from key growth drivers, such as capital development, social infrastructure, and food security.

The Budget Strategy Paper for 2012 will be a major instrument to improve fiscal planning, and hence guide government planning in the medium to long term. It also allows government to open up the budget process, and hence ensure a broad based and participatory economic governance regime in Zimbabwe. This is in line with international best practices in public finance management, and hence benchmarks the country against its regional peers, e.g. SA, Namibia, Zambia, among others.

Lastly, the measures to protect the local food, textiles, footwear, and agricultural equipment sector are positive developments that will have far reaching impacts on shoring up production, and employment throughout the value chains for those sub -sectors. The reduction of duty on raw materials and capitals goods, as well as for inputs meant for the agricultural equipment sector will also boost both industry capacity, as well as production of agricultural equipment. The cumulative impact of these initiatives will build a strong economic base that will anchor economic recovery and eventual growth going forward.

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