TREASURY’S proposals to widen the country’s revenue base through a raft of taxes will stoke inflation and push millions into poverty, a post-Budget research note by a Harare-based firm has shown.
Zimbabwe is battling high inflation, a weakening domestic currency and astronomical levels of unemployment at a time the government has weak safety nets to cushion the vulnerable.
Experts say structural weakness, policy uncertainty, corruption and international isolation have inhibited the Zimbabwean economy from performing adequately since the early 2000s, resulting in episodes of economic recessions.
While the 2009-12 period witnessed a recovery in the economy, characterised by a revival in foreign investment and a multicurrency regime, political fragility has remained a talking point.
On 30 November 2023, Finance, Economic Development and Investment Promotion minister Mthuli Ncube, presented the 2024 Zimbabwe National Budget Statement under the theme “Consolidating Economic Transformation”.
While the budget was presented in local currency (ZWL), the minister highlighted that about 60% of the budget is US dollar-linked, while foreign currency inflows into the consolidated revenue fund account constituted 48% of total revenue.
According to a post-Budget paper done by Mark & Associates Consulting Group (M&A) it would have been prudent for the Finance minister to present the Budget in hard currency.
Mark & Associates Consulting Group (M&A) is a strategic advisory firm focused on critical issues at the centre of economics, business, politics, and society.
“A strategy that is hinged on an aggressive and accelerated tax collection approach is tantamount to a toothpaste tube scenario,” M&A says.
“The toothpaste tube theory states that increasing pressure eventually forces some sort of release, just as when one squeezes a toothpaste tube and toothpaste comes out. The theory shows that pressure that has built up in some finite bounded system needs to be released somewhere or the system will break. In the context of the fiscal policy stance in Zimbabwe that is largely hinged on taxing individuals, households, and businesses, we cite that general disposable incomes in the broader economy will shrink significantly.”
The net-effect of such a policy measure, M&A says, is that aggregate demand falls, thereby constraining the growth of gross domestic product.
“This implies that the Government of Zimbabwe economic growth expectation of +3.5% in 2024 might be overly bullish,” the report says.
“Another important dynamic is that industries in Zimbabwe such as agriculture, mining and manufacturing are capital-hungry and require liquidity to stimulate productivity. Capital is one of the key catalysts for economic growth and development. There is need to focus on boosting productivity through drivers that lead to economic growth. Overall, pressure will come in the form of (i) cost-push inflation, (ii) growing poverty levels, (iii) an explosion of the informal economy, (iv) widespread economic inequality, and (v) a mass exodus of skilled labour from Zimbabwe (brain-drain).”
The research note further states that the new taxes and increases have a cost-push inflation effect given that food producers, clothing retailers as well as other economic agents will pass on the increase in costs to consumers through price increases.
“We expect prices of basic goods to head northwards and a significant rise in the cost of living,” M&A says.
“We note that Zimbabwe remains vulnerable to cases of extreme poverty given (i) the risk of a droughts, (ii) limited social safety nets, (iii) dependence on volatile primary commodities and (iv) the lack of adequate financial reserves. Increased operating costs and shrinking consumer demand for business implies the emergence of new risks such as (i) company closures and (ii) increased levels of formal unemployment. As a result, we expect the emergence of a ‘new poor’. This new class is different from the existing poor. The new poor are mostly based in urban areas and employed in the informal economy. They also depend on remittances for food, healthcare, and basic needs.”