ZIMBABWE’S Treasury has been caught between a rock and a hard place after the recently introduced tax measures triggered a new wave of price increases while weakening consumer spending, experts have warned.
BERNARD MPOFU
Finance minister Mthuli Ncube introduced new taxes to widen the debt-ridden government’s revenue base despite warnings by economic analysts that the move would be inflationary.
With nearly half of the country’s population living in extreme poverty, the new statutory obligations are not only expected to widen the gap between the haves and the have-nots, but also lead to a sharp decline in collected revenue, experts say.
Already, yesteryear giants are falling and the economy is shifting. Traditionally well-to-do brands like Truworths, Edgars and other players in the formal sector are either are scaling down operations or closing shop, throwing thousands of workers into the streets.
With department stores now taking a bow on the stage, making way for new entrants run by family members or business associates, behold the new has come. These developments sum the seismic shifts in Zimbabwe’s economy.
The past few days have seen most formal retailers sounding the alarm over the impact of the country’s weakening domestic currency for eating into their margins. Latest figures from the country’s statistical agency show that the month-on-month inflation rate rose to 6.6% this month from 4.7% in December.
Economist Prosper Chitambara attributed the rise to new taxes and global headwinds such as weakening commodity prices.
In its research note titled Seeking Stability Amidst Uncertainties, Fincent Securities says a notable feature of the last few years has been increasing informality.
“High inflation, exchange rate distortions, and a difficult business environment have raised the cost of doing business for the formal sector, triggering a rise in informal activity,” Fincent says.
“Zimbabwe’s large informal sector has lowered fiscal revenues, constrained competitiveness, and made it more difficult for the authorities to manage the economy. Rising exchange rate distortions and high inflation have misallocated resources to sectors and firms with low productivity and limited private investment.
“Critically, manufacturers and wholesalers find it challenging to navigate the imposed restrictions, especially the requirement to supply wholesalers before reaching retail outlets. Had this not been revised, it would have led to inevitable price increases and disruptions in the trade channel, potentially accelerating the rate of informalisation. There is a risk that many informal traders and retailers will import and smuggle products to meet demand, while shifting away from local manufacturers.”
Imara Asset Management says weakening consumer spending will result in declining revenues for Treasury.
“In 2024, the formal sector is weak. The retailers cannot sell product at prices that make economic sense and so trade goes elsewhere and Government receives less VAT than it should,” Imara says.
“Given that the formal sector is weak and diminishing relative to the economy as a whole, tax revenue in relative terms should also be falling. That should imply that Government should reduce its expenditure to take that into account.”
