2016 NATIONAL BUDGET BRIEF

Transcription

1 ZIMBABWE 2016 NATIONAL BUDGET BRIEF AN OVERVIEW ANALYSIS Budget 2016 Key Insights Stronger growth... but still sluggish: the economy is projected to grow by 2.7% in 2016, in comparison to1.5% growth in However, the underperformance of the mining sector especially diamonds is a major contributing factor to the continued economic and fiscal challenges. Increased diaspora remittances and FDI: diaspora remittances are estimated to reach US$960 million in comparison to US$944 million in 2015 while FDI is estimated to reach US$614 million in comparison to US$591 million in Unsustainable current account balance: current account balance is -18.2% of GDP, double that of the -9% SADC threshold. Small deficit: 2016 Revenues projected at US$3.85 billion, and total Expenditures projected at US$4 billion resulting in a deficit of US$150 million, about 1.1% of GDP. The 2016 State Budget is an employment budget that leaves no room to invest in children: employment costs account for a staggering 80% of total spending. Capital Expenditures account for only 8% whilst other Current Expenditures account for 12%. Relatively small share for social services: Social services sector are allocated a combined total of US$1.35 billion, or only about 33% of the total budget. In comparison, the average share of social sectors in the SADC region is above 45%. Proposed wage reform must benefit children: the creation of new fiscal space through the positive fiscal reform measures contained in the 2016 National Budget must benefit sectors affecting children the most, in particular health, education, water and social protection. Unsustainable high level of aid dependency in key sectors for children: off-budget aid dependency in social sectors remains a concern, especially as donors contributions to these sectors is declining and thus threatening the gains that have been achieved for children so far. Unforeseen impact of El Nino: the 2016 Budget does not make the necessary allocation to mitigate the negative impact that the El Nino effect will have on social development and welfare of children. Off-budget aid dependency in the social sectors remains a concern, more so that donor contributions to these sectors is declining threatening the gains that have been achieved for children thus far.

2 GROWTH AND INFLATION DEVELOPMENTS Economic Growth Forecast The Zimbabwean economy remains in distress and this is particularly harsh for children. Having reached a peak of 11.9% in 2011, growth has remained sluggish, and is estimated at 1.5% in 2015, some 1.7 percentage points lower than the initial forecast of 3.2% in the 2015 Budget. However, the Government expects growth to gather some pace - expanding to 2.7% in This modest growth is premised on the following, key factors: (i) implementation of the fiscal space and sustainability framework; (ii) clearance of arrears to the International Financial Institution (IFIs), thereby unlocking new financing; (iii) improved cost and ease of doing business, (iv) improved liquidity conditions; (v) stability in the banking sector; (vi) successful implementation of reforms under the Staff Monitored Programme (SMP); (vii) low international oil prices, implying reduced energy import costs and (vii) positive growth in tourism, construction, communication and a good agricultural season. In pursuit of growth, the Government s policy thrust in 2016 will focus on fiscal reform, arrears clearance and reengagement with the international community. Already, some fiscal reform measures are underway to reduce the public sector wage bill, while the Government s strategy on arrears clearance was approved during the IMF/ World Bank Annual Meetings in Lima in October Similarly, the government commits to the full implementation of the reform programme under the Staff Monitored Programme (SMP) and engaging other bilateral creditors for a programme to clear arrears. However, significant headwinds to growth remain. These will impose a significant drag on the growth, particularly the El Nino Figure 1: GDP Growth and Inflation Trends induced drought which will adversely impact on agricultural production and growth. More so, the 14 imminent drought will increase food imports thereby worsening the already precarious current account balance, whilst at the same time diverting since resources Est 2016 Proj from productive and social sector activities. Other risks to growth include (i) weak aggregate demand and low international mineral prices; (ii) fiscal space constraints weak revenue outturn against rising expenditure demands, including unplanned but unavoidable expenditures such as food imports; (iii) institutional weaknesses in local authorities and state enterprises, Economic Growth Inflation (YoY) affecting policy transmission mechanism; (iv) weak export competitiveness on account of weakening SA Rand, and v) challenges in the domestic mining sector. Percent In addition, the external sector remains in a precarious position. Current account deficit is projected at US$2.58 billion, about -18.2% of GDP, against the SADC macro-economic convergence target of less than -9% of GDP. Further, even after clearing the US$1.8 billion arrears to IMF, WB and AfDB, the country will remain with a debt of US$6.57 billion, almost double the current budget revenues, of which 61.3% is owed to bilateral creditors. This will remain an impediment to accessing external lines of credit critical for growth. 2

3 Ongoing political discourse will continue to be a drag on the growth and development prospects of the country. With the political climate appearing to deteriorate and political rivalry and violence on the rise and a decisive election due within the next 30 months, economic growth may be constrained for some time to come. Inflation Outlook Zimbabwe likely to experience further deflationary pressures in 2016, with an annual average forecast of -1.6% by end of the year, albeit 0.7 percentage points higher than in 2015, (Figure 1). In 2015, the general price level in the economy remained low, with year on year inflation opening the year at -1.3%, and reaching -3.3% by October The general price deceleration has, largely been attributed to price correction, weak aggregate demand, tight liquidity and depreciation of the South African Rand against the United States dollar. BUDGET PERFORMANCE AND 2016 ESTIMATES The 2016 National Budget projects to raise total revenues amounting to US$3.85 billion, 6.1% lower than the initial estimate of US$4.15 billion projected in the 2015 National Budget. Total Expenditures for 2016 are projected at US$4 billion, giving a deficit of US$150 million, about 1.1% of GDP. This will be financed mainly from domestic borrowings with the potential problem of crowding out private investment. Revenues The slowdown in economic growth has had an adverse effect on revenue performance. Having reached a peak of US$3.93 billion in 2014, budget revenues declined to US$3.54 billion in 2015, about 13.6% lower than the 2015 Budget estimate (Figure 2). The lower-than-expected revenue performance can be attributed to a number of factors Figure 2: Total Revenue Trend ( ) including: (i) subdued economic activity, with low capacity utilization, company closures and job loses, (ii) depressed aggregate demand, (iii) liquidity constraints, (iv) revenue leakages, and (v) illicit financial flows In 2016, the government target is to collect revenue of US$3.85 billion, about 27.2% of GDP. This is one of the highest Tax-to-GDP ratios in Sub-Saharan Africa. Without major reforms the aforementioned negative factors are likely to remain in 2016, affecting the revenue outturn. Any shocks to the revenue projection will further worsen the already tight fiscal space, thereby undermining the implementation of the planned programmes and projects. US$ Millions Est 2016 Proj Source: Min of Finance: Various Budget Statements 3

4 No significant changes are expected to the structure of revenue composition between 2015 and Tax revenues expected to contribute around 97% of the total government revenues, with the remainder coming from non-tax revenues, (Figures 3a and b). Figure 3a: Composition of Revenues in 2015 Est Other Indirect Taxes 3% VAT 25% Excise Duty 20% Non-Tax Revenue 4% PAYE 23% Customs Duty 9% Corporate Tax 10% Figure 3b: Composition of Revenues: 2016 Proj Other Direct Taxes 6% There has been some notable shifts in the contribution of different tax sources since For instance VAT contribution has fallen from 30% to 25%, reflecting contraction in aggregate demand in the economy. The economy is now more dependent on individual income tax (PAYE), whose contribution has increased from 20% to an estimated 23% in Excise duty has also increased, benefiting mainly from upward reviews in rates for fuel. The demise of the diamond sector has also meant that non-tax revenues have declined from 10% to 4% in 2015, whilst corporate tax has remained largely unchanged, reflecting the constrained business environment. Expenditures Other Indirect Taxes VAT 25% Excise Duty 19% Non-Tax Revenue 3% PAYE 21% Other Direct Taxes 10% Customs Duty 10% Corporate Tax 9% Total Government expenditures are largely determined by the size of the resource envelop, as the government seeks to limit the size of fiscal deficits. In 2015, total government expenditures stood at US$3.837 billion against revenue estimates of US$3.543 billion, thus a budget deficit of US$294 million, financed largely through domestic borrowing. This has seen total domestic borrowing (net) reaching US$258 million, about 9% of total expenditures as at end-september With only US$190 million spent on capital projects over the same period, it raises the question as to whether the government is borrowing to meet its wage obligations. This is not only unsustainable but has a crowding-out effect on private sector borrowing, which impedes growth. In 2016, total Government spending is projected to be 4.2% higher than in Total expenditures and net lending is projected at US$4 billion, against total revenues of US$3.85 billion, hence a budget deficit of US$150 million. Composition of Expenditures On account of revenue under-performance, government expenditures were being incurred on a what s-more-pressing basis, with wages receiving top priority. In 2015, US$3.159 billion (82%) of the government budget was spent on employment costs. Growth-enhancing capital expenditures accounted for only US$237 million or 6% of the budget, with the remainder of 12% was spent on other recurrent costs and loan repayments, respectively, (Figure 4a). 4

5 .qxp_layout 1 23/5/ :51 Page 5 Figure 4a: Composition of Expenditures in 2015 Capital Exp 9% Other Current Exp 32% Figure 4b: Projected Composition of Expenditures in 2016 Capital Exp 7% Employment Costs 59% Other Current Exp 32% Employment Costs 61% The situation is expected to remain broadly unchanged in 2016, with the budget remaining an employment budget and unsupportive of long-term growth. Employment costs are projected to increase in nominal terms by 1% to US$US$3.19 billion in As are share of total spending, employment costs are projected to account for 80% of total budget and 22.5% of GDP, against sustainability thresholds of 30% and 7%, respectively, in line with regional countries. Although there ought to be inter-government fiscal transfers between national and sub-national governments, this has not been the case. Local governments are left to raise their own revenue from local sources and spend on service delivery accordingly. These resource flows are not monitored in a systematic way and thus no real analysis of local government spending on investments that support children, for instance, can be provided. Proposed Wage saving Measures The high share of employment costs to total expenditures remains a grave concern, crowding out other non-wage capital and social spending, key for stimulating growth and reducing poverty. The Government acknowledges the need to reign in on its high wage costs and create room for other growth-enhancing expenditures. Consistent with the above, the 2016 National Budget proposes a number of measures that were proposed in the fiscal space and sustainability framework that was development jointly by the Government, UNICEF and other development partners, as well as private and civil society players. If fully implemented these measures can yield US$170.4 million in annual savings, and it is important for social sectors to benefit from these proposed savings. Most of the proposed measures relate to the education sector, where at least US$100 million can be realized from the proposed reforms. It would therefore, be important for such savings to be channeled towards real investments in education infrastructure and services so as to improve outcomes for children. 5

6 PROPOSED MEASURE MONTHLY SAVINGS IN US$ ANNUAL SAVINGS IN US$ Rationalisation of Youth Officer posts at Ward Level 1,611,509 19,338,108 Rationalisation of the Ministry of Youth s Harare and Bulawayo Metropolitan Provincial Structures 32, ,068 Rationalisation of the Ministry of Women Affair s Harare and Bulawayo Metropolitan Provincial Structures Rationalisation of Extension Worker Structures at the Ward Level in the Agricultural Sector Rationalisation of Ministry of Local Government s Provincial and District Office Structures for Harare and Bulawayo Metropolitan Provinces 34, ,552 2,514,320 30,171,840 65, ,224 Reviewing Vacation Leave Policy in the Education Sector 3,932,772 47,193,264 Reviewing Manpower Development Leave Policy 830,772 9,969,264 Rationalisation of Student Teacher Allowances 2,159,288 25,911,456 Withdrawing Support to Non-Formal Education 111,324 1,335,888 Withdrawing Support from Funding Bridging Programmes Offered by Tertiary Colleges 13, ,544 Non-payment of Remuneration to Teachers at Trust Schools 1,650,048 19,800,576 Retirees on Annually Renewable Contracts 450,000 5,400,000 Reducing Employment Cost Obligations to Grant Aided Institutions 793,417 9,521,000 Total 14,199, ,389,784 Figure 5: Top 20 Allocations to Ministries US$ Millions Pri & Secondary Educa on Home Affairs Defence Health & Child Care Higher & Ter ary Education, Science & Tech Dev OPC Public Service, Labour & Social Welfare Agric Mech & Irriga on Development Jus ce Legal & Parl Affairs Local Gvt, Pblc Works & Nat Housing Transport & Infrastructure Development Foreign Affairs Env Water & Climate Finance & Econ Development Welfare Services for WVWC&FDR Parliament of Zimbabwe Youth Indigenisa on & Econ Empowerment Public Services Commission Industry & Commerce Rural Dev & Preserva on of Culture Allocations to Line Ministries The Ministry of Primary and Secondary Education (MoPSE) was allocated the highest budget of US$ million, (Figure 5). Home Affairs got the second highest budget of US$ million (9.9%, of total budget). Health and Child Care was fourth at US$ million, representing 8.3% of the total expenditure and net lending. Whilst other social sector ministries such as Public Service, Labour and Social Welfare and Environment, Water and Climate accounted for 4.4% and 0.9% of the total expenditures, respectively. Whilst MoPSE got the highest budget allocation, 98.4% of the budget will be spent on employment costs. In terms of non-wage spending, the sector ranks 16th, with just US$13 million (1.6% of the sector s allocation), (Figure 6), being earmarked for non-wage spending in learning and teaching materials and school infrastructure investments. With a total of over 8,000 schools, excluding ECD, this translates to less than US$1,640 per school per year. This further translates to 6

7 .qxp_layout 1 23/5/ :52 Page 7 less than US$3.34 per year. Clearly this is insufficient to make a meaningful impact on the teaching and learning environment, and hence weak learning outcomes. Figure 6: Top 20 Non-wage Allocation US$ Millions Higher and Tertiary Education, Science and Technology Development got the highest non-wage allocation, (Figure 6). This is earmarked for current transfers to state universities and colleges Figure 7: 2015 Gvt Non-wage vs UNICEF-managed Off-budget Expenditure in Social Sectors US$ Millions Such skewed public spending on social sectors places an unsustainable burden on donors and families (out of pocket expenditures). Donor-dependency on nonwage social sector expenditures remains a concern with these off-budget expenditures dominating non-wage expenditures in these sectors in 2015 (Figure 7), and likely to continue as such in Educa on Health Gvt Target Gvt Actual WASH Harmonised Cash Transfer BEAM Transi on Funds Actual 7

8 Table 1: Selected Child Indicators Significant gains have been made for children in the recent past (Table 1), but these gains cannot be sustained on the account of donors. This re-emphasizes the need for the fiscal reform measures to create the fiscal space for increased social sector investments. INDICATOR Maternal mortality 960/100, /100,000 Under-five mortality 94/1,000 75/1,000 Full immunization Prevalence of stunting Exclusive breastfeeding (6 months) Use of improved drinking water Use of improved sanitation Open defecation Net attendance (primary school) Net attendance (secondary school) Children under 5 whose births are registered Women (20-49 years) married before Source: MICS 2014 KEY MESSAGES ARISING 1. Fiscal Space remains tight, with limited room for increased investments in children. There is, therefore, need for commitment by the government to implement to proposed fiscal & wage bill reforms and the proposed revenue enhancing measures. Equally important is the need to fully implement the SMP and the arrears clearance strategy approved by creditors during the Lima 2015 IMF/ World Bank annual meetings. 2. Off-budget support by donors towards the social sectors, although necessary in the short term, may have medium to long term negative impacts on government systems and sustainability. 3. The government needs to accelerate implementation of decentralized budget monitoring and tracking as a way of enhancing efficiency, accountability and transparency in public sector spending. 4. Disbursements of non-wage allocations to critical sectors that benefit children remains a major concern. In 2015, only 30% of the non-wage expenditures in education and health were actually disbursed reflecting both the dire fiscal circumstances and the impact on quality of services for children. 5. Government efforts to create fiscal space through a number of mentioned reforms is welcomed, but the gains that arise (projected at USD170 million) should be spent on children. All stakeholders should continue to advocate for fiscal discipline, implementation of sound/ credible policies and better expenditure prioritization for these gains to materialize. 8

9 6. Experience has shown that the Government is committed to economic and fiscal reforms and support is need to push for the implementation of such reforms. In February 2015, UNICEF convened a High Level Policy Dialogue on Fiscal Space, which was attended by senior officials in government, ZIMRA, RBZ Heads of Development Partners and Ambassadors. The outcome of the Dialogue was a Fiscal Space Roadmap of reforms, some of which were adopted and will be implemented through the 2016 National Budget, (Annex 1). 7. More resources would still be required, particularly in view of the imminent drought and the need to safeguard the gains recorded in social sectors to-date. Hence, in the short-to-medium term, pressure will be on the UN and other development partners to mobilise resources for enhancing food security, as well as for non-wage spending in social and infrastructure investments. List of Acronyms FDI GDP MICS MoPSE SADC SMP ZRP RBZ ZIMRA UN Foreign Direct Investment Gross Domestic Product Multiple Indicator Cluster Survey Ministry of Primary and Secondary Education Sothern Africa Development Community Staff Monitored Programme Zimbabwe Republic Police Reserve Bank of Zimbabwe Zimbabwe Revenue Authority United Nations UNICEF, 2015 UNICEF ZCO 6, Fairbridge Avenue, Belgravia, Harare 9

10 Annex1: List of the Proposed Fiscal Reform Measures adopted in the 2016 Budget MEASURE Mining Fiscal regime Consolidate all revenues to the CRF ACTIONS l Bill to enhance transparency and accountability to be finalized by June 2016 l Treasury to enhance oversight on statutory funds by directing all collecting entities to open accounts with the RBZ and transfer all balances Reforming the public pension system to DB l Gvt to migrate from the Pay As You Go to Defined Benefits (DB) Pension arrangements Wage bill reforms l See slide 16 l Public Enterprises and Local Authorities to maintain a 30/70% employment costs to service delivery ratio Public Enterprise reforms l 10 SOEs to be restructured starting with GMB and CSC l Strengthening of SOE corporate governance framework Investment climate l Minister of Youth, Indigenisation and Economic Empowerment to announce and gazetting before Christmas the frameworks templates and procedures for implementing the indigenisation policies to promote investment and eliminate discretionary application of the law. Easy of Doing Business Reforms l Thematic Technical Working Groups on specific indicators now in place; l Targeted industries and zones for SEZs identified; and l Ministerial Working Committee is working on an appropriate model for an effective one Stop Shop that is E-based Attracting Diaspora Remittances l Regulatory framework for Money Transfer Agents reviewed, including permission to remit funds outside the country; and l National Diaspora policy to be finalized in 2016 Public Procurement l Bill to enhance efficiency and transparency l Public procurement to be finalized by Mid-2016 Review of the PFMA l To enhance transparency and sound debt management Efficiency in Tax Administration l Installation of CCTVs at borders to reduce leakages at Borders l Revenue monitoring dash boards for the Minister, Secretary, Revenue department in MoFED and the ZIMRA Board Chairperson; l Automated Verification of travelers for rebate of duty; l Efficiency at Beitbridge border post 10