ZIMBABWE THE 2010 MID-YEAR FISCAL POLICY REVIEW. Presented by the Minister of Finance. Hon. T. Biti, M.P.

Transcription

1 ZIMBABWE THE 2010 MID-YEAR FISCAL POLICY REVIEW Presented by the Minister of Finance Hon. T. Biti, M.P. 14 July

2 Table of Contents INTRODUCTION... 7 Recalling STERP I & II... 8 GLOBAL ECONOMIC DEVELOPMENTS Inflation Commodity Prices Metals and Minerals Crude Oil Agricultural Commodities Implications for Developing Countries SECTORAL DEVELOPMENTS Agriculture Cereal Production Mining Diamonds Manufacturing Food, Beverages & Tobacco Cotton, Clothing & Textiles Chemicals & Pharmaceuticals Metal Industry Leather Industry Fertilizer Tourism Construction Consumption & Investment Inflation Financial Sector Zimbabwe Stock Exchange External Sector FISCAL DEVELOPMENTS Revenue Value Added Tax (VAT) Customs Duty Pay As You Earn (PAYE) Corporate Tax Excise Duty Mining Revenue Other Taxes Non-Tax Revenue Expenditure Recurrent Expenditures Employment Costs Civil Service Wage Bill Operations and Maintenance Payments to Service Providers

3 Foreign Travel Foreign Missions Social Service Delivery Grants and Transfers Capital Expenditures Energy Transport Road Dualisation Airports Infrastructure Railway Infrastructure Road Maintenance Water and Sanitation Agriculture Support Telecommunications Housing Vote of Credit STRUCTURAL CHALLENGES ON THE ECONOMY Reconstruction Equitable Growth Stabilisation Lack of Capital Foreign Direct Investment The Liquidity Crunch and the High Cost of Money Lack of Fiscal Space Debt Overhang Management of Public Resources Lack of Project Implementation Capacity Skills Gap Energy High Cost of Utilities Other Tariffs Labour Costs Land Utilisation Infrastructure Human Development Environmental Protection Hyperinflation Hangover Accountability over Public Resources Common Vision Business as Usual Mentality REVISED MACRO-ECONOMIC FRAMEWORK POLICY INTERVENTIONS Inflation Duty on Basic Commodities Lines of Credit Available Facilities in the Second Half of

4 Diaspora Bond SADC Support Foreign Direct Investment Leveraging Mineral Resources Mineral Policy Mining Claims Mineral Beneficiation Mineral Taxation Inter-Generational Fund Diamonds Rule of Law Commitment to the Kimberly Process Sale of Diamonds within the Kimberly Process Amendments to the ZMDC Act Diamond Act Past Diamond Sales Public Utilities Debtors Wage/Revenue Ratios Capitalisation Rationalisation of State Enterprises Over-sight over Public Utilities Public-Private Partnerships Fuel Importation Transport Mode Review of Labour Laws Financial Sector Reforms Central Bank Reforms Currency Reforms Smaller Denominations Micro Finance Institutions Lender of Last Resort Securities Market Securities Rules & Regulations Central Securities Depository Automated Trading System Insurance and Pensions Debt Relief Strategy & Process Debt Management Office Multi Donor Trust Fund Aid Coordination and Management Data Availability Revenue Retention Funds POTRAZ Universal Service Fund Public Shareholding Reserve Fund EXPENDITURE RATIONALISATION

5 Recurrent Expenditure Outstanding Bills to Service Providers Social Protection Foreign Service Payments Other Recurrent Expenditures Capital Expenditure Energy Debtors Maintenance Fund Pre Payment Meters Water and Sanitation Transport Aviation Rail Social Service Delivery Education E-learning PUBLIC EXPENDITURE MANAGEMENT Public Finance Management Legal Framework Public Finance Management Act Audit Office Act Public Finance Management System Quality Assurance Equipment Procurement Training Internal Audit Training District Roll Out Help Desk Curbing Accumulation of Bills Vehicle Hire Loss of Public Assets Tendering Advance Payment Contract Management Non Performing Contractors Electronic Funds Transfer REVENUE MEASURES Redrafting of the Income Tax Act VAT Fiscalised Recording of Taxable Transactions Electronic Cargo Tracking System Revenue Enhancing Measures Tax Exemptions and Deductions Suspension of Duty on Motor Vehicles Imported by Tourist Operators Rebates of Duty which no longer reflect Policy Priorities Taxation of the Mining Sector Review of Royalties on Minerals

6 Export Tax on Unprocessed Chrome Special Initial Allowance Fees, Charges and Fines Fines on Motor Vehicles Used to Smuggle Goods Relief Measures Regional Integration Duty on Competing Products Imported under SADC Suspension of Duty on Inputs used by the Local Industry Review of Suspension of Duty on Basic Commodities Dumping of Sub-standard Imported Products Rebate of Duty on Fiscalised Electronic Tax Registers and Fiscal Memory Devices Duty on Textiles, Clothing and Footwear Administration of Certificates of Origin Export of Scrap Metal Alternative Energy Sources Excise Duty Bond Requirements for Excisable Products Pay As You Earn (PAYE) Tax-Free Threshold Remittance Date Value Added Tax Remittance Period VAT Zero Rating - Day Old Chicks Withholding Taxes Non-Resident Tax on Remittances Capital Gains Tax Withholding Tax on Unlisted Securities Penalties for Late Payment of Tax Departmental Practice Notes Tax Amnesty Dispute Resolution, Objections and Appeals Customs Administration Transit Fraud Pre-Clearance of Goods Re-organising ZIMRA ZIMRA Structure CONCLUSION

7 INTRODUCTION And what the land is, whether it be fat, or lean, whether there be wood therein, or not. And be you of good courage, and bring of the fruit of the land. Now the time was the time of the first ripe grapes. [Numbers 13:20] 1. Mr Speaker Sir, in Article 3 of the Global Political Agreement, the Parties to the same agreed to give priority to the restoration of economic stabilisation and growth in Zimbabwe and committed to work together on a fully and comprehensive economic programme aimed at addressing economic production, food security, poverty and unemployment, and the challenges of inflation and high exchange rates. 2. It is exactly 668 days and 5 hours since the Global Political Agreement (GPA) was signed on 15 September The critical question that arises is whether or not the Inclusive Government has implemented what was agreed under Article 3:1 of the GPA. 3. The 2010 Mid-Year Fiscal Policy Review seeks to update Honourable Members on the 2009 outturn as well as fiscal and economic developments to June 2010, that way, Mr Speaker 7

8 Sir, providing an assessment of economic performance under the Inclusive Government over the past seventeen months. 4. The Review also proposes the necessary policy interventions and other measures for the remaining half of 2010, critical for the economy to remain on course towards realising our set targets outlined in our Three Year Macro-economic Policy and Budget Framework for Honourable Speaker Sir, I need to make it very clear that the current Mid Term Review is only but a review and not a supplementary Budget. 6. I seek no additional charges to the Consolidated Revenue Fund as defined by Section 103 of the Constitution. The 2010 Budget will remain the same, with revenue and expenditures of US$2.25 billion. 7. However, adjustments and re-alignments in certain Votes will have to be made, largely as a result of the underperformance of the Vote of Credit. Recalling STERP I & II 8. Honourable Members will recall that a month after its inauguration on 16 February 2009, the Inclusive Government launched the Short Term Emergency Recovery Programme 8

9 (STERP) as a critical tool in addressing the fundamental economic challenges and dis-equilibriums affecting and arresting the country. 9. STERP provided an ideological campus for navigation towards the rebuilding of the Zimbabwean economy through the following fundamental matrices: Creation of a responsive, yet efficient State that uses redistributive mechanisms, social rights, while maintaining social development; Building of a strong economy, based on market principles with careful State interventions to advance social protection and justice; and Establishment of a participatory political democracy through the new people driven Constitution and the rebuilding of fundamental democratic institutions in our country. 10. Mr Speaker Sir, on 23 December 2009, STERP was succeeded by the Three Year Macro-Economic Policy and Budget Framework (STERP II). 9

10 11. The Vision of this Framework was to build a dynamic, stable and sustainable developmental economy whose objectives as read together with the 2010 National Budget were: Sustaining macro-economic stabilisation and consolidating STERP; Support for rapid growth and employment creation; Ensuring food security; Restoring basic services; Encouraging public and private investment; Promoting regional integration; Restoring basic freedoms; and Restoring international relations. 12. Furthermore, it was recognised right from the onset that achieving the above objectives would require unequivocal and unmitigated commitment to a National Vision that was above narrow parochial political interests and recognised the immutability of a minimum bundle of certain invaluable rights. 13. In short, the development of our own Jeffersonian Principles on agreed inalienable rights a counter cyclical political vision that would remain intact irrespective of changes in the political landscape. 10

11 14. Apart from the National Vision, it was recognised that the rule of law, restoration of basic freedoms and democracy were a necessary precondition for sustained economic recovery. 15. Therefore, the implementation of agreed positions in the Global Political Agreement around issues of the rule of law, the Constitution, security of persons and prevention of violence, freedom of expression and communication, among other things was imperative. 16. Over and above this, it was recognised that fiscal discipline was critical for stabilising the economy and, hence, the adopted principle of living within our means. Therefore, the Revised 2009 Budget of 17 March 2009 made it clear that What we Gather is what we Eat. 17. The net effect of the above was the attainment of substantial stabilisation of the economy in 2009, with huge gains particularly in the following areas: Inflation reduction; Improved capacity utilisation in productive sectors of agriculture, mining and manufacturing, from below 10% to around 30% to 50%; Removal of price distortions in both foreign exchange and goods markets; 11

12 Resuscitation of financial sector services; Some improvement in public service delivery, particularly in the areas of water and sanitation, transport, health and education sectors; Improvement in social protection programmes for vulnerable groups; Overall business confidence building; Policy consistency and predictability on key policy fundamentals; The enactment of key legislation dealing with credibility and accountability over the use and management of public resources; and Re-engagement with the international community. 18. Mr Speaker Sir, the above economic gains achieved in 2009 are under threat of being eroded owing to a number of challenges during the first half of Shortcomings in the economy have included the threat to macro-economic stabilisation through the resurgence of inflation. Over and above this, has been the lack of capital, modest recovery in capacity utilisation, and more importantly, a general drop in hope and confidence in the economy. 12

13 20. It is imperative that a new paradigm be adopted during the second half of In our view we have to go back to basics and abandon the business as usual mentality. This economy requires Regeneration, Revival and Refocusing. These three Rs, should underpin the basis of a frontloaded growth in the second half of the year. 21. In Regenerating, Reviving and Refocusing this economy we have to draw the line and adopt a business unusual stance. 22. In drawing this line, this Review will thus: a. Refocus the economy back to the 2009 trajectory of discipline and stabilisation. b. Re-energise and kick-start the economy towards real growth and real delivery. c. Re-targeting Government expenditure so that pro-poor social spending targets on health, education and welfare are met. d. Relay the foundation of a common vision on the developmental State. GLOBAL ECONOMIC DEVELOPMENTS 13

14 23. The global economy is beginning to show some signs of emergence from the devastating economic crisis of 2008/2009, against the background of global financial cooperation, extraordinary fiscal stimulus policy interventions, capital injections into failing financial institutions, lowering of borrowing costs, as well as greater labour markets flexibility. 24. However, no sooner was Africa and the rest of the world beginning to emerge from the global economic crisis was the world hit by the Euro zone debt crisis, initially centred around the Greek economy. Concerns also remain over the performances of other economies, including Spain and Portugal. 25. The responses of the Euro zone countries to the new debt crisis have been dramatic and decisive. In Greece for instance, an Emergency Economic Protection Act was passed on 28 March 2010, generating savings of 4.8 billion that benefitted from public wage reductions. 26. The slashing of expenditure was met by corresponding increases in taxes. VAT for instance was increased to 23% and there was a 10% rise in luxury taxes. 27. In the United Kingdom, the new Government unveiled an emergency austerity Budget on 22 June Its main thrust 14

15 was to address structural budget deficits through cuts in budget spending, anticipated to amount to savings of 6.3% of GDP by To raise revenue, VAT was also reviewed from 17.5% to 20%, while capital gains tax rose to 28%. 28. Globally, against the background of the anticipated recovery, world economic growth is projected at a little over 4% in 2010 from an estimated under 1% in Emerging and developing economies are expected to register growth of over 6% in 2010, up from under 2.5% in Remarkable growth is particularly expected from China and India with an over 8% growth projection. 15

16 30. If sustained, global economic recovery should underpin anticipated improved growth of over 4.5% in 2010 for Sub Saharan Africa. This would also be on the back of continued implementation of strong fiscal and monetary policies. Last year, at the height of the global financial crisis, growth for the sub-region was an estimated 2%. Inflation 31. In the outlook, inflation which had declined in 2009 to marginal levels in developed economies and to around 5% in emerging and developing economies, is projected to rise respectively to around 1.5% and 6% in In 2011, decline in inflation is anticipated. 16

17 Commodity Prices 32. Increased world economic activity will auger well for international commodity prices, improving export revenue realisations and growth prospects for commodity exporting countries. 33. However, vulnerabilities to exogenous shocks remain in emerging and developing economies. Metals and Minerals 34. So far, however, gold prices, which averaged US$973 per ounce in 2009 have been increasing, from US$1 113 in March 2010 to US$1 200 by June. 35. Similarly, platinum prices which had declined from US$ per ounce in 2008 to US$ in 2009 have been on a recovery path, reaching US$1 530 in June

18 36. Nickel prices, which had slumped from US$ per tonne in 2008 to US$ in the first quarter of 2009, recovered remarkably to US$ by the first quarter of Crude Oil 18

19 37. On the negative, oil prices have since been rising in tandem with the recovery in the global economy to levels averaging US$78.71 per barrel by the first quarter of Crude oil prices had succumbed to the effects of the global economic crisis, falling sharply from US$96.99 per barrel in 2008 to US$44.11 by March Agricultural Commodities 39. On the agricultural front, cotton prices which had dropped in 2009 to US138.2 cents per kg from US157.4 cents, also recovered in 2010, averaging US198.6 cents by May. 19

20 40. This compares unfavourably with an average of US60 cents and US42 cents offered to local cotton growers in 2009 and 2010, respectively. 41. International average prices for tobacco improved from US$4.24 per kg in 2009 to US$4.47 in February 2010, before easing to US$4.39 in April. 20

21 42. Grain commodity prices, however, remain depressed with the international price of maize falling sharply from US$223.1 per tonne in 2008 to stabilise at around US$165 in 2009 and Similarly, wheat prices have been in decline, reaching US$271.7 per tonne in 2010 from US$300 in 2009 and US$454.6 in

22 Implications for Developing Countries 44. Looking ahead, the sluggish recovery in output associated with high debt and the state of distress of financial markets in most advanced economies poses major concerns for developing countries, including Zimbabwe. 45. In this regard, challenges and competition among developing economies over regaining export markets and attracting critical investment for sustaining growth will intensify. 46. This makes resolving all the constraints to unlocking new capital inflows unavoidable. Critical is the finalisation of our external payment arrears clearance programme, central to increased access to new financing from potential cooperating partners and investors. 47. The establishment and maintenance of a conducive investment environment, underpinned by honouring of Bilateral Investment Promotion and Protection Agreements will also be necessary. 48. Among others, this will encompass further strengthening of macro-economic stability, and sustenance of the liberalised business environment ushered by STERP, free of unnecessary restrictions and distortions. 22

23 SECTORAL DEVELOPMENTS 49. The positive turnaround in economic activity experienced during 2009, which saw overall economic growth for the year revised upwards from 3.7% to 5.7% continued to face challenges during the first half of Major challenges undermining robust growth of the productive sectors relate to the absence of medium to long term financing. This has constrained critical investment in infrastructure rehabilitation and the maintenance and upgrading of such key enablers as sustainable supply of power generation capacity. 51. Furthermore, companies have not been able to realise meaningful lines of credit to re-tool and access raw materials for the restoration and improvement of production capacity utilisation, vital for lowering unit production costs. The available limited facilities have remained short-term and at high cost. 52. Our original growth projection for 2010 was 7%. However, fragile prospects for recovery in economic performance demand a reduction of this figure. We have, thus, revised our growth projection for 2010 to 5.4%. 23

24 53. The revised projection figure of 5.4% should not be taken for granted. A business as usual mentality will certainly guarantee a further downward revision. 54. Indicators of positive performance in the first half of 2010 have included growth in VAT revenue and output in agriculture (18.8%), as well as projected growth in mining (31%), manufacturing (4.5%), distribution, hotels and restaurants (3.5%) and transport and communication (3%). Sectoral Growth Rates Sector 2008 Revised Original 2010 Actual 2009 Est. (Revised 2010 Proj. Proj.) Agriculture -39.3% 14.9% 10% 18.8% Manufacturing -33.4% 10.2% 10% 4.5% Mining -17.1% 8.5% 40% 31% Tourism 2.8 % 6.5% 10% 3.5% Electricity Gas and Water -36.5% 1.9% 3.4% -1.8% Construction -8.5% 2.1% 3.2% 1.5% Finance and Insurance -27.9% 4.5% 5.5% 2.0% Real Estate -36.4% 2.0% 2.2% 1.5% Transport and Communication Public Administration 5.4% 2.2% 4% 3% 0% 2.0% 3% 2.0% Overall GDP -14.8% 5.7% 7% 5.4% 24

25 Source: CSO, Ministry of Finance & the Reserve Bank Agriculture 55. Agricultural growth of 18.8% in 2010 is up on last year s 14.9%. This is mainly driven by tobacco, up 67.3% from 55.6 million kgs in 2009 to 93 million kgs; maize, up 3% from 1.24 million tonnes to 1.33 million tonnes; and beef up 2% from tonnes to tonnes. 56. Sustaining viable tobacco pricing in the liberalised marketing environment should offer scope for increased hectarage under tobacco production over the coming seasons. 57. In the current season, some 86.5 million kgs of tobacco have been sold at an average price of US$2.98 per kg by end June This compares with last year s auction floor sales of 55.6 million kgs at an average price of US$3.01 per kg during the same period. 58. Horticulture production in 2010 is also projected to register growth, rising to tonnes against last year s tonnes. There is still much more investment to be undertaken before production levels rise to levels above tonnes experienced previously. 25

26 59. Depressed cotton prices and financing constraints in 2009 undermined cotton production which decreased from tonnes in 2009 to tonnes in However, following interventions by Government and subsequent review by cotton merchants, the price for cotton increased to US45 cents per kg this year, up from US30 cents per kg in Sugar production during 2010 is also projected to decline below last year s levels. In 2009, sugar production was tonnes. This year, an estimated tonnes of sugar is anticipated. Agricultural Production, Main Products (000 tons) Tobacco Maize 750 1, ,240 1,300 Beef Cotton Sugar Horticulture Source: Ministry of Agriculture Cereal Production 26

27 62. Recovery in cereal production, including maize, during the 2009/2010 agricultural season benefitted from improved support, timely availability of inputs through the open market as well as the liberalised marketing environment, which enhanced viability of farming and boosted overall confidence. 63. The upturn in maize production when taken together with other grains resulted in an increase in cereal production from 1.51 million tonnes to 1.52 million tonnes against a national requirement of 1.95 million tonnes, giving a cereal deficit of tonnes. 64. The 3% increase in maize production over last season s production was in spite of poor performance in the southern provinces of the country. 65. Improvement in Government support extended to farmers saw a total of US$227.4 million or 25.9% of total Budget expenditure mobilised in support of cereal production and local grain purchase. Of this, US$197.1 million was availed in support of A2 and vulnerable A1 and communal farmers. Commercial Credit Scheme 27

28 66. Of the financial support to A2 farmers, Government, in conjunction with commercial banks secured credit facilities totalling US$82.9 million for inputs through the GMB. 67. Over-procurement, however, meant that out of the inputs secured, farmers only collected inputs worth US$59.5 million. This has left a carry-over stock of inputs valued at US$23.4 million being held at GMB depots comprising tonnes of fertilizer and tonnes of seed. Crop Input Pack Scheme 68. With regard to A1 and communal farmers, Government financial support largely related to provision of subsidised fertilizer inputs. Under this scheme, a 50kg bag of AN fertilizer was sold at US$7 against the market price of US$ Overall, farmers accessed tonnes of top-dressing fertilizers which Government subsidised to the tune of US$40 million. 70. Government support for agriculture was complemented by resources amounting to US$74 million mobilised by cooperating partners under the coordination of the Food and Agriculture Organisation. 28

29 71. These supported over vulnerable households under the input pack scheme, where each household received two 50kg bags of fertilizer, one AN and one compound D, as well as 10kg of maize seed. 72. The combined impact of Government and cooperating partner support for small holder farmers boosted communal farmers maize output to tonnes in 2009/2010. In the previous season, their output amounted to tonnes. Winter Wheat 73. Notwithstanding Government s US$20 million seeds and fertilizer inputs support for preparations for the winter wheat crop, uncertainty in the supply of electricity throughout the crop cycle has seen an increasing number of farmers reluctant to invest in wheat production. 74. By the end of the planting season on 31 May 2010, only ha had been put under wheat, against the targeted ha. 75. Consequently the uptake on the inputs secured by Government stood at 84 tonnes for seed and tonnes of compound D. This was against available stocks of 720 tonnes for seed and tonnes for compound D as at 11 June

30 Mining 76. In mining, productivity in the sector continues to be hamstrung by erratic power supply. This has meant that mining houses have not been able to sustain increased production even in cases where they have had limited access to lines of credit in support of recapitalisation. 77. As a result, realised output during the first half of 2010 has prompted downwards revision to overall mining sector growth from 40% to 31% in Most of this growth is underpinned by continued bullish mineral and metal prices. Mineral Production Jan Feb Mar Apr Gold (t) Nickel (t) Coal (t) 3, , , , , Asbestos () Chrome (t) Platinum (t) Source: Ministry of Mines, Chamber of Mines Gold Production 30

31 Chrome Production Nickel Production 31

32 Platinum Production Coal Production 32

33 Asbestos Production Gold and Platinum Production:

34 Nickel Production: Chrome Production:

35 Coal Production: Asbestos Production:

36 Shipments Contribution by Minerals for the first half of 2010 Diamonds 36

37 78. A total of over 4.4 million carats were produced since the beginning of the year to May 2010 from the country s four diamond mines, which includes Mbada, Canadile, Murowa and River Ranch. 79. Currently, there is no marketing of the country s diamonds as a result of issues related to the Kimberly Process Certification Scheme, a situation which has also affected traditional producers - Murowa and River Ranch mines, respectively. Manufacturing 80. The momentum of recovery in the manufacturing sector has not been sustained during the first half of 2010 as reflected by sluggish gains in average capacity utilisation levels still hovering around 35-40%. 81. Notable exceptions have, however, been noted in the food and beverages sub-sector where major gains in capacity utilisation have left some firms operating at about 70%. 82. In line with the experiences of the other production sectors, manufacturing continues to face major power outages, over and above absence of meaningful lines of credit in support of improved capacity utilisation. 37

38 83. This has sustained production costs at relatively high levels, with negative implications on the general competitiveness of domestic manufactured goods against imports from the region and beyond. Food, Beverages & Tobacco 84. The food and beverages sub-sector has witnessed notable growth following liberalisation and the introduction of multiple currencies in This allowed increased investment in new plant and equipment, particularly in the beverages sector where capacity utilisation increased beyond the initial STERP targets. 85. In line with the other sectors, challenges relate to erratic power and water supplies, coupled with shortages of working capital resources. Cotton, Clothing & Textiles 86. Capacity utilisation in the cotton, clothing and textiles sector during the first half of 2010 remains below potential production levels of tonnes. 87. During this period, the ginning industry managed to produce only tonnes of lint, also against cotton farmer viability challenges. 38

39 88. Other challenges facing clothing and garment manufacturing include lack of investment, which is constraining industry efforts to modernise plant and adopt newer and more efficient technologies. In the absence of this, competition over the domestic as well as export markets will intensify. Chemicals & Pharmaceuticals 89. The local pharmaceutical manufacturing industry has the capacity to supply more than 122 products, which translates to 47% of the country s essential drugs requirements. 90. However, primarily owing to lack of working capital and skills shortages, the industry operated at average capacity of below 25% during the first half of Metal Industry 91. The metals sub-sector provides strong backward and forward linkages to sectors such as mining, construction, agriculture, machinery, and transport. The sub-sector is operating at an average capacity of below 40%. 92. Challenges associated with Zisco Steel, previously the country s major steel producer, have further exacerbated the domestic 39

40 metals sub-sector. Zisco accounted for 80% of raw materials required in the production of steel and other related products. Leather Industry 93. The leather and leather products industry has capacity to produce a wide range of products such as semi-produced leathers, finished leathers, leather clothing, travel bags and cases, footwear and accessories. 94. Realising this potential, and raise capacity utilisation above 40%, will require major investments to overcome shortage of working capital and antiquated machinery. Fertilizer 95. The fertilizer and chemical industry has a strong impact on both agriculture and manufacturing sector performance. Currently, about 32% of fertilizer supplies are produced locally, while the balance are imports. 96. Capacity utilisation currently stands at 40% against the 19% recorded in This is expected to increase to around 45% by the end of 2010, mainly driven by refurbishment of plant at Sable Chemicals, which will help boost fertilizer output from 40 40

41 000 tonnes produced in 2009 to tonnes by the end of Tourism 97. In the first half of 2010 the distribution, hotels and restaurants sector which grew by an estimated 6.5% in 2009 showed further positive signs of growth, recording increased tourist arrivals, average room occupancy (37%) and overall earnings. 98. Arrivals to March 2010 were up 0.7% to over the first quarter of To year end, tourist arrivals are projected to remain upward against the background of sustained macroeconomic and social stability. 99. The market share for the overseas market stood at 12% in first quarter of Europe remains the major contributor to the overseas market arrivals in first quarter of 2010 having contributed 42% of the overseas market despite a 43% decrease in tourist arrivals from the region. America has the second largest overseas market share (22%) after Europe Africa which is the country s traditional main contributor to overall tourist arrivals, recorded an 11% increase in tourist arrivals from in the first quarter of 2009 to in 41

42 the first quarter of 2010, with South Africa alone accounting for 76% First Quarter Tourist Arrivals 42

43 101. Overally, the tourism sector is expected to grow by 3.5% during the year Construction 102. The construction industry, also a barometer for underlying business developments, has also been showing signs of resuscitation during the first half of In this regard, increased demand for such building materials as cement and bricks is being experienced Cement production is, therefore, projected to soar up by 140% to about tonnes in Similarly, suppliers of bricks and other building materials have also been experiencing gains in production, notwithstanding production challenges related to erratic power supplies and unavailable lines of credit. Consumption & Investment 104. The adverse effects of accelerating inflation on real incomes and tighter liquidity conditions slowed down both Government and private consumption during the first half of the year. Reflecting this, aggregate consumption during 2010 is projected to register decline of 2.4%, following a growth of 4.3% in

44 105. Similarly, aggregate investment growth is forecast to also decelerate to 26.8% in The slow down in investment is attributed to inadequate efforts to mobilise domestic savings, exacerbated by the wait and see attitude of investors linked to the perceived uncertainties related to the Indigenisation and Empowerment Regulations. Inflation GDP by Expenditure current prices GDP Expenditure 2009 (est) 2010 (proj) (Current Prices) Nominal GDP (US$ mil) 5,220 5,517 % Change (% Change) Final Consumption Private Consumption Government Consumption Total Investment Government Exports Imports Source: CSO, Ministry of Finance 106. Inflationary pressures picked up during the first half of 2010 with year-on-year inflation recording 0.7% in January, 1% in February, 3.5% in March, 4.8% in April 2010 and 6.1% in May

45 Jan-09 Feb-09 Source: CSO Consumer Price Inflation monthly % changes Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 CPI annual % chg eop CPI non food inflation Jan-10 Feb-10 Mar-10 Apr-10 May-10 CPI food inflation 107. The upward movement in prices of the above items partly reflects wage increases awarded in the first quarter of the year, which in turn increased unit costs of domestic production. Tariff adjustments for public utilities, as well as the strengthening of the South African rand against the US dollar also contributed to the price increases However, during the second quarter of 2010, the exchange rate between the rand and the US dollar had stabilised Failure to put a tight lid on the resurgence of domestic inflation would only serve to reduce the competitiveness of local goods 45

46 in both the domestic and export markets. The impact on our already income constrained consumers would be further resort to lower priced imported products, with adverse consequences for local production and employment Dec-08 Jan-09 Feb-09 Mar Price Indexes Tradable and Non-Tradable Good and services Consumer Price Index Dec 2008 = 100 Tradable and Non Tradable Goods and Services May-09 Jun-09 Jul-09 Aug-09 Apr-09 Oct-09 Nov-09 Sep-09 Jan-10 Feb-10 Dec-09 Mar-10 Apr-10 May-10 Source: Based on CSO CPI data Tradables Non Tradables All Items Financial Sector 110. With regards to the financial sector, the challenges remain the limited domestic deposit base to gradually improve the capacity of banks to provide meaningful credit to the private sector. 46

47 Banking Sector Deposits and Loans Source: RBZ Mar-09 Apr-09 May-09 Banking Sector Depostis and Loans (millions US$ and Depostits/Loans ratio) Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Banks Deposits Banks Loans Loans/Depisit Ratio 111. This has meant that although there has been some increase in bank lending throughout the first half of 2010, most loans remain short term (90 days or less) with longer-term loans accounting for less than 3% of the overall deposits. This has created serious challenges for the provision of longer-term debt capital thereby, limiting the intermediary role of the financial sector Credit costs of as much as above 30% and bank spreads of around 30% remain high, reflecting high credit risks and the liquidity crunch in the economy. 47

48 Banking Interest rates on loans and deposits Banking Interest Rates on Loans and Deposits and Spread (maximum annualized rates charged) M ar-09 A pr -09 M ay-09 Jun-09 Jul-09 A ug-09 Sep-09 Oc t-09 N ov-09 D ec-09 Jan-10 Feb-10 M ar-10 A pr -10 M ay-10 Source: RBZ Deposit Rates Lending Rates Spread 113. In terms of loans distribution, agriculture, transport and distribution followed by manufacturing were the biggest beneficiaries while construction got the least. Sectoral Distribution of Loans 48

49 Sectoral Distribution of Loans 30% 25% 20% 15% 10% 5% 0% Manufac turing Trans & Dist A gric ulture S ervices Individuals Mining Construction Other S ectoral Loan Dis tribution(31 Oc tober 2009) S ectoral Loan Dis tribution(31 December 2009) S ectoral Loan Dis tribution(31 April 2010) Zimbabwe Stock Exchange 114. Trading on the Zimbabwe Stock Exchange has largely been low, mainly due to market illiquidity in the first half of the year Foreign participation has remained subdued with investments mainly confined to portfolio restructurings. Corporate results have also failed to uplift the equity market as most corporates are still undercapitalised and also suffering from subdued demand Of the companies that sought recapitalisation mainly through rights issues, shareholder support averaged 50% with the balance being taken over by the underwriters. 49

50 117. The Tables below illustrate trading at the Zimbabwe Stock Exchange: Jan Feb March April May June Industrials Minings Source: Zimbabwe Stock Exchange 118. The industrial index which started the year at a high of had dropped to by June 2010, whilst the mining index fell from an opening of to Similarly, market capitalisation fell from US$3.97 billion in January 2010 to US$3.19 billion by end of June Jan US$ bn Feb US$ bn Mar US$ bn Apr US$ bn May US$ bn Jun US$ bn Source: Zimbabwe Stock Exchange The poor performance is as a result of investors pulling out their investments reflecting depressed investors sentiment over perceived financial risks, especially following gazetting of the Indigenisation Regulations on March In particular, foreign investors contribution to market turnover fell from between 40-50% to an average 20% per month. 50

51 Zimbabwe Stock Exchange Indices Zimbabwe Stock Exchange Indices % 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Apr- 09 May- 09 Jun- 09 Jul- 09 Aug- 09 Sep- 09 Oct- 09 Nov- 09 Dec- 09 Jan- 10 Feb- 10 Mar- 10 Apr- 10 Indus trial Index Mining Index Makert L iquidity Indic ators External Sector 122. The overall highlights in the external sector are that developments in the first half of the year point to further deterioration in the balance of payments to the end of the year This is against the background of slower recovery of exports, absence of external financial inflows, and growing reliance on imports Total exports for the first four months of 2010 were US$870 million against imports of US$ million, resulting in a trade deficit of US$675 million Notwithstanding some commodity price gains, notably gold and platinum, overall deterioration in the terms of trade during the 51

52 first half of 2010 will make it more difficult to finance the trade and current account deficits The current account gap is projected to widen further in 2010 to US$1.3 billion as imports rise to a projected US$3.6 billion for the rest of the year. This is against exports of US$1.9 billion and net private transfers of US$0.6 billion The current account deficit was largely financed by SDR allocations and reduction in banks foreign assets. Exports, Imports & Current Account Balance (% of GDP) % of GDP Years Exports Imports Current Account Deficit Monthly Exports and Imports (millions US$) Source: CSO/ZIMSTAT Note: Imports exclude imports of electricity Balance of Payments. Trade Account and Financing Balance of Payments Est Proj. 52

53 (US$ Mil) (US$ Mil) (US$ Mil) (US$ Mil) (US$ Mil) (US$ Mil) Current Account (excl.official transfers) % GDP Trade Balance Exports fob % GDP Imports fob % GDP Non factor services (net) Income (net) Private transfers (net) Capital Account (Incl. Official Transfers) Overall balance Memorandum items: Gross Official Reserves Months of imports cover Source: RBZ FISCAL DEVELOPMENTS 127. Cumulative tax revenue collections significantly improved in the first half of the year as a result of an increase in tax revenue and a slowdown in the growth of current expenditures Revenues for the year are projected to increase to US$1.75 billion, mostly stemming from increased VAT and PAYE collections, which in turn reflect improved economic activity as well as increased collection efforts at ZIMRA Notwithstanding increased tax revenue collections, the fiscal position remains fragile. The projected growth of revenue of 53

54 US$300 million falls far short of the projected shortfalls in the Vote of Credit US$810 million financing of the original 2010 Budget expenditures of US$2.25 billion Developments during the first half of 2010 confirm that the Vote of Credit has not performed at all. If not reversed, this threatens to leave the 2010 Budget as originally outlined in an unsustainable position This will simply mean that the Government will not be able to fulfil on some of those programmes it set out to undertake. Sadly, the bulk of the affected areas are in the key Public Sector Investment Projects, provision of social services including health and education This is precisely why a new paradigm is required. Indeed it is precisely why Refocusing, Regeneration and Revival is essential. It cannot be business as usual. Revenue 133. Whereas Customs Duty and VAT collections on imports accounted for two thirds of revenue during the first four months of 2009, taxes on income and profits have rebounded as economic recovery began to take root. Hence, domestic tax resources now account for two thirds of total revenue. 54

55 134. Cumulative tax revenue collections for the period January-June 2010 amounted to US$930.7 million, against a revised target of US$830.5 million. VAT, Pay As You Earn (PAYE) and Customs Duty contributed significantly to total revenue. Value Added Tax (VAT) 135. VAT contributed US$349.7 million or 37.6% of total revenue against a target of US$320.9 million. VAT on domestic and imported goods and services accounted for US$196.7 million and US$153.1 million, respectively. Customs Duty 55

56 136. Cumulative revenue collections from customs duty for the period under review amounted to US$132.8 million or 14.3% of total revenue, against a target of US$128.6 million. Revenue collections from customs duty for the same period in 2009 amounted to 31.5% of total revenue. Significant progress towards less reliance on trade taxes in preparation for harmonisation under the regional integration programme has, thus, been achieved. Pay As You Earn (PAYE) 137. PAYE collections for the period January-June 2010 amounted to US$168.8 million or 18.1% of total revenue against a revised target of US$139.1 million. PAYE contributions for the same period in 2009 amounted to US$47.9 million The significant improvement in performance of this revenue head is attributed to the re-engagement of employees as capacity utilisation in industry improves and improved remuneration is realised in both the public and private sectors. Corporate Tax 139. Corporate tax contributed US$100.5 million or 10.8% to total revenue, against a revised target of US$65.1 million. The 56

57 positive performance is mainly on account of increased estimated profit margins emanating from improved capacity utilisation. Excise Duty 140. Excise duty collections amounted to US$76.3 million against a revised target of US$100.6 million. The bulk of excise duty was collected from fuel and beer, which contributed US$40.8 million and US$16.7 million, respectively. Mining Revenue 141. Mr Speaker Sir, the contribution of mining to Budget revenue during the first half of the year remained low. This is indicative of key structural deficiencies in our taxation of mining sector activity Hence, while it is fact that Zimbabwe has a diverse spread of exploitable mineral resources, it is fact that the contribution of this sector to the fiscus has been minimal. Other Taxes 143. Revenue collections from other taxes for the period under review amounted to US$54.9 million or 5.9% of total revenue. 57

58 Collections from domestic dividends and interest, other indirect taxes and carbon tax contributed the bulk of revenue amounting to US$16.1 million, US$14.5 million and US$13.3 million, respectively. Non-Tax Revenue 144. Non-tax revenue is comprised of royalties, fees, charges and fines, pension contribution and revenue from investment and property. Collections from non-tax revenue during the period January-June 2010 amounted to US$47.6 million or 5.1% of total revenue against a target of US$44.5 million Although the revenue head performed below target, there was a significant increase in collections from fees and charges, benefiting from the review at the beginning of Expenditure 146. Expenditure developments during the first half of 2010 continued to be guided by cash budgeting adopted by Government since February Total expenditures during the first half to June 2010 amounted to US$813.4 million. Of this, US$720.5 million(89%) went towards current expenditures, whilst US$123.7 million was for 58

59 capital development projects. The balance of US$32.4 million was spent under the ZIMRA grant The amount attributed to capital expenditure falls far short of the requirements, if we are to address the infrastructure challenges facing this economy First half expenditure performance is shown on the pie chart below The current expenditure structure of the Budget where 82% of expenditure is recurrent underpins a complete absence of fiscal space and is unsustainable. This is precisely why this Review proposes a Refocus for the second half of the year. 59

60 Recurrent Expenditures 151. The bulk of the current expenditures of US$720.5 million for the six months January-June 2010 were on employment costs inclusive of pension, goods and services and transfers to grant aided institutions as detailed below The positive revenue performance during the past six months should ordinarily have allowed us more flexibility in addressing other critical expenditure issues affecting the country, particularly infrastructure. However, this was not possible as some budget items, particularly the wage bill continued to crowd out social and development expenditures. Employment Costs 153. Employment costs comprised the civil service wage bill, pensions and remuneration to grant aided institutions. These amounted to US$493.2 million against total Government revenue collections of US$930.7 million As a result of the wage bill absorbing a disproportionate share of revenue, fiscal space for non-wage operational expenditures as well as critical capital expenditures urgently needed for rehabilitation and infrastructure development was reduced. 60

61 Civil Service Wage Bill 155. The graph below illustrates developments and fluctuations on the payroll and wage bill for the civil service. 61

62 156. The wage bill has been steadily growing over the last six months, from an average of US$50 million over the first two months, rising to US$55.1 million by June This outturn is mainly because of a net growth in employment levels of , for which the Ministry of Education, Sport, Arts and Culture is accounting for (79%) as illustrated in the graph below: 62

63 158. The current wage bill levels of around 60% of the total Budget and 15% of GDP compromises both non-wage operational and critical capital expenditures. Regional best practices indicate levels of 30% of the total Budget and 10% of GDP. Operations and Maintenance 159. To date, expenditure on Operations and Maintenance stands at US$126.1 million against a target of US$120 million. The expenditures are comprised as follows: rentals and vehicles and other hire services (US$31.6 million), foreign travel (US$13.1 million), Ministries programme expenses (US$35.2 million), maintenance of buildings and equipment (US$14.3 million), domestic travel (US$4.6 million) and other operational expenses (US$27.3 million) as indicated in the graph below. 63