A glimpse at the dashboard of
policy makers usually reveals a full host of tools and instruments they can
employ to manage and guide the economy. It is so good and proper when the
monetary and fiscal policy tools and/or instruments can detect the drivers of
the economy and moderate them to avoid stagnation or overheating whilst
balancing the broad objectives of maintaining price stability, promoting
sustainable income growth and creating employment that narrows income
inequalities. The Zimbabwe Revenue Authority year end report detailing the tax revenue
heads contribution to the total tax revenue for 2012 reveals the shadowy
underlying drivers of the economy that are beyond the control of most of the policy
makers tools and instruments. And that creates a difficult economic management
challenge for policy makers as the economy operates on more or less a self-determined
auto-pilot mode. That probably explains some of the policy challenges we have
been facing like, for example, the under performance of economy vis-à-vis most
of the Medium Term Plan targets of economic growth, employment levels, saving
and investment rates, among other targets.
The Zimbabwe Revenue Authority
reported that of the total gross revenue of $3.45 billion for 2012, Value Added
Tax contributed the most at 33%, followed by Individual Tax at 21%, Corporate
Tax 14%, Excise 12% and Customs 11% and mining royalties at 4%, among others. An analysis of these revenue
heads' contribution to total government revenue reveals a worrying policy
phenomenon. The fact that the individual tax is much lower than VAT
contributions reveals a lot of structural deficiencies, mis-alignments and the
existence of a strong and vibrant shadowy or underground economy that is
pulling the strings, more or less like the Zambian economic management model
where trade taxes targets for 2012 were 37.5% of total expected revenue –thus
about 6.5 trillion Kwacha. Generally, aggregate VAT collections should be less
than the individual tax collections because of the basic reasoning that VAT is
charged on expenditures propelled by income that would have been taxed
already.
Considering that in Zimbabwe most
basic food stuffs, exported goods and agricultural inputs and implements being
zero rated, it should even make much more sense that individual taxes should be
significantly higher than VAT. More often than not in normally functional
economies, governments collect more of individual taxes than VAT. In South
Africa for example, Individual taxes contributed 33.7% of the total tax revenue
of R742 billion for 2012, compared to 25.7% for the VAT revenue head. In more
developed countries like the UK for example, VAT contributed 15% of total
revenue in 2009 compared to the direct individual tax at 29%. The fact that VAT and customs
duty (trade taxes) contributes $750 million more that individual taxes points
to the existence of a combination of significant external funding and a strong
underground economy that is able to generate foreign exchange but going under
the radar of the taxman, and indeed the latter can easily be explained by
smuggling of minerals exports and commodities.
The existence of external
funding sources is always good to have for any country, and certainly the
external loans from the likes of PTA Bank, Afrexim and so on have been handy in
providing a window of finance for various corporates in Zimbabwe during this
very important revival and recapitalisation stage in their business life-cycle.
Equally and in addition to the cross-border loans, the remittances from the
Diaspora, estimated above $250 million a year, have been forming a very
important pillar is bolstering domestic demand and financing the current
account. Although external loans and Diaspora remittances can explain part of
this huge worrying disparity between individual taxes and VAT, the fact remains
clear that these two sources of external funding are quite small and cannot
even explain even a fifth of this wide variance.
It leaves little doubt that
smuggling of minerals and other commodities out the country could be one of the
major sources of domestic wealth that is contributing to there being an amusing
revenue structure for the government. Unfortunately this has been creating a
host of challenges for the policy makers as the economy sets itself on some
self-determined auto-pilot mode, rendering most of the policy tools and
instruments less effective in determining the desirable economic course.
What could even be more puzzling
is the country’s balance of payment position. Zimbabwe has been running massive
negative balance of payment positions since the early 1990’s. Combined with the
large budget deficits that were being financed largely via seigniorage revenue,
exchange rate management became a big headache for policy makers and a host of
foreign exchange controls were instituted to manage the ever depreciating
exchange rate. The dollarisation of the economy in 2009 resolved these exchange
rate management challenges but the extent of the balance of payment position
since then has been posing more questions than answers on exactly what is it that could be financing
it. The negative balance of payment position has cumulatively exceeded $7
billion since 2009.
Although there could be merit in believing that the local
banking sector has been financing this negative BOP position, the fact that
only $4 billion deposits exists in the banking sector means that this claim is
grossly over-exaggerated and cannot explain how this country continue to import
more than it is generating from exports at a time the government is not in a
capacity to print money. On the hand, there is not much in capital investments
by foreign mining and manufacturing companies that could be explain how this
country continues to afford importing more goods than it is exporting without
the help of the government money printing press. Upon evaluating the foregoing
and after netting off the potential influence of Diaspora remittances, a
careful conclusion could be drawn that Zimbabwe is generating a lot of
unrecorded exports that are financing the imports.
This foregoing analysis about the
puzzling source of financing for BOP position mirrors equally the amusing
government revenue structure where VAT contributes more than individual taxes. Of course there are other valid
arguments that arise in attempting to explain why the individual taxes would
generally be low in Zimbabwe. One such is the deep-seated high unemployment
level estimated above 80% that has been a major policy challenge for a long
time. This high unemployment level seriously undermines the ability of the
taxman to raise more of the individual tax head. Although the unemployment
rates have been historically high for the past decade, the dollarisation of the
economy in 2009 ushered in new challenges for the many corporates that had
survived hyper-inflation under the shield of implicit subsidies that emanated
from the excessive seigniorage revenue accruing to the central government.
The
dollarisation and subsequent de-monetisation that wiped savings eroded these
subsidies and with the corporates having to survive on their own in face of
global competition, hard times began to bite. Today most big companies, save
for a few in food and beverage industries, have had to downsize their employment
levels. A sizeable number had to close and that has thrown a lot of workers
onto the streets. Even the mining sector that looks glittery, all is not
rosy. Although mining sector raked in
$1.86 billion in exports last year and is the biggest foreign currency earner
for Zimbabwe, some big mining and mineral processing companies have not been
spared the post-dollarisation challenges that have been affecting the rest of
the economy. The likes of Bindura Nickel, Rio Zim and Zimasco, Monacrome
and Zim Alloys, among others, are having
operational challenges that have definitely affected their ability to employ
more or retain employees.
This high unemployment level, in the absence of a
comfortable social safety net where there are unemployment benefits, has
created a vibrant category of self employment in many forms, from vegetable
vending to small informal cottage industries. Although these activities
generate income that sustains the livelihoods of many, the incomes are not
taxable and even if they would register to pay taxes, it is most likely the
majority of these would fall within the tax-free thresholds. Whatever arguments can be put across to
explain why the VAT collections are much more than the individual taxes cannot
exactly be backed by known facts, save to make informed assumptions that the
underground economy in Zimbabwe that is below the taxman’s radar is very big
and vibrant and indeed has been the driving force behind the financing of the
BOP position and all other trades as evidenced by the huge VAT collections. Considering
that the economy is dollarised and that this shadowy economy generates foreign
currency, it wouldn’t be further from the truth that the activities involve
smuggling or under-invoicing of mineral and commodities exports. Until such
time that such activities are exactly known to the policy makers and can be
brought into the formal sphere, influencing key macro-economic variable would
always remain a big challenge for policy makers.
