Finance Minister Mthuli Ncube who was asked to make a ministerial statement on the state of the economy two days after the government announced a 2 percent tax and reintroduced foreign currency accounts, finally made the statement in the Senate yesterday.
He said the economy was expected to grow by 6.3 percent but Zimbabwe is likely to have a trade deficit of $2.3 billion because it has exported goods and services worth $5 billion but has imported $7.3 billion worth of goods.
Ncube said Zimbabwe has so far received 165 applications for foreign investment valued at $15.8 billion but so far those worth $1.8 billion have been confirmed.
Government is currently crowding out the private sector as its borrowing is 62 percent of the credit finance available.
On the 2 percent tax, he said government had to do something to raise revenue because of its huge budget deficit which is now 10 percent of gross domestic product.
“I now want to take this opportunity Mr. President, to explain the rationale behind the 2% tax on financial transactions. In order to tackle the budget deficit that is huge, I need two approaches,” he said.
“The first approach is to expand revenue. The second approach is to contain spending. Going back to expanding revenue, the 2% tax was introduced in order to expand the revenue, to expand the tax base.
“The economy has grown as I have explained, it is bigger than we think but also the economy has become more informalised. In that process, it has become more electronic in terms of means of transactions.
“Therefore, it became very useful for us to think of ways of introducing a tax that will speak to informality, that will also spread the tax base in the way that I have tried to explain. This electronic transaction tax was the way we thought about this. I am sure there are other ways and options but we think that this is the best.
“If you observe globally, I do not know whether you read the news about what happened in the UK yesterday, where the Minister of Finance in the UK is thinking of a similar 2% tax on electronic transactions; they call it a digital tax. It is very similar.
“Do not be surprised if this Zimbabwe tax that we started here is going to be copied all over the world, especially in developed countries.”
Below is the minister’s statement in full
STATE OF THE ECONOMY
THE MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT (HON. PROF. M. NCUBE): Thank you Mr. President and thank you Members of the Senate for this occasion to present to you a report on the state of the economy. This is a short report because I will have other opportunities to present a much longer report during the budget statement but also in my interactions with you and Members of the Lower House in Bulawayo next week. This statement is a statement about the state of the economy rather than policy pronouncements about what I will be doing going forward. I have reserved those for the Budget but as I speak, I will signal the policy direction as well.
In order to put the state of the economy into context, I want to share with you the state of the global economy and this is important. We are seeing strong growth of the order of 3.7% this year and the same figure next year. This is being driven by mainly strong growth in North America, mainly United States after the cutting of taxes by the Executive in that country and strong growth that we have seen in what we refer to as emerging markets which really referred to the large developing countries which is China and India – with China showing growth of the order of 6.5% this year and slightly lower at 6.2% in 2019 and India growing faster with projection growth levels above 7.3% this year and similar figure next year.
I am happy to leave a document behind so that all these numbers are clear. I have got a table showing that. This recovery in growth and you will see where I am going with this when I come to Zimbabwe. Globally, it is stopping commodity prices from collapsing. Basically strong growth from China and India are good for commodity prices and Zimbabwe is exposed to those commodity prices. I must say that when it comes to oil, it is not so good because with the oil price averaging $75 per barrel, that is not good for us because we are a net oil importer but it is good for other African countries that are net oil exporters.
Within Africa and the region itself, we see growth in Zimbabwe hovering around 6.3%. We have revised it upward from 4.5% which we thought would be the growth this time last year but we have revised it upwards because we see more robust factors impacting the economy positively. It is not surprising therefore to see the interest in foreign investors coming through to Zimbabwe Investment Authority which will become a one-stop-shop soon. With 165 applications worth US$15.8bn in the first half of 2018, we noticed that in terms of foreign direct investment, US$1.8bn has been confirmed this far, 2018 and we are desirous that this figure moves up to US$2bn in 2019. This interest shows that foreign investors see dynamism in this economy and certainly our growth prospects augur well for the returns of the investors who are showing this interest.
Where is this growth coming from? It is being driven by the mining sector growing at about 26% currently. I am still concerned though about some of the developments in that sector where we are seeing the currency shortages beginning to impact the sector in this last quarter of the year. I still expect very strong growth from the sector. The other driver is the construction sector which is growing at about 14% and as you are well aware, the RBZ has a construction sector fund that seeks to support this sector going forward.
Finally, the third strong growth sector is agriculture growing at 12.4% and we know quite a bit – some of you here are beneficiaries of strong agricultural sector programme which seeks to drive food security in Zimbabwe but also earn much needed foreign currency within the country.
I must say because of this robust activity in the Zimbabwe economy – the economy is actually bigger than we think. We have been saying that the economy is $18bn in size in terms of GDP. That is just a figure. The real figure is that the economy is actually $25bn in size. It is 40% bigger. I made this announcement about two weeks ago just before I went off to Bali to begin the interaction negotiation with partners whom we owe money globally. The dynamism is coming from the expansion in the informal, services and financial sectors. The services sector has grown and it is driving this growth in the size of the economy.
This phenomenon is not unique to Zimbabwe. All other African countries are experiencing this where the services sector has grown. There is a rule that every five years, the economy has to be rebased. What I am explaining in terms of the change in the size of the GDP, that was a rebasing exercise. In another five years, we are going to rebase and again the economy will move upwards accordingly.
In the agricultural sector, what is driving growth is obviously productivity in tobacco, cotton, sugar cane and soya beans. In the mining sector it is gold, coal and chrome being the main drivers. Again I have got a table in my written note that explains where this growth is coming from sector by sector. I have included all the sectors that you may think of in Zimbabwe.
I now want to turn to inflation which is the internal value of money. The rising money supply occasioned by the budget deficit financing coupled with foreign currency shortages has seen a surge in inflationary pressures during the first half of 2018 but also in this third quarter of the year, already the evidence is pointing in that direction. Annual inflation stood at 5.4% in September 2018 with signs of resurgence as I have said compared to the first six months where it was relatively stable. I have got a chart below that shows the movement in this inflation upwards in terms of the visual presentation of this upward trend.
The main drivers of inflation during this period have been the parallel market exchange rates driven by foreign currency shortages giving rise to speculative demand as well as induced demand of US dollar as an asset of store of value. The eventual pass through effect of this exchange rate premiums has filtered into a sudden price increase particularly on goods as you can imagine. This was worsened by the firming oil prices that I referred to and the depreciation of the South African Rand against the US dollar which also has an impact because that is our largest trading partner. Anything that happens to the rand-dollar exchange rate is transmitted into Zimbabwe as well.
Switching to public finances, with cumulative revenues of US$3.8bn and expenditures of US$6.2bn between January and September this year, the resultant budget deficit of US$2.4bn is unsustainable in the light of constrained capacity to close the gap. We have had an unsustainable budget deficit. This year that budget deficit will come out at a double digit above 10%. I am determined that within the next two years it comes down to single digit. I have a target over a three year period to bring it to just below 4%. That target is contained in the Transitional Stabilisation Programme. I urge you all to go to that section that pertains to fiscal consolidation. Fiscal consolidation is what I will be focusing on quite a bit in terms of macro agenda.
It is therefore not surprising that we have issued so many Treasury Bills in value in order to finance this budget deficit in Government. The way these Treasury Bills have been financed also in my view has not been according to best practice so far. Best practice dictates that there should be an auction, it should be subjected to market mechanisms that would have actually made sure that the interest rate we are paying now would have been lower by as much as 3% because on the private placement, that was being implemented before we were paying interest rates of about 10 percent. We know that if we had gone to the market, we would have paid 7% interest saving 3%. Now, we have to continue servicing that extra interest. Therefore, I have decided that the auction system should start and we will probably be doing a small auction before the year-end just to test market to see if it works. It is not a desire to raise funding frankly; there are other ways to do that but it is to test the system to make sure the auction system works.
Mr. President, the overdraft facility between the Central Government and the Reserve Bank of Zimbabwe is huge. It is way above the limit of 20% of the previous year’s expenditure. It should be about $700 million, but right now we are sitting at over $2 billion in terms of that exposure. However, there is a little bit of good news which is that, we have not received as much as $3.3 billion from corporates that have not remitted the taxes that they have collected to ZIMRA on VAT. We are moving quite aggressive to collect that. We can see that we will be able to cover that Reserve Bank hole using the unremitted taxes that have been collected from individuals by the corporates.
Uncollected taxes, if I can break it down, it is about $2.3 billion being the principal, $1 billion being the interest because I have had to borrow to finance that hole. So I have to charge interest on unremitted taxes and penalties for late remittance which is another billion. In total, it comes to $4.5 billion. I am prepared to wave or to reduce the penalty portion so that it is manageable by the corporates. Twenty percent of those unremitted taxes are due to parastatals, our own institutions that we will cajole over time to pay. That is the overdraft facility.
Turning to the financial sector, Mr. President, the money supply stock stood at $9.14 billion in June this year translating to a year on year growth of 40.81%, a huge surge in domestic money supply from a figure of $6.49 billion in June the previous year 2017. It is projected that money supply will grow by 38.2% in 2018 compared to an initial projection of only 20.14%, a huge surge in money supply. Why is this growth coming through in terms of money supply growth? It is due to Government expenditure. Again, it is back to the deficit. The impact Mr. President, is that the deficit I referred to earlier is causing growth in money supply. That growth in money supply is also fuelling inflation. That is not good. It is important to contain the budget deficit in the way that I explained. Let me turn to ….
THE HON. DEPUTY PRESIDENT OF THE SENATE: Order. Hon. Members, I do not have to keep reminding you that when you bring cellphones into this House, you must switch them off or put them on silence. I hope this will not happen again.
HON. PROF. M. NCUBE: Thank you once again Mr. President. For emphasis, if you look at Government borrowing compared to borrowing by the private sector Government is borrowing about 62% of the entire credit available in the financial sector. Government is crowding out the private sector, yet we know that…
THE HON. DEPUTY PRESIDENT OF THE SENATE: Order. Minister!
HON. PROF. M. NCUBE: I am sorry Mr. President.
THE HON. DEPUTY PRESIDENT OF THE SENATE: I am sorry Hon. Minister , you may proceed.
HON. PROF. M. NCUBE: Thank you Mr. President. Government is borrowing 62% of the credit available in our financial system and only the remainder is available for private sector and quasi Government institutions. Clearly, the Central Government is crowding out the private sector and yet we want the private sector to receive the bulk of the credit so that they can develop projects, employ more people and create jobs. This is an uncomfortable situation that I am determined to turn around.
I now want to take this opportunity Mr. President, to explain the rationale behind the 2% tax on financial transactions. In order to tackle the budget deficit that is huge, I need two approaches. The first approach is to expand revenue. The second approach is to contain spending. Going back to expanding revenue, the 2% tax was introduced in order to expand the revenue, to expand the tax base. The economy has grown as I have explained, it is bigger than we think but also the economy has become more informalised. In that process, it has become more electronic in terms of means of transactions. Therefore, it became very useful for us to think of ways of introducing a tax that will speak to informality, that will also spread the tax base in the way that I have tried to explain. This electronic transaction tax was the way we thought about this. I am sure there are other ways and options but we think that this is the best.
If you observe globally, I do not know whether you read the news about what happened in the UK yesterday, where the Minister of Finance in the UK is thinking of a similar 2% tax on electronic transactions; they call it a digital tax. It is very similar. Do not be surprised if this Zimbabwe tax that we started here is going to be copied all over the world, especially in developed countries – [HON. SENATORS: Inaudible interjections.] –
THE HON. DEPUTY PRESIDENT OF THE SENATE: Order. You will have an opportunity to interact with the Minister. He is delivering his Statement, there is no need to interrupt him.
HON. PROF. M. NCUBE: Thank you Mr. President. In the rest of Africa, you also have other countries that have a similar tax or a variation of it such as Tanzania, Kenya, Uganda and Senegal. These taxes are far more widespread than we realise. This tax is dealing with the revenue side of dealing with the problem. On the cost containment side Mr. President, during the Budget Speech, I will outline measures for dealing with Government waste and cost containment. For a start, we have not yet authorised the purchase and issuance of our vehicles for the Legislature and for the Executive. I know that only the chiefs got some vehicles but not everyone else. Again, we need to signal to the Zimbabwe people that we are serious about cost containment. We will deal with the issues such as travel, wage bill, enforcing retirement policy and so forth. The list is long in terms of cost containment and I will outline this in the Budget. I believe there is political will to see this through and certainly, the President, the Head of State has shown his commitment in following through on this cost containment.
Let me now switch Mr. President to the external sector. If you look at exports of goods and services, these are projected to close of year at about $5 billion, largely driven by mineral and tobacco exports whilst overall imports of goods and services are projected to be at about $7.3 billion for the same period. You can already see that we do have a current account, a deficit in our balance of payments where our exports are lower than our imports and there lies a problem. We have as a country what we call a twin deficit problem. We have a current account deficit and we have a fiscal deficit. These two are linked and they are a problem. We need to deal with both of them.
So, you will find that for instance, on the current account deficit, I am going to take measures to make sure that we discourage excessive imports of luxury goods. There are some who have even suggested that we should even start charging in United States dollars in terms of import duties on cars. All these are ideas and suggestions and we are processing them to arrive at the right way to deal with excessive spending in terms of imports.
Also, the lifting of SI 122 which is designed to increase the supply of goods into Zimbabwe; given the hike in prices and then also curtail supply is all trying to target this current account deficit to make sure that again we bring down prices as well as improve supply in this sector. Again, I have got a table that shows exactly what the standing is in terms of this external sector balance.
I want to conclude by mentioning two issues. One is the issue of external engagement. This is a very important issue. We need to engage externally and we need to clear our arrears with what we call the preferred institutions – the African Development Bank on one hand and the World Bank on the other, but they must be cleared simultaneously. It is called the pari-passu principle. That is how it works in terms of being debtors to those institutions. So, we owe both of them close to $2 billion and we are determined that in the next 12 months we will clear those, we will pay them off and then we will move then to the second stage which is re-negotiating what we call the Paris Club creditors.
This is the individual countries – France, UK, USA whom we owe again monies individually, but they also happen to be the shareholders of the first two institutions that I mentioned. So, you are dealing with the same group of creditors or partners to Zimbabwe. I have started engaging them very seriously, building on previous work. When I was in Bali, they asked me to present the Transitional Stabilisation Programme (TSP). I did that to all of them. It was well received. Their view is that it is a credible programme and they are saying you must now walk the talk. They said Minister, we like the TSP, but please you and your colleagues in Government walk the talk and implement these measures that you want to implement and then we can work together and help you clear your arrears. That is what they are telling us and I am determined that we walk the talk at least in terms of my part sitting in Treasury.
Now, in terms of the ultimate resolution, in terms of Paris Club negotiations, there are many options on the table, several options. The options, by the way, are determined by the creditors. We do not choose how our debt should be resolved, but we can only ask. So, it could be HIPIC or HIPIC like, it could be customised, it could be ad-hoc. There are so many technical terms that are used but by the end of the day, all we want is for our debt to be resolved, that we have less of it and that is all we are looking for so that we can grow our economy.
Then finally as the last point Mr. President, is the Transitional Stabilisation Programme. Notice that what I have done in presenting on the state of the economy, I have just focused on the broader macro. There are very critical issues and drivers of this economy which is in micro part such as agriculture. What we are going to be doing in terms of agriculture is all in the TSP – how to enhance Command Agriculture, making sure that more finances are available from the banking sector. We have been speaking to them- how to resolve the payment to the farmers which is still unresolved as per the Constitution. Again, all of that is in the TSP. Our support for the mining sector in terms of beneficiation, in terms of coming up with a simple but credible and effective fiscal regime for the mining sector, reflecting on the retention ratios for instance when it comes to foreign currency, all of that is in there.
We focus on the construction sector. All the sectors are included such as the tourism sector which is a low hanging fruit. The multiply effect in the tourism sector is three times. You bring one tourist here, for every dollar they spend, the multiply effect is three times within the economy. So, this is low hanging fruit and we are determined to support that sector as well. The list is long, but of course, we have not forgotten the environment of doing business, the institutional reforms that we spoke about earlier when I was answering questions – all of this is in the TSP.
Mr. President, at the back of the document, we have a table as to the projects and programmes that we will undertake during the first two years up to year 2020 and then building on to the next five year plan and then the last five year plan to take us to 2030. We have a schedule, we have a time table, we have the actors and these will be monitored using the results measuring framework that we have all signed up to as Ministers.
To conclude and take my seat, I will give a further presentation on the state of the economy next week when we discuss the road map for the budget in Bulawayo, but also when I give the budget on 22nd November. Thank you, Mr. President.