Chinamasa’s budget review statement

Government of Zimbabwe

THE 2016 ANNUAL BUDGET REVIEW
AND OUTLOOK FOR 2017

Presentation to the Parliament of Zimbabwe
By
The Hon. P.A. Chinamasa, MP
Minister of Finance and Economic Development

20 JULY 2017

INTRODUCTION

1. Mr Speaker Sir, during my presentation of the 2017 National Budget on 8 December 2016, I indicated that, I will be bringing a comprehensive Annual Budget Review, with fiscal and macro-economic outturn to December 2016.

2. I further indicated that the presentation of the 2016 Annual Budget Review also allows opportunity for reporting on 2017 recent macro-economic developments and prospects.

3. Accordingly, Mr Speaker Sir, this Review confines itself to 2016 developments and outlook for 2017, while fiscal and taxation proposals will be contained in the forthcoming 2018 National Budget.

4. For purposes of accountability and transparency, Treasury will also continue to provide Quarterly Treasury Bulletins, capturing quarterly macro-economic and fiscal developments, in addition to the Consolidated Monthly Financial Statements, which are tabled in this August House in line with the Public Finance Management Act.

5. These arrangements should therefore avail the public with necessary information on relevant economic developments, that way enhancing and supporting their decision making processes, activities and engagement with Government on overall economic policy issues.

6. Allow me, therefore, Mr Speaker Sir, to unveil and table the first Annual Budget Review and Outlook for 2017, focusing on its main highlights.

CHAPTER 1: REAL SECTOR DEVELOPMENTS

7. Mr Speaker Sir, 2016 was a difficult year, challenged by a severe drought coupled with depressed international commodity prices. Despite these developments, the economy registered a modest growth of 0.7% against a Budget target of 2.7%.

8. Growth prospects for 2017 are quite positive. This follows a resounding agricultural season and partial rebound in international mineral prices. These positive developments gave impetus to the rest of the other sectors, to give a projected growth of 3.7% this year.

9. Details on respective sector performance are in the main document.

Agriculture

10. The recurrence of drought from the previous two years severely affected most crops and livestock, with significant losses in yields experienced in the drier southern parts of the country.

11. The 2016/17 agriculture season, saw much stronger Government and private sector cooperation in supporting the sector under various cropping programmes including the Special Maize Production Programme, popularly called ‘Command Agriculture’ .

12. Already, positive results are evident, with this year’s strong recovery of agriculture estimated to yield a commendable 21.6% growth.

Comprehensive Monitoring and Accounting

13. The success of the ‘Command Agriculture’ was not only anchored on better financing preparations and good rainfall, but also comprehensive monitoring and evaluation by teams drawn from different Government Agencies at National level.

14. These teams closely monitored utilisation of inputs and farming activities with a view to ensuring the success of the Programme in terms of yields and capacity for loans repayments.

15. All monies extended to beneficiaries under the ‘Command Agriculture’ Scheme are, therefore, being accounted for and audited under the Command Agriculture Fund approved by Parliament for that purpose and administered by the Ministry of Agriculture, Mechanisation and Irrigation Development, with recoveries maintained by Agribank.

Extension of the ‘Command Agriculture’

16. Building on the experiences of the first phase of the Programme, preparations for the 2017/18 agriculture season have already begun, with mobilisation of financial resources, procurement of seeds, fertilizers and chemicals underway.

17. Starting with the 2017/18 agricultural season, ‘Command’ wheat, ‘Command’ livestock, ‘Command’ fisheries and ‘Command’ wildlife will, therefore, be unveiled with a total value of about US$334 million.

18. This will be complemented by the Presidential Input Scheme valued at US$153.1 million to cater for about 1.8 million rural households. Under the Presidential Input Scheme, cotton will be supported to the tune of US$60 million, catering for 400 000 households with grain production taking up US$52.9 million, and the balance supporting oilseed crops such as soya beans.

Mining

19. In 2016, the mining sector realised output gains across most minerals with the exception of coal and diamonds, underpinning overall growth of 8.2%.

20. This was notwithstanding relatively low international mineral commodity prices. However, enhancement of the viability of mining companies producing gold and platinum benefitted from the review of royalties.

21. As a result, mining contribution to GDP increased to 8.7% from 7.9% recorded in the previous year.

22. With regards to gold production, I commend Small Scale Miners, whose contribution is gradually increasing to reach 42.6% of total gold output in 2016, from 36.7% in the previous year.

23. This category of miners will also benefit from Government support through the SMEs Mining Loan Fund, as well as the recently launched US$20 million SME Facility for artisanal miners.

24. In 2017, the ongoing reforms in the diamonds and coal industry are already seeing the turnaround of these sub-sectors and providing impetus for higher growth in the sector.

25. With the capitalisation of the ZMDC to the tune of $80 million, diamonds output during the first half of 2017, were 1.1 million carats against 690 000 carats realized during the same period last year.

26. Coal output is also on the increase following implementation of turnaround strategies at Hwange Colliery. Following Government capitalisation of Hwange Colliery and appointment of a new Board, coal production has jumped from a low of 80 762 metric tons per month in 2016 to 170 000 metric tons in May 2017 and 234 000 metric tons in June 2017 as turnaround strategies began to bear fruit.

27. With all these initiatives, the mining sector is expected to grow by 5.1% in 2017.

28. Mr Speaker Sir, let me, however, mention that, notwithstanding the positive growth in mining, and the sector being number one contributor to foreign exchange earnings, its contribution to the fiscus remain low, accounting for a meagre 2.2% of total revenues in 2016.
Mining Sector Revenue Share
2009 2010 2011 2012 2013 2014 2015 2016
Total Government Revenue (US$ Millions) 934 2,339 2,921 3,496 3,741 3,727 3,737 3,502
Mining Revenue (US$ Millions) 50.6 154 161.3 245.8 185.2 335.9 139.9 75.74
Mining Revenue Share (%) 5.4 6.6 5.5 7 4.8 9 3.7 2.2
Source: Ministry of Finance and Economic Development

29. The finalisation of the Mining Fiscal Regime will therefore address this challenge.

Industry

30. The positive impact of Government interventions in support of domestic value addition contributed towards revival of the manufacturing sector.

31. This included Statutory Instrument 64 of 2016, domestic financial system export incentive arrangements by the Reserve Bank of Zimbabwe, as well as supportive duty rebates on imported capital equipment.

32. The promotion of value chains, especially those linking agriculture and other extractive sectors to manufacturing, and construction sectors added impetus to the revival of the industry and with spillover effects on other service sectors.

33. Resultantly, weighted average capacity utilisation improved from 34.3% to 47.4% in 2016 in sub-sectors such as foodstuffs, textiles and ginning, clothing and footwear, non-metallic mineral products and metals and metal products.

34. The sector is, therefore, estimated to have grown by 0.3% in 2016 compared to 0.2% recorded in the previous year.

35. In the outlook, activity in the sector is expected to improve on account of strong agricultural performance and related value chains, continued implementation of SI 64 of 2016, the use of plastic money and the ongoing doing business reforms to reduce cost structures.

CHAPTER 2: FISCAL REVENUE PERFORMANCE

36. Mr Speaker Sir, revenue outturn for 2016 was US$3.5 billion, reflecting an overall revenue shortfall of US$347.8 million from the Budget target of US$3.85 billion.

Revenue Performance: January to December 2016
Actual
(US$ mil) Target
(US$ mil) Variance
(US$ mil) Variance
(%)
Total Revenue 3 502.0 3 850.0 -347.8 -9.0
Tax Revenue 3 237.0 3 607.0 -370.0 -10.3
Non Tax Revenue 264.8 242.8 22.0 +9.1
Source: Ministry of Finance and Economic Development

37. A significant portion of tax revenue during 2016 was generated from Consumption Taxes i.e. Value Added Tax (VAT) and Excise Duty, as well as Personal Income Tax.

Contributions to Total Revenue

Source: Ministry of Finance and Economic Development

38. During 2017, indications are that revenues will improve following various measures being implemented by ZIMRA in conjunction with other Government Departments on countering leakages.

39. Specifically, VAT is expected to benefit from the rationalisation of the schedule of zero rated goods and services which will reduce the value of refunds and the associated fraud.

40. In addition, the VAT withholding tax system, expansion of the fiscalisation programme to Category A, B, and D Taxpayers, increase in the number of licensed suppliers of fiscal devices and the on-going formalisation of SMEs as well as carrying out lifestyle audits, will all improve efficiencies in revenue collection as well as broadening the revenue tax base.

41. On the other hand, excise duty on fuel will continue to benefit from the implementation of the electronic cargo tracking system and the alignment of excise duty on paraffin with diesel. This has limited revenue loss from transit fraud and unscrupulous trading of paraffin for blending with diesel.

42. Corporate Income Tax collections should continue on an upward trajectory on the back of measures aimed at minimising base erosion and profit shifting by some associated companies and foreign business enterprises.

43. Furthermore, the promulgation of Regulations to govern the activities of Clearing Agents and Tax Consultants in the second half of the year will assist in mitigating tax fraud to the benefit of the fiscus.

44. On the back of the above measures, tax revenue performance during the first half of the year 2017 has been 1.4% above Budget estimates.

45. By year end, revenues are expected to rebound to US$3.7 billion, in line with the National Budget projections.
CHAPTER 3: OVERALL EXPENDITURE OUTTURN

46. Expenditures, at US$4.9 billion against a target of US$4 billion were however higher than envisaged, to give expenditure overrun of US$902 million.

Expenditure Outturn
Budget Estimate Expenditure Outturn Variance
US$m US$m US$m
Total Expenditure & Net Lending 4,000.0 4,902.2 (902.2)
Employment Costs 3,191.0 3,209.8 (18.8)
Operations and Maintenance 384.0 604.8 (220.8)
Interest 110.0 120.2 (10.2)
Capital 315.0 967.5 (652.5)
Source: Ministry of Finance and Economic Development

47. The major driver behind US$902.2 million overruns were interventions in support of recovery of our agriculture, which amounted to US$615 million, against 2016 Budget provision of US$66 million.

48. Other expenditure overruns were on account of operations and Maintenance for Ministries and Government Departments: US$220 million; recapitalization of our public enterprises; US$134 million, and compensation of former farmers.

49. I would however like to inform Honourable Members that following Cabinet approved measures on managing the wage bill, Employment Costs, which are a major challenge, were in fact close to the budget at $3.2 billion.

50. However, even at this level, the Wage Bill remain unsustainable as it still deprives other essential areas such as capital development programmes and social services in health and education.

51. Therefore, riding on Cabinet approval in 2016 to reduce the employment costs bill, Government will continue to implement the recommendations of the Civil Service Skills Audit, maintain freeze on salary reviews and filling of vacancies and will undertake rationalisation of benefits and foreign travel.

52. These measures are being buttressed by interventions on reducing consumption while prioritising development expenditures on stimulating production.

53. Specifically, in June 2017, Cabinet directed the adoption of measures to address fundamental challenges besetting the economy, namely the fiscal deficit, low liquidity, market indiscipline, and low productivity.

54. In this regard, all line Ministries and Departments are working on cost cutting measures whilst ensuring that expenditures are matched to revenue inflows and Budget allocations.

55. Other details on expenditures by respective Ministries are in the main document.

CHAPTER 4: SOCIAL SERVICE DELIVERY AND POVERTY REDUCTION PROGRAMMES

56. The Budget continues to prioritise social services spending in health care, access to education as well as other social protection services even under severe fiscal constraints.

57. Equally prioritised were poverty reduction and empowerment programmes.

58. Given the labor intensive nature of service delivery in these sectors, the bulk of the budget resources for these sectors were indeed on employment costs.

59. For example, the education Budget, including allocations towards ensuring availability of the education service providers, i.e. the 148 449 teaching staff in our primary and secondary schools as well as tertiary institutions, absorbed US$1.11 billion during 2016.

60. This notwithstanding, both primary and secondary schools across the Provinces continue to experience high teacher pupil ratios.

61. In the same vein, the health care Budget, including allocations towards ensuring availability of health care providers, i.e., the 37 332 health care workers in our public health institutions, absorbed US$295 million during 2016.

62. I am however, encouraged to note the positive contribution of the Health Levy on air time, which I introduced in the 2017 National Budget and is already beginning to prop up resources for the health sector, by an additional $4.8 million per month.

63. Other social protection expenditures incurred under the 2016 Budget included provision of US$4.4 million towards drought mitigation cash transfers to food insecure households, as well as US$1.5 million in support of ensuring vulnerable children access to education.

64. The budgetary resources for these critical areas were also being complemented by development partners, whose contribution in 2016 amounted to $471.2 million, covering areas of infrastructure as well.

CHAPTER 5: GOVERNANCE SUPPORT PROGRAMMES

65. Budget implementation during 2016 saw various Governance and Institutional Building programmes and projects undertaken in the areas of aligning laws to the Constitution, supporting the rule of law as well as the electoral process.

66. Non-wage Budget expenditures of US$22.9 million were incurred towards improving the justice delivery system.

Support to Justice Delivery
US$m
Justice Legal and Parliamentary Affairs 20.3
Judicial Services Commission 1.66
Zimbabwe Human Rights Commission 0.31
Zimbabwe Anti-Corruption Commission 0.61
Total 22.88
Source: Ministry of Finance and Economic Development

CHAPTER 6: DEVELOPMENTS ON MAJOR INFRASTRUCTURE PROJECTS

67. In view of budgetary constraints, Treasury has had to be much more innovative to ensure some reasonable funding for infrastructure projects and programmes. Accordingly, the Budget resources of US$76.4 million was complemented by the following:

• Ring fenced Statutory Funds, US$163.5 million;
• Loan financing, US$164 million; as well as
• Development Partner support, US$28.6 million.

68. Accordingly, US$347.7 million was channeled towards infrastructure development projects covering the sectors of energy, transport and communication, agriculture, ICT, water and sanitation as well as housing.

69. As a result, Government managed to complete two major projects, whose development impact will be felt for years to come. These include the Victoria Falls International Airport Upgrading Project, that was commissioned on 18 November 2016 and the Tokwe Mukorsi Dam Project, which was also commissioned by His Excellency the President R.G. Mugabe on 18 May 2017 and in one season is already 73% full. On Tokwe Mukorsi Dam civil works on a 15MW Mini Hydro power plant have already started.

70. Positive strides were also recorded on ongoing projects such as:

• Kariba South Power Extension;
• Rural Electrification of private and public institutions;
• Water supply projects for both urban and communal areas;
• Irrigation development and rehabilitation;
• Roads rehabilitation and;
• Other ICT projects, etc.

Details on implementation progress of these various ongoing projects are in the Review document.

71. Progress was also registered with regards to project development activities for some critical projects, with some now at financial close stage and details are in the main document.

CHAPTER 7: PUBLIC SECTOR BORROWING REQUIREMENTS

72. Financing of the 2016 budget deficit was primarily through domestic borrowing, against the background of absence of external financing.

73. In total, the Government deficit stood at US$1.4 billion, against an initial target of US$150 million. This was caused by a combination of inescapable expenditure requirements and revenue under-performance of US$347.8 million.

CHAPTER 8: PUBLIC DEBT

74. Treasury and the RBZ continue to pursue the reengagement process in order to resolve the country’s debt of $11.3 billion as at end December 2016. Of this debt, public and publicly guaranteed external debt stood at US$7.3 billion, with domestic debt being US$4 billion.

Arrears Clearance

75. Of the total external debt of US$7.2 billion, US$5.1 billion is in arrears. The arrears problem remains a stumbling block for Zimbabwe to access new financing at cheap borrowing terms.

76. Government is, therefore, pursuing the Arrears Clearance and already the country settled its overdue obligations to the IMF amounting to US$107.9 million.

77. The next step entails resolving arrears to the other multilateral creditors, namely the African Development Bank, US$642 million; the World Bank, US$1.402 billion; the European Investment Bank, US$294 million; and other multilateral institutions, as well as Paris Club and non Paris Club bilateral creditors.

CHAPTER 9: STRUCTURAL REFORMS

78. Government is instituting a raft of structural reforms in order to improve the competitiveness of the economy.

These include the Ease of Doing Business, Public Finance Management Reforms, Special Economic Zones, and Public Entities Corporate Governance, among others.

CHAPTER 10: FINANCIAL SECTOR DEVELOPMENTS

79. The financial sector remains stable, notwithstanding the prevailing liquidity challenges. The ongoing efforts to promote financial inclusion, plastic money, e-banking services and broader use of multi-currencies are positive developments.

80. Mr Speaker Sir, Let me stress that the current liquidity and cash challenges are not unique to this economy but an expected temporary and transitional phenomena for a dollarised economy.

81. These challenges, which include the proliferation of indiscipline of money changers, as well as foreign currency externalisation cases are being dealt with.

82. Furthermore, a lot of efforts are also being expended in containing Non Performing Loans, now at 7.87% of the total loan book, against 10.82% of December 2016.

83. The decline in Non-Performing Loans is largely attributable to enhanced credit management systems by banks during the year, coupled with disposal of some Non-Performing Loans to ZAMCO.

84. The operationalisation of a credit reference system is also expected to improve information sharing, thereby, reducing credit risk and, hence, the level of Non-Performing Loans, which in turn improves the asset quality of the banking sector.

85. Further details on performance of the Zimbabwe Stock Exchange and the state of our pensions and insurance industry, which are all qualified as stable are in the main document.

CHAPTER 11: BALANCE OF PAYMENTS

86. With regards to the Balance of Payments, there has been marginal increase in exports to US$3.7 billion against imports of US$5.2 billion, to give a trade gap of about US$1.5 billion.

87. The current account deficit has narrowed down to US$552 million from US$1.5 billion in 2015.

88. The general improvement in the current account, is largely attributed to import substitution, coupled with import compression measures introduced by Government in 2016 as well as the low uptake of intermediate imports due to the slowdown in manufacturing sector.

CONCLUSION

89. Mr Speaker Sir, economic performance in 2016 was generally subdued amid a number of challenges facing productive sectors, the public and financial sectors, as well as on the balance of payments front.

90. However, the outlook for 2017 is very positive and there is need to acknowledge the substantial strides we have made in a number of areas including agriculture, infrastructure rehabilitation, as well as social services delivery, notwithstanding a difficult sanctions environment.

91. In view of this reality, and given the fact that we are largely on our own and have to rely on our domestic resources, it is also prudent that our policies and strategies be aligned to this realism in order to optimise on our limited resources. It is incumbent on us to create an environment that is conducive for economic growth and such an environment is created by our own policies. The 2017 Budget has already set the tone for this direction, particularly in terms of fiscal management and importance of stimulating production in an environment of discipline.

Hon. P. A. Chinamasa (MP)
Minister of Finance and Economic Development
20 July 2017

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