The 2004 Budget focused mainly on implementing stabilisation policies designed to bring down inflation but was silent on monetary policy, leaving that to the new governor of the Reserve Bank, Gideon Gono.
According to a Finhold analysis of the budget, while acknowledging the need to contain inflation, and increase capacity to generate foreign currency, the budget statement was weak on actual details of how this would be done. On inflation, for example, the minister stated that the government would rigorously implement fiscal and monetary stabilisation measures but there were no details of what these were, except that the Reserve Bank of Zimbabwe (RBZ) would announce monetary policies in due course.
Finhold argued that, historically, it had been the failure to synchronise fiscal and monetary policies that was at the heart of Zimbabwe’s inflation problem. “The Central Bank always accommodated the activities of government, resulting in the high rates of growth in money supply, and invariably, inflation, witnessed in recent years. It would have been better if both fiscal and monetary policies had been announced as a package for consistency purposes,” it said.
It commended the idea of financing recurrent expenditure from current revenues with borrowings earmarked for capital expenditure as this was what other counties that had managed positive growth had done but added that given the government’s record of implementing tough policy measures, it remained to be seen whether line ministries would adhere to this.
It noted that it was likely to be tough for parastatals to recover unless the government bailed them out by taking over their past debts. But this would in turn raise government expenditure well above what the minister had proposed in the budget resulting in an even wider public sector borrowing.
On inflation targeting, the bank said, while this was a noble goal “there is, as yet, no stable model relating inflation to money supply. To this end, the task of achieving a non-accelerating inflation rate of growth in money supply is reduced to being a job for a “blindfold with a pin”. Moreover, the critical issue of interest rate policy is not clearly spelt out as it relates to the fight against both inflation and stagnation. There is a veiled desire to continue with differential interest rates between borrowing for consumption and for productive purposes. While this sounds reasonable, it is always difficult to monitor in practice. Funds originally borrowed for productive purposes can and are often diverted to finance consumption”.
The bank said though the minister proposed to introduce measures designed to assist exporters, the budget did not mention the one most important instrument for achieving international competitiveness – the exchange rate. “Given the high inflation rate at home relative to the weighted average inflation rate obtaining in Zimbabwe’s main trading partners, there is a need to allow the Zimbabwe dollar to fall in order to offset the real appreciation occasioned by this high inflation differential which works against increased exports. The benefit of this policy is that it removes rent-seeking activities associated with the administration of exchange control; a point that the Minister alluded to when he argued that corruption is high in both the private and public sectors,” it said.
Highlights of the 2004 budget were:
- Total expenditure is estimated at $8.74 trillion (which is an increase of 506% over the total expenditure for 2003). Total revenue is estimated at $6.9 trillion, which translates to an increase of 505% over the 2003 total revenue. The deficit is estimated at $1.85 trillion, which translates to 7.5% of GDP. In view of a history of expenditure over-runs in recent years, it is unlikely that this budget deficit figure of 7.5% of GDP will be attained in 2004.
- The major vote appropriations are dominated by the ministries of Defence (11%), Finance and Economic Development (19.5%), Health and Child Welfare (9.5%), Education, Sport and Culture (20.6%), and Higher and Tertiary Education (7.5%). These ministries account for about 70% of the total vote appropriations.
- With effect from 1st January 2004 the individual income tax threshold will be increased from $180 000 to $2.4 million per annum. Income tax bands will be widened to end at $4.5 million, above which income will be taxed at 45%.
- The tax-free portion of the annual bonus or performance related award will be increased from $20 000 to $100 000 with effect from 1 November 2003.
- The allowable tax-free pension contribution will be increased from $90 000 to $720 000 per annum with effect from 1st January 2004.
- The threshold of motor-vehicle deemed benefits, which depends on engine capacity has been increased from a range of $240 000 – $900 000 to a range of $600 000 – $3.3 million with effect from 1st January 2004 for vehicles with engine capacity ranging from below 1500 cc to over 3000 cc. Carbon Tax The rates of carbon tax will be increased from a range of $4 000 – $20 000 to $20 000 – $100 000 for vehicles with engine capacities below 1500 cc to over 3000 cc, with effect from 1st January, 2004.
- Corporate tax was maintained at 30%, in a move likely to provide relief to companies, which are already operating under an unfavourable macro-economic environment.
- With effect from 1st January 2004, capital allowances for passenger motor vehicles will be increased from $1 million to $10 million and for staff-housing these will be increased from $1 million, with an upper limit of $3 million to $15 million, with an upper limit of $50 million. For schools, hospitals and clinics, the capital allowances will be increased from $10 million to $50 million
- With effect from 1st January 2004 the rate of tax on an automated financial transaction and electronic transfer will be increased from $5 to $50.
- With effect from 1st December 2003, stamp duty on cheques will be increased from $5 to $50.
- With effect from 1st December 2003, stamp duty on marketable securities will be increased from $1 for every $100 or part thereof to $5 for every $100 or part thereof.
- With effect from 1st January 2004, the Deposit Protection Scheme will be exempt from income tax and withholding tax on interest.
- It is proposed to extend thin capitalisation provisions applied on the mining sector to other sectors with effect from the year of assessment beginning 1st January 2004.
- VAT will be introduced at a standard rate of 15% with effect from 1st January 2004.
- With effect from 1st January 2004, excise duty on clear beer and opaque beer will be reduced from 60% to 40%, and from 10% to 0%, respectively. With effect 1st December 2003 specific rates of duty on spirits will be converted from $70 or $28/L to 10%. Furthermore, excise duty on aerated waters will be reduced from 15% to 5% with effect from 1st January 2004. Excise duty on cigarettes and tobacco will also be reduced from 85% to 60%. However, these products will now attract value-added tax at a standard rate of 15%.
- Customs Duty On Selected Luxury Goods The Customs and Excise Act will be amended in order to empower the Minister of Finance to levy Customs Duty in foreign currency on selected luxury goods.
- With effect from 1st December 2003 a levy of $110 per litre will be introduced and collected at the point of entry by NOCZIM or ZIMRA. However, this measure does not include illuminating paraffin and aviation fuel.
- With effect from 1st December 2003, customs duty on refuse collection and road maintenance trucks will be removed.
- Customs duty on commuter omnibuses with a carrying capacity of 26 passengers and above will be scrapped with effect from 1st December 2003.
- The VAT exemption schedule will be expanded to include agriculture machinery.
- Accommodation and other tourism related services provided to non-residents who pay them in foreign currency will be exempt from VAT.
- Hospitals And Nursing Homes, Educational Services will be exempt from VAT.
- Limits on individual and corporate deposits in tax-fee Class C (PUPS) with Building Societies will be increased from $5 million to $20 million for individuals and from $3.5 million to $14 million for corporations. The limit on POSB fixed deposits will also be increased from $5 million for individuals and $3.5 million for corporates to $20 million and $14 million, respectively.