With half the year gone, we all (hopefully) did some sort of half-year review. The nations half year budget review was presented on the 28Th of July by Finance Minister Professor Mthuli Ncube. Since the introduction of the National Development Strategy 1 which runs through to 2025 Budgets have become more predictable. So while there are few highlights to pick out we can still glean some insights from the choices our fiscal guardians have made.
Budget increase of 96%
The national currency has given up 75% of its value on the official auction market. That renders all budget estimates just about irrelevant on both the revenue and expenditure sides. Even with such a massive depreciation, the Zimbabwean dollar is still overvalued by the official auction rate at least when compared to the dominant parallel market rate. The budget estimates for the 2022 budget have been revised upwards by a whopping 96%, all have been just about doubled. Bearing in mind of course that these are Zimbabwean dollar figures. How long will they remain relevant given what we have seen the currency doing?
The increase will be distributed largely in favour of employee costs with 53% of the increment going to them. The government of Zimbabwe recently announced a raft of salary and benefit increments for the civil service. Government investment programmes in financial and non-financial assets are expected to require an additional 19%. Government consumption of goods and services will take up an additional 18% while social benefits will require an additional 7%. Not much to see here nor to get excited about.
Changes to the approach to government revenues give us a little more to look at. While we are accustomed to a long list of talking points there are not many here.
Platinum royalty up to 5% from 2.5%
Platinum royalty will be increased from 2.5% to 5%. The minister that the 2.% rate was owning to a court ruling. He put forward that mining only contributes 1.2% to the GDP of the nation whereas other countries in the region are looking at around 2% contribution to GDP. What the move will certainly increase is the government revenue from the precious metal.
PAYE bands doubled
The pay as You Earn (PAYE) bands have been doubled to reflect the current state of the currency. The tax-free threshold has been doubled from ZWL$300 000 to ZWL$600 000 per annum. This means that the first ZWL$600 000 per year or ZWL$50 000 per month (up from ZWL$25 000) is now tax-free. The maximum PAYE tax rate of 40% now kicks in at ZWL$12 000 000 up from ZWL$6 000 000 per annum. This is effective from 1 August and was necessary to adjust to allow those who have received salary adjustments to enjoy some modicum of their increment. The tax-free bonus threshold, the portion of a bonus that is not taxed, was also increased from the first ZWL$100 000 to ZWL$500 000 and this is effective from 1st November 2022. Very forward looking for the minister but we have already seen observers questioning how they arrived at the mark and what it says for their expectations of the value of the Zimbabwean dollar.
Duty Rebate on scientific equipment
To advance the country’s efforts in scientific research and development a duty rebate on imported scientific equipment was proposed. The rebate will apply to institutions approved under the ministries of Health, Agriculture, Mining and Higher &Tertiary Education. The move is noble and the accessibility of the equipment could do with a boost. From the outside looking in one would think the facility could benefit the more significant majority of the nation if it were opened up to all. However, we will see when specific guidance is given if that is not already the case.
VAT in currency of trade
Saving the best for last the minister announced a change to Value Added Tax legislation that will surely have a lot of discussions. Value Added Tax is a direct consumption tax and has been the biggest contributor to government revenue over the years responsible for 23.6% of government revenue in 2021. The minister proposed that businesses operating in foreign currency should be paying their VAT obligations in foreign currency where they trade in foreign currency. To facilitate this businesses should account for VAT in the currency they trade in and be allowed to offset output VAT against input VAT in the same currency it is incurred. In simpler terms VAT will now be settled in the currency you trade-in. Where multiple currencies are used businesses will essentially be required to do two (or more) VAT returns, one for each currency. Again we would have to wait for the full guidance but this is our understanding given what is provided. While opinions are divided (at best) on Mthuli Ncube the minister has certainly shown an ability to go for the revenue and this will certainly be another feather in his hat. The impact on business is an administrative headache, which he alludes to in the budget statement and I suspect some difficult times ahead.
Overall not many surprises and there are two ways to look at this. When things are going to plan you expect adjustments to be incremental without much surprise. On the other hand economic indicators such as exchange rate and inflation have certainly not been going to plan and we would appreciate a little more urgency in the face of these challenges. This one (budget) won’t change much. In that light, the minister also released the 2023 national budget strategy document. A lot was discussed in it and it warrants a quick read but it reads from the same script as other documents before it.