Zimbabwe’s falling tax revenues due to contracting tax base, increasing budget deficits and bond notes domestic borrowing

Fiscal policy must be designed to maintain or achieve the goals of high employment, reasonable degree of price stability, soundness of foreign account, and an acceptable rate of economic growth however this is not the case in Zimbabwe.  Finance is a is a crucial component of activities of public affairs, especially as resources can be used only once. Fiscal policy can be defined as the means of determining financial policy aimed at deriving income through manipulation of demand for goods and services. The fiscal policy of a government is reflected in its taxation and expenditure policies as articulated by the budget.

Fiscal policy is the regulation of the economy through government spending and taxes. Lower tax rates are incentives for work and investment. In Zimbabwe, currently tax base is falling due to company closures and high unemployment which result in lower government revenue on the contrary government expenditure is increasing. The increase of government expenditure whilst revenues are falling have resulted in budget deficits and introduction of bond notes to finance the deficits.

The generation and collection of tax revenue in Zimbabwe have faced several challenges, some of these include growing informal sector activities that are not easy to track and tax, replacement of large scale commercial farming activities which were subject to tax with an indigenous dominated subsistence farming which does not contribute to tax revenue, widespread unemployment that has reduced the income tax base, the poor performance and closure of manufacturing firms. Budget deficits are perennial, though they can be controlled by cutting expenditure. The welfare of a country’s citizens can be judged by the effectiveness of the public sector in provision of public goods.

Zimbabwe has one of the most uncompetitive business environments and is ranked among the worst in terms of ease of doing business. The economy is shrinking with many company closures citing liquidity crises and a lot of workers are being laid off. Capacity utilisation levels in the manufacturing sector have dropped to 39.6% (Mtomba, 2014). July 2013 National Social Security Authority (Nssa) Harare Regional Employer Closures and Registrations Report for the period July 2011 to July 2013 shows 711 companies in Harare closed down, rendering 8336 individuals jobless (Zimbabwe Independent, 2013). The Registrar of Companies struck more than 176 companies off the register in 2013 (Mbiba, 2014). Zimbabwe’s social economic problems are largely blamed on political mismanagement and poor governance (Zimbabwe Independent, 2013). Currently, Zimbabwe has very high unemployment levels estimated above 80% (Mtomba, 2014). Companies are either downsizing or closing down, sending thousands of workers out of employment, making it virtually impossible for graduates and other qualified people to get jobs.

The economic challenges the country is facing has meant that the tax base has been continuously shrinking and the government has resorted to borrowing from domestic markets to finance the deficits. The introduction of bond notes to fund budget deficits has increased the country’s risk profile. It should be noted that bond notes will continue to drive out the hard currency in circulation. The plan by Reserve Bank of Zimbabwe to introduce new bond notes amounting to $300 million will result in more disaster and chaos. A prudent solution should be to demonetize bond notes and concentrate on reforming laws and creating an enabling environment to do business and attract foreign investment. The liquidity crises is a symptom, printing bond notes is simply dealing with the symptom and leaving the root cause of the problem. “Money is moving from formal sector to informal, but it is not moving the other way round” John Mangudya said. The reason for inefficient circulation of money in Zimbabwe is poor business confidence and the fact that people tend to use bond notes and hold on to hard currency. The views of Reserve Bank governor that money circulating in Zimbabwe is sufficient, but that we only have a unique situation where money is not circulating efficiently implies that he does not understand the true condition of the economy.