HARARE (Zimbabwe Investor) - Zimbabwe’s turnaround efforts have unnecessarily become more of squeezing water out of a stone as the country appears to be choosing travel through the rough terrain when the smoother highway is available.

Most companies have failed to contribute meaningfully to the fiscus following a year which most have operated well below capacity, a situation exacerbated by the continued critical shortage of working capital.

“Better 10% of an elephant than 100% of a rat”

Finance Minister Tendai Biti in his 2010 budget statement reduced corporate tax from 30% to 25% with the expected effect of increased profitability, thereby encouraging reinvestment to boost working capital. Biti’s “better 10% of an elephant than 100% of a rat” approach is based on a theory that the reduction in tax will give companies the breathing space they desperately need to expand and with it increased profits which treasury can tap into. Tax revenue will naturally increase due to this increased profitability.

Unfortunately, because companies have struggled to increase productivity, the bulk of taxes have come from indirect as opposed to direct sources, a worrisome economic anomaly. Indirect taxes are levied on goods and services while direct taxes are levied on income and wealth. An increase in direct taxes is indicative of an increase in economic activity, yet indirect taxes are expected to continue to contribute the bulk of government revenues.

From Bretton Woods with love

The World Bank recently pointed out that Zimbabwe’s economy will most likely register a 7% growth rate while most Sub-Saharan African economies would expand by an average of 3.8% this year due to a slowdown in the global recession. Zimbabwe’s economic growth is expected to be underpinned by foreign direct investment; which has spuriously been slowed down by bickering within the Global Political Agreement; revenue collection; which has not been reflective of increased economic activity; and improvements in capacity utilization by industries, which presently stands at a disappointing 32.3%.

Unemployment will increase further, according to the World Bank which will curtail growth prospects as export demand eases while consumer spending in the region remains weak, owing to low disposable incomes.

Analysts contend that Zimbabwe’s economic development will only be attainable with an increase in capital expenditure. Unfortunately there is a long way to go in consideration of low revenue inflows to the fiscus and the fact that Zimbabwe is a largely consumptive economy, perhaps keen on feeding to make up for time lost since the year 2000.

The World Bank has pledged to render technical assistance and assist to retire the country’s debt, “assuming that the inclusive Government stays on the right path and creates an opportunity for true unity and overcomes some of the problems of its past", according to World Bank President Mr Robert Zoellick.

HIPC or Knit-picking

Zimbabwe is in a crisis with regard to how best it could deal with the US$5.7 billion debt, which Finance Minister Tendai Biti had suggested could be cleared if the country took the controversial the Highly Indebted Poor Country (HIPC) route so that the country receives “a new economic start”. Paradoxically, once the country declares itself in this status, it may expose itself to the whims of global ‘vultures’ that can easily buy off the country’s debt and consequently have a major say in the economic policy that Zimbabwe may decide to pursue, more or less to its detriment or recovery. The Zambian litigation with regard to debt relief should serve as a background case before the HIPC status can be declared.

Politics play me right

Political uncertainty not only affects domestic activity but leaves most foreign investors sceptical about the prospect of investing in the country. With the country’s agricultural and manufacturing sectors having declined by 85.7% (2002-2008) and 91.1%

(2000-2008) respectively, the country is in desperate need of foreign funds for recapitalization.

The country’s greatest threat to economic growth thus remains political risk. A perceived lack of political will on the part of the inclusive government will hamper progress. Economic policy pronouncements continue to be either made or received with a lace of political connotations by both sides. It is becoming more and more difficult to tell apart political point scoring and economic policies.

A report released last week by Moscow based investment house, Renaissance Capital, has observed that the political arena is and will continue to affect investment inflow into the country.

“Politics remains the key determinant of external funding for government - specifically, how quickly the respective parties can resolve their outstanding issues," the report said.

The report also explains that political tensions have also limited the inflow of funding from external sources, specifically the West.

Although Zimbabwe did receive US$510 million from the IMF, that was only under the SDR vote to provide liquidity to the global economy under stress. What is required is a no strings attached funding with the confidence that Zimbabwe is capable of delivering. Unfortunately Zimbabwe’s domestic affairs continue to get in the way of the confidence building exercise.