2022 National Budget Statement

Presented to The Parliament of Zimbabwe on 25 November by the Minister of Finance and Economic Development Professor Mthuli Ncube

INTRODUCTION

1. The 2022 National Budget is the second annual fiscal plan Government is using to implement the National Development Strategy 1: 2021-2025. As a central policy document, it provides an opportunity for Government to refine and refocus its priorities in order to advance the economic reforms, which were started in 2018 with the launch of the Transitional Stabilisation Programme (2018-20).
2. The reforms being implemented have set the economy on a sustained growth trajectory, and poised for attaining the Vison 2030 aspirations. With a growth projection of 7.8% for the year 2021, Zimbabwe’s economy is among the high performers under difficult COVID-19 conditions and well above the 3.4% average growth for Sub-Saharan Africa.
3. Alongside GDP growth, average industry capacity utilisation is gradually picking up, reaching 47% and 54% in the first and second quarter of 2021, respectively. By year end, it is projected to average 65%, reflecting output gains from ongoing macroeconomic stabilisation and improved access to foreign currency through the foreign currency auction system.
4. Reforms have also seen inflation retreating, with annual inflation as measured by the CPI declining from 837.5% in July 2020 to 54% in October 2021. In the same vein, prudent management of public finances has produced minimal budget balances ranging from 0.2% of GDP in 2019, 1.7% in 2020 and a modest projected deficit of -0.5% in 2021. This judicious budget management has provided capacity and scope for channelling more resources to essential programmes in infrastructure and social services.
5. In addition, significant changes are currently underway within the public sector, following the introduction and signing of performance contracts for Accounting Officers of Ministries, which places greater emphasis on performance and accountability, thereby allowing for improved efficiencies in Government spending and programme/project implementation and delivery.
6. With regards to managing and mitigating the devastating effects of the COVID-19 pandemic, Government is implementing a successful and effective vaccination programme, complemented by preventive and curative measures, among other mitigatory interventions. The target is to reach 60% herd immunity.
7. Relatively, based on the current vaccination outturn, Zimbabwe has emerged as one of the countries currently making good progress on the continent, having vaccinated 38% and 29% of the targeted population with first and second dosses, respectively as at 16 November 2021.
8. On the downside, the economy faces a number of risks, associated with the threat of the ongoing COVID-19 pandemic and its mutating variants, erratic supply of key enablers such as electricity and water, deficiencies in delivery of social and other public services, slow implementation of value addition initiatives, and resurgence of inflation pressures. These challenges are being addressed under the 2022 National Budget, without losing focus on consolidating the achievements made to date in order to make the economy more resilient, and hence, the theme: ‘Reinforcing Sustainable Economic Recovery and Resilience’
9. Accordingly, the 2022 National Budget seeks to attain the following:

Strengthening macro-fiscal stability;

Consolidating the Agriculture Food Systems Transformation Strategy that seeks to guarantee food security;

Advancing the policy on value chains and value addition for purposes of sustainable jobs creation and growth;

Enhancing public services delivery including social protection and infrastructure development;

Strengthening governance and anti-corruption measures;

Accelerating the reengagement process; and

Enhancing climate change mitigation and energy security.

10. In order to enhance the coordination and implementation of programmes and projects that positively impact on the economy and citizen’s livelihoods, the 2022 National Budget will maintain the cluster approach, that is aligned to the fourteen NDS1 Pillars.
11. Before turning to the above issues, a review of global and domestic economic developments during 2021 and beyond will assist in contextualising the 2022 National Budget.

Global developments and outlook

Global Output

12. The latest IMF World Economic Outlook report of October 2021 projects the global economy to grow by 5,9 percent in 2021. In 2022, Global GDP growth is anticipated to slide to 4,9 percent and average 3,3 percent over the medium term.

MoFED Forecasts

13. Output in advanced economies is forecast to exceed pre-pandemic levels during 2022, partly owing to the sizeable anticipated additional policy support, particularly by the United States of America. By contrast, emerging markets and developing economies are expected to remain below the pre-pandemic levels due to slower vaccine rollouts and generally subdued policy support.
14. The $650 billion SDRs allocation by the IMF to its member states worldwide provides an exceptional opportunity for the countries to improve responses to health demands posed by the COVID-19 pandemic and also constitutes an important source for stimulating economic activity for developing countries. However, the resources remain inadequate to address the many challenges facing poor nations, which include rising debt levels and climate change impact.

Sub-Saharan Africa

15. In 2021, Sub-Saharan Africa is expected to grow on average by 3,7 percent, lower than the global growth rate of 5,9 percent, amid Covid-19 restrictive measures, slow vaccination programmes, limited fiscal space, growing debt burden and climate changes impact.
16. However, in 2022 vaccine deployment is expected to improve along with supportive policies to stimulate investment and this should slightly push growth to 3,8 percent. In the medium term, positive spill overs from strengthening global activity, better international control of Covid-19, and strong domestic activity in agriculture, as well as commodity exports are expected to gradually help lift the region’s GDP growth.
17. Strengthening demand and ongoing inflation trends have boosted gold prices, while prices for silver and platinum have benefited from recovery in industrial activity.
18. During the last quarter of 2021, there are signs of precious metal prices retreating, with gold prices sliding to US$1 775 per ounce in September from a peak of US$1 800 in June 2021. However, prices have remained relatively high compared to previous years.
19. Energy prices are projected to remain high in 2021 relative to 2020, mainly driven by crude oil price increases in response to production cuts. Coal and natural gas prices have also surged in response to supply disruptions and increasing demand, respectively.
20. In the outlook, international commodity prices are projected to slightly retreat in 2022 from the peak levels of 2021, although still relatively high compared to previous averages. The international commodity price outlook is favorable for commodity driven economies like Zimbabwe.

22.

Global Inflation

23. Global inflation is on the rise mainly due to pandemic-related supply chain disruptions and firming of energy prices. Inflation in advanced economies is expected to subside as inflation expectations are well anchored, while in developing countries inflationary pressures are expected to persist on account of elevated food prices, lagged effects of higher oil prices, and exchange rate depreciation.

Domestic economic performance

GDP Growth

24. Domestic GDP growth for 2021 is estimated to remain strong at 7,8 percent, mainly on account of the good 2020/21 agriculture season, higher international mineral commodity prices, a stable macroeconomic environment that facilitated domestication of some value chains and better management of the Covid-19 pandemic.
25. Main sectors driving growth are agriculture, manufacturing, electricity, accommodation and food services, as well as construction.
26. In 2022, the economy is projected to grow by 5,5 percent, underpinned by higher output in mining, manufacturing, agriculture, construction as well as the accommodation and food services (tourism) sector. The underlying assumptions for the projected growth include the following:

Normal to above normal rainfall pattern;

Subdued Covid-19 pandemic;

Relatively stable exchange rate and declining inflation; and

Favourable international mineral prices.

27. Potential risks to the above projected growth include the uncertainty in the future path of the pandemic and exchange rate volatility, which may contribute to high inflation. Other risks relate to under performance and viability of some of the State-Owned Enterprise (SOEs), extreme weather conditions, retreat in international commodity prices and higher than anticipated international oil prices.

Inflation

28. Annual inflation continued to decline during the greater part of 2021 to register 54,5 percent by October 2021 compared to 471,3 percent recorded during the same period last year. The disinflationary path was underpinned by both tight fiscal and monetary policies. Conservative reserve money targeting and the introduction of the foreign exchange auction system brought stability in the foreign exchange market and consequently inflation.
29. However, the widening of the parallel market premiums to over 50 percent beginning in August 2021, threatens to reverse the gains made on the inflation front. The widening gap is partly attributed to general indiscipline by market players. The increase in international food and energy prices, as well as global inflation continue to exert additional inflationary pressures on the domestic economy.
30. In view of the recent developments, annual inflation is likely to end the year between 52 percent and 58 percent, up from the revised target of between 25 percent and 35 percent. Government is, however, implementing the necessary policy measures to ensure that inflation is back on the single digit desired path and this includes a review of the current foreign currency auction system, further tightening of monetary policy and curbing of malpractices in the financial sector.
31. Maintenance of price and exchange rate stability over the medium to long term is central in fostering business medium term planning and investment for the achievement of NDS1 objectives. In this regard, both fiscal and monetary measures seek to achieve an average inflation target of 32,6 percent and end period range of 15 percent to 20 percent in 2022, consistent with the macro-fiscal framework anchoring the Budget.

Balance of Payments

32. The country’s external sector position remains strong, with the current account maintaining a surplus. Preliminary estimates show that the current account balance slightly narrowed, from a surplus of US$688,2 million in the first nine months of 2020, to a surplus of US$684,4 million for the same period in 2021.
33. Strong global commodity prices supported export performance during the greater part of 2021, while relatively subdued petroleum prices moderated the import bill, during the first four months of the year. This notwithstanding, the continued softening of prices for some key export commodities presents a potent risk to the outlook for exports in the medium term.
34. The current account balance is projected to remain in surplus in 2022 driven by secondary income, though at a much narrower level of US$723,2 million, compared to US$1 078,0 million projected for 2021.

Merchandise Exports

35. Merchandise exports increased by 19,2 percent to US$4 053,4 million recorded in the first nine months of 2021, from US$3 400,3 million in 2020, spurred by increases in agriculture and mineral exports, while manufactured exports remained subdued.
36. In 2022 merchandise exports are projected to grow by 0,4 percent to US$4,73 billion, mainly driven by mineral exports.

Merchandise Imports

37. Merchandise imports increased by 27,3 percent to US$4 194,7 million in the first nine months of 2021 from US$3 294,4 million for the comparable period in 2020. Fuel, machinery and raw material imports accounted for this increase.
38. In 2022, merchandise imports are forecasted to grow by 8,5 percent to US$5,9 billion, in line with the envisaged GDP growth and the reopening of the global economy.

Financial Sector

39. The Central Bank is implementing a three-pronged policy approach of conservative reserve money targeting framework, supported by prudent management of the exchange rate through the auction system, as well as measures to maintain and sustain the current financial sector stability.

Reserve Money Targeting Framework

40. The conservative money targeting framework is meant to ensure that money supply growth in the economy is maintained at levels consistent with projected economic growth and inflation targets, in the short to medium term.

Reserve Money

41. Reserve money growth targets were set at 22,5 percent per quarter in the first half of 2021 and revised downwards to 20 percent per quarter during the second half of 2021 before being further reduced to 10 percent during the last quarter in the face of a resurgence in inflationary pressures in the economy.
42. As a result, reserve money growth was kept within the set quarterly targets throughout the three quarters of 2021.
43. As at end of September 2021, reserve money was $26,24 billion, compared to a year-end target of $28,87 billion due to aggressive liquidity mopping measures, through open market operations, coupled with foreign exchange sales at the auction.
44. Going forward, Government through the Central Bank, will continue to review the reserve money targeting framework in line with inflation and exchange rate developments, as well as other macro-economic fundamentals.

Broad Money

45. Broad money was $329,19 billion as at end-August 2021, registering a year-on-year increase of 125,24 percent, compared to 642,1 percent in the same period last year. The growth in money was on the back of expansion in the deposit base. The local currency component of deposits rose by 224,97 percent annually with foreign currency accounts (FCA) deposits going up by 55,53 percent.
46. With regards to the stock of money supply (M3) in the economy, about 40 percent is in foreign currency deposits and the remainder in local currency.
47. Government continues to ensure uninterrupted and timely supply of foreign currency to key sectors of the economy through the foreign exchange auction system. The Bank is current on foreign currency auction allotments and has cleared the backlog which was previously experienced. Amounts allocated through successive auctions increased significantly for both the main and small medium enterprises auctions, bringing the total allotments to US$2,34 billion as at 2nd November 2021.
48. The weekly allotments for the main auction increased to US$34,49 million, between July 6 and November 2, 2021, from a weekly average of US$21,95 million in 2020. Similarly, the average weekly allotments for the small and medium enterprises auction also increased, from US$1,53 million in 2020 to US$9.90 million during the same period in 2021.

49.Encouragingly, the auction system continues to support the productive sectors of the economy with more than 70 percent of the allocations going towards these critical sectors and has, therefore, significantly contributed to capacity utilisation across the board. As at 2nd November 2021, 42 percent of the total allotments financed raw materials, while 21 percent funded capital goods such as machinery and equipment and 5 percent went into fuel, electricity and gas. In terms of companies, those in the manufacturing sector accounted for 17 out of the top 20 auction beneficiaries.

50. Figure 3 shows the distribution of foreign currency through the foreign currency auction system as at November 2, 2021.
51. Retail pharmacies can now access foreign currency of up to US$5000 per month per firm, to facilitate the purchase of essential pharmaceutical products from pharmaceutical wholesalers in the country.

Lending

52. As of August 2021, the growth in M3 was mainly attributed to increases in net credit to Government of 226,09 percent and credit to private sector of 221,25 percent. Credit to Government was mainly in the form of Treasury bill holdings by banking institutions, while credit to the private sector, which had remained subdued in the past few years, is now picking up in both local and foreign currency terms.
53. As at August 31, 2021, the loan-to-deposit ratio for the banks’ local currency portfolio has been increasing, from below 50 percent in 2019 to around 80 percent by end of August 2021. However, the overall loan-to-deposit ratio is being pulled down by the relatively low activity on bank lending in foreign currency and is expected to pick up gradually, on the back of current measures to encourage bank lending in foreign currency.
54. There is significant progress with regards to improving access to financial services to target segments of the economy through digital financial services, introduction of new products, enhanced financial literacy and consumer protection efforts, establishment of low-cost bank accounts, and establishment of women desks and SME units in most of the banking institutions.
55. Focus is now on drafting of the National Financial Inclusion Strategy II (2021-25) following the coming to an end of NFIS I on December 31, 2020. NFIS II will seek to integrate financial inclusion with economic development and human development in line with the NDS 1 and Vision 2030.
56. The Table below shows the trend in the financial inclusion indicators.

Credit Registry

57. The Credit Registry has facilitated the adoption of automated lending by lending institutions and integrated credit registry data into their credit approval processes resulting in increased utilisation from 824,592 as at June 30, 2020 to 1 317 853 cumulatively as at June 30, 2021, notwithstanding the lockdown restrictions.

Collateral Registry

58. The Collateral Registry System is expected to go live before the end of 2021 and will be key in facilitating access to finance by targeted beneficiaries of the National Financial Inclusion Strategy, riding on the back of moveable assets as collateral.

Anti-Money Laundering, Counter-Financing of Terrorism and Proliferation Financing (AML/CFT/PF)

59. The country continues to address deficiencies identified by the Financial Action Task Force (FATF) in accordance with set deadlines of two years despite the COVID-19 pandemic disruptions.
60. In the first quarter of 2022, FATF experts are expected to carry out an in–country assessment on the commitment to implementation of necessary policies and measures to combat money laundering, financing of terrorism and proliferation of weapons of mass destruction.

61.The visit is expected to result in the country’s removal from the list of non-compliant countries, thereby boosting investor confidence and making it easier for local banks to secure new correspondent banking relationships while retaining existing ones.

Market Discipline and Compliance

62. The introduction of Statutory Instrument 127 of 2021 was necessitated by increased incidences of business malpractices and speculative behaviour by some businesses, threatening the stability of the foreign exchange market and of prices of goods and services.
63. To this end, the Financial Intelligence Unit has intensified the monitoring of financial transactions to identify and take action against businesses that deliberately disregard the requirements of the Bank Use Promotion Act, the Exchange Control Act and anti-money laundering standards.
64. Furthermore, corrective measures are being taken against businesses that fail to bank their cash receipts, price their goods and services using speculative exchange rates or trade foreign currency on the parallel market.

Securities Market

65. The number of listed companies on the ZSE stands at 55, with one Exchange Traded Fund (ETF). The first ETF in the country was listed on 4 January, 2021. A new listing on the Victoria Falls Stock Exchange, Caledonia Mining Corporation is also on the cards. In terms of trading, “all-share index” gained 334 percent as at October 26, 2021, spurred by gains in the heavyweight counters as reflected in the growth of the ZSE Top 10 counters which were up 329 percent during the same period.
66. Cumulative sales to September 30, 2021 were $32,13 billion, compared to $9,50 billion during the same period in 2020.

Market Capitalisation

67. The ZSE total market capitalisation recorded a new high of $1,39 trillion on October 26, 2021 compared to $317,88 billion as at December 31, 2020.

Compensation for Insurance and Pensions Loss due to Currency Reform

68. The Insurance and Pensions players are now in the process of equitably distributing revaluation gains on assets attributable to currency reforms undertaken in 2019 in line with the Guideline on Adjusting Insurance and Pension Values provided by IPEC.
69. In addition, pursuant to an allocation of US$75 million investment asset by Government to IPEC, as part of compensation measures for lost value by pensioners, a dividend of US$400 000 was declared and is being disbursed to targeted beneficiaries. Subsequent disbursements will be made in 2022 and beyond, leveraging on this investment.

Compensation of

2009 loss of value

70. Government, in consultation with industry representatives, has been working on bringing closure to the pre-2009 compensation. To this end, Government is finalising the 2009 Compensation Framework that will provide guiding principles on the criteria for assessing and quantifying prejudice in relation to the insurance and pensions contracts, as highlighted in the Smith Commission of Inquiry on Conversion of Insurance and Pensions Values from Zimbabwe dollar to US dollar Report.
71. It is envisaged that the compensation modalities will be concluded before the end of 2021, with pensioners starting to get payments in 2022.

Minimum capital requirements

72. Government launched the Zimbabwe Integrated Capital and Risk Programme (ZICARP) in June 2021, aimed at promoting financial stability of the insurance sector through setting capital requirements proportionate to the level of risk. The recommended capital requirements to guide the industry are being finalised.

Prescribed Asset Status

73. The insurance industry’s level of compliance with minimum prescribed assets (PA) threshold remains low, compromising Government investment in infrastructure and other initiatives.
74. In order to ensure a wide range of investment products, Government has expanded the Prescribed Asset Status framework to include bankable projects and private equity projects that are in line with NDS1 policy thrust.

Review of Insurance
and Pensions Legislation:
Insurance and Pensions Bills

75. The Insurance and Pensions Commission (IPEC) Bill, the Pensions and Provident Funds Bill and the Insurance Bill, whose enactment will go a long way in addressing deficiencies in the current regulatory framework and empower the Commission to deliver its mandate are at various stages of approval.

International Financial
Services Centre

76. Government is in the process of establishing an International Financial Services Centre (IFSC) in Victoria Falls to develop the financial services sector, through provision of opportunities for global investment. This is expected to attract foreign direct investment, domestic investment, and export development in the country.
77. The rules and regulations governing the IFSC are being drafted and consideration is underway to extend necessary incentives.

The 2021 public finances

and outlook

78. The state of public finances has improved significantly, consistent with the 2021 National Budget objectives and targets. For the period January to September, revenue collections were $317,4 billion against expenditures of $351,7 billion, giving a deficit of $34,3 billion. By end of the year, a narrower deficit of $14 billion is projected, to be entirely funded through domestic market borrowing.

 

Revenue

79. Revenue collections during the first nine months to September 2021 amounted to $317,4 billion, against a projection of $291,5 billion for the period, resulting in a positive variance of $25,8 billion (8,9 percent). Tax revenues contributed 94,7 percent with the remainder coming from non-tax revenue.
80. The major contributing revenue heads during the 2021 fiscal year were VAT (24 percent), Corporate Income Tax (18 percent) and Personal Income Tax (17 percent).
81. Revenue collections on all other revenue heads performed above the set targets save for other direct taxes, resulting in a 12,6 percent overall revenue positive variance.

 

Personal Income Tax

82. Personal Income amounted to $52,6 billion against a target of $51,2 billion, resulting in a positive variance of $1,4 billion or 2,7 percent. The performance is reflective of the impact of bracket creep following salary adjustments within the public and private sector.

Corporate Income Tax

83. Corporate Income was $59,8 billion against a target of $54,2 billion, resulting in a positive variance of $56 billion or 10,3 percent. The positive performance was largely driven by improved performance in sectors such as mining that benefited from higher output and firm international commodity prices. Furthermore, improved access to foreign currency at a stable exchange rate and the gradual easing of lockdown measures improved the profitability of a number of corporates.

Value Added Tax

84. Value Added amounted to $75 billion against a target of $75,6 billion, resulting in a negative variance of $576,6 million or -0,8 percent. The under-performance is attributed to possible leakages arising from underreporting of revenue collected, particularly foreign currency receipts, as businesses exploit arbitrage opportunities on the foreign exchange market.
85. This has been compounded by deliberate actions by some registered operators to circumvent the use of fiscal devices, deployed to facilitate compliance to VAT legislation.

 

Excise Duty

86. Excise duty recorded a marginal negative variance of -0,6 percent, with actual collections of $37,6 billion against a target of $37,8 billion mainly on account of the under-performance of fuel excise. Fuel excise, which accounted for 83,1 percent of total excise collections, recorded a negative variance of -2,7 percent or $731,6 million.

Customs Duty

87. Customs duty amounted to $20,4 billion against a target of $20,1 billion, resulting in a positive variance of 1,4 percent. Customs duty collections were not significantly affected by lockdown measures since commercial consignments continue to be cleared even during Covid-19 restrictions.

Intermediated Money Transfer Tax

88. IMTT amounted to $28,9 billion against a target of $22,7 billion, resulting in a positive variance of $6,3 billion or 27,6 percent. Performance of the revenue head benefited from the extension of IMTT to foreign currency transactions and increased value and volume of transactions during the period under review.

 

Non-Tax Revenue

89. Non-Tax Revenue amounted to $16,7 billion against a target of $4,2 billion, resulting in a positive variance of$12,5 billion or 300 percent. The positive performance is on account of the continued review of fees and charges levied by line Ministries and Departments, in some instances to cost recovery levels.

Revenue Outlook to December 2021

90. The 2021 National Budget projected revenues of $390,8 billion for the year. However, indications are that $495,01 billion (16,6 percent of GDP) will be realised by December 31.
91. The increase in revenue is largely on account of the performance of the following specific revenue heads:

Corporate Income Tax — Collections are projected to increase in line with corporate performance and parallel market pricing of goods and services.

Tobacco Levy — Tobacco output is projected to increase from 190 million to 210 million kgs while prices on auction and contract floors were firmer than envisaged.

Excise Duty — Higher than projected increase in volumes of alcoholic beverages.

Value Added Tax — The revenue head is expected to benefit from increased disposable incomes following the civil service wage adjustment that is also normally replicated in the private sector.

Intermediated Money Transfer Tax (IMTT) — The revenue head is expected to benefit from the gradual increase in the value of electronic transactions.

Non-tax Revenue — The revenue head should continue to benefit from continuous review of charges for Government goods and services.