Demographics, lower taxes and higher savings

29 May, 2020 - 00:05 0 Views

eBusiness Weekly

Walter Mandeya

On April 19, 2018, while in Washington DC, the Government of Zimbabwe unveiled the Vision 2030 document outlining Government’s desire to rebuilding and transforming Zimbabwe to become an upper-middle income economy by 2030.

An upper middle-income economy is defined as a country with a Gross National Income (GNI) per capita of between $3 956 and $12 235 by the World Bank. Middle-income countries are home to 75 percent of the world’s population and 62 percent of the world’s poor and represent about one third of global Gross Domestic Product (GDP). Zimbabwe’s GNI was estimated at $1 790 in 2018, while the average for upper middle income economies was estimated at $8 869 in the same year.

To reach these goals, Zimbabwe needs to increase its GNI by a factor of no less than 2,2 in the coming decade, which is possible, but faces serious risks of failure given the numerous “policy missteps”, policy uncertainty and climate related shocks as noted by the International Monetary Fund (IMF) in their latest Staff Monitored report of March 2020. In addition, government has had to divert attention and resources to the fight against the Covid-19 pandemic, which has introduced new unexpected risks into the economy.

While short-term policy adjustments are always necessary, the long-term policy objectives should always provide a guiding ruder to both the policy makers and the markets as to how to behave and respond to external shocks. Short-term policy adjustments should however not introduce new or additional shocks or risks to the markets.

Consistency is therefore an imperative when medium to long term national strategies are implemented. The importance of the current Vision 2030 in dictating the longer term socio-economic future of the country cannot be underestimated and its success should be a shared goal.

To put the importance of Vision 2030 into contest first, before outlining some of the policy measures needed, we need to look at what 2030 will look like for the country. Based on the 2012 census results, approximately 11,3 million Zimbabweans are going to be economically active and in need of gainful employment by 2030.

This number compares to only 5,5 million in 2012 at the time of the census.

The number climbs to 12 million when you take into account the lack of strong safety nets, as represented by pensions, insurance and social security schemes, which have been decimated by hyperinflation, meaning more people will be working until much later into their lives just to afford decent living standards.

The current Covid-19 pandemic has not only brought the serious health and socio-economic vulnerabilities within our communities to the fore, but has also highlighted the urgency with which these issues need to be dealt with.

Analysing the census results and picking a few examples to demonstrate the potential challenges ahead gives a very grim picture if the situation is not mitigated. In 2030, assuming that the death rates remain fairly constant, approximately 1,1 million people will be retired and requiring pensions, social security payments and added healthcare services. This compares to only 535 000 citizens at or above the retirement age in 2012.

With respect to healthcare services, aged health costs will become a significant fiscal metric in the coming years given that very few people are contributing to social security schemes at the moment. When we then factor in the approximately 3,5 million females who would have reached reproductive age by 2030, the chronic investment gap in our healthcare system becomes very clear.

Therefore the importance of having a well-developed national strategy to address macro issues, such as the Vision 2030 national strategy is clear and we now need to deal with some of the policies needed to ensure that come 2030 we can count visible successes and do not review it in the same way we are doing the Vision 2020 policy document which was launched in March 1997 by the country’s former president, as indeed with many previous strategy documents. We will focus on three key macroeconomic policies of Savings, Taxes and Exports/Production, as these tend to condense all other aspects of governance into simple numbers and digits for easier analysis.

In finance, planning is generally regarded as having been done well when we can produce a budget that not only shows what our aspirations are, but that also shows what is needed to achieve those goals. Zimbabwe has over the years produced numerous annual budgets and in the past couple of years has even started doing mid-term budget reviews and supplementary budgets, but in all instances the country has ended up far off the mark.

This begs the questions whether the budgeting process is a sincere reflection of our true capabilities and the true nature of the data used in developing these projections. The consequence to such poor estimations is reflected in the numerous policy “missteps”, inconsistencies, and the “with immediate effect” approach to policy making, which does nothing to instil the type of confidence required for the huge amounts of private capital required to be committed to meet the investment shortfalls that exist.

This brings us to the first policy that is needed, which is Savings. A worrying feature of the Zimbabwean financial system is the low rates of savings in the economy due to chronically negative rates of real return for most retail investments.

This article was written by Walter Mandeya of Trigrams Investment. Views expressed are his own.

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