Zimbabwe must be ready for the bitter medicine of higher taxes and spending cuts if it takes up a staff-monitored programme (SMP) with the IMF, the World Bank warns in a new report.
Under an SMP, the IMF and Zimbabwe would agree on a set of economic programmes that the Fund would monitor. Zimbabwe and the IMF plan to open talks for the programme this quarter, as part of a broader bid by the government to please creditors and win a deal to restructure its debt arrears. This is a good idea, the World Bank says in the Zimbabwe Economic Update, launched Friday. But the country would need to make some tough decisions.
“The SMP provides an effective tool to assist in the implementation of essential economic reforms, but likely also means the government will have to make difficult decisions on spending cuts and raising domestic taxes to ensure a more balanced fiscal regime,” the World Bank says.
Already, Finance Minister Mthuli Ncube has faced strong criticism for introducing a slate of taxes over recent years.
The World Bank makes some recommendations on some of the reforms Zimbabwe needs.
Float the currency
According to the World Bank: “The parallel FX market premium remains large at above 30%, and so additional efforts are likely needed to shift towards a market-determined forex market by allowing more flexibility in the official exchange rate through a more transparent and market-driven price discovery.”
End the 25% retention
Government forces exporters to sell 25% of their forex earnings to RBZ at the official exchange rate. Because of the ZiG’s weakness, this means exporters lose value.
The World Bank says: “As such, in the medium term, there is a need to end the forex retention policy to improve the competitiveness of Zimbabwe’s exporters.”
Taxes and Revenue
World Bank recommends that the government cuts its wage bill by slashing “managerial posts and eliminating redundant positions”.
The Bank also backs the sugar tax imposed on beverages, adding Zimbabwe must consider “raising excise tax on products that negatively impact public health”.
Zimbabwe needs to drop VAT exemptions and zero-rating to increase revenue collection, while protecting the poor.
