/ 4 September 2007

Zim budget seen offering tax relief

Zimbabwe is likely to offer tax relief in a supplementary budget on Thursday but may have to print more money to keep cash-strapped government departments running ahead of elections in 2008.

Analysts said with presidential and parliamentary elections expected next March, President Robert Mugabe’s government would offer tax relief to workers who have been worst hit in an economic crisis featuring severe food, fuel and foreign currency shortages.

The Southern African country is suffering inflation of more than 7 000%, fast eroding income for workers struggling to feed their families, while political tensions are high.

Finance Minister Samuel Mumbengegwi will present on Thursday his first budget since being appointed in February this year.

‘Hapless position’

”He will increase the tax threshold especially for lower income-earning groups,” Tony Hawkins, business professor at the University of Zimbabwe said, adding that this was necessary after Mugabe banned wage increases without state approval.

”The government is in a hapless position, revenue is falling and the normal thing would be to increase taxes and duty. But we have an election in six months and the only thing they can do is offer tax relief and give more money to ministries,” he said.

Most government ministries have exhausted their funds allocated in the 2007 budget, which had forecast inflation easing to between 350% to 400% by the end of the year against a backdrop of an expected increase in agriculture and mining production.

The government has previously missed its targets by wide margins and output in both sectors has plummeted, with Zimbabwe having experienced a failed summer harvest and now scrambling to import staple maize from its Southern African neighbours.

Shrinking economy

Zimbabwe’s economy relies on agriculture but critics say Mugabe’s policy of seizing white-owned farms to give to black Zimbabweans had disrupted production and set his government at odds with key Western donors.

Mugabe denies charges he has mismanaged what was one of Africa’s most promising economies and accuses the West of sabotage as punishment for seizing white-owned farms.

The country’s economy has shrunk by more than 30% in real terms since 1999 and analysts said the government would not achieve its growth target of 0,5% to 1% in 2007 because it had not taken concrete steps to end the economic crisis.

Short of external funding and dwindling tax revenues, Mugabe’s government has relied on borrowing from domestic banks to meet its national budget requirements.

This helped push broad money supply growth to 4 200% in May, according to central bank figures, while government local debt spiralled to Z$2,1-trillion ($140-million) in May from Z$176-billion at the start of this year.

Analysts said a controversial official price freeze ordered in June had not only hit businesses and left shop shelves empty, but government tax income had also fallen dramatically.

”So they will have to continue to print money, it is the only way they can survive,” Eldred Masunungure, a leading political commentator said. ”But we know the dangers on inflation which they are trying to control.”

Zimbabwe’s central bank governor Gideon Gono has previously said printing money was the country’s ”last line of defence”. – Reuters