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Rights and Permissions Attribution—Please cite the work as follows: World Bank. 2025. Zimbabwe Public Finance Review. Washington, DC: World Bank. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank, therefore, does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Editor: Peter Kjaer Milne Cover design: Marco Silva ii Table of Contents Abbreviations and Acronyms ..... iv Foreword ..... vi Acknowledgements ..... vii Executive Summary ..... viii Introduction ..... xviii CHAPTER 1. MACRO-FISCAL CONTEXT ..... 1 1.1 Developments in Zimbabwe’s real, external, and fiscal sectors ..... 2 1.2 Monetary and exchange rate policy, and its impact on public finances ..... 6 1.3 Budget credibility ..... 14 1.4 Conclusion and policy recommendations ..... 17 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION ..... 20 2.1 Expenditure trends, quality, and progressivity ..... 20 2.2 Wage bill management ..... 30 2.3 Public investment management ..... 34 2.4 Procurement ..... 37 2.5 State-owned enterprises ..... 40 2.6 Conclusion and policy recommendations ..... 43 CHAPTER 3. OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION ..... 45 3.1 Tax revenue trends, progressivity, and tax potential ..... 47 3.2 Value-added tax ..... 52 3.3 Corporate income tax ..... 56 3.4 Mining taxation ..... 59 3.5 Health excise taxes ..... 66 3.6 Property and wealth taxes ..... 69 3.7 Tax administration ..... 74 3.8 Conclusion and policy recommendations ..... 80 CHAPTER 4. ACHIEVING MEDIUM-TERM FISCAL SUSTAINABILITY ..... 81 4.1 Baseline scenario ..... 81 4.2 Reform scenario ..... 82 4.3 Fiscal risks ..... 86 4.4 Implementing a durable fiscal consolidation strategy ..... 88 4.5 Conclusion ..... 90 References ..... 91 Annex Tables ..... 97 iii ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Abbreviations and Acronyms AfDB African Development Bank ASPIRE Atlas of Social Protection Indicators of Resilience and Equity AETR Average Effective Tax Rate BEPS Base Erosion and Profit Shifting CAMA Computer-Aided Mass Appraisal CCDR Country Climate and Development Report CIT Corporate Income Tax CPI Consumer Price Index DALYs Disability Adjusted Life Years DRM Domestic Revenue Mobilization e-GP e-Government Procurement EFDs Electronic Fiscal Devices EIB European Investment Bank ETR Effective Tax Rate FDMS Fiscalization Data Management System GDP Gross Domestic Product GoZ Government of Zimbabwe GRB Gender Responsive Budgeting HRMIS Human Resources Management Information System IDA International Development Assistance IFI International Financial Institution IMF International Monetary Fund IMTT Intermediate Money Transfer Tax ISORA International Survey on Revenue Administration ISPMIS Integrated Social Protection Management Information System MDAs Ministries, Departments and Agencies MIF Mutapa Investment Fund MMCZ Mineral Marketing Corporation of Zimbabwe MoFEDIP Ministry of Finance, Economic Development and Investment Promotion MNEs Multinational Enterprises OPC Office of the President and Cabinet iv ABBREVIATIONS AND ACRONYMS OSR Own-Source Revenue QFO Quasi-Fiscal Operation PFM Public Finance Management PFR Public Finance Review PIM Public Investment Management PIT Personal Income Tax PPDPA Public Procurement and Disposal of Public Assets PRAZ Procurement Regulatory Authority of Zimbabwe RBM Results-Based Management RBZ Reserve Bank of Zimbabwe RTGS Real Time Gross Settlement SDP Structured Dialogue Platform SEZs Special Economic Zones SMEs Small and Medium Enterprises SMP Staff Monitored Program SOE State-Owned Enterprise SSA Sub-Saharan Africa SSB Sugar-Sweetened Beverage TADAT Tax Administration Diagnostic Assessment Tool TaRMS Tax and Revenue Administration System US$ United States Dollar VAT Value-Added Tax WB World Bank WHO World Health Organization ZDERA Zimbabwe Democracy and Economic Recovery Act ZiG Zimbabwe Gold ZIMRA Zimbabwe Revenue Authority ZWL Zimbabwe Dollar v ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Foreword The Government of Zimbabwe (GoZ) recently embarked This report also provides an important contribution to the upon an ambitious set of reforms aimed to durably restore Structured Dialogue Platform (SDP) for Arrears Clearance Zimbabwe’s macroeconomic stability. The Treasury has and Debt Resolution. The SDP’s economic pillar calls for assumed responsibility for the external debts of the an IMF Staff-Monitored Program (SMP) that will help Reserve Bank of Zimbabwe (RBZ), allowing the RBZ to the GoZ to adopt a program of fiscal consolidation, and dedicate its efforts towards stabilizing monetary and prudent monetary and exchange rate policy, and set the exchange rate policy. The new RBZ Governor has embraced foundation for continued macroeconomic stability. This this shift, and the introduction of the Zimbabwe Gold (ZiG) report provides recommendations that may shape the currency initially resulted in lower inflation and improved potential fiscal reforms under an SMP going forward. exchange rate stability between April and August 2024. In turn, progress across all SDP pillars would set the basis for broader and deeper re-engagement with the Despite progress, many of its macroeconomic risks are international community. re-emerging on the fiscal side. The transfer of the RBZ’s external debt, together with increased capital spending In sum, our hope is that this report will help the GoZ in in 2023, has resulted in steep increases in the Treasury’s identifying options and opportunities to move toward debt servicing costs. In 2024, Zimbabwe faced its worst fiscal consolidation and, in doing so, help in anchoring drought in 40 years, increasing fiscal pressures for macroeconomic stability through fiscal policy. The World drought-response and undermining tax collection. Bank is fully committed to deepening its cooperation with the GoZ and meaningfully contribute to Zimbabwe’s Vision This Zimbabwe Public Finance Review therefore 2030 to achieve rapid growth and poverty reduction. comes at a critical time, seeking to identify options for the GoZ to engage in fiscal consolidation (expenditure rationalization and increased revenue mobilization) to help move Zimbabwe towards a more sustainable medium-term fiscal pathway. This can help stabilize the macroeconomic environment by providing an anchor for NATHAN BELETE price and exchange rate stability, bolstering economic Country Director for Malawi, Tanzania, Zambia & growth and job creation. Zimbabwe, World Bank vi ACKNOWLEDGEMENTS Acknowledgements This Public Finance Review was prepared by a dedicated included Victor Steenbergen and Rosa Dube, Massimo team of staff, whom we gratefully acknowledge. The Mastruzzi (expenditure trends and quality), Dhiraj overall task of drafting and synthesizing the report was Sharma, John van Dyck and Astrid Uytterhaegen led by Victor Steenbergen (Senior Economist, EA1M1) and Somya Baja (expenditure progressivity and and Marko Kwaramba (Senior Economist, EA1M1). social protection), Luciana De la Flor Giuffra (gender- The report was made stronger by comments and responsive budgeting), George Tafadzwa Mutowa suggestions from peer reviewers, including Fernando (wage bill analysis), Jay-Hyung Kim and Tuan Minh Blanco (Lead Economist, EMFTX), Alex Sienaert (Lead Le (public investment management), Eliot Kalinda Economist, EAWM2), and Johannes Herderschee (Procurement), and Sonny Mabheju (public investment (Senior Economist, CEUAE). On the Government’s management analysis, procurement and SOEs). side, invaluable collaboration and leadership were provided by Andrew Bvumbe (Head of the Public Debt Chapter 3 on opportunities for domestic revenue Management Office), Fidelis Ngorora (Chief Director mobilization was led by Victor Steenbergen. The Economic Research), Percy Takavarasha (Chief Director team included Anne Brockmeyer (tax revenue Expenditure) and Margiretta Makuwaza (Chief Director trends, progressivity, and tax potential), Indira Iyer International Development and Acting Chief Director (VAT and CIT tax gap analysis), Dhiraj Sharma, Maya Revenue). The team is also grateful for the data, inputs, Goldman and Tawanda Chingozha (distributional and support from all the staff in the Ministry of Finance, effects of removing VAT exemptions), Janette Farrell Economic Development and Investment Promotion, (mining taxation), Sally Murray and Riel Franzsen the Reserve Bank of Zimbabwe, and the Zimbabwe (property and mining taxation), Evan Blecher and Revenue Authority, as well as various other sectoral Chengetai Dare (health excise taxes), and Rosa Dube ministries, departments, and agencies. (tax administration). Chapter 1 on macro-fiscal context was led by Victor Chapter 4 on achieving medium-term fiscal Steenbergen. The team included Marko Kwaramba sustainability was led by Victor Steenbergen with and Rosa Dube, with inputs from Carren Pindiriri support from Marko Kwaramba. and Jimmy Psillos (fiscal cost of monetary and exchange rate distortions), and Sonny Mabheju The team would like to thank Farai Sekeramayi Noble (budget credibility). for providing logistic and administrative support, Peter Kjaer Milne for editorial support, Cheryl Khuphe Chapter 2 on opportunities for expenditure for communications support, and Cybil Nyaradzo rationalization was led by Marko Kwaramba. The team Maradza design and layout of the report. vii ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Executive Summary How can Zimbabwe create the necessary fiscal return of Zimbabwe’s fiscal accounts to a prudent space to absorb quasi-fiscal expenditures, reverse trajectory. Chapter 1 contains the macro-fiscal its upward trend in public debt, and support context and developments in Zimbabwe’s real, macroeconomic stability? Zimbabwe is faced with external fiscal sectors, and considers the impact an unsustainable and growing stock of public debt. that monetary and exchange rate policy distortions To service this debt, the Reserve Bank of Zimbabwe have had on Zimbabwe’s public finances. Chapter 2 (RBZ) has historically engaged in quasi-fiscal considers trends in, and the composition of, spending operations (QFOs) through money creation, leading and presents options for expenditure rationalization. to high inflation and macroeconomic instability. As Chapter 3 considers trends and the composition of part of the new Structured Dialogue Platform (SDP) revenue collection, and presents options for domestic for Arrears Clearance and Debt Resolution, the revenue mobilization. Chapter 4 ties this all together Government of Zimbabwe (GoZ) has committed to to consider how the various policy options in this end such QFOs, transfer all of the RBZ’s external debt report would affect the fiscal balance, debt servicing, to the Treasury, and strengthen revenue mobilization and the debt-to-GDP ratio, and how these policy to pay for RBZ liabilities. Yet, the transfer of these options could jointly contribute toward a credible liabilities has created a significant fiscal financing medium-term fiscal strategy for Zimbabwe. Table gap, for which consolidation is urgently required. 1 provides a summary of all key recommendations. The GoZ is thus considering options for fiscal consolidation (expenditure rationalization and increased revenue mobilization) to return Zimbabwe to a sustainable fiscal pathway. This can help stabilize the macroeconomic environment by providing an anchor for price and exchange rate stability, bolstering economic growth and job creation. It would also mark important progress under the SDP. Together with other critical reforms on land and governance issues, this could lay the foundations for the clearing of Zimbabwe’s external debt arrears, reengaging with the international community to provide access to affordable external credit lines, and helping to stimulate public and private sector investment. Jointly, this would place Zimbabwe on high-growth, stable macroeconomic pathway going forward. Against this background, this public finance review (PFR) examines options to create fiscal space and identify policy options that can contribute to a viii EXECUTIVE SUMMARY Table 1. Summary of recommendations from the Zimbabwe Public Finance Review Area Potential Key recommendations fiscal gains Macroeconomic 2.5-3.4% of GDP • Remove monetary and exchange rate distortions to enable stabilization low and stable inflation, and a competitive exchange rate. • Reverse the trend on informalization by removing macroeconomic obstacles, high compliance burden for SMEs, and reforming the Intermediate Money Transfer Tax. Expenditure 0.9-1.1% of GDP • Establish a national “social registry” to improve targeting of rationalization the social protection systems. • Ensure a fiscally responsible wage bill by eliminating duplicative and redundant positions, in line with the GoZ public service jobs evaluation report. • Improve value-for-money in procurement through eProcurement and standardized price lists. • Strengthen public investment management by strengthened appraisal processes, which would lead to the prioritization and selection of capital projects. • Improve State Owned Enterprise (SOE) transparency, timely financial reporting, and more effective oversight to limit the fiscal risks of SOEs. Domestic 3.1-3.8% of GDP • Remove VAT exemptions and zero-rating to increase revenue revenue collection but ensure that low-income households are mobilization adequately compensated. • Publish the fiscal cost of CIT tax incentives as part of the annual budget, and identify potential corporate tax incentives to rationalize. • To raise mining tax collection, strengthen and simplify transfer pricing safeguards, properly manage excess interest deductions, and improve Zimbabwe’s international tax treaty framework. There is also a need to simplify CIT and royalty taxes for the mining sector, and strengthen tax administration for mining audit assurances. • Raise tobacco and alcohol excise tax rates to World Health Organization standards and continue with the sugar- sweetened beverages tax. • Strengthen the property tax rate system through improving housing registration, computer-aided mass appraisals, digital billing/payments, and the integration of appropriate technologies. Reform the new (property-related) wealth tax by lowering the exemption threshold. • Accelerate rollout of the Tax and Revenue Administration System, and prioritizing modules facilitating taxpayer registration (especially informal sector). ix ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Chapter 1: Macro-fiscal Context 1. It raised GoZ expenditure temporarily through seignorage (inflation tax) and RBZ borrowing; Zimbabwe’s post-pandemic growth was strong, driven by private consumption, a growing informal 2. Accounting for QFOs suggests that historical sector, and dollarization. Following the COVID-19 GoZ expenditure is much higher than initially pandemic, Zimbabwe was one of the fastest expected, and that the GoZ is running a large growing economies in Africa. Most of this growth and persistent (quasi)-fiscal deficit. derived from increases in private consumption and the informal sector. The return to legal tender 3. It reduced real tax collection, in part from inflation- status of the US dollar in March 2020 was pivotal in related payment lags (the Olivera-Tanzi effect); driving this growth by reducing the vulnerability of Zimbabwe dollar (ZWL) to volatility, but also resulted 4. It resulted in a major re-distribution of funding in increasing US dollarization of the economy. away from the Treasury and toward the RBZ; and Zimbabwe is faced with a large and unsustainable 5. It undermined budget credibility, as high debt burden. While fiscal deficits were contained inflation and rapid exchange rate depreciation between 2019 and 2022, they grew excessively made having an orderly budget preparation and in 2023. Public debt continued to climb, driven by execution process in line with public finance external arrears, legacy debt, absorption of RBZ debt management (PFM) laws impossible. and a major transfer to the Mutapa Investment Fund (MIF). To move toward a pathway to clearing external Policies that stabilize prices and remove exchange arrears and resolving the country’s unsustainable rate distortions will strengthen government public debt, the authorities launched the SDP with revenue. Maintaining fiscal discipline is a far development partners in 2022. superior strategy for dealing with chronic economic stress than resorting to inflationary financing and Macroeconomic instability continued to be an issue exchange rate distortions (which are highly distortive and had a major distortive effect on Zimbabwe’s and ultimately undermine any government’s ability public finances. Distortive monetary and exchange to finance its national objectives). There is strong rate policies have contributed to the recent bouts of evidence to suggest that policies that remove high inflation and rapid exchange rate depreciation. exchange rate distortions and stabilize prices can For example, in 2023, reserve money increased by substantially improve government revenue, if they more than 1,800 percent and ZWL inflation was lead to low and stable inflation. Reversing the Olivera- at around 700 percent.¹ By April 2024, the official Tanzi effect and increasing customs duty would likely exchange rate had depreciated by more than 95 lead to swift benefits in tax collection. percent since December 2023, the parallel market gap was over 50 percent, and the ZWL had to be Only a broad set of policy reforms will likely replaced by a new currency, Zimbabwe Gold (ZiG). allow Zimbabwe to reverse the trend toward Beyond their direct impact on the economy, monetary informalization. Zimbabwe’s macroeconomic and exchange rate policy distortions also influenced instability has contributed to a growing Zimbabwe’s public finances in five different ways: informalization of the economy, with weakened tax ¹ World Bank estimates using RBZ and CCZ data. x EXECUTIVE SUMMARY collection as a result. Informality is an extremely reform the Intermediate Money Transfer Tax (IMTT). persistent phenomenon, such that it can take By taxing formal transactions, this incentivizes the years to re-formalize the private sector and regain use of informal, cash-based systems. Instead, the tax collection. To accelerate this dynamic, there IMTT should be made tax deductible for companies is a need to remove the various macroeconomic (thereby incentivizing formalization). obstacles (such as a high parallel exchange rate premium combined with punitive exchange rate The potential fiscal gains from macroeconomic controls), as well as the administrative obstacles stabilization and reversing informalization are (such as cumbersome tax compliance for small substantial. Estimates from this chapter puts and medium enterprises [SMEs]) that contribute to the potential medium-term gains in increased tax informalization. In addition, it will be important to revenue collection at 3.4 percent of GDP (Table E.1). Table E.1: Potential fiscal gains from macroeconomic stabilization and reversing informalization Policy area Policy action Fiscal impact Impact Impact (estimate, on on Equity % of GDP) Efficiency Removing monetary and Low and stable inflation 2.3% + + exchange rate distortions (no Olivera-Tanzi effect) Competitive exchange rate 0.5% + + Reversing informalization Reversing informalization 0.9% + - Reforming the IMTT to be -0.7% + - tax-deductible for formal companies Total potential fiscal gain 3.4% + + Finally, there is a need to re-establish budget Chapter 2: Opportunities for Expenditure credibility, through improved budget execution and Rationalization enforcement of PFM regulations. Weaknesses in the current budget planning and execution stage are driven Improving the efficiency of public spending in by macroeconomic instability, but further exacerbated Zimbabwe will be critical in supporting fiscal by the increased frequency of climate change-induced consolidation, while also supporting long-term droughts and international commodity price volatility. sustainable and inclusive growth objectives. Public Going forward, there is a need to improve budget spending in Zimbabwe is constrained by weak revenue credibility by ensuring strict adherence to GoZ PFM mobilization, inadequate allocative efficiency, and regulations, and by strengthening the appropriate pro-cyclicality that is further undermined by a high controls over appropriations, commitments, and inflationary environment.² Despite the recent increase, payment systems. Improvements in financial reporting average total expenditures for 2018–23 accounted, on and audits should further improve accountability and average, for 15 percent of gross domestic product (GDP), transparency of Zimbabwe’s PFM system. well below structural (23 percent) and aspirational ² The basis of analysis comprises spending of all central agencies from SAP reports complemented by integration of off budget expenditures (direct payments from the Accountant General). Data do not include foreign-funded spending or direct spending by local authorities, and includes only civil servants’ pensions. xi ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY (21 percent) peers. While the level of spending has a national “social registry” could help improve targeting exhibited a marked increase in past years, reaching of Zimbabwe’s current social protection systems and 21 percent of GDP in 2023, the increase was fueled help improve climate resilience. One potential option mostly by one-off grants and other general expenses, to (partially) finance this is through the recent reform which do not contribute to fostering growth and on removing VAT exemptions. equity objectives. Public spending also exhibits some of the highest procyclical levels in the world, which Efficient management of the wage bill is key, given undermines the effectiveness of expenditure policy its expanding share of the budget. High inflation and as a stabilization tool. exchange rate depreciation resulted in significant wage compression between 2019 and 2020, but also resulted Improving the quality of public spending is crucial in a major outflow of health and education workers. Yet, in accelerating economic growth and building several rounds of wage negotiations have since resulted human capital. While Zimbabwe enjoys a relatively in wage increases, while there has been a significant strong performance in education (compared with expansion in social workers (health and education) and the region), there is potential to improve the GoZ’s public administration workers. Jointly, this has resulted allocative efficiency to improve value-for-money. In in a re-ballooning of the wage bill. At 47 percent of contrast, the health sector has suffered significantly expenditures, the wage bill in Zimbabwe is now higher because of insufficient funding. It was also the sector than most regional peers, representing an important that was hardest hit by macroeconomic instability, with threat to fiscal sustainability and an increasing source average budget under-execution of 19 percent. A lack of rigidity. Yet, the GoZ’s jobs evaluation report points to of funding contributed to an exodus of health workers, significant “functional duplications and overlaps in roles drug shortages, and insufficient equipment. This also within and across line Ministries” (The Herald, 2024c), results in weak health outcomes, including relatively suggesting there are opportunities to eliminating high infant mortality ratios that significantly exceed redundant positions in the civil service. World Bank regional peers. There is also a pressing need to improve simulations suggest that such a reform could bring efficiency in capital investment, as under-execution significant fiscal savings, but much of this fiscal space typically led to large time delays and cost overruns. will be taken up by an increase in health workers A low focus on maintenance has further reduced the spending as part of the government’s new Health quality and lifespan of critical infrastructure assets for Workforce Compact (WHO, 2024). Overall, this results the country’s development. in only 0.3 percent in potential savings. The progressivity of expenditure policy can be The efficiency and effectiveness of public investment improved through more and better targeted spending management (PIM) can be improved through on social protection. Spending on social assistance strengthened appraisal processes, which would lead is well behind regional peers, and burdened with to the prioritization and selection of capital projects. inconsistent funding levels. Inadequate targeting of This would significantly improve value-for-money, social assistance schemes is also leading to both reduce costs, and avoid time overruns in the medium high exclusion and inclusion errors, undermining and long term. Fiscal saving could first be realized by the overall efficiency and effectiveness of social strengthening operationalization of the new PIM system protection spending. Currently, only 5 percent of total at project entry and, second, by rationalizing the stock of funding of social safety programs reaches the bottom existing capital projects. On the conservative side, these quintile of society. Electricity subsidies are similarly two options can bring fiscal savings of 0.75 percent poorly targeted and so, while 32 percent of the total of GDP compared with GoZ planned expenditure. In population benefited from electricity subsidies, only 4 practice, this would result in maintaining the historic percent of the extremely poor did, thus making these trend of spending, while ensuring considerably subsidies highly inequitable. The operationalization of improved value-for-money of Zimbabwe’s PIM system. xii EXECUTIVE SUMMARY Improvements in procurement systems present to receive substantial budget transfers. Estimates significant opportunities for efficiency savings. suggest that the GoZ spent an average of 3.5 percent Zimbabwe devotes about 25 percent of total expenditure of GDP on SOE transfers between 2019 and 2023. The to procurement, but is challenged by significant and Treasury has adopted reforms to help reduce transfers systematic under-execution, as well as value-for- to SOEs by: (i) liberalizing the fuel sector and removing money issues, with high premia charged by vendors fuel subsidies; (ii) phasing out “command agriculture” to hedge against inflation and exchange rate risks. subsidies; and (iii) moving to cost-reflective energy World Bank analysis suggests that recent reforms tariffs. Nonetheless, the SOE landscape would benefit made by the Procurement Regulatory Authority from additional reforms to improve SOE transparency, of Zimbabwe (PRAZ), including value-for-money timely financial reporting, and more effective oversight. analysis, standardized price lists and implementation of an e-Government Procurement (e-GP) system, may Overall, the GoZ has important policy options on address some of the bottlenecks, with projected fiscal expenditure rationalization, yet its expected savings saving of 0.8–0.9 percent of GDP. are uncertain and limited, with around 1.1–1.2 percent of GDP in potential fiscal gains, out of which around State-owned enterprises (SOEs) are another source 0.15 percent should be allocated to compensate low- of fiscal risk and contingent liabilities, and continue income households (Table E.2). Table E.2: Potential fiscal gains from expenditure rationalization Policy area Policy action Fiscal impact Impact Impact (estimate, on on Equity % of GDP) Efficiency Social protection Establish a national “social - + + registry” to improve targeting of Zimbabwe’s current social protection systems Increase funding to social registry to -0.15% Neutral + compensate low-income households from removed VAT exemptions Wage bill Eliminate redundant positions in 0.3 + Neutral civil service, in line with GoZ Jobs Evaluation Report Procurement Value-for-money, standardized 0.8–0.9 + Neutral price list, eProcurement Public Investment Rationalizing number of projects, - + Neutral Management maintaining historic trends of spending SOE expenditures Limit contingent liabilities from Impact unclear + Neutral SOEs (average transfer is 3.5% of GDP) Total potential 0.95–1.05% + + fiscal gain xiii ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Chapter 3. Opportunities for Domestic is low, at 0.33. This is driven by a combination of tax Revenue Mobilization incentives, a large informal sector, and compliance challenges. To increase revenue collections from CIT, Zimbabwe’s government revenue has recently Zimbabwe would benefit from estimating the fiscal increased, but still remains far below its potential. cost on all tax incentives offered, to be published as Total domestic revenue has gradually increased part of the annual budget. Reforms to streamline, over time, rising to 14.6 percent of GDP in 2023. rationalize and publish CIT tax incentives would Nonetheless, comparable structural and regional provide greater tax certainty and transparency. peer countries, on average, collect 19.8 and 20.9 percent of GDP in revenue average 2018–2022, Mining sector revenue collection is not rising respectively. This report suggests that Zimbabwe’s in line with the sector’s growth. The mining tax potential is 22 percent of GDP (implying a tax sector’s revenue collection is below the average gap of 6.5 percentage points). While Value-Added of Sub-Saharan Africa (SSA) as a share of mining Tax (VAT) and Corporate Income Tax (CIT) are less exports, and a declining relationship is observed efficient in their collection (compared to regional between mining royalties and mining exports. peers), Personal Income Tax (PIT) is relatively strong Three challenges are identified that contribute to both in terms of revenue, as well as progressivity. the mining sector’s revenue collection: (i) profit- shifting, including transfer pricing and detrimental The VAT reforms in the 2024 budget provide an double-tax agreements; (ii) prolific mining tax important way to increase revenue collection, exemptions, incentives and special mining rates; but to ensure a progressive outcome this would and (iii) significant misreporting in mining exports, require adopting a compensating mechanism indicating potential tax avoidance. Dedicated effort to for low-income households. The 2024 budget improve mining tax law and mining tax administration announced significant changes to VAT by limiting the reform could result in a 20–30 percent increase in number of VAT exempt or zero-rated commodities. CIT revenue, and a 2–10 percent increase in mining World Bank analysis suggests this could increase royalties (equivalent to 0.5–0.76 percent of GDP). VAT revenue by 0.88 percent of GDP. However, it also expected to increase the poverty headcount by Zimbabwe stands to gain by raising tobacco and 1.4 percentage points and inequality by 0.14 of a alcohol tax rates to World Health Organization percentage point. Therefore, the VAT reforms should (WHO) standards and introducing a sugar- be accompanied by a compensation mechanism, sweetened beverages (SSB) tax. Compared with which can be done with a fraction of the new VAT regional peers, health taxes in Zimbabwe are low, collections (only 17 percent, or 0.15 percent of GDP) leading to low prices that contribute to an increasing from proposed changes. Yet, focusing only on the burden of disease. Raising tobacco and alcohol current beneficiaries of the cash transfer program excises to WHO-standard levels could generate is ineffective because of its minimal coverage. There US$57 million in incremental tax revenue, or 0.18 is thus a need to also establish a nationwide social percent of GDP. The SSB tax that is proposed in the registry and develop a targeting mechanism to target 2024 budget is also expected to generate around social cash transfers more effectively. US$39.7 million, or 0.12 percent of GDP. Alongside gains in revenue, these measures are also expected CIT collections are relatively low. CIT efficiency, to discourage consumption of products that cause calculated as the ratio of actual CIT revenue collected health damage, reduce mortality and morbidity, and to theoretical revenues from a no-exemptions and ultimately lead to positive socio-economic outcomes no-deductions corporate tax on operating surplus, for Zimbabwe. xiv EXECUTIVE SUMMARY Improving the property tax rate system and the new introduced Tax and Revenue Administration System wealth tax can result in a set of high-performing (TaRMS). TaRMS is still in its rollout phase but, once and progressive taxes with strong complementarity fully operational, the system is anticipated to make to other revenue instruments. Strengthening substantial progress in improving the taxpayer administration, with a focus on registration, computer- registry, strengthening risk management through aided mass appraisals (CAMA), digital billing/payments, data-matching across source systems, supporting and the integration of appropriate technologies, could voluntary compliance and accurate report through deliver a second-generation property rates system pre-filling of tax declarations, and enabling the timely that aligns with the evolving needs and expectations filing and payment of taxes. It should also improve of taxpayers and local governments, while also efficient revenue management through automatic strengthening the foundation for other revenue processing of refunds. This is complemented by a instruments such as the wealth tax and utility billing. newly integrated focus on customer segmentation, The initial performance of the new wealth tax is likely a new risk management system, and a new system to be suboptimal due to valuation challenges and to improve VAT compliance using electronic fiscal the narrow definition of the tax base. However, key devices (EFDs). International literature suggests adjustments to the tax schedule and tax base would that such broad improvements to tax administration significantly improve the wealth tax performance. This could have a potential impact of 1.4–1.8 percent of should be combined with administrative measures GDP (Adan et al., 2023; Nose and Mengistu, 2023). such that the central government can support local authorities to improve property appraisals. In sum, while Zimbabwe’s revenue collection has increased in recent years, it is still considerably Finally, improvements in tax administration may below its potential. There are a range of different also result in large revenue gains. The Zimbabwe options to raise domestic revenue mobilization Revenue Authority (ZIMRA) has embarked on that improve both efficiency and have a pro-poor a broad set of reforms that are expected to outcome. A conservative estimate suggests that this significantly improve Zimbabwe’s tax administration could structurally raise tax collection between 3.1 performance, most notably through the newly and 3.8 percent of GDP (Table E.3). xv ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Table E.3: Potential fiscal gains from domestic revenue mobilization Policy area Policy action Policy action Impact Impact on on Equity Efficiency VAT exemptions and 2024 Budget Reforms 0.88% + - zero-rating Compensating for low- -0.15% neutral + income households CIT tax incentives Rationalize corporate tax Potential unclear (CIT tax + + incentives gap of 3.4%) Mining tax Mining tax law and tax 20–30% in CIT, 2–10% in + + administration reforms. royalties. (Equivalent to 0.5–0.76% of GDP) Health excise tax Raising tobacco and 0.18% + + (longer alcohol excise life-span) Introducing SSB tax 0.12–0.14% Property and wealth tax Property rates 40–100% increase + + (Local govt’ only) Wealth tax Marginal impact under - + current design Tax administration Improved tax 1.4–1.8% + neutral administration and use of digital technologies Total potential fiscal gain 3.08–3.76% + + Chapter 4. Achieving Medium-term mobilization rather than through expenditure Fiscal Sustainability rationalization. Careful fiscal design (focused on tax base broadening, government consumption and Bringing together the policy options from this avoiding a reduction in capital expenditure) means report suggests that there is a pathway toward that the cost of fiscal consolidation to GDP is limited. a credible medium-term fiscal strategy. Gains from macroeconomic stabilization and reversing Restoring debt sustainability will likely require informalization, expenditure rationalization, and short-term fiscal consolidation, combined with improved tax policy and tax administration could a credible plan to clear accumulated arrears to result in a potential fiscal consolidation of 3.3 percent multilateral creditors and reaching an agreement of GDP in 2024, running up to 7.2 percent in 2027. In with official creditors on a comprehensive treatment line with findings from the international literature, of Zimbabwe’s external debt. This emphasizes the most gains are expected in domestic revenue importance of the Structured Dialogue Platform xvi EXECUTIVE SUMMARY (SDP) between the GoZ and international creditors. Finally, there is need for an implementation The SDP’s economic pillar calls for a Staff-Monitored strategy to ensure a durable fiscal consolidation. Program (SMP) from the IMF that will help the GoZ to Following Comelli et al. (2023), we note the importance adopt a program of fiscal consolidation, and prudent of government in shaping the implementation monetary and exchange rate policy, and will set the of its policy reform package through sequencing, foundation for continued macroeconomic stability. compensation, communication, and trust. Institutional This report provides recommendations that may reforms are also critical to ensure a more durable shape the potential fiscal reforms under an SMP fiscal consolidation reform, particularly related to going forward. In turn, progress all the three SDP strengthening the medium-term orientation of the pillars would set the basis for re-engagement for the budget, systematic identification and management development community, ensure bridge funding for of fiscal risks, improving expenditure controls, and arrears’ clearance, and allow for comprehensive debt boosting revenue administration. restructuring. Lower debt servicing costs combined with access to concessional multilateral lending could In sum, this report shows how fiscal policy can be encourage public and private investments, bolstering a critical anchor for macroeconomic stability going economic growth and placing Zimbabwe on a more forward. The GoZ is at a crucial juncture. By adopting stable macroeconomic pathway going forward. a bold set of fiscal reforms, it can turn the page on a prolonged history of macroeconomic instability, and The macroeconomic scenario is subject to various set the foundations for a credible national budget that fiscal risks, which may cause fiscal outcomes to is efficient, able to manage unforeseen fiscal risks, deviate from baseline or presented forecasts. The and can ensure a stable and competitive currency. current macroeconomic landscape is susceptible In turn, this would open up the historic possibility of to significant fiscal risks varying from inflation, arrears’ clearance and debt resolution, which would exchange rate depreciation, wage-setting, contingent release major additional resources in concessional liabilities, QFOs, and natural disasters. This calls multilateral financing for public and private for a comprehensive analysis and management of investments. Jointly, this would lead to high growth, fiscal risks, which is critical to ensuring sound public major poverty reduction, and a major step toward finances and macroeconomic stability. achieving Zimbabwe’s development objectives. xvii ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Introduction How can Zimbabwe create the necessary fiscal and revenue mobilization) and strengthening in- space to absorb quasi-fiscal expenditures, reverse year expenditure management. The PFR examines the upward trend in public debt, and support efficiency, effectiveness, and equity aspects of macroeconomic stability? Zimbabwe is faced with spending within service delivery sectors. The latter an unsustainable and growing stock of public debt. is addressed along three key questions, namely: To service this debt, the Reserve Bank of Zimbabwe (i) Is spending aligned with national priorities (RBZ) has historically engaged in quasi-fiscal (allocative efficiency)? (ii) Is spending efficient operations (QFOs) through money creation, leading and effective (technical efficiency)? and (iii) Has to high inflation and macroeconomic instability. Yet, spending been equitable? The identification of public as part of the new Structured Dialogue Platform spending inefficiencies is undertaken through both (SDP) for Arrears Clearance and Debt Resolution, international benchmarking and efficient frontier the Government of Zimbabwe (GoZ) has committed analysis. In addition, this PFR also review the potential to ending such QFOs, transferring all of the RBZ’s to mobilize domestic revenue by focusing on: (i) external debt to the Treasury, and strengthening efficiency (minimizing economic distortions for tax revenue mobilization to pay for these liabilities. collection); (ii) equity (the ability to raise tax revenues in a progressive manner); (iii) simplicity (a system that The GoZ is urgently considering options for minimizes both compliance and administrative costs, fiscal consolidation (expenditure rationalization and avoids creating unnecessary boundaries); and (iv) and increased revenue mobilization) to return sustainable growth (the ability of the tax regime to Zimbabwe to a sustainable fiscal pathway and support long-term growth, adopting a pro-growth tax create fiscal space. This can help stabilize the mix, and utilizing taxes that correct for externalities). macroeconomic environment by providing an anchor for price and exchange rate stability, bolstering The rest of the report is organized as follows: economic growth and job creation. In addition, it Chapter 1 contains the macro-fiscal context, would mark important progress under the SDP. developments in Zimbabwe’s real, external fiscal Together with other critical reforms on land and sectors, and considers the impact that monetary governance issues, this could lay the foundations and exchange rate policy distortions have had on for the clearing of Zimbabwe’s external debt arrears, Zimbabwe’s public finances; Chapter 2 considers which in turn would help to reengage the international trends and composition of spending, and presents community, provide access to affordable external options for expenditure rationalization; Chapter credit lines, and help to stimulate public and private 3 considers trends and composition of revenue sector investments. collection, and presents options for domestic revenue mobilization; and Chapter 4 ties this all together to Against this background, this public finance review consider how the various policy options in this report (PFR) examines options to create fiscal space and would affect the fiscal balance, debt-servicing, and contribute to a return of Zimbabwe’s fiscal accounts the debt-to-GDP ratio, and how these options could to a prudent trajectory. The PFR identifies options jointly contribute toward a credible medium-term for fiscal consolidation (expenditure rationalization fiscal strategy for Zimbabwe. xviii CHAPTER 1 Macro-fiscal Context “Zimbabwe has been running large and persistent budget deficits since attainment of independence in 1980, often financed through borrowing from the central bank (…). On one hand, the monetization of fiscal deficits led to high money supply growth and inflation. On the other hand, high inflation eroded the real value of fiscal revenues resulting in even higher fiscal deficits which were also monetized, thus creating a vicious cycle.” – Dr William Kavila, Deputy Director in the Economic Research Division of the Reserve Bank of Zimbabwe (2021) Zimbabwe has been burdened by extensive periods activity, and erosion of the fiscal revenue base. As such, of macroeconomic instability. Distortive monetary macroeconomic instability significantly undermines policy and exchange rate policy have contributed to the economy’s long-term growth prospects, as well the recent bouts of high inflation and rapid exchange as its system of public finances. rate depreciation. For example, in 2023, reserve money increased by more than 1,800 percent, and This chapter reviews Zimbabwe’s recent Zimbabwe dollar (ZWL) inflation was at around 700 macroeconomic developments and considers percent. By April 2024, the official exchange rate had their impacts on public finances. First, we provide an depreciated by more than 95 percent since December overview of recent developments in the real, external, 2023, the parallel market gap was over 50 percent, and fiscal sectors. Next, we consider how distortions and the ZWL had to be replaced by a new currency, in monetary and exchange policy have contributed to Zimbabwe Gold (ZiG). These monetary and exchange the recent periods of high inflation and rapid exchange rate distortions, together with a difficult business rate depreciation. In turn, we consider the significant environment, raise the cost of doing business, which impact that this has had on public finances by in turn leads to underinvestment, a rise in informal increasing public debt and reducing real tax collection. 1 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Next, we consider the credibility of budget preparation respectively (Figure 1.1a). The country was one of and budget execution, and note the challenges posed the fastest growing economies in Africa and eclipsed by macroeconomic instability, the increased frequency most countries in the South African Development of climate change-induced droughts, and international Community, including South Africa, Zambia and commodity price volatility. We conclude the chapter Mozambique (Figure 1.1b). The recovery was broad- with policy recommendations. based, with improvements in agriculture, industry, and services (Figure 1.2a). The return to legal tender 1.1 Developments in Zimbabwe’s real, status of the US dollar in March 2020 was pivotal external, and fiscal sectors in driving this growth by reducing the vulnerability of ZWL volatility. Nonetheless, most of this growth Zimbabwe’s post-pandemic growth was strong, derived from increases in private consumption and but driven in large part by private consumption, the informal sector, which supported the services increased dollarization, and the informal sector. sector. The Government of Zimbabwe’s (GoZ) Following the COVID-19 pandemic, Zimbabwe saw contribution to growth came from consumption in a strong recovery, with economic growth at 8.5, 2021 and 2022, and through capital expenditures in 6.1, and 5.3 percent across 2021, 2022 and 2023, 2023 (Figure 1.2b). Figure 1.1: Real GDP growth (%) in Zimbabwe and selected African countries a. Zimbabwe GDP growth rate, % b. GDP growth rate of selected countries, (%) 10.0 8.5 9.0 8.0 6.1 8.0 6.0 5.3 7.0 4.0 6.0 2.0 5.0 % 0.0 4.0 -2.0 3.0 -4.0 2.0 -6.0 1.0 -8.0 6.3 - -10.0 -7.8 2021 2022 2023 Zimbabwe Zambia South Africa 2019 2020 2021 2022 2023 Mozambique Sub-Saharan Africa Source: ZimStat, World Bank. Note: SSA = Sub-Saharan Africa. Figure 1.2: Contributions to Zimbabwe’s growth, by sector and expenditure a. Real growth, contribution by sector b. Real growth, contribution by expenditure 10.0 15.0% 5.0 10.0% 5.0% 0.0 0.0% - -5.0% -5. -10.0% 2019 2020 2021 2022 2023 -10.0 2019 2020 2021 2022 2023 Trade balance Government investment Private gross fixed capital formation Agriculture Mining Industry Government consumption Private consumption Services Taxes and subsidies GDP growth Source: ZimStat, World Bank. Note: SSA = Sub-Saharan Africa. 2 CHAPTER 1: MACRO-FISCAL CONTEXT External headwinds have contributed to a Fiscal sector and debt narrowing of Zimbabwe’s current account surplus. Exports have been growing post-pandemic, in part Fiscal deficits have been more contained in because rising commodity prices increased exports recent years than by previous governments. of minerals and metals (particularly gold). This Zimbabwe has historically faced considerable is combined with increased agricultural exports, challenges maintaining a fiscal balance,³ and there notably from tobacco. At the same time, global is a close relationship between budget deficits dynamics such as supply-chain challenges and and economic growth, with a possible two-way Russia’s invasion of Ukraine led to rising commodity relationship (Kavila, 2021). Since 2019, there has prices, particularly for fuel and fertilizer. This led been a renewed effort for fiscal consolidation, as imports to grow even faster, resulting in a growing the Ministry of Finance, Economic Planning and trade deficit (Figure 1.3a). This gap was partly Investment Promotion (MoFEDIP) is committed to counteracted by a surge in remittances, together running a deficit below 2 percent (Figure 1.4). This with a strong recovery in tourism receipts, resulting is realized, in part, by utilizing a cash-budget for in a small but narrowing current account surplus which government expenditures are determined (Figure 1.3b). by actual revenue collections.⁴ Figure 1.3: Gradual worsening of the trade deficit and current account balance a. Commodities trade deficit (% of GDP) b. Current account balance (% of GDP) 30.0% 15% 5% 20.0% 10% 10.0% 5% % of GDP 0% 0.0% 0% -10.0% -5% -20.0% -10% -5% -30.0% 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Trade balance Services balance Exports Imports Trade balance Remittances Other CAB (RHS) Source: ZimStat, World Bank. Note: SSA = Sub-Saharan Africa. ³ Kavila (2021) considers five phases, namely: decade of controls (1980–1990); the first and part of the second phase of economic reforms (1991–1996); economic crisis (1997–2008); return to macroeconomic stability or the multi-currency era (2009–2012); and relapse into macroeconomic instability (2013–2018). ⁴ This mimics the cash budget utilized by the Government of National Unity (2009–2012), which resulted in a budget surplus. 3 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 1.4: Macroeconomic phases, budget balance and GDP growth a. Budget balance and GDP growth b. Budget balance, % of GDP (average by phase) Return to Relapse into Renewed macro- economic efforts for economic crisis fiscal stability (2013-2018) discipline -7.7 1997-2008 25 (2009- 2012) 0.5 2009-2012 15 Economic crisis (1997-2008) 5 -3.1 2013-2018 -5 -0.2 2019-2022 -15 -14 -6.5 2023 -25 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Budget balance (%) LHS -16 -14 -12 -10 -8 -6 -4 -2 0 2 Real GDP Growth Rate (%) (RHS) Fiscal balance Fiscal balance incl. transfer to MIF Source: World Bank staff calculations adjusted from Kavila (2021), MoFEDIP data. While fiscal deficits were contained between 2019 bonds to capitalize the Mutapa Investment Fund (MIF) and 2022, they grew excessively in 2023 due to and expunge legacy debt at the RBZ (Figure 1.5a). a sizable one-time increase in capital spending. Meanwhile, revenue mobilization remained subdued To improve fiscal policy, the authorities aimed to due to high inflation and rising informality (see Section implement public procurement policies and value-for- 1.2 and Chapter 3), and saw a adecline in 2023 (Figure money audits that helped to keep capital expenditure 1.5b). This resulted in a sizable fiscal deficit (either 6.5 constant in 2022 (see Chapter 2). Nonetheless, by percent according to MoF definitions, or 14 percent 2023, the GoZ had once again adopted a large increase according WB/IMF definitions),⁵ and a substantial in capital spending through the issuance of Treasury accumulation of government debt. Figure 1.5: Zimbabwe’s expenditure, revenue and fiscal balance (% of GDP), 2020–2023 a. Expenditure (% of GDP) b. Revenue (% of GDP) c. Fiscal balance (% of GDP) 30.0 30.0 28.6 4.0 25.0 1.3 25.0 -0.1 20.0 0.0 14.6 15.0 20.0 -4.0 -2.7 10.0 15.0 -6.5 5.0 -8.0 10.0 0.0 2020 2021 2022 2023 5.0 -12.0 Taxes on goods and services 0.0 -1.4 Taxes on income profits 2020 2021 2022 2023 -16.0 2020 2021 2022 2023 Taxes on international trade Wages Social benefits Other taxes Non-tax revenue Other spending Interest Fiscal balance Capital spending Capital spending Transfer to MIF Fiscal balance incl. transfer to MIF Source: World Bank staff calculations using MoFEDIP data. ⁵ According to GoZ, the issuance of treasure bills to the benefit of the Mutapa Investment Fund is considered government internal financing, and thus excluded from GoZ expenditure/deficit figures. WB/IMF have classified this as a capital transfer and therefore included it in GoZ expenditure/deficit figures. 4 CHAPTER 1: MACRO-FISCAL CONTEXT Public debt has continued to climb, driven by the GoZ accepted liabilities to compensate external arrears, legacy debt, absorption of RBZ former farmers who had been affected by the debt, and a transfer to the MIF. Zimbabwe’s public early 2000s land reform initiative. debt is in distress and unsustainable, constraining • Absorption of the RBZ’s debt (US$2.16 billion): access to international finance. Public debt rose to In 2023, the Treasury agreed to take over 113 percent of gross domestic product (GDP) in 2022 US$2.16 billion in the RBZ’s external debt, to and stood at 97 percent in 2023 (Figure 1.6a). By reduce macroeconomic pressures arising from 2023, total public debt rose to US$21.2 billion (Figure the RBZ’s debt monetization. 1.6b). While high inflation and a sharp depreciation of the ZWL helped keep domestic debt low, external Additional debt was accumulated in December 2023, debt increased sharply. This is partly driven by debt when the Treasury issued US$1.9 billion in T-bonds arrears. As the GoZ stopped servicing external debt as a transfer to the newly-founded government in 2000, external arrears accumulated to US$7.3 holding company for state-owned enterprises billion in 2023 (Figure 1.7a), including US$2.5 billion (SOEs), then the MIF. Jointly, this meant that these in multilateral arrears.⁶ The Treasury also took over new debt-creating flows increased from 35 percent three types of legacy debt to redress historical policy of total public debt in 2018, up to 72 percent in 2023 missteps. While crucial to help redress historical (Figure 1.7a). policy missteps, this meant a large rise in US$- denominated public debt: While Zimbabwe’s total debt has been increasing, the debt-to-GDP ratio has been volatile due to • “Blocked funds” (US$3.73 billion): In 2021, the exchange rate dynamics. Changes in the debt-to- GoZ accepted to compensate stakeholders for GDP ratio are driven in large part by stock-flow losses on cashflows that could not be repatriated adjustments from exchange rate depreciation and during a currency conversion in 2019. the gap between the average and end-of-period • Former farm owners (US$3.5 billion): In 2022, exchange rates⁷ (Figure 1.7b). Figure 1.6: Public debt (as share of GDP and US$ billion) a. % of GDP b. US$ billion 120 22 20 100 18 16 USD Billion 80 % of GDP 14 60 12 10 40 8 6 20 4 2 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 External Domestic External Domestic Source: World Bank staff calculations using IMF-WB DSA (2024). ⁶ US$1.5 billion is owed to the World Bank, US$700 million is owed to the AfDB, and US$400 million to the EIB. Arrears to the IMF were cleared in October 2016. ⁷ For example, while 2023 GDP in US dollars is estimated by converting ZWL-denominated accounts using year’s-average exchange rate (3,692:1), debt in US dollars is estimated by converting ZWL-denominated debt using years’-end exchange rate (7,143:1). This leads to a situation where aggregate debt is US$21.2 billion and 96.6 percent of GDP, even though year-averaged exchange rate estimates put Zimbabwe’s 2023 GDP at US$35.5 billion. 5 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 1.7: Main drivers of public debt a. Selected debt-creating flows (US$ billion) b. Contributions to change in public debt (% of GDP) 16,000 80% 60 40 % of Total Debt 12,000 60% USD Billion USD Billion 20 8,000 40% - 4,000 20% -20 - 0% -40 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2020 2021 2022 2023 Other debt-creating flows Exchange rate depreciation External arrears Legacy debt RBZ debt Economic growth Real interest rate Mutapa Investment Fund Share of public debt [RHS] Primary deficit Change in public debt Source: World Bank staff calculations using IMF-WB DSA (2024). Zimbabwe has been in non-accrual status to the Measures in the economic reforms matrix focus World Bank since 2000 and is also in arrears to on liberalizing the exchange rate, transferring the the African Development Bank (AfDB) and the RBZ’s external liabilities that arose from QFOs to European Investment Bank (EIB). Zimbabwe last the Treasury, strengthening domestic revenue accessed International Bank for Reconstruction and mobilization, ensuring fiscal and monetary policy is Development (IBRD) loans in 1994 and International non-inflationary, and improving access to inclusive Development Association (IDA) financing in 1998, and social protection. Finally, it calls for an IMF staff- stopped repayments in 2000. Out of the total of US$2.5 monitored program to help further define and billion in multilateral arrears, US$1.5 billion is owed to implement strategies from the economic reform the World Bank, US$700 million is owed to the AfDB, matrix (see Chapter 4). and US$400 million to EIB. Arrears to the International Monetary Fund (IMF) were cleared in October 2016. 1.2 Monetary and exchange rate policy, and The GoZ has restarted token payments to international its impact on public finances8 financial institutions (IFIs) and to Paris Club members. Lack of an arrears clearance plan for multilateral Monetary and exchange rate policy creditors impedes any World Bank program and is a requirement for further debt restructuring. Zimbabwe’s monetary policy has been defined in large part by quasi-fiscal operations. QFOs are the To move toward a pathway to clearing external financing of the GoZ, state-owned enterprises (SOEs), arrears and resolving its unsustainable public debt, and private sector companies by the RBZ (often the authorities launched a Structured Dialogue financed through money printing). This is common Platform (SDP) with development partners in among non-independent central banks that operate December 2022. The platform, hosted by the AfDB, within a broader political economy and frequently face offers a forum to discuss key thematic issues governance disruptions (Mihailovici, 2015). The RBZ between senior government officials, development has historically been deeply involved in QFOs through partners and multilaterals. Three working groups printing money and using this to finance external debt were set up, focused on: (i) economic growth and servicing payments, supporting SOEs, and making stability; (ii) governance; and (iii) land reforms. transfers to the real sector through agricultural ⁸ For details, see the background note by Steenbergen et al (2024) “The fiscal costs of monetary and exchange rate policy distortions in Zimbabwe”. 6 CHAPTER 1: MACRO-FISCAL CONTEXT subsidies and incentives for gold production (World and in US dollars (by borrowing from international Bank, 2023). The RBZ has engaged in QFOs to make commercial lenders, and by exploiting export payments in both ZWL (through direct ZWL loans) surrender requirements) (see Box 1.1). Box 1.1: Overview of the RBZ’s quasi-fiscal operations QFOs can be distinguished in three ways, based on their currency and financing method: • ZWL-denominated QFOs are driven by the RBZ directly printing money to lend ZWL to the GoZ. This was notably done from 2004 to 2007, resulting in hyperinflation in 2008 (Munoz, 2007). US$-denominated QFOs are conducted in two separate ways: • Servicing US$-denominated expenditures with ZWL. To provide US$-denominated expenditures, the RBZ borrowed US dollars from offshore commercial lenders, who were repaid through ZWL money creation. • Repaying US$ export surrenders in ZWL. The RBZ also maintains a surrender requirement that obliges exporters to exchange a share of their US-dollar receipts to the RBZ in exchange for local currency. Rather than reselling this forex in full via a domestic foreign currency auction, it utilized a part to service its own US$-denominated debt and paid for such US$- export surrenders through ZWL money creation. US$-denominated QFOs resulted in exchange rate depreciation, leading to a vicious cycle where increasing amounts of ZWL needed to be printed to service US$-denominated loans or US$- export surrenders. Figure B.1.1. Conceptual overview of the RBZ’s QFOs QUASI-FISCAL QUASI-FISCAL REVENUE & FINANCING EXPENDITURES Receiving USD from export surrender requirement USD lending/grants to Government, SOEs, Borrowing USD from 3. Repaying Private Sector international commercial USD export lenders surrenders in ZWL 2. Servicing USD- denominated loans 1. Direct lending to with ZWL government ZWL lending/grants to Government, SOEs, ZWL money supply growth Private Sector Source: World Bank staff illustration. 7 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY The RBZ’s QFOs led to a big increase in ZWL money Zimbabwe’s macroeconomic instability has supply, which resulted in high inflation and rapid historically been driven by QFOs. A massive increase deprecation of the exchange rate. Growth in reserve in the use of QFOs culminated in hyperinflation money is closely correlated with Zimbabwe’s inflation, from 2004 to 2008 (Munoz, 2007). This behavior and big spikes in reserve money resulted in the periods continued until 2009, when Zimbabwe shifted to of high inflation in the summer of 2020 (Figure 1.8a) and US dollarization. However, even dollarization failed 2023 (Figure 1.8b). A close-to-perfect linear relationship to prevent the creation of excess liquidity. Instead, exists between money supply and the Consumer Price around 2014, the RBZ started exploiting the domestic Index (CPI) (Figure 1.9a). Excess money supply also US dollar clearing system used to facilitate local US undermines the value of the local currency, leading dollar transactions—the Real Time Gross Settlement to rapid depreciation. This, in turn, also has a negative (RTGS)—to create unbacked local (“nostro”) US impact on local prices as traders price-adjust to the dollar deposits and utilized this money-creation to new, lower exchange rate, thus importing inflation. As resume its QFOs. This resulted in a parallel market such, there is also a strong correlation between the CPI for Zimbabwe’s “nostro” US dollars. The premium and the exchange rate (Figure 1.9b). paid for “real” US dollars grew steadily from around Figure 1.8: ZWL inflation and reserve money growth (y-o-y change) a. 2019–2021 b. 2022–2023 Reserve Money growth (%) Reserve Money growth (%) 1,000 500 1,200 4,000 ZWL Inflation (%) ZWL Inflation (%) 800 400 1,000 3,000 800 600 300 600 2,000 400 200 400 1,000 200 100 200 - - - - 2019M5 2019M8 2019M11 2020M2 2020M5 2020M8 2020M11 2021M2 2021M8 2021M8 2021M11 2022M1 2022M3 2022M5 2022M7 2022M9 2022M11 20231 2023M3 2023M5 2023M7 2023M9 2023M11 ZWL Inflation [LHS] Reserve Money [RHS] ZWL Inflation [LHS] Reserve Money [RHS] Source: World Bank staff calculations using RBZ and CCZ data. Note: ZWL inflation for 2023 is estimated using Consumer Council of Zimbabwe data. Figure 1.9: Linear correlation between CPI and money supply; between CPI and parallel exchange rate a. Money supply and inflation b. Inflation and parallel exchange rate 160,000.0 160,000.0 Consumer price index Consumer price index 120,000.0 120,000.0 80,000.0 80,000.0 40,000.0 40,000.0 0.0 0.0 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 5,000.00 10,000.00 15,000.00 20,000.00 Money supply (ZWL billion) Parallel exchange rate Source: World Bank staff calculations using RBZ and Zimstat data. Note: CPI = Consumer Price Index. 8 CHAPTER 1: MACRO-FISCAL CONTEXT 5 percent in early 2016 to 330 percent in early 2019. parallel market premium. The GoZ also adopted With this premium now unstainable in 2019, the ZWL exchange rate policies to try to slow down depreciation had to be re-introduced at an exchange rate of ZWL2.5 arising from excess ZWL money supply growth, to each US dollar and with all locally held US dollar notably via influencing the auction system and through balances converted into Zimbabwe dollars at this official exchange rate controls. The foreign exchange exchange rate (RBZ, 2019). Yet, the RBZ’s QFOs did auction market, introduced in June 2020, was affected not stop there, so the ZWL-USD official exchange rate by “moral suasion”. It did not follow a path of pure price quickly depreciated from 2.5:1 at introduction in 2019 discovery, as it became clear to the market that the to 51:1 in 2020, 89:1 in 2021, 372:1 in 2022, 3,509:1 in RBZ had an exchange rate target range and rejected 2023, and ultimately 30,674:1 on April 5, 2024 (when bids outside that range. This resulted in the auction the GoZ announced the new ZiG currency). rate being artificially overvalued, and a persistent premium between parallel and official exchange rates Exchange rate distortions further prevented (Figure 1.10a). In 2023, the rise in the parallel premium Zimbabwe’s official exchange rate from reflecting seemed to be derived mostly from the RBZ’s excess supply and demand forces, and resulted in a high money supply growth (Figure 1.10b). Figure 1.10: ZWL-US$ official and parallel exchange rates, and reserve money growth (y-o-y change) a. 2019–2021 b. 2022–2023 Reserve Money growth (%) Reserve Money growth (%) ZWL-USD Exchange Rate ZWL-USD Exchange Rate 250 500 12,000 4,000 Introduction of 200 forex auction 400 9,00 3,000 150 300 6,000 2,000 100 200 50 100 3,000 1,000 - - - - 2019M5 2019M8 2019M11 2020M2 2020M5 2020M8 2020M11 2021M2 2021M5 2021M8 2021M11 2022M1 2022M3 2022M5 2022M7 2022M9 2022M11 2023M1 2023M3 2023M5 2023M7 2023M9 2023M11 Official exchange rate [LHS] Reserve Money [RHS] Official exchange rate [LHS] Reserve Money [RHS] Parallel exchange rate [LHS] Parallel exchange rate [LHS] Source: World Bank staff calculations using RBZ and WB data. Zimbabwe also adopted official exchange rate (which often only accept US dollars) charge lower US controls by enforcing a 10 percent trading margin dollar prices than formal shops (that must adhere to limit above the interbank rate, which encouraged the official exchange rate). This, in turn, has contributed informalization. In 2021, the GoZ strictly enforced all to the increased informalization of the private sector. formal businesses to issue their pricing so that their Because exchange rate controls are often adopted in US dollar and ZWL prices did not exceed the official response to concerns for rising prices, one can see a US$-ZWL exchange rate plus a maximum 10 percent strong historical relationship between high increases margin.⁹ However, the persistence of a premium in inflation (as a proxy for all monetary and exchange between the official and parallel market exchange rate policy distortions) and informality as a rising share rates resulted in a situation where informal shops of Zimbabwe’s GDP (Figure 1.11). ⁹ Failure to comply has resulted in the RBZ’s Financial Intelligence Unit issuing fines and freezing companies’ bank accounts. 9 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 1.11: Informality as a share of GDP and annual inflation rates (logged) 71 100,000 Annual Inflation Rate Informal Economy 10,000 66 (Log Scale) (% of GDP) 1,000 61 100 56 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Informal Economy (% of GDP) Informal Economy (estimate) Annual Inflation Rate (%) Source: World Bank Informality Database and Steenbergen et al. (2024). Macroeconomic instability also progressively in the same economic damage for Zimbabwe as it did pushed up the use of US dollars in domestic during the 2006–2008 crisis. transactions, and resulted in a shift in tax collection from ZWL toward US dollars. Foreign currency The impact of monetary and exchange deposits increased from 4 percent in January 2019 rate policy distortions on public finances to almost 80 percent in January 2024 (Figure 1.12a). As Zimbabwe’s Tax Law stipulates that taxes should The RBZ managed to significantly increase its be paid in the currency of the transaction, this also (temporary) spending for QFOs through seignorage affected tax collection (Figure 1.12b). While 89 percent and borrowing. Policy makers often choose to print of taxes were collected in ZWL in early 2020, by the money as seignorage revenue (inflation revenue) in end of 2023 this level had dropped to only 37 percent order to finance expenditures in the short run. To (or 30 percent if using parallel rates). This shift toward approximate this for Zimbabwe, Steenbergen et al. US dollarization is a major reason why high ZWL (2024) follow the Cagan (1956) approach¹⁰ and estimate inflation and exchange rate depreciation did not result that, between 2020 and 2023, the RBZ accrued a total of Figure 1.12: Zimbabwe’s domestic transactions are increasingly dollarized, also affecting tax collection a. Share of foreign currencies in broad money supply b. Share of tax collection in US$ and ZWL 100% 100% 89% 78% 80% 75% 63% 60% 50% 40% 25% 37% 11% 20% 0% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 4% 0% Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 2019 2020 2021 2022 2023 FCAs as a Percentage of Deposits in M3 Share USD Share ZWL Source: World Bank staff calculations using RDB and ZIMRA data. ¹⁰ Cagan (1956) studied the period of German hyperinflation in the 1930s and argued that the opportunity cost of holding money is best measured by the rate of inflation (as high inflation causes money to lose its purchasing power rapidly, so real money demand falls). Cagan’s model, the real demand for money is inversely related to the expected rate of inflation. 10 CHAPTER 1: MACRO-FISCAL CONTEXT US$1.4 billion in seignorage,¹¹ equivalent to 1.2 percent Adjusting fiscal aggregates for quasi-fiscal of GDP (Figure 1.13a). In addition, the RBZ accumulated expenditure and revenues suggests that GoZ significant debt by borrowing internationally, and by expenses are much larger than initially expected, building up a backlog in settling its commitments under and the GoZ is running a large and persistent (quasi)- the foreign exchange auction and under the export fiscal deficit. Incorporating QFO-related expenditures surrender system. This is estimated to have raised the gives the best account of the historical spending RBZ’s funding by US$2.4 billion, or 1.9 percent of GDP patterns of the GoZ.¹² Between 2020 and 2024, (Figure 1.13b). Nonetheless, the RBZ spent almost all its Treasury spending accounted for 16.8 percent of GDP, borrowed funds. As such, when the Treasury took over yet QFO-adjusted expenditure was considerably larger the RBZ’s external debt in June 2023, this increased its at 20.6 percent of GDP (Figure 1.14a). A small share overall debt liabilities by 1.8 percent of GDP (MoFEDIP of this difference comes from QFO-related revenue public debt bulletin, 2023). (seignorage) (Figure 1.14b). However, adjusting for Figure 1.13: The RBZ’s quasi-fiscal financing through seignorage and borrowing a. Seignorage (inflation revenue), US$ million b. RBZ accumulation of debt, US$ million 300 2,000 250 1,500 USD million 200 USD million 1,000 150 500 100 50 0 0 -500 -50 2020 2021 2022 2023 2020M1 2020M4 2020M7 2020M10 2021M1 2021M4 2021M7 2021M10 2022M1 2022M4 2022M7 2022M10 2023M1 2023M4 2023M7 2023M10 RBZ accumulation of international debt Auction backlog and export surrender restructuring (estimate) Source: Steenbergen, Pindiriri, Psillos and Kwaramba (2024), World Bank staff calculations using MoFEDIP Public Debt Bulletins, RBZ annual reports. Figure 1.14: Fiscal aggregates adjusted for quasi-fiscal expenditure and revenue a. QFO-adjusted expenditures (% of GDP) b. QFO-adjusted revenue (% of GDP) 25.0% 25.0% 20.6% 20.0% 20.0% 16.4% 15.0% 16.8% 15.0% % of GDP 15.0% % of GDP 10.0% 10.0% 5.0% 5.0% 0.0% 0.0% -5.0% -5.0% 2020 2021 2022 2023 2020 2021 2022 2023 QFO-Adjusted Revenue Revenue QFO-Adjusted Expenditure Expenditure Average QFO-Adjusted Average ¹¹ Several checks were conducted to test the internal validity of this figure. It is close to the directly computed seignorage revenue using a change in money supply approach. Computing inflation revenue assuming no effect on tax base (real money balances) as in the ¹² accounting approach, the cumulative inflation revenue is US$1.57 billion, thus again similar in magnitude. This also provides the best account of the spending pressured faced by the Treasury in a post-QFO Zimbabwe, and should therefore be the basis of any credible medium-term fiscal strategy (see Chapter 4). 11 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY c. QFO-adjusted fiscal balance (% of GDP) 2017; Tanzi, 1978; Cagan, 1956). We follow Tanzi 2.0% (1978) by estimating this cost through a ZWL 0.0% tax-revenue weighted average of payment lags across domestic tax types, that is interacted with % of GDP -2.0% -2.6% -4.0% monthly inflation rate and ZWL tax collection. -4.2% From this, we estimate that Zimbabwe’s -6.0% inflation-related payment lags to have led to a -8.0% 2020 2021 2022 2023 US$2.8 billion loss in tax revenue (or -2.3 percent Fiscal Balance QFO-Adjusted Balance of GDP). Average QFO-Adjusted Average Source: World Bank staff calculations using Steenbergen et al. • Loss in customs duty revenue due to an overvalued (2024), MoFEDIP and RBZ data. official exchange rate. Exchange rate distortions Note: Seignorage (inflation revenue) is included as QFO-adjusted can lead to an overvalued exchange rate, leading revenue, while seignorage and debt accumulation are included to lost customs duties on imports. We estimated as QFO-adjusted expenditure. the difference between monthly ZWL customs QFOs suggests that the GoZ is running a much higher duty revenues under the official rate and the and persistent fiscal deficit—at 4.2 percent of GDP¹³ parallel exchange rate. Tax revenue foregone from (versus 2.6 percent from the Treasury only) (Figure import duty between 2020 and 2023 is estimated 1.14c). This further helps to explain the considerable at US$582 million, or 0.5 percent of GDP). recent debt accumulation. • Loss in tax revenue due to informalization of Monetary and exchange rate policy distortions the private sector. Monetary and exchange rate also significantly undermine Zimbabwe’s revenue policy distortions increase informality, thereby collection. For this, Steenbergen et al. (2024) identify undermining revenue collection. We estimate three distinct direct channels¹⁴ (Table 1.1): this effect by first exploiting the historical relationship between informality and inflation • Loss in real tax revenue from inflation-related (as a proxy for monetary and exchange rate payment lags (the Olivera-Tanzi effect). While some policy distortions) using a VAR model. Next, taxes are paid instantaneously (e.g., customs we use a cross-country panel regression to duty), others are paid monthly (e.g., personal informality’s effect on tax revenue. Finally, we income tax and excise duties) or quarterly (e.g., define a counter-factual scenario for Zimbabwe corporate income tax). When faced with high with low inflation to estimate the tax loss from inflation, the real value of tax revenue received informalization. From this, estimates suggest with a lag will be reduced, and so would cause that informalization resulted in a tax loss of at significant real money losses (McIndoe-Calder, least US$1.15 billion between 2020 and 2023. ¹³ This is considerably lower than quasi-fiscal deficits in previous decades. Muñoz (2007) estimated that in 2006 Zimbabwe’s quasi-fiscal deficit was 75 percent of GDP, resulting in the extreme hyperinflation of 2006–2008. The current situation is different because of high dollarization (Figure 12). This means that a large absolute growth in ZWL reserve money translates into a relatively small share of overall GDP, but still results in high ZWL inflation and exchange rate depreciation. ¹⁴ There are many indirect channels in which monetary and exchange rate policy distortions affect government revenue, not included here. The biggest effect is from lower growth brought about by macroeconomic instability. An overvalued exchange rate also has important price effects –making imports cheaper and exports more expensive, affecting revenue and growth. A parallel market premium incentivizes trade distortions (through under-invoicing of exports and over-invoicing of imports). 12 CHAPTER 1: MACRO-FISCAL CONTEXT Table 1.1. Fiscal cost of monetary and exchange rate distortions, 2020–2023 Channel Cumulative Share Share of Tax US$ million of GDP Collection Inflation-related payment lags -2,795 -2.3% -14.6% (Olivera-Tanzi effect) Overvalued official exchange rate -582 -0.5% -3.0% Informalization of the private sector -1,154 -0.9% -6.0% Total -4,531 -3.6% -23.7% Source: Steenbergen, Pindiriri, Psillos and Kwaramba (2024). Overall, Zimbabwe’s Treasury may have lost a gains from the RBZ (through gains from seignorage cumulative US$4.5 billion from January 2020 to and international loans) came at the expense of the December 2023 due to monetary and exchange rate Treasury¹⁵ (through loss of tax revenue and increased policy distortions. These estimates suggest that, in indebtedness). This also ultimately undermined the the absence of such monetary and exchange rate GoZ’s ability to finance its development objectives, distortions, tax revenue in 2023 could have been as as the RBZ’s gains (+3.1 percent of GDP) were lower high as US$6.6 billion (Figure 1.15a), or 18.9 percent than the losses to the Treasury (-5.5 percent of GDP). of GDP (Figure 1.15b). This again confirms findings from Cagan (1956) and Tanzi (1978) that, while policy makers may consider Zimbabwe’s monetary and exchange policies thus monetary and exchange rate distortions beneficial in resulted in a major re-distribution from the Treasury the short run, they ultimately cause significant revenue toward the RBZ. This section has shown that the losses in the medium term that are often less visible. Figure 1.15: Effect of monetary and exchange rate distortions on tax revenue and the tax-to-GDP ratio a. Tax revenue in US$ b. Tax-to-GDP ratio 8.0 22.0 6.6 Tax collection (USD Billion 6.5 5.4 5.4 20.0 18.9 6.0 5.2 4.4 4.2 18.0 3.6 4.0 16.0 14.6 2.0 14.0 0.0 12.0 2020 2021 2022 2023 2020 2021 2022 2023 Tax collection current Tax-to-GDP ration current Tax collection without monetary and exchange Tax-to-GDP ratio without monetary and exchange rate distortions rate distortions Source: Steenbergen et al. (2024). ¹⁵ This also disempowers Zimbabwe’s parliament, as they vote on the national budget but not on the RBZ’s spending patterns. 13 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 1.16: Effect of monetary and exchange rate distortions on RBZ and Treasury financial positions 4.0% 1.2% 1.9% 2.0% 3.1% 0.0% -2.0% -0.5% -0.9% -2.3% -1.8% -5.5% -4.0% -6.0% Inflation Accumulation Total Revenue loss Revenue loss Revenue loss Absorption of Total revenue of RBZ from inflation from from RBZ international overvalued informalization international debt official debt exchange rate Reserve Bank of Zimbabwe Treasury Source: World Bank staff calculations using MoFEDIP and RBZ data. Macroeconomic distortions also undermine 1.3 Budget credibility government spending by increasing Zimbabwe’s procurement and public investment costs, and raising Budget preparation the wage bill especially if the wages are pegged to the USD. A weak local currency and high inflation have Macroeconomic instability has also made it undermined public investment and procurement costs. significantly harder to prepare a credible budget. Suppliers significantly increase their pricing to hedge High inflation and exchange rate depreciation against any inflation and currency depreciation, as well weakened the macro-fiscal framework, thereby as mitigating major delays in government payment. undermining the very foundation of the budget. This can result in suppliers increasing their prices as Between 2020 and 2023, the macro-fiscal projections much as five to tenfold from their initial spot prices. In on the expected ZWL inflation rate deviated with ZWL addition, high inflation puts pressure on procurement actual inflation by an average 51 percent within one entities to issue contracts as soon as possible, limiting year, 85 percent within two years, and 97 percent their ability to conduct value-for-money assessments within three years (Figure 1.17). Yet, the MoFEDIP (see section 2.3 and 2.4). On the wage bill, there were was often aware of the risk posed by rising inflation some initial fiscal benefits from high inflation (resulting and exchange rate depreciation and, to ensure that in wage compression), but since 2023 civil service macro-fiscal figures still appeared reasonable, it wages have been (partially or fully) pegged to the USD, allowed only a limited time for budget preparation, so that any depreciation becomes a fiscal liability to the for ministries, departments and agencies (MDAs) to treasury (see section 2.1). As such, expenditure systems develop budget estimates, and for the MoFEDIP to have been undermined by macroeconomic distortions. scrutinize allocations. Figure 1.17: Deviation in ZWL inflation between macro-fiscal projections and actuals (2020–2023) -100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 Annual Inflation (% difference) t+1 t+2 t+3 Source: World Bank staff calculations using MoFEDIP data. 14 CHAPTER 1: MACRO-FISCAL CONTEXT Another challenge to budget credibility comes Worryingly, the World Bank’s Climate Change and from the increased frequency of climate change- Development Report (2024) noted that climate change induced droughts. Drought shocks have an impact had increased the frequency of droughts, which rose on agricultural output and, subsequently, on the from 1 in 10 growing seasons between 1902 and economic performance of a country. This results 1979, to 1 in 4 growing seasons between 1980 and in a reduction in agricultural output and a fall in 2011. This has made many Zimbabweans more the generation of hydro-electric power, as well vulnerable to variability in rainfall patterns. Going as the curtailment of irrigation-related activities forward, Zimbabwe can also expect more climate (Benson and Clay, 1998). As shown in Figure 1.18, variability, more droughts, and periodic storm damage these drought episodes have resulted in a steep (World Bank, 2024). Yet, such dynamics are often not decline in GDP growth, increased fiscal pressures to anticipated well in advance, making agricultural provide food to vulnerable households, and reduced growth forecasts overly optimistic (Figure 1.19), and tax revenue, resulting in a rising fiscal deficit.¹⁶ undermining medium-term macro-fiscal projections. Figure 1.18: Drought episodes, budget balance and real GDP growth (2015–2024) 10.0 1 5.0 % of GDP - -5.0 -10.0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Drought episodes Budget balance (%) Real GDP Growth Rate (%) Source: World Bank staff calculations using MoFEDIP data. Note: 2024 is a projected estimate. Figure 1.19: Deviation in real GDP growth between macro-fiscal projections and actuals (2020–2023) -5.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 Real GDP Growth (%) Agriculture Growth (%) Mining Growth (%) t+1 t+2 t+3 Source: World Bank staff calculations using MoFEDIP data. Note: Negative deviations mean a higher projected value than actual. ¹⁶ The 2024 El Niño-induced drought, for example, is expected to reduce real GDP by over 4.3 percent, compared with a no-drought scenario. It is also expected to raise expenditures and reduce revenue, leading to a 1 percent increase in the overall fiscal deficit. For more details, see the forthcoming Zimbabwe Economic Update 2024. 15 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY A third issue arises from international commodity extremely volatile, ranging from 12 percent growth price shocks. Mining output accounts for over 80 in 2013, to over 12 percent decline in 2019 (Figure percent of the country’s total exports, yet international 1.20a). Volatility is mostly driven by fluctuations in commodity prices are notably volatile. Commodity price international prices, while production has steadily fluctuations have an impact on the macroeconomic increased, as evidenced by gold (Figure 1.20b) and performance of commodity exporting economies, platinum (Figure 1.20c). However, international price with declines in commodity prices weakening dynamics are notably difficult to accurately project growth and having a had a directly negative impact forecast, thus undermining the credibility of mining on fiscal revenues (IMF, 2012; Christensen, 2016). growth estimates (Figure 1.21), and posing a challenge Zimbabwe’s annual mining growth has also been to medium-term macro-fiscal projections. Figure 1.20: Volatility of mining growth (2013–2023) a. Annual mining growth (%) b. Gold production and prices c. Platinum production and prices 15 150 2,000 150 1,600 1,800 Price (US$ per KG) Price (US$ per KG) 10 Production (KG) Production (KG) 1,400 100 1,600 100 5 1,400 1,200 0 50 1,200 50 1,000 -5 1,000 0 800 0 800 -10 2013 2015 2017 2019 2021 2023 2013 2015 2017 2019 2021 2023 -15 Gold production [LHS] Platinum production [LHS] 2013 2015 2017 2019 2021 2023 Gold prices [RHS] Platinum prices [RHS] Source: World Bank staff calculations using MoFEDIP data. Budget execution budget execution also significantly deviates from the planned budget as a share of GDP.¹⁷ On average, The credibility of the budget execution process actual expenditures were 1.1 percent of GDP lower has also suffered, with major deviations from than budgeted, while actual revenue was 2.4 percent official to actual expenditure, and an increased of GDP lower (Figure 1.21b). Yet, these deviations loss to certain sectors (such as health and social also resulted in major re-distribution of resources, protection). The official budget has consistently and as Treasury chose to prioritize certain expenditures significantly deviated from actual implementation. over others. Most notably, while sectors such as On average, government expenditures and revenues health and social protection were most negatively (in ZWL terms) were 219 percent and 142 higher than affected by weak budget execution, general public budgeted. ZWL inflation can explain part, but not all, services saw a positive deviation, receiving more of this absolute deviation (Figure 1.21a). However, funds than planned (see Section 2.1 for details). Expenditure in Budget Actual Expenditure Revenue in Budget Actual Revenue ¹⁷ This is estimated by and GDP in Budget Actual GDP GDP in Budget Actual GDP . 16 CHAPTER 1: MACRO-FISCAL CONTEXT Figure 1.21: Deviations from budget preparation to actual implementation, in absolute terms and as a share of GDP a. Deviation in ZWL (%) b. Deviation as % of GDP 212 -3.9 2020 157 2020 -6.8 557 25 2021 33 -1.0 99 2021 0.8 143 2022 121 -0.1 193 2022 -1.7 188 2023 567 682 -4.4 2023 3.2 141.9 219.4 Average 382.8 Average -2.4 Revenue deviation from budget (%) -1.1 Expenditure deviation from budget (%) Revenue deviation from budget (% of GDP) ZWL inflation rate (%) Expenditure deviation from budget (% of GDP) Source: World Bank staff calculations using MoFEDIP data. These dynamics further undermined the ability levels of expenditure arrears and GoZ domestic debt to have an orderly budget execution process, and exposure. In addition, compromised PFM system weakened the implementation of Zimbabwe’s controls resulted in high risks of misappropriations public finance management (PFM) regulations. and complicated financial reporting, which led to The authorities tried to improve PFM systems by audit delays that reduced general accountability and adopting a performance framework that underpins transparency in the public sector. These factors also program budgets, improved reporting on debt, and heightened the risk of misuse of public funds. the strengthening of internal audit.¹⁸ Nonetheless, macroeconomic instability ultimately undermined 1.4 Conclusion and policy recommendations much of this effort, and resulted in three main problems for PFM. First, it challenged control over appropriations. This chapter has highlighted how Zimbabwe is Due to inflationary pressures, Zimbabwe has significant faced with a large and unsustainable debt burden. budget overruns (in ZWL terms). These were often Zimbabwe’s post-pandemic growth was strong, but executed without the prerequisite supplementary driven in large part by the informal sector. While fiscal budget or any other authorization from the National deficits were contained between 2019 and 2022, they Assembly. Second, it challenged control over grew excessively in 2023 due to the issuance of Treasury commitments. To continue spending (amid high bonds to capitalize the MIF and expunge legacy debt at inflation), the MoFEDIP disabled the limitations in the the RBZ. This together with the absorption of RBZ debt PFM system that prevented expenditure in excess of and mounting external arrears caused public debt approved budget. Instead, it relied on an “Unallocated to rise to US$21.180 billon as at the end of 2023. Reserve Budget line”¹⁹ that covered large amounts of To move toward a pathway to clearing external expenditure (often without explicit authorization from arrears and resolving its unsustainable public debt, Parliament). Finally, it undermined payment controls. the authorities launched the SDP with development Cash management weaknesses led to escalating partners in 2022, which is work in progress. ¹⁸ From international budget open survey report of Zimbabwe, 2021- https://internationalbudget.org/open-budget-survey/. ¹⁹ A 2024 report from Zimbabwe’s Auditor Generator noted that in 2022, the Treasury disbursed ZWL$623.8 billion in Unallocated Reserve (UR) transfers to line Ministries against a total approved budget of ZWL$90 billion, resulting in unauthorized excess expenditure of ZWL$532 billion. Section 307 of the Constitution of Zimbabwe Amendment (No. 2) Act 2013 requires the introduction of a Bill for the unauthorized expenditure into the National Assembly within sixty days after the extent of the unauthorized expenditure has been established. Yet, to this day, the Treasury has not yet regularized the excess expenditure. 17 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY This chapter also showed the significant impact and, while an initial shock can significantly increase that macroeconomic instability has had on the share of private sector operating in informality, Zimbabwe’s public finances. Distortions in monetary it can take years to bring this share back to the and exchange policy contributed to recent bouts of formal sector. In turn, re-formalizing the private high inflation and rapid exchange rate depreciation. sector often takes many years to show robust effects In addition, the chapter identified five ways in which on tax collection. To accelerate this dynamic, there monetary and exchange rate policy distortions is a need to remove the various macroeconomic influenced Zimbabwe’s public finances: obstacles (such as a high parallel exchange rate premium combined with punitive exchange rate 1. It raised GoZ expenditure temporarily through controls), as well as the administrative obstacles seignorage (inflation tax) and RBZ borrowing; (such as cumbersome tax compliance for SMEs) that 2. Accounting for QFOs suggests that historical contribute to informalization. In addition, it would GoZ expenditure is much higher than initially be important to reform the Intermediate Money expected, and that the GoZ is running a large Transfer Tax (IMTT). By taxing formal transactions, it and persistent (quasi)-fiscal deficit; incentivizes the use of informal, cash-based systems. 3. It reduced real tax collection, in part from inflation- Instead, the IMTT should be made tax deductible for related payment lags (Olivera-Tanzi effect); companies (thereby incentivizing formalization). 4. It resulted in a major re-distribution of funding away from the MoFEDIP and toward the RBZ; and The potential fiscal gains from macroeconomic 5. It undermined budget credibility, as high inflation stabilization and reversing informalization are and rapid exchange rate depreciation made having substantial. Estimates from this chapter puts an orderly budget preparation and execution the potential medium-term gains in increased tax process in line with PFM laws impossible. revenue collection at 3.4 percent of GDP annually (Table 1.2). Policies that stabilize prices and remove exchange rate distortions will likely substantially improve Finally, there is a need to re-establish budget government revenue. The main implication of this credibility, through improved budget execution chapter is that maintaining fiscal discipline is a far and enforcement of PFM regulations. This chapter superior strategy for dealing with chronic economic highlights major weaknesses in the current budget stress than resorting to inflationary financing and planning and execution stage. These are driven exchange rate distortions. Policies that remove in large part by macroeconomic instability, but exchange rate distortions and stabilize prices can further exacerbated by the increased frequency of substantially improve government revenue, if they climate change-induced droughts and international lead to low and stable inflation. Reversing the Olivera- commodity price volatility. Going forward, there is Tanzi effect and increasing customs duty would likely a need to improve budget credibility by ensuring lead to swift benefits in tax collection. strict adherence to GoZ PFM regulations, and by strengthening the appropriate controls over Only a broad set of policy reforms will likely appropriations, commitments, and payment allow Zimbabwe to reverse the trend toward systems. Improvements in financial reporting and informalization. Empirical analysis suggests that audits should further improve accountability and informality is an extremely persistent phenomenon transparency of Zimbabwe’s PFM system. 18 CHAPTER 1: MACRO-FISCAL CONTEXT Table 1.2: Potential fiscal gains from macroeconomic stabilization and reversing informalization Policy area Policy action Policy action Impact Impact on on Equity Efficiency Removing monetary Low and stable inflation 2.3% + + and exchange rate (No Tanzi-effect) distortions Competitive 0.5% + + exchange rate Reversing Reversing 0.9% + - informalization informalization Reforming the IMTT to -0.7% + - be tax-deductible for formal companies Total potential fiscal gain 3.4% + + Source: World Bank staff calculations. 19 CHAPTER 2 Opportunities for Expenditure Rationalization Improving the efficiency of public spending of expenditure policy. It first offers key insights in Zimbabwe will be critical to support fiscal on how public funds are spent, by assessing the consolidation, while supporting long-term adequacy of current levels and composition of sustainable and inclusive growth objectives. public spending needed to satisfy development Achieving the ambitious goal of a growth-friendly goals, supported by international benchmarking. It fiscal consolidation trajectory requires identifying then examines structural deficiencies undermining opportunities for efficiency savings that could be re- overall expenditure policy effectiveness to help allocated productively to pursue economic development assess how public expenditures can be reoriented and equity objectives. To address this need, the analysis to achieve better targeting of social expenditures, in this chapter first focuses on how public funds are and greater focus on physical and human capital spent by measuring the levels and quality of public accumulation to sustain inclusive long-term growth. spending. Next, we consider various opportunities for expenditure rationalization. We start with wage-bill Expenditure trends management, followed by the procurement of goods and services, and public investment management (PIM). Public spending in Zimbabwe is lower than its We then consider recent expenditures and potential peers, though making comparisons is complicated fiscal risks from SOEs. We conclude with a summary by QFOs and spending outside the Treasury of all policy recommendations in this chapter and their system. Public spending in Zimbabwe is further potential gains for fiscal consolidations. constrained by low fiscal capacity and undermined by high inflationary environment.²⁰ While the level 2.1 Expenditure trends, quality, of spending has exhibited a marked increase in past and progressivity years, a significant share of spending continues to take place outside the Treasury system, and This section offers an overview of the size, significantly so over the past few years (Figure 2.1a, composition, and quality of public expenditure Annex Table 1; Annex Table 2). Despite the recent to identify opportunities for better calibration increase, average total expenditures for 2018–23 ²⁰ Analysis based on spending of central agencies from SAP reports, complemented by off budget expenditures (direct payments from the Accountant General). Data does not include foreign funded spending or direct local government spending. It only includes civil servants’ pensions. 20 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION accounted, on average, for 15 percent of GDP, well when excluding grants of an extraordinary nature in below structural (23 percent) and aspirational (21 2023 that present limited benefits in terms of human percent) peers. While the level of spending has capital accumulation or growth enhancing spending exhibited a marked increase in past years, reaching (Figure 2.1d). It will be important moving forward to 21 percent of GDP in 2023, the increase was fueled ensure that all transactions are properly recorded in mostly by one-off grants and other general expenses the government’s “SAP”²¹ PFM system. At present, a that do not contribute to fostering growth and equity large share of expenditures are not captured in SAP objectives. Without taking these extraordinary reports and instead processed as direct payments grants into consideration, growth in expenditure from the Accountant General, making monitoring was fueled mostly by increases in the wage bill and reporting of budget execution a challenge (see and social benefit payments (Figure 2.1c). Equally Section 1.3). Equally concerning, the shares of these important, the largest contributor to expenditure direct payments have increased significantly over growth occurred in general public services, even time, particularly in 2023. Figure 2.1: Zimbabwe public spending in international comparisons a. Spending (% GDP) is on the rise since 2019 … b. …but still significantly lower than peers 2019-23 average % GDP 35% 25,000 GDP per capita, PPP Spending % of GDP 30% 20,000 25% 25% 20% 15,000 20% 15% 10,000 15% 10% 5,000 5% 10% 0% 0 Zimbabwe Structural Peers Peers Sub- Saharan Africa Upper middle income Aspirational 5% 0% 2019 2020 2021 2022 2023 Treasury Treasury + direct payments Spending: Total Expenditures GDP per capita c. …with most increase coming from wage bill…. d. …and general public services 10 8 8 7 6 6 5 4 4 3 2 2 0 1 0 -2 -1 -4 -2 2020 2021 2022 2023 2020 2021 2022 2023 General services Defense Public safety Wage bill Goods and services Interest payments Economic affairs Environment Housing Social benefits Subsidies Other Health Recreation Education Capital expenditure Total expenditure Social protection Other Total expenditure Source: World Bank’s BOOST database. ²¹ SAP stands for “Systems, Applications and Products in Data Processing” and is a popular third-party software. 21 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Improving the quality of public spending is crucial needs to be unbundled further to identify potential to accelerate economic growth and build human challenges and unmask underlying issues. capital. Finding the right balance between the composition and quality of public spending will be Stabilization properties of expenditure policy critical in ensuring efficiency. An assessment of are undermined by structural issues that require various dimensions of spending quality identifies further scrutiny and monitoring. Zimbabwe’s public several opportunities for better calibration of spending exhibits some of the highest procyclical expenditure policy. Figure 2.2 benchmarks Zimbabwe levels in the world (Figures 2.3a and 2.3b), which performance versus its structural and aspirational undermines the effectiveness of expenditure policy peers²² in a range of quality dimensions comprising as a stabilization tool to minimize fluctuations in assessment of rigidity, cyclicality, social spending, business cycles, leading to growth and efficiency productive spending, efficiency, and budget credibility. losses in the long term. Potential contributors to this Zimbabwe outperforms its peers when it comes to outcome include limited access to external borrowing budget rigidity and efficiency of spending. However, due to recurring macroeconomic instability and Zimbabwe lags its peers when it comes to the share accumulation of external arrears, and high informality of total expenditures dedicated to social purposes which undermines effectiveness of social transfers and productive activities, and counter-cyclicality of and automatic stabilizers, in both cases preventing expenditure policy. However, each of these dimensions implementation of expansionary fiscal policy during economic downturns. On the other hand, while Figure 2.2: Key indicators of spending quality Zimbabwe exhibits lower levels of rigidity compared Rigidity with its peers—with high rigid spending accounting for 0.6 0.5 44 percent of total expenditures during the 2018–22 Productive 0.4 Efficiency period of analysis—these levels have, however, been 0.3 on the rise in recent years, fueled by a sharp rise in 0.2 the wage bill (Figure 2.3c). This trend continued in 0.1 0.0 2023, when excluding one-off grants, surpassing structural peer average levels. Although high rigidity remains below the level of aspirational peers, it will be important to continue monitoring its developments Cyclicality Social as persistent high rigidity can restrain policy makers’ ability to adapt to needs and force government to cut Credibility more discretionary spending components, such as Zimbabwe Peers public investment, which can significantly reduce Source: World Bank staff calculations using PFR database. long-run growth prospects. ²² Structural peers are Angola, Ghana Kenya, Senegal, and Zambia. Aspirational peers are Guatemala, Indonesia, Peru, South Africa, and Sri Lanka. 22 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION Figure 2.3a: Zimbabwe Figure 2.3b: …which Figure 2.3c: …while rigidity is exhibited high procyclicality… significantly exceeds others in also on the rise the region… Cyclical components of total 100% expenditure and GDP. Constant Correlation between real GDP and 90% 80% local currency units public spending cyclical components % total spending 70% 2 (-1 to 1, the highest cyclicality) 60% 2 0.6 50% 1 0.4 40% 1 0.2 30% 0 0.0 20% 10% -1 -0.2 0% -1 -0.4 2019 2020 2021 2022 Structural Aspirational -2 -0.6 Peru Zambia South Africa Guinea Senegal Indonesia Benin Ghana Kenya Zimbabwe Cameroon -2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 High rigidity Medium rigidity Expenditure GDP Low rigidity Source: World Bank staff calculations using MoFEDIP data. Budget credibility continues to be a challenge.²³ is systematically recorded for the procurement of goods Through the granularity of Zimbabwe BOOST, it is and services, and capital expenditures—an indication of possible to unbundle budget credibility by assessing the ineffective PIM and procurement bottlenecks (Figures extent of budget deviation across agencies, functions, 2.4a and 2.4b). On the functional side, the largest under- and economic classification.²⁴ While overall budget execution occurs in health followed by capital intensive deviation during the 2018–22 period is in line with economic affairs, while general public services remain peers, this result masks underlying disparities across the least affected category. The health and social categories. While spending on the wage bill has been protection sectors were the most affected, with average roughly aligned with budgets, significant under-spending under-execution of 19 and 11 percent, respectively.²⁵ Figure 2.4a: Greatest under-execution in Figure 2.4b: …with the health and social procurement and capex… protection sectors the most affected Budget deviation by economic classification (average, Budget deviation by sectors (average, 2019–2022) 2019–2023 3 % budget deviation % budget deviation -4 -6 -8 -9 -11 -17 -24 -19 Spending: Social Spending: Use Spending: General Defense Education Social Health Wage bill benefits of Goods and Capital public Protection services Expenditures services Source: World Bank staff calculations using BOOST data. ²³ Also see Section 1.4 for an overview of budget credibility at the macro-fiscal level. ²⁴ The analysis is undertaken by comparing revised and executed amounts as opposed to using originally approved amounts since information of approved amounts is not available at the same level of granularity. ²⁵ At its worst, amid the COVID-19 crisis, it resulted in a 40 percent under-expenditure in 2021 in health and education. 23 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Expenditure quality indicators show that development outcome gains of over 50 percent from present value could be achieved While Zimbabwe enjoys satisfactory performance if those losses were mitigated (Figure 2.6e). in education, there is potential for improvement. Zimbabwe spends more than its peers—an average of Insufficient funding has significantly undermined 4.5 percent of GDP²⁶—and, as a result, achieves better Zimbabwe’s health sector. Health expenditures results, particularly in terms of primary enrolment account for 5 percent of total expenditures, equivalent (Figures 2.6a and 2.6b). Nonetheless, one of the on average to 0.75 percent of GDP, significantly lagging biggest challenges is to improve allocative efficiency. all peers (Figure 2.6c). The 2023 health budget Employment costs dominate education spending allocation (11 percent) also falls far short of the Abuja (Figure 2.5), particularly primary and secondary levels, Declaration Target of 15 percent. Such limited funding leaving few resources for capital infrastructure, and is further exacerbated by high under-execution levels, goods and services, which in turn undermines the which undermine service delivery (as shown in Figure quality of education services. Efficiency losses are 2.4b). Jointly, this has resulted in a major weakening greatest for outcomes in secondary education. Quality of the health sector, and has contributed to an exodus of health workers (see Section 2.2), drug shortages, Figure 2.5: Wages dominate spending in education and insufficient equipment. The inadequate public 100% financing of the health sector has resulted in an overreliance on external financing, which is volatile and unpredictable. Effectiveness and transparency 99% 99% in the utilization of the funds need close monitoring, 90% particularly in the procurement of medical supplies. A 94% look at the relation between overall spending in infant 91% and maternal mortality ratios²⁷ reveals significant 80% efficiency losses and significant upside in terms of Education Primary Secondary Tertiary improved development outcomes associated with Wage Goods and services Capex Other efficiency gains (Figure 2.6f). Source: World Bank staff calculations using BOOST data. ²⁶ In the 2023 budget, the education sector was allocated 14 percent of the total expenditure. While higher than regional peers, this is still below the 20 percent thresholds for the education section recommended in the Dakar Framework for Action. ²⁷ Linkages between inputs and outputs in health are not always straightforward, as many other non-related factors might contribute especially for broad outcomes (i.e., life expectancy). However maternal mortality and infant survival rates are the ones most closely associated with efficient spending in health while understanding that other non-health spending (e.g., nutrition, water and sanitation) might also affect the relationship. 24 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION Figure 2.6: Efficiency of public spending in Zimbabwe in international comparison 6a: Spending in education is high compared to peers… 6b: …and mostly efficient, except for secondary Government expenditure on education Output oriented score of selected education indicators Percent of GDP Percent of the frontier (100), average, 2010-2020, 6 all countries 120 5 100 80 4 60 40 3 20 0 Gross primary enrollment Net primary enrollment Gross secondary enrollment Net secondary enrollment Youth literacy Average years of schooling Level of education and skills 2 1 0 Zimbabwe Regional Structural Aspirational Zimbabwe Regional Structural Aspirational Source: WDI. Source: World Bank staff’s estimates. 6c: Spending in health is among the lowest… 6d: ...with significant efficiency losses particularly Government health expenditure for infant mortality Percent 6 14 5 12 Infant survival 4 10 8 3 6 2 4 2 1 0 0 Percent of GDP Percent of government 2000 2500 3000 3500 4000 4500 5000 expenditure Public expenditure per capita on health, 2010-2020 Zimbabwe Regional Structural Aspirational Source: WDI. Other Aspirational Structural Regional FDH DEA 6e: Potential gains (average years of schooling 6f: Potential gains (infant survival) Years, DEA, 2010-2020, all countries Per 1,000 live births, FDH, 2010-2020, all countries 9 8 6 7 5 6 5 4 4 3 3 2 2 1 1 0 0 Zimbabwe Regional Structural Aspirational Zimbabwe Structural Aspirational Average years of schooling Potential savings Actual value Potential gains Source: World Bank staff’s estimates. 25 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY There is also a pressing need to improve efficiency in Expenditure progressivity capital investments. Improving operational efficiency of public investments is paramount to address existing The progressivity of expenditure policy can be access gaps and promote long-term growth scenarios. improved through more, and better targeted Accounting for about 16 percent of total expenditures, spending on social protection. Spending on social capital spending suffers from significant under- assistance is among the lowest in the world, well execution undermining overall investment efficiency, behind peers and with inconsistent funding levels typically leading to time delays and cost overruns. across years.²⁹ On average, spending in social This has resulted in low efficiency scores across most assistance accounted for around 0.2 percent infrastructure sectors, below average levels of most of GDP, considerably lower than all its peers peers (Figures 2.7a and 2.7b). Maintenance expenses (Figure 2.8). Only 16 percent of the population have also not fully kept up with capital expenditures. lived in a household where at least one member A weak focus on maintenance, combined with broad benefited from a social protection program, which allocative and technical inefficiency considerations is significantly lower than other peers such as in capital spending, can have significant long-term South Africa and Malawi (79.9 and 41.5 percent, value-for-money effects, reducing the quality and respectively.) This share is also much lower than lifespan of infrastructure assets that are critical for the SSA regional average, where about one-quarter long-term prospects of livelihoods and development (23.7 percent) of the population is covered by social for the country. Analysis of BOOST data reveals that protection programs. The low coverage comes into maintenance expenses for 2018–23 represent about an even starker contrast when compared with the 7 percent of total volume of capital expenditures, average for lower middle-income countries, in with significant room of further expansion.²⁸ A well- which social protection programs cover almost 60 functioning PIM system is essential to improving these percent of the population. outcomes, as further elaborated in Section 2.3. Figure 2.7a: Efficiency frontier Figure 2.7b: Average efficiency scores 100 1.0 Quality of overall infrastructure 90 0.9 80 0.8 70 0.7 60 0.6 50 0.5 40 0.4 30 0.3 20 0.2 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 0.1 Orthogonalized Public Expenditure 0.0 DEA Frontier DEA Frontier Structural Peers Zimbabwe Structural Aspirational Aspirational Peers Zimbabwe Peers Peers Source: World Bank staff calculations using World Economic Performance data. ²⁸ Figures might underestimate full spending on maintenance since they do not include spending by ZINARA. ²⁹ Pensions and social insurance dominate social protection spending accounting for 88 percent of the total. 26 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION Figure 2.8: Funding toward social assistance is low and inconsistent 0.4% 1.2% 0.3% 1.0% 0.3% 0.7% 0.2% 0.4% % GDP 0.2% 0.2% Zimbabwe Regional peers Structural peers Aspirational peers Income peers 0.1% 0.1% 0.0% 2019 2020 2021 2022 2023 Source: World Bank staff calculations using BOOST data. Weak targeting of social assistance schemes is social protection systems, and help improve leading to both high exclusion and inclusion errors, climate resilience. There is a need to improve undermining the overall efficiency and effectiveness the coverage of the poorest quintile through of social protection spending. According to the Atlas carefully designed means-tested mechanisms of Social Protection Indicators of Resilience and Equity and the establishment of a comprehensive social (ASPIRE) from the 2017 Poverty Survey, the benefit registry. Furthermore, as noted in the World incidence of social safety programs for the poorest Bank’s 2024 Country Climate and Development households—defined as the percentage of total Report (CCDR), there is a need to transform assistance accruing to the bottom quintile—is very social protection to a proactive approach that can low, with only 5 percent of total funding reaching the mitigate climate-induced food insecurity shocks. bottom. This is due to a combination of poor targeting, The establishment of a social registry could deliver low coverage and inadequate benefits, with social improvements in the impact on poverty reduction spending dominated by social insurance benefiting and climate security of social protection and other only people in the formal sector. Electricity subsidies programs, even with an unchanged budget for are similarly poorly targeted, so while 32 percent of the social programs (see Box 2.1). Nonetheless, for total population benefited from electricity subsidies only this to substantially improve Zimbabwe’s poverty 4 percent of the extremely poor did, therefore making reduction, an increase in funding would also be these subsidies highly inequitable (Sharma et al., 2022). required. One potential option to (partially) finance this is through the recent reform on removing The establishment of a national “social registry” VAT exemptions and zero-rating (for details, see could help improve targeting of Zimbabwe’s current Section 3.2 of this report).³⁰ ³⁰ Also see the background note by Sharma et al. (2024) “Fiscal and distributional implications of VAT reforms in Zimbabwe”. 27 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Box 2.1: Social registry: A tool for improving targeting and coordination Social registry systems are an important tool to support the outreach, intake, registration, and targeting of social programs. Social registries provide a platform for the coordination of targeted social programs across various sectors. Unlike beneficiary registries, which compile lists of beneficiaries from existing programs, social registries maintain a broader set of data on households that may be eligible for assistance. The GoZ and the World Bank are working closely to developing and rolling out the National Social Registry. Zimbabwe’s new National Social Registry system has been established as part of the Integrated Social Protection Management Information System (ISPMIS) housed in the Ministry of Public Service, Labour, and Social Welfare. The World Bank, the GoZ and other development partners have made important strides to develop it further by establishing a harmonized questionnaire that allows collection of key data to determine household vulnerability, poverty status, and whether households receive any support from the GoZ or development partners. The aim is to roll out this social registry nationwide in two phases: (i) first focused on the poorest provinces and districts; and (ii) second, to reach national coverage. To operationalize the social registry, there is also a need to streamline serve and hosting arrangements, foster partnerships with ministries and development partners, and build capacity at all levels. Once operationalized, the social registry has the potential to unlock greater poverty reduction impacts, even with an unchanged budget for social programs. Zimbabwe has been a pioneer on gender- the allocated budget and actual expenditure of responsive budgeting, yet only a small share of 2023. “Mainstream gender-sensitive expenditures” the budget is committed to gender-specific or (programs or policies for which 60 to 95 percent gender-sensitive expenditures. The 2023 budget of beneficiaries are women, girls, and historically analyzed shows that “gender-specific expenditures” disadvantaged groups) makes up 4 percent (US$25.3 represents only 0.4 percent of the total budget million) of the GRB of 2023. Finally, only 1.1 percent allocation (US$2.5 million), with maternal health of budget allocation is directed towards addressing and economic empowerment receiving most of women peace and security challenges (Box 2.2). Box 2.2: Gender-responsive budgeting in Zimbabwe Zimbabwe’s efforts toward gender budgeting began in 1995 with the adoption of gender equality protocols, but it was not until 2007 that the country officially implemented Gender Responsive Budgeting (GRB) as a strategy to promote and accelerate gender equality. This approach integrates a gender perspective into every stage of the budget process—planning, drafting, implementing, and evaluating—to ensure that budget policies address main gender issues (MoFED, 2021). Zimbabwe is a leader in the Sub-Saharan African region, ranking first 28 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION alongside Rwanda in the Gender Budgeting Index of the IMF, adhering to 11 out of 12 instruments outlined in their framework (IMF, 2024). For example, the country sets government-wide and sector-specific performance targets, links gender equality goals to specific programs and ensures they are appropriately costed. In 2022, the institutionalization of finance for gender equality was further strengthened when the MoFED began issuing a Gender Budget Statement, detailing gender financing commitments across sectors (World Bank, 2023). Zimbabwe’s expenditure towards gender equality is categorized into three main components: 1. “Equal Opportunity Gender Sensitive Expenditures/Programmes”, relates to budget allocations designed to ensure that men and women, boys and girls, have equal opportunities to benefit from the programs. This component received the biggest share of the 2023 gender-sensitive budget, amounting to 95.5 percent (US$606 million) of total allocation, with 96.1 percent of this directed towards employment costs. Despite women making up 56.8 percent of civil servants in 2023, only 15.1 percent of top management positions were held by women. This reflected a gradual but still slow progress in gender representation (MoFED, 2024). 2. “Gender-Specific Expenditures”, is comprised of expenditures that address unique needs to specific gender groups. This category represents only 0.4 percent of the total budget allocation (US$2.5 million), with maternal health and economic empowerment receiving most of the allocated budget and actual expenditure of 2023. 3. “Mainstream Gender Sensitive Expenditures”, are expenditures for programs or policies for which 60 to 95 percent of beneficiaries are women, girls, and historically disadvantaged groups. This category makes up 4 percent (US$25.3 million) of the GRB of 2023. This includes allocations for education, agriculture, social welfare, economic empowerment, and health programs. In 2023, expenditure surpassed budget allocation in economic empowerment programs, but other areas like education and health ended up spending much less than the budget – 48 and 16 percent respectively. Thus, total distribution of resources looked much different than the initial appropriation (see Figure 1). Zimbabwe’s recent 2023-2027 National Action Plan for implementation of UN-Security Council Resolution 1325 underscores the country’s commitment to addressing women peace and security challenges, despite National Budget not reflecting such commitment. The action plan’s focuses on the prevention and protection of women, especially in conflict, post-conflict, and disasters situations is reflected in its budget requirement with 32.2% of total budget assigned to these priorities. However, the 2023 GRB analyzed shows that only 1.1% of the budget allocation is directed towards these areas. This disparity highlights the need for greater alignment between Zimbabwe’s gender-responsive budgeting and its broader gender action plans. 29 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Budget allocation and expenditure under Mainstream Gender Sensitive Expenditures, 2023 Figure B.2.1a: 2023 Revised Budget Figure B.2.1b: 2023 Expenditure to September 9% 3% 4% 17% 20% 13% 38% 16% 36% 44% Economic empowerment Agriculture Economic empowerment Agriculture Social welfare Health Education Social welfare Health Education Source: World Bank estimates using MoFEDIP data. 2.2 Wage bill management workers’ average monthly earnings dropped from US$660 in 2018 down to US$77 in 2019, while health Zimbabwe saw a major reduction in the wage bill workers’ earnings dropped from US$805 in 2018 between 2019 and 2020, but wage compression down to US$110 in 2019 (ActionAid, 2022). This wage also resulted in a major outflow of health and compression resulted in major exodus of teachers education workers. The wage bill reached 80 and health workers. In 2020, over 10,000 teachers percent of total revenue in the period 2016–18. resigned, to become vendors, artisanal miners, However, introduction of the ZWL in 2019, followed or left the country in search of work. Similarly, by high inflation and exchange rate depreciation Zimbabwe’s health services board noted that, in (see Chapter 1), resulted in a major compression of 2021 and 2022, more than 4,000 health workers Zimbabwe’s monthly wage bill, from US$127 million (including 2,600 nurses) left Zimbabwe. Several in January 2019 down to US$29 million in August rounds of wage negotiations have resulted in wage 2019 (Figure 2.9a). This provided significant fiscal increases (most notably in November 2020, with 40 relief, and the wage bill dropped to 26 percent of percent increases). This helped undo part of the wage revenue in 2019 (Figure 2.9b). Yet, it also led to a compression, but wages continue to be lower than drastic fall in earnings from civil servants. Education in the past decade. 30 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION Figure 2.9: After a big drop in 2019–20, the wage bill is increasing again, driven by employment growth a. Wage bill (US$ million) and number of employees b. Wage bill (% of revenue, % of GDP) (‘000) 50 8 200 340 Nr of Employees (‘1000) Wage bill (USD million) 160 40 320 6 % of Revenue % of GDP 120 30 300 4 80 20 280 40 2 260 10 - Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 Jul-21 Dec-21 May-22 Oct-22 Mar-23 Aug-23 - - 2019 2020 2021 2022 2023 Wage bill Number of Employees Poly. (Wage bill) % of Revenue [LHS] % of GDP [RHS] Source: World Bank staff calculations using BOOST data. Employment costs are increasing again in public wage bill, absorbing cumulatively 55 percent Zimbabwe, partly due to an increase in the public of personnel spending (Figure 2.10a). Yet, growth in administration headcount and an increase in employment numbers is driven in important part by allowances. Since 2021, the wage bill has been the expansion of public administration (Figure 2.10b). increasing again, reaching 47 percent in 2023 This is contrary to government policy, which calls (Figure 2.9b), driven in part by the growing public for a civil service freeze in areas outside of health service headcount (Figure 2.9a). It is projected to and education. Such a hiring surge coincides with breach the wage bill limit of 50 percent of revenues an increase in the number of ministries from 21 in in 2024. As such, Zimbabwe’s wage bill is now 2013 to 25 in 2024 (further raising staffing needs). higher than in most countries, representing an Allowances also exceed 50 percent of the wage bill increasing source of rigidity and possible threat to and continue to expand (Figures 2.11a and 2.11b). fiscal sustainability. Public employment has steadily The greatest increases in allowances were recorded increased, requiring a closer look into the public in general public services, indicating an increase in sector labor market footprint to identify bottlenecks overhead costs to the detriment of more productive to greater public sector productivity. Education and activities. Greater scrutiny may be needed to inform health-care wage spending dominate in the total rationalization and value for money. Figure 2.10a: The education and health sectors Figure 2.10b: Yet the relatively growth in continue to make up the majority of the public public service headcount since 2021 has been sector wage bill dominated by public administration 100% 115 113 14% 14% 12% 16% 17% 75% 40% 110 40% 38% 40% 38% 106 50% 105 104 25% 48% 49% 44% 100 46% 45% 0% 95 2019 2020 2021 2022 2023 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Public Administration Education Health Public Administration Education Health Source: World Bank staff calculations using MoFEDIP data. 31 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 2.11: Allowances account for an increasing share of Zimbabwe’s wages a. Allowances account for more than 50% of total wages… b. …and allowances’ share of wages also grew over time 80% 72% 69% 100% 66% 60% 58% 60% 50% 80% 40% 60% 20% 40% 0% 20% General government services Judiciary Public safety Health Education Agriculture 0% 2018 2019 2020 2021 2022 Personnel - transfer Personnel - contributions 2018 2022 Personnel - basic Personnel - allowances Source: World Bank staff calculations using BOOST data. The wage-setting mechanism is also contributing Wage negotiations in the public service are to the higher wage bill. The indexing of local fragmented and not tied to the budget cycle. In the currency salaries to the exchange rate has led to public service, labor laws suffer from significant large deviations between the budgeted wage bill and fragmentation, posing challenges when it comes to the actual outturn. For example, in 2023, there was a rationalizing public sector wages.³¹ This has created 1,341 percent increase in the nominal public service a scenario where wage negotiations are undertaken wage bill, driven by salary adjustments. US dollar separately and at different times, a scenario that has allowances have been integrated into the salary resulted in the employment costs changing often structure. In 2024, the GoZ integrated the US$300 during the fiscal year. To offer a single forum for talks (initially temporary) COVID-19 allowances into the with the public sector, all of the laws contained in the permanent salary structure, and approved indexing main Labour Act should be harmonized. There is also the local currency component of public service wages no formalized timeline for salary negotiations with against the US dollar exchange rate. This increases staff associations, making wage bill planning and rigidity of the wage bill and exacerbates fiscal risks management difficult. from currency depreciation. Recent reform initiatives Staff associations are fragmented and are not effective in negotiations posing challenges when it In recent years, several reform initiatives have comes to rationalizing public sector wages, further been implemented by the GoZ to control the public impacting the overall wage bill. Staff associations sector wage bill and enhance its performance: represent public employees in conditions of service negotiations with the GoZ. The role of associations ends • A biometric authentication exercise took with consultations alone and they do not have a final place between 2019 and 2021, to ensure only say in terms of the outcome. Noteworthy, the GoZ is legitimate members remained on the payroll. not obliged to comply with the agreements reached, Results showed that 2,633 people (0.73 percent) creating uncertainty over the implementation of the on the government payroll did not have biometric outcomes of the negotiations (Nathan Associates, 2016). records and 363 people were deceased. Records ³¹ Members of parliament, judiciary, security services, and intelligence are not covered by the Public Service Act and subject to separate laws. 32 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION for the deceased personnel were removed from • The PSC undertook job evaluation in 2023, the payroll data entry errors and systemic though the results await Cabinet approval inadequacies were also addressed. and are therefore still unknown. One of the objectives of the exercise is to develop a • An Application Program Interface is being single-spine salary structure for the GoZ using developing between payroll and the National the Patterson job grading method (The Herald, Identification Register. This exercise is ongoing. 2022). Having a common salary structure for It is aimed at enhancing the authentication of all government employees will assist the GoZ in public service employees’ identification and rationalizing wages. At present, wages are not ensuring a clean payroll devoid of deceased uniform across government. personnel and other anomalies. This will enhance wage bill control and management by Policy options for fiscal savings the GoZ and ensure accurate personnel records. Fiscal savings may come from rationalizing the • The Human Resources Management civil service by eliminating redundant positions, Information System (HRMIS) is being as recommended by the GoZ public services job decentralized to MDA head offices, provinces, evaluation report. To ensure a more manageable wage and districts (PSC, 2022). Since 2016, PSC bill, it is critical to reduce the public headcount to more has been implementing an HRMIS project to manageable levels. The Public Service Commission’s enhance efficiency, accountability, and integrity recent Jobs Evaluation Report ( presented to cabinet in the public service by providing a centralized in September 2024) find out that there are significant platform for managing employee data and “functional duplications and overlaps in roles within various HR functions. Full utilization of the HRMIS and across line Ministries”, which include overlapping aims to transition government offices toward roles between directors and chief directors (The Herald, computerized and paperless human resource 2024c). World Bank simulations suggest that such a business processes. However, progress is held reform, together with the GoZ’s proposed freeze on back by limited financial and material resources. recruitment of public administration staff could bring significant fiscal savings, but much of this fiscal space • Implementation of an integrated results-based will be taken up by an increase in health workers management (IRBM) system is ongoing. The GoZ spending as part of the government’s Health Workforce adopted RBM in 2005 to improve accountability Compact (WHO, 2024). Overall, this could results in and performance across the public sector. The 0.3 percent in potential savings. All appointments exercise is spearheaded by the Office of the in government (including creation of new positions) President and Cabinet (OPC). The IRBM system should continue to require Treasury concurrence. led to the introduction of performance contracts for ministers and heads of state-owned entities, Improvements to wage negotiations could also help as well as local authorities (Newsday, 2022). enhance government control over the wage bill. Nonetheless, implementation of RBM has been The GoZ should finalize harmonization of the labor slow due to technical capacity gaps and the laws to create a single forum for wage negotiations. public service’s inconsistent adherence to RBM In addition, it should put in place mechanisms to principles and guidelines (Mundondo et al., ensure that wage negotiations or reviews are tied 2019). The RBM process may also need review to the budget cycle. This should help improve wage to ensure a focus on key results only. bill planning and management. 33 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY 2.3 Public investment management payments to contractors); (vi) challenges in structured monitoring and evaluation; (vii) challenges toward Zimbabwe is facing significant structural and project adjustments during execution; and (viii) the institutional weaknesses across the entire public disconnect between capital and recurrent budgeting, PIM cycle. In addition to insufficient financing (see thereby contributing to unreliable and insufficient Section 2.1), project preparation and implementation financing for project maintenance. are constrained by challenges in planning, project appraisal, financing/budgeting, procurement, human While the GoZ has been implementing PIM reforms, resources, and organizational and institutional significant institutional deficiencies still exist. In 2021, capacity. As analysed in the World Bank’s Zimbabwe the GoZ formally announced that it would enforce a new Public Investment Management Efficiency Review value-for-money framework through implementing the (2012), the country faces a number of challenges, PIM guidelines and manuals. Treasury Circular No. 3 of including: (i) capacity challenges in the MoFEDIP for 2021 evoked the use of the PIM guidelines, including effective appraisal of project proposals; (ii) lack of a climate PIM guidelines, for the implementation of public detailed, sequenced and prioritized infrastructure investments and the National Development Strategy investment plan; (iii) loosely defined criteria for project (NDS1), laying the foundation for efficiently, effectively, and selection; (iv) macroeconomic instability that inhibits sustainably managing public infrastructure resources. multi-year fiscal planning and expenditure budgeting; Nonetheless, the PIM system is still largely deficient, as (v) challenges in project implementation (cost and reflected in Table 2.1 illustrating the findings of the 2017 time overruns, significant delays in procurement and PEFA Assessment and current practices (as of 2023). Table 2.1: Comparison of PIM processes between 2017 and 2023 Dimension Status at PEFA 2017 Status in 2023 Public Investment There is no formal standard system in place PIM Guidelines were issued in 2017 Management system to act as a gate keeper, coordinate and requiring all PIM projects to undergo oversee major investment projects economic appraisal. Economic analysis of Economic analyses are conducted for some Still needs further improvement. Feasibility investment proposals major investment projects especially those studies in some cases are done late or not that are funded by PPP/JV, Loans and being done at all. Development Partners Investment project There is no formal system in place for This is still the case and needs improvement. selection project identification, screening selection, and prioritization of all major investment projects prior to their inclusion in the budget. Investment Projections of the total capital cost of some of This is still the case and needs improvement. project costing the major investment projects, together with Many projects are still not costed. the capital costs for the forthcoming budget year are included in the budget documents but they are not comprehensively done. Investment project Physical progress and costs of some of the This still needs improvement by monitoring major investment projects is monitored by standardizing project monitoring procedures implementing government unit, but it is not and preferably introducing a Project structured and there is no formal standard monitoring Template. procedure and reporting template for monitoring Source: World Bank staff elaborations using the PEFA 2017 Assessment and discussions with the GoZ. 34 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION The new PIM system has not yet been fully has been low, especially on health projects. Table implemented and operationalized. There are many 2.2 shows that capital expenditure execution ratios projects that have not followed PIM guidelines, for Zimbabwe were very low from 2019 to 2022, especially on costing and feasibility studies. probably contributed to by COVID-19 disruptions. Furthermore, the budget execution of capital projects The ratio for health significantly improved in 2023. Table 2.2: Execution ratios of capital spending (% of approved amounts) Period average 21–23 Aspirational Zimbabwe Structural Regional 2018 2019 2020 2021 2022 2023 Capital expenditure 72.0 61.8 73.6 66.7 98.7 77.7 81.0 83.2 73.4 82.1 Education 61.7 65.3 56.4 61.1 83.1 81.5 75.2 71.2 75.4 78.8 Health 65.9 39.2 41.7 38.7 21.7 90.0 50.1 91.1 66.7 84.9 Energy 0.0 100.0 95.0 98.6 52.9 86.8 79.4 295.2 71.1 514.4 Transport 91.3 71.9 93.2 77.4 69.6 98.8 81.9 343.4 85.7 74.4 Agriculture 52.5 84.3 72.3 79.1 81.9 88.5 83.2 69.9 43.5 107.5 Source: World Bank staff calculations using GoZ capital expenditure data (2024). The GoZ continues to have a large stock of stalled of spending, while ensuring considerably improved projects. The Ministry of Local Government & Public value-for-money of Zimbabwe’s PIM system. Works alone has 205 such projects (Sunday News, 2023). This Ministry also revealed a reprioritization Policy option 1: Strengthening operationalization of plan to be adopted by the Ministry whereby it will the new PIM system at project entry for better value- select five sensitive projects at a time that are at for-money. least 70 percent complete and then complete them before selecting another five projects. This approach Improved prioritization and selection of capital requires funding and addressing all the other projects through strengthened appraisal challenges that are affecting PIM in Zimbabwe. PIM processes could improve efficiency and effectiveness in PIM project management, and Policy options for fiscal savings reduce cost and time overruns in the medium and long term. Clarifying and strengthening the Given the continued challenges across all stages in MoFEDIP’s Public Sector Investment Program the PIM system, the country will need to prioritize (PSIP) unit’s responsibilities to strategic guidance the reform actions in a well-sequenced manner. and quality-at-entry activities for project pre- Fiscal savings may be first realized by strengthening appraisal and appraisal stages will help enhance operationalization of the new PIM system at project the coordination efficiency and effectiveness. entry and, second, by rationalizing the stock of existing Sector ministries should not simply be conduits for capital projects. On the conservative side, these two channeling invalidated projects to the MoFEDIP, but options can bring fiscal savings of 0.75 percent of GDP also see themselves as the “first line of defense” compared with GoZ planned expenditure. In practice, against any lack of strategic focus, weak project this would result in maintaining the historic trend rationale, and optimism bias. This strengthened 35 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY process in sector ministries will require an to remove a redundant project or reduce its scope adequate review and appraisal of projects through during construction. the strict implementation and operationalization of Treasury Circular No. 3 of 2021 with PIM guidelines The GoZ could consider two options for reallocating and sector manuals.³² capital budgets to fund: (i) to top slice the whole capital budget for the fiscal year; or (ii) to Continued capacity-building program to facilitate reprioritize the capital budget portfolio. implementation and operationalization of the new PIM system is critical. A common error is to rely too The benefit of top slicing the whole budget is that it much on outsourcing project management, even at is straightforward to implement, but the downside senior levels, resulting in inadequate internal control is that it affects all projects regardless of their over project implementation. Senior managers performance. For any given fiscal year, there are may also lack the necessary skills to perform their always projects that are performing well. Delaying roles effectively. Therefore, embarking on a major such projects brings direct financial consequences training program to develop the capacities needed to the Treasury in contract penalties and interest within government to lead the projects, in particular charges, and indirect costs such as inflationary costs in the MoFEDIP and key sector ministries (such incurred due to the delay. In addition, because such as agriculture, energy, irrigation, and transport) projects are not implemented on schedule, the delay is important. If the project sponsor lacks the in such projects postpones the economic and social capacity to perform some of the key roles in full, benefits related to the projects. additional human resources may be contracted for. However, these resources could be integrated Reprioritization aims to identify low or non- into the organization for the duration of the project, performing projects. Non-performance on projects and the responsible owner of the project must be a may take different forms, including projects facing permanent member of the organization. significant completion time or cost overruns, projects with low absorptive capacity of released funds, and Policy option 2: Rationalizing the stock of existing PIM projects that have stalled despite the availability of projects to create the necessary fiscal space. budgets and resources. To support this approach, a reprioritization methodology should be outlined There is also a need to review the PIM portfolio to assist the GoZ,³³ particularly the MoFEDIP, in and remove/adjust underperforming projects. making more informed decisions about how to This will help ensure that the remaining projects are finance immediate future needs for priority projects adequately financed and will free up fiscal space using repurposed capital budgets in the most cost- for new high-priority and high-productivity projects. effective manner possible. There are two phases of This exercise may be a standalone initiative with no this reprioritization framework: broader change in policy and the main objectives centered around a more efficient public investment • Phase 1: Strategic reprioritization. The strategic portfolio. Such portfolio review and rationalization criteria can be adopted expeditiously since they are would equip the MoFEDIP with the transparent straightforward strategic policy decisions that do mechanism for making difficult decisions on whether not need (or require very little) technical examination ³² World Bank TA has already supported the development of sector project appraisal manuals, in particular the sectors of agriculture and water, electricity, irrigation, transport (roads). The strengthened process of adequate review and appraisal of projects according to the Treasury Circular No. 3 of 2021 with PIM guidelines and sector manuals should be critical for the sector’s responsibilities. ³³ The utility of the reprioritization methodology requires continuous evaluation of the GoZ’s programs to determine whether it meets citizen needs in changing circumstances. 36 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION and are low on data demand. Applying these 2.4 Procurement strategic criteria may free up significant allocated funds required to make additional fiscal space. Public procurement expenditure peaked during the These measures include a moratorium on new COVID-19 crisis, but since then has since a rapid projects, as well as a moratorium on stalled projects. increase from parastatals. Procurement increased to 6 percent of GDP in 2020 (likely to respond to • Phase 2: Performance-based reprioritization. In the COVID-19 pandemic). It has since returned to case the resource envelope realized from the its historic level of 2.5–3.5 percent of GDP (Figure strategic reprioritization in Phase 1 is insufficient 2.12). Worryingly, however, a growing share of all to address the strategic requirements, the GoZ procurement is coming from parastatals entities. can move to the second cascading step, premised on the technical performance of the project. This Zimbabwe’s public procurement system has step evaluates and ranks the remaining portfolio weaknesses that make it vulnerable to rent- projects using multi-criteria assessment (MCA) seeking. Governance challenges are undermining premised on a simplified technical assessment value-for-money in Zimbabwe’s procurement and identifying candidates for sterilization/ system. The procurement system is insufficiently suspension. Under this, projects being robust to interference, resulting in unmonitored price implemented slowly with a significant impact on adjustments,³⁴ or in a failure by successful suppliers the budget and low consequences of suspension to meet their obligations (e.g., supplying the goods to would be ideal candidates for sterilization/ the procuring entity, both on time and in the correct suspension. This step is more data intensive. quantities and quality).³⁵ This is resulting in an Figure 2.12: Public procurement in Zimbabwe 1,200 8% 900 6% USD Million (% of GDP) 600 4% 300 2% 0 0% 2019 2020 2021 2022 2023 Commissions Local Authorities Ministries Parastatals Total as % of GDP [RHS] Source: World Bank staff calculations using PRAZ and MoFEDIP data. ³⁴ For example, in March 2024, Harare city council was caught in a high-profile case, where 500 desktop computers were priced at US$4,000 each, above the market price of US$700. This meant the inflated procurement budget was US$2 million rather than US$350,000 in a cost-competitive environment (The Herald, 2024a). ³⁵ In January 2024, the Zimbabwe Anti-Corruption Commission has launched investigations into allegations that persons were paid US$40 million by the Treasury to supply and deliver goats meant to support underprivileged households across the country, but these goats were never delivered and funds were used for private consumption (The Herald, 2024b). 37 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY increasing number of procurement issues raised by The GoZ also introduced a new Procurement the Auditor General’s office.³⁶ Regulatory Authority of Zimbabwe. In 2018, the GoZ transformed the State Procurement Board (which The procurement system is also undermined by performed both a regulatory and operational functions macroeconomic instability. A weak local currency and in procurement) to the Procurement Regulatory high inflation have undermined procurement. Suppliers Authority of Zimbabwe (PRAZ), an independent significantly increase their pricing in an effort to hedge regulatory body with no operational functions. Under against any inflation and currency depreciation, as well PRAZ, all public procurement activities are to be as mitigating major delays in government payment.³⁷ carried out by approved and decentralized procuring However, because of the uncertainty of inflation dynamics, entities as defined in the PPDPA Act. this can result in suppliers increasing their prices as much as five to tenfold from their initial spot prices. In To improve value-for-money, PRAZ launched addition, high inflation puts pressure on procurement value-for-money audits and a new e-GP system. entities to issue contracts as soon as possible, limiting To manage procurement in a high inflation their ability to conduct value-for-money assessments. environment, PRAZ developed targeted value-for- money audits. In addition, it developed US$-based The GoZ is taking major steps to reform its public standard price together with the MoFEDIP and procurement legislation. Recent reforms in public Zimstat. In October 2023, the new e-GP system procurement started with implementing the findings was official launched that enables procuring of the Country Integrated Fiduciary Assessment entities and bidders to conduct procurement (CIFA) of 2012 through the Roadmap for Public activities electronically. The system is not yet fully Financial Management improvements of 2013, and implemented across all MDAs. Once implemented, are still ongoing. In 2015, government agencies and it provides scope for more efficient, inclusive and the bidding community recognized the need for transparent procurement processes that will close public procurement reform in Zimbabwe, including weaknesses in the manual procurement systems introducing e-Government Procurement (e-GP). It was being replaced. The potential benefits of e-GP are also realized the legislative and regulatory framework many, as it removes the involvement of the human for government procurement needed to be expanded element in the process, introduces fair competition, to cover all types of public procurement and agencies. reduces transaction costs for both buyers and This led to the enactment of the Public Procurement suppliers, and brings inclusivity by reaching remote and Disposal of Public Assets Act 2017 (PPDPA Act) areas, while also shortening the procurement cycle and its Public Procurement Regulations 2017 (PPR). times (Box 2.3). ³⁶ Most recently, commercial public entities under the Mutapa Investment Fund have been exempted from the procurement requirements of the PPDPA Act, which also increases the risk of procurement irregularities, rent-seeking and interference (see Section 2.5). ³⁷ Discussions with suppliers suggest they see an average of 9 months to 1.5 years to receiving government payments. 38 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION Box 2.3: The potential benefits of introducing e-procurement The introduction of e-GP can improve value-for-money. Costa Rica and Peru show that e-GP can result in fiscal savings without changes to existing legal, institutional, or regulatory frameworks, but only greater focus on process and purchasing agency performance. Greater unit costs for homogenous goods were related to the number of bidders, with a higher number resulting in lower overall unit costs, but a significant number of transactions were undertaken with fewer than three bidders (Figure B.2.2a). Timing also plays a crucial with transactions dominated by fewer days allowed to prepared bids, or evaluations extended over a long period of time, tends to discourage bidders, resulting in higher unit costs overall as in the case of Ecuador (Figure B.2.2b). In general, more competitive and transparent bidding processes tend to yield greater savings (Figure B.2.2c). Figure B.2.2a: Number of Figure B.2.2b: So does Figure B.2.2c: …and bidders matter timing… contracting type Distribution of awarded Prices were lower when Distribution awarded 1.2 contracts according to the bidders had 34+ days to contracts according to the number of bids submitted 1.0 prepare and submit bids procedure type used 1.0 3% 100% 0.9 9% 2% 100% 8% 25% 19% 36% 70% 14% 0.6 17% 33% Direct contracting tender Open tender Special tender Total Abbreviated 1 2 3 4a6 7a9 Masde9 Total 64% of contracts received 3 bids or loss Q1 Q2 Q3 Q4 Q5 Source: Adjusted from World Bank Costa Rica Public Finance Review, 2019a. Policy options for fiscal savings existing bottlenecks, implementing strategic demand consolidation, and improving transaction-level Procurement is an area where substantial efficiency process outcomes to minimize unit cost dispersion savings could be garnered (Figure 2.14). Zimbabwe and leverage government purchasing power. devotes about 25 percent of total expenditure in procurement, which suffers from both significant and Fiscal savings from procurement may come from systematic under-execution (20 percent, on average, implementing value-for-money, a standardized over the 2018–23 period), as well as value-for-money price list and e-GP. Standardized price lists can challenges with high premia charged by vendors to benefit the economy in the following ways: savings account for macroeconomic instability. Using the through bulk purchasing and discounted costs, and fiscal saving methodology, an estimated 30 percent through by-passing the quotation stage. PRAZ’s of total spending could be saved by addressing value-for-money analysis and standardized price 39 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY lists are already bringing significant savings, and monitoring procurement outcomes and help identify figures that sum up to about 0.4 percent of GDP (Figure bottlenecks or areas for targeted interventions to 2.15a). E-GP is also projected bring fiscal savings of maximize value-for-money opportunities. In addition, about 0.4 percent of GDP, in line with other countries it will be important for PRAZ to play the essential that have also introduced e-GP (Figure 2.15b). role in both educating purchasing agencies on the functionalities and requirements of the system To fully reap the benefits, it is critical that the new to ensure widespread adoption and compliance system is rolled out to all ministries, and captures with existing regulations, as well as devoting all goods and services. This will enable routine efforts toward diversifying suppliers, addressing monopolies, and ensuring relevance and consistency Figure 2.14: Potential savings in procurement of procurement plans. 5 4.5 2.5 State-owned enterprises 4 3.5 3 State-owned enterprises (SOEs) are a major 2.5 source of fiscal risk³⁸ and contingent liabilities. 2 When budget transfers are insufficient to cover 1.5 operating costs and the needed capital investment 1 0.5 to enhance capacity for current and future service 0 delivery, public entities may be forced to borrow, ZWE SSA LMIC UMIC often with government guarantees, or to run arrears. Minimum structural level Potential savings This leads to a build-up of government contingent Source: World Bank staff calculations. liabilities, which may be explicit or implicit. The Figure 2.15: Fiscal savings from procurement a. PRAZ’s value-for-money analysis and standardized b. Cross-country estimates of e-procurement suggest price lists are bringing significant savings that Zimbabwe’s e-GP may lead to 0.4% of GDP in savings 135 1.4 Saving from e-procurement (% of GDP) 125 Ukraine 123 1.2 1 Georgia 102 0.8 Bosnia and Herzgovina 0.6 Thailand Ecuador Zimbabwe Kyrgyz 0.4 Republic Agnola 0.2 Indonesia 0 2 7 12 17 2023Q2 2023Q3 2023Q4 2024Q1 Public procurement as % of GDP Source: World Bank staff calculations using PRAZ data and the World Bank’s global e-procurement database. ³⁸ SOE-related fiscal risks can be caused by various factors. These include uncompensated quasi-fiscal activities, external interference in SOE operations, excessive SOE borrowings creating contingent liabilities, significant SOE losses, weak SOE reporting, and insufficient government oversight. Consolidating and assessing fiscal risks from SOEs is challenging. 40 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION contingent liabilities will need to be disclosed in the • Liberalizing the fuel sector and removing financial statements of public entities, as required fuel subsidies: In 2019, the GoZ liberalized by the financial reporting standards. The problems the petroleum sector by allowing bulk fuel in Zimbabwe are that: (i) a number of public entities consumers with free funds to import their own do not meet the statutory reporting deadlines and fuel. It also led to the removal of fiscally-costly hence the GoZ does not have up-to-date information fuel subsidies. on contingent liabilities from public entities; and (ii) the disclosure of contingent liabilities by public • Phasing out “command agriculture” subsidies: entities does not always meet the requirements of The World Bank’s 2019 Public Expenditure the financial reporting standards and, in some cases, Review on Agriculture estimated that, between the contingent liabilities are not disclosed at all. 2016 and 2018, subsidies for the special maize program and grain marketing board cost Estimates suggest that SOEs continue to receive between 2.1 and 4.2 percent of GDP, yet the net substantial budget transfers. Figure 2.16 provides impact on agriculture was limited. In response, an initial estimate of total SOE transfers by the Treasury has gradually phased out such combining the Treasury’s figures on “capital grants subsidies, and focused instead on the smaller to other central government units”, with the RBZ’s Pfumvudza program of agricultural support for credit to public non-financial corporations, and finally vulnerable households, at 0.4 percent of GDP. the recent capital transfer to the MIF. Jointly, this suggests that the GoZ spent an average of 3.5 percent • Moving to cost-reflective energy tariffs: of GDP on SOE transfers between 2019 and 2023 The World Bank’s 2023 Zimbabwe Economic (or 2.3 percent, excluding the recent MIF transfer) Update notes how the energy sector has been (Figure 2.16). In 2019, this was driven by RBZ credit undermined because energy tariffs did not reflect but, since 2020, almost all these funds have come the costs of electricity services. With tariffs from the Treasury, including a major US$1.9 billion substantially below efficient cost recovery levels, capital transfer to the MIF in 2023. the Zimbabwe Electricity and Transmission Distribution Company experienced a significant Despite the recent rise in SOE transfers, the revenue-cost gap, exceeding US$200 million at Treasury has adopted three critical reforms in its peak in 2020. The Zimbabwe Power Company recent years, to help reduce transfers to SOEs and experienced an even larger revenue-cost gap limit their contingent liabilities. between 2019 and 2021, peaking at almost Figure 2.16: Government and RBZ transfers to SOEs (% of GDP) 9 6 (% of GDP) 3 0 2019 2020 2021 2022 2023 Central Bank credit to public non-financial corporations Treasury capital grants to other general government units Treasury transfer to Mutapa Investment Fund Total transfer to SOEs Average transfer to SOEs Source: World Bank staff calculations using MoFEDIP fiscal data and an RBZ survey. 41 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY US$1 billion in 2019. This has provided major The current framework for managing and fiscal burdens. Fortunately, the GoZ has since overseeing the GoZ’s interests in SOEs is still implemented an electricity pricing policy for full fragmented. Various institutions are handling recovery of efficient costs of service provision, different aspects of the role. Comprehensive ensuring a reduction in the fiscal costs of energy information on public entities as a group, as well company losses. as on individual SOEs, is needed. An SOE Aggregate Report can fill this gap and improve the availability Ensuring relevant financial reporting and fiscal and accuracy of information on the SOEs sector discipline by public entities can assist government and hence give the GoZ a complete picture of all to oversee the operations of the public entities the entities in the SOEs portfolio. This is more so as an informed owner. Fiscal discipline can be where SOEs have subsidiaries, e.g., the Industrial achieved by a number of initiatives, including: (i) Development Corporation, the Zimbabwe Mining identifying and separating out the cost and funding Development Corporation, and the National Oil of public service obligations; and (ii) monitoring and Infrastructure, etc. The SOE Aggregate Report is also managing the fiscal burden and potential fiscal risks intended to enhance focus in the oversight role of the of public entities. The risks have to be monitored GoZ in the management of SOEs and build the GoZ’s and appropriately disclosed in the audited financial capacity for effective monitoring of the SOE sector statements of the public entities. The audited as an informed owner. financial statements have to be produced within the deadline set out in the Public Finance Management The financial statements of SOEs are also faced Act, Chapter 22;19 (PFM Act) and audited in terms with a growing number of issues from the Auditor of the Audit Office Act (Chapter 22.18) (Audit Office General (Table 2.3). Audit findings between 2018 Act). Compliance with these requirements needs and 2022, highlight a growing number of issues over to be improved for some SOEs, as is evident from time, driven especially by challenges of governance. the Reports of the Office of the Auditor General. In Other issues that are increasingly common relate some countries including in Latin America and the to revenue collection and debt recovery, and the Caribbean, fiscal statistics include those of SOEs, and procurement of goods and services. Of all negative this enables government to set fiscal targets for the findings in the period 2019–21, 206 were followed whole public sector. It also ensures the fiscal burden up, 92 were addressed, 60 were partially addressed, of the SOEs is included in the national budget. and 54 were not addressed. Table 2.3: Issues for SOE performance raised from auditor reports Issues Financial Year Audit 2018 2019 2020 2021 2022 Governance 99 53 121 80 170 Revenue collection and debt recovery 20 7 15 12 37 Management of assets 0 0 0 4 25 Procurement of goods and services 2 4 5 13 20 Employment issues 8 3 6 3 5 Service delivery 0 0 0 1 4 Total 129 67 147 113 261 Source: Reports of the Auditor General on State Enterprises and Parastatals: 2018 to 2022. 42 CHAPTER 2: OPPORTUNITIES FOR EXPENDITURE RATIONALIZATION The Mutapa Investment Fund the MoFEDIP could monitor the MIF’s financial performance, set key objectives, and propose The Mutapa Investment Fund may exacerbate fiscal mitigating measures in case of risks to public risks if not properly managed. The establishment of finances (supported by legislation as needed). The the MIF in September 2023 raises concerns around MIF should also be fully compliant with public corporate governance and financial transparency, sector legislation, including public procurement, and and adds to the ongoing fiscal challenges. While subjected to annual audit by the Office of the Auditor the MIF was recently established with a view of General. Likewise, introducing strong safeguards enhancing the GoZ’s agility to deal with SOE assets, on borrowing capacity and individual borrowing its governance framework is underdeveloped, and proposals and requests for public guarantees should results in a potential overlap with other ministries’ also be approved by the MoFEDIP and disclosed. If legal oversight over SOEs under the MIF’s portfolio. there is a need to increase its capital, its shareholder, The recent amendments to grant the President the the GoZ, should borrow (and put that on its books) power to exempt the MIF from the application of and transfer resources to it. public procurement legislation (Public Procurement and Disposal of Public Assets Act) raises concerns in 2.6 Conclusion and policy recommendations terms of fiscal transparency and accountability.³⁹ The role of the MoFEDIP and Parliament in overseeing the The policy options in this chapter focus on overall performance and financial management of the MIF public financial and investment management and is minimal. The MIF could also create fiscal risks, as procurement reforms. Findings highlight the need a spending authority that can circumvent the budget to improving targeting of social protection through a process and opens the door for the risks that come “social registry”; reduce non-functional expenses and from extra budgetary entities. continue to control the wage bill; enhance the quality, efficiency and transparency of public investments Several policy options emanate from the MIF’s by reinforcing project preparation, appraisal and setting. Controlling fiscal risks emanating from evaluation; finalize the rollout of the e-procurement operations of the MIF will be key for the stabilization framework; and monitor SOEs’ activities and effort. It would be beneficiary to ensure the MIF’s enhance the proper management and governance transparency and full integration in the budget of the MIF. Jointly, this could limit fiscal risks and process. The MIF’s annual operating budget, capital lead to a potential revenue of 1.1–1.2 percent of GDP, investment plan, and borrowing plan could be out of which around 0.15 percent should be allocated subject to approval by the MoFEDIP. Furthermore, to compensate low-income households (Table 2.4). ³⁹ Yet, critically, it is still subject to the Public Financial Management Act and Debt Reporting Act of Zimbabwe. 43 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Table 2.4: Potential fiscal gains from expenditure rationalization Policy area Policy action Fiscal impact Impact Impact (estimate, on on Equity % of GDP) Efficiency Social protection Establish a national “social - + + registry” to improve targeting of Zimbabwe’s current social protection systems Increase funding to social registry to -0.15% Neutral + compensate low-income households from removed VAT exemptions Wage bill Reduce the number of managerial 0.3 + Neutral posts and eliminate redundant positions Procurement Value-for-money, standardized 0.8–0.9 + Neutral price list, eProcurement Public Investment Rationalizing number of projects, - + Neutral Management maintaining historic trends of spending SOE expenditures Limit contingent liabilities Impact unclear + Neutral from SOEs (average transfer is 3.5% of GDP) Total potential 0.95–1.05% + + fiscal gain Source: World Bank staff estimates. 44 CHAPTER 3 Opportunities for Domestic Revenue Mobilization Meeting Zimbabwe’s sizable fiscal needs will minimize distortions, and reduce opportunities require a large and sustained increase in domestic for tax avoidance and evasion. This, together with revenue mobilization (DRM). This, in turn, calls targeted efforts toward progressivity, can increase for a broad package of reforms of tax policy and the equity and efficiency of the tax system (World tax administration policy measures. Successful Bank, 2024). reform episodes in the region have tended to include a tax policy focus on indirect tax (VAT and This chapter considers the historic performance excise) reforms and tax incentives rationalization, of revenue collection, and the potential to mobilize and undertaking tax administration measures for additional domestic revenue. We start by reviewing improving compliance by strengthening automation historical tax revenue trends over the period 2019– (see Box 3.1, Akitoby et al., 2018; Jung, 2023). These 2023, and assess Zimbabwe’s tax potential. We findings have shaped the choice of policy reforms then consider policy options to move Zimbabwe considered in this report to strengthen Zimbabwe’s closer to its tax potential in a more efficient and domestic revenue mobilization. equitable manner. We focus first on streamlining VAT exemptions, and consider their distributional effects Potential fiscal savings are identified for policy and potential compensation mechanisms. Next, we options toward efficiency gains, improved consider opportunities for improving CIT collection effectiveness of spending, and strengthened and updating Zimbabwe’s mining fiscal regime. equity consideration. Careful tax design can We then consider opportunities for raising health help minimize the economic distortions brought excise taxes related to alcohol, tobacco, and SSBs, about by taxes. For example, by broadening and by improving the newly introduced wealth tax on narrow tax bases or simplifying taxes, countries properties. Finally, we consider options to enhance can raise necessary revenue by making it easier tax administration and compliance, most notably to both administer and comply with taxes, through the improved use of digital technologies. 45 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Box 3.1. Lessons from successful revenue reform episodes in Sub-Saharan Africa To consider major drivers of revenue mobilization, Jung (2023) considers all countries in Sub- Saharan Africa (SSA) since 2010 that have seen a sustained increase in tax revenue of 2.5 percentage points of GDP over a five-year period. From this, they identify four episodes: Mauritania, Rwanda, The Gambia, and Uganda. The authors identify a set of four common lessons from the identified episodes: 1. Implementing a package reform of tax administration and tax policy measures. All four identified countries implemented several tax administration measures and tax policy reforms (i.e., tax rate increase, base broadening, and tax incentive rationalizations) in parallel. The literature also supports that a package reform tended to be more successful in revenue mobilization (Akitoby et al., 2018). 2. Focusing mainly on indirect tax (VAT and excise) reforms and tax incentive rationalizations. The Gambia introduced a VAT to replace a sales tax and a specific excise on tobacco products. Mauritania raised the excise tax rate on tobacco and extended VAT coverage to the mining sector. Uganda increased several excise rates on locally produced spirits and on cigarettes, as well as reducing many VAT exemptions. Rwanda raised its excise rate on airtime of mobile phones and removed incentives granting VAT exemptions on imports for investment certificate holders. These indirect tax reforms contributed to significant revenue gains in the identified episodes. 3. Tax administration reforms mainly focused on improving compliance through strengthening taxpayer segmentation and automation. Uganda expanded its taxpayer segmentation approach to the medium taxpayer by creating the Medium Taxpayer Office (MTO), combined with “e-tax services” to facilitate taxpayers’ registration, filing and payments. The Gambia implemented a detailed “Compliance Improvement Plan (CIP)” for large taxpayers. Rwanda introduced new electronic filing and payment systems with the implementation of electronic tax registration. 4. Launching social dialogue with key stakeholders, high-level political commitment, and technical support. During the tax reform period, some countries introduced redistributive measures. In Mauritania and The Gambia, fuel subsidy reforms with mitigating measures (i.e., targeted cash transfers for the most vulnerable) were undertaken, since indirect tax reforms were usually regressive. In addition, high-level political commitment and buy-in from key stakeholders played a critical role for reform success. Uganda announced and implemented national revenue plans with strong political will, and Mauritania launched social dialogues with civil society and opposition groups, which helped enhance buy-in from key stakeholders and reduce resistance to the reforms. Finally, the episodes frequently overlapped with strong technical assistance support and/or IMF programs. Source: Jung (2023), “Nigeria’s Tax Revenue Mobilization: Lessons from Successful Revenue Reform Episodes”. 46 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION 3.1 Tax revenue trends, progressivity, in revenue. Zimbabwe thus falls far below this, even and tax potential when considering its recent revenue performance. Zimbabwe’s government revenues have recently Tax revenue in Zimbabwe is more reliant on increased, but remain below the levels observed in indirect taxes, especially easy-to-collect excises, peer countries (Table 3.1, Figure 3.1). Total revenue than most peer countries, given high levels of has evolved non-linearly over the past five years. informality (Figure 2, Table 1). Non-tax revenues Revenue first decreased from 13.7 percent of GDP play a very small role in Zimbabwe compared with in 2018 to 10.9 percent of GDP in 2019. Revenue peer countries, representing less than 5 percent of then jumped back up in 2020, and then continued total revenues. In Zimbabwe, as in most structural to increase, reaching 16.5 percent in 2022. Revenue and regional peer countries, VAT is the single most for 2023 is estimated to be 14.6 percent of GDP. The important source of revenue, collecting about 25 most comparable structural peer countries collected percent of total tax revenue. Excise taxes are relatively 19.8 percent of GDP in revenue, on average, in the more important in Zimbabwe than in peer countries, period 2018–2022. For regional peers, the average presenting 14.1 percent of GDP, compared with 7–10 revenue over the same period was slightly higher, percent in peer countries. Reliance on trade taxes in at 20.9 percent of GDP. Aspirational peers show a Zimbabwe is below the regional average but higher stronger performance, collecting 24.4 percent of GDP than in aspirational peer countries. Most importantly, Figure 3.1: Fiscal revenues in Zimbabwe and peer countries 20 15 10 5 0 2018 2019 2020 2021 2022 Zimbabwe Regional Structural Aspirational Total tax revenues Other revenues (**) Source: World Bank staff calculations using GFS data. Note: Regional peers are all lower middle-income countries in SSA. Structural peers are Zambia, Kenya, and Ghana. Aspirational peers are South Africa, Peru, and Indonesia. Figure 3.2: Tax revenue composition in Zimbabwe and peer countries 100 80 60 40 20 0 2018 2019 2020 2021 2022 Zimbabwe Regional Structural Aspirational VAT Excise taxes Personal income tax Corporate income tax Taxes on international trade Other taxes (*) Source: World Bank staff calculations using GFS data. Note: Regional peers are all lower middle-income countries in SSA. Structural peers are Zambia, Kenya, and Ghana. Aspirational peers are South Africa, Peru, and Indonesia. 47 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Zimbabwe collects 19.6 percent of revenue from high for manufactured goods, but slightly below the the Personal Income Tax (PIT) and only 15.2 percent peer-country average for primary goods. from the Corporate Income Tax (CIT), less than structural and aspirational peers. The fact that the Tax rate changes and tax revenue levels in CIT collects less revenue than the PIT is somewhat Zimbabwe are not always correlated (Figure 3.4). usual in the region, and likely due to the informality The CIT rate dropped from 26 to 25 percent in 2017 rate exceeding 60 percent and the extensive use of and further to 24 percent in 2020. Meanwhile, CIT corporate tax incentives. revenue increased between 2019 and 2020, both as a share of tax revenue and as a share of GDP. The VAT Zimbabwe’s tax revenue structure is partly a rate was lowered from 15.0 to 14.5 percent in 2020 reflection of its tax rate structure (Figure 3.3). due to the pandemic, but increased again to 15.0 The tax rates for the Value-Added Tax (VAT) (15 percent in the 2023 budget. However, VAT revenue percent) and the CIT (24 percent) are slightly below as a share of GDP steadily increased between 2019 the average for peer countries. Import tariffs are and 2021. Figure 3.3: Tax and tariff rates a. Tax rates on main taxes (percent) b. Tariff rates (applied rates, percent) 50 14 12 40 10 30 8 20 6 4 10 2 0 0 Corporate Personal Value-added All Manufactured Primary income tax income tax tax products products products Zimbabwe Regional Structural Aspirational Zimbabwe Regional Structural Aspirational Source: KPMG and OECD (graph A) and WDI (graph B). Figure 3.4: CIT and VAT rates and revenue a: CIT rate and revenue b: VAT rate and revenue 25 3 15 4 VAT Revenue, % of GDP CIT Revenue, % of GDP 24.8 14.9 3.8 2.5 VAT Rate CIT Rate 14.8 3.6 24.4 14.7 3.4 2 24.2 14.6 3.2 24 1.5 14.5 3 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Year Year Source: GFS, Author’s Compilation. 48 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION Table 3.1a: Fiscal revenues Last available figure 18-22 Aspirational Zimbabwe Structural Regional 2018 2019 2020 2021 2022 2023 Percent of GDP Total revenues 13.7 10.9 13.2 14.8 16.5 14.6 16.5 20.9 19.8 24.4 Total tax revenues 13.5 10.6 12.7 14.2 15.7 14.3 15.7 14.4 14.2 18.5 Taxes on good and services 6.2 4.8 5.1 5.4 6.5 6.1 6.5 5.9 5.6 7.8 VAT 3.6 3.0 3.2 3.4 4.0 4.2 4.0 3.9 3.4 5.5 Excise taxes 2.5 1.9 1.9 1.8 2.2 1.9 2.2 1.4 1.2 1.5 Other 0.1 -0.2 0.1 0.2 0.2 0.0 0.2 0.7 0.9 0.8 Direct taxes 4.8 3.2 5.8 7.0 7.0 4.6 7.0 5.8 7.2 8.8 Personal income tax 2.3 1.5 2.1 2.5 3.1 2.7 3.1 2.8 3.4 4.0 Corporate income tax 2.2 1.5 2.5 2.9 2.4 1.6 2.4 2.7 3.3 4.8 Other direct taxes 0.3 0.2 1.3 1.7 1.5 0.2 1.5 0.2 0.5 0.0 Taxes on international trade 1.2 0.9 1.1 0.9 1.1 1.2 1.1 2.4 1.4 0.6 Other taxes (*) 1.3 1.7 0.7 0.9 1.2 2.4 1.2 0.3 0.0 1.4 Social contributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.9 Other revenues (**) 0.2 0.3 0.5 0.6 0.7 0.3 0.7 6.3 5.5 5.0 Source: World Bank staff calculations using GFS and MoFEDIP data. Note: (*) It includes taxes on payroll and workforce, taxes on property, and other taxes. (**) It includes other social contributions, grants and other revenues. 2023 figures are estimates. Table 3.1b: Total tax revenues Last available figure 18-22 Aspirational Zimbabwe Structural Regional 2018 2019 2020 2021 2022 2023 Percent of total Total tax revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 VAT 27.0 28.3 25.0 24.2 25.5 29.5 25.5 26.8 24.2 29.5 Excise taxes 18.2 18.0 14.7 12.6 14.1 14.8 14.1 9.7 8.5 13.1 Personal income tax 17.2 14.3 16.2 17.4 19.6 20.3 19.6 19.6 24.0 19.2 Corporate income tax 16.1 14.0 19.3 20.3 15.2 12.5 15.2 19.1 23.3 11.4 Taxes on international trade 8.7 8.7 8.3 6.5 7.2 8.5 7.2 16.4 10.1 8.7 Other taxes (*) 12.8 16.7 16.4 19.0 18.4 4.3 18.4 8.4 9.9 18.0 Source: World Bank staff calculations using GFS and MoFEDIP data. Note: (*) It includes taxes on payroll and workforce, taxes on property, and other taxes. (**) It includes other social contributions, grants and other revenues. 2023 figures are estimates. 49 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY One driver behind the recent uptick in tax revenue is facing an increasingly large burden of taxation, is the increase in PIT revenue due to inflation- creating incentives for de-formalization. generated bracket creep (Figure 3.5). Zimbabwe’s PIT is more complex than in most countries.⁴⁰ In The introduction of new tax instruments, such 2019, and especially in 2020, the GoZ adjusted the as the Intermediate Money Transfer Tax (IMTT), band thresholds but, given the previous stability of has raised revenue, but also created significant thresholds, bracket creep had already taken place. An distortions. Increases in government revenue increasing share of the formal labor force has been between 2016 and 2022 came in part by increasing pushed into the PIT net, and average PIT rates on collection of income taxes and VAT, rising by 4 and PIT-liable individuals have increased. The increased 2 percent of GDP, respectively (Figure 3.6). However, reliance on PIT amid a large informal sector is a other non-conventional taxes contributed to a further concern, as it means a small share of the labor force rise of 2.5 percent of GDP. Between 2016 and 2022, Figure 3.5: Inflation and percentage change in PIT tax band thresholds 600 400 200 0 2018 2019 2020 2021 2022 Year Inflation Threshold 1 Threshold 2 Threshold 3 Threshold 4 Threshold 5 Source: PFR Tool, EY Tax Guides 2018–2022, ODI TaxDev Earned Income Taxes Dataset. Figure 3.6: Recent increases in government revenue by type a. Government revenue by type b. “Other taxes” as share of tax revenue 20 20 Revenue as % of GDP 15 15 % of Tax Revenue 10 10 5 5 0 2016 2017 2018 2019 2020 2021 2022 0 Tax on income and profits Customs duties 2016 2017 2018 2019 2020 2021 2022 Excise duties Value Added Tax (VAT) IMTT Tax on Gross Revenue Other taxes Non-tax revenue Taxes on Specific Services Other Indirect Taxes Source: World Bank staff calculations using MoFEDIP data. ⁴⁰ It has six bands, and a top rate of 40 percent, which is significantly above levels in peer countries. Tax rates have been mostly stable over the past five years, with the exception of the top rate, which was reduced from 45 to 40 percent in 2020. While the tax schedule had eight bands in 2018, the top bands have gradually been merged, meaning an increasing share of individuals became subject to the top tax rate. Between 2017 and 2018, the tax band threshold was stable, while high inflation was already present. 50 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION these other taxes increased from 8 to 18 percent most peer countries), and the total excise level is of all tax revenue (Figure 3.7). This is driven largely below the peer-country average, and much lower by the introduction of an IMTT that taxes all formal than in aspirational peer countries (Figure 3.7b, see money transactions, which results in double-taxation, Section 3.6 for details). heavily distorts economic transfers, and undermines firms’ performance (Chizana and Wadesango, 2022). Tax progressivity Other such taxes are on gross revenue, including on airtime, a tobacco levy, a withholding tax on local Despite high reliance on indirect taxes, PIT contracts, and mining royalties. introduces a degree of progressivity into Zimbabwe’s tax system (Figure 3.8). While indirect A rise in excise tax revenue is primarily driven taxes are generally less progressive, Zimbabwe’s by the fuel excise, as health-related excise taxes PIT system counterbalances this, as it introduces are low. The carbon price in Zimbabwe is higher strong progressivity through a high PIT rate and than in all structural and aspirational peer countries a low exemption threshold, i.e., a high share of except Kenya (US$79). The carbon price is entirely the formal labor force subject to the PIT. This due to the high level of fuel excise taxes, combined means that the Kakwani index and the Reynolds- with the absence of fuel subsidies. Zimbabwe’s fiscal Smolenksy index—two commonly used indices for system achieves a relatively high carbon price of the progressivity of the tax system, calculated based US$68 per ton CO₂ in 2022 (Figure 3.7a). Cigarette on household survey data—are higher for Zimbabwe excises are ad valorem rather than specific (as in than for peer countries. Figure 3.7: Tobacco excise and carbon price a. Total carbon price (US$4 per ton of CO₂) b. Excise taxes on tobacco (%, most sold brand) 50 USD per ton CO2 50 40 30 20 -50 10 Indonesia Peru South Africa Zambia Ghana Zimbabwe Kenya 0 Cigarettes, Cigarettes, Cigarettes, total specific ad_valorem Emissions trading systems Fuel excise taxes Carbon tax Reduced VAT rate Subsidies Zimbabwe Regional Structural Aspirational Total carbon price Source: WHO (graph A) and World Bank (graph B). Figure 3.8: Progressivity of Personal Income Tax – Kakwani and Renolds-Smolensky indices, percent 0.4 0.05 Reynolds-Smolensky Kakwani Index 0.3 0.04 0.03 Index 0.2 0.02 0.1 0.01 0.0 0 Zimbabwe Regional Structural Aspirational Country/Country Group Kakwani Index Renolds-Smolensky Index Source: Mylonas and Thomas (forthcoming) using MoFEDIP and GFS data. 51 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Zimbabwe’s tax potential structure includes goods and services that were taxed at the standard rate (14.5 percent until 2022, Zimbabwe’s tax revenue remains far below the and 15 percent since 2023), zero-rated (0 percent) or country’s potential of 22 percent of GDP (Figure 3.9). were exempt. Generally, all goods and services are World Bank dynamic stochastic frontier analysis⁴¹ standard rated unless specifically exempted, zero- suggests that Zimbabwe’s tax potential is around 22 rated or subject to VAT at a special rate. The zero- percent of GDP, implying a tax gap of 6.5 percentage rated VAT categories include exports of goods from points. Zimbabwe’s tax collection potential is almost Zimbabwe and basic foodstuffs such as sugar and as high as the potential for aspirational peer countries. rice (listed in the VAT Regulations). No VAT is charged The tax potential is relatively stable over time, implying on exempt supplies, for instance, on financial services that the tax gap is negative related to the tax collection and electricity and piped water for domestic use. In level (Figure 3.9). 2022, businesses with turnover of over US$40,000 or the ZWL equivalent were required to be compulsorily 3.2 Value-added tax registered. The registration threshold has since been decreased to US$25,000 in 2024. VAT is the principal indirect tax in Zimbabwe, and has accounted for more than one-quarter of To increase domestic revenue mobilization, total tax revenue over the past decade. The VAT the 2024 Budget announced that many basic Figure 3.9: Tax collection and tax gap a. Tax gap in Zimbabwe and peer countries b. Tax gap in Zimbabwe over time 25 20 22 20 15 15 10 10 5 5 0 0 2009 2011 2013 2015 2017 2019 2021 Zimbabwe Regional Structural Aspirational Tax Gap, Percent of GDP Tax collection Tax gap Tax of Collection, Percent of GDP Source: World Bank PFR tool, 2024. Table 3.2: Change in VAT schedule from 2024 reform (percentage of items by VAT category) Original VAT Schedule 2024 VAT Schedule Change Items Standard Exempted Zero Standard Exempted Zero Standard Exempted Zero Rated Related Rated Related Rated Related Food items 31 52 17 45 55 0 +14 +3 -17 Other items 67 22 10 71 29 0 +4 +6 -10 Total 54 33 13 62 38 0 +8 +5 -13 Source: World Bank analysis using ZIMRA reports, 2024 GoZ Budget, and Statutory Instrument 10A of 024. ⁴¹ The predictors of the tax gap used by this model are GDP per capita, share of trade in GDP, agricultural value-added in GDP, the age dependency-ratio, and time-invariant country characteristics. See Steenbergen and Kwaramba (2024) for details. 52 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION commodities would be shifted from zero-rated Tables (SUT) for Zimbabwe and detailed commodity- to exempt⁴² status, and some items shifted from wise VAT tax rates and exemptions. Using the SUT, exempted to standard-rated status (Table 3.2). we estimate the VAT tax gap in 2022 was 5.4 percent, Examples of items that have been standard rated comparable to the VAT tax gap of 5.7 percent using include meat and fish, selected manufacturing items, the c-efficiency method (Figure 3.10b). and mining equipment (GoZ, SI 15 of 2024). To consider the cost of tax expenditures, we VAT tax gap analysis⁴³ decompose the tax gap into a policy and compliance gap. Using the VAT policy in 2022 under which products To estimate the VAT tax gap,⁴⁴ we first consider the are standard rated, zero-rated or are exempt, the c-efficiency ratio, which is a composite efficiency effective weighted average effective tax rate (ETR) measure of VAT tax collection. The c-efficiency ratio is found to be 6.4 percent as against the standard is the ratio of actual revenues to theoretical revenues rate of 14.5 percent. From that, we estimate that the from a perfectly enforced tax levied at a uniform VAT policy gap is 4.1 percent of GDP, which would be standard rate on all consumption. In Zimbabwe, the the total gains to the Treasury if all exemptions are c-efficiency of VAT has fallen from 0.37 in 2012 to removed and zero-rated goods commodities were 0.29 in 2022, indicating policy and compliance gaps. taxed at the standard tax rate. The VAT compliance Using the c-efficiency of VAT collections, a “back- gap is 1.3 percent of GDP, which is the maximum of-the-envelope” VAT gap (adjusted for the informal that could (theoretically) be gained in tax revenue sector) indicates that the VAT gap was 5.2 percent through improved tax administration measures. This in 2012, and has risen to 5.7 percent in 2022 (Figure suggests that the VAT policy accounts for over three- 3.10a). A more detailed disaggregation of the tax quarters of the total gap at 76 percent, while the VAT gap is computed using Zimbabwe’s Supply and Use gap due to low compliance is 24 percent. Figure 3.10: VAT tax gap a. Macro level: c-efficiency and VAT gap b. VAT policy gap, compliance gap and total gap, 2022 5.7% 0.37 5.7% 0.38 6.0% 5.6% 5.7% 5.6% 0.36 5.0% VAT Gap as % of GDP 0.34 4.3% 5.5% 0.32 4.0% c-Efficiency % of GDP 5.4% 0.30 0.29 3.0% 5.3% 0.28 5.2% 0.26 2.0% 5.2% 1.3% 0.24 5.1% 1.0% 0.22 5.0% 0.20 0.0% 2012 2022 Policy Gap Compliance Gap Total Gap VAT gap as % of GDP c-Efficiency Total Gap using SUT Total Gap using c-Efficiency Source: World Bank staff calculations using MoFEDIP and ZIMRA data. ⁴² For a “zero-rated” good, the government does not tax its sale, but allows credits for the value-added tax paid on inputs. If a good or business is “exempt,” the government does not tax the good’s sale, but producers cannot claim credit for VAT paid on inputs. As such, the tax burden for zero-rated items is lower than for zero-rated items (and government’s tax expenditures are higher). ⁴³ For details, see the background note by Sharma et al. (2024) “Fiscal and distributional implications of VAT reforms in Zimbabwe”. ⁴⁴ There are three main approaches for a tax gap analysis: top-down, bottom-up and econometric techniques. For the VAT and CIT gap analysis, the analysis uses the top-down approach using SUT tables, sectoral GDP data and VAT collections. 53 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY VAT policy changes as reflected in the 2024 budget Distributional effects of VAT reforms and could result in a revenue gain of 0.88 percent of compensation scenarios GDP. Limiting the number of VAT exempt or zero- rated commodities boosts the fiscus by increasing While removing VAT exemptions may increase tax the efficiency and neutrality of VAT tax collection revenue, it can also hurt low-income households. (Warwick et al., 2022). The 2024 budget has proposed This can undermine the GoZ’s objectives of equitable to move many items from zero-rated or exempt and progressive tax policy and resolute progress status into the standard rate category, which we call toward poverty reduction. As such, the GoZ could “rate rationalization”. The policy changes mean that consider compensatory mechanisms to complement the share of standard-rated commodities increases the removal of VAT exemptions. This may help from 36 percent of value added to 39 percent (Figure ensure that fiscal reforms achieve domestic revenue 3.11a). The partial equilibrium impacts of this reform mobilization, while also ensuring progressivity and are found to increase the ETR from 6.4 percent in 2022 poverty reduction. to 7.8 percent in 2024 due to rate rationalization, and then further to 8 percent due to the 2023 increase To assess the distributional impact of the proposed in the standard rate to 15 percent (Figure 3.11b). reforms, Sharma et al. (2024) use a partial fiscal An increase in the ETR also results in the VAT tax incidence analysis framework. Figure 3.12a shows gap falling from 5.62 percent of GDP in 2022 to an the Lorenz curve for disposable income for VAT and estimated 5.36 percent in 2024. Significantly, the illustrates that VAT is progressive, i.e., the share policy gap decreases from 77 percent of the total of VAT paid by richer segments of the population gap in 2022 to 66 percent in 2024, or from 4.3 percent is higher than the share of income going to the of GDP to 3.42 percent of GDP over the same period households. However, Figure 3.12b also shows (Figure 3.11c).⁴⁵ most of the benefits from VAT exemptions go to the Figure 3.11: Impact of the 2024 VAT policy change a. Share of standard-rated items b. Impact on effective tax rate c. Impact on VAT gap 46% 8.0% 5.62% 42% 7.8% 5.36% Effective Tax Rate (ETR) 39% 36% % of value added 6.4% 4.30% 19% 3.42% % of GDP 18% Share Share Share taxed taxed at taxed at at below 2022 Rate RR +15% standard zero rate/ standard Policy Rationalization Standard rate exempt rate (RR) Rate 2022 Policy 2024 Budget 2022 Policy 2024 Budget Total VAT Gap Policy Gap Source: World Bank staff calculations using MoFEDIP and ZIMRA data. ⁴⁵ This a simulated impact of the VAT policy reform, which may not be fully realized because consumers may have a behavioral response to higher VAT rates by switching their consumption bundle or increasing purchases from the informal sector. 54 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION relatively better-off households. Almost 44 percent of poor households, potentially at a fraction of the total VAT exemptions accrue to the richest decile, the new VAT collections. We consider three whereas only about 10 percent goes to the bottom compensatory mechanisms: 40 percent of the population. This is driven by the top decile’s higher level of overall consumption, and • Scenario 1 (Full re-distribution): This considers the possibly a relatively higher share of spending on food effect of distributing all extra collections (0.88 items and other goods with preferential rates. So, percent of GDP) to the poorest 40 percent of while VAT exemptions do benefit the poor and bottom households.⁴⁶ By definition, this scenario would be 40 percent of the population, they are an inefficient revenue-neutral to the Treasury as all the additional way to reach them. revenue collected would be redistributed. However, it would reduce poverty by 8 percentage points, The 2024 budget VAT reforms are estimated from 30.6 to 22.7 percent (Figure 3.13). to lead to an increase poverty and inequality. While the removal of VAT exemptions and zero- • Scenario 2: (Compensating the bottom 40 percent): rating announced in the 2024 budget is expected This considers compensating the bottom 40 to increase the VAT revenue by 0.88 percent of GDP percent for the consumption losses of removing (see VAT tax gap analysis above), it also increases VAT exemptions.⁴⁷ In this case, the poverty rate the poverty headcount by 1.4 percentage points and is identical to the baseline (Figure 3.13). Yet inequality by 0.14 points. This is because a higher critically, this compensation can be done using share of disposable income goes to VAT payments, only 17 percent of extra VAT collected (0.15 hence less is available for consumption. percent of GDP), meaning that the Treasury still gains 0.73 percent of GDP in tax revenue. It is thus However, compensatory mechanisms could an opportunity to raise (net) tax revenue, while restore the welfare impact of VAT reforms on still compensating low-income households. Figure 3.12: The progressivity of VAT and the distribution of exemption benefits a. Progressivity of VAT b. Distribution of exemption benefits 100 50 Share of total benefit (%) 80 40 60 30 % 40 20 20 10 - - 0 1 2 3 4 5 6 7 8 9 10 Exemption benefits Decile of disposable income 1 2 3 4 5 6 7 8 9 10 Cumulative share of disposable income Decile of disposable income Cumulative share of VAT Source: World Bank staff calculations using PICES 2017. ⁴⁶ This is admittedly unrealistic as the fiscus would not be able to perfectly identify the poorest 40 percent of households. However, the scenario is considered to establish an upper bound of the potential poverty-reducing effects of the reforms. It also shows that the current setup of VAT exemptions and zero-rating is an inefficient way to reduce poverty and inequality in Zimbabwe. ⁴⁷ This scenario is again unrealistic as it assumes perfect knowledge of the additional VAT payment and perfect targeting of the poorest 40 percent of the population. Yet, it establishes that the benefits of the reforms (additional revenue to savings to the fiscus) are considerably higher than the costs (increase in poverty headcount and inequality). 55 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY • Scenario 3 (Compensating current cash transfer focusing only on the current beneficiaries of the recipients): This considers the poverty effects of cash transfer program is ineffective because of its the compensation of losses to current recipients minimal coverage. To expand coverage, there is thus of the Harmonized Social Cash Transfer (HSCT) a need to also establish a nationwide social registry program.⁴⁸ In this case, fiscal cost of compensation and developing a targeting mechanism to target is low (0.026 percent of GDP). Yet, because of the social cash transfers effectively. very low coverage (0.4 percent of the population), compensating only the HSCT recipients has no 3.3 Corporate income tax real ability to counter the impact on poverty (Figure 3.13). This illustrates the limitation of the Zimbabwe’s CIT collection is relatively low, in part current social protection system, and the need for because of global pressure to reduce CIT rates. a nationwide social registry to target social cash Corporate tax rates in Zimbabwe have decreased transfers effectively. from a 25 percent in 2019 to 24 percent from 2020 onwards.⁴⁹ This is lower than the African average of In sum, the 2024 VAT reforms provide an important 27.4 percent, and lower than most of its peers.⁵⁰ While way to increase revenue collection, but ensuring a globally there has been a steady decline in CIT rates, progressive outcome would also require adopting this fall in has generally been offset by reducing or a compensating mechanism for low-income abolishing tax expenditures. In Zimbabwe, however, households. The changes announced in the 2024 despite globally competitive tax rates, CIT revenue budget are expected to increase VAT revenue by 0.88 accounted for just 14 percent of total tax revenue in percent of GDP. But they also increase the poverty 2019 and 15.2 percent in 2022. headcount by 1.4 percentage points and inequality by 0.14 points. Therefore, the VAT reforms should be CIT-efficiency analysis also suggests a relatively accompanied by a compensation mechanism, which low efficiency of CIT collection. CIT efficiency, can be done with a fraction of the new VAT collections calculated as the ratio of actual CIT revenue collected (only 17 percent) from the proposed changes. Yet, to theoretical revenues from a no-exemptions and Figure 3.13: The impact of VAT reform on poverty and inequality a. Impact on poverty reduction (food poverty) b. Impact on inequality (Gini points) 1.8 1.8 points change 0 0.14 0.14 Percentage Gini points change -0.36 -7.9 -2.9 2024 Budget VAT Reforms Scenario 1: Full redistribution of gains to bottom 40% Scenario 2: Full compensation of “losses” to bottom 40% Scenario 3: Full compensation of “losses” to current HSCT recipients 2024 Budget VAT Reforms Scenario 1: Full redistribution of gains to bottom 40% Scenario 2: Full compensation of “losses” to bottom 40% Scenario 3: Full compensation of “losses” to current HSCT recipients Source: World Bank staff calculations using PICES 2017. ⁴⁸ This scenario provides a contrast to the previous two scenarios by working through existing administrative systems (and highlighting their limited scope to target low-income households). ⁴⁹ In addition, a 3 percent Aids Levy is charged on corporate tax payable, raising the effective rate to 25.75 and 24.72 percent. ⁵⁰ The 2023 corporate tax rate was 27 percent in South Africa, and 30 percent in Malawi, DRC, Kenya, Tanzania and Ethiopia. Regionally, Asia has the lowest average corporate tax rate at 19.8 percent. The OECD country average of 38 is 23.7 percent and the world average is 23.4 percent. 56 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION no-deductions CIT on operating surplus, while seven over the same period, and now includes the increasing from 0.20 in 2019 to 0.33, is still very low mining, manufacturing, agriculture, energy, tourism, and suggests significant revenue loss from CIT. Low transport, and health sectors (Figure 3.15b). CIT efficiency is reflected in the significant CIT gap of 3.4 percent of GDP in 2022 (Figure 3.14). The CIT incentive structure in Zimbabwe is complex, with sector-specific rebates and Corporate tax incentives exemptions, and several cross-cutting incentives across tax types. Companies can claim several The low efficiency of CIT collection can be partly revenue expenditure deductions as per the Corporate explained by the recent expansion of CIT tax Tax Law. The Special Initial Allowance provides an incentives.⁵¹ In Zimbabwe, the total number of CIT additional capital allowance on certain expenditures, tax incentives increased from 11 in 2015 to 17 in which blurs the lines between revenue and capital 2020, and cover a broad set of category incentives expenditures to avail incentives. Furthermore, the (Figure 3.15a). The number of sectors eligible for manufacturing sector,⁵² as well as the agriculture, such incentives has also expanded from four to tourism, transport and aviation sectors, can also Figure 3.14: CIT gap and CIT efficiency 3.8% 0.38 0.40 3.6% CIT Gap as % of GDP 3.6% 0.31 0.35 0.33 CIT Efficiency 3.4% 0.30 3.4% 0.21 3.4% 0.25 3.2% 3.1% 0.20 3.0% 0.15 2.8% 0.10 2.6% 0.05 2019 2020 2021 2022 CIT Gap as % of GDP CIT Efficiency Source: World Bank staff calculations using MoFEDIP and ZIMRA data. Figure 3.15: Number of corporate tax incentives in Zimbabwe, 2009–2020 a. Corporate tax incentives, by tax type b. Corporate tax incentives, by sector 18 18 16 16 5 3 4 14 5 1 14 5 12 1 5 1 1 5 1 10 3 3 3 1 1 12 4 1 8 3 4 3 3 3 1 1 1 1 5 5 7 6 1 1 10 3 3 3 1 4 1 2 1 2 1 2 3 3 5 5 5 5 3 2 2 2 8 1 3 3 1 2 2 2 2 2 2 1 3 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 6 1 1 1 10 11 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1 8 4 5 3 4 4 6 6 6 7 3 2 3 2 2 2 2 1 1 1 1 1 1 1 Agriculture; forestry and fishing Mining and quarrying 0 Electricity and gas Manufacturing 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Programming and broadcasting activities Accelerated Depreciation Reduced Tax Rate ICT services industries/High tech Services Tourism Tax Deduction>100% Tax Holiday/Tax Exemption Others Source: World Bank corporate tax incentives database. ⁵¹ Other contributors to low corporate tax collection include a large informal sector and challenges in tax compliance. ⁵² The incentives for the manufacturing sector include electrical manufacturers’ rebates, pharmaceutical manufacturers’ rebates, clothing manufacturers’ rebates, textile manufacturers’ rebates and furniture manufacturers’ rebates. 57 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY claim additional incentives and rebates as specified Potential reforms to improve for each respective sector. Over and above general CIT revenue collection tax incentives, the mining sector can also claim special tax incentives, as well as certain discretionary As a first step to improve CIT revenue collection, exemptions.⁵³ Fiscal concessions for Build Own Zimbabwe would benefit from estimating the fiscal Operate and Transfer (BOOT), Build Operate and cost on all tax incentives offered, to be published Transfer (BOT) arrangements and Special Economic as part of the annual budget. The “inventory of Zones (SEZs) in the form of tax holidays and reduced incentives” available to investors should be clearly CIT rates also notably reduce revenue collections. laid out in the law and steps to rationalize the incentive Moreover, general (cross-cutting) duty concessions structure to make it simpler should be undertaken. such as rebates of duty on imported capital This would be similar to steps taken by South Africa equipment make the tax incentive structure more and Jordon, which have dedicated websites and online complex. With numerous tax incentives, several of portals with links to relevant laws and administrative which are overlapping, the effective CIT rates in documents.⁵⁵ Of immense value would also be the Zimbabwe are much lower than the headline tax systematic analysis, tracking and publication of rate indicates. the fiscal cost of incentives as part of the annual budgetary exercise. For instance, Morocco annually The revenue loss from CIT expenditures is difficult publishes a detailed statement of tax expenditure to estimate due to insufficient information, both in with expenditure presented by tax objectives, tax tax declarations, as well as in tax policy. ZIMRA’s instrument, and by type of beneficiary.⁵⁶ annual reports identify a very high cost of aggregate tax expenditure that includes tax expenditures on all Reforms to streamline, rationalize and publish CIT tax types at 15 percent of GDP in 2022.⁵⁴ However, tax incentives will provide greater tax certainty a recent MoFEDIP-GIZ project suggests that current and transparency. These are critical private sector estimates of tax expenditures are not credible, and investment drivers and will also help the GoZ to that tax declaration statements do not allow a proper examine the costs and benefits of the incentive tax assessment of tax expenditures due to insufficient structure to design more efficient incentives systems information and lack of disaggregation of taxable keeping the overall growth objectives in mind. For profits, assets, and deductions. In addition, certain tax this, the Republic of Korea’s system provides a laws that prevent the MoFEDIP from accessing firm- good example, which includes a sunset clause for level tax data to review expenditure also hinder more every tax expenditure program, with a 1- to 5-year accurate estimates of the tax incentives availed by termination date. This is complemented with a firms. Hence, at present, there is no reliable system comprehensive performance evaluation every few to monitor tax expenditures and assess potential tax years to consider whether to extend, reduce, expand expenditure rationalization policies. or abolish tax expenditure programs by examining ⁵³ These include full expensing on exploration, development and operations incurred wholly and exclusively for any mining operations and indefinite carry-forward of losses, among other incentives. Discretionary exemptions, on approval of the Minister, can be availed for non-resident’s shareholders tax, fees, remittances, and royalties. ⁵⁴ ZIMRA estimates that from 2019–2022, tax expenditures (VAT, CIT and customs) increased from US$2.1 billion to US$3.7 billion, or growing from 8 to 15 percent of GDP. This would make these tax expenditures the highest known in Africa by a significant margin. ⁵⁵ South Africa: http://www.investmentincentives.co.za/ Jordon: https://jic.gov.jo/portal/Home/Inventory ⁵⁶ Morocco: http://www.finances.gov.ma/Docs/2014/DB/dep_fisc_fr.pdf 58 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION their achievement and economic effects (in part industry by 2030 (the GoZ’s Vision 2030, 2019). Mining through a cost-benefit analysis) (Kim, 2017). output accounts for over 80 percent of the country’s total exports. Commercial production comes from several Creation of a simplified taxation regime from SMEs strategic minerals including gold, platinum group can reduce obstacles to formalization. Currently metals (PGM), diamonds, and lithium (Figure 3.16). the tax legislation relies on presumptive taxes to tax SMEs, which have the weakness of being uniform Gold is Zimbabwe’s biggest mining commodity. without regard to business performance. Progress Gold accounts for 44 percent of production and is was made on a simplified tax structure for SMEs also the largest mineral export, with over US$2.14 and a report published under the Rapid Results billion in exports in 2020 alone. Significant gold Framework in 2019, which recommended a 3 percent incentives and changes in retention policy resulted turnover tax for SMEs. This can be revisited with a in gold production leaping 55 percent from 2021 to view to assessing the costs and benefits of moving 2022, albeit softening in 2023 due to delivery issues. to this simplified structure. Small-scale gold miners make up 62 percent of producers (RBZ, 2023) and are more likely to use 3.4 Mining taxation open pit methods of extraction.⁵⁷ Gold producers are required to sell to Fidelity Printers and Refinery, Mining is a large and growing industry in Zimbabwe. a gold monopsony controlled by the RBZ. In some The sector has grown significantly in recent years, cases, large-scale mining companies are given from US$2.3 billion in 2019 to almost US$4 billion in special clearance to export directly. 2022, in part because of rising global prices. The GoZ aims to grow the mining sector into a US$12 billion Zimbabwe is one of the world’s largest producers of rare metals, including ‘green’ metals used Figure 3.16: Mining production share in 2023 for the clean energy transition. Zimbabwe is the world’s third-largest producer of platinum, and the Diamonds, 5.0% Other, 6.7% fifth-largest for global palladium output (Global Nickel, 5.4% Data, 2023). It also has an abundance of lithium Lithium, with production growing 1,000 percent between Chrome, 0.3% 2018 and 2023 to a cumulative US$209 million, 6.8% and is expected to increase to US$100 million per year. Other ‘transition metal’ deposits include rare earths, nickel, copper, and zinc, used for clean energy electronic vehicles produced in the EU, the United Gold, 44.4% States, and chiefly in China. Zimbabwe’s push toward beneficiation also saw the construction of a major Platinum group investment in a spodumene concentrate plant in Metals, 31.4% 2023. Such domestic beneficiation initiatives should Source: World Bank staff calculations using MoFEDIP data. greatly enhance value chains for clean-energy metals. Note: Platinum Group Metals include Platinum, paladium, rhodium, ruthenium. Other minerals include coal, copper, lithium, Finally, Zimbabwe is also the world’s seventh-largest phosphate, and cobalt. diamond producer (Kimberley Process, 2023). ⁵⁷ This makes it more difficult for the Ministry of Mines to monitor registration activity or to monitor gold trades. 59 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Main challenges for mining tax Zimbabwe’s mining royalties are also low compared revenue collection with other SSA countries. When considering mining royalties as a share of mining exports, Zimbabwe’s Mining sector tax revenue collection is not rising performance has reduced from 5.5 in 2012 to 2.5 in in line with the sector’s growth and is likely below 2021. This is significantly lower than Senegal (6.3), its potential. Increased output from mining ordinarily Ghana (4.7) or Burkina Faso (3.5), and only aligned to leads to mining royalties’ collections trending steadily South Africa (Figure 3.18a). While in 2021 its royalties upward. However, a downward correlation can be were 0.4 percent of GDP, Africa’s average mining observed between mining royalties to total tax revenue, royalties for Zimbabwe’s level of mining exports is and mining royalties relative to country exports. For 1 percent of GDP (Figure 3.18b). Beyond royalties, example, while Zimbabwe’s mining exports and mining Zimbabwe also collects mining revenues from CIT royalties were growing in tandem between 2012 and and PIT, VAT and dividends.⁵⁸ The mining sector’s 2015, they have since diverged significantly (Figure 3.17). total revenue-to-GDP ratio in Zimbabwe was 1.2 Most notably, between 2018 and 2023, mining exports percent during the period 2014–20. This is also below grew from 8 to 16.8 percent of GDP, while mining that for countries in SSA, which averaged 2 percent royalties only grew from 0.1 to 0.4 percent of GDP. during this period (IMF, 2021). Figure 3.17: Mining exports and mining royalties in Zimbabwe, 2012–2023 a. Share of GDP b. US dollars 20 1 6,000 400 Mining Royalties Mining Exports Mining Exports 0.8 (USD Million) 15 4,500 300 (% of GDP) (% of GDP) 0.6 10 3,000 200 0.4 5 0.2 1,500 100 0 0 - - 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mining Exports [LHS] Mining Royalties [RHS] 2023 Mining Exports [LHS] Mining Royalties [RHS] Source: World Bank staff calculations using MoFEDIP and UN COMTRADE data. Figure 3.18: Mining exports and mining royalties across Sub-Saharan Africa a. Selected African countries, 2012–2021 b. Across Sub-Saharan Africa, 2021 Mining Royalties (% of GDP) 8.0 2.5 BWA 6.3 6.3 mining reports (%) Mining royalties/ CMR 6.0 2 5.5 4.7 5.0 3.5 1.5 COD 4.0 TUN 2.7 2.5 1 SEN GHA 2.0 1.1 MAR NER BFA 0.5 ZAF - CIV ZWE 2012 2015 2018 2021 0 UGA Burkina Faso Ghana Senegal 0 10 20 30 40 South Africa Zimbabwe Mining exports (% of GDP) Source: World Bank staff calculations using MoFEDIP, OECD Global Revenue Statistics and UN COMTRADE data. Note: The dotted line is the predicted value for the relationship between mining exports and mining royalties. ⁵⁸ Additional mining sector income is also derived from various mining licences, fees, and charges, which is not reflected here. 60 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION A first challenge that may be driving Zimbabwe’s treaties have left too much scope for treaty shopping sub-optimal mining collection comes from and revenue leakages.⁵⁹ Beer and Loeprick (2020) vulnerabilities to profit-shifting and transfer- find that such outdated tax agreements (especially pricing initiatives from multinational enterprises with ‘investment hub’ countries) have an average (MNEs). The dominant role of MNEs in the mining revenue loss of 15–25 percent of CIT revenue, while sector contributes to a significant tax risk in the form providing little gain. of base erosion and profit-shifting (BEPS). MNEs can exploit gaps and mismatches between different A third issue comes from the introduction of countries’ tax systems to engineer debt levels, to mining tax exemptions, incentives and special continuously inflate borrowings between connected mining rates. Tax evasion tends to occur where entities, and to claim large deductions from interest particularly complex computations of CIT are or transfer profits into service hubs, established in required, as these discourage compliance and open low tax jurisdictions. All these issues allow MNEs to additional opportunities for profit-shifting. Miners artificially offset profits (or create ongoing losses), in Zimbabwe often complain that its fiscal regime is thereby reducing their corporate tax liabilities. too complicated. An ordinary miner is levied tax at 25 Garcia-Bernardo and Jansky (2023) use a new percent, yet it could obtain a special mining license, country-by-country reporting database to reveal the resulting in a 15 percent CIT rate. In addition, there distributional consequences of profit-shifting. They is an “additional rents profit tax” calculation, which estimate that MNEs worldwide shifted over US$850 further complicates compliance. The mining sector billion in profits in 2017. For Zimbabwe, they suggest also received several CIT tax incentives (see previous that around US$45 million was shifted in profits, section), which further increase the complexity, while resulting in a tax revenue loss of US$16 million, or also reducing the tax base and fairness of the tax 4.2 percent of total CIT. OECD (2015) analysis also system. Tax incentives can also undermine other suggest a BEPS revenue cost of 4–10 percent of economic policy objectives in the mining sector. For CIT for advanced and emerging economies. Lack of example, in recent years, lithium operators have effective enforcement measures means that very benefited from a deferral of the export tax on un- few company reassessments are issued (as reflected beneficiated lithium through tax incentives from the in tax data) and, hence, low expectations by MNEs of SEZs. This thus undermined the policy designed to ever being comprehensively audited. promote value-add processes in-country and to limit the illicit country minerals trade. The GoZ removed Zimbabwe’s risks of BEPS are further exacerbated SEZ tax incentives for the mining sector in 2023. by its outdated international bilateral tax agreements and tax treaties. Treaty shopping is The system for mining royalties is even more one of the most important BEPS concerns and is complex and could be costly to the GoZ. There are commonly used to route profits or gains via conduit differentiated rates for large- and small-scale miners, companies. In Zimbabwe, this can be exploited by and a split between monetary and in-kind payment. Yet, using provisions of older double-taxation agreements simulations from Laporte et al. (2021) of the average (DTAs) with lower-tax countries to avoid withholding effective tax rate (AETR) of gold mining suggest that tax, or reduce effective tax rates. Zimbabwe, similar the current system is costly to the GoZ (Figure 3.19). to most countries, has provisions to tax passive Zimbabwe has the absolute lowest AETR in Africa, and income through withholding instruments in tax has been declining over time (from 36 percent in 2012 law. However, anomalies in the drafting of older tax to 26 percent in 2020). In comparison, the average ⁵⁹ For example, the DTA with Mauritius (1992) allows non-residents to escape withholding on all sales, technical or similar outgoing services. This DTA is also problematic because of an outdated “most favored nation treatment” clause, which allows for matched, lower thresholds and concessional treatment of newer country DTAs, such as China (2016), with only a 2.5 percent dividend withholding. 61 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY across Africa is around 50 percent. The GoZ is accruing Recent government reforms additional revenue by purchasing gold at below-market prices using the monopsony power of Fidelity Printers Zimbabwe has made significant advances in (not reflected in the AETR calculation). However, this its international tax policy since joining the also encourages smuggling and thereby inadvertently Organisation for Economic Co-operation and contributes to revenue losses (Figure 3.19). Development’s (OECD) Global Forum and its African Initiative in 2023. Assistance from the African Tax Finally, trade data also suggest there is significant Administration Forum (ATAF) has also enhanced misreporting in mining exports, indicating revenue capability as regional issues can best be potential tax avoidance in the mining sector. When implemented following regional assistance practices, comparing Zimbabwe’s reported mineral exports to ensure that a fair share of tax is recouped from with UN COMTRADE’s global mining imports from the exploitation of resources. Zimbabwe, there is a considerable discrepancy (Figure 3.20). This takes the form of underreporting Zimbabwe adopted several changes to mining in some commodities such as gold (potentially legislation. These include amendments to the Mines indicating smuggling to avoid the country’s and Minerals Act (Chapter 21.05) in 2023, which mandated below-market rates), and overreporting introduced rebates for minerals sold domestically, in other commodities such as nickel (potentially or used in domestic beneficiation, as well as royalty reflecting masking other high-value goods such remission powers. Further changes in the Mines as lithium) and diamonds (capturing opportunities and Minerals Act, proposed by an amendment Bill in for capital flight). This situation has been persisting 2022, including information disclosure on beneficial for a prolonged period, as indicative of a paper ownership of a mining rights, are a welcome step to highlighting this issue as early as 2016 (Kwaramba improve transparency. et al., 2016). Both under- and over-reporting is likely coming at a significant cost to Zimbabwe’s Treasury To help improve mining revenue collection, the and indicates possible tax avoidance in mining. This GoZ has adopted a number of fiscal reforms. suggests that Zimbabwe is facing a challenge in It removed SEZ incentives for the mining sector appropriately auditing the mining sector. in 2023. The 2024 budget also included several Figure 3.19: Average effective tax rate on gold Figure 3.20: Mining exports (Zimbabwe reported mining (simulation), selected African countries versus mirrored export data), 2021 (2012–2020) 2,500 60 56 2,120 Average Effective Tax 54 54 50 50 2,000 Rate (%) 43 44 1,613 40 42 USD Million 1,500 36 30 26 1,063 1,000 20 2012 2013 2014 2015 2016 2017 2018 2019 2020 Burkina Faso Ghana Senegal 500 380 341 South Africa Zimbabwe 166 205 101 3 16 Source: World Bank staff calculations using simulations from 0 Laporte et al. (2021) from a medium-grade open pit mine (3g/t) Gold Nickel Chromium Diamonds Platinum and average price of US$1,100/oz (2015). This database includes Zimbabwe Export Data Mirrored Export Data the details of the tax regime (rate, base and exemptions) applicable to the prospecting phase and mining phase of a gold mining Source: World Bank staff calculations using MoFEDIP and UN project in 21 African countries from the 1980s. COMTRADE data. 62 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION amendments to assist with revenue collection, sector licensing regime. Going forward, it then including: becomes possible to consider the implementation of a reform measure from a 2019 World Bank study • No approvals for transfer of mining rights are in Zimbabwe, whereby the preferential royalty rates allowed without payment of capital gains tax and for small-scale gold miners can be reviewed along stamp duty, or any other tax on the value of the with other concessional rates for base metals that transaction. Failure of tax obligations renders allow for arbitrage. the asset disposal or mining lease as void. Key priorities going forward⁶⁰ • A 1-percent levy on “gross” proceeds domestically or for export, of lithium, black granite and other Targeted policy actions can help reduce tax cut or uncut dimensional stones and quarry avoidance in the mining sector and foster revenue stones. Gross amounts are generally determined mobilization. There is need to strengthen and simplify after deductions for royalties, VAT and Mineral transfer pricing safeguards, properly manage excess Marketing Corporation of Zimbabwe (MMCZ) interest deductions, improve tax treaty practices, commission. particularly to curtail treaty shopping, and strengthen investment negotiation practices (OECD BEPS Actions, • All disposal or lease of mining rights could and Beer and Devlin, 2021). There will also be some be lodged with the State, and reviewed and impetus to engage with the new OECD global efforts approved before they are implemented. for strategic reform of the wider CIT structure, which can have implications for how mining MNE profits are • Any lithium value-addition process that does not taxed (IMF, 2022). result in the production of lithium carbonate is not regarded as beneficiation and is liable to A first recommendation is to strengthen BEPS- an export tax. No licenses are granted to any related tax anti-avoidance, transfer pricing and tax prospective lithium company without approval revenue protection in Zimbabwe’s Tax Law. There of a beneficiation plan. is need for targeted legal reforms to avoid BEPS. Key efforts to doing so based on global best practice • The Minister may authorize collection of mining include the following: royalties “in kind” to be carried out by the MMCZ, the RBZ and Fidelity Printers (RBZ subsidiary). • Limit indefinite carry forward of tax losses. Systemic carry forward losses are a substantial The Ministry for Mines has also implemented a threat to tax revenue. Global practice suggests pilot cadastral survey of mines. This pilot was that they should be limited to a carry-forward completed in one province. The next step to take period of 7–10 years. is to compare the cadastral boundaries with the provincial mining titles register and all Minister • Limit interest deductions on debt to levels of of Mines-approved prospecting licenses, special economic activity (30 percent EBITDAA). An grants, exclusive prospective orders and registered interest limitation rule can place limits on the claims. Once the outcome of this work is evaluated size of deductions, to offset earnings stripping. and improved though a project plan and rollout, the Common practice is to limit net interest to bigger challenge is establishing a Mining Cadaster 30 percent earnings before interest, tax, Registry to increase management of the mining depreciation, and amortization. ⁶⁰ This section draws extensively on the World Bank’s 2019 TA report on “Zimbabwe Scoping Mining and Tax Administration”. World Bank, 2019b. 63 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY • Broaden taxable presence by expanding the reduces the tax base and opens opportunities for categories of a ‘permanent establishment’ (PE). tax avoidance: Important concepts such as business income, royalties, interest and dividends, and the • Simplification of CIT calculations and royalty tax for definition of permanent establishment, if not the mining sector. Consider simplifying ‘Additional robustly defined, erode the collections of tax rent resource profits’ to parallel the company from non-residents on source country profits. tax on profits, applied at a level of turnover that This should include a services PE (s19B Income captures large-scale miners. Similarly, consider Tax Act).⁶¹ ways to streamline royalty taxes. • Strengthen ‘anti-avoidance’ rules to capture • Optimize gold mining royalty base rates for large- schemes that have principal purpose of profit- and small-scale miners. This can help reduce tax shifting or economic value-shifting.⁶² avoidance opportunities and raise Zimbabwe’s AETR on gold production (which is the lowest in A second recommendation is to improve Zimbabwe’s Africa) and is most effective when aligned with international tax treaty framework and practices. efforts to stem illicit mineral flows across borders. Treaty shopping is one of the most important BEPS concerns and is commonly used to route profits or A fourth recommendation is to strengthen gains via conduit companies, using provisions of tax administration functions for mining audit Zimbabwe’s older DTAs with lower tax countries to assurance. Access to information is critical in avoid withholding tax, or reduce effective tax rates: ZIMRA’s compliance activities to augment early reviews and monitoring. ZIMRA needs to have • Change old DTAs that allow zero withholding by sufficient legislative powers and skills training to be conduit arrangements. There is a need to conduct able to obtain all relevant sales documents, inspect a study of treaty shopping practices in Zimbabwe premises, and analyze extractive minerals samples and whether anti-avoidance provisions can operate for validating valuations and payments in kind. Given in preference to, and override, treaty provisions. It the extensive functionality of MMCZ, it makes sense is recommended to turn off or renegotiate older to combine compliance efforts, enabled by the MMCZ treaties providing mining revenue leakages and/ Audit, Risk and Legal Committee and subject to the or introduce override measures. Minister’s consent: • Publish DTAs and agreed conventions for • Improve mining royalties’ audits by matching investment negotiations/transparency in tax data between ZIMRA, the Ministry of Mines (on agreements. This improved transparency will all minerals), and Fidelity Printers (on gold further help limit the revenue losses from older purchases). (outdated) DTAs. • Improve tax return reporting by designing company A third recommendation is that there is a need to tax schedule for disclosure of transfer pricing simplify CIT and royalties for the mining sector. (using international transaction data and clearly The current system is excessively complicated, identified nature of local operations).⁶³ ⁶¹ For example, consider including the furnishing of mining services and other technical services (19th Schedule). ⁶² (s98 of Income Tax Act, [Chapter 23.06]) to operate where schemes lack any economic substance (self-executing) if they have a ‘primary or a substantial purpose’ of tax avoidance and replace the ‘sole’/‘main’ purpose test or alternatively lower the threshold to a ‘not incidental purpose.’ Consider including evasion of a taxable presence by a multinational in targeted tax schemes. ⁶³ The Finance Act No.13 of 2023, introduced crucial definitions for manufacturers, wholesalers, retailers, and informal traders within the VAT Act which could be coordinated with company tax identification for groups engaging in cross-border trade. 64 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION • Improve audit and risk-management through data- of international studies on BEPS and mining tax matching and better transfer-pricing audits (e.g., reforms to consider the potential revenue impacts documentation checks, benchmarking routine for Zimbabwe. Conservatively, these reforms could services, limiting claims to fixed percentages). increase CIT revenue collection by 20–30 percent, and mining royalties by 2–10 percent (Table 3.3). By adopting the necessary legal and administrative This would place Zimbabwe’s mining revenue reforms, Zimbabwe can likely considerably raise collection more in line with regional countries such its mining sector revenue collection. We use a range as Botswana and Zambia. Table 3.3: Potential revenue impacts from mining sector tax reforms Mining sector improvement areas Potential revenue impact TAX LAW IMPROVEMENTS 1. Limit on carry forward losses 4–10 percent of CIT¹ 2. Limit interest deductions on debt to levels of economic activity (30 percent EBITDAA) 3. Broaden taxable presence by expanding the categories of a ‘permanent establishment’ 4. Strengthen ‘anti-avoidance’ rules to capture schemes that have principal purpose of profit shifting or economic value shifting 5. Simplification of CIT calculations Mining royalties lift (impact unclear) 6. Optimize gold mining royalty base rates for large and small-scale miners 15–20 percent of CIT² 7. Change detrimental old DTAs that allow zero withholding by conduit arrangements. Publication of DTAs, investment agreements and mining leases. TAX ADMINISTRATION IMPROVEMENTS 8. Improve mining royalties audits by data matching ZIMRA, the Ministry of 2-10 percent of mining royalties³ Mines, and Fidelity Printers. 9. Improve tax return reporting by designing company tax schedule for Indirect benefits to CIT and mining disclosure of transfer pricing. royalties. 10. Improve audit and risk-management through data-matching and transfer- pricing audit improvements (e.g., document checks, benchmarking routine services, limiting claims to a fixed share). TOTAL GAINS FROM MINING TAX LAW AND 20–30 percent increase in CIT. TAX ADMINISTRATION REFORMS. 2–10 percent increase in royalties (equivalent to 0.5–0.75% of GDP). Source: World Bank staff calculations. Notes: ST = Short term. MT = medium term. 1) Estimated using Garcia-Bernado and Jansky (2023), and OECD (2015) analysis of average revenue cost of Base-Erosion and Profit Shifting. Also see Crivelli et al. (2016) Erosion, Profit Shifting and Developing Countries. 2) Estimated using Beer & Loeprick (2020). 3) World Bank staff estimates. 65 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY 3.5 Health excise taxes SSA countries declined by 40.8 and 46.0 percent, respectively (Figure 3.21a). Health taxes are excise taxes applied to products that generate health-related negative externalities • Deaths and DALYs lost per 100,000 people due and internalities, particularly tobacco, alcohol, and to alcohol use have increased by 17.9 and 24.4 sugar-sweetened beverages (SSBs). They provide an percent, respectively, in Zimbabwe between important economic benefit by targeting consumption 1990 and 2019 whereas the trends in other of products that generate negative externalities and SSA countries declined by 30.0 and 27.5 percent, internalities. Increases in well-designed health taxes respectively (Figure 3.21b). can discourage the consumption of products that cause health damage, thereby reducing mortality and • Deaths and DALYs lost per 100,000 people due to morbidity, and ultimately leading to positive socio- diets high in SSBs consumption have increased economic outcomes (Sassi et al., 2013). Also, health by 33.8 and 45.0 percent, respectively, in taxes have the potential to generate significant Zimbabwe between 1990 and 2019 whereas the excise tax revenues for the fiscus. trends in other SSA countries declined by 27.7 and 24.5 percent, respectively (Figure 3.21c). Tobacco, alcohol, and SSBs are relatively large and growing contributors to mortality and morbidity in Health excise taxes in Zimbabwe Zimbabwe. Combined, they contributed to 12.4 and 8.1 percent of all deaths and disability adjusted life Although tobacco and alcohol excise taxes are years lost (DALYs) in 2019, respectively. Since 1990, levied in Zimbabwe, the tax burden (share of tax mortality and morbidity due to tobacco, alcohol, and in the retail price) is substantially lower than in SSBs in Zimbabwe has grown rapidly, more than other developing countries. For instance, in 2020 other SSA countries where mortality and morbidity total tobacco taxes constituted 29.3 percent of the due to tobacco, alcohol, and SSBs is declining. retail price (WHO, 2021a), which is significantly below the 75 percent minimum target recommended by • Deaths and DALYs lost per 100,000 people due the World Health Organization (WHO, 2023a). Taxing to tobacco use have increased by 12.4 and 14.8 unhealthy foods is an important strategy to reduce percent, respectively, in Zimbabwe between consumption of these foods and is a source of 1990 and 2019 whereas the trends in other substantial fiscal revenue. Figure 3.21: Mortality and morbidity due to tobacco, alcohol, and diets high in SSBs in Zimbabwe and SSA, 1990–2019 a. Tobacco b. Alcohol c. Diets high in SSB consumption 3,000 2,000 50 DALY’s per 100,000 DALY’s per 100,000 DALY’s per 100,000 40 1,500 2,000 30 1,000 20 1,000 500 10 0 0 0 1990 1994 1998 2002 2006 2010 2014 2018 1990 1994 1998 2002 2006 2010 2014 2018 1990 1994 1998 2002 2006 2010 2014 2018 Zimbabwe Sub-Saharan Africa Zimbabwe Sub-Saharan Africa Zimbabwe Sub-Saharan Africa Source: GBD (2019). Note: SSBs are sugar-sweetened beverages. 66 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION Tobacco taxes in Zimbabwe are generally lower is treated equally, i.e., the same tax is applied to beer, than in peer countries. Direct comparisons of wine, and spirits. This tax structure generates several tobacco taxes are challenging due to variations in tax challenges, including varying effective tax rates on structures between countries. Zimbabwe applies a different products. Tax rates would be required to mixed system, applying both specific and ad valorem increase by several orders of magnitude on beer and taxes. The specific tax of US$5 per 1,000 cigarettes is spirits to match alcohol tax rates in peer countries. similar to Nigeria, but significantly lower than other peer countries including Ghana, Kenya, and South Trends in tobacco and alcohol excise tax revenues in Africa. The ad valorem rate of 20 percent of the ex- Zimbabwe have been volatile, reflecting changes in factory price is also lower than other countries in tax policies, economic volatility, and variations in tax the region. compliance. Both tobacco and alcohol excise revenues fell in 2019 but have since recovered strongly. Between Cigarettes taxes and prices are generally lower 2018 and 2022, tobacco and alcohol excise revenues than in peer countries. WHO data on the price of increased by 30 and 62 percent, respectively (Figure the Most Sold Brand of cigarettes in the African 3.23a). Alcohol generates significantly more excise region show that prices of cigarettes in Zimbabwe tax revenue than tobacco, reflecting higher levels of are marginally lower than the median country in consumption. Furthermore, alcohol excise revenue 2022 (Figure 3.22). However, the excise tax share is dominated by beer, accounting for 79 percent of is significantly lower than countries with even alcohol excise revenue. lower prices, highlighting the relatively low rate of excise taxes in Zimbabwe. The excise tax accounts Tobacco and alcohol excise tax revenues are lower for 22 percent of the price, lower than WHO’s than global averages. Tobacco and alcohol excise recommendation of 70 percent. It has also declined tax revenues amounted to 0.07 and 0.29 percent from 29 percent in 2010, highlighting how taxes have of GDP in 2022, respectively (Figure 3.23b). This not increased in line with price increases. represents no increase in revenue since 2018 for tobacco, and a small increase from 0.24 percent for Alcohol tax rates are also significantly lower than alcohol. Relative to GDP, tobacco excise tax revenues in peer countries. Alcohol is taxed differently on are significantly lower than the global average of 0.6 locally produced and imported brands.⁶⁴ All alcohol percent of GDP, while alcohol is slightly less than Figure 3.22: Decomposed price of the most sold brand of cigarettes in African countries, 2022 Price per pack (USD) 10 8 6 4 2 0 Congo, Rep. Congo, DR Guinea-Bissau Ethiopia Benin Chad Eq. Guinea Niger Malawi Togo Rwanda Burundi Comoros Cameroon Mauritania Madagascar Burkina Faso South Sudan Zimbabwe Zambia CAR Cote d’Ivoire Mali Senegal Ghana Nigeria Uganda Mozambique Sao Tome Gabon Tanzania Liberia Gambia Angola Algeria South Africa Cabo Verde Eswatini Lesotho Namibia Kenya Botswana Mauritius Seychelles Excise tax Net of excise tax Source: WHO (2023b). ⁶⁴ There is a volumetric excise US$0.25 per liter for the locally produced, but an alcohol-content based specific tax of US$1 per liter of Absolute Alcohol (LAA) plus 30 percent of the CIF value for imported brands. 67 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY the global average of 0.3 percent of GDP (Blecher Potential impact of proposed SSB excise tax et al., 2023). Specific tax rates will need to increase just to maintain the revenue level over time as GDP The 2024 Budget proposed implementation of rises. This highlights significant scope for tobacco an excise tax on SSBs. The initial proposal was and alcohol excise tax increases in Zimbabwe, not to implement an excise tax of US$0.02 per gram just to maintain levels of relative revenue, but also to of sugar in SSBs from January 1, 2024. Since the increase revenues toward global benchmarks. announcement, the Ministry has since reduced the proposed excise tax to US$ 0.001 per gram of sugar. Potential impact of tobacco and alcohol As with other health taxes such as tobacco and alcohol excise tax increases taxes, SSB taxes typically increase the price of the product, thereby reducing consumption and resulting Increases in excise tax rates have the potential to in reductions in its associated mortality and morbidity. raise tax revenues. Increasing the specific taxes on tobacco and alcohol by 50 percent and increasing The impact of the proposed excise on sales and the ad valorem tax on tobacco by 40 percent are tax revenue will be determined by the impact on expected to increase excise tax revenues by 32 prices. SSBs are generally not as inelastic as tobacco and 45 percent relative to 2022, respectively. This and alcohol, and may even be relatively elastic due will generate an additional US$40 million, or 0.14 to the large number of substitutes available. This percent of GDP. Larger tax increases in the specific may result in SSB taxes generating a smaller tax tax on tobacco and alcohol of 100 and 70 percent, revenue yield compared with other health excise respectively, will generate even larger increases in taxes. The impact on prices will be mediated by the excise tax revenues. Tobacco and alcohol excise tax variation in contemporary prices between brands revenues are simulated to increase by 43 and 64 and within the market, but also due to the tax having percent, respectively, generating US$57 million in a different effect on prices based on the variation in incremental revenue, amounting to 0.18 percent sugar content between brands.⁶⁵ Brands with more of GDP. This would also reduce the consumption of sugar will pay more excise per liter, while there will tobacco and alcohol, thereby reducing tobacco- and be no impact on prices for brands with artificial alcohol-related mortality and morbidity. sugars (including diet brands). Figure 3.23: Tobacco and alcohol excise tax revenue in Zimbabwe, 2019–2022 a. US$ million b. Share of GDP 100 0.30% Excise revenue (US million) Percentage of GDP 80 0.20% 60 40 0.10% 20 0 0.00% 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Tobacco Alcohol Tobacco Alcohol Source: World Bank staff calculations using MoFEDIP data. ⁶⁵ Sugar content variation across SSB brands means excise ranges from US$0 (for drinks with artificial sweeteners) to US$0.14 per liter. 68 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION World Bank estimates suggest that the tax will • Revenues: Property taxes have strong revenue result in an increase in prices of 17 percent.⁶⁶ The potential in general, with particularly strong variation in prices will range from 11 percent on gains available in rapidly urbanizing areas with smaller volume and lower sugar content beverages, rising land values. up to 21 percent on larger volume and higher sugar beverages. Based on a pre-tax market volume of mmovable: The tax base, i.e., buildings and land, • I 520 million liters, the impact on sales will be a cannot be moved away when taxed or when decline of 17 percent to 432.2 million liters.⁶⁷ This taxes are increased. This improves efficiency will yield around US$49.6 million in excise tax and reduces the distortive nature of the tax. revenue. A less elastic scenario would result in a smaller decline in sales of 12 percent and a larger • Benefit Tax: It can be seen as a benefit tax, if the revenue yield of US$52.7 million, while a more services taxpayers receive (roads, street lighting, elastic scenario would result in a larger decline police, etc.) approximate the value they pay in in sales of 22 percent and a smaller revenue yield property tax. of US$46.4 million.⁶⁸ Based on South Africa’s SSB tax, it would be prudent to anticipate a 20 percent • Accountability: There is a link between the quality discount on revenue collections. This reduces the of services funded locally and property values estimate of excise tax revenue to US$39.7 million, (hence the tax base), creating positive incentives or between US$42.2 million and US$37.2 million and accountability for local governments. across scenarios. • Land Management: It can promote the productive 3.6 Property and wealth taxes 69 use of land, rather than speculative land holding. Property taxes offer several strengths to improve Zimbabwe’s property-related taxes revenue performance, especially for local governments. Urban land, and the physical properties Zimbabwe has a range of different property-related on this land, represent the largest source of untapped taxes at the central and local government levels municipal revenues in many developing countries. (Table 3.4). This includes: (i) a recurrent property Broad asset ownership means that taxing such land/ tax (‘property rates’), as well as stamp duty, estate properties can raise significant public revenues, as duty, and VAT applied to properties; (ii) capital gains evidenced in Kigali in Rwanda and Lagos in Nigeria,⁷⁰ tax; (iii) a forthcoming new wealth tax; and (iv) the and these revenue sources can continue to rise as special unit tax. This section focuses on the potential cities become more productive. Property taxes are for strengthening the ‘property rates’ system and increasingly popular for five reasons: wealth taxes. ⁶⁶ Assuming an increase in the pre-tax prices of 5 percent to account for the effect of inflation. ⁶⁷ Price elasticity of demand of -1.18 applied using the mid-point formula, based estimates in South Africa (Stacey et al., 2017). ⁶⁸ Price elasticity of demand of -0.80 and -1.6 applied in the less and more elastic scenarios, respectively. ⁶⁹ For details, see the Zimbabwe PFR background note by Murray and Franszen (2024), “Property Taxation in Zimbabwe”. ⁷⁰ In Kigali, Rwanda, estimates suggest a 1 percent levy tax on land and property could generate US$60 million per year, over four times the city’s own-source revenues. These taxes can have a significant impact on the ability of municipal government to deliver public infrastructure and services. In Lagos, Nigeria, reforms to property taxes that have been implemented since 1999 have helped the state to increase public revenues from taxes five-fold to over US$1 billion in 2011 (Collier et al., 2021). 69 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Table 3.4: Property-related taxes in Zimbabwe Tax Tax Base Significant Exemptions Rate When levied Central Stamp Duty Market value of property 1–4% plus At sale fixed US$ (progressive) Estate Duty Market value of estate Family home 5% At (including property) inheritance VAT Gross sale price of 15% At sale commercial building Capital Gains Capital gain (including Seller’s age>55 20% (from At sale Tax property) Sale proceeds used for next Feb 1, 2009) residence Wealth Tax Market value of residential Properties under US$250k 1% (tbd) Recurrent (proposed) property Principle private dwelling (annual) Owner’s age>65 Local Special Unit Ha of farmland (rural) US$1–3 per Recurrent Tax hectare (annual) Property Buildings (urban) Market value Set by local Recurrent Rates (non-residential) council (monthly Area-based formula billing) (residential) Property rates However, the same data also show a dramatic uptick in rates for 2021 and 2022, to 0.9 and 1.1 percent Zimbabwe’s recurrent property tax (referred to as of GDP, respectively. This uptick is also reflected in ‘rates’) is among the most important own-source data on rates in absolute US dollar equivalent terms, revenue (OSR) for funding the public services which rose from US$35 million in 2020 to US$321 provided by local government entities, especially million in 2021. in urban areas. The 2017 Public Expenditure Review estimated property taxes to generate about 1 percent The efficiency of the ‘rates’ system is supported by of GDP from 2011–2014. This accounted for the several factors: second-most-important OSR after sales (revenues received from the provision of services such as water, 1. Simplicity and familiarity: The area-based rates sanitation and refuse removal) (World Bank, 2017). for residential properties follow a straightforward More recent data shared by the authorities for the formula, enhancing administrative ease and purpose of this report show a continued decline in taxpayer comprehension. Moreover, the system rates revenue as a share of GDP from 2009, reaching has been in place since at least 1995, rendering 0.1 percent of GDP in 2019 and 2020 (Figure 3.24). it familiar to taxpayers. 70 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION Figure 3.24: Zimbabwe’s rates revenues, 2009–2022 1.5% $400 $300 Share of GDP USD millions 1.0% $200 0.5% $100 0.0% $0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Property Rates - share of GDP Rates - USD millions Source: World Bank staff calculations using MoFEDIP data. 2. Enforcement mechanisms: Local governments This means that rates do not take into account possess some effective enforcement tools, such rising land values. The updating of valuation rolls is as utility disconnection for non-payment. likely impeded by local councils’ lack of systems to systematically collect property transaction price data, 3. Billing efficiency: Some local councils limited data on land and building characteristics, consolidate rates bills with other utilities, outdated cadasters, and a lack of investment in streamlining billing and payment processes. valuation processes. 4. Local autonomy and accountability: Local The application of a single property tax rate to all governments have the flexibility to tailor rates properties in a valuation zone may also lead to according to local fiscal requirements, taxpayer unfair tax burdens. Zones may in practice contain capacities, and efficiency considerations. properties of different qualities and values. When all are taxed at the same US$/m² rate, some may be Despite these strengths, the rates system is far from over-taxed, compromising affordability and fairness, operating at optimal capacity. Recent information while others may be under-taxed, compromising on collection technologies could not be acquired for revenue performance. this study. However, in 2016, it was estimated that 95 percent of bills were paid in cash and in person, Wealth tax every month at tax offices (Chakasikwa, 2017). As a result, long queues were reported at tax offices. Low A new wealth tax for central government was digitization and automation represent an inefficient introduced as part of the 2024 budget. This tax will be use of taxpayers’ and tax collectors’ time, raise the levied at a rate of 1 percent on all residential properties risk of human error and rent-seeking, and are an worth more than US$250,000, that are owned by incentive for tax avoidance. individuals younger than 65 years. The tax is also not chargeable on a “principal private dwelling”, i.e., a Outdated valuation rolls impede property tax building owned by an individual and used as their sole valuation and administration. Despite a rule that or main residence. The principal private dwelling must valuation rolls must be updated every 3–10 years, also have a title deed (and so a primary residence that many have not been updated for over a decade. is not formally registered will be taxable). The taxpayer For example, Harare’s General Valuation Role was is the owner, and may be a person, a trust, a company, last updated in 2006 (Finn and Bandauko, 2024). or a foreign national (Mphiri, 2024). 71 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY The wealth tax’s performance is likely to be weak to even identify candidate properties for auditing and could lead to a tax that is costly to administer and registration. Authorities will also lack data and while raising little in revenues. This is because of credibility to contest self-declared values without three challenges: (i) a narrow definition of the tax base; sound, transparent and well-acknowledged valuation (ii) enforcement challenges and strong incentives to systems and data. misreport; and (iii) property valuation deficiencies. Priorities for Improving Zimbabwe’s First, the wealth tax policy defines a tax base property and wealth taxes that is too narrow. The exclusion of principal private dwellings and properties worth less than Zimbabwe may reap multiple benefits from US$250,000 is likely to result in few properties strengthening its existing rates system. The rates qualifying for the wealth tax. It is likely that very few system offers clear areas for improvements that are residential properties command market values above supported by international best practice. Reforms US$250,000 that are not principal private dwellings. could improve revenue generation, fairness, and Once properties that are owned by people over 65 affordability, while also building a strong basis for are excluded, the tax base is narrowed further. The the collection of related taxes and fees such as age limit of 65 years may also create a fairness the wealth tax and local utility fees. This justifies challenge, excluding older owners of valuable second focusing investments to strengthen the design or multiple residences. and performance of the rates through three key recommendations: Second, the wealth tax will face enforcement challenges and strong incentives for misreporting 1. Efficiency of administration: Valuation rolls by property owners. Properties worth just under should be reviewed for completeness of the US$250,000 face no wealth tax obligation, whereas tax registry, and registration drives conducted properties worth just over US$250,000 face a 1 where deficiencies are identified. Collection percent tax on their entire value, creating a strong efficiency may be improved by electronic ‘threshold effect’ and incentive to declare just below billing and payment systems, complemented by the eligibility threshold. It will be challenging to target consolidated billing approaches, to reduce the audits to detect or deter such misdeclarations, or to burden of tax payments and enforcement. The credibly challenge declared values, making the tax effectiveness of enforcement mechanisms could hard to administer. be reviewed and reinforced. Local government capacity constraints in these areas should be Third, property valuation deficiencies mean that reviewed, to design any appropriate central among the few eligible properties, even fewer are government technical assistance to improve likely to be taxed, and taxed at the correct market rates administration. value. The preparation and maintenance of valuation rolls is the responsibility of local authorities, and 2. Effective appraisals: Property values should be these may be outdated and/or incomplete in many regularly reviewed and updated. Capacity could cities. Furthermore, unlike non-residential buildings, be strengthened through central government residential properties are assessed by local support to local governments, including for the authorities using an area-based approach that does development and upkeep of computer-aided not aim to produce a “market value” assessment. mass appraisals (CAMAs) enhanced by new Hence, very little data may be available on the technologies for data collection and processing. market value of residential properties, even where A regularly updated CAMA can be used to review valuation rolls are completed. Without adequate data and update value zones, and to nuance appraisal on buildings and values, authorities may be unable formulae by identifying and incorporating 72 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION key coefficients that explain significant price 1. Lower the exemption threshold to capture variations within value zones. a more meaningful segment of the property market. The exemption threshold should be 3. Affordability: Transparent data on the rates informed by a mass appraisal exercise such structure, rates as a share of incomes, and as the CAMA, and aim to improve revenue principles followed in rate-setting could not be performance while maintaining affordability. It obtained for this analysis, but are imperative should also consider the overall tax burden, when to assess and ensure affordability. Such data rates, the wealth tax, and other property-based should be collected to analyze the tax burden, taxes are combined. considering the burden of rates in combination with other property-related taxes (including 2. Avoid threshold effects by taxing only the the wealth tax). In addition, with any technical property value above the threshold. This can updating of property values and registration, tax reduce incentives to ‘bunch’ marginal property increment ceilings may be introduced to limit the values just below the threshold, and reduce annual increase in each taxpayer’s liabilities, to perceptions of unfairness. separate the technical updating of the valuation role from the political challenge of raising taxes, The two above measures are complementary: and to improve predictability and affordability a lower exemption threshold will be more for taxpayers. acceptable and affordable to taxpayers when combined with the exemption of values below that Back-of-the-envelope calculations suggest reforms threshold. Exempting the portion of the property could improve Zimbabwe’s property tax revenues by value below the chosen threshold greatly reduces up to 0.4 to 1 percent of GDP. International benchmarks the burden on each taxpayer, compared with a suggest a ceiling for property tax revenues of around system where the whole value is taxable at a flat 2 percent of GDP, which likely reflects both technical rate. The GoZ could even consider a progressive feasibility and acceptability, affordability, and fairness schedule of rates and threshold. to taxpayers. A more pessimistic ceiling could mirror that of the top performer in SSA, South Africa, which In addition to policy changes, administrative raised 1.4 percent of GDP as property tax in 2019. measures would also improve the wealth tax Rates in Zimbabwe raised about 1 percent of GDP in performance: the most recent data available for this analysis (2022) (Figure 3.24). Taken together, effective reforms may 3. The central government can support local have the potential to raise recurrent property tax authorities to improve property appraisals, revenues to a maximum of 1.4–2 percent of GDP, or including the roll-out of CAMA. This would by 0.4–1 percent of GDP assuming baseline revenues offer a credible basis for auditing self-declared are still 1 percent of GDP. values for the administration of the wealth tax, while simultaneously supporting revenue The initial performance of the new wealth tax is generation from local property rates. Thanks likely to be weak due to the narrow definition of the to this complementarity with the rates system, tax base and valuation challenges. However, two key such an investment is likely to be cost-effective, adjustments to the tax schedule and tax base could despite the narrow base of the wealth tax itself, transform it to a high-performing tax with strong and may help inform future policy changes to complementarity with other revenue instruments: the wealth tax. 73 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY 3.7 Tax administration analysis on compliance risks, and an effective independent internal and external oversight of Improvements in tax administration are critical operational and financial performance. It also has to improving domestic revenue mobilization. strong legislation on advanced tax rulings across its International evidence suggests that almost various tax acts (Sparkman et al., 2018). all successful revenue reform episodes in developing countries were underpinned by revenue Nonetheless, ZIMRA also faced significant issues administration measures, regardless of their of tax compliance, risk management, timely filing income group and the range of tax policy measures of declarations, supporting voluntary compliance, (Akitoby et al., 2018; Jung, 2023). Tax administration and efficient revenue management. The IMF’s 2018 measures are essential to facilitate and enforce tax TADAT Performance Assessment Report noted that compliance, which reduce the tax gap and thereby ZIMRA suffered from a set of weaknesses including: increase the tax yield (Brondolo et al., 2008). The (i) a suboptimal IT system for tax administration; (ii) effectiveness of tax administration relies to a great inadequate and inaccurate taxpayer registration extent on the risk management systems in place to database; (iii) lack of systematic initiatives to identify identify, monitor, and mitigate risks to meet taxpayer unregistered taxpayers; (iv) underperforming e-Service obligations (registration, filing of tax declarations, platform; (v) weak on-time filing and payment paying taxes on time, and reporting) (Chooi, 2022). compliance; (vi) deficient process for managing manual returns; (vii) inefficient VAT refund processes; Strengths and weaknesses of (viii) the absence of a compliance risk management Zimbabwe’s tax administration framework; (ix) lack of an annual audit program and centralized risk-based case selection process; (x) lack The Zimbabwe Revenue Authority (ZIMRA) is of a clear headquarters function; (xi) duplication of built on a strong foundation of human resources, duties and responsibilities across functions; and (xii) analysis, and independent oversight. The IMF’s lack of a well-developed and transparent framework 2018 Tax Administration Diagnostic Assessment Tool to manage integrity. This resulted in relatively low (TADAT) assessment notes that ZIMRA’s strengths scores (see Box 3.1), with many areas receiving a “D” include a professional, well-trained competent (inadequate performance) or “C” (weak performance) staff, readily available taxpayer information, strong ratings (Sparkman et al., 2018). 74 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION Box 3.1. Zimbabwe’s TADAT performance in 2018 The IMF’s Tax Administration Diagnostic Assessment Tool (TADAT) provides an objective, standardized performance assessment of a country’s system of tax administration (including insights into tax policy impacts on tax administration). A four-point ‘ABCD’ scale is used to score each dimension and indicator: • ‘A’ denotes performance that meets or exceeds international good practice. • ‘B’ represents sound performance (i.e., a healthy level of performance, but below international good practice). • ‘C’ means weak performance relative to international good practice. • ‘D’ denotes inadequate performance, and is applied when the requirements for a ‘C’ rating or higher are not met. A ‘D’ score is also given in situations where there is insufficient information available to assessors to determine and score the level of performance. Table B.3.1: Summary of Zimbabwe’s 2018 TADAT Performance Assessment INDICATOR Score SUMMARY EXPLANATION OF ASSESSMENT POA 1: Integrity of the Registered Taxpayer Base P1-1. Accurate and reliable taxpayer D The registration information held in the central information. national computerized database is unreliable. P1-2. Knowledge of the potential C Ad hoc actions have been undertaken to detect taxpayer base. unregistered taxpayers. POA 2: Effective Risk Management P2-3. Identification, assessment, D ZIMRA conducts studies and analyses of compliance ranking, and quantification of risks but lacks a structured risk assessment process. compliance risks. P2-4. Mitigation of risks through a D ZIMRA does not have a compliance improvement plan. compliance improvement plan. P2-5. Monitoring and evaluation of D There is limited monitoring and evaluation of compliance compliance risk mitigation activities. risk mitigation activities by senior management. P2-6. Identification, assessment, and D A documented process is in place to identify, assess, mitigation of institutional risks. and prioritize institutional risks, along with Business Continuity Plans, but staff are not trained in disaster recovery procedures. POA 3: Supporting Voluntary Compliance P3-7. Scope, currency, and D ZIMRA provides a wide array of information and accessibility of information. services to taxpayers, through various channels, that are current and available at no cost to taxpayers; however, the time taken to respond to taxpayer requests is not tracked. 75 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY INDICATOR Score SUMMARY EXPLANATION OF ASSESSMENT P3-8. Scope of initiatives to reduce D A secure on-line portal is available to taxpayers to taxpayer compliance costs. access account details, but much work remains to reduce taxpayer compliance costs. P3-9. Obtaining taxpayer feedback on C ZIMRA regularly seeks performance feedback products and services. from taxpayers through a variety of channels. Ad hoc input is also sought from taxpayer groups and intermediaries on deficiencies in processes and design of new products. POA 4: Timely Filing of Tax Declarations P4-10. On-time filing rate. D The data provided to assess taxpayers on-time filing is unreliable. P4-11. Use of electronic filing facilities. D Electronic filing facilities are in place but are often unavailable. POA 5: Timely Payment of Taxes P5-12. Use of electronic payment A All taxes are paid electronically. methods. P5-13. Use of efficient collection systems. A A broad range of withholding at source and advance payment arrangements are in place. P5-14. Timeliness of payments. D Data is not sufficiently reliable to determine the timeliness of payments. P5-15. Stock and flow of tax arrears. D The stock and flow of tax arrears cannot be properly assessed, as the data is unreliable. POA 6: Accurate Reporting in Declarations P6-16. Scope of verification actions D Tax audits cover all core taxes using a range of audit taken to detect and deter inaccurate types, but there is no documented annual tax audit reporting. program, nor automated data matching to verify reported tax declarations against third party information. P6-17. Extent of proactive initiatives to D There is no system of public binding rulings in place encourage accurate reporting. although the legal framework for ATR exists. P6-18. Monitoring the extent of C ZIMRA monitors inaccurate reporting through tax gap inaccurate reporting. studies but results are not independently reviewed, made public, or used to improve accuracy of reporting. POA 7: Effective Tax Dispute Resolution P7-19. Existence of an independent, B A multi-layered, tiered dispute resolution review workable, and graduated dispute mechanism is in place, is used, and has independence, resolution process. but auditors are not explicitly required to inform taxpayers of dispute rights and procedures. 76 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION INDICATOR Score SUMMARY EXPLANATION OF ASSESSMENT POA 7: Effective Tax Dispute Resolution P7-20. Time taken to resolve disputes. D Delays in the administrative review process results in less than 90 percent of the cases being resolved within 90 days. P7-21. Degree to which dispute B ZIMRA analyzes tax dispute outcomes of a material outcomes are acted upon. nature, and when necessary, proposes and initiates administrative, policy and legislative changes. POA 8: Efficient Revenue Management P8-22. Contribution to government tax C ZIMRA provides extensive input into government’s revenue forecasting process. budgeting processes, but VAT refund levels and tax losses are not monitored. P8-23. Adequacy of the tax revenue D The ZIMRA and MOFEDIPED accounting systems do not accounting system. interface. P8-24. Adequacy of tax refund D The VAT refund system is deficient and the time taken processing to process refunds is not monitored. POA 9: Accountability and Transparency P9-25. Internal assurance B Internal audit is independent, reports directly to an mechanisms. Audit Committee, has an audit scope covering all key operational areas, and its operations are reviewed annually by OAG. Staff integrity assurance mechanisms are in place. P9-26. External oversight of the tax C+ External independent oversight of ZIMRA’s operational administration. and financial performance is well established and systematic, and ensures recommendations are acted upon. The independent inquiry process on suspected wrongdoing and maladministration is not well developed. P9-27. Public perception of integrity. C ZIMRA conducts public perception surveys twice a year, but the results are not made public. P9-28. Publication of activities, results, C ZIMRA prepares annual reports of its financial and and plans. operational performance and submits them to MOFEDIPED, but strategic and annual operational plans are not made public. Source: Rebecca A. Sparkman, Thabo M. Letjama, Denise Edwards, Maurice Ochieng, Alan Robidoux, and Mark A. Crawford (2018) Zimbabwe TADAT Performance Assessment Report, September 2018. 77 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Recent tax administration reforms now customized based on the different needs and attributes of specific taxpayer segments (large, In response to the challenges highlighted by medium and small client offices). ZIMRA and has also the 2018 TADAT report, ZIMRA has embarked implemented the Enterprise-wide Risk Management upon a broad set of reforms that are expected System, guided by its Corporate Risk Management to significantly improve Zimbabwe’s tax Policy to foster sound risk management policies. In administration performance. Most notably, in addition, ZIMRA has recently adopted the NIST Cyber October 2023, ZIMRA introduced the new Tax and Security Framework that ensures the organization Revenue Administration System (TaRMS). This new can identify, protecting, detecting, responding and nationwide system was developed following technical recovering from cyber security threats. assistance from World Bank, IMF and AfDB between 2019 and 2023, to put in place structures to enhance Finally, ZIMRA has also introduced its new efficiency in tax collection and strengthening public Fiscalization Data Management System (FDMS) to accountability of tax administration. The TaRMS gives improve VAT compliance using electronic fiscal a 360-degree view of taxpayers, linked to commercial devices (EFDs). This system interfaces with existing banks, and will ensure that taxpayers have direct hardware and virtual fiscal devices to directly report access to their ZIMRA accounts and can file returns transactions at taxpayers’ point of sale. The FDMS online, pay online and receive refunds through linked provides a self-service portal to taxpayers, approved bank accounts. The system can validate tax returns suppliers, and manufacturers of electronic fiscal and generate own returns where there has been no devices, to help detect tax fraud and increase VAT submission by the taxpayer. It also has a back-end tax compliance. solutions to allow additional capabilities for data analysis and reporting. It also allows for a quick way Potential impacts of tax administration to integrate data from different tax types, to assist in reforms on revenue collection a more targeted audit system. To consider the potential effects of ZIMRA’s TaRMS is in its rollout phase but, once fully reforms on revenue collection, we first view them operational, the system is anticipated to make as a broad improvement to the tax administration substantial progress across various areas of the system, suggesting a potential impact of 1.4–1.8 TADAT assessment. It is designed to improve the percent of GDP. Adan et al. (2023) use two metrics taxpayer registry, strengthen risk management to assess the impact of tax administrative reforms through data-matching across source systems, on revenue collection—countries’ average score in support voluntary compliance and accurate report TADAT, and in the International Survey on Revenue through pre-filling of tax declarations, and enable Administration (ISORA). Using a Hausman-Taylor the timely filing and payment of taxes. It should also cross-country panel regression, they find that improve efficient revenue management through countries’ strengthening their scores from the 40th automatic processing of refunds. to the 60th percentile⁷¹ is associated with an increase in tax revenue by 1.8 percentage points (pp) of GDP ZIMRA’s risk management and compliance efforts using the ISORA database, or 1.4 pp using the TADAT are further aided through an integrated focus on database. The event-study analysis reveals that the customer segmentation and a new risk management revenue yields are increasing over time to more than system. Most tax administration services are 3 pp after the sixth year (Adan et al., 2023). ⁷¹ This is not an uncommon change, as 17 countries experienced such an improvement in their ISORA’s index from 2014 to 17. 78 CHAPTER 3: OPPORTUNITIES FOR DOMESTIC REVENUE MOBILIZATION Another approach is to focus explicitly on ZIMRA’s Key priorities for ZIMRA tax administration increased use of digital technologies to improve tax and revenue mobilization going forward administration, which suggests a similar potential impact of 1.6–2.8 percent of GDP. Recent literature To realize on Zimbabwe’s potential for improved offers rich empirical evidence that quantifies tax administration, one priority lies in accelerating the revenue yields from the adoption of digital the rollout of the TaRMS. ZIMRA needs to complete technologies in tax administration (Table 3.5). Country implementation of the TaRMS by rolling out studies from Eswatini, Peru and China suggest that the remaining modules. The roadmap includes the introduction of e-filing and e-payment increases prioritizing modules that will facilitate taxpayer the share of on-time tax payments, reduces registration and particularly the informal sector. compliance costs, and results in higher reported net Three key priorities in this regard are: tax liability for taxpayers with a higher risk of evasion. Similarly, the introduction of EFDs can improve VAT • Interfaces with source data systems: ZIMRA compliance, as shown in Ethiopia and Rwanda. should work on establishing robust interfaces Finally, Nose and Mengistu (2023) use a Hausman- with other government systems, including Taylor cross-country panel regression to consider ASYCUDA, SAP-FI, Registrar of Companies, the impact of the adoption of digital technologies Deeds & Intellectual Property, Civil Registry, the and services in tax administration (as measured by payroll system, national identification systems, ISORA and TADAT) on tax collection. This shows that pensions systems, the PFM system and banks. digital adoption is associated with larger tax revenue collection and a reduction in the VAT compliance gap. • Real-time transfers of taxes collected by They find that increasing e-filing adoption by half third parties: ZIMRA should collaborate could boost tax revenues by 1.6 percent of GDP. The with banks and financial institutions across use of large-scale data-matching systems to detect Zimbabwe, including those in rural areas, to inaccurate reporting leads to significant revenue establish reliable mechanisms for the swift impacts—over and beyond mandatory online filing transfer of collected taxes, considering the and payments—of 1.6–2.8 percent of GDP. This could varying levels of banking infrastructure. provide another potential estimate of the revenue ZIMRA will need to prioritize the discussions gains from the TaRMS system. for banks and other third parties that collect Table 3.5: Evidence of tax gains from strengthened tax administration systems and digital technologies Study Country Reform Tax gains (% of GDP) Adan et al. (2023) Cross-country Broad improvements in tax ISORA (1.8%) administration systems from 40th to 60th TADAT (1.4%) percentile Nose and Mengistu (2023) Cross-country Mandatory online filing and payments 1.6–3.3% Using large-scale data matching systems 2.8–5.6% for accurate reporting and compliance Santoro, Amine, and Magongo (2022) eSwatini E-filing 4.00% Bellon and others (2022) Peru E-invoicing 0.93% Fan and others (2020) China E-invoicing 1.56% Mascagni, Mengistu, and Woldeyes (2021) Ethiopia Electronic Fiscal Devices for VAT 0.88% Eissa and Zeitlin (2014) Rwanda Electronic Fiscal Devices for VAT 0.68% 79 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY on behalf of ZIMRA to remit funds to ZIMRA 3.8 Conclusion and policy recommendations within 24 hours of collection. This chapter finds that Zimbabwe’s government • Accelerate the rollout of EFDs and integrate revenue has recently increased, but still remains the Fiscalization Data Management System far below its potential. Total domestic revenue has with TaRMS compliance management: ZIMRA gradually increased over time, up to 14.6 percent of GDP should accelerate the rollout of hardware in 2023. Yet, most comparable structural and regional and virtual EFDs to allow for more effective peer countries collect 19.8 and 20.9 percent of GDP compliance monitoring for VAT. The new in revenue, on average, in 2018–2022, respectively. system has not yet reached key taxpayers due Zimbabwe’s tax revenue remains subdued. This report to compatibility issues and ZIMRA’s capacity to suggests Zimbabwe’s tax potential is 22 percent of support fiscalization. GDP (implying a tax gap of 6.5 percentage points). Zimbabwe does excel in the progressivity of its tax • Incorporating small-scale traders and system, in part through a highly progressive PIT. informal sector: ZIMRA should review the use of the TaRMS for small-scale traders and the This chapter has provided a range of different informal sector, and explore a more user-friendly options to raise domestic revenue mobilization in platform to encourage their registration and use. a way that improves both efficiency and has a pro- It could create mobile-friendly online registers to poor outcome. A conservative estimate suggests that ensure wider accessibility for income reporting this could structurally raise tax collection between and tax compliance. 3.1 and 3.8 percent of GDP (Table 3.6). Table 3.6: Potential fiscal gains from domestic revenue mobilization measures Policy area Policy action Fiscal impact Impact on Impact on (estimate, % of GDP) Efficiency Equity VAT exemptions 2024 Budget reforms 0.88% + - and zero-rating CIT tax incentives Rationalize CIT tax incentives Potential unclear (CIT tax gap + + of 3.4%) Mining tax Mining Tax Law and tax 20–30% in CIT, 2–10% in + + administration reforms royalties (equivalent to 0.5–0.76% of GDP) Health excise tax Raising tobacco and 0.18% + + (longer alcohol excise life-span) Introducing SSB tax 0.12–0.14% Property and Property rates 40–100% increase + + wealth tax (local gov’t only) Wealth tax Marginal impact under - + current design Tax administration Improved tax administration 1.4–1.8% + Neutral and use of digital technologies Total potential fiscal gain 2.9%–3.6% + + Source: World Bank staff estimates. 80 CHAPTER 4 Achieving Medium-term Fiscal Sustainability This chapter considers how the various policy debt servicing. Zimbabwe’s public debt has continued options in this report could jointly contribute to a to grow rapidly in recent years, in part by taking over credible medium-term fiscal strategy for Zimbabwe. “legacy debt” to redress historical policy missteps.⁷² We begin by considering the baseline scenario, and By 2023, total public debt rose to US$21.1 billion and the difficult situation Zimbabwe finds itself in, with constitutes 97 percent of GDP (Figure 4.1c). This is a significant fiscal gap, rising debt-servicing, and a increasingly straining Zimbabwe’s fiscal regime by large and unsustainable stock of public debt. Next, raising the (mostly US$-denominated) debt servicing we consider how the policy options in this report requirements. Current projections suggest that this would affect the fiscal balance, debt-servicing, and is already straining Zimbabwe’s fiscal position in the debt-to-GDP ratio. We also reflect on how external 2024, with a projected deficit of 3.4 percent of GDP debt arrears clearance would further aid Zimbabwe’s (Figure 4.1a). Without a major change in the fiscal situation. We then consider the various fiscal risks position, the deficit may gradually decline but an faced by Zimbabwe’s policy makers. Finally, we increased share of revenue will have to go to debt consider the international lessons for implementing servicing. The WB-IMF debt sustainability analysis a durable fiscal consolidation strategy. suggests that the debt service-to-revenue ratios would likely increase from 21 percent in 2024, up 4.1 Baseline scenario to 102 percent in 2027 (Figure 4.1b). The medium- term debt-to-GDP ratio remains high at 72 percent, Zimbabwe’s public debt is in distress and significantly exceeding the 35 percent that the World unsustainable, and Zimbabwe’s Treasury is faced Bank and IMF’s debt sustainability analysis considers with a considerable debt overhang and high yearly sustainable for Zimbabwe.⁷³ ⁷² This includes “Blocked funds” (US$3.73 billion), compensation for former farm owners (US$3.5 billion) and absorption of the RBZ’s external liabilities (US$1.8 billion). See Section 1.1 for details. ⁷³ The WB-IMF Debt Sustainability Analysis puts the sustainability debt burden as the present value of total public debt under three categories: weak – 35% of GDP, medium – 55% of GDP, and strong – 70% of GDP). 81 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Figure 4.1: Projected fiscal balance, debt servicing and debt-to-GDP a. Fiscal balance b. Debt service-to-revenue ratio 5 120 102 Debt service-to-revenue ratio -0.3 -0.5 0.3 84 0 -3.4 90 66 (% of GDP) -5 60 21 -10 15 30 -15 0 2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027 Fiscal balance Baseline projections Debt service-to-revenue ratio Baseline projection c. Debt-to-GDP 120 97 72 70 (% of GDP) 20 -30 2020 2021 2022 2023 2024 2025 2026 2027 Public sector debt Baseline projection WB-IMF DSA sustainable debt-levels Source: World Bank staff calculations using WB-IMF DSA (2024). Nonetheless, even the above-mentioned baseline the most pro-cyclical budgets seen in SSA. The lack scenario may be overly optimistic as it does not of any fiscal space also makes Zimbabwe especially take into account Zimbabwe’s historic (quasi- vulnerable to fiscal shocks (such as from the El Niño- fiscal) spending pressures. Historically, QFOs induced drought in 2024). Any sustainable medium- from the RBZ have contributed a sizable share of term fiscal strategy should therefore not only seek GoZ expenditure. Chapter 1 noted that between 2020 to meet the fiscal gap, but also build in an adequate and 2023, the Treasury’s average expenditure was buffer to absorb unforeseen fiscal risks and enable 16.8 percent of GDP, but QFO-adjusted expenditure the adoption of counter-cyclical fiscal policy. This was 20.6 percent of GDP. Avoiding such QFOs in the would help to build fiscal resilience and allows fiscal future will require the GoZ to either adjust to a major policy to further anchor macroeconomic stability. decline in expenditures (3.8 percent of GDP) or, more realistically, identify additional revenue to meet this 4.2 Reform scenario higher spending level through the Treasury. This PFR identifies significant potential for creating In addition, there is a need to better absorb climate fiscal space that can help bridge Zimbabwe’s shocks and adopt counter-cyclical fiscal policy. fiscal gap and reduce debt. Chapter 1 identified As shown in Chapter 2, the Treasury’s commitment the potential fiscal gains from macroeconomic to a cash budget (where actual revenue collection stabilization and reversing informalization, Chapter 2 shapes total expenditures) has resulted in one of identified the gains from expenditure rationalization, 82 CHAPTER 4: ACHIEVING MEDIUM-TERM FISCAL SUSTAINABILITY and Chapter 3 identified the potential gains from in 2027. In line with findings from the international improved tax policy and tax administration. Jointly, literature (see Box 4.1), most gains are expected in this can result in a potential fiscal consolidation of domestic revenue mobilization rather than through 3.3 percent of GDP in 2024, running up to 7.2 percent expenditure rationalization. Figure 4.2: Potential fiscal consolidation 8.0 7.2 6.2 6.0 5.1 % of GDP 4.0 3.3 2.0 0.0 2024 2025 2026 2027 Revenue (Macroeconomic stabilization) Revenue (Tax policy and tax administration) Expenditure rationalization (Government consumption) Total Source: World Bank staff calculations. Box 4.1: Lessons from Sub-Saharan Africa on successful fiscal consolidation episodes This section draws on lessons learned from fiscal consolidation episodes defined in the international literature (Comelli et al., 2023; Akitoby et al., 2018; Arizala et al., 2021; Al Rikabi et al., 2024). The evidence shows that sustained fiscal consolidation in SSA is possible but chal¬lenging, as consolidation episodes have often reversed. For example, Comelli et al. (2023) identify 82 episodes of fiscal consolidation in SSA during 1980–2021, but in only 24 were fiscal gains sustained. Sustained episodes involved much larger adjustments in the cyclically adjusted primary balance (CAPB). These countries were characterized by a large initial fiscal adjustment need but managed to achieve this by adopting a multi-year approach (the median duration was three years) and a larger adjustment (they improved their CAPB on average by more than 4 percent of GDP on a cumulative basis). The bulk of fiscal gains were linked to tax revenues, rather than spending cuts. In SSA, domestic revenue mobilization can play a greater role in the adjustment process without necessarily undermining growth to the same extent as seen elsewhere,⁷⁴ for two main reasons: • There is more scope to raise revenue than cut spending: Given low levels of domestic revenue mobilization, there is significantly more scope to raise revenues (through tax policy or revenue administrative reforms) than to cut government spending, which is already very tight in critical areas such as health or education. Past studies estimate a large revenue- raising potential in the region. For example, Box 1 in Chapter 2 identifies several countries ⁷⁴ In contrast to advanced economies, where empirical studies find that expenditure-based adjustments are preferable. 83 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY achieving tax revenue increases in excess of 2.5 percentage points of GDP over a five-year period. Similarly, Akitoby et al. (2019), and Gaspar et al. (2019) deem that increasing the tax- to-GDP ratio by 5 percentage points of GDP in a decade is an ambitious but realistic target for many countries. Benedek et al. (2021) sets a target of 3–7 percent of GDP for comprehensive tax strategies in developing countries. • The growth effects may be less detrimental for revenue-based adjustments rather than spending cuts. Arizala and others (2021) find that fiscal consolidations based on revenue mobilization are less harmful to growth in Africa than those based on expenditure. This is because expenditure-based fiscal consolidations typically occur through reductions in capital expenditures. Yet, fiscal multipliers tend to be higher for public investment given its effects on productive capacity and the stock of infrastructure, indicating that this type of expenditure should be protected to the extent possible during adjustment periods (Ardanaz et al., 2021; Al Rikabi et al., 2024). In contrast, measures to broaden the tax base or improve revenue administration are likely to have less deleterious effects on economic activity. Source: Adjusted from Comelli et al. (2023) and Al Rikabi et al. (2024). Careful fiscal consolidation design (focusing on tax depends on composition: cutting capital expenditures base broadening, government consumption) means is much costlier in terms of output than cutting that the cost to GDP is limited. Fiscal consolidations current expenditures or raising revenue.⁷⁵ Applied to typically have a contractionary effect on output. To Zimbabwe’s potential reform scenario, this suggests examine the potential effect for Zimbabwe’s fiscal that the cost to GDP is limited at between 0.1 and consolidation, we follow Arizala et al. (2021), who 0.3 percent of GDP. This is because of careful fiscal estimate the impact of fiscal policy on economic consolidation design, through focusing on tax-base activity for 44 SSA countries during 1990–2016. broadening and government consumption, and They find that the impact of fiscal consolidation avoiding a reduction in capital expenditure. Figure 4.3: Impact of fiscal consolidation on output 2024 2025 2026 2027 0.0 -0.1 % of GDP -0.2 -0.1 -0.3 -0.3 -0.3 -0.3 -0.4 Revenue (Tax policy and tax administration Government consumption Total growth impact Source: World Bank staff calculations using Arizala et al. (2021). ⁷⁵ More specifically, during episodes of investment-based fiscal consolidation, a 1 percentage point of GDP improvement in the fiscal position lowers output by 0.4 percent in the first year of consolidation, and by about 0.7 percent three years later. In contrast, during fiscal consolidations based on current expenditures and revenue, a 1-percentage-point-of-GDP improvement in the fiscal position lowers output on impact by 0.1 and 0.2 percent, respectively (Arizala et al., 2021). 84 CHAPTER 4: ACHIEVING MEDIUM-TERM FISCAL SUSTAINABILITY The reform scenario would lead to a significant to below 35 percent (Figure 4.4c). adjustment in the fiscal balance, debt servicing and debt-to-GDP ratio. The reforms could lead to Arrears clearance and debt restructuring a significant fiscal surplus (Figure 4.4a). Estimates using WB-IMF Debt Sustainability Analysis The SDP aims to address arrears clearance and suggest that such a surplus would also mean debt resolution through a joint focus on economic, that Zimbabwe’s debt service-to-revenue ratio land and governance reforms. Restoring debt would peak in 2025 and thereafter rapidly decline sustainability requires a credible plan to clear (Figure 4.4b). Finally, it would result in a major accumulated arrears to multilateral creditors and reduction in debt, declining to 49 percent of GDP reaching an agreement with official creditors on a (versus 72 percent in the baseline). Yet, this still comprehensive treatment of Zimbabwe’s external cannot bring Zimbabwe to sustainable debt levels, debt. To achieve this, in 2022, President Mnangagwa further emphasizing the importance of the SDP for appointed AfDB President Dr. Akinwumi Adesina arrears clearance and debt resolution. The hope is and the former president of Mozambique, Dr. that swift progress on the SDP could set the basis Joaquim Chissano, to champion the SDP, under for comprehensive debt restructuring and would which the GoZ initiated a high-level dialogue with eventually reduce Zimbabwe’s debt-to-GDP ratio creditors and development partners. The SDP is Figure 4.4: Impact of reform scenario on fiscal balance, debt-servicing and debt-to-GDP ratio a. Fiscal balance b. Debt servicing 10 120 Debt service-to- 5 revenue ratio 90 (% of GDP) 0 60 -5 -10 30 -15 0 2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027 Fiscal balance Baseline projections Debt service-to-revenue ratio Baseline projection Reform projection Reform projection c. Debt-to-GDP ratio 120 70 72 (% of GDP) 49 20 35 -30 2020 2021 2022 2023 2024 2025 2026 2027 Public sector debt Baseline projection Reform projection Reform and arrears clearance projection WB-IMF DSA sustainable debt-levels Source: World Bank staff calculations using WB-IMF DSA (2024). 85 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY anchored on three matrices of proposed reforms 4.3 Fiscal risks on economic, land and governance reforms needed to unlock arrears clearance. The results matrix for The macroeconomic scenario is subject to various each of the three pillars of the structed dialogue fiscal risks, which may cause fiscal outcomes to matrix was designed to help in alignment with the deviate from baseline or presented forecasts. The conditions for lifting of the United States’ 2002 current macroeconomic landscape is susceptible Zimbabwe Democracy and Economic Recovery Act to significant fiscal risks varying from inflation, (ZDERA).⁷⁶ In addition, the SDP’s economic pillar exchange rate depreciation, wage-setting, contingent calls for a Staff-Monitored Program (SMP) from liabilities, QFOs, and natural disasters. This calls the IMF, that will help the GoZ to adopt a program for a comprehensive analysis and management of of fiscal consolidation, and prudent monetary fiscal risks, which is critical to ensuring sound public and exchange rate policy. This will help set the finances and macroeconomic stability. foundation for continued macroeconomic stability. This report provides recommendations that may The current currency regime, susceptible to shape the potential fiscal reforms under an SMP exchange rate instability, may be a source of fiscal going forward. risk. Though currently the exchange rate is stable, there are high risks of currency instability as there is The hope is that sufficient progress across all three uncertainty and low confidence in the new currency SDP pillars would set the basis for re-engagement regime. This is complicated by the possibility of for the development community, and eventually money printing as government revenue maybe convince a potential donor to provide bridge inadequate to cover fully the planned expenditure. funding for the arrears’ clearance. Any arrears’ In the past, excess creation of liquidity has led to clearance option depends on progress made in high inflation and exchange rate depreciation, and the SDP, and is meant as a concluding trajectory to also contributed to substantial budget deviations the SDP. However, Zimbabwe’s path to debt relief (see Chapter 1). The presence of a significant remains uncertain. Yet, once sufficient progress is parallel market premium further distorts budget made on the economic, land and governance pillars, credibility. Controlling money supply to mitigate a credible and timely plan to clear arrears to the against macroeconomic instability, exchange rate World Bank and the AfDB could help to reinstitute depreciation and high inflation is imperative. Zimbabwe’s access to IDA resources, and qualify Zimbabwe to seek debt restructuring from bilateral Related to this, the current wage-bill-setting and commercial lenders, and bring debt-to-GDP ratio modalities present significant fiscal risks. The back to a sustainable level. GoZ has pegged wages to exchange rate to preserve ⁷⁶ The Zimbabwe Democracy and Economic Recovery Act (ZDERA) restricts U.S. support for multilateral debt relief and other financial assistance by multilaterals for the GoZ subject to specific conditions. According to section 4(c) ZDERA, until the U.S. President certifies that the following conditions are satisfied: (i) restoration of the rule of law ; (ii) election or pre-election conditions ; (iii) commitment to equitable, legal, and transparent land reform; and (iv) subordination of the Zimbabwean Armed Forces, the National Police of Zimbabwe, and other state security forces to the elected civilian government., the Secretary of Treasury shall instruct the U.S. executive director to each multilateral organization to oppose and vote against: (i) any extension of any loan, credit, or guarantee to the Government of Zimbabwe; or (ii) any cancellation or reduction of indebtedness owed by the GoZ to the United States or any IFI. While ZDERA specifically restricts bilateral debt relief in relation to debt held by any agency of the U.S. Government, it does not limit bilateral assistance. 86 CHAPTER 4: ACHIEVING MEDIUM-TERM FISCAL SUSTAINABILITY wage values. The indexing of the local component spending authority that can circumvent the budget of public service wages against the US dollar process and opens the door for many of the risks that exchange rate implies continual adjustment of come from extra budgetary entities. It can fragment wages every month, especially when exchange policy-making and implementation, cloud the rate depreciates daily or monthly. This presents the understanding of the GoZ’s fiscal and policy activities, possibility of huge deviations between the budgeted dilute accountability and weaken fiscal control. This wage bill and actual outturn. Furthermore, paying creates fiscal risks through the continual engagement salaries in US dollars maintains a rigid wage bill in quasi-fiscal activities, as well as vulnerability to that cannot change even if the structure of revenue rent-seeking. Controlling fiscal risks emanating from collection changes. In general, wage demands that operations of the MIF will be key for the stabilization are not in line with revenue generation capacity effort. To mitigate the fiscal risks, it would be may result in inflationary pressures and may also beneficial to ensure the MIF’s full integration in the compromise service delivery causing deviation of budget process. It should also adhere to Zimbabwe’s targets and actual outcomes. The mitigation may corporate financial reporting standards, with timely involve delinking salaries from the exchange rate quarterly fiscal reports to the MoFEDIP, robust internal to moderate continual increase in wages. audits by a reputable firm, and publishing complete financial statements in line with the internationally The presence of many SOEs presents potentially recognized accounting standards. significant and common source of fiscal risks, with government bailouts of troubled SOEs costing Finally, Zimbabwe is susceptible to many the GoZ. Loss-making state entities constitute external, natural and climatic shocks. The risks larger fiscal risks, as they may require periodic emanating from climate change are huge, droughts recapitalization or ongoing support.⁷⁷ The GoZ has have become more frequent, with the 2024 drought the Framework for Evaluating, Monitoring, and not only affecting the budget provision but also Managing Guaranteed and On-lent Loans to manage economic growth (see Chapter 1.3). Climatic fiscal risks, with new borrowing requests assessed shocks or natural disasters are associated with and recommended by the External and Domestic unbudgeted expenditure (additional costs) either Debt Management Committee for approval. on reconstruction of public infrastructure and/or provision of disaster relief. Furthermore, commodity A new source of fiscal risks emanates from the shocks or global conflicts may negatively impact recently formed Mutapa Investment Fund. The revenue sources or increase spending more than MIF’s activities risk creating an additional entity with previously anticipated.⁷⁸ ⁷⁷ Bova et al. (2016) find that the average cost of government intervention in public sector enterprises across a sample of events over the period 1990–2014 amounted to about 3 percent of GDP on average and 15 percent of GDP in the most extreme cases. ⁷⁸ Bova et al. (2016) find that the average country-specific fiscal cost of natural disasters over 1990–2014 was 1.6 percent of GDP, with the largest resulting in fiscal costs of 6 percent of GDP. 87 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY 4.4 Implementing a durable fiscal systems, and utilizing proceeds for the sugar-tax consolidation strategy for the delivery of cancer equipment. Beyond identification of policy reform options, 2. Compensation. Reform opposition can also be there is also a need to consider an implementation alleviated by providing support to those who strategy to ensure a durable fiscal consolidation. are the most negatively affected. Well-targeted As noted in Box 3.1, few fiscal consolidation episodes compensatory measures that mitigate the are sustained, and in many cases the fiscal outcomes impact of reforms, especially on the poor, can are reversed. Resistance to fiscal reform is difficult be critical for building public support. Targeted to overcome since the costs of the status quo are not cash transfers are, in principle, the preferred always visible, while many new measures reduce, at approach to compensation in low-income least temporarily, the welfare of broad segments of countries. For Zimbabwe, we advocate for the society (Daniel et al., 2006). compensatory mechanisms to offset the cost of VAT reforms on low-income households.⁷⁹ For such To ensure a more durable fiscal consolidation targeting to be effective, there is also need for an reform, governments need to win over public effective national social registry (Prady, 2020). The opinion by showing that public funds will be used GoZ and the World Bank are currently developing in an efficient, fair, and transparent manner. such a social registry together. Comelli et al. (2023) identify four ways in which governments can shape their policy reform package 3. Communication. Effective communication with to help improve their implementation: sequencing, stakeholders can also contribute to building compensation, communication, and trust: broad public support. In general, the public needs to understand the need for policy changes 1. Sequencing. It is easier to garner public support and buy-in. Explaining the importance of reform for change when reforms display clear gains, objectives, providing information to dispel and some degree of certainty exists about any misunderstanding, and highlighting its potential “winners” and “losers.” Gradualism benefits can reduce the resistance of the public. can help improve the population’s perceptions Governments should also communicate on the of costs and benefits, and helps to reduce the costs of no reform. A review of price subsidy costs for those affected. In contrast, frontloading reform experiences found that the likelihood consolidation, especially when the economy is of success almost tripled with strong political weak, can have detrimental consequences on support and proactive public communication economic activity and employment. In addition, (IMF, 2011). For Zimbabwe, there is need for a more adjusting reform pacing creates the possibility comprehensive and more timely communication of displaying concomitant gains. For Zimbabwe, of reform objectives, and the potential benefits of it may thus be worthwhile to gradually implement fiscal consolidation, through the sizable increase some of the tax reforms. In addition, effort needs to in public and private investment that would follow be given to showcase reform gains, such as from from international reengagement and access to improved value-for-money through e-Procurement multilateral concessional credit. ⁷⁹ For details, see Chapter 3.2 and background note by Sharma et al. (2024) “Fiscal and distributional implications of VAT reforms in Zimbabwe”. 88 CHAPTER 4: ACHIEVING MEDIUM-TERM FISCAL SUSTAINABILITY 4. Trust. A more fundamental cause of resistance to management capacity, broader use of risk fiscal reforms is the population’s perception that management tools, and the accumulation of public money is not being well spent. Challenges adequate fiscal buffers. Zimbabwe faces a range to state effectiveness in the provision of public of fiscal risks that could potentially result in large, goods and services (including security, justice, unexpected fiscal deficits (see previous section). and development in rural areas), rent-seeking, Recent efforts have been put in place to improve the and other governance problems erodes trust modeling of such risks, and to keep a reliable and in public institutions, lowers tax compliance,⁸⁰ comprehensive record of debt liabilities. However, and increases the size of the informal sector, Zimbabwe would also benefit from direct controls while fueling social discontent. For Zimbabwe, to limit exposure to potential risks—for instance, there is a need for continued effort to improve legally binding limits and centralized authorization PFM to ensure the transparent and effective of guarantees, PPPs, subnational and SOE use of public resources that responds better to borrowing, and other explicit contingent liabilities. citizens’ needs and achieves sustainable growth and development. Improved communication of 3. Improving expenditure controls by reviewing the benefits of public services is also critical to the integrity of the spending cycle, automating boosting the GoZ’s social contract and encourage some procedures, and improving cash (quasi)-voluntary tax compliance. management. Zimbabwe continues to face challenges on expenditure controls (see Chapter Institutional reforms are also critical to ensure a 1.3). Ineffective controls raise the likelihood of more durable fiscal consolidation reform. Comelli extra-budgetary commitments, which are a major et al. (2023) emphasize the need to root policy source of fiscal and risk and key contributor to debt. objectives and political commitment within sound There is a need to ensure strict adherence to GoZ institutions. They identify four institutional reforms PFM regulations by strengthening the appropriate that are considered a general prerequisite for effective controls over appropriations, commitments, and implementation of a fiscal consolidation strategy: payment systems. Improvements in financial reporting and audits should further improve 1. Strengthening the medium-term orientation accountability and transparency of Zimbabwe’s of the budget, starting with the foundations PFM system. such as the macro-fiscal forecasting capacity. Zimbabwe develops its budget on a three-year 4. Boosting domestic revenue mobilization rolling basis, and has a medium-term fiscal by strengthening revenue administrations’ strategy. However, this PFR has showcased resources, promoting digitalization, and that there are significant challenges to budget introducing medium-term revenue strategies. credibility (see Chapter 1.3), in part because of Most developing countries achieving major challenges to macro-fiscal forecasting (that were revenue increases did so in large part through caused, in part, by macroeconomic instability). revenue administration reforms (see Box 3.1, and Improvements to budget institutions (budget Akitoby et al. [2019]). Zimbabwe has significant preparation and execution) are thus critical for potential for improved tax administration through fiscal consolidation. its Tax and Revenue Administration System Tax (TaRMS). Accelerating the system’s rollout will be 2. More systematically identifying and managing critical for Zimbabwe’s fiscal consolidation (see fiscal risks, including through a central risk Chapter 3.7). ⁸⁰ See Prichard et al. (2019), Cummings et al. (2009) and Alm (2018). 89 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY 4.5 Conclusion ensure bridge funding for arrears’ clearance, and allow for comprehensive debt-restructuring. Zimbabwe currently finds itself in a difficult fiscal position. It has historically been burdened The macroeconomic scenario is subject to various by extensive periods of macroeconomic instability, fiscal risks, which may cause fiscal outcomes to driven by quasi-fiscal activities that led to the deviate from baseline or presented forecasts. The accumulation of debt, high money supply growth, current macroeconomic landscape is susceptible inflation, and exchange rate deprecation. As a to significant fiscal risks varying from inflation, result, it is now in a difficult position, with a large exchange rate depreciation, wage-setting, contingent and unsustainable stock of public debt, high debt- liabilities, QFOs, and natural disasters. This calls servicing costs, and weak domestic revenue to for a comprehensive analysis and management of finance its development objectives. fiscal risks, which is critical to ensuring sound public finances and macroeconomic stability. This chapter has shown that there is a pathway toward a credible medium-term fiscal strategy Finally, there is need for an implementation for Zimbabwe that could absorb quasi-fiscal strategy to ensure a durable fiscal consolidation. expenditures, reverse the upward trend in public Following Comelli et al. (2023), we note the importance debt, and support macroeconomic stability. We of government in shaping the implementation bring together the analysis on potential fiscal of its policy reform package through sequencing, gains from macroeconomic stabilization and compensation, communication, and trust. Institutional reversing informalization (Chapter 1), the gains reforms are also critical to ensure a more durable from expenditure rationalization (Chapter 2), and fiscal consolidation reform, particularly related to the potential gains from improved tax policy and tax strengthening the medium-term orientation of the administration (Chapter 3). Jointly, this can result in a budget, systematic identification and management potential fiscal consolidation of 3.3 percent of GDP in of fiscal risks, improving expenditure controls, and 2024, running up to 7.2 percent in 2027. In line with boosting revenue administration. findings from the international literature, most gains are expected in domestic revenue mobilization rather In sum, this chapter has shown how fiscal policy than through expenditure rationalization. Careful can be a critical anchor for macroeconomic stability fiscal design (focused on tax-base broadening and going forward. The GoZ is at a crucial juncture. By government consumption, and avoiding a reduction adopting a bold set of fiscal reforms, it can turn in capital expenditure) means that the cost of fiscal the page on a prolonged history of macroeconomic consolidation to GDP is limited. instability, and set the foundations for a credible national budget that is efficient, able to manage Restoring debt sustainability will require a credible unforeseen fiscal risks, and can ensure a stable and plan to clear accumulated arrears to multilateral competitive currency. In turn, this would open up creditors and reaching an agreement with the historic possibility of arrears clearance and debt official creditors on a comprehensive treatment resolution, which would release major additional of Zimbabwe’s external debt. This emphasizes resources in concessional multilateral financing for the importance of the SDP between the GoZ and public and private investments. Jointly, this would international credits. 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The Situational Report: Implications of the lithium mining rush in Zimbabwe, Analysis of Legal Developments (February 2023). 96 ANNEX TABLES Annex Table 1: Annual expenditure Flows (% of GDP) Standard PFR Tabels: Zimbabwe, Annual Expenditure Flows (% GDP) Struc- Aspira- tural tional Economic 2015 2016 2017 2018 2019 2020 2021 2022 2023 AVG Peers Peers Income Region World Total .. .. .. .. 10.7% 10.9% 16.6% 17.5% 23.0% 14.8% 24.0% 20.7% 29.9% 20.9% 32.2% Wage Bill .. .. .. .. 2.9% 4.0% 5.4% 6.1% 6.5% 5.0% 7.6% 6.1% 8.3% 6.7% 8.6% Spending In Basic Wages .. .. .. .. 1.7% 2.4% 3.2% 2.9% 2.6% 2.6% 6.2% 5.0% 7.7% 5.5% 6.8% Spending In Allowances .. .. .. .. 1.1% 1.7% 2.2% 3.2% 3.9% 2.3% 1.0% 0.7% 1.1% 0.9% 1.2% Goods And Services .. .. .. .. 2.7% 2.4% 3.8% 5.1% 3.7% 3.3% 3.9% 3.5% 5.9% 3.6% 5.7% Maintenance .. .. .. .. 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% 0.2% 0.3% 0.3% 0.2% 0.4% Basic Services .. .. .. .. 0.4% 0.9% 1.1% 1.4% 0.9% 0.8% 0.3% 0.4% 0.7% 0.5% 0.7% Capex .. .. .. .. 1.2% 1.4% 2.3% 2.2% 1.4% 1.5% 3.9% 3.3% 5.3% 4.5% 5.1% Interest .. .. .. .. 0.2% 0.1% 0.0% 0.1% 0.1% 0.1% 3.2% 2.7% 1.9% 1.3% 1.8% Social Benefits .. .. .. .. 1.7% 1.5% 2.0% 2.6% 2.1% 1.9% 0.9% 2.1% 3.2% 1.4% 5.0% Social Assistance .. .. .. .. 0.2% 0.1% 0.2% 0.3% 0.1% 0.2% 0.4% 1.0% 1.0% 0.6% 1.5% 97 Pensions .. .. .. .. 0.5% 0.7% 1.0% 1.1% 1.1% 0.9% 0.8% 1.4% 2.4% 1.1% 4.1% Other (Social Insurance) .. .. .. .. 0.9% 0.7% 0.8% 1.2% 0.8% 0.9% 0.8% 1.4% 2.4% 1.1% 4.1% Subsidies .. .. .. .. 1.1% 0.4% 0.2% 0.4% 0.2% 0.4% 1.2% 1.1% 1.7% 0.8% 1.6% Other .. .. .. .. 1.0% 1.1% 2.8% 1.1% 9.1% 2.7% 3.4% 1.9% 3.6% 2.6% 4.5% Functional General Services .. .. .. .. 2.4% 2.3% 3.5% 3.9% 3.4% 3.0% 10.3% 6.8% 8.5% 6.9% 7.7% Defense .. .. .. .. 0.8% 0.8% 1.4% 1.5% 1.3% 1.1% 1.4% 0.8% 1.6% 1.3% 1.4% Public Safety .. .. .. .. 0.5% 0.7% 0.9% 1.1% 1.0% 0.8% 1.5% 1.3% 2.3% 1.3% 1.9% Judiciary .. .. .. .. 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2% 0.5% 0.4% 0.3% 0.4% Public Safety .. .. .. .. 0.4% 0.6% 0.9% 1.0% 1.0% 0.7% 1.3% 1.1% 1.6% 1.0% 1.4% Economic Affairs .. .. .. .. 4.4% 3.8% 5.9% 5.5% 11.6% 4.9% 3.6% 2.8% 6.0% 3.7% 5.0% Agriculture .. .. .. .. 2.8% 2.4% 3.5% 2.8% 1.9% 2.9% 0.5% 0.5% 1.0% 0.8% 0.7% Energy .. .. .. .. 0.0% 0.1% 0.1% 0.0% 0.0% 0.1% 0.6% 0.2% 1.2% 0.5% 0.9% Transport .. .. .. .. 0.4% 1.0% 1.1% 1.3% 0.9% 1.0% 1.4% 1.8% 2.1% 1.3% 1.9% Road Transport .. .. .. .. 0.3% 0.9% 0.9% 1.3% 0.8% 0.8% 1.0% 1.2% 1.5% 1.1% 1.3% Railroad .. .. .. .. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.1% 0.1% 0.1% 0.1% Water Transport .. .. .. .. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.2% 0.0% 0.2% Air Transport .. .. .. .. 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.0% 0.2% 0.1% 0.1% Environment .. .. .. .. 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.3% 0.3% 0.2% 0.4% ANNEX TABLES Standard PFR Tabels: Zimbabwe, Annual Expenditure Flows (% GDP) Struc- Aspira- tural tional Functional 2015 2016 2017 2018 2019 2020 2021 2022 2023 AVG Peers Peers Income Region World Housing .. .. .. .. .. 0.0% 0.0% 0.1% 0.0% 0.1% 0.5% 0.7% 0.7% 0.6% 1.0% Health .. .. .. .. 0.5% 0.8% 1.1% 1.3% 1.2% 0.9% 1.3% 2.2% 2.7% 1.8% 3.6% Recreations .. .. .. .. 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.4% 0.3% 0.7% Education .. .. .. .. 1.2% 1.6% 2.3% 2.6% 2.9% 1.9% 3.9% 3.2% 4.5% 3.5% 4.5% Primary Education .. .. .. .. 0.5% 0.8% 1.0% 1.2% 1.4% 0.9% 1.4% 1.8% 1.8% 1.4% 1.7% Secondary Education .. .. .. .. 0.2% 0.4% 0.6% 0.6% 0.8% 0.4% 0.9% 0.7% 1.5% 0.9% 1.3% Tertiary Education .. .. .. .. 0.3% 0.3% 0.5% 0.5% 0.5% 0.4% 0.8% 0.6% 0.6% 0.6% 0.7% Social Protection .. .. .. .. 0.9% 0.8% 1.2% 1.4% 1.3% 1.1% 1.2% 2.4% 3.6% 1.5% 6.1% Rigidity Low .. .. .. .. 38.7% 32.8% 42.2% 35.9% 55.6% 37.4% 29.2% 21.2% 30.2% 30.2% 29.4% Medium .. .. .. .. 12.7% 6.5% 5.5% 4.5% 2.2% 7.3% 16.1% 15.3% 14.6% 14.5% 13.9% High .. .. .. .. 48.5% 60.6% 52.3% 59.5% 42.2% 55.2% 54.7% 63.5% 55.2% 55.3% 56.7% 98 ZIMBABWE PUBLIC FINANCE REVIEW: ANCHORING MACROECONOMIC STABILITY THROUGH FISCAL POLICY Annex Table 2: Annual execution rates (% of total) Standard PFR Tabels: Zimbabwe, Annual Execution Rates (% total) Struc- Aspira- tural tional Economic 2015 2016 2017 2018 2019 2020 2021 2022 2023 AVG Peers Peers Income Region World Total .. .. .. .. -6.5% -11.2% -10.9% -6.9% 43.6% -8.9% -9.1% -4.8% -6.5% -15.1% -8.4% Wage Bill .. .. .. .. -0.6% -0.8% -5.4% -7.4% -5.0% -3.6% 1.6% 0.4% -1.9% -4.6% -2.0% Goods And Services .. .. .. .. -10.6% -17.5% -25.2% -12.3% -18.4% -16.4% -3.1% -6.2% -7.8% -14.5% -7.8% Capex .. .. .. .. -38.2% -26.4% -33.3% -1.3% -22.3% -24.8% -25.8% -10.6% -11.3% -29.2% -16.8% Interest .. .. .. .. .. .. .. .. .. .. 9.6% -1.7% -0.3% -9.1% -4.8% Social Benefits .. .. .. .. -14.2% -8.7% -9.3% -10.8% -2.9% -10.7% 1.9% 20.8% 0.4% -2.4% 1.1% Non-Pensions .. .. .. .. -52.9% -19.6% -24.1% -24.6% -8.2% -30.3% -7.0% 9.7% -4.8% -14.3% -4.7% Pensions .. .. .. .. -1.3% -10.5% -11.3% -3.1% -0.1% -6.5% 13.3% -1.2% 1.7% 0.6% 0.8% Subsidies .. .. .. .. 19.7% 6.0% -10.4% -1.6% -30.1% 3.4% 17.2% 28.5% 9.0% -4.0% 5.7% Functional .. .. .. .. -16.0% -14.3% -24.5% -22.9% -22.4% -19.4% -12.3% -12.0% -5.9% -8.3% General Services -15.3% .. .. .. .. -6.1% -2.5% -6.0% -10.1% -10.7% -6.2% 4.7% 2.3% -1.6% -1.0% Defense -1.6% .. .. .. .. 99 Public Safety -21.9% -14.2% -8.2% -10.6% -15.6% -13.7% 6.2% -1.8% -3.3% -8.0% -4.9% .. .. .. .. -5.0% -2.8% -15.5% -2.0% -17.3% -6.3% -2.0% -2.7% -5.4% -8.2% Judiciary -12.4% .. .. .. .. -23.0% -15.1% -7.3% -11.3% -15.4% -14.2% 8.0% -0.9% -3.0% -4.2% Public Safety -6.8% .. .. .. .. 4.0% -10.5% 9.2% 14.1% 278.0% 4.2% -15.4% -2.1% -7.7% -10.7% Economic Affairs -19.1% .. .. .. .. -20.0% -17.1% -7.4% -10.6% -6.0% -13.8% -23.0% 0.4% -11.0% -14.3% Agriculture -24.4% .. .. .. .. -0.3% -6.5% -3.1% -32.5% -22.3% -10.6% 8.5% 9.7% -9.0% -10.1% Energy -13.2% .. .. .. .. -18.0% -14.7% -14.8% -5.7% -1.6% -13.3% -13.2% -1.9% -0.4% -6.0% Transport -14.0% .. .. .. .. -14.2% -16.0% -15.5% -4.4% -1.2% -12.5% -13.6% -1.1% -6.8% -8.4% Road Transport -14.5% .. .. .. .. .. 0.0% -22.6% -5.4% -15.0% -9.3% -15.2% 15.3% -17.5% -18.4% Railroad -27.7% .. .. .. .. -56.4% -52.6% -66.3% -71.9% -1.9% -61.8% -17.7% -28.1% -21.1% -18.0% Water Transport -33.2% .. .. .. .. -69.1% -15.0% -19.2% 18.7% -20.2% -21.2% -18.7% 7.8% -0.6% -8.6% Air Transport -22.0% .. .. .. .. -8.5% -51.6% -20.0% -25.0% -5.0% -26.3% 4.8% -3.1% -10.4% -11.3% Environment -22.8% .. .. .. .. .. -3.9% -48.2% -13.7% -31.7% -21.9% -24.9% -5.6% -11.1% -11.3% Housing -26.5% .. .. .. .. -12.9% -17.8% -36.2% -10.4% -5.5% -19.3% -14.5% -1.4% -6.2% -7.6% Health -16.0% .. .. .. .. .. -23.2% -40.2% -5.8% -10.8% -23.1% -7.3% -0.8% -7.3% -5.6% Recreations -8.9% .. .. .. .. -6.7% -5.8% -11.2% -6.4% -4.0% -7.5% -1.6% -4.5% -2.0% -5.8% Education -12.3% .. .. .. .. -4.4% -5.8% -4.0% -1.7% -0.2% -4.0% -5.0% 2.6% 7.3% 2.8% Primary Education -11.7% .. .. .. .. -7.0% -2.5% -6.9% -3.3% -0.3% -4.9% 2.6% -1.4% 0.0% -0.4% Secondary Education -9.0% .. .. .. .. -10.9% -7.3% -16.6% -14.1% -3.0% -12.2% -2.0% -3.8% -2.6% -3.4% Tertiary Education -9.7% .. .. .. .. -11.1% -11.9% -13.6% -9.0% -1.0% -11.4% 16.6% 20.7% 1.9% -2.1% Social Protection -4.4% ANNEX TABLES