Why Making The Poor Pay For Government Expenditure Is A Bad Idea - Going Big On A Wrong Idea!

While we can only commend the Government for looking to leverage technology in order to grow its tax revenue via formalisation, the reasoning and application is massively flawed.

For a policy targeted to plug 40% of the budget deficit, it is worrying to see that there was little research or effective consultation with the Government’s partners in the process of formulating this policy.

While inexperience can be attributed for the new government’s initial gaffes that decimated the little confidence that locals and foreign onlookers had in ED’s team, the Zimbabwean government has failed to show evidence of committing to a sustainable long-term strategy that will rescue Zimbabwe, already barrelling down a slippery slope, from crashing to new lows.

The recent measures appear to be that of a man drowning and clutching at straws. It has instead continued to exhibit fundamental characteristics of the regime of 12 months ago: incapable of taking accountability for Zimbabwe’s current situation; quick to pass the buck to the man on the street and a blatant disregard for the private sector. Where the world expects aggressive implementation of fiscal discipline and consolidation, the new government says that the main solution is to impose high taxes on an already struggling public.
Why Making The Poor Pay For Government Expenditure Is A Bad Idea

Zimbabwe’s main challenge is government’s excessive expenditure on largely unproductive segments of the public sector

This was apparent in its response to the public’s outrage against the 2% excise tax, as Government said that their ‘modest’ tax is a necessary evil that the country needs to bare in order to ‘stop the bleeding.’ The statement is tragic, suggesting that the new Finance Minister is either insincere or ignorant of Zimbabwe’s main challenge: government’s excessive expenditure on largely unproductive segments of the public sector. Just recently the government was ready to spend about USD20m on new vehicles for legislators. The splurge was suspended on account of the public reminding them that there was a cholera outbreak that required their outmost attention. It is understood that the vehicle purchases will be made at a more ‘appropriate’ time.

The statement, and supposedly the strategy behind this policy, is also insensitive to the plight of the average Zimbabwean, the literal man on the street. After decades of mismanagement and corruption, the government destroyed employment opportunities for this “man”, forcing him to create his own opportunities in the informal sector in order to survive. The same Government then proceeded to forcibly evacuate him from his ideal location for his struggling business venture. This same government now wants this man, tittering on the poverty line, to plug about 40% of budget deficit at his expense.

The government wants the man on the street, tittering on the poverty line, to plug 40% of the budget deficit.

In Kenya, the local revenue authority (KRA) generates about USD230m in mobile money taxes from its USD80bn economy with 45m citizens. The Kenyan government is also battling with record high public debt levels and rising twin deficits, and yet the most they could increase excise taxes was from an average of 0.12% to 0.20% of the transacted amount. The Zimbabwean government on the other hand, wants to generate USD900m in revenues from an economy that is apparently a quarter that of Kenya. To put this into perspective, the Government of Zimbabwe (GoZ) wants locals to pay it an extra USD57 a year per capita, which compares to USD5.04 in Kenya. The imbalance is even more striking considering that the GoZ’s targeted tax is 4.55% of GDP per capita vs. 0.28% of GDP per capita in Kenya.

Given that the ambitious tax is roughly 4 times what Econet generated in revenue from EcoCash in FY18, it is poignantly obvious that this development will undermine the private sector’s efforts to increase the affordability of financial services. As we saw recently, Econet was able to leverage its scale and cut EcoCash fees. The lower fee regime would have grown transaction volume further, and in turn allow Econet to cut prices further to levels commiserate with the welfare of the man on the street. However, the charts above suggest that the new tax will most certainly be regressive.

However, because Zimbabwean banks charged an average of USD2.50 per withdrawal against USD0.30 in Kenya, the number of transactions per capita in Zimbabwe was 10% of that in Kenya. A two fold increase in the average fee in Zimbabwe would ultimately see mobile money transactions decline by 67%. However, this cannot happen in Zimbabwe as there is not enough cash in circulation to offset the decline in mobile money volumes. So what happens then?Back in 2014 to 2016 when banks charged exorbitant rates for cash withdrawals, a comparative with Kenya showed that Zimbabweans where price savvy in their transactions. The comparative suggested that Zimbabweans and Kenyans were willing to spend USD2.40 to USD2.80 per month on transaction charges, and as such, adjusted their transaction habits accordingly.

Given that mobile money transactions fall between the ranges of USD1.00 to USD700.00, government’s compromise to exempt transactions below USD10 offers little reprieve from the adverse impact of the new tax. Ironically, the government exempts transactions relating equities trading, showing that they acknowledge how the new tax will undermine investment returns.

The 2% tax is punitive on the poor and does not equitably distribute the burden across all segments of society.

Exempting equities and money market trading, which are largely activities undertaken by those with access to capital and disposable incomes, the tax is punitive on the poor and does not equitably distribute the burden across all segments of society. The tragedy here is that they fail to see that there is an even larger segment of the economy where returns and livelihoods will be affected more significantly by the new tax. This segment consists mostly of informal traders who trade commodities in an overall low-margin business. Given that these are the operators that now dominate mobile money transactions, it becomes obvious that this policy, asking the vendor to fund an extra USD57 a year, is detrimental to Zimbabwe’s economic recovery.

The policy most certainly undermines the Financial Inclusion agenda. The topic is high on the agenda globally, such that governments across the continent, having realised the obvious gains they can achieve with regards to economic empowerment and revenue generation, have gone as far as ending their respective banking sector’s monopoly on financial transactions. Like Kenya, these governments have been responsible in their formulation of the relevant tax policies.

This new tax can only be detrimental for financial inclusion and the long term benefits it brings, especially with regards to combating poverty.

Influential NGOs such as the Bill and Melinda Gates Foundation, having championed financial inclusion as an enabler for eradicating poverty, have also championed mobile money penetration. Given that the strategy to drive financial inclusion, especially in a lower per capita income market such as Zimbabwe, is highly dependent on the affordability of financial transactions, this new tax can only be detrimental for financial inclusion and the long term benefits it brings, especially with regards to combating poverty.

Overall, the policy runs contrary to the mantra that ‘we are open for business.’ Not only does it undermine Econet (a favourite with international investors) ahead of its unbundling, but it also shows a disregard for the private sector’s intelligence. EcoCash settled on a pricing structure similar to that of other mobile money platforms elsewhere, suggesting that the pricing we see today is the most efficient for sustaining a mobile money ecosystem. Government’s proposed tax, which increases pricing two-fold, is most certainly inefficient and leaves us to question their ability to insure that subsequent policy will ensure a sustainable environment for investment. Which such draconian and unpredictable policies, who would bet their money on this Government?

This lack of appreciation for the drivers that are key to deepening financial inclusion also suggests that Zimbabwe’s policy making depth is still low. The world wants to see Zimbabwe employ some level of structured rationale, especially when it comes to leveraging disruptive technologies efficiently. Credibility is put into question when a policy of this magnitude shows great disregard for basic market intelligence

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