THE World Bank (WB) has revealed that Zimbabwe lost over US$4,5 billion, or 2,5% of its gross domestic product (GDP), between 2020 and 2023 due to distortions in its monetary and exchange rate policies.
The biggest losses, according to the global lender’s statement released on Wednesday, stemmed from inflation-related tax losses (US$1,4 billion), informalisation (US$1,2 billion), and customs duty foregone (US$580 million).
“In the absence of such distortions, tax revenue in 2023 could have been as high as 18,9% of GDP, compared to the 14,6% of GDP observed,” the bank said, citing its new Zimbabwe Public Finance Review (PFR) report, also launched on Wednesday.
“Tax revenue can be increased in a way that improves both efficiency and pro-poor outcomes. To increase tax revenue, Zimbabwe’s 2024 Budget announced various reforms to broaden the tax base, including removing some VAT (Value-Added Tax) exemptions.
“While these reforms can lead to revenue gains, they may also hurt poor households. Compensatory mechanisms can restore the impact of VAT reforms on poor households, potentially at a fraction of the new VAT collections.”
Other potential reforms to raise revenue include streamlining corporate tax incentives and strengthening mining tax policy, the statement highlighted.
In addition, the report discusses options to better align public-health excise taxes on alcohol, tobacco, and sugar-sweetened beverages with World Health Organisation standards, as well as reorganise the newly proposed wealth tax.
Considerable benefits may be derived from the newly introduced Tax and Revenue Administration System. Estimates suggest such policies could structurally raise tax collection by between 3,1% to 3,8% of GDP.
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“Public spending can be streamlined, resulting in greater value-for-money,” the lender said.
There are also opportunities to enhance the efficiency of public spending, procurement, and public investments through improved evaluation systems and the use of e-procurement.
“Finally, there is a need to improve targeting of social protection through a ‘social registry’. Jointly, this could lead to potential savings of 1,1–1,2% of GDP, out of which around 0,15% could be allocated to compensate low-income households,” the WB said.
The WB stated that these policy reforms would lead to a significant adjustment in the fiscal balance, resulting in a fiscal surplus. This could enable Zimbabwe’s debt service-to-revenue ratio to peak in 2025 and thereafter decline rapidly, potentially reducing overall debt.
The PFR seeks to support the government’s task of fiscal consolidation by identifying policy options to help rationalise expenditure and increase revenue mobilisation.
This can help create fiscal space and move Zimbabwe onto a more sustainable fiscal pathway.
In turn, prudent fiscal policy will help stabilise the macroeconomic environment by providing an anchor for price and exchange rate stability, bolstering economic growth and job creation.
