Fiscal discipline must underpin upcoming budget statement
The pre–budget strategy paper issued by the Ministry of Finance and Economic Development last month noted that fundamental challenges facing the economy revolve around low productivity, domestic production levels across sectors, as well as market indiscip
STATISTICS from the Reserve Bank of Zimbabwe show that as at March 31, 2017, 51 percent of bank assets were invested in treasury bills. These investments at that time were used to finance RBZ debt, Government debt and budget deficits which cumulatively totalled $3,7 billion.
In the same vein, because of continuous budget deficits, total domestic debt to debt has reached $4,014 billion as noted by the Public Debt Management Office. This trajectory is not good. It has resulted in serious crowding out effect, worsened the liquidity crunch as it has created serious disparities between money supply and physical cash.
The current domestic debt together with external debt results in total debt of $13,12 billion. This current level of debt, which represents 78 percent of Gross Domestic Product (GDP) has two key implications for Zimbabwe.
First, from a debt sustainability angle; it clearly sends alarm bells on the country’s ability to service the national debt. This therefore raises the country risk premium. What it means is that between now and he medium-term future, Zimbabwe will attract foreign capital at a high cost.
Second, the 78 percent debt/ GDP is above the country’s own threshold. Section 11(2) of the Public Debt Management Act [Chapter 22:21] requires that the total outstanding Public and Publicly Guaranteed Debt as a ratio of GDP should not exceed 70 percent at the end of any fiscal year. This is a serious problem when Government fails to adhere to its own legal framework.
Ironically, the 70 percent debt/ GDP threshold set by the Government of Zimbabwe is far above the 60 percent Southern African Development Community (SADC) threshold, to which Zimbabwe assented to through the ratification of the Finance and Investment Protocol.
Like the Public Debt Management Act, Section 11(1) of the Reserve Bank Act [Chapter 22:15] requires that Central Bank lending to the State at any time shall not exceed 20 percent of previous year’s Government revenues. However, notwithstanding the need for compliance with the stipulated threshold in 2014 and 2015, Reserve Bank lending thresholds to Government were surpassed in 2016 to reach 27 percent.
The preceding discussion shows the state of affairs of our fiscal position. This clearly articulates rampant fiscal indiscipline. In dealing with this menace, the recently published pre — budget strategy which gives the clearest hint of Government intentions in the forthcoming budget statement came up with the following proposals:
◆ The Ministry of Finance and Economic Development called upon Ministries and Departments to submit sectoral specific proposals on cutting budget expenditure costs as part of their input towards development of the 2018 National Budget. This specific recommendation, in my view, has limited scope to deal with the current ever ballooning budget deficit because ministries’ budgets are largely centred on employment costs which are not going to change as things stand;
◆ The Government sees scope in raising revenue collection through interventions that improve tax administration efficiency, curb leakages that result from smuggling and other vices. This recommendation is spot on. Efficiency in tax administration is key. To date, business is burdened by excessive administration requirements which can be reduced through the establishment of a single payment system. For example, in the tourism sector, has twenty-two (22) heads of taxes and levies it must pay. These tax heads are collected by thirteen (13) agencies which raises the cost of doing business for the sector and in some case Government loses revenue through corruption.
◆ Budget submissions should, hence, also consider sector specific measures to generate additional revenues across Government. Again, this recommendation is spot on. This is rightly so for Ministries who provide oversight to ailing parastatals and State-Owned Enterprises. Line ministries must take key interest in the performance of parastatals which falls under their ambit and must make them deliver. In addition to these measures, my humble submissions to the Ministry of Finance and Economic Development which are aimed at restoring fiscal discipline are as follows:
◆ Government must set its debt/GDP ratio to 60 percent to comply with its regional commitment;
◆ In line with Reserve Bank Act, Reserve Bank must not lend Government any amount which exceed 20 percent of the Government previous revenue.
◆ During the 2009 – 2012 Government maintained budget surplus due to cash budgeting. In my view, it looks plausible for Government to revert back to cash budgeting.
◆ In expanding the fiscal space, there is need for Government, in the forthcoming budget, to consider giving tax incentives such as five-year tax breaks to companies making fresh investment, companies supporting local producers under the framework of local content regulations. In the same vein, there is also need to revisit tax threshold applying to small and medium enterprises by coming with turnover based tax as opposed to thump suck presumptive taxes which are very high. Together we make Zimbabwe great!
◆ Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela University. Feedback: +263 772 541 209 or gmugano@gmail.com