Takeaways from Mid-Term Budget Review
ON Thursday, Finance and Economic Development Minister Professor Mthuli Ncube presented the 2020 Mid-Term Budget Review statement. The main objective of a budget review is to assess whether or not the announced measures are working with the aim of making adjustments where there are significant deviations from the originally intended policy path.
In addition, such a review is intended to make adjustments where budgeted revenues and expenditures have been overtaken by events.
Review statements are also necessary if there are some unforeseen events which have worsened poverty and hardships on citizens, such that relief measures are needed.
This budget review was eagerly awaited, as the policy path that the economy has been taking in 2020 has shown significant deviation from the path envisaged when the 2020 Budget was presented in November 2019.
For example, when the 2020 Budget was presented, it was forecasted that month-onmonth inflation would fall to single digits from the first quarter of 2020 and would close the year at around 2 percent through a strict reserve money targeting programme by the Reserve Bank of Zimbabwe (RBZ).
Then, Government had just announced a mono-currency regime, which was to be supported through mechanisms aimed at currency stabilisation.
The exchange rate was about $1:19 on the parallel market and $1:15,32 on the interbank exchange platform. However, inflation has since reached an annual rate of 737,26 percent in June 2020, having peaked at 785,5 percent in May 2020.
Month-on-month inflation stood at 31,66 percent in June 2020, which is quite significantly higher than the single-digit levels that had been envisaged. The exchange rate in the parallel market is only recovering now from a high of more than $1:100 recorded in June 2020.
This implies that the context is different from what was envisaged, hence a budget review would be needed.
Supplementary Budget
While the expectation was that there would be a Supplementary Budget, Prof Ncube indicated that only 46 percent of the originally budgeted expenditure had been utilised by the various ministries and departments by
June 2020.
This would mean that there is capacity to utilise the remaining 54 percent during the course of the year. For this reason, the Minister pointed out that there was no need for a Supplementary Budget.
However, while this is mathematically correct in terms of averages, the challenge is that the various ministries utilise resources differently, such that some had overspent by June 2020 while others had underspent.
For example, the Ministry of Mines and Mining Development had utilised only 10,9 percent of its budget by June 2020, while the Ministry of Environment and Hospitality Industry utilised only 12,4 percent of the allocated budget.
This means that there is scope for these ministries to utilise the remaining resources within this calendar year. However, the Ministry of Local Government and Public Works had already used about 78 percent of allocated resources by June 2020, while the Ministry of Defence and War Veterans had utilised 67,9 percent.
This means that the allocated resources are likely to be used up by now in these ministries, hence they need additional resources.
The fact that there was no Supplementary Budget might, therefore, mean that those ministries that did not utilise resources should be prepared to lose the resources to those that will exhaust their allocations before the next budget period. This would mean that a number of programmes and activities that were budgeted for but could not be undertaken for various reasons will remain uncompleted due to lack of resources if they are reallocated to other ministries.
In any case, it is likely that where Government had anticipated a lower inflation rate at budgeting compared to what eventually obtained, the budgeted resources would be quickly eroded by inflation.
Inflation is now projected to decline to 300 percent by December 2020, which roughly means that resources that would buy four items when the 2020 Budget was announced in December 2019 would buy only one item come December 2020.
It is economically not possible for the budgeted amount to be adequate to perform the same tasks envisaged, unless there are some other extenuating circumstances.
A look at what is happening on the ground confirms that there are indeed such circumstances. The failure to have a Supplementary Budget underlines the limited activities that have been taking place due to Covid-19, which stalled a number of planned activities and programmes.
If the economy were to re-open fully, then such programmes would be grossly underfunded if they were to be implemented.
With Covid-19 still around, it is understandable that there will be limited movement in resources, which explains the Minister’s conviction that the resources will still be adequate.
The Zimbabwe economy is expected to contract in 2020 rather than expand as originally projected, following the Covid-19-induced challenges as well as unfavourable weather conditions in 2020.
Prof Ncube estimates the country’s GDP to shrink by 4,5 percent in 2020, a revision from an expansion of 3 percent when the 2020 Budget was announced.
The reduction of 4,5 percent at a time when the economy is characterised by a myriad of challenges affecting production can be considered as an improvement, given that in 2019 the economy is estimated to have shrunk by about 6 percent.
The Minister also announced that by June 2020, revenue collection had exceeded the target, as $34,2 billion had been collected, against a target of $32,1 billion. It is critical to note that in an inflationary environment, surpassing a target is very easy, as the increase in prices also imply that the amount of tax collected is also high.
However, total expenditure to June 2020 was about $30 billion, meaning that there was excess of revenue over expenditure; hence there was a surplus, a word which has now been associated with a lot of controversy.
Economic direction
There are a lot of positives from the budget review, which can be a basis for optimism concerning the economic direction.
There is general consensus among economic actors that the main reason the economy is struggling while incomes of people continue to be eroded can be attributed to inflation. And inflation is mainly arising from the exchange rate movements, which results in negative inflation expectations which are modelled into human behaviour.
Producers and retailers put a premium on pricing while consumers prefer to hold on to a stronger US dollar for value preservation.
Thus, the extent to which the measures which Government has committed to do in this budget review helps in controlling inflation as well as associated expectations would be critical in determining whether the outlook is positive or not. There are several causes of the current economic situation, for which one key reason is fiscal indiscipline.
By avoiding a Supplementary Budget, Government has sent a clear message that it has no appetite for spending, which was the basis for money creation and fuelling inflation.
Fiscal indiscipline is also credited for the failure of dollarisation.
Thus, the commitment to exercise fiscal restraint on the part of Government that was underlined by the budget review statement is critical, especially commitment to avoid recourse to RBZ borrowing and money printing. The statement is also coming at a time when Government is at nascent stages of implementing a new foreign currency determination regime through the auction system.
The success of the auction system will be measured when the parallel market players now believe that those participating in the auction system are also acting in their interest.
The parallel market is mainly fed from Diaspora remittances and FCA salary accounts.
Holders of such funds cannot directly participate in the auction system as their amounts are low individually, but they also have a price they attach to their foreign currency.
The demand for foreign currency from the parallel market mainly arises from small businesses and informal sector players, who can also not directly participate at the auction system.
Thus, there is already a market with its own supply and demand dynamics, which has to be broken up and mimic the conditions set by the formal auction system, whose players are mainly those that are banked.
The runaway parallel market has generally stabilised, due to a combination of both the auction system as well as strict monitoring and punitive measures adopted to control money exchange.
However, it is still active, as it offers more lucrative rates to holders of hard US dollar cash. Convergence can only happen if the holders of Diaspora remittances now feel motivated to sell their forex to the bureau de change at rates determined by the auction system.
If the current discipline and commitment is maintained, this will eventually happen.
Thus, fiscal discipline coupled with reliance on the market system for price discovery at the foreign exchange system as announced, can usher in confidence as well as helping in curbing the building up of negative exchange rate and inflation expectation which are inbuilt into pricing dynamics.
Resuscitation
The budget review statement also provided for measures towards economic resuscitation.
Given the Covid-19 pandemic, which is not showing any signs of ebbing, the extent to which Government introduced measures that unlock local supply and value chains is instrumental in influencing economic direction.
Organic growth is easier where the use of SMEs and small businesses can be promoted.
It is, therefore, quite pleasing that the operationalisation of the National Venture Capital Fund has been identified as a priority.
Implementing the initiative within the context of industrial parks and centres of excellence as announced is quite noble, but supply response capabilities can be easily strengthened by co-ordinating with polytechnic colleges and universities, where low-cost technologies to kickstart the projects and programmes aimed at import replacement is located.
Harnessing the technological know-how already resident in the institutions of higher learning is a low-hanging fruit.
The budget review statement also makes an attempt at boosting aggregate demand in the economy. While production systems can be strengthened, it is critical for products to find a well-resourced consumer in the market.
Government has opted to increase the taxfree threshold by 150 percent to $5 000, which will also release a significant amount of worker earnings for consumption.
However, given that inflation is projected to be twice this level by December 2020, the upward increase in the tax-free threshold should at least have attempted to match inflation so that the adjustment remains realistic till the end of the year.
This need for a further cushion also arises in the context of only a 200 percent increase in the minimum taxable amount for the 2 percent Intermediated Money Transfer Tax to $300, which is still too low as most products which the poor purchase at any given time would cost more than $300.
◆ Cornelius Dube is an economist. He holds a Masters Degree in Economics and has more than 16 years experience in economic policy research and analysis.