Pre-budget strategy paper, TSP: A review

Last week, government released its Pre-budget Strategy for 2021. This is a periodic paper released ahead of the budget as part of national consultation efforts before presentation of the final budget for the succeeding year, normally in November of each year. This year’s strategy paper began by government’s own review of the Transitional Stabilisation Policy (TSP), which has been in effect since 2018. It details, in most parts of the successes achieved under the program, which is the precursor of the 10-year National Development Plan (NDP), which is set to run between 2021 and 2030.

This article looks at some of the projections and the underlying assumptions used in forecasts for the ensuing periods particularly the 2020 and 2021 economic growth projections. Government believes the economy of Zimbabwe will rebound in 2021 after dipping in 2019 and 2020. The actual and predicted 2019 and 2020 economic performances show a clear and wide variance to TSP set targets. In the TSP, government set a 2019 and 2020 target of 9% and 9,7% respectively (Page 10). It is quite telling to note such a wide variance in a year where no black swan event happens.

A black swan is an unanticipated event which authorities have little to no control over. Occurrences such as COVID-19 can be classified as black swan. These events potentially cause an economic shock which make projections widely missed.

For Zimbabwe, 2019 only witnessed a prolonged but foreseen drought and Cyclone Idai. The latter did not cause a significant impact on the economy. Much of the resources committed in the affected communities was donor sourced and pulled from local corporates. The donor community has also bridged a huge gap on food aid historically. It leaves us with very few reasons why government did not anticipate a pending recession in 2 successive years and as deep as -10% according to independent estimates.

My persuasion is that when government undertook to institute TSP, the underlying assumption was that the stable USD regime would remain in place. Although unsubstantiated narratives have been proffered on the premeditation of currency reforms through the TSP, in the document, the Minister of Finance clearly spells out his fears. He highlighted that although currency reforms would buttress the reform agenda, the move was widely unpopular and would not yield short term benefits.

Ahead of a media meeting on the TSP with the minister in October 2018, research by Equity Axis revealed that most of the countries which pursed austerity were only successful while using their own currencies. At the meeting, an analyst at Equity Axis, questioned the minister on how he intends to achieve the desired objectives of austerity without own currency. The minister, on record said this was not a priority now, again highlighting that government had no policy plan to reintroduce the local currency with the planned TSP and made forecasts for the TSP period.

The importance of this background information is that it helps us to ascertain the sincerity of policy makers, the accuracy of their forecasts and the firmness of policy positions. The reason why the economy went on to report a -10% GDP fall instead of 9% growth is because something fundamental happened which authorities had not assumed would happen. This factor is currency reforms. Some quarters prior to, highlighted that currency reforms were rushed and this was clearly demonstrated by the loss of purchasing power and sharp contraction in production and consumption levels in the economy. Be it as it may, assuming that currency reforms had not come into play, austerity alone would have resulted in a negative GDP outturn for the economy, but not as sharp as was attained.

Now to the 2021 Pre-Budget Strategy Paper. The paper came with revised forecasts for 2020 and 2021 through to 2023. For 2020 government now expect GDP to fall by -4,5% from a TSP target of 9% which was later revised twice to -6% and -3,5% and now to -4,5%. Independent estimates including Equity Axis forecast a GDP loss of between -10% and -15% for 2020. For 2021 government anticipated a rebound to growth estimated at 7,4%, before moderating to 5,5% and 5,2% in 2022 and 2023 respectively.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net.