Digesting the 2021 Budget
AS expected, the 2021 National Budget was couched around the National Development Strategy (NDS) 1, which was recently launched by the Government to guide economic policy for the next five years.
Having put in place the basic measures for achievement of stability, notably fiscal rebalancing and establishment of a functional and more efficient foreign currency market — the Foreign Currency Auction System — under the Transitional Stabilisation Programme (TSP), Treasury recognises the need to sustain the stability currently obtaining in the economy. Reasonably so because stability paves way for accelerated growth and development.
Owing to austerity measures and efficient operation of the Foreign Currency Auction System, the economic environment has been fairly stable since the last six months from June 2020.
Now that we have the basics right, one of the key focus areas of 2021 Budget was sustaining stability as a springboard for faster economic growth and development.
Taking cognisance of the structural and permanent nature of our economic challenges, its commendable that a great deal of consideration was given on addressing the real economic fundamentals relating to production, productivity, investment, job creation, consumption and debt management.
Having these fundamentals in the right place guarantees durable stability and accelerated growth and development.
After eight years of economic slowdown, which accelerated into decline of 6 percent in 2019 and projected contraction in 2020, the prioritisation of supply side interventions is the only sensible thing to do.
Given the abundance of natural resources commanded to our care by the creator, Treasury indicated that resource sectors mainly agriculture and mining will be prioritised.
Importantly, the policy thrust shall be geared towards leveraging on these natural resources to diversify the economy, through re-industrialisation and strengthening as well as domestication of value chains.
Re-industrialisation, which is all about the share of the manufacturing sector to GDP, is seen as a permanent cure to all the country’s economic challenges mainly slow or negative growth, unemployment, debt and economic instability. Successful re-industrialisation requires attracting and retaining a considerable amount of capital, which only possible with favourable policies.
Reflective of the base effect but appropriate balance of stabilisation and growth measures, the economy is expected to grow by 7,4 percent in 2021.
This growth projection is quite possible as we are coming from a lower base after contraction of 6 percent in 2019 and projected 4,1 percent in 2020.
Going forward, and in line with Vision 2030, increased private sector participation and investment is expected to sustain projected average annual growth of 5 percent over the remaining NDS1 period.
A private sector led economy make it possible to increase investment as a share of GDP, which is a precondition for accelerated growth.
This is because reduced Government participation in the economy frees a lot of budget towards investment in capital goods. However, without acceleration of public sector reforms, a private sector led economy and benefits there-from will be very difficult to achieve.
Public sector reforms will allow Government to focus more on provision of public or social goods such as education, health, water and electricity, which was sacrificed when all focus was on austerity measures to stabilise the economy.
This model economy is able to contain the debt levels with the statutory limits of 70 percent of GDP. Importantly, this model economy is not unhealthily dependent on taxation as is currently the case today.
While the widening of the tax net the informal sector is reflective of the informalised nature of our economy, it is reflective of the urgent need to grow the tax base through re-industrialisation.
Tax measures introduced include simplified tax regime for self-employed professionals and upward review of a number of taxes.
In line with the private sector and investment led growth model, a great deal of 2021 Budget is going towards capital expenditure. Out of the total budget of $421 616 billion for 2021, an amount of $131 596 billion, which translate to 31 percent of the budget will be devoted towards capital expenditure.
A similar scenario is projected 2020 where capital expenditure is projected at $52 742 billion, which translates to 32 percent of the total expenditures of $178 495 billion.
This enabled Government to undertake significant capital projects such as the expansion of Harare-Masvingo-Beitbridge Road, whose multiplier effect is beginning to be realised in the broader economy.
As they say development is all about welfare, the level of happiness or well-being of citizens, with growth in the economy, Government is expected to realign the wages of civil servants to reflect the realities on the ground.
At projected 2020 level 39,9 percent to total budget, there is more scope to increase wages for the civil servants, in line with increase in budget.
However, real wage benefit will be derived from inflation containment, which is expected to average 134,8 percent close the year at 9 percent in 2021.
The private sector is equally encouraged to realign their workers’ wages in line with envisaged economic growth if real development is to be realised.
Taking a clue from Milton Friedman quote that: “Inflation is taxation without legislation”, it appears treasury is overly cautious about anything that has potential to increase money supply out of control.
This is unlike in the past when money supply was allowed to grow uncontrollably, resulting in historic hyperinflation in 2008.
It appears the disinflation measures by both Treasury and RBZ are paying dividend as inflation has slowed down significantly from August 2020.
From October 2020, year-on-year inflation in local currency declined to 471 percent from 659 percent in September 2020, while month-on-month was recorded at 4,4 percent.
Similarly, blended year-on-year inflation, which measures the combined price changes of goods and services in both the $ and US$ slowed down to 249 percent from 376 percent during the same period, while blended month-on-month inflation stood at 1,4 percent by October 2020.
Supporting the inflation management was the operation of the recently established Foreign Currency Auction System, which stabilised the rate at around US$1: $81. This rate reflects a significant narrowing of the parallel market margins.
Owing to the impact of external shocks on the economy, against a background limited source of external support, there is need to build a buffer to deal with the threats.
A small budget deficit of $4,9 billion (-0,5 percent of GDP) anticipated by end of 2020, marks the beginning in building of essential buffers for unforeseen exogenous shocks and expanded implementation of developmental programmes.
However, the deficit level will continue to be managed within regional average levels of 3 percent of GDP to control inflation.
The improvement in the external position with overall current account surplus of projected US$1 229,3 million, to give two consecutive years of positive current account balance, will support the stability and growth imperative.
Furthermore, real economic rebalancing typified by import substation and export promotion measures are expected to sustain the improvement in the country’s external position.
While the measures outlined by the Minister appear well thought-out, without implementation the desired achievements will remain a pipe-dream.
Importantly, the low hanging fruits such as serious fight against corruption, can support the measures spelt out by the Minister.