Restoring macroeconomic policies key to economic transformation
THIS instalment is a continuation of last Sunday’s instalment titled, “Restoring economic fundamentals key to economic resuscitation”. Zimbabwe has experienced tight fiscal phenomena pre-and-post hyperinflation era and has been in debt distress for too long. Something has to be done and done now.
As part of strategy to manage the post hyperinflation during the tenure of the Government of National Unity, the Government implemented a cash budgeting framework, which helped to keep the budget deficit at a relatively low level.
The plan was to maintain this framework in place in the short to medium term. Meaning operational beyond the GNU, and later adopting the Staff Monitored Programme II (SMP-II), in its context targeting a zero primary balance in fiscal operations.
Unfortunately, there has not been full commitment to the dictates of the SMP-II. The Government’s continued large amounts of current expenditures effectively crowded out capital expenditure, which is essentially critical for medium and long-term economic growth.
The whole scenario has resulted in the weakness of public investment in the economy that has been exacerbated by the low external borrowing capacity as a result of the high public debt overhang.
The credibility of the fiscal policy of the country has continued to be seriously compromised by the under-performance on the revenue side of the fiscus as the revenue base continues to dwindle.
As a result, the country’s fiscal policy has lacked the reflection of the key development priorities and social objectives. The biggest challenge has been lack of will to judiciously stick and adhere to policies and plans.
A conscious decision was made by the Government in 2014 for example, to attempt to align the 2015 national budget with the Zim Asset. However, the fiscal developments for the 10 months to October 2014 showed that cumulative revenue collections remained seven percent below the target that was set for that year.
Value Added Tax (VAT) contributed 27 percent to total revenues, individual income tax (PAYE) contributed 24 percent, excise duty contributed 14 percent and corporate income tax contributed nine percent.
The performance of corporate taxes remains pathetic as more companies shut down. Revenue shortfalls are mainly caused by company closures and job losses as the economy continued to informalise.
The latest developments are that Government’s wage bill is expected to grow by 16 percent this year to $3,7 billion, and rise to $3,9 billion next year and pushing the budget deficit to about 14 percent of the gross domestic product (GDP). The economy cannot sustain such level of recurrent Government expenditure.
The country is already spending about 80 percent of its fiscal budget on salaries of civil servants, who received a raise of 17,5 percent in July, translating to a further $500 million added to the wage bill this year alone, from an original projection of $3,2 billion.
Quoting the Permanent Secretary of the Ministry of Finance and Economic Development, Mr George Guvamatanga, “while we had estimated employment costs for 2018 at around $3,2 billion, and the projected out-turn indicates a total expenditure of employment cost of $3,7 billion, we expect gradual increases in 2019 to about $3,9 billion.
The budget deficit out-turn is expected at 11,1 percent, a double digit budget deficit is not sustainable.”
“I think there are economic models that have clearly indicated that the moment you start to run to the 14 percent or 15 percent as your budget deficit, you start to invite hyperinflation into the economy. That is why the budget framework for 2019 looks at fiscal consolidation, expanding the revenues collection, but with a much tighter expenditure control.”
On the monetary policy front, the Government has expressed the desire to continue using the multiple currency regime. In an attempt to strengthen the functionality of the central bank, the Government’s treasury accounts were transferred from a commercial bank to the central bank in July 2014, thus at least restoring the central bank’s function as banker to the Government following Cabinet approval of the principles for amendments to the Banking Act in June 2014.
These amendments were expected and meant to improve corporate governance in the banking sector, strengthen the troubled bank resolution framework, enhance consumer protection, improve regulatory co-ordination and facilitate the licensing and regulation of credit reference bureaus.
In an environment where the monetary authority has, no effective direct control over money supply, interest rates and exchange rates control of fiscal expenditure and maximisation of export revenue inflows are key to economic stabilisation and price control.
In conclusion, there is need to restore the equilibrium and balance between the fiscal policy and monetary policy as the country forges ahead with its economic transformation. Zimbabwe needs to get its macro-economic policy working effectively once again.
Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at nbongani@gmail. com