Restor­ing macroe­co­nomic poli­cies key to eco­nomic transformation

Sunday News (Zimbabwe) - - Front Page -

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

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