State of the econ­omy and way for­ward

Be­low is a state­ment by the Hon Pro­fes­sor Mthuli Ncube, Min­is­ter of Fi­nance and Eco­nomic De­vel­op­ment, on the State of the Econ­omy and the Way For­ward, is­sued on 5 De­cem­ber 2018

The Herald (Zimbabwe) - - Opinion & Analysis - Hon Prof Mthuli Ncube Spe­cial Cor­re­spon­dent Read the full state­ment on www.her­ald.co.zw

ON 22 Novem­ber 2018, I pre­sented the 2019 Na­tional Bud­get to Par­lia­ment un­der the theme — “Aus­ter­ity for Pros­per­ity’’. The Bud­get con­sti­tuted the first eco­nomic and fi­nan­cial frame­work for im­ple­ment­ing the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme (TSP), which is also an ini­tial step­ping stone to­wards re­al­is­ing Vi­sion 2030.

And in­deed, that am­bi­tious Vi­sion is duly the theme of this Con­fer­ence — “To­wards an Up­per Mid­dle In­come Econ­omy by 2030”.

To give per­spec­tive to this con­fer­ence theme, al­low me to briefly walk del­e­gates on the state of our econ­omy, be­fore high­light­ing the thrust of the TSP and the 2019 Na­tional Bud­get.

In the 2019 Na­tional Bud­get, I in­di­cated that dur­ing the first half of 2018, the econ­omy ex­hib­ited signs of strong re­cov­ery, rid­ing on im­proved con­fi­dence from a peace­ful pre-elec­tion en­vi­ron­ment and prospects for in­creased in­vest­ment.

GDP Growth

In 2018, key growth driv­ers were agri­cul­ture and min­ing, com­ple­mented by the ser­vices sec­tors.

With re­gards to agri­cul­ture, to­bacco and cot­ton yields outperformed the 2017 lev­els and 2018 Bud­get tar­gets, to sup­port over­all sec­tor growth of 12,4 per­cent. Sim­i­larly, in min­ing, gold out­put sur­passed last year’s pro­duc­tion lev­els, to give min­ing growth es­ti­mate of 13 per­cent.

Tourism and other ser­vice sec­tors (with av­er­age growth of 5 per­cent) also added pos­i­tive con­tri­bu­tion to the 2018 growth mo­men­tum, all to a growth ex­pec­ta­tion of about 6,3 per­cent in 2018 dur­ing the first half of the year.

Re­gret­tably dur­ing the last half of the year, there were no­tice­able chal­lenges, which posed some risks to eco­nomic ac­tiv­ity, and these are as­so­ci­ated with for­eign cur­rency sup­ply chal­lenges, fis­cal im­bal­ances, fi­nan­cial sec­tor vul­ner­a­bil­i­ties, in­fra­struc­ture de­fi­cien­cies and ca­pac­ity un­der­util­i­sa­tion, among oth­ers.

None­the­less, the econ­omy re­mains re­silient and is ex­pected to record a solid growth of 4 pe­cent in 2018.

Pub­lic Fi­nances

Pos­i­tive eco­nomic per­for­mance, gave scope to bet­ter rev­enue col­lec­tions for the nine months of the year, which amounted to US$3,8 bil­lion, against a tar­get of US$3,4 bil­lion. By year end, solid col­lec­tions of US$5,3 bil­lion are an­tic­i­pated.

How­ever, while rev­enues ex­ceeded Bud­get tar­gets, to­tal ex­pen­di­tures for Jan­uary to Septem­ber 2018, over­shot to reach US$6,5 bil­lion against a tar­get of US$4,1 bil­lion. Tak­ing into ac­count the ex­pen­di­ture de­vel­op­ments to Septem­ber, out­turn to year end is es­ti­mated at US$8,2 bil­lion, against a bud­get of US$5,3 bil­lion, im­ply­ing an ex­pen­di­ture over­run of US$2,8 bil­lion (11,7 per­cent of GDP).

Such a high deficit is clearly un­sus­tain­able against ac­cept­able in­ter­na­tional lev­els of around 3 per­cent of GDP. The high bud­get deficit has been feed­ing into the rapid build-up in do­mes­tic debt stock which stood at US$9,6 bil­lion as at end of Septem­ber 2018 as well as other macro vul­ner­a­bil­i­ties.

The bulk of do­mes­tic debt is also in Trea­sury bills, is­sued for re­cap­i­tal­i­sa­tion of pub­lic en­ter­prises, set­tling Gov­ern­ment obli­ga­tions and RBZ debt as­sump­tion.

GDP Re­bas­ing

Zim­babwe has un­der­taken a re­bas­ing of Gross Do­mes­tic Prod­uct in line with in­ter­na­tional norms, which re­quire re­plac­ing of the old base year, tak­ing cog­ni­sance of changes in struc­ture of the econ­omy. This ex­er­cise is un­der­taken fol­low­ing sec­tor sur­veys by ZIMSTAT.

These sur­veys re­flected sig­nif­i­cant changes in the num­ber of es­tab­lish­ments in spe­cific sec­tors and the whole econ­omy (5 419 to 38 137). And also im­por­tant is that the sur­veys cap­tured the GDP con­tri­bu­tion by the in­for­mal sec­tor, which has grown big­ger in Zim­babwe.

The whole ex­er­cise cul­mi­nated in the adop­tion of a new base year 2012 from the pre­vi­ous 2009 base year. Sub­se­quent changes of GDP num­bers in line with the new base year in­di­cate that GDP at cur­rent prices for 2016 has moved up­wards from US$16,6 bil­lion to US$20.5 bil­lion, while at con­stant prices it grew by 29,2 per­cent from US$14,2 bil­lion to US$18,3 bil­lion.

The re­bas­ing ex­er­cise also re­vealed some vi­tal in­for­ma­tion on our pub­lic fi­nances. In essence, there is no­table fall in rev­enue to GDP ra­tio, re­flect­ing that rev­enue gen­er­at­ing ca­pac­ity of the Zim­bab­wean econ­omy is yet to be har­nessed and that the cur­rent tax sys­tem has scope for ex­pan­sion.

In ad­di­tion, the higher rev­enue to GDP ra­tio be­fore re­bas­ing im­plies that a higher tax bur­den is be­ing shoul­dered by a few tax­pay­ers while tax eva­sion, par­tic­u­larly in the in­for­mal econ­omy, re­mains quite high.

With re­gards to trade, ex­ports dur­ing the first half and part of the third quar­ter were on the rise, un­der­pinned by growth in gold, plat­inum, chrome and to­bacco ex­ports, on the back of favourable prices and in­creased pro­duc­tion.

Ex­ports of goods and ser­vices for the first three quar­ters of the year amounted to US$3,79 bil­lion, against US$3,44 bil­lion recorded dur­ing the same pe­riod in 2017.

The growth in ex­ports, how­ever, suf­fered a knock in the third quar­ter of 2018 due to chal­lenges re­lated to for­eign cur­rency short­ages, par­tic­u­larly for key ex­porters. This com­pro­mised the abil­ity of ex­port­ing firms to cover their costs of key con­sum­ables, hence re­duced pro­duc­tion.

Im­ports

On the other hand, the pres­sure em­a­nat­ing from ris­ing in­ter­nal growth dur­ing the first nine months of the year, pro­pelled the de­mand for im­ports of goods and ser­vices.

A to­tal of US$5,87 bil­lion in mer­chan­dise im­ports were recorded dur­ing the first nine months of the year, against US$4,86 bil­lion of the same pe­riod last year.

These im­ports were mainly dom­i­nated by fu­els, elec­tric­ity, fer­tiliser, chem­i­cals, soya, medicines and few other con­sum­ables.

The higher growth of im­ports rel­a­tive to ex­ports im­plies a widen­ing trade bal­ance of US$2,1 bil­lion dur­ing the first three quar­ters of the year, com­pared to US$1,4 bil­lion.

The de­te­ri­o­rat­ing trade bal­ance, higher pri­mary in­come pay­ments rel­a­tive to re­ceipts and slow­down in trans­fers, par­tic­u­larly re­mit­tances, gave rise to a widen­ing cur­rent ac­count bal­ance.

This se­cond part of Zim­babwe’s twin deficits has also a role in ig­nit­ing the macro in­sta­bil­ity in­clud­ing in­fla­tion­ary pres­sures dur­ing the fourth quar­ter of the year through ris­ing par­al­lel ex­change pre­mi­ums.

As a re­sult, an­nual in­fla­tion, which av­er­aged 2,9 per­cent dur­ing the first half of 2018 shot to 20,8 per­cent in Oc­to­ber 2018, re­flect­ing the dan­gers of liv­ing with the twin fis­cal and cur­rent ac­count deficits.

The Tran­si­tional Sta­bil­i­sa­tion Pro­gramme

In view of the above chal­lenges and our quest for trans­form­ing the coun­try into up­per mid­dle in­come sta­tus, Gov­ern­ment has launched a short-term sta­bil­i­sa­tion strat­egy — the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme (Oct 2018-Dec 2020), which is a ready un­der im­ple­men­ta­tion and to be fol­lowed by two strate­gic suc­ces­sor plans — Fiveyear Na­tional De­vel­op­ment Plans: NDP 2021-2025 and NDP 2026-2030.

The Tran­si­tional Sta­bil­i­sa­tion Pro­gramme’s im­me­di­ate task is cen­tred on macro and fis­cal sta­bil­i­sa­tion and lay­ing a solid foun­da­tion for at­tain­ing the over­all goal of a strong, sus­tain­able and shared growth.

Such growth will be an­chored on good gover­nance and pro­mo­tion of demo­cratic prin­ci­ples, eq­ui­table ac­cess to means and out­comes of pro­duc­tion, as well as modern in­fra­struc­ture that sup­ports day-to- day so­cio-eco­nomic ac­tiv­i­ties.

Sus­tain­able and shared growth will also pri­ori­tise ef­fi­cient de­liv­ery of pub­lic ser­vices and restora­tion of Zim­babwe’s right­ful place in the global econ­omy.

Im­ple­ment­ing the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme by pow­er­ing the re­spec­tive strate­gic and trans­for­ma­tive divers for change and de­vel­op­ment is ini­tially through the 2019 Bud­get.

The Trans­for­ma­tive Driv­ers of Change

Macro-Fis­cal Sta­bil­i­sa­tion

The pri­mary ob­jec­tive of the TSP and hence the 2019 Bud­get is to sta­bilise the econ­omy by tar­get­ing the fis­cal and cur­rent ac­count twin deficits, which have be­come ma­jor sources of over­all eco­nomic vul­ner­a­bil­i­ties in­clud­ing in­fla­tion, sharp rise in in­debt­ed­ness, ac­cu­mu­la­tion of ar­rears and for­eign cur­rency short­ages.

The strat­egy for re­duc­ing the bud­get deficit en­tails manag­ing ex­pen­di­tures while stim­u­lat­ing eco­nomic ac­tiv­ity in or­der to broaden the rev­enue base for any fu­ture ex­pen­di­tures re­quired for de­vel­op­ment.

In ad­di­tion, dur­ing the macro sta­bil­i­sa­tion phase, ef­forts will be di­rected at mo­bil­is­ing and op­ti­mis­ing rev­enues without com­pro­mis­ing the vi­a­bil­ity at source.

On the other hand, manag­ing the cur­rent ac­count deficit, as al­ready in­di­cated in the Bud­get, will re­quire mea­sures on manag­ing our im­port bill while stim­u­lat­ing ex­ports and other forex in­flows.

Trea­sury Bill Is­suances High fis­cal deficits be­came en­trenched largely due to ex­pen­di­tures com­mit­ted out­side the Bud­get frame­work and fi­nanced pri­mar­ily through Trea­sury Bill is­suances and RBZ over­draft.

Go­ing for­ward, with im­me­di­ate ef­fect, all Trea­sury bill is­suances will be strictly through the auc­tion sys­tem and for fi­nanc­ing ex­pen­di­tures un­der the Bud­get frame­work and for short-term cash­flow mis­matches.

The over­draft fa­cil­ity with the RBZ is now lim­ited to 5 per­cent of pre­vi­ous years’ rev­enues and for the sole pur­pose of smoothen­ing cash­flows.

The Pub­lic Fi­nance Man­age­ment Act is, there­fore, be­ing amended to pe­nalise any Trea­sury Bill is­suances out­side the Bud­get frame­work.

Ex­pen­di­ture Con­tain­ment

The Bud­get em­pha­sises on liv­ing within means by in­still­ing fis­cal dis­ci­pline and ra­tio­nal­is­ing ex­pen­di­tures in or­der to cre­ate ad­di­tional fi­nan­cial ca­pac­ity for fund­ing de­vel­op­men­tal ex­pen­di­tures and en­hanc­ing de­liv­ery of pub­lic ser­vices.

Con­se­quently, a num­ber of mea­sures on con­tain­ing ex­pen­di­tures are al­ready un­der im­ple­men­ta­tion, tar­get­ing the wage bill and other op­er­a­tional ex­pen­di­tures.

In sup­port of ex­pen­di­ture con­tain­ment mea­sures, the Bud­get is also in­tro­duc­ing mea­sures on im­prov­ing ex­pen­di­ture con­trols, fis­cal trans­parency, and re­port­ing.

Tri­par­tite Ne­go­ti­at­ing Fo­rum (TNF)

So­cial di­a­logue has proved to be a key plat­form for ad­dress­ing var­i­ous so­cial and eco­nomic chal­lenges be­tween the three so­cial part­ners, namely, Gov­ern­ment, labour and busi­ness.

The TNF, there­fore, pro­vides scope for ne­go­ti­at­ing a so­cial con­tract that also re­duces pres­sure on the wage bill with the ob­jec­tive of en­hanc­ing the eco­nomic de­vel­op­ment process of the coun­try and at the same time pro­mote con­sen­sus build­ing for the na­tional good.

Penal­ties un­der the Pub­lic Fi­nance Man­age­ment Act

Com­pli­ance with pro­vi­sions of the statutes that gov­ern pub­lic fi­nance man­age­ment is cen­tral to fis­cal dis­ci­pline and the achieve­ment of Gov­ern­ment de­vel­op­ment and ser­vice de­liv­ery ob­jec­tives.

The PFM Act em­pow­ers the Trea­sury to ex­er­cise gen­eral di­rec­tion and con­trol over pub­lic re­sources, and fur­ther pro­vides for fi­nan­cial mis­con­duct in cases of wil­ful and/or neg­li­gent fail­ure to per­form duty and ex­er­cise pow­ers in com­pli­ance with pro­vi­sions of the Act.

Trea­sury will, in the con­text of amend­ing the Pub­lic Fi­nance Man­age­ment Act, pro­pose mea­sures that en­hance the en­force­ment of ap­proved penal­ties, for cases of non-com­pli­ance with re­quire­ments of the Act, to achieve im­proved ac­count­abil­ity in the man­age­ment of pub­lic re­sources.

Multi-Cur­rency Sys­tem

In the 2019 Bud­get, I re­it­er­ated that the coun­try is still us­ing the multi-cur­rency sys­tem, which was put in place by Gov­ern­ment in 2009. From this multi-cur­rency bas­ket, the US dol­lar is our ref­er­ence cur­rency, also ap­ply­ing to the 2019 Na­tional Bud­get.

Gov­ern­ment com­mits to pre­serv­ing the value of money bal­ances on the cur­rent rate of ex­change of 1 to 1, in or­der to pro­tect peo­ple’s sav­ings and bal­ance sheets. This value preser­va­tion ar­range­ment is hinged on con­sis­tent im­ple­men­ta­tion of pru­dent fis­cal and mone­tary poli­cies, as well as dis­ci­plined mar­ket con­duct by a eco­nomic agents as es­poused in the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme.

Go­ing for­ward, the ob­jec­tive is to build for­eign re­serves and credit lines, as part of the strat­egy for the value preser­va­tion ob­jec­tive.

In the same vein, as macro-fis­cal con­sol­i­da­tion pro­gresses, Gov­ern­ment will es­tab­lish a strong in­clu­sive frame­work, through an in­terim For­eign Cur­rency Al­lo­ca­tion Com­mit­tee, with broader rep­re­sen­ta­tion as was the case in the past.

This will, how­ever, be in the con­text of grad­u­ally ex­it­ing from ex­change con­trols to mar­ket-based mech­a­nisms that pro­mote ef­fi­ciency in for­eign cur­rency al­lo­ca­tion.

Re-en­gage­ment for Ex­ter­nal Debt Res­o­lu­tion

Re-en­gage­ment with co-op­er­at­ing part­ners and In­ter­na­tional Fi­nan­cial In­sti­tu­tions to dis­cuss and map the way for­ward on the coun­try’s Ar­rears Clear­ance Road Map con­tin­ues. The last meet­ings were held in Oc­to­ber 2018, in Bali, In­done­sia.

In sum­mary, the co-op­er­at­ing part­ners are in sup­port of the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme, as it cap­tures ad­e­quately the re­forms that Gov­ern­ment is im­ple­ment­ing, in or­der to turn around the coun­try’s eco­nomic for­tunes.

How­ever, the in­ter­na­tional com­mu­nity em­pha­sised the need to con­sis­tently im­ple­ment the mea­sures as out­lined in the TSP and, there­fore, im­ple­men­ta­tion of re­forms un­der the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme holds the key for ad­vanc­ing the ar­rears clear­ance strat­egy and un­lock­ing of new fi­nanc­ing.

Pro­duc­tive Sec­tors

The 2019 Bud­get recog­nises the cur­rent con­straints of lim­ited fis­cal space against high de­mands, and, there­fore, ini­tially fo­cuses on quick-win flag­ship projects and pro­grammes across key sec­tors of the econ­omy, with a view of stim­u­lat­ing in­clu­sive growth with jobs.

Con­se­quently, the 2019 Bud­get pri­ori­tises agri­cul­ture, in­fra­struc­ture re­ha­bil­i­ta­tion and de­vel­op­ment which or­di­nar­ily sup­ports our pro­duc­tive sec­tors be­sides other so­cial-eco­nomic ac­tiv­i­ties.

Pub­lic Ser­vices De­liv­ery

In the same vein, the Bud­get pri­ori­tises health­care, ed­u­ca­tion, water and san­i­ta­tion as de­liv­ery of these ser­vices re­mains ut­most im­por­tant and yet still falls short, that way im­pos­ing hard­ships on parts of the pop­u­la­tion.

De­tails on these sec­tors will be dealt with by the re­spec­tive Min­is­ters.

In­fra­struc­ture De­vel­op­ment

In­fra­struc­ture de­vel­op­ment is pri­ori­tised un­der the 2019 Bud­get and the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme as a key in­gre­di­ent for at­tract­ing in­vest­ment, re­duc­ing the cost of do­ing busi­ness and fa­cil­i­tat­ing busi­ness oper­a­tions.

Trea­sury in con­sul­ta­tion with line min­istries and other de­part­ments has drawn an In­fra­struc­ture De­vel­op­ment Plan. The 2019 pri­or­ity projects have been se­lected through fur­ther en­gage­ments with line min­istries, pub­lic en­ti­ties and stake­hold­ers.

A num­ber of the iden­ti­fied projects will be ac­corded high pri­or­ity, With their ex­e­cu­tion be­ing tracked by Cab­i­net un­der the 100-Day Pro­gramme Cy­cle. This will en­sure ad­e­quate re­sources are di­rected to­wards ef­fec­tive projects de­liv­ery, in­clud­ing ac­cess to crit­i­cal con­struc­tion in­puts.

The list also in­cludes projects that ad­dress emerg­ing in­fra­struc­ture gaps, which have put the lives of the pub­lic at risk, par­tic­u­larly in the water and san­i­ta­tion, hous­ing and en­ergy sec­tors.

In­fra­struc­ture Spend­ing and Fi­nance

A to­tal of US$2,6 bil­l­lion will be in­vested in in­fra­struc­ture dur­ing 2019, of which US$1,1 bil­lion will be mo­bilised through the Bud­get and US$1,5 bil­lion as off-bud­get fi­nanc­ing.

Al­ready, Gov­ern­ment has fa­cil­i­tated mo­bil­i­sa­tion of off-bud­get loan fund­ing through pub­lic en­ti­ties, which will re­sult in US$969 mil­lion be­ing dis­bursed dur­ing 2019 for on­go­ing works at Hwange 7 and 8 Ther­mal Power Sta­tion (US$350 mil­lion), Harare-Masvingo-Beit­bridge Road Up­grad­ing Project (US$250 mil­lion), NRZ re­cap­i­tal­i­sa­tion (US$216 mil­lion) and R. G. Mu­gabe In­ter­na­tional Air­port (US$78,2 mil­lion).

Fur­ther­more, statu­tory and pub­lic en­ti­ties own re­sources will con­trib­ute US$390 mil­lion, whilst de­vel­op­ment part­ners are ex­pected to in­vest US$99,4 mil­lion, mostly tar­geted at projects in en­ergy, water and san­i­ta­tion, trans­port and ir­ri­gation sec­tors.

In­clu­sive and Pri­vate Sec­tor Led Growth

Gov­ern­ment deems all sec­tors of the econ­omy as hav­ing po­ten­tial and abun­dant ca­pac­ity to con­trib­ute to eco­nomic growth and jobs cre­ation. Crit­i­cal for trig­ger­ing this op­por­tu­nity is har­ness­ing and or­gan­is­ing the req­ui­site fi­nan­cial and hu­man cap­i­tal re­sources for this pur­pose.

An ag­gres­sive in­vest­ment drive is fun­da­men­tal un­der the thrust “Zim­babwe is Open for Busi­ness”. This ne­ces­si­tates en­hanced ef­forts on re­form­ing the busi­ness and in­vest­ment en­vi­ron­ment, un­der the Ease of Do­ing Busi­ness Re­forms.

The short­com­ings iden­ti­fied un­der the Ease of Do­ing Busi­ness Re­form Agenda are be­ing pri­ori­tised with spe­cific ac­tions be­ing in­sti­tuted un­der 100-Day Rapid Re­sults Plans.

Other in­vest­ment ini­tia­tives in­clude the for­ma­tion of the Zim­babwe In­vest­ment and De­vel­op­ment Agency (ZIDA), through amal­ga­ma­tion of the Joint Ven­ture Unit in the Min­istry of Fi­nance and Eco­nomic De­vel­op­ment; Zim­babwe Spe­cial Eco­nomic Zones Au­thor­ity; and the Zim­babwe In­vest­ment Au­thor­ity.

As of 31 Oc­to­ber, 2018, a to­tal of fifty two (52) in­vest­ment pro­pos­als with an ag­gre­gate value of US$57 bil­lion had been re­ceived for ap­praisal.

Al­ready, eleven (11) of them have al­ready been ap­proved by Gov­ern­ment, set­ting the stage for prepa­ra­tions to­wards com­menc­ing oper­a­tions. The ap­proved projects have a com­bined value of US$5,3 bil­lion. The bulk of the projects are work in progress and are at var­i­ous stages of pro­cess­ing.

Ven­ture Cap­i­tal Fund­ing

Fur­ther to this, Gov­ern­ment is also es­tab­lish­ing an en­abling en­vi­ron­ment to at­tract in­vest­ments through ven­ture cap­i­tal.

Ven­ture cap­i­tal firms match fi­nanc­ing to en­trepreneurs po­ten­tially vi­able good projects, thereby con­tribut­ing to the suc­cess of in­vestee com­pa­nies. Con­se­quently, up­com­ing firms grow and cre­ate jobs, in­crease over­all in­no­va­tion, pro­duc­tiv­ity and growth at macroe­co­nomic level is re­alised.

It is en­vis­aged that such in­vest­ments will com­ple­ment Gov­ern­ment ef­forts in turn­ing around the econ­omy.

Tax In­cen­tive for Jobs

The Bud­get also made pro­pos­als for a tax­a­tion regime tar­get­ing job cre­ation, es­pe­cially in­cen­tivis­ing in­vestors, cor­po­rates and en­trepreneurs. Con­sul­ta­tions with the pri­vate sec­tor are on­go­ing with a view of iden­ti­fy­ing strate­gies for pro­mot­ing job cre­ation in the econ­omy.

The US dol­lar re­mains the ref­er­ence cur­rency in Zim­babwe’s multi-cur­rency bas­ket as part of the strat­egy for the value preser­va­tion ob­jec­tive

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