TSP: Dealing with fiscal deficit

GOVERNMENT has identified unsustainable and prolonged fiscal deficits as the major challenge threatening economic recovery efforts and growth.

The country has been running a budget deficit for several years and between January to September, the deficit had already reached $2,5 billion against a target of $715,4 million.

If corrective measures are not put in place, the fiscal deficit is likely to close the year higher than the $2,6 billion deficit recorded in 2017.

The prolonged deficit is said to be perpetuating uncontrolled domestic borrowing, and feeding into vulnerabilities for the financial sector and the rest of the economy, and thereby, posing macro-economic instability.

Financial sector vulnerabilities are reflected through the cash shortages and distortions in the foreign exchange market. This is more so as financing of the deficit has been through the issuance of Treasury Bills and also through the overdraft to the Central Bank, which is currently about $2,2 billion.

The result has been a mismatch between huge bank deposits of close to $10 billion and a cash to deposit ratio of less than the optimal level of around 15 percent.

However, Government, through the Transitional Stabilisation Programme (TSP), targets to strengthen fiscal responsibility and management of Government expenditures.

Government spending, which saw its wage bill account for more than 90 percent of revenue generated, is one of the reasons why the country has been recording a trade deficit for years.

“The Programme, therefore, first and foremost, targets strengthening fiscal responsibility and management of Government expenditures in order to create an appropriate environment for increased budget development expenditures that enable and enhance the economy’s overall productive activities,” reads part of the TSP.

Treasury will preside over a Fiscal and Financial Stabilisation Committee to coordinate and monitor adherence to the fiscal and monetary targets outlined by the TSP.

Over the years, lack of discipline and proper monitoring mechanisms resulted in Government departments and parastatals recording budget deficits.

Furthermore, the TSP targets the eradication of corruption, which is a major source of leakages to public revenues and also a major cost to various productive activities.

In addition, the Programme will also institute measures that seek to strengthen the economy’s balance of payments, particularly with regards to enhancing exports, currency competitiveness, improving capital inflows, as well as managing over dependency on imports.

While in the last couple of years, Treasury Bills were being used to finance the budget deficit, Government is planning to put in place a Treasury Bill Issuance Framework. Through this, issuances of Treasury Bills will be strictly aligned to the Parliamentary approved borrowing requirement.