Unpacking 2022 National Budget
WHILE significant progress has been recorded in real sectors of the economy, notably agriculture, mining and construction, stability remains a major concern for policymakers.
Having gotten the basics right, specifically fiscal balance, the natural expectation by policymakers and a number of analysts alike was that stability was going to follow; more so, with the acceleration of economic recovery in 2021.
Zimbabwe’s economy is projected to grow by 7,8 percent in 2021, which is way higher than Sub-Saharan Africa and global growth forecasts of 3,7 percent and 5,9 percent, respectively.
However, faced with deep-seated structural challenges, fiscal rebalancing and growth are inadequate to usher durable stability.
We now know better! Inflation, which has been on the downward trajectory since the beginning of the year, started to increase in September and reached 54, 5 percent in October 2021.
This prompted the Government to revise its year-end inflation projection to 52-58 percent from a previous projection of 25-35 percent.
Equally worrying is the accelerated depreciation of the local currency (ZWL) and widening rate between the parallel and official market.
At the level of US$1 to $160-200, the current parallel market exchange rate represents premiums of 50-90 percent on the official exchange rate, which is way higher than acceptable premiums of 20-30 percent.
Treasury contends that if left unchecked, inflation and currency depreciation are real threats to gains achieved in the real sector so far; therefore, the projected growth has been lowered to 5,5 percent for 2022.
Given the threat of economic instability, Treasury’s emphasis on efforts to deal with the adversary is unsurprising.
This is necessary to keep the flame of hope burning.
If instability continues unchecked, there is real danger of ordinary citizens, the majority who bear the brunt of economic stability, losing hope.
Without necessarily vindicating dollarisation, Treasury has maintained its preference of foreign currency by insisting on foreign currency taxes, duties and levies on selected products and services.
Reasonably so, because in the current environment characterised with concentration of foreign currency in the hands of a few and wide exchange rate deferential between the parallel and official foreign currency markets, the unintended consequences for local currency preference, arguably to support the local currency, are undesirable.
The commitment to social protection and measures to cushion civil servants from exchange depreciation and inflation have been well received by the market. While Treasury maintained its position to contain subsidies, it justifiably maintained support for Productive Social Protection Schemes, which is essentially target vulnerable groups.
This constituency has always carried the biggest burden of economic challenges. They have also paid heavily for the recovery of the economy in 2021.
With an allocation of $19,5 billion to the Ministry of Public Service, Labour and Social Welfare, and commitment to utilise some of the Special Drawing Rights (SDR) towards social protection, it is hoped the support to this constituency will be meaningful.
Alongside borrowings, SDRs are also expected to support financing of $76,5 billion (1,5 percent of GDP) budget deficit.
US-dollar bonuses
Equally welcome was the decision by Treasury to pay civil servants bonuses in foreign currency as well as what seems to be a considerate taxation of the same. Civil servants are going to receive bonuses of up to US$700 in foreign currency this year.
The tax-free threshold for bonuses has been reviewed to $100 000 and US$700 from $25 000 and US$320 the previous year, respectively. The review is effective from November 1, 2021. Payment of bonus in US dollars is important to deal with speculative price increases on account of an anticipated increase in Zimbabwe dollar liquidity in the market from the 13th cheque.
We normally experience exchange rate depreciation during the last quarter of the year due to bonus payments, at a time when the foreign currency position of the country is at its weakest.
Clearly, the Government has capacity to pay bonus in foreign currency.
Treasury has been collecting significant revenue in foreign currency and is projecting foreign currency revenue of US$1,5 billion, which is about a third of its total budget of $927,3 billion in 2022.
From this collection, Treasury is also able to pay contractors for mainly infrastructure in foreign currency.
This is necessary to increase the flow and accessibility of foreign currency in the economy. Discretionary expenditure is high among the ordinary citizens than the affluent. Payment of contractors in foreign currency will go a long way in easing pressure for foreign currency.
The current instability is largely attributable to payment of an estimated $45 billion to contractors this year, who would immediately offload the same for foreign currency.
It appears Treasury is well bought to the widely held view that only sound economic fundamentals can guarantee durable stability and recovery.
Revival of the manufacturing sector is seen as key to rebuilding these fundamentals, which include economic diversification, employment, budget and trade balance.
Notable progress has so far been made in rebalancing both domestic and external positions.
Budget deficit was contained at a modest 0,5 and 1,5 percent in 2021 and 2022 respectively, from more than 10 percent before we embarked on reforms in 2018.
Equally comforting is the improvement of the trade balance to US$1,078 billion and US $723, 2 million in 2021 and 2022 respectively from prior reforms peak amounts of around US$2 billion per annum.
However, worryingly, this performance is mainly driven by a narrow range of players, which suggest that diversifying our economy is the urgent need of the day.
Improved access to foreign currency through the Foreign Currency Auction System is seen as a major boost to the manufacturing sector.
As at November 2 2021, RBZ allocated US$2,34 billion through the SME and Main Auction.
Out of this amount, 70 percent went towards support to the productive sectors, mainly importation of raw materials, packaging materials, as well as machinery and equipment, which is seen as supporting manufacturing sector recovery.
Continued growth of the manufacturing sector to 6,2 percent this year and 5,5 percent next year as well as an increase in average capacity utilisation to 65 percent for 2021 points to recovery of this sector.
In line with NDS1, the target is to increase the share of the manufacturing sector to 30 percent of GDP from the current levels of 10-15 percent. Performance of the primary sectors, mainly agriculture, is key to supporting this target.
Due to good rains in the 2020/21 season, agriculture is expected to register strong performance, with 36,2 percent growth expected in 2021.
While it’s normally rare to experience two consecutive good agriculture seasons in Zimbabwe, weather experts project another good season next season. Resultantly, the agriculture sector is expected to continue growing at 5,1 percent in 2022.
To support fiscal restraint and in line with the Agriculture Recovery Plan, financing of agriculture will mainly be done by banks, with Government providing guarantees where necessary.
As highlighted earlier, the Government continues to support Social Protection Schemes, such as Pfumvudza/Intwasa.
Worryingly, however, is the firming input prices, mainly of fertilisers.
Fertiliser prices are increasing due to Covid-19-related reasons, which include reduced supplies from China and Russia alongside increasing freight costs.
This will further affect the input recovery rate on Government guaranteed programmes.
Equally important in sustaining economic recovery is the performance of the mining sector.
Firming global commodity prices are expected to drive mining sector growth to 8 percent in 2022 from 3,4 percent expected this year.
Being the largest foreign currency generator, this sector has been key in supporting the foreign currency auction system through the export surrender proceeds.
From expected merchandise exports of US$4,7 billion, RBZ is expected to rake in US$1,9 billion from the 40 percent export surrender. This together with an estimated US$1,3 billion from 20 percent domestic surrender (US$10m per week) and weekly Government liquidation of US$15 million will go a long way in supporting auction requirements of about US$40 million per week or US$2,1 billion per year.
This is why the mining sector is seen as critical to Zimbabwe today.
However, currency stability and parallel and official market exchange rate disparity are seen as key in unlocking value from exporters and other foreign currency earners who are currently sitting on around US$1,7 billion in private nostros.
It is clear from the Budget that while we are on the right path, there is still a lot of work to do to get the economy back on sustainable recovery path.
Public debt, which stood at US$13,7 billion, remains an albatross around Zimbabwe’s neck. However, what’s comforting to note is that we have started making token payments of US$44, 2 million towards external debt service.
These payments were specifically done to International Financial Institutions and bilateral Paris Club creditors.
Servicing of external debt is important for the re-engagement efforts currently underway.
Maturities for relating to domestic debt, which currently stand at US$532 million, pose a risk to broad money expansion.
This monetary variable currently stands at $330 billion and 60 percent of it in ZWL.
Broad Money supply has been increasing due to credit creation by banks, partly aided by leveraging on 40 percent forex component of the ZWL as security to borrow ZWL.
Despite what is clearly a good job by RBZ to contain base money below $28 billion, broad money is a real threat that needs to be checked.
The scale of our challenge is not small but can be solved. We are happy with the efforts and progress so far.
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