A forward looking budget, informed by lessons of the past

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Kudzanai Sharara Taking stock
The 2018 national budget consultation meetings have started. Government ministries, state entities, private entities and all Zimbabweans are expected to give their input with regards to what they would want to see in the 2018 national budget. By the end of November or early December, we expect to see the outcome. Expectedly, deliberations are about budget allocations, growth projections, and economic outlook. However, an area that will be more intriguing is that of policy measures that will be implemented to stimulate or consolidate the 3,7 percent growth rate that is expected in 2017.

While this 3,7 percent is largely attributed to the good agricultural season, chances are that structural issues such as capital flow bottlenecks, central government expenditures, and business environment are being understated.

There are also monetary issues that may also have a negative impact on growth that also need to be considered. For instance industrialists at recent forums such as the CZI annual breakfast are very vocal that the current foreign currency shortages are hindering productivity. As companies struggle to get raw materials the ultimate impact is production will slow down at best or stop altogether. The RBZ has already accused banks of not following the foreign currency allocation priority list, while the CZI has also reported that foreign currency allocations are not getting to their intended beneficiaries.

There is need to ascertain the impact all this is having on production so that we can manage our expectations of a 3,7 percent growth rate. The danger of ignoring all else, and remaining bullish on that growth rate, is that corrective measures will not be taken and the country’s economy will continue to nudge ahead on false growth expectations. Without acknowledging these headwinds, chances are also high that the Budget will end up proposing policy measures that will be prove impotent in supporting and sustaining economic growth.

Let’s stay with monetary issues where the big question is, what sort of impact to economic growth can be attributed to the bond notes incentives?

There is no doubt that companies and entities that have received the extra 5 percent are grateful and might push production to enjoy similar benefits in future.  As we know Zimbabwean output, offered on global markets at a strengthening US dollar valuation, struggle to be competitive on the export market. So the 5 percent incentive can subsidies some of the manufacturing companies’ to price their exports marginally lower; maybe even at cost and use that 5 percent incentive as the profit margin while they gain market share on global markets.

So with regards to the manufacturing sector that exports output, getting a 5 percent incentive could be a catalysts enough to push for greater export volumes in a pricing context. The RBZ then needs to ensure swift reward of the incentive. Questions are, however, being raised on whether the country is enjoying the same benefits when it comes to giving the mineral sector the same benefits.

For instance, are miners improving production because there is an export incentive to be earned, or they are improving production because the prevailing commodity prices are attractive? As we go into the next year, and as the RBZ plans to inject more incentives, has a study been done to show whether all beneficiaries have increased production that is specifically attributable to the introduction of the incentives, or incorrect analyses may be deceiving the appraisal of bond note incentives?

Let’s take listed entity Padenga for example; has there been an increase in exports of crocodile skins since the introduction of the export incentive?

Chances are that Padenga has not increased production as the company has its own targets and limits in terms of pushing more crocodile skins through its production lines. Another angle that we can look at is that of the export incentive versus the tax that is being paid by these companies. Chances are that the taxes that are being paid to the national fiscus by mining houses are less than the export incentives. Arguments have already been put across that export incentives given to miners in the first quarter of the year at $18,1 million were more than the royalties paid by miners for the same period at $16,4 million according to Zimra. So where is the benefit? Emphasis here is that when appraising policy interventions, government should be aware of context and overlap in its many diverse policies. There should be intentional disaggregation of data and events to trace the potency and credibility of each policy initiative on its own.

There is serious need for retrospection, to find out whether the benefits from the incentive outweigh the harm. Do we get more by going the export incentive route or by using the combined $500 million Afreximbank facilities for other purposes?

The country might not have gone through the export challenges had the RBZ silently used the $200 million to strengthen the use of electronic systems for transactions.

If the use of plastic money had been marketed as a smart and modern way of doing things, Zimbabweans would not have been spooked into hiding their US dollars under the mattresses. Thus even market sentiment towards policies themselves can have conflicting implications on economic growth.

Admittedly, exports are important, but import substitution should be of equal esteem. With greater push for export earnings, import substitution should have been a main focus area as well. The $200 million export inventive could have equally been used to capacitate the agricultural sector which is struggling to get bank loans.

Targeted lending could have come up with an equally if not better outcome than giving out bond notes incentive to an open, and stubbornly speculative market. Specific companies with potential to export could have been given loans at preferential interest rates — a strategy often called “window guidance” in monetary policy- and perhaps the results could have been much better on stimulating the economy.

So budget deliberations must be done from an evaluative perspective first. I have just belaboured one main policy of the last year, but several policy initiatives have been undertaken. Evaluation must take a multi-pronged approach and bear in mind the potential overlap and conflict within policies. If next year’s budget is to be effective, it has to be guided by the policy lessons of the preceding year.

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