eBusiness Weekly
Last Thursday, November 22, 2018, Finance and Economic Development Minister, Honourable Mthuli Ncube delivered perhaps the hardest hitting Budget Statement in recent times. Having had a full week to digest the Budget, I am now more than convinced that the fiscal plan presented by the minister lays a very solid foundation for the economic recovery of our country.Aptly themed: “Austerity for Austerity”, the 2019 Budget outlines a robust set of tough measures, most of them unexpected, but many of them a direct response to what the minister referred to as the “Twin Deficits”, which are the fiscal deficit and the current account deficit.
These evil twins have conspired to become the major sources of economic vulnerability, manifesting themselves as sharp increases in Government debt, a bloated domestic money supply, which has translated into foreign currency and cash shortages, which have fuelled inflationary pressures in the economy.
Hon Ncube, flanked by his astute team, anchored on the solid experience of Secretary for Finance, George Guvamatanga, a retired but tried and tested banker, should be commended for the widely consulted Budget, which makes an accurate diagnosis of the economic malaise, and then offers a cocktail of bitter but effective medicine.
Austerity now the New Rule in town
The Government has been spending much more than the revenues that are generated each year, resulting in progressively higher Budget deficits. To finance the deficits, the authorities have resorted to bank financing of expenditures, via issuance of Treasury Bills, an unsustainable strategy in an illiquid environment, in which the domestic market had inadequate capacity to fund. To counter the potential liquidity effects of bank financing of the Government deficit, it became necessary for Government to resort to the overdraft facility with the Reserve Bank of Zimbabwe.
The RBZ overdraft, essentially a printing press, together with Treasury Bills and Savings Bonds, were utilised to finance the extra budgetary expenditures.
Some of these expenditures that have contributed to the $2,8 billion Budget balance for the year 2018 relate to unbudgeted civil service wage adjustments of $350 million, support to agriculture $1,2 billion, capitalisation of State-Owned entities of $380 million as well as investments and capital projects-roads and dam construction.
It is worth noting that these expenditures, while they are reflective of financial indiscipline in that they were incurred outside the budget framework and therefore resulted in an unsustainable deficits, were also an attempt by Government to re-stimulate the economy.
However, no matter how well intentioned, financial indiscipline should neither be tolerated nor condoned. The minister thus decided to close the loopholes through which TBs were being issued, as well as to tighten the cap on the RBZ overdraft financing window.
Aggressive fiscal targets
In order to restore macro fiscal stability, the 2019 Budget proposes a drastic reduction of budget deficits from the current 11,7 percent of GDP projected for 2018, to 5 percent of GDP by end of year 2019, and subsequently to 4,1 percent of GDP in 2020 and 2,9 percent of GDP by 2021 and ultimately to below 1 percent of GDP by the year 2025.
These targets are only achievable under conditions of austerity. Austerity is not just about controlling and rationalising expenditure. It is also about making expenditure more efficient and targeted, reducing waste, but also increasing revenue and expanding the tax base. The various revenue heads must contribute more and this the minister has tried to instil in his budget.
Preserving the value of domestic savings
Curbing money supply growth is a key focus of the Budget. Hon Ncube does not want Zimbabweans to lose their savings again to debasing of value due to excessive money supply expansion, which is the quickest trigger of hyperinflation.
The chief source money supply growth has been, as already said, Government borrowing. There has been a marked rise in the level of domestic debt, which constitutes the money supply. The statutory debt cap of 70 percent GDP will most likely have been breached by end of year. This cancerous growth in broad money supply (M3) has pushed up inflation via parallel market exchange rates for foreign currency as economic agents sought refuge in imported goods.
The stock market has also been pushed to dizzy heights, creating another wealth effect on the economy, which also tends to push up inflationary pressure.
The rapid expansion of money supply had become a serious threat to macro-economic stability and the high rate of injection of Government securities has also raised serious concerns for financial sector viability.
To this end, Hon Ncube suggested that the Government debt profile should be restructured by lengthening the tenure of Government debt instruments.
Secondly there will be no extra budgetary issuance of TBs beyond the expected maturities of outstanding paper, estimated at just over $2,2 billion for 2019.
The implication is that all new Treasury Bills will be issued in line with the expenditure framework outlined in the Budget and the requests will only be entertained at the instance of the Accountant General.
To further improve accountability and transparency, the Government will move away from issuance of TBs via negotiated private placements and migrate to an auction-based system of issuing Government paper.
This move will make the TB market more efficient as trades will be based on a transparent price discovery mechanism, in line with a market yield curve.
The absence of a yield curve in the economy has been a source of inefficient price discovery across all asset classes, including money market instruments, foreign exchange, stocks and shares as well as properties. Re-establishment of a yield curve will root out pricing distortions in the financial markets.
Reshaping consumption patterns
While the austerity measures imposed on the economy by Hon Ncube will go a long way in re-modelling Government expenditures, it should be noted that the 2019 Budget signalled a clear intent by the minister to reshape consumption habits of Zimbabweans as a whole. It is now common cause that demand management measures that have been implemented in recent years to redirect foreign currency to productive use have been ineffectual.
There is an excess and artificial demand for foreign currency fuelled largely by money supply growth on one hand and a voracious appetite for imported goods on the other.
The minister proposed drastic changes to the customs duty structure to support the import licence regime in controlling imports. In order to dissuade the importation of non-productive goods, especially consumptive passenger motor vehicles, customs duty on vehicles and selected goods will now be payable in foreign currency.
These measures will not only enable Government to create cash flows in foreign currency, but also encourage consumers of foreign currency to direct its use to more efficient and productive use.
Forget utopia. It’s bitter medicine that cures painful ailments
The one test that Hon Minister Ncube’s 2019 Budget is going to be effective is the fact that there is a major hue and cry about many of his policies. A Minister of Finance should not attempt to seek popularity. I am not surprised that his proposed cost and revenue measures are tough.
His stance on containing expenditure is very tough. But to me the most important message to Zimbabweans that Minister Ncube is driving home is: “If you want to consume luxury imports, pay for them in hard currency, including the duties”.
That is a very strong message, and the Minister of Finance needs to stick to his guns. Only then will we live to see the back of the twin evil twins.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.
