Two weeks into the appointment of the new Cabinet and seven days after Finance and Economic Planning Minister Patrick Chinamasa unveiled an ambitious budget that has received mixed reactions from many quarters, it is not surprising that the 2018 National Budget, which came hot on the heels of a one of the most significant political events in the history of the country, becomes the subject of detailed and critical analysis.
There is general agreement that in terms of the context of the budget statement, which is the new economic order being pushed by the country’s new President, the text of the budget lived in many respects to expectations. The positives from the budget have been exhaustively discussed.
Minister Chinamasa presented a pro-business budget in that he strongly spoke about the need to re engineer the investment climate in Zimbabwe, create conditions for attracting sustained investment flows. The measure he proposes, if speedily implemented to the latter, will go a long way to allow the economy to re-invent itself.
However, among the excitement generated by the budget, there is room for to us to critically discuss some of the glaring and the not so obvious obstacles that the Government faces in delivering on its well meant promises.
Tackling Budget Deficits and Inflation
Minister Chinamasa identifies inflation as a real risk, but the budget is completely silent on what he intends to do about it. This suggests two things. Either that he has no real plan, which would be worrisome given the damage that inflation can afflict on an economy such as ours. People have very long memories and its only a few short years since Zimbabweans came out of the painful decade of madness which ushered in dollarisation in 2009.
By his own admission, it is the successive budget deficits that are fuelling price dislocations in the economy.
Therefore the $5,7 billion 2018 expenditure plan, which is balanced out by a $5,1 billion revenue base, and a $672 million budget deficit leave many economists wondering.
It could also mean that, realizing that rising inflation in the economy will have a positive spin on government tax revenues, particularly VAT, perhaps Minister Chinamasa intends to create an inflation wave, which he can use to ride out his budget deficit.
Tax revenues are projected to go up by 17 percent from $3,688 billion projected for 2017 to $4,306 billion in 2018 driven largely by grown in taxes on goods and services, ie VAT.
This suggests that Minister Chinamasa knows very well that in the absence of increased sales volumes, which are unlikely when prices are rising as fast as they are doing, prices will have to rise even faster. This in my view will trigger an inflation spiral in the economy.
As prices rise, volumes could likely fall, making businesses unwilling or even unable to invest into increasing capacity in the face of increasing costs.
Wage demands will also increase in the economy, disincentivising companies from taking on new hires. As inflation picks up, so will the demand for hedge tools, such as foreign currency.
In short rapidly rising inflation will be bad for business and confidence during 2018 and beyond!!! I conclude that if the inflation risk is no t dealt with in practical terms, it will dramatically undermine the good intentions that government has. Will Government master the political will to rein in inflation?
Civil Service and Parastatal Reforms
Minister Chinamasa made several bullish statements on Governments desire to restructure the civil service. His wide ranging efforts also target public enterprise reforms. The nagging question remains; how easy will it be to follow these things through. Let take a look at some of the practicalities.
Firstly, it is not easy to retire a civil servant, financially that is. Government faces a huge upfront cost in terms of lump sum pensions. It is an accepted reality that part of the reasons why some Government employees have served well beyond their retirement ages is because Government was trying to manage its cash flows.
A sudden mass retirement of civil servants means that a significant outlay has to be made from current resources to fund pension drawdowns. This money is not available.
Minister Chinamasa said clearly that government intends to ensure that personnel being retired will have access to resources to start sustainable economic projects. What I seem to miss is where these funds are provided for in reality.
On state enterprise reforms, I also foresee some obvious challenges. Most of these entities are bankrupt or heavily in debt and will ill afford severance packages. This especially so given the high salaries that these institution pay. We should also look closely at the relationships that currently exist between the politics of the land and the “strategic” nature of some of these enterprises. SOEs made a whopping $270 million loss in 2017, a large chunk of this, comprises business costs unrelated to productivity, but to the pursuit of strategic political interests.
Will the new Government demonstrate the political will to close off the leakages from SOEs, from which significant political mileage was being derived?
Will Minister Chinamasa follow through on his statement that public enterprises, including local authorities, should “cease to exist just to pay salaries and wages, and incur financial deficits.”
The same agenda should be extended to those Government regulatory agencies that seemingly exist for the sole purpose of collecting revenues from business and the public, without visible services being offered.
The foreign currency and cash crisis
Minister Chinamasa’s budget set the right tone with his aim to improve the economic environment. However he should also have been more deliberate in outlining proposals to improve foreign currency inflows. He did not attend to the issues around cash shortages and bond notes, perhaps deferring the monetary authorities.
It remains clear that the monetary based export incentive is also inflationary and is inflaming key variables such as the exchange rate, impacting the cost structures in the economy.
Minister Chinamasa only proposes cosmetic solutions to the problem, namely prioritising foreign currency allocations to producers of essential goods and services; exercising flexibility in the issuance of import licences to those with “free funds”, in order to avert shortages of essential goods not produced locally. Currency and cash problems will not go away by themselves.
My considered view is that parallel market rates will continue to rise unless we figure out a way return to the system where some 30 percent or so of transactions in the economy were in actual real US dollar notes, which were in continuous circulation.
There are no concrete proposals aimed at restoring and maintaining the integrity of the multi-currency system by revising the export incentive scheme. This I identify as a major obstacle going forward.
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.