eBusiness Weekly
Move not sustainable
Value of income to weaken further
Budget deficit could spiral
At the heart of the Zimbabwe’s economic challenges is an unsustainable budget deficit, whose financing through issuance of Treasury Bills and recourse to the overdraft with the Reserve Bank is untenable. This is according to Finance and Economic Planning Minister Patrick Chinamasa in his 2018 National Budget.
Minister Chinamasa said the budget deficit is also at the core of factors driving the demand for foreign exchange, as well as creation of excess money supply, which is largely in the form of electronic RTGS and mobile money balances.
By his own admission, the Minister said money creation through domestic money market instruments which do not match with available foreign currency, only serves to weaken the value of the same instruments, translating into rapid build-up in inflationary pressures, to the detriment of financial and macro-economic stability.
Justified but not sustainable
Although the decision to increase salaries for civil servants is justified, given the loss of value of disposable incomes, there is a great potential that the result will be an adverse effect on the inflation outlook plus increased pressure on demand for foreign currency.
Having realised the threat and weaknesses posed by increased money supply, the RBZ sought to put in place policy measures to sterilise the impact on the stock of money supply/RTGS balances within the economy. A move that was commended by many, but also viewed with scepticism as the country’s treasury is not known for turning words into action.
The promise to reduce the share of employment costs in the budget to initially 70 percent in 2018, 65 percent in 2019, and below 60 percent of total revenue by 2020, seems to have already been forgotten with the Government engaging in out of budget spending.
Earlier in the year, we saw Government reneging on a decision to retrench over 3 000 Youth officers – a proposal made in the 2018 National budget in December last year, when Minister Chinamasa announced that 3 188 youth officers were going to be retrenched in order to save the treasury $19,3 million dollars per year. The youth were to be reinstated on the pay sheet with effect April 1, 2018. Recently we saw Government nurses getting an unbudgeted for windfall, while other civil servants have been promised a 15 percent salary increment — with negotiations still ongoing.
Budget deficit to spiral
While it is the right of every Zimbabwean to be employed and properly remunerated, this should be done on merit and for the benefit of the broader economy. 2018 is an election year, so chances are that there will be a limit to which the Government will be willing to rationalise employment, as has happened with the youth officers.
The aggressive re-engagement drive, though needed will also add a couple of unbudgeted millions to the whole equation. The latest spending puts doubt to Government’s ability to rein in fiscal spending and casts further doubt that the expenditure will contract in line with the 2018 National Budget plans.
This comes at a time Government has already struggled sticking to its budget as in 2017 a financing gap of $400 million was targeted but the deficit ended up spiralling to $1,7 billion. In the 2018 National Budget, the deficit has been put at $672 million but given the trend and what is happening on the ground, the deficit could easily rich the $1 billion mark.
Value of income to weaken
With multilateral lenders still to loosen their purses, chances are that all this spending will be financed by the domestic banking sector. The RTGS balances in the banking sector will continue to balloon, putting more pressure of demand for goods and services and in the process foreign currency.
This will not only weigh on liquidity in the banking system and on lending to private sector but will also push up foreign currency premiums and by the same token weaken the real value of money. It then becomes a vicious cycle, like chasing the wind or chasing one’s shadow. Higher wage pressures will emerge again as disposable incomes are eroded.
While the battle to rein in employment costs appears like a lost cause, hope is that Government will stick to the other measures proposed by Minister Chinamasa.
The Government seems to be forging ahead with plans to cut spending and reform State Enterprises and Parastatals. Cabinet has since approved the consolidation and dissolving of some underperforming SEPs as they had become a liability to the State for years. This move comes with huge cuts on spending and hopefully will help minimise the effects of running a huge budget deficit whose repercussions are being felt across the entire economy.
