Budget dishonest, populist says MDC


By Tendai Biti

THE budget statement presented yesterday by Finance minister Herbert Murerwa is once again an indictment of Zanu PF rule.



al, Helvetica, sans-serif”>It shows beyond doubt that this government has failed. It is a populist budget, underpinned by dishonesty and hypocrisy.


It is dishonest in that it fails to address the three fundamental macro-economic issues of the exchange rate, inflation and negative interest rates. It is hypocritical in its attempt to disguise its crude populism. More importantly, it is a vehicle for the continued reproduction legally and extra-legally of Zanu PF.


Of immediate procedural concern is the fact that the blue book, which contains the actual revenue and expenditure estimates, was not made available by the minister. This is unconstitutional, and technically means that the budget has not been presented. Zanu PF thus does not even have the capacity to present the budget, much less implement it.


The severity of the crisis is such that there was some hope of new ideas, but sadly the budget statement provides no evidence of any sort of change on the government side. On the pivotal macro-economic management issues in the current crisis, the budget statement failed to make clear any position. Decisions on these crucial areas are held over to the RBZ governor’s monetary policy statement, which is promised by mid-December.


If the minister took seriously for a moment his statements about not being able to continue doing business as usual, the need to act expeditiously and to build confidence in the government’s policy stance, he would surely have grasped the nettle of articulating policies to fight what he said was the country’s number one enemy – inflation.


When the RBZ governor pronounces on monetary policy and inflation, there can be very little hope of any policy change. The very first action in the week after the new governor’s appointment was to pump huge amounts of liquidity into the market, a certain formula for increasing the rate of inflation.


Another major issue the minister correctly identifies is the need to expand export revenues. The statement rightly notes the loss of competitiveness of the mining industry due to a fixed exchange rate in the face of rampant inflation. The solution is to devalue the currency, but instead of this the statement talks of “recapitalisation” of the export industries. This means worsening the fiscal deficit without changing one iota the lack of incentive to export.


Incredibly, the statement also makes clear that “quasi-fiscal” expenditures, which in 2003 amounted to an astronomical amount of over 3,5% of GDP, are to be prohibited. This means that the payments to gold and tobacco producers to compensate them for the inadequate exchange rate will be discontinued.


These payments had fallen to well below the levels required for viability and it was widely expected that there would either be an across-the-board devaluation in the budget or else an increase in the special allowances for export sectors. As they are to fall away, the total demise of two of Zimbabwe’s prime export industries – gold and tobacco – is now certain.

In the face of this implication in his statement, how can the minister be taken seriously on any claims about economic recovery?


The minister also ducks the crucial issue of interest rates in the budget statement. The tired description he gives of measures to achieve a supply side response makes it clear that the economically irrational notion of suppressed interest rates is going to continue.


The nation has been told about supply side response for three years and during that time GDP has actual contracted by minus 30%. And despite whatever supply side measures are touted, the budget statement itself is anticipating a further decline of minus 8,5% in GDP in 2004.


Keeping interest rates below inflation, and pretending that the “leaks” such an adverse incentive structure creates can be controlled, is one of the major causes of the present crisis. When there is a gap between interest rates and inflation, economists talk of “negative real interest rates”.


As any first-year economics student would know, the problem with negative real interest rates is that they destroy the basis for savings, investment and growth in the economy and create the conditions for speculation and accelerating currency depreciation and inflation.


Just as Zanu PF has no respect for the rule of law, it has no respect either for the laws of economics. These may not be written down in statute books, but economic laws nonetheless apply in the real world. “Cheating” by trying to manipulate one economic lever has inevitable consequences elsewhere in the economy.


In this case, the cheating allows the well connected to enrich themselves, while ordinary people’s lives are devastated by hyperinflation, loss of jobs, shortages of food and the collapse of the health and education services.


Turning to the budget itself, it hardly merits detailed analysis for the simple reason that it is based on totally unrealistic assumptions about GDP and inflation. If Zanu PF manages to cling onto power, there will be one or probably two or more supplementary budgets in order to raise expenditures to somewhere near keeping pace with ever accelerating inflation.


As usual, the inflation assumptions underlying the budget, are not made explicit: lack of transparency is after all one of the hallmarks of the Zanu PF government. However, working back from figures that are provided in the statement, it would appear that the assumption is that inflation will average around 570% in 2004.


The ministry’s inflation estimates, however, are totally at variance with the policies of rigorous control on foreign currency, negative real interest rates and a continued significant budget deficit. The domestic funding of a very significant budget deficit provides the underlying inflationary pressures in the economy.


The problem for the budget formulators is the government’s denial that it is its own policies that are responsible for the acceleration of inflation. To admit as much would require much higher inflation to be assumed as a basis for the budget.


Evidently it is considered less embarrassing by Zanu PF to have patently absurd numbers for the national budget than to admit that inflation is going to move to above a 1 000% in 2004. Our estimate is that if Zanu PF continues in power and maintains the policies described in the budget, inflation in 2004 will rise be above 1 000% before midyear, and will probably average at least 1 200% for the year as a whole.


Needless to say, the impact of inflation at these levels will be devastating, not least on the expenditure categories in the budget. To take some examples from the budget for 2004: Health was allocated in 2003 (after the supplementary) $122 billion, and has been allocated $701 billion in 2004.

That’s a nominal increase of 475%, but a fall in real terms of minus 56%.

Even though Zanu PF is apparently content to see the health service totally collapse (even going to the extent of arresting medical personnel to accelerate the process), it seems likely that there will be a return to parliament for a supplementary budget in 2004.


It is notable that the repressive sectors – Defence and Home Affairs – while also due for expenditure reductions in real terms, are much smaller than the decimation being inflicted on the health sector. The expenditure on repressive wages alone is 20% more than the entire budget of the health sector.


Similar analyses could be made of every other sector and expenditure category. The amounts allocated are simply inconsistent with the terrifying inflationary prospects implied by the macro-economic policies and budge deficit. A case in point is civil service wages: these have been increased significantly in nominal terms. Civil servants will experience a reduction of real purchasing power of their wages of more than 40%. If they find this unacceptable and protest, on present form they will also be arrested.


Also of major concern on the expenditure side is the fact that 15% of the budget (a staggering $1,3 trillion) has been entrusted to the Minister of Finance as an unallocated reserve. This is dangerous and unconstitutional.

It means that government can spend such a large amount of money without parliamentary scrutiny. We have pointed out before that the unallocated reserve represents a special Zanu PF slush fund and should thus be delegitimised.


On the revenue side, the budget statement makes some acknowledgment of the unfairness of workers with salaries well below the poverty datum line being taxed at the top marginal rate of 45%. The income tax threshold has been raised to $2,4 million, but in view of the prospect of inflation rising to over 1 000% before mid 2004, this gesture is also hollow as it will soon be overtaken by events, and poor people will once again have to pay income tax.


Once the MDC is in power, we will link the tax threshold to an independently monitored, regularly updated poverty datum line.

It is no surprise that the 2004 budget statement is completely lacking in any coherent economic ideas. Nonetheless, given the severity of the economic crisis that the country faces, there was always the hope before it was presented that the government might try to reverse its past policy stance.

But no. Even if Zanu PF had legitimately won the last two elections, which it did not, they have forfeited the legitimacy to govern by choosing and implementing such destructive economic policies.


It is only when there is a total change of regime that the economic reconstruction and recovery which Zimbabweans are crying out for can commence. The MDC’s economic blueprint – Restart – will tackle the deep economic crisis through a comprehensive five-year programme of fully co-ordinated fiscal, monetary, exchange rate, sectoral and trade polices.

The objectives of Restart are to reconstruct the social fabric and economic infrastructure, stabilise the macro-economy, recover levels of savings, investment and growth and begin to transform the economy and society to eliminate social exclusion and achieve equitable, inclusive national development.


The sooner MDC assumes power, the sooner Restart can begin addressing the crisis and bringing hope to the people of Zimbabwe.