Will the minister deliver the kiss of life?

By Admire Mavolwane

AS has become the norm in recent years, it is again that time of the year when we get to hear the official view of how the economy has been performing in the past six months.

Obviously, most people have a fair idea or an opinion on how the economy and the standard of living has deteriorated or improved since January.

However, the official stance is still an important benchmark. The Minister of Finance is expected to present the half year review of fiscal policy as well as a supplementary budget later this month. The supplementary budget has put paid to the notion of keeping spending to within our collective means. In preparation for this occasion, we would like to bring to light some points to ponder concerning our economy which have arisen so far this year.

Rewinding, readers may remember that we did draw attention to the disparities between growth in revenues and expenditures contained in the 2005 budget proposals, which averaged 215% and were out of sync with the then, highly ambitious inflation targets of between 20% and 35% by December 31 2005.

We also highlighted the fact that at the time of the budget, the official figures on the performance of the economy in terms of real gross domestic product (GDP) for 2004 were not at hand, but that a decline of 2,5% was projected. Furthermore, a real growth of between 3,5% and 5% for 2005 was officially forecast predicated upon 28% growth in agriculture in the 2004/2005 season as well as concomitant recoveries in other sectors.

For the period January to December 2005, government was expected to spend $27,5 trillion, funded by revenue collections amounting to $23,0 trillion. This left a funding gap of $4,5 trillion, which equated to 5% of GDP, implying that the country was expected to produce $90 trillion worth of goods and services. Without foreign support, the budget deficit was to be financed through domestic borrowings. The budget statement had this to say about the budget deficit; “In the absence of external support, a fiscal deficit of $4,5 trillion is consistent with the capacity of the domestic financial sector to support public sector borrowing requirements. Levels in excess of this will imply recourse to Reserve Bank money printing, which is highly inflationary.”

As at July 1, total government domestic borrowings were a hair raising $11,9 trillion – more than twice the originally forecast budget deficit. What is more alarming is the fact that in a space of six months the debt has ballooned from $3,3 trillion, a growth of 239%. If this level of growth is maintained, which is a real possibility given the current high interest rate regime with the central government currently borrowing at 150% and 140% per annum for three and six months respectively, then we have a runaway horse, minus the rider, on our hands.

The high interest rate regime will prove to be a double edged sword in the near future, taming the inflation rate scourge on the one hand whilst fueling inflation through unsustainable levels of government domestic borrowings. Assuming, obviously with a high degree of optimism, that the GDP outturn is correct it would imply that government borrowings are now 13% of forecast GDP.

Various conjectures can be postulated as to why and for what purposes the government has borrowed so much in such a short space of time. One of them is obviously the need to fund unbudgeted commitments like food imports and the expanded cabinet with its requirements for staff, office space and new vehicles. Add to this the talk of $3 trillion needed for the reconstruction exercise, which we hear would be funded by the Reserve Bank, and the spending is likely to grow unabated.

At this point everyone is all but agreed that 28% growth in agriculture is not attainable due to a variety of reasons including the overwhelming official favourite scapegoat – drought. By the end of June, the 21,4 million kilograms of tobacco sold by auction, mainly by small growers, had realised an average US127,86 cents/kg whilst the 11,5 million kilograms sold through private contracts by mainly large-scale growers had fetched an average US164,96 cents/kg or 29% more.

The difference between the two sets could be attributed to the skills levels, resources in terms of irrigation and better organisation. Combined sales by both sets of growers are not expected to exceed 80 million kilogrammes so volume, as well as prices will be significantly down on last year. Remember, this output level is 50% of the initial target of 160 million kilogrammes.

This situation will be replicated in horticulture, cotton, sugar and wheat production. According to Cottco officials, national seed cotton production for the 2004/05 season is likely to be approximately 200 000 tonnes, some 40% lower than what was produced in the previous season and (again) half of what was initially forecast. Whilst we have had no official maize production figures for the past couple of seasons, we expect a similar downward trend to have occurred.

Other sectors have so far not fared that well either. Manufacturing industry has been hamstrung by foreign currency shortages needed for the importation of critical raw materials and spares. Fuel shortages have only served to exacerbate the situation. Thus capacity utilisation in most cases could well be below optimum levels. Mineral production is similarly constrained with production figures for most mining houses, with the exception of Hwange showing reduced output.

At the same time the outlook for international metal and mineral prices is not encouraging either with an anticipation of them softening. Tourism, notwithstanding all the promotions and other initiatives, is yet to respond and thus the unfavourable status quo is expected to be maintained.

At the risk of being labeled a doomsayer, one can only conclude from the above that real GDP could well fall by a conservative 3%-4% this year. The International Monetary Fund paint an even gloomier projection. The fundis within the Bretton Woods institution cite the increased budget deficit stemming from substantially higher producer and credit subsidies, higher priced food imports and interest payments among other factors, as pointing towards an even higher decline in real GDP.

The growth patterns seen in indicators such as the afore-mentioned government debt and the ballooning budget deficit are symptomatic of higher inflation and support a worsening inflation outlook. Indeed, notes and coins in circulation -termed high-powered money – have expanded by 474% year-on-year to March 2005. This is before factoring in the recent fuel prices and a whole host of increases effected on July 1 by both the private and public sector which include rentals and telecommunication charges, which also beckon a return to the 2002/03 era.

Thus the new inflation targets of between 50% and 80 % by end of year could well have been overtaken by events and the December’s inflation could at least be double these revised target figures.

These are just some points and facts to consider as we await the presentation of the half year fiscal policy review and supplementary budget. The government was expected to borrow only $4,5 trillion but has now considerably overshot that figure. This, as the Minister highlighted, is not consistent with the domestic financial sector’s capacity to support public sector borrowings as well as being highly inflationary. Think about it!