Shakeman Mugari/Conrad Dube
THE budget presented last week by acting Minister of Finance and Economic Development Herbert Murerwa is highly consumptive and lacks the ingredients to resuscitate the ailing economy, analysts say.
said the budget allocated trillions of dollars of state funds to various sectors of the economy without putting in place programmes to resuscitate agriculture, tourism, mining and manufacturing, all of which are central to economic revival.
Presenting the $27,5 trillion budget last week, Murerwa said there were indications that the economy would grow by between 3,5% and 5% next year. He attributed this to “significant improvement in the supply response in the productive sectors of the economy, especially mining and agriculture”.
In direct contradiction to Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono who expects gross domestic product (GDP) to plunge by about 5%, the minister said GDP —— the sum total of what the country can produce — would this year slow down to 2,5% from last year’s 8,5%.
The minister also said he expected the agricultural sector to rebound from five years of decline to notch 28% growth next year. The mining sector, the minister said, would register positive growth of 7,5% while the manufacturing industry, which has been on a slide for the past five years would decline by 8,5% this year.
Murerwa said the tourism industry, which bore the brunt of the commotion in the often violent and chaotic land reform, would benefit from anticipated tourist inflows from China, which recently awarded Zimbabwe Approved Destination Status (ADS).
Turning to expenditure, the minister said $23 trillion (81,2% of the total budget) would finance recurrent expenditure in ministries and government departments.
Only $5 trillion (18% of the total budget) would be channelled towards capital projects such as infrastructure development. This bloated expenditure would result in a budget deficit of a massive $4,5 trillion, representing 5% of GDP. The budget deficit was at $1,346 trillion as of September.
It is expected that like last year the deficit would be financed by the local banking sector.
“In the absence of external financial support, a fiscal deficit of $4,5 trillion is consistent with the capacity of the domestic financial sector to support borrowing requirements,” Murerwa said.
Other highlights of the budget include the allocation of $11,49 trillion (42% of the total budget) to the Public Service Commission for civil servants’ salaries, confirming the government wage bill still takes the largest chunk of the national cake.
Murerwa said the budget was part of government’s plans to reduce inflation to between 30-50% by the end of next year.
Other major allocations include $6,8 trillion to education, $2,7 trillion to health while Defence and Security will gobble a whopping $2,3 trillion. Agriculture, the mainstay of the country’s economy until government embarked on its unplanned land reform programme five years ago, was given $688 billion, supposedly to finance inputs.
Mining was allocated $52,6 billion while $483,5 billion would be used to finance next year’s general election.
In a move widely seen as populist, the minister proposed widening of the income tax threshold for individuals from $9 million to $12 million per annum or $750 000 to $1 million per month. The tax-free portion of the bonus was raised from $100 000 to $5 million.
Apart from these cosmetic changes, analysts said the budget was unlikely to put the economy back on the recovery path. They noted that the budget was highly consumptive and populist.
They said the budget failed to boast production in key sectors of the economy and increase foreign currency inflows. The analysts say the budget does not address the supply side which is the main reason why the country is experiencing foreign currency shortages.
A post budget review compiled by Finhold Financial Holdings last week (Finhold) notes that it was heavily biased in favour of recurrent expenditure — a scenario not conducive for growth and production.
“As stated in previous commentaries, a budget dominated by recurrent expenditure is hardly growth-enhancing given the state of the country’s infrastructure,” Finhold said in the report.
About 82% of the total budget would be channeled towards recurrent expenditure of which 51.1% would be used for public service wages.
The report also notes that the expected 28% growth in the agriculture sector was heavily dependent on other key factors.
“Growth in agriculture is highly dependent on exogenous factors (such as weather), which the country has no control over. If, for example, Zimbabwe receives below rainfall this season, the projected growth will not be achieved,” said the report.
The report further observes that the minister was conspicuously silent on the country’s overall balance of payments deficit which has deteriorated from US$335 million in 2003 to US$523 million this year, “yet, experience shows that countries that adjusted their currencies to offset increases in domestic inflation managed to expand their exports substantially,” the report says.
Finhold further notes that despite commitment by government to come up with plans to boost export and increase foreign currency inflows, none of the policies have been fully implemented.
Exports have gone down by 60% in the past four years on the back of systematic destruction of the tobacco industry and horticultural exports. Tobacco production has crashed by more than 70% and exports have also slumped significantly. Maize production has also witnessed a sharp decline and independent food organisations and assessors believe that the country could face a serious grain deficit.
Analysts say the minister failed to articulate policies to arrest the collapse in the agriculture and manufacturing sectors, which have slumped by 70% and 60% respectively since about 1999. Movement for Democratic Change secretary for economic affairs, Tendai Biti, said the budget showed the government was only “living for today” and had no plan to kick-start the economy.
He said the budget was based on a dishonest impression the government was creating in order to win next March’s election.
“They are just creating an impression. Instead of addressing the supply side of the economy by reviving production in agriculture, manufacturing and construction, the government has set out to devour the national cake through excessive expenditure,” Biti said.
The budget was dangerously biased towards recurrent expenditure instead of capital expenditure, which is vital to boost production and address the supply side of the economy, said Biti.
“The budget has ambitious revenue targets which cannot be met. It is dishonest in that you cannot address the economic fundamentals without correcting the political situation. The budget does not deal with the restoration of investor confidence,” he said.
Economic commentator Eric Bloch described the budget statement as hollow as it skirts issues of job-creation and higher exports.
“It is missing innovation on new incentives for investment, job-creation and exports. It does not say how they will increase exports to deal with the perennial shortage of foreign currency,” said Bloch
Bloch also said the budget was silent on how the government would increase direct foreign investment and persuade the donor community to open vital lines of credit.
“Lines of credit have dried up. We need to guarantee free and fair elections and judiciary independence. There must be genuine efforts to restore law and order if we are to access international funds,” he said.
“This budget will not get us lines of credit,” he said. Zimbabwe is currently battling to persuade the International Monetary Policy (IMF) to be spared the looming expulsion from the Bretton Woods institution.
Economists believe that Zimbabwe’s economic recovery is not possible without financial support from the IMF and World Bank, both of which have expressed grave concerns about the country’s political situation.
Despite government claims that the land reform has been “successfully completed” evictions are still continuing while violence on farms is still rife.
Zimbabwe National Chamber of Commerce president Luxon Zembe said apart from attempts to increase the tax bands for taxpayers, the budget did not articulate any proper framework to increase production.
“The budget does not address the issue of economic growth. It overlooks issues to do with arresting the deindustrialisation. It does not
have a bold stance on economic revival,” Zembe said.
“Recurrent expenditure is excessively high. Corporate tax is also too high. There is need to allocate more resources towards capital projects that boost production and encourage external investors to come to Zimbabwe,” he said.