Comment: 2009 budget mission impossible

WHEN government this week set the maximum taxable income at $250 trillion a month, what sort of budget is it going to come up with next Thursday?


It can only be in foreign currency if our bankrupt rulers can produce the dollars to finance the budget.

Stand-in Finance Minister Patrick Chinamasa will definitely not want to announce the appropriation in Zimbabwe dollars.

It is not just the embarrassment of stumbling over awkward figures laden with zeros (remember Samuel Mumbengegwi struggling with trillions two years ago) but the reality that the local currency has virtually ceased to be local tender.

Lack of confidence in the currency is seen by the degree of unofficial dollarisation prevailing in the economy. We have seen the level of unofficial dollarisation progressively undermining the domestic currency as a store of value.

Chinamasa is well aware that while announcing votes in foreign currency will roll easier from the tongue, financing whatever budget will be a big task for a government struggling to get foreign currency to buy basic stationery like envelopes and carbon paper.

Chinamasa’s budget next week is therefore a wish list of government aspirations but also a realistic advertisement of the extent of the crisis in this country.

Dominating his beggar’s list should be the vast amounts required for food imports to nourish 8,2 million, according to government’s own admission.

Vast amounts are required to put health and education on the path to recovery. The civil service wage bill in foreign currency will be staggering.

The government will also need to spend billions in hard currency to repair damaged public infrastructure, complete long-stalled capital projects like the Tokwe Mukosi Dam and initiate new ones.

Just to fathom the scope of the resources required, US$40 million will be required to pay 100 000 teachers at a conservative monthly pay rate of US$400. Unicef last week provided US$5 million to pay health workers but that is the amount required for just a month.

Industry has said it requires US$900 million to raise capacity utilisation from the current low of 10% to 80%. In the absence of credit from banks or balance of payments support, government is expected to step into the void.

The huge task to hand for the government is financing whatever budget it is going to announce.

Traditional sources of financing the budget — corporate and individual taxes, tariffs and excise duty — have lost substance with the demonetisation of the local currency. Printing of money to support the central bank’s quasi-fiscal activities is no longer a sensible option either.

 
Modalities of collecting corporate tax and Paye in foreign currency are still being worked out.

Setting tax brackets for foreign currency salaries is another taxing exercise due to the absence of proper benchmarks in the new form of remuneration. Then there is the parlous state of the banking sector to contend with.

The state of the sector is an important consideration for any economy moving toward formal or informal dollarisation.

Successful dollarisation requires full financial integration, as banks will now play a critical role in the maintenance of monetary and balance of payments equilibrium.

Whenever there is excess demand for funds banks should be able to source them from abroad and if there is excess supply banks should be able to invest funds abroad. Our banks are not sufficiently integrated into the international financial system to provide adequate support for dollarisation.

But even with international integration, there is the issue of country risk in granting loans and providing financial support for the connected banks in the dollarised domestic economy.

Country risk depends on the perception of fiscal viability and the ability to service debt.  Zimbabwe has not fared well in this area.

Figures aside, Chinamasa’s budget speech must clearly signal government’s intention to create a low-inflation environment and to make even more far-reaching fiscal and broader public sector adjustments.

This is necessary to enhance investor confidence and promote the restoration of long-term investment.

Essentially dollarisation will require utmost discipline and responsibility in the conduct of the public affairs of the country.

The country needs to focus on programmes that offer the best returns. Wasteful programmes that are designed to buy votes must be discarded. Focus must be on invigorating economic activity to raise capacity utilisation in industry and on the land in order to create employment.

Government finances would also need to be put on a sound footing, and budgetary rules and practices as well as general accounting standards within the public sector strengthened. The government must be in a position to sustain revenue flows in line with expenditure.

All this however requires prudent economic blueprints underpinned by political stability. Otherwise the budget will turn out to be another academic exercise with no positive impact on our desperate situation.