HomeBusiness DigestBudget exposes deep fiscal crisis

Budget exposes deep fiscal crisis

FINANCE minister Patrick Chinamasa’s US$4,1 billion 2015 national budget presented yesterday exposed a deep fiscal crisis gripping government amid shock revelations that government will spend 92% of revenues in recurrent expenditures, leaving a negligible 8% for capital projects and service delivery.

Chris Muronzi

Chinamasa told parliament of the total expenditures of US$4,1 billion, US$3,7 billion will be spent on the recurrent expenditures such as labour, meaning an insignificant amount would remain for crucial development projects and service delivery in a country reeling from collapsed infrastructure and poor service delivery.

This effectively crowds out crucial capital projects, retarding critical development.

“Recurrent expenditures will continue to dominate overall expenditures accounting for 92% of total expenditures, leaving about 8% for capital development programmes,” he said.

The current account balance is projected to deteriorate from a deficit of US$3,351 billion in 2014 to a deficit of US$3,431 billion in 2015, due to huge trade deficits, low transfers and incomes.

In his budget speech, largely betraying government’s continued lack of fiscal space as the country’s economic tailspin shows no sign of abating, Chinamasa (pictured) delivered the expected gloomy news to the nation.

An inordinate chunk of around US$3,3 billion will pay for employment costs, leaving the balance of only US$798 million to cover operations, debt service and capital development programmes.

This is despite evidence that total revenue collections for the 10 months to October 2014 amounted to US$3 billion against a target of US$3,27 billion and US$3,1 billion realised over the same period in 2013.

“For the period to October 2014, employment costs amounted to US$2,51 billion, accounting for 80% of total expenditures, excluding loan repayments.

This was against a target of US$2,35 billion, giving an expenditure overrun of US$154 million, which is catered for under the 2014 supplementary budget presented together with my 2014 Mid-Year Fiscal Policy Review Statement,” Chinamasa said.

Government had hoped to reduce the wage bill from 75% of the total budget in 2013 to between 55%-65% in 2014, but failed dismally as it is now surging towards 100% of revenues, which is an unmitigated financial disaster for government.

Although the Civil Service Commission was supposed to be undertaking a restructuring exercise which should have been completed in time to inform the 2015 budget process, Chinamasa was silent on that.

The exercise was aimed at aligning ministries’ staffing levels with their mandates, and to also identify any duplications and ghost workers.

The revenue under-performance clearly reflected, among other stubborn challenges, subdued economic activity and depressed aggregate demand, company closures and retrenchments, lack of foreign direct investment and liquidity challenges besetting the economy.

Chinamasa sees 2014 revenues closing at US$3,93 billion, comprising US$3,7 billion in tax revenue and US$227 million in non-tax revenue.

Although government estimates to December 2014 show an overall expenditure outturn of US$3,92 billion, implying a gap of about US$200 million from the original 2014 budget, in the 2015 budget a US$15 million deficit is anticipated if there are no further overruns.

According to Chinamasa, almost US$500 million will come in as budgetary support. Invetment is key to growth.

“Recovery in ZimAsset targeted growth rates of around 6% will require significant investment – foreign as well as domestic – in infrastructure, new equipment and machinery and more modern technology,” Chinamasa said.

He said it was important to address the ease and cost of doing business in the economy, adding there was need to guarantee uninterrupted supply of adequate power.

Zimbabwe continues to face debilitating power shortages as it has a peak demand of about 2 200MW against an average generation capacity of about 1 300MW, forcing the country to import power and resort to load-shedding. Imports are surging.

The country’s external debt position remained precarious on the back of subdued export performance and a huge import bill. For instance, Zimbabwe’s exports totalled US$2,4 billion while imports stood at US$5,3 billion.

Chinamasa hopes export incentives he put in place would grow exports. He unveiled the incentives to encourage companies to export, but analysts say local companies are grappling with high operating costs and obsolete equipment owing to a decade of economic decline.

“As a result, international reserves remain under one month import cover, while the current account deficit constitutes about 23,9% of GDP,” he said.

“Sadc macro-economic convergence targets are of reserves of three months import cover and a current account deficit under 9% of GDP.”

A key source of liquidity — foreign direct investment (FDI) — is only coming in dribs and drabs, while exports remain stagnant or are dropping.

In the 10 months to October 2014, the country received FDI amounting to US$146,6 million compared to US$311,3 million during the same period in 2013, a marked decline of more than 50%.

Last year, Africa received over US$82 billion in FDI, with our neighbours Mozambique receiving over US$8 billion or 10% of FDI flows to Africa.

However, Chinamasa yesterday insisted the indigenisation programme will remain in place as it is although he urged flexibility by implementing authorities, a stance which is unhelpful. Government recently told the International Monetary Fund that it will clarify the controversial indigenisation policy by March next year.

FDI is seen increasing by 69% from US$349 million to US$591 million on the back of the continued implementation of the ease and cost of doing business reforms and re-engagement process.

“The disproportionate gap between the country’s exports and imports has inevitably culminated in a trade deficit of US$2,9 billion for the period to October 2014,” Chinamasa said.

“In 2015, exports are projected to increase by 5% to US$3,832 billion. Growth in exports will be driven mainly by flue-cured tobacco (3,4%), raw sugar (4,7%), gold (4%) and ferrochrome (1.4%).”

Merchandise imports are seen at US$6,6 billion in 2015, compared to US$6,5 billion in 2014. The projected increase in imports of 1,9% in 2015 will be driven by the continued depreciation of the South African rand against the US dollar.

“Concomitantly, the trade deficit is projected to narrow by 2% to US$2,828 billion, as growth in exports exceeds that of imports,” he said.

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