Mid term fiscal policy fails to tackle critical economic issues

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The mid-term fiscal policy statement is an empty statement except for the Finance minister Patrick Chinamasa’s usual rhetoric of painting rosy a picture of the battered economy.

Tapiwa Mashakada

All we now know is that the minister’s statement did not provide a new narrative of the issues seriously arresting the economy: jobs, declining living standards, rise of the vending sector, liquidity crunch, de-industrialisation, food deficit, among others.
The list is endless. To date, government is still clueless on how to address some of these macroeconomic challenges.
Growth
Chinamasa lied that the initial growth forecast was 3,5%. In the 2015 budget statement, the minister pronounced a growth target of 6%. Obviously, the misrepresentation was deliberate.

The main reason being to avoid the embarrassment of missing his target by such a wide margin (from 6% to 1,5%).

As I pointed before, the main challenge facing the economy is growth. Growth is being choked by lack of investment as a result of bad government policies such as the Indigenisation legislation. It is clear from the minister’s statement that the key sectors which are growth drivers are set to decline.

Agriculture has declined by 8,4%. The country is need of food imports to the tune of 600 000 metric tonnes;

Manufacturing is dead. All that remains are industrial museums.

There has been massive deindustrialisation precipitated by prolonged liquidity shortages and competition from cheap imports;
l Mining is doing fine with a growth rate target of 5, 1%. But that is not even sustainable. Mining is a capital-intensive sector which requires investment and the Indigenisation Act will stop that. Moreover, we all know that mineral prices are determined globally and they are cyclical. So far Zimbabwe has not benefited from its diamonds;

Tourism is expected to perform better, but that is just a pain killer.

Import duties

Duty on second-hand clothing and shoes will have serious repercussions on the informal sector. There are no jobs so our people have been surviving on buying and selling “mabhero”. These are anti-poor policies by a regime that is cornered. We condemn this senseless policy measure which is highly insensitive;

  •  Duty on fertiliser is a sure way to kill agriculture. The local fertiliser manufacturing companies do not have the capacity to produce enough fertiliser for the country. In the past government has failed to pay its debts to fertiliser companies. Moreover, electricity outages have affected capacity utilisation;
  • Again duty on pharmaceutical products will harm the health care sector which is already exposed to drug shortages.

Public finances

From the analysis of revenue performance during the first six months of 2015, it is clear that government has no fiscal space and this has affected service delivery across the country.
The revenue target for 2015 has been slashed from US$3,9 billion to US$3,6 billion.

From the above table, it is clear that VAT on imports, excise duty and carbon tax were the only revenue heads that surpassed their set targets during the period under review.

Structurally, this is wrong. The country’s revenue must come from domestic taxes reflecting high economic activity.

Relying on trade taxes is a sign that domestic production is becoming insignificant in the revenue equation.

Admittedly, the terms of trade are tipped against Zimbabwe with imports standing at US$8 billion while exports are at US$3,5 billion. In short, we are exporting jobs.

Budget deficit
The government deficit now stands at US$400 million dollars.

At this rate, we can extrapolate that by December 2015, the deficit will exceed the US$1 billion dollar mark. In fact, it is now clear that government will come back to Parliament with a Supplementary budget.

Deflation
The economy has been in a prolonged state of deflation since July 2013. The falling of the price level as measured by the consumer price index is not healthy when it is accompanied by sluggish growth.

What this means is that people are not spending because they don’t have buying power. Companies are not investing because they cannot access funds from banks. Banks are not lending because it is too risky to do so.

Government itself is insolvent. It wants to reduce its employment costs from 80% to 40% in line with the IMF Staff Monitored Programme (now the Zimbabwe Recovery Fund).

Yet about 75 000 workers out of the 200 000 civil service staff compliment are ghost workers. This was confirmed by the 2009 Ernst and Young report.

What it all means is that government cannot stimulate the economy because it is broke. This is the reason why investment is a must. In a dollarised environment the only game in town is opening up to investment and servicing debts.

That is the formula to increase money supply (because government cannot print US dollars).

Therefore, deflation is a symptom of currency supply constraints. Ironically, bank deposits have continued to grow and are at US$5 billion dollars. This money is comprised of short term deposits or demand deposits and is difficult to lend.

Banks require surplus funds for on-lending. This is what economists call investible surplus which come from national savings.

Labour market flexibility

Government has abandoned workers. Government is culpable for the dismissal of workers on three months contracts.

It is clear that Zanu PF ministers are the new employers of farm workers and they have not been paying wages. They now want to avoid their responsibility by dismissing workers without terminal benefits. This is a typical neo-liberal policy.

Wither Zimbabwe
The struggle continues. The economy is collapsing like a deck of cards. And there is total paralysis on policy.
Zimbabwe is now the “Greece” of Sadc. The 2,2 million jobs promised in ZimAsset are a pie in the sky.

The 7,8 % growth rate target of ZimAsset is a pipe dream. Zimbabwe is in a fiscal policy coldron. Indeed, it is a macroeconomic and fiscal policy crisis.

Tapiwa Mashakada is an economist and MP for Hatfield. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com and cell +263 772 382 852

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