The mid-term fiscal policy statement was released last week. Much was not expected considering the constraints. Nevertheless, it was disappointing that key challenges facing the economy remain unaddressed.
Ritesh Anand Column
As anticipated, revenues have fallen short of expectations forcing Finance minister Patrick Chinamasa to revise the budget downwards from US$3,99 billion to US$3,6bn. Recurrent expenditure, particularly the civil service wage bill, continues to drain the fiscus leaving very little room for development and capital expenditure. The target to reduce the wage bill from the current 89% to less than 40% may be little ambitious given the high rates of unemployment in Zimbabwe.
The recent Supreme Court ruling on termination of contracts on three months notice has led to many job losses and this trend is likely to continue. While the focus should probably be on employment creation rather than avoiding or lessening job losses, the current conditions contrast the government’s electoral promise of creating 2,2 million jobs more and more distant. In this context, the mid-term policy statement was much ado about very little.
The GDP growth forecast was revised downwards from 3,5% to 1,5% due primarily to a poor agricultural season. The GDP is expected to be somewhat lower at -2% to -3% in 2015. Apart from the agricultural sector, which is expected to decline by 8,2% in 2015, the mining and manufacturing sectors are also expected to decline also.
A combination of the slump in global commodity prices and the ongoing liquidity shortages are likely to dampen growth in the mining sector and hamper the recovery of the manufacturing sector. While this year has been quite challenging for the country, 2016 will be much the same unless decisive action is taken, soon, to turn the economy around.
Despite the slowdown in economic activity, imports continue to grow while exports are expected to decline due to lower commodity prices. Government’s solution to raise duties and taxes to protect domestic industries is welcome though there is very little left to protect. Most industries suffer from outdated equipment, high cost of borrowing, inefficient systems and processes and high labour costs. General policy needs to focus on attracting investment rather than building barriers to trade.
Capacity utilisation in the manufacturing sector has declined to less than 40%. The increase in duties is therefore likely to burden the consumer more and raise the cost of basic products. Furthermore, unless strict measures are put in place and enforced, any increase in duties will only increase the amount of goods being smuggled into Zimbabwe.
Government is working under very difficult conditions with very few levers at their disposal, and with growing signs of a slowdown in the global economy the outlook is somewhat grim.
The establishment of technical advisory groups to address the low rankings in the doing business index is welcome. It would be wise, at the onset, to set a firm and comprehensive mandate and timeframe for these groups which will define the key deliverables and enable the country to measure its success. Without a holistic approach to attracting investment and clear and consistent investment policy, improving rankings will be difficult. A possible solution would be for government to set up a technical investment committee to look into what needs to be done to attract investment and implement the findings.
Key highlights from the mid term policy statement:
2015 fiscal budget revised downwards from US$3,9bn to US$3,6bn.
Cumulative collections of US$1,72bn from January-June 2015. Expect to collect US$1,88bn in the second half of the year.
Total expenditures for the year have been revised downwards from US$4,1bn to US$4bn; inclusive of Budget year 2014 unpaid expenditures of $158.4mn. Continued over-dependence on imports has meant persistent current account deficits since 2009, with the deficit projected at US$3,1bn this year, and financed mainly through private sector borrowing.
Projections to year-end indicate a capital account surplus of US$2,6bn, attributed mainly to offshore loans to the private sector.
Foreign direct investment, although on the rise from US$471 million in 2014 to the projected US$591m in 2015, still remains far below what is required.
Overall imports growth is projected to be 6% in 2015.
For the rest of 2015, exports are projected to decline by 5%, owing to softening commodity prices as well as the decline in agricultural output of our cash crops such as tobacco and cotton.
This year, the overall balance of payments deficit is projected to worsen to US$499m.
Zimbabwe’s public and publicly guaranteed debt stood at US$8,4bn as at end June 2015. This comprises external debt of US$6,7bn, representing about 47% of GDP, and domestic debt of US$1,7bn.
Food imports are projected to increase by 64% in 2015, mainly on account of maize, given the less than anticipated 2014/15, season harvest following the drought.
Diaspora remittances for the first half of 2015 stood at US$409,5m, up from US$397,8m for the same period last year.
Chinamasa recognises the challenges facing the economy. According to him, the constrained fiscal space is now threatening the social and infrastructural development objectives outlined in the government economic blueprint, Zim Asset.
Can meaningful development be delivered to the electorate with the current budget structure? It is, therefore, imperative that measures to reduce the wage bill are implemented immediately to sustainable levels, comparable to those of regional member states? We also need to urgently tackle the bureaucratic hurdles hindering private sector growth, leading to low rankings in the ease of doing business indices. There is need to reform some of our practices, and improve institutional effectiveness, so that we improve our competitiveness in the region and the global economy.
It is now time to act decisively to address key challenges facing the economy in the absence of which any policy statement will be much ado about nothing.