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2016 national budget bland

In assessing the effectiveness of the national budget, the following factors are important. First, the extent to which the budget is clear and credible. The budget should be designed within clear and credible limits and/ or fiscal rules.

Prosper Chitambara

It is important to ensure that the national budget is in sync with the medium-term and long-term priorities and aspirations of government. In other words, there should be mutual harmony and clear complementarities between the national budget and the government’s economic blue-print, ZimAsset.

Finance minister Patrick Chinamasa presenting the 2016 national budget

More importantly, it is crucial to determine whether the capital budgeting framework meets the national development needs of the country. It is also imperative to have a clear concrete plan to manage and monitor the commitments made in the budget. The extent to which the national budget is pro-poor is also pivotal.

The budget comes at a time the country is experiencing low inflationary pressures owing to a stable though overvalued exchange rate. The high levels of informalisation whereby 94,5% of employment and the economy is now informalised presents challenges for domestic resources mobilisation. The challenge is therefore to facilitate the transitioning of the informal sector into formal enterprises so as to broaden the tax base.

Another downside risk is the preponderance of domestic borrowing, biased financing mix of the budget and the current account deficit which will crowd out resources that were meant for productive purposes. There are also revenue leakages through illicit capital flows through transfer pricing and international tax avoidance. Exports, investments and savings remain sluggish while the economy continues to shed jobs.

A major challenge confronting the economy relates to the weak and inefficient institutions. Inefficient institutions as measured by corruption, weak enforcement of contracts and a large bureaucracy deter foreign investment (Wei, 2000). By reducing uncertainty, strong institutions reduce transaction costs, information costs and risks for private firms (Gwenhamo, 2009).

Uncertainity and lack of clarity with respect to the indigenisation and economic empowerment regulations have increased the risk premium as well as related information and transaction associated with investing in the country.
Moreover, in some instances key institutions such as parastatals have been used as vehicles for the extraction of rents by the politically and economically connected elites. Hence, instead of them being critical agents of development they have been a major economic let-down and drain to the fiscus. It therefore becomes imperative to expeditiously restructure these key institutions by insulating them from political pressures and interference and also bad corporate governance so as to stop any further haemorrhaging of the economy. This type of change however requires doses of political will and commitment to be actualised. Indeed, it’s a pill that may prove too bitter to swallow.

Another dimension of institutions that is key to Zimbabwe relates to the issue of property rights. It is vitally important to reform and strengthen property rights in the agricultural sector through granting transfer rights. This will help to unlock more private sector involvement in the financing of agricultural production. Besley and Ghatak (2009) define property rights to an owner’s right to use a good or asset for consumption and/ or income generation (referred to as “use rights”). It can also include the right to transfer it to another party, in the form of a sale, gift or bequest (“transfer rights”). A property right also typically conveys the right to contract with other parties by renting, pledging, or mortgaging a good or asset, or by allowing other parties to use it, for example, in an employment relationship.

A productive economy requires that assets be used by those who can do so most productively, and improvements in property rights facilitate this by enabling an asset’s mobility as a factor of production (for example, via a rental market). In addition, modern market economies rely on collateral to support a variety of financial market transactions, and improving property rights may increase productivity by enhancing such possibilities.

Economic literature at both micro and macro levels provides evidence that improving property rights affects economic decisions in the way that the theory posits. For example, Erica Field (2007) found out that improving squatters’ rights in Peru seems to have reduced the need to use guards. Field and Torrero (2006) found that property titles are associated with increase in approval rates on public sector loans by as much as 12% when titles are requested by lenders.

Galiani and Schargrodsky (2005) analysed the collateral effect of property rights reform. They studied a group of squatters who occupied an area of wasteland in the outskirts of Buenos Aires more than 20 years ago from the time of the study. An expropriation law was subsequently passed, ordering the transfer of the land from the original owners to the state in exchange for a monetary compensation, with the purpose of providing title to the squatters. They find that it improved housing investment, among other things.

The high debt remains an albatross to the economy and therefore the performance of the budget. The government has unveiled an ambitious arrears clearance strategy that was given the thumbs up by creditors on the side lines of the 2015 IMF/World Bank annum meetings in Lima, Peru.

The government hopes that by clearing its arrears it will be able to unlock fresh capital inflows into the country.
This aspiration may however not be fully actualised until we deal with the country risk factor and the factors that are driving the high risk premium in the first place. At its best, the arrears clearance strategy may only eliminate or reduce the external and multilateral indebtedness but however leave the country with an unsustainably high domestic and bilateral debt stock.

The most sustainable debt reduction strategy is to enhance economic growth until we have outgrown the debt. This however requires that we deal with the most binding constraint to growth in Zimbabwe which is the energy deficit. Power and energy supply needs to be ensured for new investment. This however may prove farfetched considering that the Ministry of Energy and Power was only allocated a paltry 0,2% of the budget.

The moderate growth forecast of 2,7% for 2016 is out of line with the ZimAsset benchmarks and may prove unattainable on account of the anticipated rainfall patterns which may negatively affect agriculture production. On the other hand a slowdown in the global commodity prices represents a double edge sword for Zimbabwe. The overvalued exchange rate is also a serious threat and impediment to internal and external competitiveness.

Out of the proposed US$4 billion budget recurrent expenditures are projected at US$3,685 billion (which represents 92,1%). Growth in the public wage bill has far outstripped growth in real GDP and this is not sustainable. A wage bill of 21,3% of GDP in 2014 is higher than for some comparator countries. For instance, Zambia had a public wage bill of 10,1% of GDP in 2014 while in Kenya it is 10,2% of GDP. Ideally, the public wage bill threshold should be maintained at a level of no more than 10%.

Clearly therefore, the public sector wage bill is compromising fiscal and is jeopardising growth by generating excessive deficits and crowding out growth-enhancing public investments. The trade and current account balances are projected to remain under severe pressure in the medium term on account of poor export and import performance on the back of an appreciating US$. An overvalued exchange rate represents a subsidy on imports and a tax on domestic production. The financing of the current and capital accounts remains contingent largely on domestic borrowing.
The two education ministries received a combined total of US$1,117 million which represents 27,9% of the budget.

Defence and security received US$755 million which represents 18,9% while health received US$330 million representing 8,3%. On the other hand, agriculture received 3,6% of total budget while social sectors received 4,4%.

Collier (2006) shows that military expenditure retards development by diverting government resources that could be put to better use. He argues that military expenditure is not an effective deterrent of rebellion, and, if it is reduced in a coordinated manner across a region then external security interests would be unaffected. The resources freed by reduced military expenditure can be used to enhance development which in turn would reduce the risk of internal conflict. Hence, development, not military deterrence, is the best strategy for a safer society. Uganda has demonstrated the positive impact that reduced military expenditure can have on human development.

One significant weakness with regards to the way the 2016 budget has been designed is that it does not shed light on progress, scaling up and plans concerning a number of good initiatives that were flagged in the 2015 Budget. In the absence of this, it is difficult to ascertain what has been the fate of these initiatives. Future budgets must contain a matrix articulating key initiatives in the preceding budget, progress made in this context and a plan and timeline for key milestones to be achieved during the budget period.

Variances between actual spending and budgeted allocations (either overshooting or shortfalls) are serious issues which affect the credibility of the budget. Such variations are not predictable and in most cases shortfalls are seen in areas most targeting the poor such as health, education and water. There are also issues with respect to consistency and timeliness of disbursements. Predictability and timely disbursements are of paramount importance which necessitates the need for strong monitoring and internal controls.

More importantly, it should be noted that macroeconomic policies such as budgets are neither formulated nor implemented in a vacuum. It is, therefore, important to recognise the significance of the political context.
A stable political and economic environment is essential for improved export earnings and reduced consumption imports which in turn translate into a trade surplus. Finally, it is important to expedite the following initiatives: public service reforms; create an enabling legislation and regulations for public-private partnerships (PPP); leverage remittances from the diaspora in a quid-pro-quo manner by clarifying the issue of dual citizenship and granting diasporans the right to vote; the restructuring of parastatals and strengthening of state institutions in order to eliminate state capture; and taxation reforms to reduce the tax burden and control for leakages.

Chitambara (PhD Economics candidate) is a development economist with the Labour and Economic Development Research Institute of Zimbabwe. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852

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