The central problem currently upsetting the Zimbabwean economy is the budget deficit and the manner in which it has been financed.
From the onset, I should hasten to say that budget deficits per se are not harmful. It all depends on how they are incurred and how they are eventually financed. It is widely accepted that deficits arising from capital expenditure may not be harmful to the economy because capital expenditure creates growth-enhancing synergies.
Generally, fiscal deficits can be financed through borrowing which is commonly referred to as debt financing or printing of money which is also referred to as inflationary financing. The other unorthodox way of financing the deficit is by way of accumulating arrears or deferrement of payments when they become due.
Since 2013, we find that the government has been facing a fiscal cauldron. Expenditure rise has just become too disproportionate to revenue performance. In 2013, revenue estimates stood at US$3,8 billion compared to expenditure increase of US$4,8 billion. Between 2013 and 2016 the civil service bill ballooned from $120 million per month to US$200 million while the civil service employment figure suddenly reached 500 000 way above the 300 000 figure we all knew during the inclusive government. Since 2013, government has been accumulating a monthly budget deficit of US$180 million.
In order to finance the deficit, government has been, firstly, resorting to the issuance of Treasury Bills (short-term instruments to raise capital). The maximum tenure of TBs is one year, after which they have to be redeemed at a particular coupon rate. Because of a lack of fiscal space, government has had to roll over TBs on maturity. This has affected cash flows of many investors, including banks that hold TBs. It is estimated that TBs in the market now amount to US$2 billion.
Secondly, it is strongly believed that government has been financing the deficit by raiding money from the Reserve Bank nostro account and even from RTGS. Perhaps this explains the delays in RTGS transactions.
Thirdly, government has been delaying salary payments to civil servants. Already, civil servants have lost a month’s worth of wages due to the delays. This constitutes an immoral saving on the part of government. Fourthly, government has been accumulating arrears to service providers. These arrears are thought to be around $1,5 billion.
The accumulated public domestic debt now stands at US$5 billion. This is frightening, especially considering the poor performance of tax revenues. The economy is in a prolonged state of deflation with growth heavily constrained by a lack of fresh capital, an uncompetitive manufacturing sector, a decimated agricultural sector and an opaque mining sector. All these factors militate against recovery.
Apart from these fiscal issues highlighted above, there is the perennial issue of confidence. The confidence crisis was nurtured by incoherent policies and a lack of policy consistency. The best example is the Indigenisation Act. The financial crisis we saw in recent months are symptoms of a deeper fiscal crisis. In this fiscal crisis, the budget deficit is the eye of the storm.
I argue that public financial and economic management, coupled with naked public sector corruption, are the albatross in the economy — in the sense that the defective budget financing measures I have alluded to merely tinker around with demand management as opposed to addressing supply side factors.
This is precisely the downside to re-engagement. One key demand from the International Monetary Fund is that government must downsize its civil service and cut employment costs to 40% of recurrent expenditure from the current 89%. This requires political will. As it stands, we are already in an election period and I doubt the government has either the political will or the ability to address employment costs.
My hunch is that between now and elections, we are not going to see a significant policy shift. This is a sad situation considering that, all being equal, elections are scheduled to happen in 2018. Meanwhile, Zimbabwe is burning and going through an implosion on the back of biting socio-economic problems. On the economic side, the solution is the creation of a National Economic Council that will bring economic experts and stakeholders to come up with an emergency economic stabilisation and recovery plan for Zimbabwe (a Marshall Plan of our times). The National Economic Council (NEC) will shape the economic reform agenda and the developmental trajectory of the country during and after the National Transitional Authority. In my view, the key economic reforms that the NEC would pursue must, inter alia, include the following:
Stabilisation of the budget and the financial sector;
Emergency humanitarian relief aid;
Putting the economy back to work by addressing supply side constraints;
Mobilising resources for kick-starting growth-enhancing programmes such as infrastructure development;
Re-engagement with the international community, including the Diaspora;
Setting out the agenda for economic and institutional reforms;
Developing the Zimbabwe investment brand and position Zimbabwe as a viable investment destination;
Promote inclusive and sustainable growth.
But the jury is still out regarding the question: how and when shall the old order give way to a new prosperous Zimbabwe based on principles of sound economic and financial management, democracy and good governance?
Mashakada is an economist and former minister of Economic Planning and Investment Promotion during the Inclusive Government era, and is MP for Hatfield. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: firstname.lastname@example.org and cell no +263 772 382 852.