THE recently announced mid-year fiscal policy review is generally a pallid statement highlighting the challenging economic space the country is operating in.
Financial Matters Shingai Moyo
With a US$623 million budget deficit which has been largely financed by Treasury Bills, Finance minister Patrick Chinamasa’s statement clearly shows that the government is now at a stage where it may fail to service treasury bills. It is clear from Chinamasa’s statement that the government expenditure pattern is unsustainable. Critically analysing the half-year fiscal review and considering the entrenched economic challenges, it is clear that the government is the main source of current liquidity challenges and deepening economic troubles.
Government runaway expenditures have become an albatross to the fragile economy. In an environment where revenues are underperforming, government should have no option but to curtail its expenditures. However, there seems to be no appetite in government to cut down on expenditure. With Chinamasa announcing salary cuts and suspension of bonus payments, other elements in government are resisting the move to protect their flagging political fortunes.
Continuing with the current expenditure pattern implies that the financial services sector should prepare for more treasury bills. Financial institutions are already holding a high level of treasury bills which are closer to US$2 billion. For instance, ZB bank had US$108 million in treasury bills as at June 2016, constituting 35% of its total assets, FBC had US$72 million in treasury bills, while Agribank had US$47 million in treasury bills, 25% of its total assets, to mention just but a few banks. Failing to pay these treasury bills will clearly destabilise the financial services sector.
The financial sector, the banking sector in particular, now faces high risk. The financing of this bloated expenditure through issuances of treasury bills is crowding out the private sector and seriously undermining the viability of the economy. The position with regards government finances and expenditure pattern is now similar to the 2008 situation. Chances are high that, given the underperforming revenues and pressures to finance bloated expenditures, government may unilaterally use banks’ balances on RTGS and replace them with treasury bills. This is not new as the government has done it before. Banks also need to curtail their appetite or forced appetite for treasury bills going forward. Worryingly, the government is at an advanced stage of introducing bond notes as the central bank boss said yesterday. Introducing these bond notes at a time government is struggling to pay for maturing treasury bills, service debts and pay salaries further raises suspicion and erodes confidence in the economy. Bringing the bond note when government finances are in disarray may lead the economy to the hyperinflation era quandary, where fiscal indiscipline led to record levels of money printing and, eventually, the demise of the Zimbabwe dollar.
The rejected raft of policy measures such as salary cuts, suspension of bonuses and rationalisation of civil servants’ salaries will not be implemented, given that general elections are around the corner. Implementing such measures will be political suicidal for Zanu PF and will feed into the bouts of social unrest that the country is already experiencing. No change, therefore, is expected in terms of economic performance, given that general elections are just around the corner.
The government is likely to continue with its populist policies and rolling over treasury maturities. Liquidity challenges are expected to remain entrenched exacerbated by bloated government expenditure. Without a rescue package from development institutions such as the International Monetary Fund, government will continue using domestic resources to finance its needs, thereby crowding out the private sector. Foreign direct investment will continue to be on a negative trend due to sustained policy uncertainty, local shortages of hard currency and negative perceptions around the introduction of bond notes next month.
Moyo is an economic and financial consultant. He writes in his personal capacity.