Mid-term fiscal policy statement bold but …

Finance minister Patrick Chinamasa announced a very bold and pragmatic mid-term review statement on September 8.

New Perspectives,Prosper Chitambara

The statement comes at a time most key economic indicators seem to be heading south. Fiscal revenues for the first half of the year were US$1,692 billion, representing a 9,8% decline from the target. Even more worryingly, total expenditures in the first half were US$2,316 billion against a target of US$2,007 billion. Employment costs accounted for 96,8% of the total fiscal revenues, presenting a serious threat to macro-economic sustainability.

Consequently, the fiscal deficit is projected to end the year at US$1 billion. The rising fiscal deficit has dire implications for domestic indebtedness as it is largely financed through domestic debt through the issuing of treasury bills. In turn, the ballooning domestic debt is crowding out the private sector and has the potential to affect financial sector sustainability.

Foreign direct investment (FDI) and remittances are also generally on the decline. More critically, the rising informalisation of the economy presents significant challenges for domestic resource mobilisation.

The salient highlights of the mid-term fiscal policy statement include: an audacious proposal to cut 25 000 jobs by December 2017; lower the salaries and allowances of ministers and senior bureaucrats by between 5% and 20%; taxation of civil servants’ allowances; suspension of bonus payment for the next two years. Other fiscal austerity measures proposed include: issue one condition-of-service vehicle to deputy ministers and permanent secretaries, rationalise diplomatic presence worldwide by reducing the number of embassies and consulates and review the class of travel arrangements for all government officials, including ministers, parliamentarians, independent commissions and authorities and state enterprises’ officials; and reviewing and enforcing compliance with official foreign business travel per diem rates, taking into account global cost of living developments.

Granted, progress has been registered in a number of areas such as the ease of doing business reforms being championed by the Office of the President and Cabinet. Notwithstanding, progress on key reforms has been slow. For instance, there are concerns in terms of the slow pace of reforming key institutions namely the parastatals and crucial property rights in the agricultural sector so as to unlock more resources and create fiscal space. The revised economic projection of 1,2% down from 1,4% is overly optimistic and unlikely to be met in light of the projected decline in agricultural production owing to the drought, subdued commodity prices and continued deindustrialisation. Statistics from the Zimbabwe Congress of Trade Unions (ZCTU) have shown that 229 companies closed shop during the first half of the year.

A crucial question is whether Chinamasa can unlock critical support from key stakeholders such as labour unions.

Already, the unions are threatening a backlash as they were not consulted in the proposal to retrench workers and suspend bonuses among others. Reducing the public sector wage bill is regarded as one of the most difficult fiscal austerity measures for governments to undertake the world over. It has been argued that expenditure on public sector employment provides a useful political role. It can help to ensure political stability by providing work to educated people in urban areas and is a valuable source of patronage. Public sector jobs also serve as an important social insurance mechanism, particularly in developing economies vulnerable to shocks as they constitute a large share of non-agricultural employees. Public sector jobs are also a source of patronage used to buy the support of vital constituencies. Given these political dynamics, it is unsurprising that most governments try to protect spending on wages and salaries, even when they face heavy debt burdens. With the looming 2016 elections, Chinamasa may not get the necessary support to see through the envisaged reforms as they may be deemed politically unsustainable and prove to be too bitter a political pill to swallow.

While cutting the public service by 25 000 will go a long way towards reducing the public service wage bill, bolder actions aimed at downsizing the size of government need to be undertaken to make it leaner and more efficient.

This downsizing will be motivated and justified in terms of the size of the economy (ie low GDP, fiscal revenues) as well as the relatively low population size. Countries such as Sierra Leone and Uganda have taken the bold action of closing about a third of their ministries. In Kazakhstan in 1997, a presidential decree reduced the number of ministries from 21 to 14 and the number of government bodies from 47 to 24. However, strong political will and commitment is a necessary ingredient for this kind of reform process.

Importantly, the government needs to expedite the reform of state-owned enterprises (SOEs) so as to transform them into autonomous and profit-oriented institutions with pro-market regulations and good corporate governance mechanisms. SOEs have been a major drain to the fiscus. There is, however, scope and potential for transforming and reforming these key institutions into strong drivers of development in Zimbabwe.

Moreover, government needs to adopt a more growth-friendly tax system by shifting the tax burden away from direct income toward consumption, immovable property and the environment. Personal and corporate income taxes, as well as social security contributions, are the most distortive taxes as they have sizable adverse effects on labour use, productivity and capital accumulation.

Shifting the tax mix away from such taxes and towards recurrent taxes on immovable property (the least distortive to the labour market) and towards consumption taxes should thus raise living standards and help to lower the labour costs.

It is important to ensure that the National Productivity Institute (NPI) is fully functional. The NPI should develop, disseminate knowledge and experiences in productivity, for promoting consciousness and improvement in productivity, with the objective of strengthening the performance and competitiveness of the economy as well as of improving the working conditions and quality of life. It is also important to strengthen the TNF as a basis for coming up with a social contract as a prerequisite for sustainably unlocking the challenges the country is facing.

Chitambara holds a PhD (Economics) from the University of the Witwatersrand and is a Senior Economist with the Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ) in Harare. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com and cell no +263 772 382 852.