HomeBusiness DigestWhy Parliament should reject the 2017 Budget

Why Parliament should reject the 2017 Budget

IN SEPTEMBER 2016, Finance minister Patrick Chinamasa called for a drastic change of course in his midterm budget review. He stated that we must reduce the cost of employment, get the economy growing and radically change our spending priorities away from consumption towards production.

Eddie G. Cross

But when he rose to present his proposed budget for 2017, he failed dismally to take his own advice into account.

For a number of reasons I think that this budget simply cannot be accepted by Parliament if the institution is to fulfil its oversight role over the executive and our national affairs.

Since he became Minister of Finance, Chinamasa abandoned the cash budgeting principles, which had guided the budget process during the Government of National Unity. His predecessor Tendai Biti had made the famous remark that “we can only eat what we kill” and this adage and principle served the country well.

Confidence surged, the economy expanded rapidly and every year the Ministry of Finance managed a small fiscal surplus and significant growth in tax and other revenues. In fact, between 2009 and 2013, gross revenues to the State expanded 14 times and reached US$4,3 billion with a US$100 million surplus planned for that year.

Instead of maintaining what was clearly a winning formula — the Government abandoned the cash budget and increased expenditure on salaries without increasing revenue.

The consequence was that the planned budget surplus for 2013 became a substantial deficit. This was repeated in 2014, 2015 and 2016. In the process the Ministry of Finance was forced to borrow money from the market and has run up a massive debt in Treasury Bills and a very large overdraft at the Reserve Bank of Zimbabwe (RBZ).

The ministry cannot pay the interest on these new borrowings and will inevitably go into default on repayment of the Treasury Bills when they come due for repayment.

Already, Treasury Bills are being discounted by as much as 30% by companies who need the cash rather than a paper IOU in their accounts. Further debt financing of the budget deficit is simply not possible and in the absence of any significant new financing from external sources, the State has only two choices in 2017: cut its budget for staff costs or print money.

While the Ministry of Finance and the Reserve Bank are desperately trying to maintain the value of the bond note in circulation, there is already a discount on these as real US dollars are openly trading on local money markets at a 15 % premium. If State expenditures are not reduced drastically and immediately, the Government will have no choice but to print more money, and on a large scale.

The moment this happens the economy will see a resumption of inflation in local prices and a sharp reduction in the real value of the new currency. Because real US dollars will disappear from formal markets, civil servants and other formal sector employees who are paid through the banks will experience a sharp reduction in the buying power of their salaries.

The structural problems created over the past four years by this fiscal delinquency go far beyond just the above implications for 2017. They include complete instability of the banking sector with all banks facing liquidity problems and a drastic decline in the real value of their assets.

The re-engagement process with the multilateral financial agencies like the IMF and the World Bank has collapsed and with it any hope of a deal over our international debt and new financing.

The markets understand these issues and Zimbabwe remains in the grip of a crisis of confidence which is paralysing investment and even the maintenance of what we already have in the way of productive assets. Until we restore confidence in our financial and fiscal policies we simply cannot expect FDI inflows or new funding to enable us to grow our economy.

The 2017 budget already envisages a massive deficit of US$400 million or over 10% of revenues and expenditure. This violates agreements with the IMF and the limits set in ZimAsset.

However, State revenues are already US$900 million a year below 2013 levels and continue to decline. It is difficult to see any growth in 2017 even if the agriculture sector sees some growth.

After the modest changes to employment policies, expenditure on staff costs are budgeted at 92% of total expenditure. The long term target is 30%- a laughable goal.

But we have no choice but to accept that we have to cut our coat to fit the cloth available – in my view we have no choice but to cut staff payments by US$700 million to get the level of expenditure on salaries down to 70%. Next year we should target 60% until we can eventually get our level of expenditure down to the international norm. This can quite easily be achieved in the current year by simply reducing the level of allowances to civil servants.

These constitute over half of all staff costs and we do not need to touch basic salaries to achieve this target.

Then there are the allocations to different key ministries and state agencies. In my view the reduction in the allocations to Health and Tertiary Education are simply unacceptable. Allocations to key drivers of economic growth are also totally inadequate – SMEs, agriculture, tourism and industry. Allocations to those institutions which provide oversight are also too low.

We have expanded the responsibilities of the auditor-general’s office and yet we now reduce her budget. Parliament comes out of 2016 with debts equal to half its 2016 budget. It simply cannot be expected to operate on such low levels of budget allocations.

We face elections in 2018 and the allocations to the Zimbabwe Electoral Commission (Zec) are well below what is required. The Anti-Corruption Commission cannot be expected to be an effective agency on this sort of allocation. We must fund the Woman’s Bank and support small business financially, very little is set aside for either.

Even with a sharp reduction in staff costs, the revenues likely to accrue to the State will not satisfy all demands. So it is necessary to look for new sources of funding — Parliament has argued for years that all revenues to State institutions, such as fines and licence fees, should go to the Consolidated Revenue Fund for allocation and supervision — this involves over US$800 million and would constitute a significant element in the revenues to the State.

I have clear evidence that corrupt elements in Zimbabwe are skimming off some US$400 million a year from the imports of fuel to the country. If this was disrupted and new levies and duties applied to fuel imports it would save us nearly US$500 million a year in foreign exchange and increase tax revenues by US$400 million without affecting pump prices.

For years I have argued that the collection of just five in customs duty on all imports is ridiculous. I believe that a concerted effort by the State to close all loopholes and to properly administer customs at the border posts could double customs revenue to US$800 million. It is also time that we raised excise duties on cigarettes to regional levels to discourage smuggling. It is also long overdue for the State to impose full control over all sales of diamonds to ensure that the State receives what it is due.

Is this a tall order? I do not think so and I am sure that if we tackled the 2017 budget on this basis the rewards would be immediate and significant.
Cross, Member of Parliament for Bulawayo South. These New perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economi
cs Society. Email kadenge.zes@gmail.com and cell +263 772 382 852.

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