Fiscal consolidation should be a priority

Poor economic activity, high and rising government debt, together with unprecedented unemployment levels, have heightened calls for fiscal consolidation which is expected to be one of the key reform areas of Zimbabwe’s new administration.

Financial Matters with Tinashe Kaduwo

This is not an easy task under any circumstances. Fiscal consolidation is generally reducing the budget deficit which has over the years become an albatross to economic growth. This can only be done by either cutting spending or raising revenue while holding expenditure. Fiscal consolidation entails implementing austerity measures and usually stifles growth in the short term, but with wider benefits in the medium to longer term. Rapid implementation of austerity measures may result in slower growth and even unintended consequences. Following the appointment of Emmerson Mnangagwa as President, who is viewed by some as a reformist, and re-instatement of Patrick Chinamasa as Acting Finance minister, there has been renewed prospects of the new government pushing for fiscal consolidation. Given Chinamasa’s previous rhetoric in support of austerity measures such as scrapping of civil servants bonus payments and support of international re-engagement which has been also echoed by Mnangagwa, the new administration is likely to run a more stringent fiscal policy going forward. However, efforts to consolidate the fiscal position faces serious headwinds emanating from costs associated with general elections scheduled for 2018 and sluggish revenue growth. Without foreign assistance in the form of an aid package, the only way to lower government fiscal deficit will be through reducing its expenditures. The costs associated with next year’s elections will however temper government’s efforts to reduce spending. Furthermore, government’s expenditure remains dominated by the public sector wage bill and subsidies to agriculture under its Command Agriculture programme, which will prove difficult to change without large cuts to the civil service or removing some of the subsidies in its Command Programme. In 2016 when government first rolled out its Command Maize Programme, it incurred an additional US$600 million unbudgeted for expenditure to partly finance the programme. There is need to cut such expenditures to attain fiscal consolidation — which will prove difficult. Large cuts to the civil service or scrapping of bonus payments may also prove difficult, especially in an election year. Cutting the civil service or scrapping bonus payments may have political consequences as they may not be received well by the electorate.

Government is also likely to push through its re-engagement plan. This implies that after subtracting the cost of elections, Command Agriculture financing and paying civil servants, anything left is likely to be spent towards clearing arrears to the World Bank and African Development Bank which is around US$1,7 billion.

The difficulties in reining in spending and sluggish revenue growth will see government deficit likely to remain high in 2018, but slightly lower than the estimated US$2 billion in 2017 as government implements fiscal reforms.

Without foreign assistance, government will face little room for needed growth-boosting capital spending.

However, the change in leadership has ushered in some hope and optimism, which the new government should safeguard jealously. There is optimism that the new government marks the beginning of fiscal discipline and a more sustainable fiscal policy. Fiscal discipline should be the main focus of the new administration in its roadmap towards fiscal consolidation. A rushed fiscal consolidation process may result in slower growth and the government has to strike the right balance that is both good for stability and growth. This is possible, but there is no denying that, in the short term, consolidation involves real costs and requires tough choices, the more so given that growth is far below potential and there is little scope for additional lift from monetary policy given the state of the financial sector and the challenges induced by treasury bills and bond notes. Ultimately it is economic growth that will make the difference between successful and failed fiscal consolidation.

Kaduwo is an economist at Econometer Global Capital. — tkaduwo@econometerglobalcapital.com or kaduwot@gmail.com