2018 national budget good but . . .

The 2018 National Budget has come at a time the country has just experienced some changes in political leadership, which have brought optimism, confidence and hope of an economic turnaround to many people.

Prosper Chitambara,Economist

On the economic front, the country continues to experience a binding liquidity crisis. The liquidity crisis is a manifestation of structural deficiencies and distortions in the economy typified by deindustrialisation, rising informality, high public debt, lacklustre export performance, dwindling capital inflows, capital leakages, poor infrastructure, institutional weaknesses, weak confidence, a volatile political environment among others.

In particular, the high levels of informality presents challenges for domestic resource mobilisation within the context of budget financing.

The macro-economic framework underpinning the 2018 National Budget remains highly consumption-oriented with the bulk of fiscal revenues going towards funding employment-related costs (high marginal propensity to consume, negative savings ratios).

In 2018, employment costs are expected to constitute 75% of total expenditures down from about 90% in 2017. The public sector wage bill poses a serious threat to fiscal and macro-economic stability, as the country has one of the highest public employment costs in sub-Saharan Africa.

In particular, the public sector wage bill has far exceeded growth in real Gross Domestic Product (GDP). The high public sector wage bill has crowded out necessary public investment in capital projects and the social services. Worryingly, the public wage bill is projected to increase by about 13% in 2018 yet economic growth is only projected at 4,5%.

The financing of the widening fiscal deficit through domestic borrowing has resulted in an increase in the public debt and an unsustainable macro-economic situation.

The fiscal deficit was estimated at US$1,042 billion (7,3% of GDP) in 2016. The fiscal deficit is expected to widen further in 2017 to US$1,707 representing a 64% increase owing to a lacklustre performance of revenues and pressures on the expenditure side.

Funding for the upcoming elections in 2018 will put serious on expenditures. As a result the fiscal deficit is expected to remain high in 2018. Official statistics are however projecting a fiscal deficit of US$672 million in 2018. Total public debt stock is estimated at US$13,6 billion in 2017 (75% of GDP) comprising public domestic debt stock of US$6 billion and foreign debt stock of US$7,5 billion.

As at December 31 2016, total public debt (both domestic and external) stood at US$11,3 billion of which US$4 billion was domestic debt. Of concern is the fact that total debt stock is estimated to increase by 20%, while domestic indebtedness is estimated to grow by 50% whereas the country’s exports are estimated to have increased by not more than 10% from US$3,7 billion in 2016 to an estimated four billion in 2017.

The cost of servicing the debt also continues to crowd out fiscal resources that could have been invested in critical social services such as health care and education. As a result, government spending on critical sectors such as health remains relatively low.

Government subsidies to loss making parastatals amounting to US$224,5 million in 2017 have also had a strong crowding out effect on critical social and capital expenditures. The reform of parastatals therefore needs to be urgently expedited in the 2018 fiscal year so as to stop the further haemorrhaging of the economy.

Economic performance in 2018 is projected at 4,5%. However, this performance may be weighed down by the elections which are already generating a lot of uncertainties and are expected to put pressure on expenditures.

Uncertainties associated with the 2018 elections may dampen investment further affecting growth with a number of investors expected to adopt a wait and see attitude. The investment environment remains problematic.

In the short-to-medium term, the economy will continue to face structural challenges arising from high levels of informality, weak domestic demand, high public debt, lack of confidence, a fluid political environment and institutional weaknesses.

According to the 2017-2018 Global Competitiveness Report by the World Economic Forum (WEF), the most problematic factors for doing business in Zimbabwe include (in order of their importance): policy instability (19,3%); foreign currency regulations (15,9%); inefficient government bureaucracy (13,6%); access to finance (10.5%); corruption (9,2%); government instability (8,8%); inadequate supply of infrastructure (8,3%); tax rates (4,6%); restrictive labour regulations (4,4%) and tax regulations (4,1%), among others.

The 2018 National Budget falls short of being pro-poor and inclusive owing to the grossly inadequate allocations to key pro-poor sectors such as education, health care and social protection.

For instance, government allocation on health care continues to account for a relatively small share of total government spending with health sector allocation standing at 7,7% in 2018 up from about 6% in 2017. The Abuja target (of 10%) remains an elusive target for the country.

Government also spends a relatively small share of its gross domestic product (GDP) on health care. Lower levels of per capita health expenditure indicate that health expenditure in the country is insufficient to guarantee adequate access and quality of healthcare. Per capita health allocation stands at about US$25 in 2018 up from US$22 in 2017 and about US$24 in 2016. Per capita health spending is US$650 in South Africa, US$90 in Zambia and US$200 in Angola.

The inadequate public financing of health has resulted in an overreliance on out-of- pocket and external financing, which is highly unsustainable.

The Primary and Secondary Education ministry was allocated about 17% of the Budget which is below the 20% Dakar Declaration benchmark. The Agriculture ministry received 9,3% of the total planned expenditures which is marginally below the Maputo Agreement (2003) target of 10%. The Defence ministry received US$420,4 million (constituting 7,9% of the total vote), while the Home Affairs ministry received US$435,5 million (representing 8,2% of the total vote).

In Rwanda and Uganda they drastically reduced defence and security in recent years to allow for scaling up of pro-poor expenditure on human and infrastructure development. Military and security spending have been shown to retard development by diverting government resources that could be put to better use.

In conclusion, the 2018 National Budget contains pragmatic measures to cut unproductive and wasteful recurrent expenditures, while scaling up social and capital expenditures.

This should provide a solid foundation for medium term development if implemented. With elections next year, the performance of the National Budget is likely to be affected both in terms of funding requirements and increasing uncertainties.

The National Budget may therefore fail to meet some of its targets. The financial condition of state-owned companies and public entities represents another significant risk over the medium term.

The risk for higher inflation in the medium term remains, although the price increases may not be as severe as in the past. Future budgets must contain a matrix articulating key initiatives in the preceding budget, progress made in this context and a plan and timeline for key milestones to be achieved during the budget period.

Chitambara is a development macro-economist based in Harare. These New Perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES). Email kadenge.zes@gmail.com and Cell +263 772 382. 852.

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