Mnangagwa’s govt fails first fiscal test

ZIMBABWE’S fiscal details for the first quarter of 2018 show government had cumulative revenue collections of about US$1,2 billion, against total expenditure outlays of US$1,4 billion, resulting in a budget deficit of US$225,4 million.

Zimind Comment

According to the Reserve Bank of Zimbabwe’s latest quarterly report, the total government revenue inflows during the quarter under review were 8% above the target of US$1,1 billion. The economy remained heavily dependent on value-added tax (VAT) and taxes on income and profits, which contributed 35% and 34%, to total revenue, respectively, during the quarter. Government expenditure surpassed the target of US$1,1 billion by US$273,3 million.

Employment costs constituted the largest proportion of total expenditure, constituting 60,4%, followed by capital expenditure and net lending at 20,4%; operations and maintenance 15,8%, while interest payments stood at 3,4%. The deficit was largely financed through domestic sources, particularly the issuance of Treasury Bills.

The large budget deficit confirms that government is still living beyond its means and this can only spell doom. The International Monetary Fund (IMF) has repeatedly encouraged Zimbabwe to introduce a raft of measures to reduce the budget deficit which is crippling the country. Among the measures proposed to rein in runaway expenditure is urgent fiscal consolidation. Public sector employment costs remain at an unsustainable level, constraining social and infrastructure spending. It is critical for the government to contain broader, adverse spillovers from the fiscal imbalances.

Economic experts have also underscored the need to restore the credibility of the currency regime and safeguard the financial sector. While private sector credit growth remains subdued, bank asset concentration on non-liquid central bank deposits and Treasury Bills has increased financial sector fragility. The IMF has encouraged a proactive approach to managing these risks, by bolstering the regulatory and supervisory framework. Coupled with that, the IMF also stressed the urgency of structural reforms and the need to create a conducive environment for private sector-led growth.

Though President Emmerson Mnangagwa’s efforts to improve the business climate are commendable, sweeping reforms to create an investor-friendly environment through dispensing with archaic policies and legislation that spooks investors are key. Fighting corruption is also crucial towards returning Zimbabwe’s fragile economy to a firm recovery and growth trajectory.

There has been a refreshing approach to the policy of re-engagement with the international community, key toward unlocking external financing, which is key in attracting investment and resolving the debt overhang. But the envisaged changes can only succeed in an environment where holistic structural reforms are embraced.

In the broader scheme of things, fiscal indiscipline remains a major impediment. With limited access to foreign inflows, Zimbabwe’s fiscal imbalances have become unsustainable, and are being financed by rising domestic borrowing. This is potentially disastrous. The problems persisting in the economy, particularly the huge budget deficit, show Mnangagwa’s government has failed its first fiscal test to live within its means and break with the past.