Fiscal indiscipline hurts consumers in Zimbabwe

Prices of basics have gone up, with parallel market rates also skyrocketing as businesses turn to the black market for their foreign currency needs.

Financial Matters with Tinashe Kaduwo

Consumers’ purchasing power is once again being eroded as the economy continues to struggle. Prices of most basics, including fuel, have been rising over the past six months.

Parallel market rates for hard currency are shooting back to the November 2017 levels. The situation has been worsened by the unavailability of foreign currency in banks for cash withdrawal. As such, businesses and individuals are relying on the parallel market for foreign currency, which has seen rates surpassing the 170 mark again. Zimbabwe, for years, has had a checkered history when it comes to maintaining and sustaining macro-economic stability and fiscal discipline, a situation that is detrimental to consumer welfare. It is fiscal indiscipline that led to record level money printing and eventually the demise of the sovereign currency, the Zimbabwe dollar.

The economy seems to be facing that same problem again, but under a different conditions. Dollarisation brought stability, as government could not “print its way out” of revenue shortfalls and spending overruns. Zimbabwe does not have a currency problem, but a serious fiscal problem. Unrestricted domestic borrowings by government as a result of overrun expenditures have wiped away the benefits and economic stability brought by dollarisation. In the first quarter, government incurred a deficit of US$225,4 million, largely financed through domestic sources, particularly issuance of Treasury Bills (TBs) and overdrafts — its newfound form of money creation. This would have exactly been the same as money printing if the economy had its own sovereign currency. The central goal of any government is to provide jobs and create wealth for its citizens. This can only happen in a growing, stable economy.

Restricted spending and reduced domestic borrowing by government is key to sustainability and a positive economic outlook. Whoever wins the July 30 elections will be inheriting a chaotic economy fraught with huge domestic and external debt, which requires total economic transformation. There are certain critical elements that have to be put in place to make sure this transformation actually takes place.

First, government has to maintain and sustain macro-economic stability. This raises a critical question: which path should the country follow in the short to medium term, while crafting sustainable solution, de-dollarisation or re-dollarisation? Total re-dollarisation may worsen fiscal problems or force fiscal discipline, while de-dollarisation is prone to abuse. It is critical for the country to have a period where the fiscal deficit is sustainably low, where prices are stable, currency firm and interest rates are also low. These are the key elements of macro-economic stability. These critical elements are all affected by the government spending pattern and its borrowing behaviour, making fiscal discipline key. Zimbabwe needs to work towards instilling fiscal discipline for it to achieve macro-economic stability and sustainable economic growth.

Government needs to be kept in check, as political exigencies, especially during elections, undermine fiscal discipline. Government expenditure in the first quarter amounted to US$1,4 billion, surpassing the target of US$1,1 billion by US$273,3 million, a common characteristic of its spending behaviour over the years. Government must focus on managing its cash books. To manage prices, there is need to manage both the expenditure and borrowing appetite.

As long as government continues to incur huge deficits being financed from the Reserve Bank of Zimbabwe overdraft and TBs, prices will remain sticky downwards. Price increases, runaway parallel market rates and the resultant loss in consumer welfare are a true reflection of the impact of high public debt. There is huge task at hand that the July 30-mandated government has to do to ensure that prices are stable and translates to significantly reduced lending rates, important to private sector productivity and economic growth.

Kaduwo is an economist at Econometer Global Capital. — or