Govt must ensure fiscal consolidation for growth


JUST like Zambia, Zimbabwe is facing an unsustainably high budget deficit which has destabilising implications not only to the financial sector, but also to the rest of the economy. There are interesting similarities between Zimbabwe and Zambia’s macroeconomic conditions, particularly the pattern of government spending. For instance, Zambia, just like Zimbabwe, is struggling with debt. Zambia’s external debt stock as at end of June 2018 was US$9,4 billion, representing 34,7% of gross domestic product. Zimbabwe’s external debt stock is also around the same figure. However, Zambia has a lower domestic debt of around US$5,1 billion compared to Zimbabwe’s US$9,5 billion.

Financial Matters with Tinashe Kaduwo

The two countries have something in common: unsustainable budget deficits. There are fears Zambia may default on its debt payments. In its 2019 budget announced on September 28 under the theme “Delivering Fiscal Consolidation for Sustainable and Inclusive Growth”, Zambia came up with some good policy recommendations that Zimbabwe may also adopt.

What is of great significance on Zambia’s budget is that it is aligned to its short-term macroeconomic policy — the Economic Stabilisation and Growth Programme, its long-term macroeconomic policy (the Seventh National Development Plan) and its vision of becoming a prosperous middle-income country by 2030. This is a critical point that Zimbabwe must adopt when it comes to macroeconomic policy planning formulation and implementation. Zimbabwe needs a well-crafted vision with a clear roadmap of achieving it. The country also needs a long-term macroeconomic policy which forms the basis of all other short-term economic stabilisation policies.

Zambia’s 2019 budget seeks to attain a good set of specific objectives. These include annual GDP growth rate of at least 4%, sustain inflation within the 6% to 8% range, raise international reserves to at least three months of import cover, increase domestic revenue to not less than 18% of GDP, reduce the fiscal deficit to 6,5% of GDP, prioritise the dismantling of arrears and reduce the pace of debt accumulation and ensure sustainability. As Zimbabwe struggles with debt and budget deficits just like Zambia, there is need for the country to implement policy reforms to reverse the fiscal disequilibrium. However, reversing the fiscal disequilibrium should be seen as a process which takes time and, therefore, the need for a proper economic policy to anchor the reforms. Policies that encourage growth will help increase revenue whilst austerity measures will help keep spending under check. It is important to note that delivering fiscal consolidation for sustainable development requires robust legal, policy, regulatory and structural reforms. High fiscal deficits have serious negative consequences. These include reduced levels of credit for private sector growth, higher inflationary pressures and volatility in the exchange rate. Such consequences affect the poorest members of society disproportionately.

Since fiscal issues are of utmost importance, government should diligently implement bold reforms in the areas of fiscal and debt management. Zambia, for instance, in its 2019 budget, proposed to significantly reduce expenditure on administrative parts of the public service so as to prioritise allocations to key service delivery expenditures. This is important to unlock resources for sectors that are of greater importance to society. Zambia also put controls on the wage bill by restricting recruitment and also scaled down domestically financed capital expenditure by phasing the completion of existing projects. The country in this regard prioritised only projects that are at least 80% complete. Zambia also focussed on increasing domestic resource mobilisation to 18,7% of GDP and curtailing domestic borrowing from 4% to 1,4% of GDP. The measures show serious intent by the government to reverse its fiscal disequilibrium. Zimbabwe needs such reforms, given its unsustainable government spending that has resulted in huge growth in money supply. Uncurtailed government spending may plunge the economy into further volatility similar to what we witnessed during the hyperinflationary era, where uncontrolled government spending led to record levels of money printing and the resultant demise of the Zimbabwean dollar.

Kaduwo is a researcher and an economist. —