AMHVoices: Fiscal deficit primary driver of our distress

Government excessive borrowing has largely ignited the expansion of the domestic (national) debt. It is common knowledge that if a government runs persistent deficits over many years, the national debt will accumulate, especially in Zimbabwe where debt repayments are financed through the printing of money. Currently, government’s domestic debt is US$9,5 billion. Between 2012 and 2018, the domestic debt has grown by a despicable 3 344,53%.

Within a period of 6 years the national debt intensified by a staggering U$9 224 200 000 from the US$275 800 000 as at 2012. Given this unquenchable appetite for borrowing, Zimbabwe’s road to economic recovery is surely bottomless, unless the craving for borrowing is curtailed. This provides ample evidence that the Reserve Bank of Zimbabwe (RBZ) is not an independent arm of the government and thus subject to political control which has disastrous economic consequences.

The external debt currently stands at US$7,4 billion, hence government’s total indebtedness is US$16,9 billion. This is surely an unsustainable debt position. The government has demonstrated unrestrained behaviour regardless of stern warnings from the International Monetary Fund financial soundness guidelines. Local financial, economic and industrial analysts have demonised government’s incessant borrowing behaviour, but the message has continuously fallen on deaf ears.

By its very nature, a debt distress has ravaging effects on every economic facet. The debt distress has thus rendered Zimbabwe a financially unsound economy hence the foreign currency and foreign direct investment drought.
Given the current debt distress, Zimbabwe has been having limited access to external resources hence the ballooning of the public debt as government borrow from public funds.

Crowding out effect

Crowding out generally describes a scenario where an increase in government borrowing diverts money away from the private sector. Government’s excessive growth of public expenditure (financed through domestic borrowing) has been crowding out the private sector economic activity.

Evidence from the fiscal roadmap report shows that the government Treasury Bill issuances increased to US$7,6 billion in August 2018 from US$2,1 billion in 2016. From a Treasury Bills (TBs) to GDP ratio perspective, the current TBs in circulation represent 36,5% of the country’s gross domestic product (GDP). The new minister openly acknowledges the true fact that such borrowings are a huge cost to the government. Imperatively, short-term debt instruments by their very nature are costly.

Sadly, the suffering caused by the creation of such costly financial positions is largely felt by the taxpayers. Given this scenario at hand, one can postulate that the government has not shown any remorse by using expensive means of borrowing.

Consideration has only been limited to the need to satisfy their recurrent consumptive needs. Government has fundamentally been pushed to use domestic borrowing given that the international financiers have closed offices for us given our debt distress.

Whenever government intervenes in the market through the issuance of TBs, they mop up the market liquidity, thereby reducing the banks’ financial intermediation capacity.

It is a common international practice for governments to operate fiscal deficits so as to spur growth, but this should be done within sustainable limits. Consequently, in the Zimbabwean case, the gigantic domestically-financed fiscal deficit left the private sector with scarce resources to operate with. Given the financial resource scarcity, there has been limited credit creation, hence the lack of productive investments.

It is vital to reinforce a point, that over the years, the incessant increase in the number and value of government securities on the Zimbabwean markets triggered the interest rates to increase. The increase in interest rates was driven by the need to encourage individuals and companies to acquire the government securities. The negative effect of this strategy is that the higher interest rates increase the cost of private sector investment, thereby reducing (crowding out) private sector investment.

The crowding out effect has been predominantly evident in Zimbabwe given that few domestic and foreign investors have made any meaningful or tangible investment facilities.

By virtue of the government fiscal deficit (through domestic borrowing) absorbing productive resources which could have been more effectively used in the private sector, there is limited room for private investment growth.

Further exacerbating the dire situation, the Zimbabwean financial sector has remained unsound and plagued with credit risk because of the government’s uncapped quasi-fiscal activities. A financially unsound sector has solidified the country to be rendered a high risk investment zone. As such, the country has lost strategic relationships with foreign banks. Banks are further exposed to exorbitant transaction costs and a severe lack of access to external financing given the broken financial relationships. This problem has mainly been triggered by the policy inconsistencies of the monetary and fiscal authorities.

The economic quagmire has been aggravated by exogenous factors such as deteriorating export prices and meagre foreign direct investments, thus worsening our balance of payments position. Given the policy paralysis and an unstable business operating environment, there has been a diminishing interest by foreign corporations and entrepreneurs to do business in Zimbabwe.

Thus, the amalgamation of exogenous and endogenous factors worsened an already compromised external position hence the economic predicaments that are presently prevailing in our motherland.

Money supply growth, inflation

Zimbabwe had weak economic activity, particularly in the year 2016. Since then, the negative economic trajectory had grossly hampered the economy. At a time when the economy was experiencing weak economic activity, government was busy increasing government expenditures.

Fundamentally, an increase in government spending largely increases the demand for money and aggravates the liquidity challenges. The increased money supply growth, if it is not harmonised with a corresponding increase in economic productivity (physical increase in goods and services), it is unquestionably inflationary.

Despite receiving stern warnings from industrial experts, economic analysts and financial technocrats, the Zimbabwean government has always borrowed to spend huge chunks of money on the unsustainable recurrent expenditures, unnecessary defence and security expenditures and employment costs, and the concomitant frequently unbudgeted 13th month salary (civil service bonuses). Contrary to the much-publicised success stories of the command agriculture initiative, the costly provision of inputs to farmers and assistance to the agricultural marketing board has been counterproductive.

The agricultural support initiatives have increased government’s demand for money to finance the unsustainable model. Given that command agriculture is a political project, there has been limited financial due diligence regarding particularly its impact on the government national debt.

As such, like its predecessor, agricultural subsidisation initiatives such as the Productive Sector Facility (PSF) and the Agricultural Sector Enhancement Facility (Aspef), the command system is a debt trap time-bomb. Government’s subsidisation programmes represent a direct loss to the RBZ. These quasi-fiscal activities dwarf the government deficit and largely contribute to money creation.

It is public knowledge that government’s purchase of vehicles for officials has largely been a bone of contention. The widely economically unnecessary purchase of vehicles for traditional chiefs has been done only to satisfy political ambitions of the ruling government.

Government’s demand for money is largely unsustainable given that it has a bloated public sector. This position is further compounded by political decisions which favour political campaigning schemes at the expense of economically viable investments.

Given the lack of commitment to reform and the urgently required fiscal consolidation, government’s borrowing appetite has remained unabated. It is common knowledge that government’s foreign currency reserves are dry.

Regardless of having such knowledge of a lack of foreign cash reserves, but driven by their desire to satisfy political objectives, government resorted to the overdraft facility. The unthinkable reality beckoned, the borrowing was financed through crediting external (nostro) accounts. Government utilised the foreign currency from the nostro accounts and exchanged it with the real time gross settlement (RTGS) electronic funds.

In effect, such a stance created fictitious US dollar balances given that there was no simultaneous increase in the physical quantities of US dollars to back up the overdrawn nostro accounts.

In a nutshell, the fiscal deficit is such a gigantic conundrum given that it is driven by the desire to satisfy political ambitions at the expense of economically tangible solutions. Thus any austerity measures should be coherently and logically matched with our history of economic struggles. As such, the monetary and fiscal authorities have a moral duty to avoid haphazard austerity measures, which are meant to squeeze the already constrained corporates and poor economic inhabitants.