IN the famous television series MacGyver, played by Richard Dean Anderson, the main character had a knack for mysteriously engineering daring escapes from danger and saving the day.
With Finance minister Mthuli Ncube set to present his 2020 fiscal statement next week, the troubled Southern African country may be in need of its own MacGyver. In Ncube, Zimbabwean felt they had found the man who could fix the country’s economy like the amazing television character.
And this is going to be no mean task.Traditionally, the two most powerful tools government and the central banks use to steer the economy in the right direction are fiscal and monetary policy. When used correctly, the two can stimulate the economy and achieve set economic objectives.
Until Ncube showed up last year, the relationship between fiscal and monetary policy was disconnected. Government used the central bank to create money to finance fiscal deficits, a situation that triggered high inflation.
Under Ncube’s care, he has tried to rein in money supply growth in the economy. Fiscal and monetary tools help in stimulating the economy and slowing it down when it heats up.
Zimbabwe is currently experiencing low aggregate demand and Ncube is in a quandary as to how to stimulate the economy. The prevailing debate is: which one is the better tool?
Generally, government uses its spending and taxation powers to bring about changes in the economy such as aggregate demand.
The combination and interaction of government expenditure and revenue collection is a delicate balance that requires good timing and a little bit of luck to get it right.
The direct and indirect effects of fiscal policy can influence personal spending, capital expenditure, exchange rates, deficit levels, and even interest rates, which are usually associated with monetary policy.
In his pre-budget consultative meeting, Ncube realises the task at hand is near-herculean.“Mr Speaker Sir, I have noted the huge resource requirements being demanded by all ministries. As you are all aware, the capacity of the budget to finance expenditures is dependent on the capacity of the economy to generate revenues. From our deliberations, you will agree with me that revenue generation capacity is still low due to a number of challenges,” he says.
“The budget ceilings that have been given by Treasury, are therefore derived from the anticipated resources envelope from taxes and what we can borrow from the market without destabilising the economy. We also need to be mindful that unrestrained expenditures financed through unsustainable means are the major source of economic instability we are battling today.”
Ncube says an analysis of only eight bids submitted by different ministries show funding requirements of ZW$112 billion, a figure that by far exceeded the total resource envelope for the 2020 Budget.
Economic analyst Victor Bhoroma says the solution to Zimbabwe’s economic problems need more than just fiscal policy.“The solution lies with implementing the necessary reforms in governance, reining in on government expenditure, supply side intervention to grow production, strengthening institutions (rule of law, property rights and policy consistency) and confidence building. The only worry about a local currency is excessive money printing by the central bank which makes multiple currencies dearer options when forced to choose,” he says.
Bhoroma says government needs to limit expenditures.“Limiting government expenditure to tax revenues. Incentives to the productive sectors of the economy (mining and manufacturing, among others) to export and improve capacity utilisation, restoring institutional credibility (rule of law, property rights, policy consistency, central bank independence, judicial independence and title deeds for land holders to boost production,” he says. “Inclusive governance and dialogue to build domestic and international confidence.Transparent and accountable economic management (dealing with corruption decisively)”Against such an uphill task, Ncube has a daunting task ahead of him.
Among the highlights of the 2019 US$8,2 billion budget was a gross domestic product (GDP) annual growth projection of 3,1%, the privatisation of five parastatals to generate US$350 million, 5% salary cuts for senior government officials with the declaration that the multi-currency regime remains in place.
However, a year later, the reality on the ground depicts a totally different picture to what had been envisaged by Ncube in his fiscal statement last year.
The devastating impact of the power cuts, which last up to 18 hours daily, the drought and the catastrophic Cyclone Idai in the eastern parts of the country, among other challenges, have rendered government’s 3,1% growth projection way off the mark.
The International Monetary Fund has projected that the economy will instead contract by 7,2% this year.The multi-currency regime has since been banned through Statutory Instrument 142 of 2019 issued on June 24 this year, making the Zimbabwean dollar the sole legal tender.
However, economist John Robertson said the 2020 budget is likely to be much ado about nothing.“I expect a lot of waffle that adds up to promises that, again, will not be kept and the government ends up looking for someone to blame,” Robertson said. “The best we can hope for is a stable exchange rate, but there is not much to show that will happen.”
He pointed out that lack of reforms will render most proposals in the budget futile.“I do not think there is nothing to look forward to. I just hope next year will not be worse. They are always talking about reforms, but I cannot see any evidence of it,” Robertson said.
Business consultant Simon Kayereka said the Treasury boss should address a number of issues, among them the 2% tax on electronic transactions and money supply.
“Issues that should be addressed include removing the 2% tax, which is punitive. He should reduce money supply which is stoking inflation, as well as putting measures to ensure currency stabilisation,” he said.
Ncube sees the country’s GPD shrinking by 6,5% owing to a drought and power outages in the current financial year.Ncube needs plenty of luck — or to be a financial MacGyver. Unlike MacGyver, the last scene may be one where Ncube, Zimbabwe’s poor version of the television hero, kills the once pretty girl — Zimbabwe — he once promised to rescue.