ECONOMIC reforms and austerity measures being spearheaded by Finance minister Mthuli Ncube under the Transitional Stabilisation Programme (TSP) have gone off the rails after it emerged the central bank created ZW$3,2 billion in reserve money and Treasury spent ZW$8,2 billion in unbudgeted expenditure in the 2019 fiscal year.
The revelations are contained in Ncube’s 2020 fiscal policy statement presented yesterday. The 2020 budget is valued at ZW$63,8 billion (US$4,25 billion at the interbank rate and US$3,19 billion at the black market rate of US$1:ZW$20).
Ncube, who stopped short of expressing disappointment at not meeting set targets under the TSP, has been leading economic reforms characterised by fiscal discipline after years of unrestrained expenditure and the use of the central bank to finance fiscal deficits.
The latest revelations question the government’s commitment to the economic reforms.
The TSP was launched on October 5 2018 after last year’s general elections as part of President Emmerson Mnangagwa’s reform agenda.
The programme’s objective was to leverage on the country’s core competencies in natural resources (among other resources) to rebuild and transform Zimbabwe into an upper middle-income economy by 2030.
He said unbudgeted expenditures in the current fiscal year had contributed to government’s failure to meet the TSP targets.
“In 2019, spending outside the budget and macro-economic shocks disrupted attainment of the TSP targets,” he said. “Refraining from unbudgeted activities and borrowing from the central bank will, therefore,constitute a key obligation for both Treasury and the central bank authorities from 2020.”
According to Ncube, government has also failed to meet the agreed International Monetary Fund (IMF) Staff-Monitored Programme (SMP) targets in line with the TSP.
The SMP covers the period May 15, 2019 to March 15, 2020.
The SMP seeks to assist the troubled country to implement key reforms in line with the TSP and help build a track record of implementing sound economic policies as it seeks to normalise relations with the international community.
Ncube said a challenging macro-economic environment and other shocks have caused setbacks on some quantitative targets related to the stock of official international reserves, ceiling on new non-concessional external debt contracted or guaranteed by the central government and ceiling on credit to the non-financial public sector from the RBZ.
Ncube said total expenditure for the current year would be ZW$26,2 billion against a target of ZW$18 billion.
“While the Mid-Term Review projected cumulative expenditures of ZW$18 billion, revised estimates are now at ZW$26,2 billion,” Ncube said. “This figure incorporates all outside the budget expenditures related to various subsidies and agricultural and drought-related expenditures, as well as unanticipated cost escalations on capital projects and other government operations, including employment costs estimated at 35,1% of total expenditure.”
Zimbabwe has been financing command agriculture programmes to the tune of billions of dollars.
On the monetary front, things have also not been going according to plan, he said.
Governments use both fiscal and monetary policies to achieve economic objectives. In Zimbabwe’s case, the two are often at odds.
According to Ncube, reserve money grew 103,3% from ZW$3,2 billion in March 2019 to ZW$6,4 billion as at August 31.
The growth was despite the central bank’s initially targeted reserve money growth of between 8% and 10% in 2019 to anchor inflation expectations and support the mono currency.
Zimbabwe outlawed the use of foreign currencies in local transactions in June and made the Zimbabwean dollar the sole legal tender.
“The increase is largely attributable to growth of credit to government,” he said. “Similarly, money supply increased by 89,6% from ZW$10,4 billion in March 2019 to ZW$19,7 billion. The annual increase in money supply was largely attributable to growth in transitional deposits of 126%, time deposits of 99,5% and Negotiable Certificate of Deposits 205,2%.”
Bond notes and coins increased by 53,5% from ZW$484,8 million in August 2018 to ZW$744,9 billion in August 2019.
Ncube said there was need for both fiscal and monetary authorities to adhere to public finance management laws.
“In addition, it is paramount that both fiscal and monetary authorities observe public finance management laws and regulations, as well as principles of transparency and accountability in order to regain lost confidence,” he said. “For that purpose, the PFMS Act will be further strengthened with relevant fiscal responsibility provisions, while ensuring that all expenditure Strict adherence to the procedures laid out in the Public Finance Management Act (Chapter 22:19), including the issuance of warrants by the Accountant-General prior to any spending commitment made by an Accounting Officer, will also be enforced.”
Ncube said he would pay more attention to what he described as specific risks to the success of the 2020 National Budget. He painted a picture of an economy deep in trouble.
Apart from unrestrained expenditure, loans to government accounted for more than a third of total credit. This shows that government is crowding out the private sector.
This comes at a time government is pushing through a policy to get companies in the country to produce more.
Capacity utilisation in the manufacturing sector stood at 35%.
“Annual growth in domestic credit continued on an upward trend registering 42,8% in August 2019 compared to a growth of 25% recorded in August 2018,” he said.
“Net credit to government grew by 35,3% in August 2019 to ZW$12,51 billion compared to 74,5% in December 2018. The decline in net credit to government was a reflection of fiscal consolidation measures pursued in the first half of 2019.”
However, in the second half of the year, loans to government caused a spike to agricultural financing.
Credit to the private sector recorded an annual growth of 63,75% to ZW$6,10 billion from 3,94% in August 2018.
A budget deficit of ZW$5,2 billion has been forecasted based on year-end projections for revenues and expenditures.
He conceded the current hyperinflation environment in the country has eroded incomes for most workers but insisted government was committed to ensuring a decent standard of living to public servants, and will take inflationary developments (cost of living adjustments) into account in the ongoing wage negotiations.
Meanwhile, Treasury has made arrangements to pay all civil servants their bonuses in November 2019.
Subsidies, other distortions
Ncube said distortions emanating from subsidies present an additional risk to macro-economic and fiscal stability going into the future.
He singled out subsidies on fuel, electricity and agriculture as a cause for concern, saying this has in the past led to “large and often unpredictable expenses”.
“Where subsidies are deemed essential and can be financed, these will need to be clearly targeted and reflected in the budget with adequate budgetary provisions,” Ncube said.
He said there was need for both fiscal and monetary authorities to adhere to public finance management laws.
“To ensure effective implementation of the proposed subsidy policy, additional measures will be taken to tighten eligibility to subsidised goods and services so that only those who are eligible can benefit,” Ncube said. “To ensure effective implementation of the proposed subsidy policy, additional measures will be taken to tighten eligibility to subsidised goods and services so that only those who are eligible can benefit.”
Ncube said his ZW$63,8 billion budget was anchored on the need to enhance productivity in the economy and sustainable economic growth.
“The thrust for the 2020 Budget is centred on ramping up productivity in the agriculture, manufacturing, mining and services sectors to create jobs and reduce imports,” he said.
Although Ncube set out what he said were principles for a sound budget for 2020, he seemed to be losing the reform battle.