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Economy on right track but…


THE Minister of Finance and Economic Development, Professor Mthuli Ncube presented the Mid-term Budget Review last week on Thursday. The review comes at a time when the country is in the grip of a Covid-19 third wave.

The Covid-19 pandemic has worsened the poverty and inequality situation in the country. The resultant loss of lives, livelihoods and incomes has thrown many households into extreme poverty.

Estimates from the World Bank show that the number of extremely poor Zimbabweans reached 7,9 million – almost 49% of the population in 2020, up from 42% in 2019.

Inequality is on the rise, according to the mini-Poverty, Income, Consumption and Expenditure Survey (PICES) from Zimbabwe National Statistics Agency (Zimstat), the Gini index (a statistical measure of economic inequality in a population) rose from 44,7% in 2017 to 50,4% in 2019. The richest 10% of the population consumes 40% of the total national consumption.

Inflation has been on a slow-down, but the prices and the cost of living continue to increase. Monthly inflation slowed down from 3,88% in June to 2,56% in July, while annual inflation decelerated from 106,64% in June to 56,37% in July.

This is quite a commendable feat. However, as long as we have annual inflation (in those numbers), the cost of living will continue to increase. Besides, prices in Zimbabwe were/are relatively very high in Purchasing Power Parity (PPP) terms, so while indeed the slowdown is positive, it also exacerbates the already high prices and the cost of living.

Official inflation numbers also do not fully capture price developments in the economy owing to the high levels of informality.

The slowdown in official inflation can be attributed to a strict monetary targeting regime being implemented as well as the general improvement in foreign exchange availability on the foreign exchange auction system.

There have, however, been delays in terms of actually accessing the foreign exchange, which is a cause for concern. The pent-up demand for foreign exchange also remains unmet.While the official exchange has maintained some relative stability, the demand for foreign currency continues to outstrip available supply.

The aggregate demand for foreign exchange in the economy per month averages about US$400 million (this is based on total imports of US$4,7 billion for 2020) while the auction is allotting on average about US$207 million (based on actual allotments for June), creating a huge mismatch.

To demonstrate how prices are relatively higher in Zimbabwe, we can take the price of fuel.The current price of blend/petrol is US$1,33 per litre, while the price of diesel is US$1,30 per litre. These prices are the highest in the Sadc region and among the highest on the African continent.

According to www.globalpetrolprices.com, the global average price of petrol is US$1,19 per litre, while that for diesel is US$1,06. In South Africa, the price of both petrol and diesel is averaging US$1,15 per litre, while in Zambia petrol is averaging US$0,88 per litre, with diesel averaging US$0,78 per litre.

In Botswana, petrol is averaging US$0,93 per litre, while diesel is averaging US$0,91 per litre; and in Mozambique petrol is retailing for US$0,98 per litre, while diesel is averaging US$0,90. The high level of fuel prices in the country is a significant contributor to the high cost of living as well as the lack of economic competitiveness.

According to the 2021 edition of United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report, FDI inflows into Zimbabwe stood at US$194 million from US$280 million in 2019.

On the back of a small number of approved projects, Zimbabwe’s FDI inflows more than doubled to US$745 million in 2018 from US$349 million in 2017. This is on account of the challenging doing business environment as well as the uncertainties associated with the Covid-19 pandemic.

A cause for concern is the growing public indebtedness. Domestic debt as at end April 2021 amounted to ZW$20,9 billion (US$244,1 million), up from ZW$12,5 billion (US$146 million) as at 30 September 2020, representing a 67% increase. This comprises Treasury Bonds amounting to ZW$ 13,6 billion (US$158,8 million) Treasury Bills amounting to ZW$4,9 billion (US$57,2 million) and arrears of ZW$2,5 billion (US$29,2 million).

However, total domestic debt constitutes only 0,9% of GDP. As at end December 2020, total Public and Publicly Guaranteed (PPG) external debt including Reserve Bank of Zimbabwe (RBZ) external guaranteed debt amounted to US$10,5 billion, representing 71,2% of GDP.

This is an increase of 28% from the US$8,2 billion as at September 30. Accumulation of external debt arrears remains a major challenge to the country, making up over US$6,5 billion (77%) of total external debt.

The debt service expenditure of ZW$961 million (US$11,2 million) for the first half of the year while absolutely necessary has a crowding out effect on critical social spending.

The review failed to live up to many people’s expectations with no major fiscal policy changes especially to deal with the fallout from the Covid-19 pandemic.

The Minister of Finance and Economic Development also did not request for a supplementary budget. A major expectation was that the minister was going to allocate more resources towards social protection to mitigate the high levels of poverty, as well as adjusting the tax-free threshold for individuals to improve real incomes (disposable incomes).

Fiscal revenues for the first half of the year were estimated at ZW$198,2 billion (US$2,3 billion), whilst expenditures were about ZW$197,6 billion (US$2,3 billion), resulting in a surplus of ZW$570 million (US$6,6 million).

VAT contributed 23% to total revenues with corporate income tax and PAYE coming second and third at 20% and 17% respectively. The presumptive, carbon, and sin taxes performed relatively well.

I am a major proponent of sin taxes as they have proven very effective in disincentivising the consumption of harmful products while helping governments to mobilise additional fiscal revenues to finance development.

In view of the high levels of inequalities, many have been advocating for a wealth tax. A number of countries have introduced wealth taxes with very mixed results.

Public expenditures in critical sectors remain inadequate and below regional and international benchmarks. An analysis of the sectoral spending performance for the first half of the year shows that Government spent only 0,07% of GDP on social protection, which is a far cry from the 4,5% benchmark set under the social policy for Africa Agreement of 2008.

Government also spent a measly 5,5% of total expenditures on public health, which is far less than the 15% Abuja Declaration benchmark. Spending on basic education was 11,6% of total government spending for the first half of the year.

Government has done relatively well in terms of agriculture spending at 20% of total expenditures, as well as in terms of spending on water and sanitation.

Water and sanitation spending constituted 1,6% of GDP, which is higher that 1,5% set under the eThekwini Declaration of 2008. Overall capital spending was ZW$67 billion (US$782,7 million) which accounts for 34% of total expenditures, while compensation of employees was ZW$80 billion (US$934,5 million), which constitutes about 40% of total expenditures for the first half of the year.

Going forward, maintaining price stability is critical and will depend largely on the ability to control/bridle money supply growth. However, given the huge demands/pressures on the expenditure side and the limited fiscal space, there is a possibility that government may be forced to seek recourse to monetary financing and/or even domestic borrowing.

In the outlook, annual inflation is expected to drastically slow down to an average of below 50% by year end, while average month-on-month inflation is expected to be below 1%.

The World Bank is expecting, inflation is expected to fall from 557,1% in 2020 to 86% in 2021. While the economy is on the right track a lot of work still needs to be done especially around implementing critical institutional reforms to entrench economic confidence.

Chitambara is a development economics scholar.

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