By Paison Tazvivinga & Vusa Ncube
On Thursday July 28, 2021, Hon Minister of Finance Prof Mthuli Ncube presented the Midterm Budget Review Statement laden with policy achievements recorded thus far.
The statement also proffered an optimistic view of the economic trajectory going forward, chief among them, an upward review of GDP growth. Among the notable achievements is the fact that authorities are in line to overcome short reckless resource allocation and to promote coordination between policy and budgeting. These are the results of long-sighted planning. Also noted is the significant decline in inflation to 56,37% year-on-year in July 2021 from triple digit levels, spending within budget which has resulted in improved public finances, supportive monetary policy target on attaining macroeconomic stability (reserve money growth target per quarter was lowered from 25% in 2020 to 22,5%).
The message however has been received with mixed feelings. There are two main opposing points of view: those that concur with the Minister’s austerity measures; and those that oppose the current economic stance in favour of a more expansionary approach.
To understand these, it is necessary to give some background context to the Zimbabwe economy just prior to the coming in of the new dispensation.
The Zimbabwean economy was marred with escalating debt which at USD13,6 billion in 2017 amounted to 74,9% of GDP, above a statutory limit of 70%, a recurring budget deficit and a negative current account balance of USD1 billion, among other notable misfortunes.
When the new dispensation came in, Prof Ncube identified fiscal discipline as the root cause of most of the economic challenges that the country had been experiencing. He set out to address this through creating a stable environment first. The major building blocks for such were identified as low inflation, a stable exchange rate, increased productivity, improved exports and a manageable budget deficit, among others. The authorities set the foregoing as essential conditions precedent to the increase of government expenditure in a non-inflationary manner to boost aggregate demand.
To date, great milestones have been achieved, as noted in the metrics discussed in earlier paragraphs. The bedrock of all these achievements has been fiscal discipline. The relevance of fiscal discipline in our local context emanates from it being an anchor for sustaining macroeconomic stability, reducing vulnerabilities (such as rising inflation and debt), and improving aggregate economic performance.
Currently in Zimbabwe, it is difficult to take an expansionary stance because any increase in money holdings by the public translates to increased demand for foreign currency as a buffer. Therefore, money expansion without stable inflation and confidence in the local currency is totally unfavourable as it will be inflationary. At the moment inflation in Zimbabwe is explained more by the exchange rate channel than any other usual channel. It is therefore better to get back to the stable macroeconomic environment first before taking on an expansionary approach.
Empirical evidence has proved that fiscal deficits, policy uncertainty and increased corruption, especially in developing countries, hinder economic growth. In other words, fiscal indiscipline has associated costs. It is therefore prudent to pursue policies that manage uncertainty, corruption and fiscal deficits whilst promoting policy sustainability as this stimulates economic growth. These services must be implemented at all levels of government to enhance fiscal discipline.
Furthermore, considering the huge debt overhang and limited foreign financial inflows and resources to finance economic growth, it is wiser to instil discipline, transparency, accountability, and efficiency in management of public finances.
Although some have argued that an expansionary fiscal policy will boost economic activity, it must be noted that irresponsible fiscal expansion may lead to an unstable fiscal environment. This will derail all the reform efforts that have been witnessed thus far. If anything, our experience has taught us that budget preparation and expenditure should be embedded in discipline, prudence, and accountability.
It is from this point of view that the Minister’s intentions must be read. His emphasis on long-term vision was cemented by the double announcement of the Mid-term Budget review and 2022 Budget Strategy Paper.
This was a clear move of managing expectations. It could be discerned that the future has an expansionary fiscal policy and one could foresee the sectors which will run on budget deficit.
High level recommendations
To strengthen the ongoing reform agenda that will level the economic environment, there is need to build strong regulatory institutions. Weak institutions hinder the success of economic reforms hence the need to start building stronger institutions with promptness. To make these institutions efficient, greater premium must be placed on eliminating corruption, re-institutionalising fiscal policy sustainability and set performance benchmarks for public officers.
Equally important is the political will to embrace reforms. It is important for the government to embrace reforms and be willing to implement them because without such, changing existing government systems can be daunting especially when there are conflicting views on the rationale behind the reforms and the expected results. There is also a need to address some of the outstanding issues that are making business operations costly, these include, high taxes, bank charges, distortions in the foreign currency market and rising informalisation.
If the economy can get back to 2018 level (which was reached in the context of fiscal indiscipline) under stable conditions, then we can expect a sustainable growth. However, the past economic sins require citizens to buy in if current efforts by authorities are to be fruitful. No country has ever succeeded without a sense of patriotism from its citizens.
In addition, whilst numbers do not lie, and our economic progress seems to be well quantified, it is important to ensure that this progress is not noted and celebrated by the literati solely. The average man and woman on the street, with no knowledge of GDP and balance of payments should also feel this progress at a micro level. This should be the ideal.
- Tazvivinga is a development economist. — firstname.lastname@example.org. Ncube is a financial analyst and a keen student of the world. — email@example.com.