FINANCE and Economic Development minister Mthuli Ncube is concerned about the depreciation of the local currency against the greenback as he drafts the national budget for 2024, fearing Zimbabwe’s fiscal deficit could spiral out of control.
In his 2024 Budget Strategy paper released last week, Ncube said exchange rate volatility has been a major source of risk, hence there was a need for urgent policy interventions.
“Exchange rate volatility has been a major source of risk in the recent past, affecting revenue collection, expenditures and debt service, particularly for those items denominated in foreign currency,” he said.
“To the extent that exchange rate depreciation feeds into domestic inflation, thus generates pressure on prices on the budget. In the absence of policy interventions, a 1% depreciation of the Zimbabwe dollar against the US dollar widens the fiscal deficit by about 0,1% of GDP (gross domestic product).”
According to the World Bank, Zimbabwe’s economy was valued at US$20,68 billion at the end of 2022.
This means that a 1% depreciation could cause the fiscal deficit to widen by about US$20,68 million.
“Government will continue to strengthen the value for money audits measures and plug loopholes in the existing procurement systems to ensure that MDAs (ministries, departments and agencies) are not overcharged in respect of payments for goods and services as well as regulate the market, having observed that some of the suppliers or contractors were manipulating the foreign exchange market,” Ncube said.
He added that to mitigate the risk, government had adopted various stabilisation measures, such as weekly wholesale of foreign currency to commercial banks.
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“The medium-term expenditure framework is anchored on ensuring that expenditures are limited to available resources and the fiscal deficit maintained at sustainable levels of below 3% of GDP,” Ncube said.
Treasury has set a target of ZW$2,3 trillion (US$504,85 million) as the budget deficit, 1,5% of the GDP for 2024, based on expected revenues of ZW$30,7 trillion (US$6,73 billion) against expenditures of ZW$33,1 trillion (US$7,26 billion).
“Structural budget rigidity and limited fiscal space are mainly on account of the rising wage bill in relation to other expenditures. The ratio of wage bill to revenue has risen from 35% in 2020 to around 48,6% of revenue, well above the NDS1 (National Development Strategy 1) target,” Ncube said.
“This is further compounded by increasing commitments of foreign currency denominated expenditures that are now crowding out expenditures for critical social sectors and infrastructure development.”
Wages, procurement, social needs, infrastructure spending and climate shocks remain the biggest government expenses, which will soar even higher if the local currency loses value.
The Treasury boss promised to implement a value for money programme on public procurement, increase transparency over the wage bill, stick to the approved budget, cash budgeting and institute penalties for over expenditures.
That is why recent fiscal and monetary measures around mopping excess liquidity and promoting local currency usage were introduced to re-establish foreign exchange stability and to converge the formal and informal forex rates.
The cause of the local currency’s depreciation between May and June is the increase in money supply.
Money supply grew to ZW$14,27 trillion at the end of June, over 500% from December 2022.
While the increase is largely reflected in the expansion of ZW$10,97 trillion (US$1,91 billion) in foreign currency deposits, the balance of ZW$3,3 trillion, in local currency, is nearly 228% higher than the December comparative.
Ncube said achieving targeted collections was underpinned by tax administration initiatives that enhance enforcement and tax compliance of business processes and adoption of new technology, among other initiatives.
“Expansion of the base through embracing emerging industries, including those in the informal sector, as well as capturing the digital market place where sellers and buyers of goods and services converge through e-platforms will ensure that eligible taxpayers contribute towards national development,” he said.
The Zimbabwe Revenue Authority will also enforce tax collections.
“Furthermore, consistent with reforms to contain tax expenditures and minimise leakages, the government is prioritising review of concessions and contracts that undermine revenue collections as well as adjusting fees, levies and charges in line with the cost recovery principle,” Ncube said.
He said revenue collection risks may emanate from reduced tax compliance and transfer pricing, particularly in mining.
“This risk is further compounded by rising dollarisation, which is shrinking the tax base and promoting informalisation,” Ncube said.