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Golden Sibanda
The World Bank says the need by the Zimbabwean Government to scale up financing for health care and social protection, especially in urban areas, amid high vulnerabilities to the Covid-19 induced lockdown, has raised spending pressures on the national Treasury.
This, the bank say may widen the fiscal deficit from just about 4 percent last year to 5,6 percent of Gross Domestic Product (GDP) this year.
However, Finance and Economic Development Minister Professor Mthuli Ncube said in June that the country was on track to meet its budget deficit target of 1,5 percent of Gross Domestic Product (GDP) in 2020.
The treasury chief rebased the domestic economy in 2018 from about US$18 billion to US$25 billion, to cover a number of widespread economic activities previously not captured in national accounts.
Mthuli said he would not seek additional funding this year since the national Treasury had spent less than half of its budget despite pressure from the pandemic.
Zimbabwe has over the last half decade and the decade up to 2008 struggled with persistent budget deficits amid increased public expenditure needs, an under-performing economy and constrained ability to borrow externally at low interest rates.
However, the global lender said in a recent update on Zimbabwe that the country is facing an economic crisis, which has been worsened by Covid-19 and has further constrained its capacity to generate revenue from taxes amid inability to borrow externally.
The southern African country is yet to recover from the devastating impact of natural disasters that ravaged the country last year, which have taken toll on the Treasury.
In 2019, Zimbabwe was hit by a double whammy of a severe drought and Cyclone Idai, whose impact was coupled with shortages of foreign currency that led to double-digit contraction of agriculture, electricity, and water production and pushed over half of the population into food insecurity.
Policy missteps, the bank said, lack of effective fiscal-monetary-forex policy co-ordination a significant quasi-fiscal activities by the Reserve Bank of Zimbabwe, undermined the de-dollarisation effort and resulted in a rapid depreciation of the local currency and high inflationary pressures.
The prevailing high inflation has eroded disposable incomes of the majority of the population and depressed domestic demand.
Gross Domestic Product (GDP) is estimated to have contracted by 8,1 percent in 2019 and the recession is projected to continue in 2020 due to persistent climate shocks and the domestic vulnerabilities worsened by Covid-19.
The bank said the pandemic has negatively affected exports, tourism and manufacturing, deepening the economic crisis and poverty levels.
“As uncertainty about the duration and severity of the virus spread remains high, GDP is expected to contract in 2020 between 5 percent under the baseline scenario and 10 percent in the low case scenario.
“Inflation reached triple digit levels in 2019, and is projected to remain high in 2020 as Covid-19 disrupts production and trade.
Inflation surged to 521 percent year-on-year in December 2019, fuelled by a rapid exchange rate depreciation, poor harvests, and reduction of subsidies on fuel and electricity.
Food prices increased by 725 percent, resulting in a severe loss of purchasing power for the poor. Continued local currency depreciation, disruption of production and trade as a result of Covid-19 are likely to fuel inflationary pressures in 2020.
The Government introduced a new inflation rate in June 2020 based on blending US dollar and the local currency prices.
The blended annual inflation rate stood at 457,2 percent in June 2020 while the unblended (usual) annual inflation rate stood at 737,3 percent down from 786 percent in May 2020.
The annual inflation soared further to 837 percent in July.
With limited access to external financing and growing humanitarian needs due to Covid-19 and persistent climate shocks, the Government may resort to monetary financing, stoking further inflation, the World Bank further noted.
Human capital
“Despite the increases in social protection spending, including repayment of arrears on important social programmes, most extremely poor citizens remained unprotected, and their numbers are rising.
“Education and health spending budgets, which have a large salary component, were eroded by inflation, worsening human capital outcomes and jeopardising opportunities for future generations.
“On the back of sizable financing needs and deteriorating revenue generation capacity, the pandemic has increased expenditure pressures.
“Efforts to scale up health care financing and provide social protection to urban beneficiaries who are most exposed to the lockdown are ongoing.
“As a result, the fiscal deficit is expected to widen to 5,6 percent of GDP, “ the bank said.
Development challenges
The Bretyon Woods institution also said that poverty levels increased sharply in 2019 and are projected to worsen further in 2020. In 2019, the number of extreme poor is estimated to have reached 6,6 million, double the level in 2011.
A substantial decline in agriculture production and high food prices increased food insecurity, with close to 50 percent of the population being food insecure in 2019.
Extreme poverty reached 40 percent of the population in 2019, up from 33,4 percent in 2017, with urban poverty rising faster (from 4 percent to 10 percent) than rural poverty.
The poverty levels are projected to rise further in 2020 due to continuing economic contraction and loss of employment and income, exacerbated by the restrictions on mobility, inflationary pressures and drought conditions.
The number of extreme poor is projected to increase from 6,6 million in 2019 to 7,6 million in 2020 under the baseline scenario and to eight million under the low case scenario.
Bongani Ndlovu