Fiscal policy review: Gvt should bite the bullet

Persistence Gwanyanya
FOR those who listened to the delayed fiscal mid-term policy review, it is difficult to disagree with the view that the economy is in real bad shape. It is the increase in imbalances in both the domestic and external sectors that is most worrying. The domestic economy is characterised by a widening budget deficit while the foreign sector continues to be weighed by an equally widening current account deficit.

The effect of these twin evil forces is arguably Minister Chinamasa’s major headache.

It is precisely the reason why this year’s economic growth projection has been revised to 1,2 percent from 1,4 percent.

There is need for real economy policy interventions to put the economy back on track.

Given the current state of the economy, there is need to institute serious economic reforms aimed at rebalancing the economy towards increased production, while at the same time reducing consumption.

And also given the painful nature of economic reforms, there is need for everyone to put their shoulder to the wheel.

A renewed spirit of dedication and sacrifice is also needed in order to rebuild the economy.

Zimbabwe still remains a highly consumptive economy with 97 percent of Government revenue in the first half of the year gobbled by civil servants salaries.

It simply means that only 3 percent is allocated to developmental activities that are crucial in rebalancing the economy.

Now, the biggest question is how Government will continue to keep staff costs in check given that the staff rationalisation exercise has been ongoing since the beginning of the year.

The decision to cut 25 000 civil service jobs, which will save an estimated US$155 million per annum, is very painful especially in the current circumstances where there is a high unemployment rate and increased informalisation of the economy of the economy, but it has to be made.

Government has to bite the bullet.

Also by trimming civil servants allowances, Government will be able to realise savings in the short-term.

Forgoing 2016 and 2017 bonuses, including staggering salaries, is a very brave decision that is likely to free up fiscal space.

Whilst this may be painful, it has become very necessary considering Government’s current financial circumstances. However, it becomes necessary for Government to ensure that the money saved in this way is not abused or inefficiently re-allocated.

Though all these measures are thoughtful, there is need for additional interventions and far-reaching reforms in order to set a platform for sustainable economic growth.

The need to rationalise the country’s 97 state enterprises is long overdue.

Whilst it is heartening to know that 10 state enterprises will soon be privatised, most of the entities – the bulk of which need urgent intervention – are still burdening the fiscus.

This underscores the need to shift from a pre-occupation towards strategising to focus on execution.

In the fiscal review, Minister Chinamasa rightfully noted that the need to cut expenditure needs to be complemented by measures to boost investment.

Again, the big question is how Government will raise the investible funds since only 3 percent is available for developmental activities.

The depletion in the domestic savings stock — itself a legacy of hyperinflationary era — has also not helped.

Long-term savings are fundamentally important in supporting sustainable economic development programmes.

It is therefore unsurprising that of the US$200 million that will be set aside for command agriculture, the bulk of it will be sourced from pension funds.

This leaves foreign direct investment as an alternative funding source for growth.

Despite the need for FDI, the country continues to receive lows levels of capital flows due to a number of challenges in facilitating the ease of doing business.

Even though the country has improved from number 177 to 155 out of 185 economies in the World Bank’s Ease of Doing Business Index, there is still scope for more reforms meant to attract investment.

Well, the need for FDI cannot be overemphasised given the need to re-industrialise the industry against the infrastructure deficit of between US$15 billion-US$20bn, obsolete technology and antiquated machinery that characterises our economy.

An efficient infrastructure is pivotal in supporting the country’s re-industrialisation drive.

Worryingly, we have been lagging behind in this regard.

The country’s re-industrialisation drive will need be centred on the clusters system.

This involves the organisation of economic activities into interlinked activities that foster growth, competition and attraction of capital.

It’s a pity that this strategy has remained in the works for quite a long period of time.

There has to be more emphasis on value addition and beneficiation.

It makes the economy more competitive.

With a ranking of 125 out of 145 in the World Bank’s global competitiveness index, the country is poorly placed to grow exports, which are key to its growth and solving the obtaining liquidity challenges.

The growth strategy will be hinged on imported substitution, supported by Statutory Instrument 64 of 2016.

Imports have been haemorrhaging the country of liquidity whilst also posing serious contractionary effects.

However, it is important to recognise that some benefits are beginning to accrue to local firms in particular and the economy in general.

Major beneficiaries so far are cooking oil manufacturing companies such as Pure Oil and Welmar Surface Investments.

A number of manufacturing companies are also set to benefit.

Some foreign companies are even contemplating setting up plants in Zimbabwe.

Notable companies that are investing in the country are Pepsi and Willowton.

However, the mid-term fiscal policy also revealed a worrying trend where revenue generation is concentrated on two sub sectors — tobacco and mining.

Depending on commodities make the economy susceptible to the vagaries of international commodity prices.

Revenue streams need to be diversified.

The renewed focus on agriculture is commendable. A total of 2 million tonnes of grain per annum are expected from the current initiative on command agriculture.

But emphasis has to be on agri-business, not primary agriculture.

My take is that the responsible Minister should emphasise agri-business instead of concentrating on the primary agriculture.

Still, there are a number of issues that need to be attended to make the programme successful.

Pension funds are likely to resist contributing to the fund and Government has to find a way to convince them to play ball.

Also agriculture has to focus on yields and productivity.

One can only imagine the challenges that lie ahead.

The country can no longer afford to go with business as usual.

There is need to take bold action to trim Government expenditure and grow the cake.

Being a dollarised economy, growth will come from exports.

This is the only way we can solve the problems, from liquidity to the income challenge.

Everyone should pitch in and summon a new spirit of sacrifice. There is no room for corruption and inefficiency.

Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer. For feedback you can email [email protected] or WhatsApp +263 773 030 691.