2017 National Budget: A critique

11 Dec, 2016 - 00:12 0 Views
2017 National Budget: A critique Minister Chinamasa at Budget

The Sunday Mail

Persistence Gwanyanya —
There is definitely need to increase the flow of capital into Zimbabwe so as to kick start industrial production. The infrastructure deficit of between US$14 billion to US$20 billion, coupled with an estimated US$5 billion required to recapitalise the industry, is telling.

ZIMBABWE’S economy is unhealthily balanced. The 2017 National Budget announced last week is instructive. The country’s consumption and import levels continue to outweigh production and exports.

This unbalanced state of the economy remains a major drawback to economic recovery. The resultant budget and trade deficits are weighing down the economy.

It is therefore no surprise that the economy has been slowing down since the last quarter of 2012, making economic rebalancing urgent, before the economy sinks into a deeper crisis. Like China, Zimbabwe should adopt an investment and export led growth model.

Though this may not be a one-size-fit-all model, there is a lot of benefit that the country can derive from the prescribed model.

Investment and export led growth model — China’s growth miracle
China emerged from nowhere to become an economic super power after implementing an investment and export led growth model. An investment and export oriented growth model also entailed rationalisation of consumption and imports.

This new growth model was anchored by structural and institutional reforms largely typified by zero tolerance on graft.  By 2013, after 35 years of economic reforms, China has lifted about 350 million people from poverty.

It is now the second largest economy in the world and at one moment it was thought China would overtake America as the largest economy of the world.

Economic growth in China was largely attributed to the effects of capital accumulation, which was sustained by increased labour, productivity and institutional and structural reforms.

The state of Zimbabwe’s economy
The economy has been faltering since the last quarter of 2012 on account of both global and local influences. The economy is expected to slow down for the fourth consecutive year with a growth of 0,6 percent projected in 2016.

Economic slowdown comes on the backdrop of low domestic production across various sectors mainly agriculture, mining, manufacturing, tourism and construction.

Even the moderate growth of 1,7 percent projected in 2017 is largely dependent on agriculture’s performance, which itself is under threat from the La-Nina effect.

Key sectors of the economy continue to under-perform on account of both external and local factors. The agriculture sector is expected to decline by 3,7 percent this year, as drought takes a heavy toll for the second consecutive year.

Even the projected 12 percent increase in 2017 is largely dependent on the effects of La-Nina. The projected growth of 1,7 percent in 2017 will be anchored on improved performances in the mining, manufacturing and tourism sectors.

However the performance of these sectors is not good enough to restore the economic vitality needed today. The poor performance of the agriculture sector is expected to weigh down the manufacturing sector’s performance due to the interlinkages between the two.

This, coupled with challenges relating to antiquated equipment, lack of capital, low aggregate demand, liquidity constraints, high cost of utilities and lack of competitiveness, will result in a modest growth of 0,3 percent in 2017.

Measures to improve the country’s brand as a competitive tourism destination will support the projected growth of 0,8 percent in the tourism sector.

The mining sector continues to succumb to the vagaries of the developments in the global economy which threaten the estimated overall growth of 6,9 percent.

Domestic production is a key challenge As demonstrated by the sectoral analysis above, Zimbabwe’s major problem is that of low domestic production. The country has gone through massive de-industrialisation that has ravaged the manufacturing industry, making it very uncompetitive.

There is urgent need to reindustrialise the country. Quite clearly, re-industrialising Zimbabwe requires huge capital inflows.  Negative domestic savings of 11 percent imply a huge savings investment gap which can only be filled by foreign capital mainly FDI.

Sadly, foreign capital continues to under-perform due to discouraging policies and ease of doing business factors in Zimbabwe. A decline in foreign capital inflows to US$692 million is projected in 2016, against US$1,2billion in 2015.

This, together with the dissaving culture in the country, has seen a decline in the gross fixed capital formation by 8 percent in the year. There is definitely need to increase the flow of capital into Zimbabwe so as to kick start industrial production.

The infrastructure deficit of between US$14 billion to US$20 billion, coupled with an estimated US$5 billion required to recapitalise the industry, is telling.

As highlighted before, capital was a major driver of China’s economic growth when it started to implement economic reforms in 1978.

Thus there may be need for radical policy changes and expediting the ease of doing business reforms to attract more foreign capital.

Zimbabwe remains a consumptive economy
Low production levels largely reflect budgetary constraints which limit investment in productive goods. For the 10 months to October 30, 2016, employment costs consumed 91 percent of the total revenue collection of US$2,98 billion, leaving only 9 percent (US$260million) for all other current and capital expenses.

Sadly, the provision for employment costs remains high at US$3billion in 2017, which leaves out only US$520 million (14 percent of total revenues) for capital development programmes.

This is despite the fact that the Public Service wage bill rationalisation measures are expected to result in some savings of US$140 million in the outlook period.

The situation is compounded by the fact that parastatals and other public enterprises continue to milk the fiscus, mainly through their inefficiencies.

Most of the public enterprises are reportedly failing to service their debts resulting in Government guarantees being called up. As at October 31, 2016, called up guarantees represented 15,8 percent of the total external debt stock.

There is definitely a strong case to privatise some of the public enterprises. However, little precious action happened on the ground despite Government reiterations.

Unhealthy budget and trade deficits weigh down the economy
The unbalanced state of the economy has resulted in high levels of budget and trade deficit, whose contractionary effects have largely weighed down economic growth.

The country’s budget deficit is expected to top US$1,8 billion on account of under-performance in revenue and high levels of consumption, especially by Government.

The resultant financing gap of US$1,8 billion is nearly half of the budget. This financing gap is expected to remain in 2017 at US$400 million albeit that it is a decrease from the 2016 level.

High budget deficits naturally spill over into high levels of imports given the constraints in the productive sectors. The country’s import bill remains unsustainable at US$5,35 billion

The increase in imports was experienced against a downturn in the overall export performance. Exports are expected to fall by 6,9 percent to almost US$3,4 billion in 2016.

This is expected to result in a trade deficit of about US$2 billion.  Clearly, the budget deficit and trade deficit characterising the economy needs to be funded from somewhere.

It’s worrying the sources of funding for the two deficits have largely been debt, creating sources which are unsuitable given the fact that the country is already over borrowed.

Funding the deficits and resultant debt
The period under review has seen increased recourse to domestic financial system to finance the budget deficit. The concomitant crowding out effect is a drawback to private sector growth. The unsustainable debt levels in Zimbabwe largely reflect the impact of high budget and trade deficits.

As at October 31, 2016, Zimbabwe’s public debt stood at US$11,2 billion or 79 percent of GDP. Of this debt, US$7,5 billion or 53 percent of GDP was external debt.

Of the external debt, US$5,2 billion is in arrears, and this has resulted in the deterioration of relationships with major creditors, thereby inhibiting access to finance.

While the country is prioritising arrears clearance to international financial institutions, it is important to note that the reliance on debt is an unviable growth path in Zimbabwe today.

Ironically even the RBZ continues to borrow to finance some monetary projects. It is estimated that RBZ’s debt is now around US$400 million and there seems to be more appetite to borrow from that institution.

Prescribing solutions to Zim’s economic challenges
There is need to rebalance the economy towards more production and exports. This entails reduction in consumption and exports. Unlocking the growth potential of Zimbabwe requires injection of capital.

Given the domestic capital constraints occasioned by the high dissaving rate and budgets there is need for policies that attract foreign capital mainly FDI.

Government may have to consider some radical measures to attract and retain the required capital. The need for the ease of doing business reforms and institutional and structural reforms cannot be overemphasised.

Clearly, the road ahead is painful and requires sacrifice.

Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society who writes in his personal capacity. Feedback: [email protected] <mailto:[email protected]> and WhatsApp +263 773 030 691.

Share This:

Survey


We value your opinion! Take a moment to complete our survey

This will close in 20 seconds