The Sunday Mail
Clemence Machadu Insight
Howdy folks!
“Right now, we literally have nothing, so to speak.” These words were attributed to Finance and Economic Development Minister Patrick Chinamasa when he was in France in his quest to mobilise resources from the Paris Club. He went on to explain that the country’s strategy was to achieve private sector-driven growth in manufacturing, agriculture, tourism and mining; with the biggest challenge being insufficient lines of credit.
Back home, Minister Chinamasa is the person who spearheads the crafting of a National Budget whose objectives include allocation of resources, reducing inequalities, fostering economic stability and growth.
We are in that time of the year when the Finance Minister is expected to present his Mid-Term Fiscal Policy Review Statement.
The review is coming at a time when a lot has unfolded in the economy, being incensed by different developments, both internally and externally.
Globally, the International Monetary Fund has cut global growth prospects for 2016 by 0,1 percent to 3,1 percent; thanks to Brexit.
The Fund says Brexit causes substantial increase in economic, political and institutional uncertainty, further opining that if not for Brexit, global forecasts would have been slightly higher.
The upside of Brexit, however, is that it left gold prices firmer and crude oil prices weaker.
For the National Budget to succeed, adequate resources should be available to meet all the planned expenditure.
Sadly, collections by the Zimbabwe Revenue Authority in the first half of the year declined.
Zimra was targeting US$1,75 billion in the first half of the year, but only managed to collect US$1,65 billion.
Collections might fall further during the course of the year due to import restrictions, as no more customs duty will accrue.
The fall in revenue collections in the first quarter represents a deficit of US$105 million.
What this means is that Government is going to be faced with the hard dilemma of either having to cut the budget or find alternative sources of raising the money.
Already, the budget had a financing gap of US$150 million which was to be funded largely through borrowing on the domestic market.
Can the domestic market further provide an additional US$100 million to fund the budget, given the biting US dollar shortages?
Or we could be looking at the adoption of belt-tightening measures.
The demerits of going either way far outstrip the merits.
But an easier way to understand whether the National Budget has so far met its target is to review it on the basis of its theme — “Building a Conducive Environment that Attracts Foreign Direct Investment”.
This is the central idea that the main elements of the 2016 National Budget were working together to develop.
The latest investment figures from the Zimbabwe Investment Authority can give an indication as to how far the budget theme has been met.
In the first six months of the year, projects approved by ZIA were valued at US$305,5 million; compared to US$1 billion registered during the same period last year.
From the above, we understand why the initially targeted growth of 2,7 percent in GDP has already been cut to 1,4 percent.
I see a further reduction to around 0,7 percent; given the deceleration of economic activities in our main markets.
Growth prospects for our neighbouring South Africa, our biggest trading partner, for instance, have been substantially rationalised from the initial 0,6 percent to 0,1 percent.
But we get to further understand why the 2016 National Budget is in trouble when we look at the broad assumptions underpinning its framework.
One of the fundamental assumptions was a normal-to-below-normal rainfall season.
The agricultural sector was projected to grow by 1,8 percent.
In other words, agriculture was expected to perform better than last year’s growth of -3,6 percent.
But it turns out to be otherwise as we are facing an El Nino and poor planning-induced drought which has resulted in millions in need of food aid.
The drought has since been declared a disaster.
What this means is that the National Budget has to make provision for additional resources to cater for maize imports, or substitute other budget expenditures for food.
If agriculture performs badly in Zimbabwe, there are far-reaching consequences.
As we always say, agriculture is the backbone of Zimbabwe’s economy.
Crush the backbone and you will leave the economy paralysed.
This is because agriculture contributes about 60 percent of its output to the manufacturing sector.
It also contributes 30 percent to export earnings, 65 percent of employment, 19 percent of GDP and provides a major source of livelihood for over 70 percent of the population.
The National Budget also assumed that there was going to be some rebound of global economic growth to around 3,6 percent in 2016.
But it appears the target can no longer be attained this year.
The IMF has already slashed the projection to 3,1 percent and it is likely that we might close the year at 2,6 percent.
A slowdown in global economic activity results in the prices of commodities falling.
And for an economy such as ours whose majority of exports are commodities (with the same exports being the main source of liquidity) it is bad news.
Another key assumption that the National Budget made was lower cost of borrowing.
But the current cash crisis has been threatening the realisation of that reality.
The cost of money is determined by the quantity of loanable funds and the market forces at play.
The situation in Zimbabwe is that the levels of loanable funds has depleted, while the demand for loans for consumption has been rising.
Central Bank statistics for April 2016 indicate that there was a 66 percent decline in cash holdings in banks.
These are not perfect conditions for lower interest rates.
Further, banks have lately been deliberately sitting on deposits as they are now increasingly reluctant to lend due to the increase in loan defaults.
The level of loan defaults increased to 15 percent in the first quarter of the year, against an acceptable standard of 5 percent.
This can only spell trouble for productive sectors that rely on bank loans to fund their key operations as they are left handicapped to sustain growth and expansion.
The forthcoming fiscal policy review should play an essential part in instilling macro-financial stability and define a new growth inspired by realistic assumptions.
We should move from literally having nothing to dynamic growth levels that enhance the general citizenry’s quality of lives.
Later folks!
