Locating economic challenges

21 Oct, 2018 - 00:10 0 Views

The Sunday Mail

Dr Gift Mugano
Zimbabwe is facing twin problems – trade imbalances and fiscal imbalances (budget deficits).These problems are as a result of low production.

With regards to trade imbalances, in the last 10 years, Zimbabwe’s trade deficit has cumulated to $30 billion. On an annual basis, Zimbabwe’s major imports are finished goods which include cereals, motor vehicles, pharmaceuticals and animal and vegetable fats with an import value running over $2billion.

Imports have been the major drainer of liquidity, representing 82 percent of contribution to capital flight.

When it comes to fiscal imbalance, Government expenditure has consistently exceeded revenue, thereby creating budget deficits, which were financed by Treasury Bills (TBs).

As noted by the Ministry of Finance and Economic Development, TB issuances have increased from US$2,1billion in 2016 to a cumulative US$7,6billion by end of August 2018.

In 2014, Treasury Bills to GDP ratio was at 4,4percent and had increased sharply to 36,5percent by end of August 2018.

In the same vein, the overdraft with the Central bank stood at US$2,3billion, as at end of August 2018, well above the statutory limit of US$762,8million.

This resulted in rapid increase in money supply/factitious money, which is not sufficiently backed by hard notes and coins, hence the cash challenges

To date, the high deficit has ignited expansion of domestic debt from US$275,8million in 2012 to current levels of US$9,5billion against US$7,4billion external debt.

This brings total public debt to US$16,9billion (96,79percent of GDP) – exceeding the forecasts and statutory thresholds.

Section 11(2) of the Public Debt Management Act (Chapter 22:21) requires that the total outstanding Public and Publicly Guaranteed Debt as a ratio of GDP should not exceed 70percent at the end of any fiscal year.

This requirement is, however, far above the 60percent SADC threshold, to which Zimbabwe assented to through ratification of the Finance and Investment Protocol.

Section 11(1) of the Reserve Bank Act (Chapter 22:15) requires that Central Bank lending to the State at any time shall not exceed 20percent of the previous year’s Government revenues.

Notwithstanding the need for compliance with the stipulated threshold in 2014 and 2015, Reserve Bank lending thresholds to Government were surpassed in 2016 to reach 27percent.

This has resulted in a rampant increase in money supply, which has resulted in a significant mismatch between RTGS balances and the hard notes available, hence the soaring black market rates.

In responding to these challenges, Government has announced fiscal and monetary measures aimed at rebalancing the economy. Further, the Minister of Finance and Economic Development presented the Transitional Stabilisation Programme.

Fiscal policy measures

The Finance Minister has committed to limit the use of the RBZ overdraft facility and curtail RBZ advances to Government in line with Section 11(1) of the Reserve Bank Act (Chapter 22:15). This is a good move.

However, introduction of the 2 cents per dollar tax, in my view, is against the pro-poor thrust. This measure increases the cost of doing business and exploring other measures to raise more revenue by reducing and streamlining taxes could have been a better option.

Monetary Policy measures

The RBZ secured US$500 million to cater for importation of strategic requirements that include fuel, electricity, wheat, etc. The RBZ has put up very good effort here but this is just one month import cover and it is worsened by the fact that there is a payment backlog.

We need to put concerted measures in all fronts, that is, tourism, manufacturing and agricultural sectors aimed at substituting imports and generating exports as well as mobilising lines of credits. The RBZ has also expanded the productive sector facilities to include the establishment of a $50 million Construction Finance Facility for retooling and working capital requirements for the construction industry in line with the growing economy. However, this facility is wrongly targeted. The Central Bank must target the productive facility to pressure points noted on trade deficits; such as imports of cereals, plastics and paper, etc.

Economic stabilisation measures

The economic stabilisation measures announced by the Finance Minister are sound and good, they are comprehensive. They are aimed at addressing structural rigidities, corruption, ease of doing business and the aforementioned twin problems.

Line ministries and respective Government departments must now align their work with the pronouncements made in the TSP. For example, the Ministry of Industry and Commerce should come up with robust industrial policies with a focus on import substitution for products on our major imports list. Likewise, the Agriculture Ministry must work on an agricultural policy aimed at reducing importation of vegetables, cereals and fruits.

This can be done through the establishment and operationalisation of the commodity exchange which inter alia provides instruments like warehouse receipts.

These can unlock funding and operationalisation of derivatives.

Following the tabling of the TSP, the Ministries’ silence is worrying. We would like to see and hear what each ministry is doing in response to the programme.

It is very crucial to note that in a dollarised economy, monetary and fiscal authorities do not necessarily have all the solutions. In all the 33 countries that dollarised, monetary and fiscal policies were ineffective in stimulating the economy.

Rather, the two were complimentary to structural ones such as the industrial, agricultural and trade policies. We need to change the policy narrative in Zimbabwe by focusing on these three policies.

 

Dr Mugano is an expert in Trade and International Finance. He is a Research Associate at Nelson Mandela University, Registrar at Zimbabwe Ezekiel Guti University and Director at Africa Economic Development Strategies. Feedback: Cell: +263 772 541 209. Email: [email protected].

 

 

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