OPEN ECONOMY: There is fiscal space for bonuses!

With the noble intentions of fiscal responsibility, Finance and Economic Development Minister Patrick Chinamasa announced the removal of civil servant bonuses up to 2017.

Indeed, as it turned out, errors in procedures led to the overturning of that decision by the President. Behind this very normal incident of misunderstanding, however, lies a more profound conundrum as it relates to our economy.

Is the IMF ever wrong, or Zimbabwe has no choice but for the IMF to always be right?

Although I cannot be certain, it is not a far-fetched assumption that the Finance Minister’s decision was motivated by the IMF staff-monitored programme.

It is typical modern IMF economics to trim government spending; commonly referred to as austerity or belt tightening.

However, five weeks ago I did warn of the perils of cutting recurrent expenditures below a threshold necessary to sustain economic stability. Severe austerity of such kind does very little in terms of improving a country’s debt sustainability while it short-changes essential social services.

On that particular point as well, I referenced events between Greece and its creditors, led by the IMF, and warned of similar occurrence in our case.

Well, just last week the IMF came to admit that it had indeed failed to realise the damage austerity would do to Greece, with its economy contracting at an extent three times worse than what the IMF had projected. Hopefully, our policymakers can be swayed by this admission into understanding that not every IMF proposition warrants unquestioned reverence.

Instead, our policymakers should begin to assess the realities that we face as a country for ourselves, and generate solutions born out of the legitimacy of this reality. Public finance models which influence IMF thinking are not pragmatic to Zimbabwe’s reality.

The IMF often overlooks that Zimbabwe, and other African nations in general, do not have comparable fiscal capacity to developed economies. For instance, as Zimbabwe’s National Budget is less than 1 percent of most EU country budgets, proponents of more room for capital expenditures within our budget, especially on percentage comparisons, are doing so from a very misguided scale.

For over centuries, developed economies have accumulated substantial fiscal resources, which enable them to construct their understanding of public finance. Particularly, the Western world has deep fiscal capacity from substantial local private enterprises and returns from net foreign assets through multi-national corporations and foreign resource ownership.

These allow developed nations to either spend directly from fiscal collections, or enable credit facilitation by having guaranteed revenues to service debt. Inherently, this vast margin of difference in fiscal capacity between developed nations and countries like us makes duplicating fiscal policies impractical.

IMF advice is of a normative nature (what ought to be). However, we need solutions from positive economics (what the facts are).

Conventional IMF perspectives of public financing only direct us towards the bondage of foreign debt dependence. We should conceive a more fitting long-term strategy for public financing. Hoping for lines of credit from the IMF is not it!

Our economy is already over leveraged, and it lacks fiscal capacity to service further debt. It is disappointing that the Ministry of Economic Planning has not intervened to propose any alternative methodology of expanding our fiscal capacity.

It has not offered Minister Chinamasa any options other than the cards dealt to him by the IMF.

After all, the Ministry of Finance and Economic Development can only work within the limitations of resources that are availed to it.

The Ministry of Economic Planning, however, is supposed to be the brain box to devise the best economic methodology to inform the best economic decisions.

Because it has not given out much in creative fiscal policy, our hands are tied, leaving us subject to IMF command. Perhaps I can offer suggestions of more suitable methodology.

Initially, we should have been pursuing internal capital formation. Capital formation is the creation of wealth within an economy, derived from greater circulation of investment and economic opportunities amongst indigenous enterprises.

The higher the capital formation of an economy, the faster an economy can grow its aggregate income, thus expanding its fiscal capacity for national revenue.

One of the main policies of capital formation is liberalising certain sectors of the economy.

Opening space for private enterprise in sectors such as energy, transport, and utilities enables capital accumulation by the private sector. It also has the desired effect of reducing burdensome costs to the State.

Actually, this is where we can achieve effective cost cuts. Liberalising the economy means Government doesn’t have to finance unprofitable and heavily indebted State enterprises. Likewise, by liberalising more sectors and allowing free market forces, this will reduce the bulging deadweight in our economy.

Deadweight has been contracting our fiscal capacity for years. Deadweight loss occurs when supply and demand are not in equilibrium, or when there is market inefficiency in a sector. For instance, we grossly understate the economic loss incurred by protecting the Grain Marketing Board as the monopoly purchaser of grains at a fixed price of US$390 a tonne.

We must “open economy”.

Achieving capital formation is a desirable fiscal strategy in that it creates a more lucrative private sector which not only gives tax revenue, but can actually finance capital projects as well. The benefits are evident in other countries that have pursued this strategy.

Argentina, a nation cut off from international credit markets just like Zimbabwe, on Tuesday sold US$1,4 billion of bonds to local investors, showing that it can raise money on its own.

Closer to home, the East African Community private sector is set to form a 1,9 billion shilling fund to increase their support for capital projects.

So worldwide, the realisation of self-sufficient financing has come of age in developing economies.

Of course, our infrastructure gap cannot be closed by just internal capital formation.

Hence, there is need for a strategy to attract investment to finance infrastructure projects. This strategy comes with the low price of transparency! We must identify specific capital projects that have a high priority.

From there, credible financial projections must be drafted up, showing future cashflows to be derived from these projects.

When this is in place, it will be easier for Public-Private Partnerships between the State and private financiers. All that becomes necessary is transparent infrastructure regulation and contracting.

Legal frameworks around these projects must be clear and universally applicable to all potential takers. At that point, if we struggle to find capital project financiers, the reasons would be between a lack of competitive procedural efficiency and the projects not showing future cashflows for investor pay back.

The former, however, would be a potential for further cost-cutting. Efficient administration and services in investment procedures simply involve cutting out unnecessary bureaucratic bottlenecks that are a cost to governance. Removing these bottlenecks would be useful fiscal saving.

It is evident that Zimbabwe has plenty of options to create fiscal space for certain expenditures, including civil servant bonuses. Unfortunately, however, our present circumstance is the outcome when a country fails to craft its own economic methodology.

We seem to have choice, but for foreign lenders to always be right!

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