Budget plots progress on fundamentals

04 Aug, 2019 - 00:08 0 Views
Budget plots progress on fundamentals

The Sunday Mail

Presenting his supplementary budget last week, Minister of Finance and Economic Development Professor Mthuli Ncube spoke directly to the concerns of Zimbabweans, both as individuals and as businesses.

He did not try to hide anything as he gave the news, both good and bad. The point is the Government is fixing a range of fundamental issues and switching from a print-and-spend system with rules very loosely enforced, if at all, to the sort of fiscal and monetary regimes that are regarded as best practice and with audit reports taken very seriously indeed and sloppiness and corruption objects for stern action.

Most Zimbabweans regard the surge in prices over most of the last 10 months to be the biggest burden they have had to bear. This was the result of both demand-pull and cost-push inflation.

Money supply had been growing rapidly thanks to an acceleration of the decades-long culture of deficit budgeting, and not just deficits but Governments going to the extent of borrowing money to pay monthly bills, such as civil service salaries and pensions.

That ever-widening river of liquidity was the fundamental cause of so many of our woes.

In the end that growing pool of local currency meant that the 1-1 exchange rate between a dollar in the bank and a US dollar, always a bit of a fiction, became totally unsustainable. There were simply too many RTGS dollars against far too few US dollars and we could no longer pretend. That then gave rise to the cost-push inflation, as exchange rates drove up the price of imports and imported raw materials and we saw the second surge of inflation in a few months culminating in the June month-on-month figures.

Monetary policies, first floating the RTGS dollar and then ending the multi-currency regime while at the same time doing something useful about getting the interbank market to work properly, although a little more progress is needed there, brought stability in July.

But, in one of the less highlighted points of Minister Ncube’s statement, was the fascinating fact that in the first three months of this year there was a net inflow of US$196 million, largely the result of fewer imports (the inflationary pressure on demand saw to that) coupled with a smaller but still useful rise in exports.

For Zimbabwe to run a current account surplus is a miracle since so many of us want to consume more than we produce. Presumably the switch in much household spending, with consumption of imported luxuries falling while consumption of locally-produced essentials remains static, helped. And the Zimbabwean equivalents of imported goods are now, in many cases, significantly cheaper.

With exchange rates reflecting reality, local manufacturers no longer need special protection, just good management.

But a sustained current account surplus takes a lot of pressure off the exchange rate and in time should start pushing the rate down. In any case, as that surplus starts permeating certain circles, along with the obvious fact that month-on-month inflation is falling very fast, we may well start seeing net exporters keener to sell their nostro holdings rather than wait to make an exchange rate gain.

All these gains would be meaningless, of course, if Prof Ncube adopted the practices of his predecessors and spent money he did not have. He belongs to a sterner school and in the first six months ran an accumulative primary budget surplus of more than $800 million. This meant he paid his monthly bills out of his revenue, basically what the rest of us pay in taxes. And he managed that despite having to cushion, to some extent, civil servants from the ravages of inflation, cope with a severe drought and provide instant relief for victims of a major cyclone. He costed all of this in his report and still reckons he will continue running the primary surplus for the rest of the year.

That does not mean that he will not be borrowing. He will. But his budget deficit is purely on the capital account and even there he is expecting to use tax dollars to pay almost half the cost of his capital spending. But buying stuff like dams, roads and power stations is different.

They can be bought, at least in part, on borrowing. Paying civil servants cannot. But borrowing needs to be prudent and managed, and the Minister was firm on this.

He will only borrow for approved budgetary items, that is Parliament will need to agree in advance that he can borrow for certain items. This is, of course, one reason why the Minister needed to present a supplementary budget.

He cannot just change the income and expenditure figures to adjust for inflation. He needs Parliament to go through his numbers and confirm that he can raise expenditure in line with inflation so long as he has raised the extra revenue the same way. His numbers add up and as he noted, the Auditor General and the IMF are both now checking. And he takes recommendations from both seriously.

He did take the opportunity for modest tax changes. Most taxes are already percentages, such as income tax, VAT, customs duty and transfer tax. He has now adjusted his excise duties, the taxes on alcohol, tobacco and fuel which were a fixed number of cents a unit, either to a pure percentage or to a combination of a larger fixed number to adjust for inflation plus a percentage.

But he also took into account on income taxes that most in business and in employment have seen some income growth. He is not trying to gouge Zimbabweans so he widened tax brackets, with people earning less than $700 a month now escaping a liability for income tax. He will probably on average get the same percentage of earned income, but he is not transferring more of the burden from the rich to the poor, which keeping the same brackets would have done.

One mantra of the present Government, and its Finance Minister, has been transparency. Prof Ncube presented his mid-year accounts accurately and timeously, so at least we all know now what is happening, and why, and what he is doing about it, and how.

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