The Sunday Mail
Cornelius Dube
Last Thursday, Finance and Economic Development Minister Professor Mthuli Ncube presented his largely anticipated maiden National Budget Statement.
The blueprint happens to be the first policy instrument towards implementation of the Transitional Stabilisation Programme.
The TSP, together with two other five-year economic blueprints to be introduced from 2021 to 2030, constitutes the main implementation tools towards the country’s National Vision of being an upper middle-income country by 2030.
Presented under the theme “Austerity for Prosperity”, the 2019 National Budget Statement is generally aimed at correcting the fiscal imbalance that is mainly responsible for high inflation, indebtedness and foreign currency challenges.
Austerity measures generally mean a reduction of Government spending or an increase in taxes or both such measures with the intention of dealing with budget deficits.
However, while it is Government that is undertaking austerity measures, the impact cascades to all citizens.
For example, a reduction in Government spending might imply that projects and programmes which were benefiting some sections of society are stopped while an increase in taxes would naturally reduce incomes.
The austerity measures in the 2019 Budget are generally more aimed at the expenditure management than revenue raising.
This is largely because the main tax revenue boosting measure, namely the intermediated money transfer tax of 2 percent, had already been introduced.
The increase in excise duty on cigarettes from $20 per 1000 sticks to $25 per 1000 sticks; and the increase of excise duty on fuel by 7c per litre on diesel and 6,5c for petrol are the two main new tax measures.
The decision to levy import duty on selected products in foreign currency is also a measure that will be painful on the consumer given the scarcity of foreign currency.
In particular, the 2019 National Budget was prepared while conscious of the twin deficit hypothesis which postulates that there is always a causal relationship between a large current account deficit and a large budget deficit.
In other words, dealing with the current account problem without dealing with the high budget deficit is a difficult if not impossible task.
Thus, central to the 2019 National Budget is the desire to deal with the high fiscal deficit, which will also eventually lessen pressure on the current account deficit.
However, levying duty in foreign currency as well as requiring payment of taxes in foreign currency for goods sold in foreign currency is also an attempt at enhancing foreign currency inflow to the government.
This also increases its capacity to meet foreign currency denominated obligations without resorting to the exporters’ proceeds for every need.
A look at the 2019 National Budget Statement also reveals that Government has realised that the 2018 GDP growth projection of 6,3 percent is unachievable.
In that regard, the 2018 GDP growth rate is now projected at about four percent.
In 2019, GDP growth is expected at 3,1 percent, which is a further decrease from the 2018 projected rate.
The downward trend is mainly attributed to poor agricultural output due to anticipated low rainfall.
The anticipated small growth rate of only 3,1 percent has huge implications on the ability to attain upper middle-income status by 2030.
An upper middle-income economy is defined as one with a gross national income per capita of between $3 956 and $12 235.
Taking into account the rebased GDP of $22 billion for 2017, and using the Population Projections Thematic Report produced by the Zimbabwe Statistics Agency in 2015, then GNI would need to increase by an annual average of about 9,1 percent between 2018 and 2030 to reach the Vision 2030 objective.
This might also imply a higher growth rate for GDP, which is not equivalent to GNI.
It also means if the 2018 and 2019 GDP growth rates are only four percent and 3,1 percent respectively, then between 2020 and 2030 the economy would need to grow tremendously, more than the 9,1 percent GNI average.
This also explains why the minister introduced a short-term blueprint first, to be followed by relatively longer-term ones.
The short-term is only doing the groundwork, preparing the way for the longer term economic blueprints.
If the 2019 and 2020 National Budgets are able to deal with the main stumbling block, then subsequent National Budgets have more realistic growth enhancing prospects.
The 2019 National Budget is therefore largely aimed at economic stabilisation; it seeks to position the economy in the right path by correcting the legacies from the past, which have given rise to the current problems.
The main central focus of the 2019 National Budget is expenditure containment and increasing revenue as a way of managing fiscal deficit. Expenditure for 2019 is projected at about US$8,2 billion while anticipated revenues are about $6,6 billion.
This means that the 2019 Budget has also failed to be a balanced budget; something that is difficult given the current size of the deficit.
The 2019 deficit is expected to be about $1,6 billion, which is a decline of almost half from the 2018 level of about $2,9 billion.
The current budget measures would therefore have three main achievements if implemented successfully.
Firstly, they would be able to reduce the budget deficit to a manageable level of about five percent of GDP compared to almost 12 percent in 2018.
A deficit of five percent of GDP generally falls within recommended best practices.
Secondly, the 2019 National Budget would be able to increase revenues by about 24 percent compared to the 2018 level.
Thirdly, the 2019 National Budget would be able to contain expenditure at the 2018 level; only a small insignificant increase of about 0,03 percent is expected in expenditure in 2019 compared to 2018.
Under normal circumstance, the ability to raise revenues by 24 percent while containing expenditure would have given rise to a budget surplus.
Unfortunately, there are legacies from the previous dispensation to be taken into account, hence past economic management principles will continue to be an albatross around our necks as we swim to safety.
Despite being able to increase revenues, in line with the theme, austerity measures are a priority.
This is further underlined by the commitment by Government to borrow from the Reserve Bank of Zimbabwe a maximum of only 5 percent of previous revenues even though the Statutory limit is 20 percent.
Having taken such a huge decision, Government also expects its civil service to bear some pain for the austerity measures to be successful.
The measures on basic pay-based bonuses, retirement of youth officers and a five percent salary cut on top government officials, ranging from principal directors up to the Presidium, are also painful decisions to support the austerity measures.
Therefore, the austerity measures can only succeed if all stakeholders believe that they are necessary to steer the economy towards a stage where measures to expand the economy would work.
This requires all stakeholders to continue to be innovative and to perform to the same output level or even better while using limited resources.
It is also an opportunity for the private sector to be innovative and step up to grab the business opportunities that arise.
Cornelius Dube has a Master’s in Economics from the University of Zimbabwe, and more than 10 years research experience in different economic sectors. He works as a Senior Research Fellow at a top economic think tank in Zimbabwe. The views expressed above are personal opinions and should not be associated with the institution he is currently affiliated with
