Chinamasa’s fine balancing act

Source: Chinamasa’s fine balancing act | The Herald December 7, 2017

Clive Mphambela
ZIMBABWEANS wait with bated breath for Finance Minister Patrick Chinamasa’s 2018 National Budget Statement, which he is expected to present this afternoon; outlining macro-economic and fiscal objectives, targets and other projections, taking into account several underlying macro-economic and fiscal assumptions.

The 2018 Budget is hugely anticipated to provide solid indications on key economic parameters and underlying macro and micro-economic assumptions to drive economic performance, and the anticipated revenue out turns, critical for providing guidance on the expenditure capacity of the Government for the coming year.

However, what will be more important is that, Minister Chinamasa’s budget will be able to buttress the vision for a new and vibrant Zimbabwe that has already been projected and shaped in the inauguration ceremony address by President Emmerson Dambudzo Mnangagwa, which he presented on November 24, 2017.

The budget should give the nation and the world at large, the first credible indications that indeed, Zimbabwe has changed course and Government now means business. If he fails in this very first step, under the new administration, whose Cabinet was only appointed last week, all hope for economic recovery may be lost.

Therefore, beyond just delivering a credible national budget statement this afternoon, Minister Chinamasa actually faces a gargantuan and unenviable task ahead of him, balancing the many competing interests.

As things stand the economy is facing unprecedented challenges on many fronts. Inflation and monetary instability have already reared an ugly head. The economy is facing acute foreign currency position, notwithstanding the growth in export receipts and the falling import bill. The country’s external position remains precarious, with a long list of requests for outstanding foreign currency allocations/payments for imports now estimated at over $700 million.

There are serious dislocations in the financial system, the foreign exchange markets and the retail market (with multiple tier pricing) that require sober attention.

Unemployment is acutely high, with the majority of our citizens now scrounging for a living in the informal sector. In line with the declaration by the President that we need “JOBS JOBS JOBS” in the economy, the budget must lay the foundation for the creation of sustainable jobs in the economy for it to be relevant to the new order.

The resurgence of inflation in the economy is severely threatening the security of households and the fact should not be ignored that real incomes have dramatically fallen in the last 12 months. While official inflation has been recorded at 2,78 percent for October, this statistic unfortunately does not capture the real rise in business and household costs, which is significantly higher.

For businesses, the major risk is that we may see nominal wages rising significantly faster than productivity, causing further disruptions and denting competitiveness. The minister should not be shy to accept these realities if he is to deliver a meaningful and truthful financial plan for the country, which will be sensitive to the stark realities facing the nation.

The Government desperately needs to create fiscal headroom, but at the same time regain fiscal discipline. The country’s infrastructure is weak and we need new investment, in the transport sector (rail and roads), energy, public infrastructure as well as infrastructure to rejuvenate and sustain industrial and agricultural productivity.

At the same time confidence in the economy has significantly waned, if not completely eroded. Minister Chinamasa’s plan must necessarily throw some coals into the economic furnace.

However, to be fair on the man holding the purse strings, the task of balancing short term political needs with the broader demands of sustainable long term economic reforms is a very a delicate one, requiring the Minister to dig deeply into his reserves of economic management skills, political energy and administrative resolve.

As an independent economic thinker, I should hasten to caution that we should be under no illusions. We must all be clear upfront that what we all HOPE for in the budget this afternoon, and what we should realistically EXPECT maybe two very different animals.

I will not be able to talk justifiably on all the issues that Minister Chinamasa should deal with in his Budget address later today, so I will focus on a few areas which I believe are imperatives for laying the base for sustainable economic recovery.

Priority 1: Correctly incentivising exporters, driving foreign exchange generation, whilst restoring and maintaining the integrity of the multi-currency system.

Top of my list and perhaps key to the restoration of confidence in the economy, is the need for the Minister of Finance to decisively address the pervasive need to restore the integrity of the multi-currency system.

He can do so by taking the bull by the horns and speedily driving a policy to either revoke and demonetise the bond note so that we revert to the clarity and stability that existed under proper dollarisation, or alternatively, he should propose drastic changes to the export incentive, so that we can move rapidly from the current form of the export incentive, which is a destabilising monetary tool, to a fiscalised export incentive based on appropriate import taxes. This is absolutely critical for economic stability and confidence in the economy to return.

Dollarisation in 2009 ushered in price and macroeconomic stability. From the goings on in the economy at the moment, it is now very clear that liquidity challenges can only be resolved in the short-term through access to larger and cheaper lines of credit, sustaining the growth of inward remittances, portfolio and investment flows and grants and in the medium to long term, through the growth of exports, which are themselves a function of a sound investment environment underpinned by growth in productivity.

In this regard there is urgent need to honestly review the negative costs and uncertainty brought about by the introduction of bond notes. The instrument, which had the dual purpose of stimulating exports and ameliorating cash shortages, seems to have had the unintended consequences of inadvertently driving hard currency out of circulation through the operation of normal laws of economics.

As a result we have seen further dislocations in the macro-economic environment, manifesting as resurgence in harmful parallel foreign exchange market activities fuelled by both genuine economic need and speculation.

As a country, we also have an ugly multi-tier pricing system in the economy and growing grey exports, which are harmful to the sustainability and viability of local industry. There is need for Government to immediately institute measures to restore the integrity of the multi-currency system in order for confidence to return.

Priority 2: Improving the Investment Environment

This is critical for promoting foreign investment inflows as well as spurring domestic investment. In the same mix, the Zimbabwean Diaspora must be recognised as a key player in the economic recovery equation.

The Diaspora must be viewed, not just as a source of remittances, but a critical source of investment capital. Minister Chinamasa must propose an incentive package to make it viable for Zimbabweans in the Diaspora to bring back the billions they currently hold in savings.

Diasporans are also occupying critical positions across the globe and are well placed to mobilise funding for economic recovery. This constituency cannot therefore be ignored in the minister’s 2018 National Budget Statement.

The minister must also outline the plan for re-engagement of foreign financing partners. Zimbabwe needs a clear roadmap for bringing back the country into the international community of democratic nations. This will also help the economy to deal with the country’s external debt issues in a sustainable way.

The indigenisation and economic empowerment framework must be further clarified in the context of the new Government’s policy thrust. Such clarity must be given without allowing any room for the rhetoric that has previously spoiled what is otherwise a good policy for the country. Any further necessary amendments or adjustments to the policy should be made with speed.

The budget must address the inflation risk that has emerged in the economy. Over the last few months, latent inflationary pressures had begun to manifest, raising the spectre of derailing economic growth prospects. Foreign exchange and cash rationing mechanisms on the back of liquidity challenges continue to adversely impact the economy.

These problems should not be ignored and it must be clear that they are being exacerbated by the large and recurrent, current account deficits, which are symptomatic of an economy that has become excessively reliant on domestic absorption, in turn fuelled largely by the fiscal deficits. These factors have collectively given rise to the current cash and foreign currency shortages in the economy.

Ease of doing business reforms must be sped up and these should increasingly be pursued with a special focus on reducing the cost of doing business. Zimbabwe is currently among the countries with the highest costs of doing business in the region and there is need to address this aspect.

Priority 3: Civil service reforms should be aimed at improving Government efficiency, enhancing fiscal sustainability and promoting financial sector stability.

I also hope that the minister will clear the air on Government’s strategy for funding its budget deficits in a sustainable way. He must tell the nation the measures he will put in place to restore fiscal discipline on the part of Government. Fiscal sustainability and financial sector stability are like conjoined twins. The long term stability of the financial sector hinges on fiscal discipline and sustainability on the part of Government.

The inclusive and sustained development and deepening of the financial sector, through new financial instruments and creating and strengthening the financing capacity and diversification of the financial sector depends on Government maintaining strict fiscal discipline. Going forward, the Government’s full attention must be turned towards and comprehensively reviewing the country’s fiscal framework.

The current fiscal deficits and the manner in which the deficits are being financed is unsustainable and imposes significant adverse implications on the stability of the banking sector. A growing proportion of the balance sheet assets of banks is now held in the form of Treasury bills, whose value is receding as Government debt builds up.

This debt build up is not only crowding out productive sector lending, but is also raising the risk premium for Zimbabwe, elevating the cost of debt and capital. This clearly militates against Government efforts which henceforth should be actively geared towards the reduction in the overall costs of finance in the economy.

Funding the growing domestic debt in this manner is also inflationary, fuels money supply growth and thus imposes an ominous threat to the domestic savings base. This may prove disastrous for confidence in the financial sector in the very near term.

Government’s skewed expenditure patterns, with over 95 percent of its budget going into consumption, has contributed to the rising propensity for imports, the erosion of local productive capacity and the consequent depletion of the country’s foreign currency base. The budget must deal decisively with the above.

Hopefully, the budget will pronounce coherent reform proposals for the civil service. To take the budget seriously, we must get a clear sense of Government’s policy thrust on civil service reforms. I already subscribe to what I have coined as a “RETIRE, RETRAIN AND REDEPLOY” civil service reform process. Elder and pensionable servants, who have done their part, should be necessarily retired from public service.

The remaining workforce should be reconfigured to drive efficiency and productivity in the Government. Departments with excess staff should be identified and all the hard working men and women should be speedily retooled and re-equipped with new skills and redeployed to other critical areas that will drive the efficiency of the State.

For instance, if we have too many policemen for our needs as a country going forward, but feel that we have very few teachers and nurses, we must quickly offer new skills to those in the police service so that they can be moved from the police service into the other professions. This is critical and can be replicated across all sectors of Government. Funding can easily be justified for this.

With the right policy frame, external financial support can be easily secured for such a programme. This sort of redeployment of resources will be a far more effective, socially and economically sustainable process of reforming the civil service rather than the mass sacking of hard working well educated people.

Bonus payments in my view should be linked to productivity or performance. I accept that it is difficult in the short-term to assess the level of productivity and differentiate the performance of any two civil servants in the current setup.

A more careful analysis would be required. In any case we have never had a productivity bonus in the civil service but 13th cheque, which in many cases is contractual. On that score, I urge the Government to respect the contractual terms of employment of its workers by providing for and speedily paying civil service the 13th cheque.

Priority 4: Consolidating and Sustaining the Momentum now present in Agriculture.

Just like in the initial phases of economic recovery of South Korea, Singapore, Taiwan and the post war Japanese economy, which was anchored on agriculture recovery and land reforms, agriculture should underpin the first two to three years of economic recovery.

The sector provides ample opportunity for rapid investment and recovery, job creation, foreign currency generation and import substitution. Agriculture will also lay a solid foundation for the recovery and sustenance of the agro-industrial and manufacturing sectors, whilst proving the impetus for the growth of the transport and heavy engineering subsectors.

Agriculture recovery will be underpinned by unlocking the capital value of agricultural land. Government must urgently deal with the outstanding issues around the security of tenure for farmers, farm size rationalisation whilst also putting to finality the thorny issue of providing compensation to the previous land occupants in terms of the law.

Government must also as a matter of necessity, strengthen the agricultural marketing systems, so that investment can begin flow into agriculture, whilst investors are assured of reasonable returns on their investments. This leads to my next key imperative.

Priority 5: Aggressive State Owned Enterprise Reforms.

State owned enterprises (SOE) are key economic players provided they play their correct economic roles. SOEs can be leveraged to anchor both near term economic recovery and long term industrial growth.

We therefore need to get insights into Governments strategy for reforming state owned enterprises and how the Government will re engineer the SOEs so that they start contributing to the new economic trajectory of the country.

It is imperative that entities such as the National Railways of Zimbabwe, ZISCO, the Cold Storage Company (CSC) and the Agricultural and Rural Development Authority (ARDA), are immediately and speedily brought back to viability and plans to achieve this should be clearly outlined in the budget this afternoon.

In the near medium term Government must also place priority on investment in an efficient public transport system that will cut down on fuel imports and bring efficiencies in the economy, and invest the resources released into the energy sector to boost electricity generation, improve energy security and to power agriculture and industrial growth.

A bold decision on non-viable State owned enterprises or those that have little bearing on economic recovery going forward should be made to either mothballed or sell them to private investors.

Minister Chinamasa must deliver a jobs budget

Finally perhaps more importantly, Minister Chinamasa budget will only be able to justify his relevancy if all his policy measures are aimed at Creating New and Sustainable Jobs in the Country . . . If he does just that, then he will win the hearts and minds of the long suffering people.

The country is desperate for jobs . . . so the minister should go for a budget that supports the call by the President that we need JOBS JOBS JOBS!!!!

We therefore also want to hear how the Minister will lead the creation of a stable platform for capacitating micro, small and medium enterprises and driving informal sector growth. The MSME Sector has the potential for sustainable job creation and expanding the tax base. We need concrete proposals to be articulated on this front.

If Minister Chinamasa addresses these key areas, prospects for sustained recovery growth will be very good. My expectation is that the budget must be keenly and honestly aware of the downside risks that are now inherent in the economy which I have pointed out.

The Minister must therefore outline his proposals for comprehensive structural reforms which are required to sustain the medium to long term growth of the economy both in terms of a sound macroeconomic policy framework, supported by an appropriate mix of sectoral level micro-policies.

• The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.