Fiscal crisis signals Zimbabwe’s economic implosion

via Fiscal crisis signals economic implosion – The Zimbabwe Independent by Chris Muronzi May 16, 2014 in News

GOVERNMENT revenue collections plunged by 3,9% in the first quarter this year, latest figures released by the Finance ministry show, pointing to a worsening economic implosion characterized by dislocation of fundamentals and deflation.

This came as former Finance minister Tendai Biti yesterday warned that Zimbabwe was “on a slippery slope” and “would soon plunge into recession from where it will be difficult to climb out”.

“I warned months ago that after the elections the chickens will come home to roost, and this is what is happening now,” Biti told the Zimbabwe Independent.

“The economy is sliding rapidly than we imagined and now government is living on the edge using unsustainable tools, measures and interventions. For instance, the issuance of treasury bills and other instruments, and selling of valuable state assets to raise money for recurrent expenditures while coming close to the debt ceiling is unsustainable. Only a fool would borrow money for consumption because it comes back to haunt you.

“Besides, a new problem of deflation and stagnation has kicked in. This reflects a structural crisis which needs a structural approach, but given that this government is run by structurally illiterate people, you can be guaranteed that nothing serious will be done to deal with the issue.”

Data released by Zimbabwe National Statistics Agency recently showed a decrease in the rate of Zimbabwe’s annual inflation in March by 0,42% to -0,91%, meaning prices as measured by the all items Consumer Price Index decreased by an average of 0,91% points between March 2013 and March 2014.

Analysts cited low aggregate demand in a poorly performing economy as the main reason. Apart from that, the weakening of the South African rand against the United States dollar, which is the base currency in Zimbabwe, also contributed to the situation.

Fears are mounting that due to deflation, the real value to debt will increase, while the situation may trigger a recession and lead to a deflationary spiral in which the decrease in prices leads to lower production, that in turn leads to lower wages and demand, and ultimately further decreases in prices to the detriment of the economy.

Principal Director in the Ministry of Finance Pfungwa Kunaka said this week key economic indicators showed a decline in government revenue collections.

Value Added Tax collection — which indicates the level of aggregate demand in the economy — declined by 15,1% during the first quarter of 2014 compared to 2013.

Severe liquidity constraints in the financial sector, which have seen domestic credit growth of only 8,6% between February 2013 and February 2014 compared to about 34% in 2012/13 and 50% in 2011/12, have also hit the economy.

Kunaka said credit risk remained a major challenge judging by the non-performing loans ratio which rose to 16,6% as at March 31 2014, up from 15,9% as at December 31 2013.

According to a 2013 Nssa report, more than 2 893 companies, of which the manufacturing sector accounted for the majority, closed by the end of December. A total 55 000 employees had to be retrenched as companies downsized or closed shop in the face of a stubbornly harsh economic climate.

Kunaka said information from the Master of the High Court indicated that nine companies were put under final liquidation in a single day in February.

He added that there was a decline in essential imports such as raw materials, equipment and machinery which are critical to supporting production as the economy continues to implode under pressure from the liquidity crunch.

Traditional sources of liquidity such as exports and foreign direct investment have all but dried up owing to various economic problems such as lack of investor-friendly policies typified by the indigenisation programme, low capacity utilisation and uncompetitiveness.

A total of US$1,8 billion was received as remittances in the country last year. Diaspora remittances have grown to become an important source of funds that can be leveraged for national development.

The fall in revenue collections comes against the background of a rising civil service wage bill after government awarded civil servants salary increments effective this year.

Civil servants’ salaries were last year gobbling up nearly US$2,6 billion annually, a figure representing 70% of government’s total revenue collections.

In a statement this week, Civil Service Commission secretary Pretty Sunguro said those in the education sector would now be accessing their salaries on Friday (today) rather than Thursday (yesterday), while the rest of the civil service salaries would be staggered by a week from normal pay dates.

This means the rest of the civil service, who were set to be paid on May 22, will now only receive their salaries on May 29.

Pensioners are also affected by the deferment, and they will only get their money on May 30, instead of May 28.

This is the second month in a row that the cash-strapped government has had to defer civil servants wages. Government now needs US$155 million to pay its 230 000 workers monthly.

Government chews around 35% of GDP compared to 27% on average for Africa and 25% for Asia. More than half of the expenditure goes towards paying civil servants. Zimbabwe therefore has the highest public service wages-to-GDP ratio in sub-Saharan Africa, after Lesotho.