Govt faces fiscal crisis on bloated wage bill

via Govt faces fiscal crisis on bloated wage bill – The Zimbabwe Independent September 26, 2014

THE visiting International Monetary Fund (IMF) mission has raised the red flag and rang alarm bells over a looming fiscal crisis in Zimbabwe due to an unsustainable wage bill of US$248 million a month as government revenues continue to dwindle amid budget overruns.

This has left Finance minister Patrick Chinamasa stuck between the proverbial devil and deep blue sea as he has no fiscal space to manoeuvre out of the growing financial crisis.

Sources who attended the IMF delegation’s meetings with senior government officials, including Chinamasa, said the Bretton Woods institution team warned of a “financial cataclysm” if the bloated wage bill is allowed to spin further out of control. Since 2009, the wage bill has grown from about 60% to close to 80%.

“The IMF mission rang alarms bells over the wage bill during its current visit and this has become an emergency issue in many respects,” a senior cabinet minister said.

“If this is not addressed urgently, our government faces bankruptcy and failure to pay civil servants. It’s a looming financial catastrophe.”

Chinamasa, battling to balance Zanu PF’s populist electoral promises and economic realism, on Tuesday told businesspeople at a breakfast meeting held in Harare that government was struggling to address the problem, admitting the country’s wage bill was “embarrassing” and “unsustainable”.

“As a solution, we have to create the necessary political climate, build consensus in order to tackle the issues,” he said. “I can assure you that we are working on this issue,” he said, apparently yielding to mounting IMF pressure over the issue.

Chinamasa’s remarks followed earlier warnings by IMF country representative Domenico Fanezzi who told the gathering Zimbabwe’s wage bill constitute a huge chunk of the gross domestic product
at US$14 billion and this was “unreasonable”.

Zimbabwe spends around 35% of GDP compared to 27% on average for Africa and 25% for Asia.

So Chinamasa and government face tough options: To intensify the Zimbabwe Revenue Authority taxation crackdown and further squeeze companies and tax payers already taxed to the bone or retrench part of government’s 236-000 strong work force.

Further taxation will almost certainly fuel a wave of company closures and retrenchments, while impoverishing the already overburdened taxpayers.

Retrenching civil servants might trigger a fierce backlash on Zanu PF whose government is disastrously unable to meet its long list of electoral promises, including creating 2,2 million jobs by 2018 as targeted by the party’s economic blueprint, ZimAsset.

Zanu PF, in its 2013 election manifesto, promised to unlock US$1,8 trillion by utilising idle assets and transfer at least US$7,3 into the hands of the previously marginalised black Zimbabweans through indigenisation – which has virtually deteriorated into an empty slogan after triggering capital flight worth billions – and create more jobs among other exaggerated promises now haunting President Robert Mugabe and his officials.

However, instead of the promised boom and jobs galore, the economy is haemorrhaging into a bloodbath as companies and retrenchments intensify.

Since the general elections last year, the economy has been spiralling. Even multi-billion deals signed with Russia and China have failed to breathe life into the suffocating economy.

In a quick succession, government recently signed investment projects topping US$8 billion on paper but most of them have been described as pie in the sky and failed to renew confidence in the economy.

Chinamasa’s fiscal policy earlier this month confirmed what is already known that the economy is on a slippery slope towards a recession. According to Chinamasa, the economy is now projected to grow by 3,1% in 2014, down from initial forecasts of a 6,1% growth due continuing low business and investment confidence, scarce liquidity, and subdued international prices for major exports, among other factors.

Former Finance Minister Tendai Biti has warned the economy is headed towards a recession and might sink into depression unless effective interventions are made.

Apart from cutting the unsustainable wage bill, the IMF recently said Zimbabwe needs to enhance financial sector stability, strengthening debt management measures and capability, among other issues such as continued sale of diamonds through international centres and sustained reforms to meet its ongoing Staff Monitored Program targets.

The IMF and Zimbabwe reached consensus under the SMP on measures to improve the current economic situation, including a package of measures to address the fiscal gaps that have arisen in the context of the weaker economic forecast and wage pressures.

The ballooning wage bill is crowding out crucial capital and social expenditure that can transform the economy, currently heading for recession.

Since 2009, the Zimbabwean government has struggled to meet its cash budgetary needs largely due to a huge civil service wage bill which keeps ballooning and accounted for as much as 76% of total expenditure between January and June 2014.

Salaries gobbled up nearly US$2,6 billion in 2012, which translated to 70% of the government’s total revenue collections. The wage bill swelled further due to a 14% increase on civil servants salaries awarded by Mugabe’s government earlier this year to make good on his 2013 promise to improve conditions of service for government employees in the run up to last year’s elections.

In an interview with the Zimbabwe Independent yesterday, Confederation of Zimbabwe Industries’ immediate past president Joseph Kanyekanye said as early as 2012 he argued there was need to retrench as much as 50% of government employees to match limited budget capacity.

“I think difficult decisions have to be made because this level of consumption is not sustainable and it has to be rationalised,” he said. “If there are no prospects of increase in revenue then you have to work with suitable benchmarks and you can move back to desired levels when things normalise, but to continue and pretend nothing is happening and nothing needs to be done will damage the economy.”

Labour economist Joseph Kanyenze said government lacks the political courage to make bold decisions.

“Retrenchment is political, especially in the civil service and one cannot make such decisions when they are not prepared to face the consequences,” said Kanyenze.

He said Zimbabwe should not only focus on reducing staff costs, but growing the economy. “It is not a case of either or, one has to do both,” he said.

“Another challenge is that the Ministry of Finance has no control on the courts where labour issues spill to and government reform requires ministries working together, for instance there is a shortage of health workers, but some areas are over staffed,” he added.

More than 75 000 ghost workers were unearthed in the civil service through a comprehensive audit carried out by Ernst & Young (India) in 2011. Most of them remain on the wage bill.

Reserve Bank of Zimbabwe governor John Mangudya recently noted in his maiden monetary policy statement the country is faces interwoven economic challenges that include tight liquidity conditions, company closures, rising formal unemployment, low production levels, rising non-performing loans and disproportionate trade balance.

In a July 2014 letter of intent to the IMF, Chinamasa and Mangudya said the country remains committed to keeping the overall wage bill on a downward trend relative to government revenues and expenditures in the medium term.

They said government is committed to granting only one salary adjustment in 2014 and maintain the hiring freeze which started in July 2012 to manage the wage bill.