Austerity measures still the way to go

Source: Austerity measures still the way to go | The Herald August 19, 2019

Prof Ncube

Beaven Dhliwayo Features Writer
Austerity measures introduced by Government last year and expected to run for the next couple of years seem to be a tough pill to swallow given the dire straits of the country’s economy which were caused by the previous Government’s policies.

There has been public outcry that austerity for prosperity measures as outlined in the Transitional Stabilisation Programme (TSP) and together with the 2019 National Budget and the Mid-Term Budget Review by Finance and Economic Development Minister Prof Mthuli Ncube spells more harm than good to the poor as this means renewed moaning and groaning in the prevailing economic conundrum.

People should know and fully understand why the Treasury boss has put the painful economic structural reforms which have the potential to transform the country’s economy if they are fully implemented.

Zimbabweans should shy away from common talk by opponents of economic recovery in this country.

Let’s now talk about the real motive behind the adoption of “austerity for prosperity” by the Government as it embarks on its solid mission of transforming the country into an upper middle-income economy by 2030.

To begin with, austerity is an extreme form of “fiscal consolidation” where the growth in public spending declines and/or taxes rise at a rate such that Government’s budget deficit declines over time, but with the clear intent of reducing wages to improve economic competiveness.

It’s distinct from the “fiscal consolidation” underway in the US and UK which is intended to stop unsustainable levels of public debt, not cause deflation.

The purpose of austerity is to make an economy more trade competitive and attractive for business investment and improve long-term economic growth.

Austerity is what happened in Greece since 2010 when its budget deficit was almost 16 per cent of its Gross Domestic Product (GDP).

The advocates of “austerity leads to prosperity” argue that public spending “crowds out” private spending.

Further, if public spending is accompanied by a growing public debt then such spending sends the economy backwards.

Austerity advocates believe that reduced public spending can lower real wages. If it does, this can promote economic growth by encouraging higher employment and greater business investment and confidence.

The measures under austerity include reductions in government spending, increases in tax revenues, or both. These harsh steps are taken to lower budget deficits and avoid a debt crisis.

Austerity measures also include tax reforms.

Fact is governments are unlikely to use austerity measures unless forced to do so by bond holders or other lenders.

It is wise to note that the country is heavily indebted and needs to clear its debt so that it attracts more investments and thereby grow the economy.

Currently, Zimbabwe has a national debt stock of close to US$18 billion, both domestic and external. Nearly US$9 billion being owed to external creditors, and Government has committed to repay some of the loans to international lenders by the end of this year.

Speaking on his return from Bali, Indonesia, in October last year where heads of multilateral institutions had been meeting, Finance Minister Mthuli Ncube said his presentation on debt clearance and privatisation of loss-making parastatals was well-received and if rolled out, would be the panacea to the country’s economic crisis.

He added that the country is actively seeking to have the foreign debt forgiven under the Highly Indebted Poor Countries (HIPC) programme by the IMF, a move that would spring the ailing economy into life and ease the liquidity crunch.

Through its economic reform policies and a number of Statutory Instruments (SIs) the Second Republic is raising income taxes, especially on the wealthy, targeting tax fraud and tax evasion and working on the privatisation of Government-owned businesses.

These are industries considered vital to the State’s interest. They include utilities, transportation and telecommunications. Selling them will raise revenue to pay off debt.

Some of the debt is being repaid since the country recorded a budget surplus of ZW$803.6 million between January and June this year as the TSP starts to bear fruit.

Zimbabwe also registered a positive current account for the first time since the adoption of the multi-currency regime in 2009.

Presenting his mid-term fiscal review in Parliament, Prof Ncube said the attainment of a fiscal surplus, combined with a current account balance of US$196 million during the first quarter from a deficit of US$491 million for the same period in 2018, signalled improved confidence in the TSP.

During the first half of 2019, monthly revenue collections performed above target of ZW$139,9 million to give cumulative revenues of ZW$4,99 billion, against a target of ZW$4,15 billion, giving a positive variance 20,2 percent.

However, Government incurred unavoidable expenditures due to the Cyclone Idai disaster that swept through eastern Zimbabwe, spending ZW$4,2 billion against a target of ZW$3,7 billion, translating to 15 percent over-expenditure of ZW$532 million between January and June 2019.

“The negative variance is a result of inescapable and unforeseen expenditures on both current and capital heads, arising from higher-than-anticipated inflation, exchange rate fluctuations, drought and the devastating Cyclone Idai,” Prof Ncube said.

The positive developments are coming out because the Second Republic chose to go austerity for now so that the country will enjoy the vast benefits that lay ahead. Patience is indeed needed as austerity for prosperity is starting to yield benefits as mentioned above.

Necessary Measure

Meanwhile, the European Central Bank (ECB) has released a paper saying that austerity measures were necessary for the medium- and long-term recovery for countries with a high public debt-to-GDP ratio, though the short-term fiscal consolidation efforts would be painful.

John Cochrane, senior fellow at the Hoover Institution at Stanford University, says the policies are meant to reverse long-standing budget deficits, and reform out of control social spending, pensions, subsidies and state-controlled industries, together with strong structural reform, liberalising product and labour markets, and cracking down on corruption and tax evasion.

“The [initial] aim was to stop a run and chaotic default on government debt, and with long-run stability of government finances assured, interest rates would fall, allowing slow repayment of that debt,” Cochrane notes.

Harvard economist Alberto Alesina recently summarised evidence concerning whether government deficit reduction — that is, expenditure cuts and/or tax increases — always induces such negative effects.

“The answer to this question is a loud no. Sometimes, even often, economies prosper nicely after the government’s deficit is sharply reduced. Sometimes, just maybe, the austerity programme boosts confidence in such a way as to ignite a recovery,” said Alesina.

A good example is that of Seychelles which had been in the more difficult situation in 2008, with foreign reserves near zero, unable to pay for an oil tanker in port to offload its vital cargo, and a debt to GDP ratio of 135 percent.

As a consequence, as part of their IMF agreement, they had to take severe measures, restructuring their debt. Their restructuring included a 45 percent reduction in principal for government to government (Paris Club) debt, private bondholders and even multilaterals. Debt to GDP had now fallen to 75 percent.

Minister Pierre LaPorte observed that whether they had the IMF or not, they had no choice but to reform, and that the longer they waited (they were 18 years too late), the more they hurt.

After the collapse of the Soviet Union (from which they had received subsidies), Seychelles discovered the international bond market, starting with only a US$20 million loan through Citibank, and in the decade to 2008, debt had risen from US$150 million to US$850 million.

Mauritius Financial Secretary Ali Mansoor noted that in 2006, Mauritius was going the way of Seychelles, suffering from economic shocks from the impact of changes to the multi-fibre agreement on its large textile industry, resulting in a 30 percent loss of textile jobs, and more than 20 percent loss of output in just one year, coupled with rising commodity prices for petroleum and food.

The new Minister of Finance decided to undertake a comprehensive reform programme, reforms that should have been done 10 years earlier.

The Financial Secretary advised his new Minister of Finance to do all the tough reforms in his first year. If they had been done earlier, they could have been sequenced in a more leisurely fashion.

According to Mansoor, there is no trade-off between stimulus and austerity when you have run out of money, and that rather than stimulus that you can’t afford, the best alternative is to unlock growth through reform.

Thus, the austerity for prosperity measures did not start in Zimbabwe but are being implemented globally and remain the only way the country will restore its former glory.