Outlook bleak despite projected growth

Source: Outlook bleak despite projected growth – The Zimbabwe Independent July 28, 2017

The presentation by Finance minister Patrick Chinamasa on July 20 was unique in that it was not a mid-term fiscal policy review, but rather a review of the 2016 fiscal year, combined with the outlook for 2017.

By Daniel Ngwira

According to the Treasury chief, this change was meant to “strengthen the outline of the budget statement presentation as an instrument of budget accountability and fiscal transparency, in the process improving policy engagement and accessibility for a wider range of public and targeted audiences”.

Some of the criticism of the annual review did not take into account that the focus of the annual budget review was 2016 and not the half year of 2017. Chinamasa stated a mid-term fiscal policy review would be reserved for exceptional circumstances that would demand a supplementary budget.

While the minister was trying to streamline the budget statement and in the process reserving an extensive economic review for the fiscal year six months later, it does appear that his audience would only get delayed information.

Information is more useful when it is availed timely. In addition, the advantage of presenting a review of the year together with the presentation of the budget for the forthcoming year is that the budget review provides a backdrop against which some new or proposed policy interventions could be made.

This would help the minister to place his audience at an equal footing that could be desirable to ensuring understanding.
While Chinamasa indicated that “Treasury will, however, continue to provide Quarterly Treasury Bulletins, capturing quarterly macro-economic and fiscal developments, in addition to the Consolidated Monthly Financial Statements published monthly in line with the Public Finance Management Act,” the lack of depth of the recent review on economic issues pertaining to the first half of the year demonstrates the essence of the mid-term fiscal policy review as was issued in the past compared to the new practice proposed by the minster in December 2016 and now implemented for the first time ever.

Yet the major advantage is that the minister will present a review when all the data is now available without relying on forecasts. Be that as it may, Chinamasa presented data which shows an economy under fire, not only against a background of an El-Niño-induced drought that is attributed to a sluggish growth of 0,7% against a budget of 2,7%.

In its current form, Zimbabwe needs higher sustained growth rates to quickly realise a turnaround. While electricity and water were the major pull down factors, as they are mundane in all sectors of the economy, the positive is that there is work happening in Kariba South to enable increased power generation. This would go some way in restricting power imports.

Of course, what is disturbing is that the project managers are said to be employing Chinese as dump truck drivers in a country with high unemployment. Labourers should be sourced locally.

Chinamasa also noted that household consumption was down by 11,8%. This was attributed to low disposable incomes and poor export performance. What needs to be noted is that Zimbabwe is characterised by under-employment. What this entails in common parlance is that people employed in one form of economic activity or the other by that they are not being paid according to their qualifications or experience.

This results in low disposable incomes. In addition, as employers realise that it is an employers’ market due to the desperation that exists for jobs, they end up underpaying labour services, thereby creating a vicious cycle in that those low-income earners are also customers of other businesses.

The low consumption level can be addressed by driving production higher. Higher output would enable the production costs per unit to fall, thus making our exports more competitive. Overall, this improves export performance.

Measures to address electricity and water help to bolster export performance. Own generation of power is expected not only to reduce reliance on imported power, but also to reduce the cost of electricity. This goes a long way in improving the ease andcost of doing business in the country.

The annual budget review celebrated the “success” of “Command Agriculture”, a political name for the Special Maize Production Programme. The minister indicated that the agricultural sector is expected to grow by 21,6% in 2017, with maize output expected at 2,2 million tonnes against a domestic grain requirement of 1,8 million tonnes.

Government should be cognisant that without a successful rainfall pattern, it would be difficult to achieve a meaningful crop. While Chinamasa is upbeat that the country is now preparing for a possibly successful 2017/2018 agricultural season, it should be noted that part of the success of the “Command Agriculture” was due to the act of God in that there were good rains in the current season.

Such a success is not sustainable. In order to build resilient success, government should invest in infrastructure that ensures successful agricultural seasons. This includes harnessing water through dams and installing robust water conserving irrigation systems. While government has entered into a grain offtake understanding with the Grain Millers Association to the tune of 800 000 tonnes for the upcoming season, it should be noted that the millers are in business and as such they would hunt for the cheaper prices possible to cut down on costs in their business.

Government should do whatever is possible to ensure there is no unnecessary profiteering in the business given that no grain imports will be permissible going forward. Imported grain has so far been cheaper than the local grain. Price competitiveness should be ensured to minimise the risk of a spike in food inflation.

Ironically, coal and diamonds were the major pull downs in the mining sector, which saw most minerals recording gains. It remains to be seen whether the ongoing reforms in the diamond and coal sector would yield the expected turnaround and growth in these sectors.

While mineral exports were recorded at US$2,2 billion buoyed by gold and the platinum group of metals, the contribution of the mining sector to the economy was insignificant at 2,2% of the entire economic pie. The mining sector requires serious capitalisation if the country is to benefit more and increase its contribution to the entire economy. While mining is a key sector which the indigenisation laws are trying to safeguard as an extractive sector, it is important for government to come up with a business and finance model that will result in the economy being uplifted.

Whereas diamonds have been a blessing in some neighbouring countries, to Zimbabwe they have been a curse, as they appear to be non-existent in our country or too insignificant to make any meaningful contribution to the fiscus. In order to drive the contribution of mining northwards, it is necessary for government to come up with deliberate policy measures to achieve mineral beneficiation.

The manufacturing sector grew marginally by 0,3% compared to 0,2% in the previous year. The minister attributed this growth to measures put in place as export incentives by the central bank, as well as the implementation of statutory instrument 64.

This in turn is said to have improved weighted average capacity utilisation from 34,3% to 47,4% in selected sub-sectors. This figure would be more useful if the composite capacity utilisation had been provided instead of comparing the overall figure to the growth of the sub sectors.

So far, the said improvements of the sub-sector capacity utilisation do not appear to have benefits which have trickled down to the ground. Government should institute real measures to improve overall capacity utilisation, as it has a bearing on the overall performance of the economy and the exports.

While the minister has hailed extensive destination marketing as the key success factor in tourism, government should be reminded that a good marketing programme includes the substance of the economics as opposed to mere talk.

While there has been an improvement, police presence on roads remains high. This should be further scaled down to reduce annoyance of tourists. In addition, government should stabilise the economic environment. At the present, the economic environment could promote nefarious activities, which in turn would drive away tourists.

Further, an improved socio-political environment would encourage some high-profile figures to announce their visits to the country, thereby encouraging more high-value spenders. This could see a robust growth in tourist arrivals compared to a growth of 100 000 experienced in 2016.

The country’s construction sector remains constrained, as it is reported to have capacity utilisation of 29%. Government reports that it has a housing backlog of 1,25 million units. Securing funding for this key sector is paramount as it could easily see the growth of employment numbers. The benefits of boosting construction are easily felt downstream in any economy and that is why countries turn to construction in down times. Sadly for Zimbabwe, with a budget that is consumed by recurrent expenditure, especially employment-related, this is hard to achieve. Government is yet to put in place a credible plan regarding the construction sector.

Since 2013, revenue collection has either steadied or declined with the lowest level being 2016 at US$3,5 billion. This contrasts with the period between 2009 to 2013 when revenue collection was on a growth trajectory. In 2016 there was a revenue shortfall of nearly US$350 million.

Consumption taxes and excise duty played a key role, reflecting the state of the economy driven mostly by consumption and imports. Sadly, tax arrears were on a growth path with PAYE arrears rising from US$591,8 million to US$662,2 million, while corporate tax arrears grew astronomically from US$276 million to US$751 million.

In 2017 government expects to improve revenue collection through countering leakages and the rationalisation of the schedule of zero-rated goods and services. The latter move is expected to reduce VAT refunds. While these measures will increase the taxes collected, government should focus more on expanding the tax base in the long term. This will ensure increased collections and also help reduce tax rates for the benefit of the over-taxed Zimbabweans.

However, government incurred an expenditure overrun of nearly 25% or US$$900 million. This was mainly driven by capital expenditure of US$967,5 million against a budget of US$315 million, operations and maintenance expenditure of US$604,8 million as opposed to an estimate of US$384 million.

Employment costs were largely contained with a small overrun. The overrun is a reflection of the need to have a fair share of the capital expenditure budget. The problem with the overrun is on the financing. Domestic financing of such has a tendency of crowding out investment.

As nearly 92% of the budget went to employment costs, government is implored to make tough decisions to reduce labour costs.

In addition, government should look at all the costs, line by line, to reduce costs. This should include travel costs.

Nearly US$400 million of the 2016 budget accommodated the 2015 employment costs like bonuses. Government cannot afford this.

The question is: should it continue to pay the thirteenth cheque under these difficult conditions? I beg to differ.

What is worrying is that of the US$2,1 billion Treasury Bonds and bills issued, government used US$1,7 billion to pay off legacy debt. Nearly US$360 million of this was used to finance the budget deficit, with average maturities of 160 days for bills and the remaining US$10 million being borrowed for three years.

As at December 2016, Zimbabwe’s external debt stood at US$11,6 billion with public and publicly guaranteed external debt standing at US$7,3 billion.

Nearly 70% of the external debt is in arrears, thus posing a huge risk to the country’s chances of accessing wider funding sources at cheaper costs.

Section 11 of the Debt Management Act requires that outstanding government debt, as a ratio of GDP, should not exceed 70% at the end of any fiscal year. The aggregate of the external debt and the Treasury Bills (TBs) issued show that the total debt is close to the 70% threshold.

Chinamasa downplayed the current cash shortages by saying they are not unique to Zimbabwe: “The current liquidity and cash challenges are not unique to this economy but an expected temporary and transitional phenomena for a dollarised economy.”

What the minister underestimated is that the cash shortages are now nearing a two-year mark. Besides, the fact that these shortages are not unique to Zimbabwe does not mean that they cannot be quickly addressed.

It is also high time government demanded performance and accountability from state and public institutions. In 2016 government borrowed US$128 million through issue of TBs to fund public institutions.

These include Agribank, ZB Bank, POSB, Small and Medium Enterprises Development Corporation (SMEDCO) and several others.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. Email: daniel.ngwira@gmail.com/ cell: 267 73 113 161