Relaxing austerity to ease reform pain

Source: Relaxing austerity to ease reform pain | The Herald 11 NOV, 2019

Prof Ncube

Golden Sibanda

LOFTY expectations await Finance and Economic Development Minister Mthuli Ncube’s 2020 National Budget from ordinary citizens and corporates stung by pain of the Treasury chief’s austerity measures; who are thirsting for relief.

Minister Ncube is expected to present the fiscal policy on Thursday this week with focus certainly on measures in next year’s national budget that will lessen the burden and pain of the Government’s austerity for much of this year.

Probably, the biggest pain ever to emerge from the austerity programme was the instant rise in cost of living; testified by galloping inflation against slow-rising or stagnant incomes, as the economy adjusted and reacted to the new economic order.

Austerity is a political-economic term referring to economic (usually Government) policies that aim to reduce budget deficits through spending cuts, tax increases or both.

Economist Persistence Gwanyanya, said austerity in the Zimbabwe case was underpinned by need to reduce the budget deficit.

“How do you correct that position, you correct it through revenue enhancing and cost-cutting measures,” he said.

Minister Ncube is targeting to contain the national budget deficit this year to within 4 percent of Gross Domestic Product (GDP).

“When he talks about rationalisation, he is talking about those two; expenditure by central Government and revenue and when he is talking about relaxation, he is giving a measure of leeway in terms of expenditure by Government to stimulate the economy,” Mr Gwanyanya said.

And so it has entailed cutting Government expenditure (slowing down economic growth), increasing revenue through the 2 percent tax and excise duty on fuel, cutting subsidies on utilities (especially electricity and water) and fuel and reducing the current account deficit.

The economist also said going forward, given Treasury’s thrust in 2020, interventions will entail boosting disposable incomes (increasing non-taxable incomes, reducing or removing certain taxes) and subsidies (eg water and power).

This will result in many people having more finances to spend on various household needs to enhance their standards of living. The same principle will also apply to corporates.

Minister Mthuli is thus not expected to introduce any shock therapy measures such as liberalising fuel procurement, more taxes or increasing tax thresholds, new currencies and floating Zimbabwe dollar exchange rate like he did in 2019, which caused significant suffering.

The 2020 budget will shift focus from the painful big-bang austerity and economic reform measures to productivity, competitiveness and job creation.

Notably though, the finance minister says austerity measures achieved their goal; which was to contain excessive public expenditure (budget deficit) and reducing trade imbalance (current account deficit).

And at first, the majority probably cared less of the meaning of Austerity and the minister’s warning that Zimbabweans should brace for tougher times as he sought to correct structural rigidities in the economy in order to place it on sustainable growth path.

But the apathy was not until the reform measures he introduced under his Transitional Stabilisation Programme (TSP) released bloated pressures of the broken economy, which were masked for years by a multi-currency system dominated by the United States dollar.

And as per his promise of a better 2020, the majority of Zimbabweans expect the Treasury chief’s 2020 budget measures to almost instantly bring tangible relief after a year of chastening belt-tightening.

Economist Eddie Cross said austerity had to happen to correct economic ills of the past two decades, particularly the huge pool of idle RTGS dollar, which was not supported by any form of production.

He said that the billions of electronic dollars, which were being presumed to be United States dollars, were not greenback and the minister sought means to devalue the money to a more manageable level.

“That was the prime problem with (and the focus of) the austerity programme. Because what he had to do was to tell the people that the mountain of RTGS was not US dollars; it was RTGS dollars,” he said.

Mr Cross said that the huge amount of reserve or idle (hot) money, created through borrowing via the Reserve Bank of Zimbabwe overdraft window and issuance of Treasury Bills, was not sustainable.

“So he had to do two things, increase income to Government; he did that through the 2 percent tax and then the inflation (increase). The inflation and 2 percent tax together, have been able to restore fiscal balance; so there is no fiscal deficit.”

Mr Cross said the devaluation of the Zimbabwe dollar reduced the “mountain” of RTGS dollars in the market and with the objective achieved the minister will now turn to stimulating productivity, growth and job creation.

However, he said boosting disposable incomes will need to be gradual and responsible so as not to upset stability of the economy and inflation.

“There is going to be increases in people’s salaries, but it’s going to be gradual and will be very carefully planned and monitored. The other thing I think he is going to do is that he is going to strengthen the value of the Zimbabwe dollar,” he said.

Mr Cross said the exchange rate of 15 to 1 was not reflective of fundamentals in the economy. He said together with the minister, they believe the rate should be around $6 to US$1.

“I think when those things happen people will start to feel a bit better off than today.”