Source: State of the economy and way forward | The Herald 07 DEC, 2018
Hon Prof Mthuli Ncube Special Correspondent
Below is a statement by the Hon Professor Mthuli Ncube, Minister of Finance and Economic Development, on the State of the Economy and the Way Forward, issued on 5 December 2018
On 22 November 2018, I presented the 2019 National Budget to Parliament under the theme — “Austerity for Prosperity’’. The Budget constituted the first economic and financial framework for implementing the Transitional Stabilisation Programme (TSP), which is also an initial stepping stone towards realising Vision 2030.
And indeed, that ambitious Vision is duly the theme of this Conference — “Towards an Upper Middle Income Economy by 2030”.
To give perspective to this conference theme, allow me to briefly walk delegates on the state of our economy, before highlighting the thrust of the TSP and the 2019 National Budget.
In the 2019 National Budget, I indicated that during the first half of 2018, the economy exhibited signs of strong recovery, riding on improved confidence from a peaceful pre-election environment and prospects for increased investment.
In 2018, key growth drivers were agriculture and mining, complemented by the services sectors.
With regards to agriculture, tobacco and cotton yields outperformed the 2017 levels and 2018 Budget targets, to support overall sector growth of 12,4 percent. Similarly, in mining, gold output surpassed last year’s production levels, to give mining growth estimate of 13 percent.
Tourism and other service sectors (with average growth of 5 percent) also added positive contribution to the 2018 growth momentum, all to a growth expectation of about 6,3 percent in 2018 during the first half of the year.
Regrettably during the last half of the year, there were noticeable challenges, which posed some risks to economic activity, and these are associated with foreign currency supply challenges, fiscal imbalances, financial sector vulnerabilities, infrastructure deficiencies and capacity underutilisation, among others.
Nonetheless, the economy remains resilient and is expected to record a solid growth of 4 pecent in 2018.
Positive economic performance, gave scope to better revenue collections for the nine months of the year, which amounted to US$3,8 billion, against a target of US$3,4 billion. By year end, solid collections of US$5,3 billion are anticipated.
However, while revenues exceeded Budget targets, total expenditures for January to September 2018, overshot to reach US$6,5 billion against a target of US$4,1 billion. Taking into account the expenditure developments to September, outturn to year end is estimated at US$8,2 billion, against a budget of US$5,3 billion, implying an expenditure overrun of US$2,8 billion (11,7 percent of GDP).
Such a high deficit is clearly unsustainable against acceptable international levels of around 3 percent of GDP. The high budget deficit has been feeding into the rapid build-up in domestic debt stock which stood at US$9,6 billion as at end of September 2018 as well as other macro vulnerabilities.
The bulk of domestic debt is also in Treasury bills, issued for recapitalisation of public enterprises, settling Government obligations and RBZ debt assumption.
Zimbabwe has undertaken a rebasing of Gross Domestic Product in line with international norms, which require replacing of the old base year, taking cognisance of changes in structure of the economy. This exercise is undertaken following sector surveys by ZIMSTAT.
These surveys reflected significant changes in the number of establishments in specific sectors and the whole economy (5 419 to 38 137). And also important is that the surveys captured the GDP contribution by the informal sector, which has grown bigger in Zimbabwe.
The whole exercise culminated in the adoption of a new base year 2012 from the previous 2009 base year. Subsequent changes of GDP numbers in line with the new base year indicate that GDP at current prices for 2016 has moved upwards from US$16,6 billion to US$20.5 billion, while at constant prices it grew by 29,2 percent from US$14,2 billion to US$18,3 billion.
The rebasing exercise also revealed some vital information on our public finances. In essence, there is notable fall in revenue to GDP ratio, reflecting that revenue generating capacity of the Zimbabwean economy is yet to be harnessed and that the current tax system has scope for expansion.
In addition, the higher revenue to GDP ratio before rebasing implies that a higher tax burden is being shouldered by a few taxpayers while tax evasion, particularly in the informal economy, remains quite high.
With regards to trade, exports during the first half and part of the third quarter were on the rise, underpinned by growth in gold, platinum, chrome and tobacco exports, on the back of favourable prices and increased production.
Exports of goods and services for the first three quarters of the year amounted to US$3,79 billion, against US$3,44 billion recorded during the same period in 2017.
The growth in exports, however, suffered a knock in the third quarter of 2018 due to challenges related to foreign currency shortages, particularly for key exporters. This compromised the ability of exporting firms to cover their costs of key consumables, hence reduced production.
On the other hand, the pressure emanating from rising internal growth during the first nine months of the year, propelled the demand for imports of goods and services.
A total of US$5,87 billion in merchandise imports were recorded during the first nine months of the year, against US$4,86 billion of the same period last year.
These imports were mainly dominated by fuels, electricity, fertiliser, chemicals, soya, medicines and few other consumables.
The higher growth of imports relative to exports implies a widening trade balance of US$2,1 billion during the first three quarters of the year, compared to US$1,4 billion.
The deteriorating trade balance, higher primary income payments relative to receipts and slowdown in transfers, particularly remittances, gave rise to a widening current account balance.
This second part of Zimbabwe’s twin deficits has also a role in igniting the macro instability including inflationary pressures during the fourth quarter of the year through rising parallel exchange premiums.
As a result, annual inflation, which averaged 2,9 percent during the first half of 2018 shot to 20,8 percent in October 2018, reflecting the dangers of living with the twin fiscal and current account deficits.
The Transitional Stabilisation Programme
In view of the above challenges and our quest for transforming the country into upper middle income status, Government has launched a short-term stabilisation strategy — the Transitional Stabilisation Programme (Oct 2018-Dec 2020), which is a ready under implementation and to be followed by two strategic successor plans — Five-year National Development Plans: NDP 2021-2025 and NDP 2026-2030.
The Transitional Stabilisation Programme’s immediate task is centred on macro and fiscal stabilisation and laying a solid foundation for attaining the overall goal of a strong, sustainable and shared growth.
Such growth will be anchored on good governance and promotion of democratic principles, equitable access to means and outcomes of production, as well as modern infrastructure that supports day-to- day socio-economic activities.
Sustainable and shared growth will also prioritise efficient delivery of public services and restoration of Zimbabwe’s rightful place in the global economy.
Implementing the Transitional Stabilisation Programme by powering the respective strategic and transformative divers for change and development is initially through the 2019 Budget.
The Transformative Drivers of Change
The primary objective of the TSP and hence the 2019 Budget is to stabilise the economy by targeting the fiscal and current account twin deficits, which have become major sources of overall economic vulnerabilities including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.
The strategy for reducing the budget deficit entails managing expenditures while stimulating economic activity in order to broaden the revenue base for any future expenditures required for development.
In addition, during the macro stabilisation phase, efforts will be directed at mobilising and optimising revenues without compromising the viability at source.
On the other hand, managing the current account deficit, as already indicated in the Budget, will require measures on managing our import bill while stimulating exports and other forex inflows.
Treasury Bill Issuances
High fiscal deficits became entrenched largely due to expenditures committed outside the Budget framework and financed primarily through Treasury Bill issuances and RBZ overdraft.
Going forward, with immediate effect, all Treasury bill issuances will be strictly through the auction system and for financing expenditures under the Budget framework and for short-term cashflow mismatches.
The overdraft facility with the RBZ is now limited to 5 percent of previous years’ revenues and for the sole purpose of smoothening cashflows.
The Public Finance Management Act is, therefore, being amended to penalise any Treasury Bill issuances outside the Budget framework.
The Budget emphasises on living within means by instilling fiscal discipline and rationalising expenditures in order to create additional financial capacity for funding developmental expenditures and enhancing delivery of public services.
Consequently, a number of measures on containing expenditures are already under implementation, targeting the wage bill and other operational expenditures.
In support of expenditure containment measures, the Budget is also introducing measures on improving expenditure controls, fiscal transparency, and reporting.
Tripartite Negotiating Forum (TNF)
Social dialogue has proved to be a key platform for addressing various social and economic challenges between the three social partners, namely, Government, labour and business.
The TNF, therefore, provides scope for negotiating a social contract that also reduces pressure on the wage bill with the objective of enhancing the economic development process of the country and at the same time promote consensus building for the national good.