‘Budget full of heroic assumptions’

via ‘Budget full of heroic assumptions’ – DailyNews Live Guthrie Munyuki • 7 December 2015

HARARE – Respected economist and director of the Labour & Economic Development Research Institute of Zimbabwe (Ledriz)  Godfrey Kanyenze shares his views with the Daily News Senior Assistant Editor Guthrie Munyuki on the recently unveiled 2016 National Budget and other economic issues and below are the excerpts of the interview.

Q: The 2016 National Budget has been heavily criticised for being a “supermarket” budget, is this criticism justified?

A: To some extent yes. It is one of the longest Budget statements, touching on almost every issue, without necessarily resolving them. For me, it is a budget in limbo, crafted under a severe liquidity crunch, and yet expecting to draw and benefit from anticipated bold reform measures and the reengagement dividend (new lines of credit, FDI inflows etc.).

It is based on quite heroic assumptions pertaining to adequate planning on mitigating the impact of the El-Nino weather conditions of late rains and a short season, successful implementation of bold policy initiatives expected to trigger new lines of credit and FDIs, productivity and economic growth, and enable the country to meet future external debt obligations, as well as global economic rebound.

Q: How is the Finance minister going to fund this Budget in light of the declining revenues and absence of meaningful capital injection from key financiers?

A: The revenue proposals in the 2016 Budget are of limited scope and may not raise any significant levels of additional revenue. The Budget assumption is that the economy would grow by 2,7 percent in 2016, creating the fiscal space to fund the Budget of $4 billion.

However, it appears the Budget assumptions with respect to adaptation to the El Nino effect of late rains and a shorter season, as well as successful reengagement and the implementation of agreed structural reforms are overly ambitious and the perennial problem of a lower growth trajectory, revenue underperformance and increased deficit will resurface in 2016, especially considering the weak commodity prices and impact of drought.

The reality of re-engagement is that it would be premised on the attainment of a track record of successful implementation of the agreed structural reforms, and in any event, the impact of reforms is lagged. It appears once more, Budget assumptions remain a game of hit and miss, played with more enthusiasm than success.

Q: What should be an ideal Budget include?

A: An ideal budget should be aligned to the national development plan as it is the means to roll out and finance the activities in the plan.

It has to be guided by and reflect the Constitutional provisions, and in particular the attainment of the socio-economic rights to basic education, healthcare, utilities (water, electricity and sanitation), housing, social protection, decent work amongst others as enshrined in the Bill of Rights.

It should therefore prioritise livelihood issues and be people-centred, prioritising what matters to them. It must foster inclusive, pro-poor growth and be developmental as opposed to the current focus on conspicuous consumption by prioritising infrastructure development, a key enabler for growth and development.

In essence, the “first-things-first” principle must guide the Budget. Q: Most of the allocation is going towards recurrent expenditure, in fact salaries, yet government is mulling to cut by half the civil service; will this culling be a reality in 2016?

A: Indeed, with 92 percent of the Budget focusing on recurrent expenditures, 79,8 percent employment costs, with only 9,6 percent for operations and 7,9 percent for capital expenditures, such an expenditure mix is not sustainable.

Reducing the proportion of the Budget that goes to employment costs is not an easy process as it is a matter of political economy, with potential losers and winners. Those that will tend to lose are inclined to oppose the intended measures, while those seeking to deal with the malaise would want to push through the reforms.

Because of these trade-offs, there is need for the process to be as consultative as possible, involving all key stakeholders from the various government ministries and departments to public sector employee representatives and international development partners.

Buy-in and consensus building are therefore pivotal for the success of such reforms. Moreover, even if agreed, culling the numbers does also involve separation costs that may increase the overall costs in the short-term. Using other methods such as non-replacement of those that retire as was the case under Economic Structural Adjustment Programme (Esap) will only have incremental effects over time and may therefore not result in substantial reductions in the overall costs in the year the reforms are implemented.

It is also well established that reforms have a lagged effect; you do not reap in the same season you sow. Hence, a look at the projected level of employment costs at 79,8 percent of total expenditures in 2016 is marginally higher than the level of 79,7 percent for the period January-September 2015.

Measures designed to validate and authenticate the levels of employment in the public sector (the head count of employees) are helpful given the results of the 2009 Ernst and Young payroll audit which suggested there were 75 000 irregularly employed civil servants.

Getting to know how many people are actually employed by grade is therefore a useful starting point in the process of rationalising civil service employment. Ultimately, raising the levels of productivity and growing the economy is the most sustainable way of addressing this challenge.

Q: Apart from job cuts in the civil service, what else can government do to improve its revenues and reduce its domestic debt?

A: There is a lot that government can do. As the Mid-term 2015 Fiscal Review Statement indicated, government is losing $1,8 billion annually through smuggling, illegal dealing in gold and precious stones, corruption, fraud, tax evasion, and externalisation, among others.

Public enterprises are also identified as a major area of concern in terms of poor corporate governance practices. In the 2016 Budget Statement, an example is given from the Zimbabwe Electricity Transmission and Distribution Company (ZETDC), which was allocated $482 million for power generation, transmission, distribution and rural electrification to address the power shortages. Yet as indicated by the Finance minister Patrick Chinamasa, ZETDC’s debtors’ book as at September 30, 2015 stood at $1 billion.

An inclusive process of reengagement of International Financial Institutions and the development community at large is most critical in order to deal with debt arrears and overall debt resolution so that the country can access new lines of credit, and attract FDIs.

In tandem with this, the government needs to address the high cost and ease of doing business in Zimbabwe so that both domestic and foreign investments can flourish.

Q: Why is it important for government to reduce its domestic debt and how does this influence activity in the economy?

A: In a multi-currency set-up such as ours, government cannot print money and has no monetary policy leverage. In such a scenario of cash budgeting, it is therefore important that government exercises fiscal discipline and ensures that it only spends the money it has raised.

Getting into a deficit and financing it through issuance of government paper is merely postponing the problem since at some point in the future, those instruments will mature and government will have to pay back, with interest. This worsens the debt overhang.

A culture of indebtedness is regressive, especially where the debt is acquired to finance consumption and government has to raise money from elsewhere to finance it.

On the contrary, it is critical to inculcate a culture of saving and investment, with borrowing only reserved for areas that can finance the repayment in future.

Q: Zimbabwe and China have signed deals in telecommunications, infrastructure and power; are these priority areas for the country and how much benefit can be derived from these?

A: Indeed, these are critical enablers that have to be prioritised to promote productivity, ease of doing business and competitiveness.

However, as seen in the past, signing deals is one thing, consummating them is yet another. Cost and ease of doing business reforms can facilitate their successful implementation, provided the necessary political will and courage is there.

It appears the origins of the investments does not alter the fundamental requirement that the doing business environment be as friendly as possible. Financial prudence precludes throwing good money after bad.

Q: How much does government need to do to win the hearts of international investors and key western financiers?

A: While the Finance ministry, that of Trade and Industry and the Reserve Bank of Zimbabwe have led the re-engagement process that led to the presentation and acceptance of a debt arrears clearance strategy on the sidelines of the annual meetings of the World Bank and IMF in Lima, Peru in October 2015, there is need to make the process more inclusive to include all key government ministries, and national stakeholders outside government.

This will ensure national social cohesion and consensus to remove policy contradictions, inconsistencies, policy reversals and resistance.

Q: The Ease of Doing Business is one area that Zimbabwe falls short, how much work does it take the government to institute reforms to improve on this and which are key priority areas?

A: Instructively, Zimbabwe’s rank in the 2016 World Bank Ease of Doing Business improved from 171 in 2015 to 155 out of 189 countries, a feat achieved by improving policies and reforms in just two areas, namely, Getting Credit, where the country ranked 79 from 90; and Protecting Minority Investors, where Zimbabwe moved from position 87 to 81.

Areas lagging behind in terms of reforms that should be prioritised are: (i) Starting a Business (position 182 from 179 previously); (ii) Dealing with Construction Permits (184 from 185); (iii) Getting Electricity (161 from 160); (iv) Registering Property (stagnant at 114); (v) Paying Taxes (145 from 142); (vi) Trading Across Borders (100 from 99), and (vii) Enforcing Contracts (stagnant at 166).

These areas are being emphasised in the on-going Ease of Doing Business reform agenda being spearheaded by the Office of the President and Cabinet.

Successful execution would however, require an inclusive domestic consultative process that embraces all key national stakeholders given the trade-off involved.

Q: You are among people who have decried the inconsistencies on the indigenisation law, have there been any improvements and if not, what needs to be done?

A:In the 2015 Confederation of Zimbabwe Industries (CZI) Manufacturing Sector Survey Report, at least 90 percent of respondents indicated that the economic environment in Zimbabwe, including the Indigenisation and Economic Empowerment Act, is largely deterrent to FDI.

While the 2014 National Budget tried to clarify the indigenisation and economic empowerment regulations, highlighting sector-specific approaches under resource-based investments and other investments, this did not resolve the issue with potential investors, continuing to deter FDIs.

The 2015 Budget proposed further clarifications and simplifications. While confirming that the 51/49 percent ownership structure enshrined in the Indigenisation and Economic Empowerment Act applies to all sectors of the economy, the clarification in the 2015 Budget Statement is with respect to the timelines for achieving this, which is left to negotiation between the would-be investor and the respective/ relevant line ministry responsible for the particular sector/sub-sector.

This has not also resolved the issue of leaving this critical issue to discretion. The 2016 Budget Statement reaffirmed the position with respect to the resource sectors that the 51 percent shareholding will be effected through the resource being exploited, at no monetary cost to the government or the designated entities.

With respect to other sectors of the economy outside the resources sector, the Statement simply stated that consultations towards strengthening and clarifying the processes of implementing the indigenisation policies had been completed.

It was left to the minister of Youth, Indigenisation and Economic Empowerment to announce and gazette the frameworks’ templates and procedures for implementing the indigenisation policies in a manner that both promotes investment and eliminates discretionary application of the law before end of 2015.

However, given the sensitivities and controversies around the issue, it is imperative to include all key national stakeholders to provide a more holistic consensus approach and bring finality to the issue.