What the mid-term fiscal policy must deliver

THE traditional role of a fiscal policy is to influence the direction of the real economy through Government expenditure and its revenue.

Source: What the mid-term fiscal policy must deliver | The Sunday Mail July 17, 2016

THE traditional role of a fiscal policy is to influence the direction of the real economy through Government expenditure and its revenue.

A fiscal policy review provides the authorities with an opportunity to fine-tune the economy towards desired macro-economic objectives.

Achieving desired economic growth, inflation management, employment creation and management of balance of payment position are some of the key macroeconomic objectives of a country.

Economic policies are normally couched around guiding national strategic blueprint(s), which set out the medium to long-term objectives of an economy.

The Zimbabwe Agenda for Sustainable Socio-Economic Transformation is used as an official national strategic planning document for all macroeconomic policies in the five-year period to 2018.

The President also rolled out the 10 Point Plan, which set out the desired environment for all policy formulation.

The key economic issue in Zimbabwe today is how to stimulate the stagnating economy given its unique circumstances.

Normally, a faltering economy is stimulated by an expansionary fiscal policy involving increasing aggregate demand through Consumption (C), Investment (I), net Government expenditure (G-T) and the trade balance (X-I).

Today, Zimbabwe finds itself in a different position to other economies as it is unable to print money to stimulate its economy, due to dollarisation.

On the other hand, the supply side of the economy is severely constrained and thus unresponsive to the fiscal and/or monetary policy stimuli.

There is, therefore, need to balance the virtues of demand management and supply side economic policies.

This involves rebalancing of both the local and external economy.

Economic Rebalance

The imbalances in both the local and external economy have been weighing down the whole economy for the greater part of the new millennium.

Prior to dollarisation, economic imbalances manifested through the twin evil sisters of excessive budget and BOP deficits.

The contractionary effects of these two economic adversaries saw the economy shrink by more than 50 percent before dollarisation.

Economic slowdown experienced since the last quarter of 2012 is largely a result of the unbalanced state of the economy.

The imbalance in the domestic economy is epitomised by the disproportionately high levels of consumption at both private and public sector levels.

With consumption level of around 80 percent of GDP and a civil service wage bill of about 83 percent of budget, the economy is unbalanced.

Given production constraints in Zimbabwe, the high level of consumption naturally results in increased imports.

The persistent trade deficits that characterise our economy are reflective of an unbalanced external economy. These deficits have been haemorrhaging the economy of the much-needed liquidity whilst also contracting it.

This situation makes economic rebalancing more imperative.

Economic rebalancing will involve reducing consumption and imports whilst increasing investment and exports.

Although we agree on the need to rebalance the economy, we may not all on the best way to achieve it.

This put to light the recently implemented Statutory Instrument 64 of 2016, which restricts importation of selected products for commercial use.

SI 64 of 2016

This is a protectionist policy intended to cushion local industry from international competition and help it grow.

The restriction was extended to products that can easily be produced locally such as mahewu, which will ease the pressure on the scarce foreign currency.

If successfully implemented, the policy may result in increased production and partly alleviate liquidity challenges.

An analysis of the new foreign payment mechanism reveal that the available foreign currency can sustain all of the country’s payments in the top priority list, which demonstrate the need to reduce imports as part of economic rebalancing.

However, like with any other protectionist policy, there is risk that the protected industries may remain in the infant stage to the detriment of the whole economy.

In today’s globalised economy where distance no longer matters, foreign firms will always set shop in a country if there is a compelling case to do so.

The case of Delite of South Africa, which recently opened a factory to manufacture cooking oil, bears testimony to this proposition.

This will make it very difficult to continue protecting inefficient firms. However, Foreign Direct Investment (FDI) will only flow into a country where conditions of doing business are sound.

Zimbabwe still has a lot of ground to cover in this area. The above analysis reveals that restricting imports alone is inadequate to solve the challenges of an unbalanced economy.

Given the high levels of consumption in Zimbabwe, measures to curb imports should be complemented by an industry policy that promotes production and exports.

Otherwise curtailing imports would have hard landing ramifications on a number of businesses in Zimbabwe.

There is need to create a business environment that offers opportunities

for production and export and thus accommodate the affected parties.

However, the situation on the ground reveals that little is being done to industrialise the country and boost production.

Below are some of the policy measures expected to be given priority by the expected mid-term fiscal policy:


Normally, investment is driven by savings. Empirical evidence reveals that countries that save more will be able to invest more and grow their economies faster.

Long-term savings such as pension funds and retained profits are key in driving investment. Zimbabwe is currently dissaving due to excessive consumption levels typified by BOP and budget deficits (prior to dollarisation)

The savings culture was also destroyed by the hyperinflation scourge that almost brought the country down to its knees.

This coupled with the high level of informal sector makes it difficult to increase the propensity to save in Zimbabwe.

Also, given the financial constraints in the country and the need to reindustrialise the economy, savings may not be enough to meet the needs of the country.

With budget of US$3,9 billion, assuming that the country devotes 60 percent of it towards investment, only US$2,3 billion can be availed annually.

This is a small amount compared to the amount needed to cover infrastructure deficit of US$15-US$20billion alone.

To achieve increased investment, consumption should give in.

Under the IMF Staff Monitored Programme, the target is to reduce recurrent expenditure to 40 percent of GDP. This will be a tough task given our bloated Government. Trimming Government is also considered unpalatable.

Given this scenario, there is definitely need for some form of economic stimuli, which will boost the economy’s absorption capacity whilst also growing the economy.

External capital, mainly FDI and foreign debt, should step up to the plate in view of limited capital locally.

FDI or debt?

Due to the revenue constraints in the domestic economy, the country has been unhealthily dependent on foreign debt to fund its BOP deficits.

The country’s BOP deficit has been averaging US$3 billion per annum since 2012 and was mainly funded from foreign debt (short term borrowings and creditor finance). Given the high level of debt in Zimbabwe at US$8,4 billion, or 67 percent of GDP as at 30 September 2015, the country can no longer continue to contract more debt without risking falling into a debt trap since the bulk of the debt is in arrears.

Brazenly, the IMF and policy makers alike seem to think that debt will be a viable growth option for Zimbabwe.

The hype created by the conclusion of the Lima Agreement between Zimbabwe and international financial institutions bears testimony to this proposition.

Under the Lima Agreement, Zimbabwe will be considered for fresh debt if it clears its arrears of US$1,8 billion with IFIs.

This is only important in so far as it results in the improvement in the country’s credit ratings.

Given the unbalanced state of the economy there is danger that any new debt will go into funding current expenditures will be undesirable.

There is overwhelming empirical evidence supporting the notion that FDI is a more viable growth option than debt.

The positive association between FDI and economic growth suggest that the former could be a missing link in the country’s growth matrix.

In 2014, Zimbabwe recorded FDI inflows of U$545 million, far lower than South Africa (US$5,7 billion), Mozambique (US$4,9 billion) and Zambia (US$2,4 billion).

The country’s competitiveness is largely weighed down by dilapidated infrastructure, antiquated equipment and machinery, obsolete technology and capacity underutilisation-all of which are a result of the de-industrialisation process that we underwent as an economy.

The mid-term fiscal policy should look at these constraining factors with a view to addressing them.

Also, most importantly, no country can hope to successfully implement product beneficiation and value addition without adequate electricity. Since, it is a capital intensive sector, FDI is therefore imperative.

Economic clusters

Clusters are made up of independent and informally-linked firms, making them looser, less structured and more flexible.

The thrust of economic clusters is to have critical mass in one location of firms that are highly competitive in their particular fields.

Their biggest advantage is that they influence industry competitiveness. Examples of clusters include telecommunication firms in Silicon Valley, California.

There is possibility for a diamond cluster in Mutare where firms in the diamond value chain are located. It is also possible to have a tobacco cluster given our comparative advantage in this sub sector.

Linkages within clusters mean that the whole is greater than the sum of the parts.

Economic clusters can ably attract FDI.

In today’s world, resource-based and low-tech manufacturing is losing global share to medium and high-tech manufacturing.

Globalisation and liberalisation make it vital for enterprises to reach global “best practice” standards.

Failure to do so means that firms cannot survive without protection and barriers to imports-SI 64 of 2016.

The country’s rebalancing equation will not be complete without enhancing measures to boost exports. Exports can only be boosted through beneficiation and value addition.

To make herself competitive, Zimbabwe needs adopt a weaker currency — rand.

Whether the rand will be well received by the market given its volatility remains highly debatable.

Bond notes

It is debatable whether the five percent export incentive scheme in the form of bond notes will effectively boost exports, as there are a number of constraints to production and exports in Zimbabwe.

To fully draw on the US$200 million facility that is backing the bond notes, the country needs to export goods and services worth US$4 billion.

If we assume that the average annual exports of US$3,6 billion achieved between 2010 and 2015 are maintained into the future, the country needs slightly more than a year to exhaust this facility in export incentives and bonuses.

This means that the export incentive scheme will also have a life of slightly more than one year, unless an additional facility is established to support the scheme.

This, plus the cost of the Afreximbank facility, calls for a re-look at the export incentive scheme.

In fact, exporters may need the assurance offered with economic certainty hence the need to conclude the issue of bond notes expeditiously.

Government should play its role in promoting the use of plastic money given that it owns the bulk of institutions in the country.

All parastatals and Government institutions should embrace plastic money.


Persistence Gwanyanya is an economist, banker, and member of the Zimbabwe Economics Society. He writes in his personal capacity. Feedback: percygwa@gmail.com and WhatsApp +263773030691