Austerity has achieved goal: Mthuli

Prof. Mthuli Ncube

FINANCE and Economic Development Minister Professor Mthuli Ncube says the Government’s austerity measures have thus far achieved a significant portion of the milestones Treasury had targeted.

However, a recent International Monetary Fund (IMF) mission to Zimbabwe for Article IV Consultations concluded that policy actions were still urgently needed to tackle the root causes of economic instability and enable private-sector led growth.

It said the key challenge pertained to the need to contain fiscal spending consistent with non-inflationary financing and tightening monetary policy to stabilise Zimbabwean dollar exchange rate and start rebuilding confidence in the national currency.

But Minister Ncube contends that, thanks to the austerity measures, the Government’s finances were now in a much healthier state, enabling it to meet most of its obligations and adhere to the approved budget.

The austerity measures have also entailed growing Government revenues, especially through improved ordinary tax revenue and the 2 percent intermediated money transfer tax introduced last year.

In fact, while Government has faced some challenges regarding tax collections, the money transfer tax has performed wonders, helping Treasury post budget surpluses in the six months to July, and Minister Ncube says the tax is here to stay.

With improved finances, Treasury has not used the Reserve Bank of Zimbabwe (RBZ) overdraft window, which by December 2018, left the Government with a $3,5 billion exposure to the bank.

The funds were part of money that fuelled unbudgeted Government expenditure and contributed to building up of money supply growth, which has been blamed for fuelling inflation.

Zimbabwe’s annual inflation raced from 5,39 percent in September 2019, just before onset of reforms, to 175,6 percent by June 2019, as prices rampaged amid a US dollar crunch.

The country also continues to be dogged by shortage of foreign currency for key imports like fuel and power, which sees hours of rolling blackouts, low exports and industrial output as well as high cost of finance and production, among others.

“We have not borrowed a cent from the RBZ and here we are with two months to go; I do not even intend to borrow; we are not interested, if the Reserve Bank is independent, you don’t use it as a cash box,” he said.

Minister Mthuli made the remarks in a presentation to editors of various media organisations in Harare on Wednesday, however, pointing out that the TSP’s missed targets included the rising inflation and rapid money supply growth.

But again he said with the better state of Government finances, Treasury was now able to meet critical financial obligations, including paying its workers’ salaries and other benefits on time, although some still clamour for interbank rate linked wages.

“There is a time before I started when civil servants did not know when they would get paid. Remember that moment; now they know. They are getting paid on time; they are getting a bonus (this month),” he said.

For the first time in a long time, the minister said, Government finances were in good hands and in a sound state. He dismissed claims of the public finances being in shambles.

Austerity measures have also resolved the other of the twin deficits; trade imbalance, which the finance minister said had narrowed on the back measures that include US dollar tax on vehicle imports.

The US dollar tax revenue on imports that include vehicles has helped in raising foreign currency for importation of critical things, for instance the medicines as well as fertilisers.

“It has also contained the current account deficit; we need that to be contained plus the fiscal deficit; so that we can support currency stability. If you have problems with those two areas, that will contribute to currency instability for sure, but that is not the sole panacea for currency stability,” he said.

But the IMF said in September risks to budget execution included demands for further public sector wage increases, quasi-fiscal activities of the RBZ that should be absorbed by central Government, and pressure to finance agriculture, which could push budget deficit back into an unsustainable stance.

Overall, however, Minister Ncube said IMF was impressed with the depth and amount of reforms Zimbabwe has instituted since October last year under the Transitional Stabilisation Programme (TSP).

“But people have asked me to say but Minister, at what cost; inflation. Inflation is our cost; there is always a cost to reforms; that has been our cost; inflation. But our target as Government is to stabilise the currency; at US$1 to $15, we keep it there; fine, we are competitive,” he said.

He said after stabilising the currency, it was critical to de-link it from pricing.

“That is what has been driving prices. But also we are aware that it’s not just an issue of stability; it’s the issue about cash availability that also pushes prices up,” Minister Ncube said.

Treasury says it is also aware of the acute shortage of cash within the economy, which the authorities say will be addressed over the next 6 months through gradual injection of doses of notes and coins.

“But then it should be done properly, we have agreed that it’s a currency swap, swap literally RTGS dollars for cash. Put simply, the central bank says give us your RTGS, here is your cash equivalent,” he said.

Electronic balances to be cancelled in exchange for physical cash.

Minister Ncube said the cash and RTGS dollar swaps would reduce money supply growth, as swapped electronic dollars would then be cancelled. The process will start over the next two weeks.

He said the reintroduction of Zimbabwean dollar, through Statutory Instrument 142 in June this year, was probably the last leg of the monetary reforms.

“That’s probably the last major step in macro reforms; that’s it. That is why we are declaring that this era of intense, tough reforms and austerity is over.

“We are now switching the budget to enhancing productivity and growth, competitiveness and job creation; I repeat job creation,” he said.

This will entail specifics such as rebates. Minister Ncube bemoaned the impact the two natural disasters of Cyclone Idai and the drought have had on the economy, which are partly to blame for the 6,5 projected economic decline.

“Don’t underestimate the impact of this drought. Don’t underestimate the impact of the cyclone; in fact we did not only have one, but two; Idai and Kenneth. Don’t underestimate the impact of the power cuts from the drought.

“Even when we were calibrating the SMP (staff monitored programme), the IMF and ourselves we didn’t fully take that into account when we were coming up with the targets,” he said.

As such, given the impact of the two natural disasters, the 2020 National Budget will largely contain stimulatory measures to engender growth. With regard to supporting agriculture, Treasury says banks would support farmers under Smart Agriculture Concept while Government will only step in to provide guarantees for security. This relieves Government of pressure to avail huge amounts of financial resources at a time banks were not lending on the back of 99 year leaves, which they deem unbankable security.