‘Govt urged to be frugal on fiscal spending for stability’

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Zimbabwe should maintain a tight grip on fiscal discipline to ensure macroeconomic stability going forward, amid a projected strong economic rebound next year after a difficult 2024 that has been throttled by an El Nino-induced drought, according to the World Bank.

With growth rates of 6,1 percent in 2022 and 5,3 percent in 2023, Zimbabwe is one of the fastest-growing economies in Southern Africa according to the bank, due to an expansion in agriculture, mining and remittances-induced services growth.

Both the World Bank and the International Monetary Fund say the Southern African nation will register one of the quickest growth rates in 2025, at 6 percent, from an estimated 2 percent this year.

The World Bank said this in its latest update on Zimbabwe, updated on October 18, 2024 and detailing the economic situation, opportunities and challenges to development in the country.

Real gross domestic product growth is expected to decline to 2 percent in 2024 due to the El Niño-induced drought that ravaged most crops in the agriculture-driven economy, lower mining prices and macroeconomic instability.

“Ongoing power shortages have contributed to decreased industrial growth and disrupted winter irrigation,” the World Bank said.

While inflationary pressures have ‘moderated’ since the introduction of the ZiG, the World Bank noted, the exchange rate continued to be under pressure, “as evidenced by a sizable devaluation in late September 2024”.

Zimbabwe introduced its gold-backed currency in April this year to replace the inflation-battered Zimbabwe dollar, as part of a coterie of measures to tackle persistent high inflation pressures.

The currency volatility limits formal sector production and undermines companies’ and individuals’ planning, the multilateral lender pointed out.

“Macroeconomic pressures also persist on the fiscal side. The transfer of RBZ’s external debt to the Treasury, together with increased capital spending in 2023, has resulted in steep increases in the Treasury’s debt servicing costs,” the World Bank noted.

Zimbabwe’s Treasury said last week that the country’s total sovereign debt stood at US$21 billion as of June. External obligations make up 48 percent of the liabilities. This includes about US$3,4 billion Treasury inherited from the central bank last year to avoid unbudgeted money printing to pay off the debts, which it suspected was behind sustained currency volatility.

According to the World Bank, Zimbabwe is among countries saddled with the highest debt burdens, which the global lender says continues to consume significant resources, depriving key areas such as key infrastructure, human capital development and health.

Although the country registered some improvement in its Government debt to gross domestic product (GDP) ratio from 96,6 percent last year to 87,2 percent in 2024, the World Bank contends that the debt level remains too high and a detriment to national development.

The country’s debt situation was significantly lower and stagnant between 2010 and 2019, at 38 percent of GDP but rose rapidly to reach 100 percent of GDP by 2022.

Zimbabwe is also likely to remain under severe pressure due to the impact of the El Nino-induced drought, which resulted in more than 70 percent of the country’s rain-fed crops being declared write-offs.

President Mnangagwa declared the situation a state of national disaster, with about 7,5 million people deemed food insecure.

However, in what would signal planned and inevitable need for increased fiscal spending, the President declared that no-one would die of hunger, but the interventions may have unintended consequences on the economy.

“At the same time, the drought has increased fiscal pressures for drought-response and undermined tax collection. As such, fiscal consolidation and discipline are key to macroeconomic stability going forward,” the World Bank said.

Commenting on the issue, Persistence Gwanyanya, an economist and member of the Reserve Bank of Zimbabwe Monetary Policy Committee ,said the Government had invested a lot in key infrastructure, which was a critical foundation for growth going forward.

He, however, rued the fact that the investment in the key economic enablers was financed from short-term money, due to limited funding options, a scenario that has led to excess liquidity that often undermines economic stability.

“Ideally, the infrastructure should be funded from long-term funding. As such, that will continue to present risks to (economic) stability. That instability could be a threat to growth going forward. We do not seem to have found solutions to that (short-term funding) issue,” he said.

Against this backdrop, Gwanyanya said the Government needed to continue to explore more judicious ways of managing the creation and flow of excessive liquidity, which undermines durable stability.

Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, said in his mid-term budget review that the budget deficit was projected at 1,3 percent of gross domestic product this year.

This, apparently, falls well with the SADC guidelines on macroeconomic stabilisation.

Due to the developing nature of most economies within SADC member states, fiscal balances have fluctuated wildly over the past decade, the regional block says.

With the liberalisation of regional economies, SADC’s Annex 2 of the Protocol on Finance and Investment set out deficit targets for member states.

Member states were encouraged to achieve ratios of budget deficit to Gross Domestic Product (GDP) of less than 5 percent by 2008, decreasing it to less than 3 percent by 2012 and maintaining that ratio through 2018.

The central bank, as part of its tight monetary policy stance, last month increased the bank policy rate from 20 to 35 percent and standardised statutory reserve requirements on call and demand deposits from 15 and 20 percent, respectively to 30 percent.

Source: Business Weekly