The pertinent questions from the 2018 budget that remain unanswered

Finance Minister Patrick Chinamasa

HARARE,– If all goes according to plan, finance Minister Patrick Chinamasa’s 2018 budget will be remembered chiefly for its promised repeal of the Indigenisation Act, except for the diamond and platinum industries.

Just why these two groups should be treated differently from the rest of the economy will, no doubt, be made clear in the forthcoming parliamentary debate.

That vital aspect – not in itself a fiscal measure – aside, the budget is more a story of good intentions than of concrete measures. The tax changes are minor. The government remains committed to reviving industry via greater protection and a wider array of incentives. But even then, on Treasury’s own forecasts, manufacturing is going to grow only 2% after 1% growth in 2017.

Policymakers should heed US economist Dani Rodrick’s advice that the basis of a sound industrial policy is a competitive exchange rate. Zimbabwe is trying to offset an uncompetitive exchange rate by greater resort to protection and subsidies, while simultaneously reneging on its obligations under treaties with SADC and COMESA, as admitted by Chinamasa in his speech.

The same Minister who a year ago promised to reduce the 2017 deficit by $1 billion from $1.4 billion to $400 million, but increased it to $1.7 billion, is once again promising a $1 billion deficit reduction. In a year in which inflation will reach its highest level since the bad old hyperinflationary days of 2008, this is an ambitious — indeed unlikely — prospect especially in an election year.

Projected 2017 tax revenues of $4.3 billion are 16% higher than targeted in the budget a year ago with company tax revenues $88 million (26%) above budget and VAT up $143 million (14%). However, revenue growth of 16% to 17% in both 2017 and 2018 – four times the rate of GDP expansion – suggests that there is much more inflation in the system than the officially estimated 3%.

In 2017, spending at $6 billion is $1.9 billion or 46% above estimate, while next year spending is projected to fall 5% to $5.7 billion, mostly due to a $370 million (24%) cut in capital expenditure. Recurrent spending will rise marginally but there will be a 4% reduction in employment costs, which will account for 76% of tax revenues, down from 90% in 017.

The budget numbers show that in a year in which total spending will decline by $300 million, government borrowing will increase by $2 billion to $8.2 billion. If the budget deficit is reduced by $1 billion to $670 million, why will the government need to borrow another $2 billion? Obviously, quasi-fiscal operations, notionally abolished when the GNU was in office, are alive and well.

In contrast, private sector borrowing will rise by just $400 million to $4.5 billion, which means that in 2018 government with 66% of total borrowing will “crowd out” the private sector.

None of this approximates the “strong adjustment” measures which the IMF in its July 2017 Article IV report on Zimbabwe said are necessary to set the economy on a path of sustained growth. Without such adjustment inflation would reach 30% in 2018, it said – a far cry from the budget estimate of 3%.

Money supply grew 41% in the year to September 2017 and with nominal output growing 10% (at best) inflation in 2018 is likely to be far above 3%, especially when the 50% devaluation of the currency in the parallel market is factored into the equation.

No-one can seriously have expected strong adjustment in an election year. This budget confirms that we are not going to get it. Nor, it would seem, are we going to get increased savings in a year in which inflation will rise sharply while Minister Chinamasa and no doubt RBZ Governor Mangudya, pressure the banks to lower interest rates. Policymakers, it seems, have short memories. The lessons of negative real interest rates during the hyperinflationary years have already been forgotten

The Minister was silent on the critical issue of the exchange rate. The hard truth is that a sustained economic revival depends on the country having a competitive exchange rate. Measures such as increased protection for industry, local content regulations and the 5% export subsidy are sticking plaster solutions, while “internal devaluation” – a slow and lengthy process- depends on effective measures to cut government spending and borrowing.

Also missing was a serious discussion of the debt situation. The Minister spoke optimistically about re-engagement with the international community and the resurrection of the Lima arrears clearance plan, but he did not dwell on the domestic debt crisis.

This is hardly surprising. After all, when Mr Chinamasa took over as finance minister in 2013, domestic debt was very small. Less than 5 years later, on his watch, it has surged to $6 billion, growing at 0.8% of GDP each month and set to increase by another 30% next year.

Worse still this is foreign currency debt, meaning that the distinction in the official figures – and that includes IMF reports – between foreign and domestic debt is artificial. The debt is denominated in US dollars, which cannot be inflated away as the Zimbabwe dollar debt was in the early 2000s.

The primrose path is paved with good intentions. Mr Chinamasa’s promises of a New Economic Order are welcome, but turning these into actuality is a different matter. That the same singers are singing different songs may – hopefully – mean that they accept that for 38 years, over which time real per capita incomes have fallen, they have been getting it wrong. Alternatively, it may mean that their conversion to something closer to economic rationality has more to do with survival instincts than recognition of their accumulated past failures.