by Justice Zhou
How best can a broke and debt-ridden government in Zimbabwe fix its economic problems in the run up to crucial elections in 2018?The answer, according to economists, is very simple: it must cut back on reckless spending, reduce the budget deficit and repay the money it owes to lenders.
Structural reforms would be unpopular, but a necessary evil for a country whose economy is weak, with a yawning budget deficit, high unemployment and declining revenues. This is despite President Robert Mugabe, who was expected to defend his rhetoric to the hilt for obvious reasons anyway, insisting the country wasn’t fragile at the just-ended World Economic Forum on Africa in Durban.
And the term"reforms”, by itself, is probably the global lender IMF’s polite way of telling Mugabe’s government that it must carry out fiscal consolidation and austerity measures before help in the form of loans could be offered.
The budget deficit for this year is projected to be roughly $400 million, accounting for 3 percent of GDP. Normally, a government would finance a shortfall by borrowing from capital markets or major lenders, but the prospects for credit availability aren’t looking very good at the moment.
For instance, Zimbabwe will have to reduce the size of its civil service or curb the wage bill, restructure state-owned enterprises and cut back on reckless borrowing, among other cost-cutting measures.
That would definitely mean that a huge elephant is in the room for the finance minister, Patrick Chinamasa, who now has to try to strike the balance between the structural improvements and his waning party’s competing political needs.
The next elections are barely a year away, so spending cuts would obviously be deemed to be self-defeating and unpopular among the ruling party elites. In the months leading to polls, Zanu Pf has often ensured there were freebies to lure voters, even if it meant the cash-strapped government was living beyond its means.
Shrinking tax base
Perhaps one of the biggest catches is how to boost revenues when the corporate sector has hit the skids, unemployment has spiralled, and as a result, the tax base rapidly shrunk. In a desperate bid to make up for the drought of revenues, Chinamasa has revealed his intentions to go after informal businesses, but that even does not seem to be encouraging.
However, fiscal consolidation and austerity sometimes don’t always yield the desired results. They may worsen the situation and result in lower tax revenues. Sometimes they may cause a possible risk of stalling economic growth if attempts to balance the books by tightening the fiscal purse are made.
State-owned companies, the so-called parastatals, have for a long time been the centre of political patronage and ensuing corruption, proving to be a drain on state coffers. With no scrutiny at all as to how funds at loss-making state firms are managed, executives still pocket hefty salaries and perks, raising the ire of the opposition politicians.
The health of Zimbabwe’s banking system has increasingly become the focus of attention, with calls for closer supervision as a number of smaller lenders recently collapsed. Reserve bank authorities maintain the system is safe and sound, and smaller banks posed no systemic risk.
Calls by the IMF would be a litmus test for the treasury chief, who has to get the approval of his party on whether to forge ahead with the structural reforms that the global lender requested him to carry out.
But Mugabe’s government will rue the day when it discredited donors and threatened to enforce laws that would compel foreign investors to surrender part of their shares to locals.
The legacy of that political rhetoric continues to linger even as desperate efforts are being made of late to dispel it, amid investor fears. Confidence has, as a result, been at the lowest ebb, while investment and foreign exchange inflows are increasingly drying up.
The lack of foreign capital has prompted the government to depend mainly on tax revenues to support its budget, 90 percent of which is gobbled by civil service salaries.
As the economy slows down and some companies lay off workers or halt operations altogether, critics have lambasted Chinamasa for failing to rise to the occasion and rein in the shrinking tax base, high unemployment and the crippling cash crunch.
To make matters worse, limited infusions of the dreaded bond notes have not helped stem the cash crisis as initially intended by the central bank.
The flight of capital and smuggling of cash may have largely contributed to the cash crisis. But the situation would have been much better had earlier calls by economists for stricter measures to stem the needless importation of consumption goods, which also led foreign exchange shortages to spiral out of control, been heeded.
At the same time, Mugabe’s possible departure from office is increasingly looming due to his advancing age and deteriorating health. This has sparked sharp disagreements within his Zanu Pf party by factions jostling to take over from him.
The infighting has heightened political risk, prompting investors to keep withholding their money, perhaps hoping that a new leadership after Mugabe’s exit from power will usher in a safer and friendlier environment to do business in the southern African country.
In what it hoped was a landmark achievement towards being allowed to resume borrowing after a 15-year stand-off, Zimbabwe finally cleared its outstanding arrears with the IMF in 2016.
If reports that the country is also on the verge of settling the $1.75-billion arrears it owes the World Bank and AfDB are anything to go by, the government would have pulled out a dramatic surprise, because nobody knows how it managed to obtained this amount of money.
The treasury has projected the economy will grow at a pace of 3.7 percent this year, compared with a 3.8 percent forecast by the World Bank. The IMF has revised down its projection to 2 percent, from an initial 2.5 percent estimate.
Claims that the country will have a bumper grain harvest for the first time since the chaotic land reforms at the turn of the millennium also remain to be proved, a development expected to ease cash shortages as imports for the cereals will hence not be required.
