Zimbabwe: Is the government’s strategy of balancing the books paying off?

By Farai Shawn Matiashe
Posted on Wednesday, 7 July 2021 11:01

Zimbabwe's finance minister Mthuli Ncube arrives to present 2021 national budget to parliament in Harare, Zimbabwe, 26 November 2020. REUTERS/Philimon Bulawayo

The Zimbabwean government is hyping the country's good headline statistics, but the country's economic problems – no new aid from development institutions amidst high inflation, high unemployment and high levels of poverty – remain unchanged.

In early June, President Emmerson Mnangagwa’s government boasted of a budget surplus of $Z9.8bn ($19.5m).

The announcement of the budget surplus by finance minister Mthuli Ncube came amid a report by the World Bank that projected economic growth in Zimbabwe will reach 3.9% in 2021, a significant improvement after a two-year recession.

The World Bank cited a bumper harvest that is expected to boost food security for families in rural areas, as one of the contributing factors to the country’s growth.

Mnangagwa took to Twitter to boast of his economic policies.

This is not the first time that Ncube has claimed the country had a budget surplus since he took the finance ministry portfolio in 2018.

Unlocking more financing

Economic analysts believe this is a strategy by Ncube to unlock more funding from multilateral partners.

“The strategy of the government is to balance the fiscal books and probably ingratiate itself with these international financial institutions as a way of unlocking more financing,” Prosper Chitambara, a senior economist at the Labor and Economic Research Institute in Harare tells The Africa Report.

Since 2019, we have operated based on a cash budget with a small surplus. Salaries have been reduced as a percentage of tax income from 97% in 2018 to 40% now.

But new help from those institutions is not likely soon.

In a June report, the International Monetary Fund wrote: “A Fund financial arrangement would require a clear path to comprehensive restructuring of Zimbabwe’s external debt, including the clearance of arrears and obtaining financing assurances from official creditors; a reform plan that is consistent with macroeconomic stability, growth and poverty reduction; a reinforcement of the social safety net; and governance and transparency reforms.”

“The government is trying to use this as a way of unlocking financing by multilateral partners or even bilateral partners. Normally, these partners would prefer to put resources in an economy that is being better managed concerning the issue of balancing the fiscal books.”

Chitambara says having a surplus would put Zimbabwe in a good state in terms of financing with international financial organisations such as the World Bank and the International Monetary Fund, as well as bilateral partners.

Why the budget surplus?

A Harare-based economist, who spoke on the condition of anonymity for fear of reprisal, says aside from the 2030 upper-middle-income status goal, the strategic focus is on inflation and the exchange rate.

“To do that the government has frozen public spending. This helps explain the deterioration in government-provided services, not just health and education, but also physical infrastructure of all kinds – roads, railways, electricity and water and sanitation, housing and the national airline,” he says.

The economist says the government has handed off most of its duties to the private sector. Middle- and upper-income households are increasingly seeking private education and healthcare as well as using solar power rather than state-provided electricity.

He adds the government has also dropped real wages in the public sector. “Although the number of people in government employment has increased, the total public sector wage bill was lower in 2020 than in the three years from 2016 to 2018.”

Cash crunch

Eddie Cross, an economist and former Reserve Bank of Zimbabwe monetary policy committee member, says that in 2018 the state decided to revert to cash budgeting and only spend what it earned in tax revenue. This was to avoid the massive fiscal deficits experienced in the mid-2000s as well as from 2013 to 2017, when it reached 40% of state expenditure.

“Since 2019, we have operated based on a cash budget with a small surplus. Salaries have been reduced as a percentage of tax income from 97% in 2018 to 40% now,” he says.

“The finance ministry is committed to maintaining that position, which means that they can only increase civil servants’ salaries when the revenues increase,” adds Cross.

Revenue rise

The anonymous economist says that public spending dropped in real terms and revenue doubled.

“All of this means that taxpayers – and the bulk of taxes are indirect, meaning they are levied on the entire community in form of value-added taxes, money-transfer tax, customs and excise duties, among others – are paying more for less. Real revenues are up 100% and real spending down 3%,” he says. “It is no wonder that Ncube can boast of a budget surplus.”

The economist says the strategy is to starve the economy of money – stagnant spending, higher taxation and the halving of the US dollar money supply – to maintain the exchange rate.

“In fact, the money supply in United States dollars – at $270m in February 2021 – was half its value in 2016, which was $564m and lower than in 2018,” he says.

Inflation nation

Zimbabwe slowed its inflation rate to 162% in May this year, after having recorded 838% in July last year – the highest in a decade.

In 2020, an estimated 500,000 jobs were lost in the country while almost a quarter of pupils dropped out of school, according to the World Bank.

Covid-19 has exposed the structural weaknesses in our economy concerning high levels of poverty, inadequacies to social protection and public health.

The World Bank’s latest economic and social report shows that 7.9 million Zimbabweans, nearly half of the population, fell into poverty between 2011 and 2020 due to continued elevated prices and a slow recovery of jobs and wages in the formal and informal sectors worsened by Covid-19.

Breaking waves

The Harare-based economist says the current economic rebound may start to lose momentum under the pressure of the third Covid-19 wave and weaker commodity prices internationally.

“This means that government spending will accelerate on the back of money printed by the central bank. Unless carefully managed, the inflation and exchange-rate gains of the last year will then start to unravel,” he says.

Zimbabwe has started to put some of its cities and towns under strict lockdown due to rising Covid-19 cases.

As of 5 July, Covid-19 had infected more than 56,000 people while claiming the lives of 1,911.

Though the Mnangagwa-led government boasts of having rolled out one of the best Covid-19 vaccine programmes in Southern Africa, only 571,721 people have so far received their second dose of the vaccine.

Spending priorities

The Labor and Economic Research Institute’s Chitambara says there is a need to ensure that the government harness the budget surplus to finance critical productivity-enhancing and poverty-reducing sector such as health.

“Covid-19 has exposed the structural weaknesses in our economy concerning high levels of poverty, inadequacies to social protection and public health. We need to ensure that we are plowing these surpluses into these sectors. For me, I am even comfortable with running a deficit but ensuring that we finance the welfare of the public,” he says.

For decades the ruling party, the Zimbabwe African National Union-Patriotic Front, has managed to maintain itself in power despite a dismal economic record that includes falling incomes and high levels of unemployment and poverty.

The anonymous Harare economist concludes: “Zimbabwe’s leaders are confident they can continue to maintain this situation by throwing money at the rural population, though not for schools, health facilities, roads, water and electricity among others especially in the run-up to elections every five years.”

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