HARARE, September 7 (The Source) – Finance minister Patrick Chinamasa on Thursday presents the mid-term fiscal policy review with the economy unravelling rapidly, compounded by rising civil unrest over President Robert Mugabe’s management of the country.
Zimbabwe’s economic revival, which saw an average growth of seven percent between 2009 and 2012, has come off following President Mugabe’s disputed re-election in 2013.
Chinamasa has five key challenges to address.
The foreign debt albatross
Zimbabwe is trying to emerge from years of international isolation and desperately needs to woo back international lenders.
The southern African nation remains a Foreign Direct Investment (FDI) leper, receiving just $510 million of the $5 billion worth of FDI that the region got in 2015, according to the United Nations Conference on Trade and Development.
But it has to settle a foreign debt of $8,3 billion, of which $1,8 billion is in arrears.
It owes $110 million to the IMF, $600 million to the African Development Bank and $900 million to the World Bank.
Its re-engagement process was predicated entirely on being able to secure new funds from the lenders before the end of the year.
How is Zimbabwe going to repay the debts?
It has so far missed its self-imposed deadline of June, which would have opened the possibility of IMF loans – the first since 1999 – in the third quarter of the year.
In July, Zimbabwe reportedly clinched a deal with the African Export-Import Bank (Afrexim) and U.S. investment bank Lazard to “mobilize” $1,1 billion to clear some of the debt, opening up the possibility of accessing credit.
But the IMF has emphasised the need for overhaul of economic policy and a plan for debt sustainability before it considered disbursing funds.
Rationalising the civil service
The Zimbabwe government spends 83 cents of every dollar it collects on salaries for its workers, estimated at 500,000 with recurrent expenditure in 2016 seen at 92.1 percent of budget.
Under the 15-month staff monitored programme (SMP) — an informal agreement between a government and IMF staff to monitor the implementation of its economic reforms — Chinamasa pledged to sharply cut its public sector wage bill to 52 percent of expenditure by 2019 to improve fiscal discipline and promised wider reforms aimed at streamlining expenditure and boosting investment in productive sectors.
But with many of Zimbabwe’s traditional industries closing and the remaining companies struggling, patience is wearing thin among the restive population. Independent analysts put Zimbabwe’s jobless rate northwards of 90 percent, which, coupled with an economic meltdown and cash shortages, have led to a series of protests and the biggest show of public dissent against Mugabe’s rule in a decade.
The government is facing its biggest financial squeeze since it dumped its hyperinflation-hit currency in 2009 and adopted the US dollar, and has, for the past three months, failed to pay its workers on time.
Culling the bloated civil service is a political gamble, but one Chinamasa needs to take.
The Public Service Commission – a government department responsible for hiring state workers, has already said that it would abolish 8,252 posts out of 19,235 jobs in the agriculture ministry.
In the 2016 budget, Chinamasa also proposed to reduce ward staffing levels for the youth and women’s ministries.
It’s a start, but these are low hanging fruits. How about cutting down the size of the bloated executive and ministries?
Falling revenue and a huge budget deficit
Zimbabwe’s budget is entirely funded by taxes as international lenders stay away but the collapse of its manufacturing industry, the worst drought in a quarter century, low mineral commodity prices that have hit exports and lack of foreign investment have seen revenue collection falling below target.
The Zimbabwe Revenue Authority said taxes for the January to June period amounted to $1,65 billion, below the projected $1,75 billion. Compared to the same period last year, collections were down nine percent.
The economy continues “to ride on choppy waters,” noted the ZIMRA chair, Willia Bonyongwe.
Chinamasa last November put the expected budget deficit for 2016 at $150 million – compared to $400 million last year — which was to be financed from local borrowings but that figure is likely to be higher due to poor revenue collection performance.
Government has become more reliant on Treasury Bills to fund recurrent expenditure, but last month, Old Mutual Securities, a unit of the Zimbabwe Stock Exchange-listed financial services giant, Old Mutual Limited warned that these have become risky given the tight fiscal space.
Reserve Bank officials privately estimate the current amount of local debt in the form of TBs at over $4 billion, most of which is attributable to the Finance Ministry through its Public Debt Management Office. The $4 billion gap is equivalent to the size of the entire 2016 national budget.
The central bank’s own schedule showed the growth of its TB securities held by commercial banks from $325,7 million in January last year to $1,126 billion in February this year.
Building societies held $65,6 million from $51,8 million over the same period.
In the first quarter, government projected domestic loan repayments of $678,6 million and a budget deficit of $150 million, result in a financing gap of $828,6 million for the year. How will Chinamasa plug the gap?
The reform of Zimbabwe’s 91 state-owned companies — most of which are underperforming — has been on the agenda for a long time but, in Chinamasa’s own words, government did not have “the energy or the resources.”
At their peak, state enterprises contributed up to 40 percent of the country’s gross domestic product (GDP), but they have been dragged down by legacy debt, corruption and mismanagement.
But worryingly, the government has been preying on the few of these enterprises that are cash-rich. Broke and unable to fund its operations, government is allowing line ministries to raid parastatals under their care for money.
Across government, parastatals last year forked out at least $12 million dollars to fund Ministries that were failing to get money from Treasury for operations. None of the payments were authorised by Treasury.
The case at the Ministry of ICT, Posts and Courier Services reflects the extent of the crisis. The ministry used money from the Posts and Telecommunications Regulation Authority of Zimbabwe (POTRAZ) and state owned mobile firm NetOne to buy condition of service vehicles for Minister Supa Mandiwanzira and his deputy Win Mlambo with approval from the Office of the President and Cabinet (OPC) but without the nod from the Ministry of Finance.
In April, Chinamasa said government had targeted 10 parastatals for priority restructuring. They include Air Zimbabwe, Cold Storage Commission (CSC), Civil Aviation Authority, National Railways of Zimbabwe (NRZ), Agricultural and Rural Development Authority (ARDA) and the Grain Marketing Board (GMB).
But questions remain whether government is sincere about its promise to reform public enterprises, when it is itself leeching off the same struggling companies. Arising from this is also the question of government expenditure — which evidently runs into millions of dollars -– hidden in the accounts of the parastatals.
Cash crisis and bond notes
Government clearly intends to go ahead with the plan to introduce bond notes above the objections of a sceptical public. How will the market react to what Mugabe has called a “surrogate currency”?
Analysts point out that when government eventually adopted a basket of multi-currencies to replace the hyperinflation ravaged local unit in February 2009, the market had long rejected the Zimdollar.
On announcement on May 4, the Reserve Bank of Zimbabwe said the bond notes, backed by a $200 million facility from the African Export and Import Bank (Afreximbank)y were part of measures to ease the cash shortages.
It has since repackaged them as incentives for exporters, who will now get five percent extra on every dollar earned from external sales.
But the market is still bearing scars still fresh from the bearer cheque printing frenzy that fuelled hyperinflation to a record 500 billion percent and led to loss of pensions and lifetime savings. However the government may phrase it, bond notes are a local currency by another name. The fears that the ghost of 2008 may come back to haunt Zimbabwe are legitimate. Is it time to consider switching to the Rand, ditch the US dollar and abandon the bond notes?