Sanderson Abel, Business Correspondent
Fiscal policy involves the use of Government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs. To this end, it is a tool that is meant to change the pattern of spending on goods and services and by which a redistribution of income and wealth can be achieved in the economy. Fiscal policy is usually complemented by other government policies including monetary policy, industrial policy, trade policies among others.
In Zimbabwe, the public finance has been precarious with revenue generation of the fiscus heavily compromised. The Government has been able to maintain a near balance budget over the last three years with revenue being equal to expenditure.
This was mostly as a result of the cash budgeting system where the Government had to stay within the budget without overruns. This budgeting system meant the Government did not seek recourse from the banking system to finance its recurrent expenditures hence avoiding the crowding out system. The Government only resorted to the financial system when it borrowed from old mutual and NSSA to finance the constitutional referendum and this resultantly squeezed resources from the whole financial system hence crowded out private sector expenditure.
The cash budget system is commendable though it has the disadvantage of constraining the Government expenditure especially the delivery of social services and infrastructural development. Salaries and wages continued to consume the bulk of the resources generated leaving little for programming purposes.
The efficacy of fiscal policy to stimulate economic growth in the country has become centre of controversy among the various stakeholders in the country: academics, business people, labour and other critical stakeholders especially after the adoption of the multi-currency system in 2009. Of major concern t to the whole debate has been the issue around fiscal space which has been reducing government ability to manoeuvre.
Fiscal space can be defined as the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position (IMF). Usually, the idea is that in creating fiscal space, additional resources can be made available for some form of government spending (or tax reduction). In principle, there are different ways in which a government can create such fiscal space. Additional revenues can be raised through;
1. Improving on tax measures or by strengthening tax administration.
2. Lower priority expenditures can be cut in order to make room for more desirable ones.
3 Resources can be borrowed from domestic sources
4. Resources can be borrowed from external sources.
5. Governments can use their power of seigniorage (that is, having the central bank print money in order).
Looking at the above options shows that the Government is not able to use the majority of the options due to the structural challenges currently facing the country. The multi-currency system adopted by the Government closed the door to the printing of money in the country. Not only has this option closed this door but it has also reduced to greater extent the availability of monetary policy instruments which the central bank uses to compliment fiscal policy.
Currently, the Government is buoyed by an external debt of more than US$10 billion of which the majority of it the Government is in arrears. Given this scenario the majority of international sources of credit have since blacklisted the Government hence no new lines of credit are available to the country hence compromising the ability to finance infrastructural development. It becomes critical at this juncture that the current discussions as tabled in the staff monitored programme as this has the potential to unlock some of the international lines of credit as the majority of the lenders take a cue from the Bretton Woods institutions.
The domestic money markets continue to be characterised by great deal of illiquidity emanating from the lack of sources of liquidity as the majority of them continue to under-perform. The sources of liquidity under the multi-currency system are usually the export proceeds diaspora inflows, offshore credit lines, foreign direct investment inflows, and capital transfers including grants. All these sources have not been perfectly improving the liquidity in the economy as the country has money supply of only US$4 billion.
The effect of the Government trying to finance its operations from this source was ample when the Government borrowed to finance the constitutional referendum, the whole economy felt the heat as the crowding out effect gripped the whole economy. The Government borrowed (US$40 million) from Old Mutual and NSSA and the banking sector was deprived of the same amount which could have gone to productive use and this was felt throughout the economy.
Given the structure of the country’s expenditure, it is very difficult to streamline expenditure. The recurrent expenditure is dominated by the wages and salaries accounting for 71 percent of total expenditure (as of June 2013). This implies that the Government can reallocate all other expenditure within the remaining 29 percent to cater for other recurrent expenditures and capital expenditures.
International best practice requires that capital expenditure should be around 25 percent of the national budget but the current fiscal policy set up cannot allow this to happen as it will the government with no room to manoeuvre with other recurrent expenditures.
Given the limited fiscal space and the huge infrastructure deficit facing the country, alternative infrastructure financing options will be required to ensure scaling up of infrastructure investments.
Presentation of the Fiscal Policy Statement on Thursday by the Minister of Finance and Economic Development is not an easy task but must do task.
Lower priority expenditures can be cut in order to make room for more desirable ones is a political decision which requires the government of the day needs to make, as defined by its agenda. This equals the standoff currently obtaining in the United States of America between the Democrats and the Republicans on where resources should be channeled. Given our scenario and the developments past years will show that almost all sectors need attention in one way or the other.
Fiscal Performance in the Multi currency regime
Year Revenue Expenditure
2009 0.934 Billion
2010 2.008 Billion 2.239 Billion
2011 2.998 Billion 2.972 Billion
2012 3.640 Billion 3.647 Billion
Currently, the prevailing situation shows the situation is not going to change in the fiscal circle since revenues are now projected to grow to US$.437 billion and US$ 4.965 billion in 2014 and 2015. The implication of this trajectory is that the current scenario of the domination of the expenditure by the labour costs will continue and little development will be implemented in the country.
International best practice requires that employment cost take up around thirty percent of the total expenditure hence the government should come up with measures that will reduce the current unsustainable wage to total cost ratio in the forthcoming years.
This will go a long way reducing the compromised effectiveness of government operations, financing of various planned public investment projects and programs. Moving forward it is also important that the fiscal authorities avoid budget overruns since this has the potential to lead the government abandoning the cash budgeting system and resorting to the money marketing financing which will consequently lead to crowding out effect hence increasing the cost of funds for the private sector.
It is important to note that the current government initiative is in the right direction especially for enhancing the fiscal space.
Government efforts towards normalizing relations with the international community and current efforts in respect of the Staff Monitored Program with the IMF are particularly commendable. Given the potential of this program to unlock resources for the country, the government needs to pursue this in letter and spirit. It is also important that the debt issue be resolved. Resolving the debt issue; hence implementation of the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS) should be prioritized as it will show the level of commitment of the government.
Presentation of the Fiscal Policy Statement on Thursday by the Minister of Finance and Economic Development is not an easy task but must do task.
- Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. He can be contacted on abel@baz.org.zw <mailto:abel@baz.org.zw> or on 04-744686, 0772463008