Alarm over Zim’s fiscal crisis

LIVINGSTONE MARUFU AND CLOUDINE MATOLA

Treasury should enact stringent fiscal consolidation measures to calm the market and manage the escalating budget deficit, economists have warned.

Such steps, they argue, would lead to more disciplined fiscal management  and reduce inefficiencies in public spending, a critical move as the economy faces mounting challenges.

This follows a directive issued by the Ex-chequer this week, instructing ministries, government departments, and agencies to prioritize expenditures for the remainder of the year.

According to George Guvamatanga, Permanent Secretary in the Ministry of Finance, Economic Development, and Investment Promotion, the focus will be on wages and social welfare payments, while curtailing travel-related expenditures as the government try to navigate a constrained fiscal environment, further strained by the sharp depreciation of the local currency, the Zimbabwe Gold (ZiG).

Economist Dr. Prosper Chitambara  told Business Times, a market leader in business, financial, and economic reportage, that  there was a pressing need for fiscal reforms to enhance fiscal efficiencies and sustainability.

“There is a need for fiscal consolidation reforms, especially in terms of public spending  as there are a lot of inefficiencies in terms of public spending that we need to address and eliminate.

By doing so we may create a fiscal space that may finance critical productivity enhancing well being sectors such as health, social protection and education,” Dr Chitambara   told Business Times.

He continued: “Some international financial institutions warn over non-productive spending and there is a need for fiscal consolidation  that ensures better stability  by creating more fiscal space  to invest in critical enhancement sectors of our economy.”

Another economist, Professor Gift Mugano,  echoed these concerns, warning that unbudgeted programmes are exacerbating the fiscal crisis, making it difficult for the government to meet its financial obligations.

He also highlighted that key tax revenue sources, such as the Intermediated Money Transfer Tax (IMTT), have experienced a significant decline in contribution to total tax receipts, falling from 16% to just 3.41%.

“So when you see that kind of a decline from 16% to 3.4% of IMTT, and also for corporate tax declining from 15% to 9,5%, it tells you that government is in a mess,” Professor Mugano said.

He added: “Government must look at ways on how they can rein in the informal sector, how they can increase production, and how they can power the economy in terms of energy,” Prof Mugano said.

Economic analyst Victor Boroma, highlighted the adverse effects of unchecked government expenditure and currency depreciation.

He proposed pegging the 2025 national budget in hard currency and capping expenditure below taxable revenues while cutting non-essential costs such as foreign travel and vehicle purchases.

“It largely reflects the impact of depreciation on the local currency and the uncontrollable government expenditure. It is now necessary to set the budget in foreign currency and for the government to cap expenditure below taxable revenues. Similarly, there is a need to trim non-core government expenditure especially foreign foreign travel, motor vehicle purchases and others.

“This is going to have a negative impact on government suppliers as most of them are left in a very difficult position.  These businesses will go for a very long time without being paid  and their payments are going to be eroded by inflation.

They might be paid when the new budget starts to kick in but we know that in the next two months their payments are going to be delayed and this will affect their cash flow,” Boroma said.

Given that the government is the biggest consumer in the economy it means that there is going to be a slump in aggregate demand in the economy.

“It means there will be a difficult run in terms of cash flows for companies because of that. It has a chain effect on all players   in the economy in terms of  demand  and purchases.

This means there will be a  slowdown towards the year end  but what may happen is that it may offset household consumption,” Boroma said.

Yet another economist, Tony Hawkins  stated that Zimbabwe’s fiscal woes have been evident for some time, citing government  borrowings and unfunded expendires revealed in Reseve Bank of Zimbabwe  (RBZ) reports.

“We can see that from its borrowings, which are published by the Reserve Bank   of Zimbabwe (RBZ) every month.

Secondly, we know that a year ago, when he (Finance Minister, Mthuli Ncube) presented the budget, the Minister said that the applications and the bids from departments were vastly higher than the amount of money that the Treasury could allocate.

“In other words, they under-allocated, and as a result, when you get to the final months of the year, the cash has run out. Also, as I think in that letter, or a version of it that I read, the government said, the Treasury is admitting that there are a number of unfunded expenditures.

All of these factors have come together to squeeze the situation, and they’re trying to cut expenditure in the last quarter,” Hawkins told Business Times.

He added: “We’re going to see arrears building up. Even more arrears, you know, firms not being paid and so forth. We’ve already seen the staggering of the civil service bonuses to try and spread that over time, to give them more money, more time to collect money. And we’re going to see increased government borrowing, which we always knew was going to happen anyway.

They are borrowing from RBZ. We can see that. If you notice what the governor says, the governor always says he’s not lending on overdraft.

But what they’re doing, of course, is just issuing Treasury Bills. And since nobody wants treasury bills, the RBZ takes them up. And that is an effect of borrowing from the government, from the Reserve Bank.”

However, another economist, Persistence Gwanyanya , viewed the Treasury’s directive  as a positive shift towards prudent fiscal management.

“This is clearly a break from the past reflecting that the Treasury is now more realistic  and more responsive to the changing market conditions.Instead, this announcement is seen as giving confidence to the market as it demonstrate preponderance by Treasury to walk the talk,” Gwanyanya said.

Companies are also grappling with a challenging  operating environment .

“As a result, the ZB Financial Holdings (ZBFH) had to make frequent adjustments to its plans and strategies in order to remain afloat in this difficult operating environment,” ZBFH company secretary Tinashe Musiiwa said.

FMHL company secretary Sheila Lorimer, concurred.

“….the gap between the official and alternative market exchange rates widened significantly prompting an official adjustment of the local currency by 43% on 27 September 2024. The devaluation of the local currency had a negative impact on Zimbabwe Stock Exchange listed investment portfolios at the end of the third quarter of the year. The preference by economic agents to utilise the United States dollars when procuring or receiving payment for commodities such as fuel, power, raw materials, as well as human capital and certain statutory payments dented confidence in the Zimbabwe Gold (ZWG),” she said.

As Zimbabwe’s fiscal challenges persist, the call for reforms, disciplined public spending and effective economic policies remains louder than ever.

The outcomes of these efforts will be pivotal in shaping the country’s economic trajectory.

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