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Paddington Masamha: ‘Austerity for Prosperity’ Fiscal Measures: Zim Tussling For Economic Transformation (Part 1)

By Paddington Masamha

Zimbabwean leaders are legendary for establishing public melodies which attempt to stimulate their policy intentions. ‘Austerity for prosperity’ is the current fiscal authorities’ catchphrase. Nonetheless, the mere adoption of an optimistic mantra does not necessarily guarantee the attainment of economic policy objectives. 

Paddington Masamha
Paddington Masamha

Empirical country case studies generally broadcast different austerity economic outcomes. World-wide country experiences exhibit that the austerity outcomes have largely depended on the specific ‘monetary environment’ in which such measures are implemented.

In Zimbabwe for instance, austerity was launched within a multi-currency regime. However, the dominant currency was the bond note which had a 1:1 parity peg with the US dollar. In October 2018 at the time of the TSP austerity introduction; the economy was plagued with a severe currency crisis. Foreign currency black market activity was widespread. The inescapable inflationary spiral tormented the nation.

From the time of his appointment, it was expected that the new Minister of Finance and Economic Development, Professor Mthuli Ncube would come up with a monetary solution to the Zimbabwean currency crisis. Having denounced the surrogate currency before his appointment, the public expectation was that of bond note demonetization as an instant antidote. Instead, the bond note has morphed into a Zimbabwean currency.

On the 27th of February 2019 the Minister of Finance and Economic Development, through a document titled, “GOVERNMENT’S PROGRESS ON POLICY REFORMS” endorsed the RBZ’s 20 February MPS statement.

The new monetary policy measures, ‘specifically introduces a new currency called the RTGS dollar, which includes electronic balances in banks and mobile platforms, bond notes and coins’ as reported on Page 9 paragraph 35. The capacity for austerity to catapult the economy into a genuine recovery path is undeniably partly dependent on the monetary environment. 

Austerity basically entail the reduction in government spending, increases in taxes and or both. In basic terms, it is the equivalent of a contractionary fiscal policy stance. Whenever a government is faced with the inability to pay its debts, austerity is the usual policy direction. A debt burdened government will introduce huge spending cuts and or increase taxes so as to reduce the gap between expenditures and revenues of the national budget statistics.

When Zimbabwe was faced with the inability to pay its debts, a liquidity crisis and reduced economic activity; the fiscal authorities on 5 October 2018 introduced the Transitional Stabilisation Programme (T.S.P.) whose main theme is, “Towards a Prosperous & Empowered Upper Middle Income Society by 2030.” The 2019 budget running under the banner of ‘Austerity for Prosperity’ seeks to buttress, reinforce and corroborate the T.S.P.  reform agenda.

Approximately six months after the T.S.P. policy promulgation, the empirical strength of the policy propositions is becoming an area of increasing economic contestation. Depending on their audience, the policy formulators (and implementers) have been exhibiting conflicting signals. To the international media, the prosperity gospel takes centre stage.

Locally, the fiscal authorities are backtracking and changing timelines. The variance between austerity economic promises and reality on the ground is very significant, if not predominantly adverse.

This opinion piece seeks to provide a mini-cost benefit analysis of the motherland’s new policy direction.

Austerity Short-run Benefits

Holding criticism constant, the original intention of increasing taxes was to try to boost the government’s revenue base. The Zimbabwean fiscal authorities have been collecting the 2% transaction tax from the majority of the financial transactions. The justification for replacing the 5cents ($0.05) per transaction tax system with the 2 percent tax per USD value transacted was mainly to widen the revenue collection base.

Evidence from the Minister of Finance and Economic Development basically point towards the direction that significant amounts are being collected and the expectation of proper use of the increased revenue collections will soon pay dividends.

Basing on the publicly available statistics, it is reported that ‘US$52.5 was raised in November and US$103.8 in December 2018 giving a total of US$166.2 million for 2018’ and  US$98.5 million was collected in the month of January 2019. The expected 2019 total revenue collections just from the IMTT, is projected to be US$600 million. This statistic basically represent an average IMT tax collection of $50million per month.

The current MOF on the 1st of October 2018, through his Fiscal Measures for Reversing Fiscal Dis-equilibrium embarked on various measures to effectively and efficiently collect government revenues. Quoting his words the Minister said, ‘…in order to enhance governance at ZIMRA, I hereby terminate the term of the current Board with immediate effect…’ On the 19th of December 2018, a new ZIMRA board was appointed.

Though l have strongly argued such a move was a political strategy to appoint trusted lieutenants, there is strong evidence from the fiscal authorities that such a move has bolstered the revenue collection efforts.

The main trigger of the ZIMRA board changes was mainly to ‘improve on revenue administration.’ Additionally the MOF anticipates the new board to, ‘…spearhead the recovery of outstanding debts and other strategic interventions to improve efficiency of the authority.’

Tax expects have always argued that ZIMRA has been consistently reaching revenue targets and the main problem has not been the collections themselves but the unabated leakages.

Thus associating the current increased revenue with a 19 December 2018 board appointment is rather a simplistic viewpoint. Instead, the board success should be evaluated maybe after a year of being in office. Thus in the interim period, increased revenue collections particularly the last quarter of 2018 are partly explained by the new IMT tax.

Recently following the devastating impact of cyclone Idai, the Ministry of Finance and Economic Development released $50million for Emergency and Infrastructure Restoration. The funds disbursement are expected to be utilised for rescue efforts, rehabilitation of rural infrastructure such as roads, bridges, water facilities, educational institutions, heath, electricity and essential rural facilities.

Through its various arms such as Civil Protection Unit (CPU), roads department, relevant ministries such as health and education; the funds disbursement is projected to go a long way in resuscitating the rural lives which have been grossly affected by the devastating cyclone.

Fiscal authorities posit evidence which demonstrates that the nation is slowly moving in the positive direction with regards to the containment of government expenditures. Basing on the MOF’s public discourse, the gap between monthly government revenues and the concomitant expenditures is slowly starting to converge.

Going forward, it is hoped that the commitment to the full implementation of the proposed fiscal retrenchments and the proposed revenue boosting measures will ultimately shrink the government budget deficit.

The MOF publicly announced that ‘government is cash positive’ and the nation is ‘spending what we have.’ As reported, the expenditure management and revenue enhancing measures have been realizing resounding success stories.

For instance, the ‘monthly budget deficits declined from US$651.2 million in August 2018 to US$39.8 million in September and US$242.1 million in November’ and a probable surplus of US$732.7 million is the likely statistic for the month of December 2018.  

However, the fiscal progress particularly for December and January window cannot largely be relied on to establish an economic recovery trend. Basically, the two mentioned months are characterized with reduced industrial activities (e.g. industry usually closes early December and reopens mid-January) hence economic activities particularly imports are likely to have declined in such off-season periods.

By and large; through the TSP fiscal consolidation measures, the Zimbabwean government has made significant progress is terms of cost containment on the major expenditure pressure points such as; treasury bills, public wage bill, civil service bonuses (13th cheque payment), government freeze on hiring non-critical staff and the procurement of parliamentary and ministerial vehicles.

Specifically, it is reported that ‘…government has since stopped the issuance of additional Treasury bills at the end of October 2018, except roll overs…’ The Zimbabwean domestic debt has largely been driven by the unsustainable practice of Treasury Bill issuance and the government over-reliance on the RBZ’s overdraft facility.

Previously, government was over-borrowing from the fiscal pocket hence violating the 20% statutory borrowing limit. As such, the crowding out-effect (funds meant for private sector expansion has been in the hands of government) has been inescapable. In most circumstances, the TB collections have largely been financing recurrent expenditures as well as consumptive borrowings.

For that reason, the MOF’s public announcement of the discontinuation of such an un-productive practice is not only a welcome development but if sustained will surely crowd-in private sector investment. Furthermore, it will further ensure that the ‘…government spends within its means and within the Budget.’

On the 5th of October 2018, the TSP tabled a proposal to reduce the government wage bill. The 27th of February 2019 Ministry of Finance and Economic Development report titled, “GOVERNMENT’S PROGRESS ON POLICY REFORMS” reports the government success story pertaining to the previous year’s policy propositions. Specifically it is reported that ‘government successfully retired 3 188 youth officers’ which ‘translates into monthly remuneration savings of US$395 per each Officer.’

Consequently, basing on this statistic; government could have saved USD$1 259 260.00 of monthly salaries. Going forward, assuming the ruling party respects this disbanding of a youth wing; the national finances will have been freed from unnecessary leakages. The national youths have largely been utilized for political mileage by the ruling party for various party businesses such as election campaigns. Relinquishing their power base (without a concomitant creation of a new political strong hold), is certainly groundbreaking.

An additional wage bill reducing measure is the 5% salary cut for senior government officials. The MOF has reported that starting January 2019, the proposed measures were effected. As such, a ‘…5% salary cut for senior Government Officials from the level of the Principal Directors and their equivalent grades up to the Presidium…’ is now fully operational. Whilst this is presented as a significant sacrifice by the fiscal authorities, the major public concern is largely placed on the fruitless international travels.

Basically, the MOF and the President have been on a global offensive in their endeavor to reposition the Zimbabwean brand. However, miniature progress has been made from these expensive travels.

Profoundly, it is public knowledge that government officials are not salary reliant but largely ‘cash-in’ on travel and subsistence allowances (with the amounts getting heftier particularly for overseas missions). For that reason, the usual statistical conclusion is that the 5% salary cut cost savings are more than outweighed with the expensive government travel expenses. 

A positive development which the MOF advanced in 2018 was the cost saving of US$75 million emanating from the civil service 13th cheque payment adjustments.

Starting December 2018, the fiscal authorities have made a new commitment to pay civil service bonus ‘based on the basic salary excluding the allowances.’ This new measurement thus excludes the transport and housing allowances which have been traditionally summed up with the basic salary to calculate the 13th cheque.

In aggravation to that, the fiscal austerity program has introduced a government freeze on hiring non-critical staff. The wage bill reduction strategies are aligned to the government’s primary intention to right-size public employment, rationalize posts in the public service and part of strategies to strengthen wage bill management. However, to guarantee the efficient provision of education and health service; fiscal authorities have, ‘…approved the hiring of additional staff of 1 816 in health and 3 000 in education starting 2019.’

This development is largely driven by the long-term strategic vision to nurture developmental initiatives which are anchored on human capital development. The new focus on human capital development is largely motivated by the IMF’s new policy focus on ‘human capital.’

Through the 2019 national budget, the fiscal authorities have made a public commitment to prioritise ‘investment in education and health as the main route to harnessing the demographic dividend.’ Such policy initiatives are largely long-run objectives and hence evaluated better in the long-term.

The issue of the procurement of parliamentary and ministerial vehicles is the main concern of the public. Basing on the reports given by the fiscal authorities; ‘…government went further to suspend procurement of ministerial and Parliamentary vehicles despite it being contractual obligation…’ Basing on the tone within publicly available government reports; the only thing to applaud is merely the ‘delayed vehicle purchases’ but government is still obligated to perform on the contractual obligations.

The public interest is mainly concerned with the number of vehicles each government official is entitled to, the make and model of such vehicle entitlements. Given that Zimbabwe is currently in an austerity phase, the public expectation was for the ‘political leadership to forfeit their contractual obligations’ or accept less expensive vehicle models.

Given that the MOF inherited a fiscal pocket which was hemorrhaged and weighed down with a ballooning budget deficit, on its face value such a positive development should be applauded. The positive cash position however should not be celebrated much given that a series of draconian taxes were levied on the poor masses. Practically, government expenditure has not reduced but the revenue side is now bolstered by the 2% IMT tax and the January 2019 fuel tax collections.

Emanating from a foreign trade perspective, there has been reported evidence of having a significant decline in the marginal propensity to import. This decline in imports has mainly been triggered by the import control measures that have been instituted by the fiscal authorities.

For instance, the regulatory requirement that car import duties are payable in foreign currency has grossly reduced the demand for the second-hand vehicles (commonly known as Ex-Japs). Over and above that, the overall aggregate demand within the economy has been significantly suppressed with the bundle of taxation measures that have been invoked since October 2018.

The 2019 budget has also been hailed for the tax relief measures which include the review of the tax-free threshold from US$300.00 to US$350.00, the suspension of customs duty (and also exempt from VAT) the sanitary wear products for a period of 12 months, the redirecting of 5% of Third Party Insurance Cover to an Accident Compensation Fund, the requirement that government Ministries and Departments must remit all revenue collected into the Consolidated Revenue Fund and the Suspension of customs duty on selected goods used by the physically challenged persons.

Such fiscal milestones have however been adjudged to be necessary conditions and have thus not been viewed as fiscal privileges meant to cushion the general populace.

Moreover, given the adoption of new monetary measures starting on the 20th of February 2019; the US$300.00 to US$350.00 tax thresholds have been rendered invalid. For instance, an employee who before the announcement was earning US dollar denominated salary would naturally expect the tax thresholds to change with the income depreciation percentage of 250-300%.

Zimbabwe has been gripped by an inflationary spiral which worsened between October 2018 and January 2019. However, the reported figures for the month of February largely exhibit that the month to month inflation rate was 1.67%. The expectation of the MOF is that inflation would fall from the current year-on-year rate of 59.39% to a single digit by year end.

This scenarios however, disregards the monetary developments of 20 February 2019. Evidence on the ground basically demonstrate that though RTGS dollar is now the pricing currency, traders within the market have exorbitantly re-priced their commodities. As such, a single digit inflation rate is an ambitious target.  

In the interim period, the much needed state owned enterprises and parastatals reforms are largely futuristic stratagems. Probably by December 2020, this writer will again do another TSP cost-benefit analysis and discuss the economic policy progress.

Commendable progress has also been realised with regards to institutional and political reforms. Specifically, the repeal of POSA and AIPPA will not only be a great political development (through opening up of the democratic space) but is the much needed political improvement which incubates the respect of economic freedom and civil rights.

Both locally an internationally, Zimbabwe still has a long struggle ahead. The unfortunate killings of innocent civilians on 1 August 2018 during the post-election violence and similar brutality during the January 2019 fuel price protests make the objective for international re-engagement a mammoth task. The commitment to improving easy of doing business together with the ‘Zimbabwe is Open for Business’ mantra is a welcome melody but needs substantial economic and political transformations for it to bear fruits.

The TSP is still at its implementation infancy. The publicly available government reports point towards the direction that indeed austerity measures are realizing some prosperity. The article motioned the short-run austerity benefits. In the course of presenting these short run benefits, the writer momentarily overlooked the shortcomings of the austerity measures.

Paddington Masamha is an independent Financial and Economic Analyst. He can be reached on email [email protected] and Twitter @PMasamha