ZCTU Critique Of The 2019 Mid-Term Fiscal Policy Review And Supplementary Budget

Introduction

The mid-term fiscal policy review and supplementary budget statement was unveiled by the Minister of Finance and Economic Development on 1 August. The country is facing its worst crisis in 10 years with serious shortages of cash, water, power, fuel, wheat, maize. Economic growth slowed down from 4.7% in 2017 to an estimated 3.5% in 2018 against a target of 6.3% contained in the Transitional Stabilisation Programme (TSP).  The economy remains constrained by a lack of confidence (and trust); infrastructural deficits; political instability and institutional weaknesses among others. According to the World Bank Global Economic Prospects for June 2019, economic growth is projected to decline by -3.1% in 2019 making the country the worst performing economy in SSA. This places the country in an unenviable position negatively affecting the country’s investment prospects. TSP targets growth of 9.0% in 2019.

The country has also witnessed a worsening of the power outages with deleterious effects on the rest of the economy. Most businesses and organisations have been forced to rely on generators as a backup, resulting in an unsustainable increase in production costs threatening the viability of most business organisations. Businesses have also had to reduce operating hours negatively impacting on production/output. Some businesses have reportedly been forced to lay off part of their workforce as a way of reducing costs in order to remain viable. The austerity measures being implemented in the country have disproportionately affected the working class and the ordinary citizens with nominal incomes remaining largely stagnant while in real terms incomes have been grossly emasculated by a combination of rising inflation and high taxes.

The majority of the citizens don’t have access to social safety nets necessary to mitigate the deleterious impact of the fiscal austerity. Moreover, government social spending remains very small accounting for only 4% of total fiscal spending during the first quarter of the year. A critique of the current macroeconomic thrust of ‘austerity for prosperity’ is that it inordinately focuses on the attainment of macroeconomic stability as an end in itself at the expense of employment creation and poverty reduction. It has been observed in many countries that, obsession with eliminating fiscal and current account deficits, if achieved through cutbacks in public expenditure, especially on development and social services, can retard the process of growth and result in an increase in poverty.

Ensuring pro-poor and inclusive economic growth requires that the people and their needs come first, implying a human-rights strategy to development. Thus, the prioritisation of people and their basic needs (such as food security, healthcare, education, housing, transport, access to public utilities, decent jobs and infrastructure) should occupy pride of place in macroeconomic policy.

  1. Review of the Fiscal Framework and Outlook

 

Monthly revenue collections for the first half of the year amounted to ZWL$5.0 billion, against expenditures of ZWL$4.2 billion resulting a cumulative budget surplus of ZWL$803.6 million. This nominal surplus increase is indicative of the chronic high inflation which remains the biggest challenge to achieving macroeconomic stability in the country. Tax revenues at ZWL$4,880 million, account for 98% of total revenues. This is indicative of the high tax rates prevailing in the country which have negatively affected economic confidence and eroded competitiveness.

Total public expenditure during the first half was ZWL$4.2 billion against a target of ZWL$3.7 billion, representing over-expenditure of ZWL$532 million (15%). Worryingly, recurrent expenditures continue to account for the lion’s share of total fiscal expenditures at 79%, with only 21% spent on capital projects. Employment related expenditures account for about 52%. This is however expected to decline to 30% by year end. In terms of social service delivery, $62.5 million was disbursed towards education, health as well as other social protection programmes during the first quarter. This represents about 4 per cent of the total expenditures. This is reflective of the fiscal austerity for prosperity thrust of the government.

Total public expenditure for the year are now projected at ZWL$18.62 billion consisting of ZWL$5.56 billion ((30%) employment costs and ZWL$7.08 billion towards capital expenditures (38%). Government spending on social sectors remains grossly inadequate. Health accounts for 6.5% of total expenditures for the year, below the Abuja Declaration target of 15%. Primary and secondary education accounts for 8.0%, below the Dakar Declaration target of 20%. Lands and agriculture accounts for 24%. Energy accounts for 0.5%. Transport and infrastructure accounts for 6.2%. Defence accounts for 5.9%. The inadequate public financing of health has resulted in an overreliance on out-of-pocket and external financing which is highly unsustainable.

A current account surplus of US$196 million was registered during Q1 of 2019 compared to a deficit of US$491 million for the same period in 2018. Broad money supply (M3) growth averaged about 60% in May 2019 up from about 45% in April 2019. This is unsustainable in the light of declining economic output. Zimbabwe’s external and domestic debt stock stands at US$8 billion and ZWL$8.8 billion respectively. The huge external debt remains an albatross around the neck of government’s reengagement efforts. The sluggish pace of the implementation of key economic, institutional and political reforms has also bogged down the reengagement efforts.

While in nominal terms macroeconomic performance seems to have improved, in real terms (when one takes into account the effect of inflation) the gains are seriously eroded. This explains why government paradoxically had to issue a supplementary budget in the midst of the ‘supposed’ budget surplus. There is also an apparent disconnect between the nominal economic numbers on the one hand and the real situation on the ground on the other hand. For instance, in spite of the budget surplus, the social and humanitarian situation in the country remains quite dire with gross underfunding of key sectors such as public health and social protection.

  1. Review of Tax Measures

While the review of the employees’ tax free threshold from ZWL350 to ZWL$700 per month, this new figure is below the PDL of ZWL$924 for the month of April. The ZCTU has always maintained that the tax-free threshold should be linked to the PDL.  The TNF in 2001 resolved that the income tax free threshold be linked to the prevailing PDL. Taxing someone earning below the PDL is not only immoral but also regressive.

The immediate upward review of electricity tariffs and the increase in excise duty (ad valorem) on fuel to about 45% and 40% per litre of petrol and diesel respectively up from an average about 19% and 16% respectively will have an immediate knock on effect on the inflation. The 2% tax will also now be levied on the transfer of money between Mobile Money Transfer Agents and Recipients. Government is projecting month on month inflation to fall to below 15% by August 2019. This is however unlikely to be realised in light of the foregoing. Government service fees have also been increased by on average about 400% which is also expected to exert severe inflationary pressures which could result in the country sliding into hyperinflation.

The decision to discontinue the publication of annual inflation numbers until February 2020 is very unfortunate and smacks of dishonesty. This is because domestic prices already factored in to a very large extent the black market premium, a major driver of inflation since 2016/2017.

 

  1. Conclusion

The country has now been classified by the World Bank as a lower middle income country with a gross national income (GNI) per capita of US$1,790 in 2018 up from being classified as a low income country in 2017 with a GNI of US$910. This is however largely academic as it does not necessarily entail an improvement in the standards of living of the people on the ground. In fact, anecdotal evidence actually shows that the incidence of poverty is growing whilst income inequalities are also rising. The TSP is underpinned by the vision ‘Towards an Upper Middle Income Country’ by 2030. Importantly, attaining upper middle income status and ensuring pro-poor, inclusive and sustainable development are not the same. Indeed the country can attain upper middle income status by 2030 without necessarily reducing poverty and ensuring that economic growth is pro-poor, inclusive and sustainable. What is needed are macroeconomic policies that put citizens at the centre and forefront of development as both agents and beneficiaries. Such policies must necessarily prioritise the provision of socio-economic rights and not rely on the ‘trickle down’ from economic growth. In most cases economic growth is hardly sufficient to ensure any meaningful trickle down.

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