‘Don’t forget fiscal, monetary policies’

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SINCE November 2017, when president-elect Emmerson Mnangagwa took over from Robert Mugabe, the thrust of the new administration has been re-engagement with the international community in a bid to encourage foreign direct investment.
All the while, business, economists and analysts have intensified calls on government to address the shortcomings in the country’s fiscal and monetary policies, calls which appear to have been ignored.
Mnangagwa’s administration seems to have made some considerable progress in re-engaging the international community with its “Open for Business” drive that is claimed to have attracted up to $20 billion in investments and commitments, but the fiscal and monetary problems have, however, persisted without much indication of improving.
IH Securities (IH), a local research firm, in a report published this week, recommended that government implements fiscal austerity measures starting with those outlined in Finance Minister Patrick Chinamasa’s budget statement in December last year.
“Employ fiscal austerity measures where superfluous government spending and borrowing is cut … Strictly following through with plans to reduce government expenditure by cutting employment costs would be a significant step towards reducing fiscal deficit, and thus curbing debt by suspending the issuance of TBs to fund government expenditure,” reads the report.
Persistence Gwanyanya, an economist, concurred with IH, saying there is urgent need for government to deal with fiscal imprudence.
“What needs to be done going forward is very plain and simple ― government needs to reduce expenditure and implementing the various austerity measures outlined in the budget last year would be a very good start,” he told The Financial Gazette this week.
Apart from suppressed domestic and foreign investor confidence, Chinamasa has blamed the poor performance of the economy on “indiscipline in the management of public finances” which, he says, transmits to vulnerabilities in foreign exchange generation and availability.
“Moreso, the fiscal imbalances are being financed through Treasury Bills and overdrafts with the Reserve Bank of Zimbabwe (RBZ), with destabilising consequences on overall macro-economic instability. Our quest for reversing economic decline and eradicating unemployment and poverty can only become a reality if we walk the talk with regard to adoption of a paradigm shift in the way we do business and manage our economy, public enterprises and finances,” he said in his budget statement.
Chinamasa availed in the budget a number of “fiscal anchors” that the ministry envisaged would strengthen fiscal discipline. The anchors included fiscal deficit targeting, setting restraints on the level of public debt to Gross Domestic Product (GDP), limiting government borrowing from the central bank and reducing the public wage bill.
During the first half of the year, there has not been much indication of follow through on the asserted measures. All indicators point to government missing its fiscal deficit target while no apparent efforts have been extended towards restraining public debt level and government borrowing from the central bank.
To reduce the public wage bill, the minister had proclaimed retirements, recruitment freezes and other measures. But any progress that could have been made during the course of the year was probably undone by the civil service salary hikes implemented in July which pushed the wage bill’s contribution to public expenditure beyond 90 percent.
Turning to the monetary policy, IH recommends the sterilisation of money supply to curb inflation which has raised its head once again over the past two years.
“Sterilise broad money supply, that is RTGSs, to curb inflation and demand for hard currencies,” the research firm said.
Between January and May this year, money supply grew by about $700 million or 10 percent, from $7,8 billion to $8,6 billion. Last year money supply increased by about 40 percent from $5,7 billion in January to $8 billion in December.
Meanwhile, Gwanyanya said limiting government borrowing is a priority if this aspect of the monetary policy is to be dealt with effectively.
“Transferable deposits or RTGS money has also been increasing as the supply of Treasury Bills has increased over the past two years as government borrowing continuously increased … Limiting government borrowing is also a priority, there are statutory limits to government debt as a percent of GDP and we have a statutory limit on the RBZ overdraft facility, up to this point, these have been violated and if we fix this we will be making good progress,” the economist said.
The World Bank and British research firm BMI Research have also warned that the country’s inflation could breach five percent by year-end if government borrowing continues unrestrained.
The IMF’s projections for the country’s inflation also fall within the levels expected by the World Bank, its interpolation is also largely based on expectations of unrestrained government borrowing which, it says, would limit inflation if addressed.
It is without doubt that the country’s economy is desperate for foreign capital confidence and the just ended harmonised elections will be key in how that turns out. As the jury is still out on this situation, with Europe and America still to make definite judgments on the credibility of the polls and with the MDC Alliance’s court appeal still to be heard, it remains unclear how the country’s external environment will be like going forward.
It, however, remains clear that the government of the country, however it is going to be constituted going forward, will have to extend efforts to deal with problems within the realm of the domestic environment and the fiscal and monetary policies should undoubtedly take priority.
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