2019 BUDGET REVIEW FOR SAAA PERSISTENCE GWANYANYA ECONOMIST

2019 BUDGET REVIEW FOR SAAA PERSISTENCE GWANYANYA – ECONOMIST AND BANKER

FROM AUSTERITY TO PROSPERITY ØThe recently announced budget statement reveals an economy in bad fiscal space and needing urgent intervention. ØThis economy is characterized by currency instability, occasioned by fiscal imbalances. ØAddressing these fiscal imbalances require austerity as well as revenue boosting measures. ØThis fiscal adjustment will set the platform for currency reforms needed to attract investment. ØSo, there is no easy way out. e

UNPACKING AUSTERITY MEASURES ØThese measures will take the form of reduction in wage bill, parastatal reforms, reduction in Gvt support programs and more operational efficiency. ØNo new measures to talk about-Minister picked a lot from previous budget. ØCoordination and proper implementation will be the major differentiator ØThis is why the new output rather than input principal was necessary as it fosters accountability.

AUSTERITY MEASURES CONT… ØThese measures will take the form of reduction in wage bill, parastatal reforms, reduction in Gvt support programs and more operational efficiency. ØIn what could be viewed as a way to show commitment to the implementation of austerity measures, Senior Government officials including the President and Cabinet Ministers will have their basic salary cut by 5% from the beginning of next year. Ø However, there is still scope to reduce the wage bill to the recommended 60% of budget through reduction of allowances that make up about 40% of it. Ø.

AUSTERITY MEASURES CONT… ØIn line with the thrust of creating a private sector driven economy, Government support programs such as Command Presidential Input Scheme, which chewed about a billion since last year, will be gradually reduced as private sector participation increases. ØIn the same vain, Zimbabwe Asset Management Company (ZAMCO), which has so far acquired more than US$1 billion nonperforming loans, will no longer be acquiring any new nonperforming loans.

AUSTERITY MEASURES CONT… ØA reduction in these commitments will go a long way in reducing expenditure overruns, noting that Government borrowed about US$4 billion through mainly Treasury bills (TBs) in a space of a year to support these as well as election related expenses of about US$1 billion. ØOther expenditure reducing measures such as rationalization of service mission, public service retirements, and implementation biometric register for civil servants, effective management of vehicle fleet, reduced foreign trips and retirement of 2 917 youth officers will see a reduction in budget deficit to 5 percent of GDP in 2019.

REVENUE BOOSTING MEASURES ØTogether austerity measures, revenue boosting initiatives are expected to reduce budget deficit from 11. 7% of GDP in 2018 to 5 & 4. 1% in 2019 & 2020. Ø Revenue flows will be boosted by the 2% transactional tax. Ø It was necessary to adjust other tax heads mainly for the formal sector e. g. PAYEE and Income Tax Ø A small adjustment on PAYEE was effected-minimum taxable amt increased from US$300 -350 and cap increased to US$20 k where tax rate of 45% apply. Ø We feel an adjustment on the minimum taxable amt as well as maximum tax was necessary to lessen tax burden on poor and reduce inflation risk.

NATIONAL DEBT REMAINS AN ALBATROSS Ø At US$17. 69 billion as at August 2019, national debt remains an albatross in the country’s neck. Ø Domestic debt rose from nowhere in 2012 to US$9. 54 billion. Ø Its financing, through mainly TBs and overdraft on RBZ which stood at US$6. 2 billion and US$2. 5 billion in August, is the main challenge. Ø External debt, which stood at US$8. 14 billion in August 2018, is equally a problem given the foreign currency challenges. Ø Treasury has already indicated that the multilateral institutions, who are preferred lenders, are happy with the current efforts to resolve their outstanding balance of US$2. 6 billion. Ø However, debt is not a viable growth strategy for the country today.

EXCHANGE RATE AND INFLATION VOLATILITIES Ø It’s worrying that the exchange rate and price volatility is driving the economy towards de-dollarization Ø Cash premiums, which are currently around 250% largely explain the spike in inflation to 21% in Oct from 5% the previous month Ø This calls for permanent solution to our currency problem. Ø The current bond/US$ exchange rate peg is no longer delivering results.

COMMITMENT TO MULTIPLE CURRENCY Ø As foreign currency problems persist, Treasury has affirmed its commitment to maintain the multiple currency regime, ostensibly to cushion the poor, through prioritization of foreign currency allocation to towards essentials. Ø The formation of a Foreign Currency Allocation Committee is seen as a measure to improve transparency in the allocation of this scarce commodity. Ø Equally, the levying of duty in foreign currency on motor vehicles as well as increase of exercise duty on diesel and paraffin by 7 cents per litre and 6. 5 cents on petrol, is seen as a measure to preserve foreign currency as these two are seen as major consumers this scarce commodity. Ø The former policy doesn’t affect commercial vehicles. Ø its also not in sync with the bond concept of 1: 1.

NO EASY WAY OUT Ø Austerity is a euphemism for pain, so we have to endure the pain before things get better. Ø I have always argued that, faced with the need to tighten the belts, it’s difficult for one to project a robust growth. Ø As such the revision of growth projections to 4 and 3. 1 percent in 2018 and 2019 from the STP projections of 6. 3 and 9 percent is unsurprising. Ø Unfavorable weather conditions are also seen as weighing down the growth projections