The Battle of the Budget

When the GNU Government was sworn in 2009, the new Minister of Finance had a daunting task – total revenues to the State from all sources in 2008 had been just US$280 million. All schools were closed, the average wage of a Civil Servant was just US$5 per month and over 75 per cent of the population was on food aid.

In the next four years the economy was to bounce back and revenues recovered rapidly – to US$900 million in 2009, US$1,7 billion in 2010 and US$2,8 billion in 2011 peaking at just short of US$4 billion in 2012. If we assume that we were collecting about 25 per cent of GDP then the derived GDP for those years would have been $3,6 billion in 2009, $6,8 billion in 2010, $11.2 billion in 2011 and then $16 billion in 2012.

Biti managed the overall budget by adjusting Civil Service salaries in line with the available resources and started by paying just $50 per month to the Service, holding the percentage spend on salaries and pensions at about 60 per cent of the budget. He argued consistently that our tax rates were high compared to other regional States and that we should be spending about 30 per cent on salaries with 60 per cent going to other demands. In all four years he ran a small budget surplus – although he was not servicing our debt obligations.

When the control of the budget reverted to Zanu PF following the 2013 elections, they immediately applied pressure on the budget to meet their elections promises. Most prominently was the decision to pay nearly a 30 per cent increase in salaries in the third quarter of 2013. This immediately plunged the country into a fiscal crisis and the new Minister of Finance has been desperately trying to bridge the gap between revenues and expenditure ever since.

The full impact of this crisis is only now emerging and in the budget statement to the House of Assembly on the 27th of November, the extent of the budget deficit has become apparent. After showing a small (about 1 per cent) budget surplus in 2012 and 2013, the budget deficit in 2014 has grown to over $1 billion or 27 per cent of revenue and 21 per cent of expenditure. Under “normal” circumstances a 5 per cent deficit is regarded by economists as being sustainable.

In circumstances where the State is unable to borrow from abroad because it is in default with all major creditor States as well as all the multilateral agencies, this was clearly a problem and you can see how the Minister has covered his tracks by looking at how active the Ministry has been in issuing Treasury Bills with varying maturity rates to organisations with surplus cash who were in no position to say no. The result is that the Ministry has suddenly accumulated very large quantities of Treasury Bills that are now in the market and being traded. One side effect is that long term money supply has grown and some economists have stated that this suggests the economy is expanding.

Nothing could be further from the truth. A simple quick analysis of the revenue side of the 2014 budget (revised to take into account 10 month’s actuals and two months estimates) shows that overall revenue is down 10.76 per cent – VAT down 24 per cent, and Excise duties down 30 per cent. These numbers suggest that consumer spending is down by about 30 per cent and there is simply no way that the economy is growing – not even at the modest 3,2 per cent indicted by the budget office or the IMF/World Bank.

If I use my simple indicator of 25 per cent of GDP for calculating the GDP in 2014 then I come up with a figure for 2014 of $14.9 billion compared to $16 billion in 2013 – a decline of nearly 7 per cent. In addition the budget shows a shocking figure of 83 per cent of total expenditure being salaries and pensions – worse still this means we spent $3,9 billion on staff costs with revenues of only $3,7 billion. We actually borrowed money to pay salaries.

In these circumstances the forecast of 6 per cent growth in revenues in 2014 seems ridiculous – even if they forecast a stand still situation (which is about the best they can hope for) then they are left with the inevitable where the budget deficit is going to spiral totally out of control just as it did in 2008. The big difference now being that they cannot print money to try and cover the gap; this time it will simply be reflected in the inability of the State to meet its essential obligations including salaries and statutory payments.

Indeed the budget statement provides (despite the forecast increases in revenue) for a budget deficit of over $500 million in 2015. Repayments of nearly $500 million a year from 2016 onwards shows the folly of the commitments made in 2014 and now forecast for 2015. Significantly the budget shows, for the first time, significant contributions to the fiscus of aid flows from the international Community. Not the Chinese or the Russians who simply do not participate in that game – it seems to be almost exclusively a Western aid phenomena.

Even with this support, expenditures on education and health are both down and the allocations to certain Ministries seems to be significantly reduced (Agriculture, Parliament, Environment and Water, Transport, Foreign Affairs, Local Government, Media, Energy and ICT all show severe reductions in their allocated budgets).

We are in the midst of a full blown fiscal crisis, one that can only be resolved by radical action on many fronts. We need to reduce our civil service to more manageable proportions, we can do that by trimming back on the numbers in the army and airforce as well as the militia, we need to remove all ghost workers and pensioners from the payroll.

We must indicate to the remaining Civil Servants, many of whom are committed and outstanding people, that we are going to pay decent salaries in the future – when the budget allows us to do so, but until then we all have to pull in our belts and make sacrifices.

We must get our economy back onto the recovery path it was in during the GNU. Then we must get the economy growing fast to accommodate all our urgent needs – 300 000 new jobs a year, export earnings capable of meeting our import needs, State revenues that enable us to provide a decent education and health services to all our people. To get there we need FDI in large amounts and for that we have to have political stability, policy consistency and predictability, the rule of law and property guarantees, no unreasonable indigenisation targets and a massive reduction in corruption. No talk of price controls or exchange controls, no talk of a new currency.

Then finally we need to reengage the global community and seek help with our immediate needs – fiscal and social. For that to happen we have to sign up to the norms and values of a normal social democracy with a strong Bill of Rights. Too tough to handle you say, to which I respond, what is the alternative?

Eddie Cross
Bulawayo, 2nd December 2014