Budget Magic

In the next few weeks we are going to consider a budget for Zimbabwe. It is going to be impossible to balance our possible income against expenditure demands. Just to remind everyone of what has transpired over the past 4 years I set out my personal estimates of the real income and expenditure of the State, all figure in USD billions:

Heading201320142015 2016
Income4.33.83.63.4
Expenditure4.84.84.64.4
Deficit0.5111

In simple terms therefore I estimate that the total budget deficit since 2013 has been $3.5 billion. This has been funded by new domestic debt – mainly in the form of Treasury Bills but also an overdraft at the Reserve Bank – now approaching $1.0 billion. In addition to these massive amounts, the Government has taken over $1.7 billion in historical debt from the Reserve Bank and started to issue Treasury Bills in settlement. Add this to Parastatal debt to creditors, now assumed by the Ministry of Finance and unpaid bills of central Government and you can throw another $2 billion into the pot.

Whichever way you compute the figures you will not find it difficult to come to an overall estimate of domestic debt at $10 billion. Add to that our existing foreign debt of $7.5 billion and we enter the new fiscal year with a debt burden (without taking into account the debt owed to 4 500 commercial farmers which when it is finally computed, will not be less than another $10 billion), of $17.5 billion – a quick calculation of interest at 5 per cent overall, and you come up with a first charge on income of $875 million.

We have not serviced our debt for decades and I see no chance of us doing anything about this interest debt in 2017 and therefore, without any new borrowings our debt will rise by nearly a billion dollars in unpaid interest alone.

Then we have the burden of a bloated Civil Service on salaries that simply cannot be sustained. In 2016 I estimate the total cost of employment at $3.2 billion. This is made up of $2.6 billion in direct State salaries and allowances and $480 million in State pensions and salaries of State linked institutions whose salaries are paid by the State – like Universities. I fully understand that the Ministry of Finance is going to make some changes to the salary bill, but I cannot for the life of me see him saving more than about $280 million. This means that the next direct charge on income is going to be a staff costs bill of about $3 billion.

So now let’s have a look at possible revenues in 2017. Firstly we have to deal with the trends in GDP growth and inflation. I dispute all current estimates of GDP in Zimbabwe. Claims of growth – no matter how low, are pure fiction. Just ask any business manager what is happening to his local markets – they, without exception, will report falling sales and demand in the domestic economy. State revenues have tracked this decline in local economic activity and it is very difficult to avoid an estimate of a reduction of local GDP of 20 to 25 per cent since 2013. The actual decline in State revenues since 2013 has been just over 21 per cent. My estimate is that the final out turn of State revenue in 2016 will be -5.6 per cent. No way is this economy growing.

The Minister will announce that his own estimate is that in 2017 the economy will grow by 4.7 per cent. He bases this on strong growth in agriculture and mining. Both ambitions are totally baseless. Without basic reforms agriculture is going nowhere and even a better wet season this year will not result in higher crop or livestock output. “Command” farming is going to be yet another Zanu PF disaster and will fail miserably. As for mining – the key issue here is the outlook for commodity markets and precious metals and I see these as being flat. At the same time the operation to take away from exporters 70 per cent of their foreign earnings, replacing these earnings with RTGS “dollars” will be a massive disincentive to export growth and investment – the 5 per cent “incentive” will have no impact and will simply make the banks position even less tenable.

The Rand is going to be weaker in 2017; the recent strengthening simply cannot be maintained and if they make the mistake of firing the Minister of Finance, the plunge in the Rand could be dramatic. All the fundamentals in SA call for a weaker Rand and this is going to also impact on Zimbabwean output. In addition, I cannot see any possibility that we will see us move out of the dangerous waters of deflation. All this adds up to another gloomy outlook for the Zimbabwean economy in 2017. In the absence of any dramatic political developments and changes in national leadership I see another year of declining revenues to the State. This will be exacerbated by informalisation and smuggling through all borders.

This means that the slow but steady decline in State revenues is going to continue in 2017. Let’s say to $3.2 billion. This simply leaves nothing after salaries for any other State priorities. Total current foreign aid from all bilateral sources, is likely to remain at about $800 million a year and given the continued freeze in our foreign relations, nearly all of this money will be spent outside the budget framework – roughly $350 million for Health services, another $350 million on humanitarian aid in different forms and the rest on water and sanitation and other forms of support for critical areas.

Expenditure through the various “Statutory Funds” will total another $800 million – again none of it spent through the budget. This means that unless the State is able to repeat its “budget magic” by borrowing more from the local markets or international agencies, they simply will not be able to fund even the existing levels of expenditure. The consequences will be disastrous for all agencies of the State. This explains the increasing panic in the Government as it tries to secure new funding from any possible source.

The Ministry of Finances budget magic has involved stripping the private sector of all available cash. They have used various means – Treasury Bills have converted local hard currency sources into paper, then they raided private bank accounts using the RTGS system – leaving the bank system without the cash resources to meet their local operating needs. This has converted more hard cash into local paper dollars in the form of just an entry in a ledger in the Reserve Bank represented by an “overdraft”. Now they are taking $200 million a month from exporters accounts and replacing them with RTGS dollars that have no backing or real substance – only the flimsy (paper thin?) promise by our banks that they will pay them “real dollars” on demand.

As every Zimbabwean knows, the banks are at the end of their tethers on this issue. When anyone gets their salary through the RTGS system (the great majority) and then goes to the bank to get some cash, you face either severe restrictions or closed doors and empty ATM’s. That tells you where we are right now and no amount of Juju in the Ministry is going to change that. This is the end of the road.

Eddie Cross
Kariba, 15th October 2016