The Budget in 2017 – Mission Impossible

The Minister of Finance has an impossible task on Thursday this week when he brings his proposed budget for 2017 to the House of Assembly for debate and approval. To achieve fiscal and monetary stability and to get the economy back on its feet after four years of decline will need an exercise that would do Houdini credit. I am afraid that it will be beyond his abilities.

Biti followed a few fundamental principles during the four years he had responsibility for the fiscal health of Zimbabwe. In 2009 he established the basic structure of the budget and this remains unchanged today 8 years later and is unlikely to change next year. Then he set a ceiling on the total cost of employment and this was achieved by holding down the size of the Civil Service by limiting recruitment and restricting salary levels.

He was aided by a dramatic surge in total revenues – climbing from just $280 million in 2008 to $4,3 billion in 2013 – a surge that saw tax revenues grow by a factor of 14 in 4 years. But his major policy plank was that we “eat what we kill” – in economic terms, he ran a balanced budget with a small surplus of revenue over expenditure. The surplus planned for 2013 was $100 million. Apart from these fundamentals, Biti was known as a man who was prepared to stand up to the President, Mr. Mugabe.

Within a month after taking power at the 2013 elections in July, the new Zanu PF team, led by Patrick Chinamasa made a series of changes to the basic budget structure maintained by Biti. They secretly brought onto the payroll perhaps 150 000 new employees and the President “ordered” a substantial pay increase. Total costs of employment surged from $2,6 billion to $3,2 billion. The budget surplus vanished and by the end of the year, Mr. Chinamasa had to borrow $500 million to cover a substantial budget deficit.

But an even bigger problem was looming – after 4 years of rapid growth revenues to the State began to decline. Behind this was a sharp fall in confidence in the business sectors of the economy. In weeks the stock market collapsed by 30 per cent with billions of dollars fleeing the bourse and leaving the country, a billion dollars in hard cash was withdrawn from the Commercial banks. These fundamental trends have been maintained in the succeeding 3 years and show no sign of being reversed. State revenues declined sharply in 2014 and continued to decline in 2015 and 2016 so that by the end of 2016 total revenues to the Ministry of Finance had declined from $4,3 billion in 2013 to $3,4 billion in 2016.

Mr. Chinamasa faces two basic problems – revenues may continue to decline as confidence refuses to return to local markets and the cost of state employment remains at the levels established in 2013 - $3,2 billion. In 2016 this was about 95 per cent of revenue and the budget deficit was over $1 billion – completely unsustainable at 22 per cent of total expenditure.

But his problems are only starting there – the strategy of reengagement with the international Community and the International Financial institutions have not made real progress and are unlikely to achieve any real results until there are fundamental changes in Government. He has stripped the local financial market of all available liquidity and has nowhere to go for the many hundreds of millions of dollars he will need to pay for total planned expenditure as another massive budget deficit is looming.

He will try to show some progress in balancing his books but his estimates for economic growth in 2017 are way off the reality. There is no sign of any sort of economic turnaround and no real reasons why there should be, except perhaps the hope that agriculture may be a bit better if the rains continue. Global markets remain flat. He will also try to reduce the costs of employment but his political masters will not allow any substantial reductions in either employment or salaries – so these changes will be marginal at best.

So his problem will be one that rests with the Banks and local financial institutions – how to bridge the huge gap between his costs and revenues. His only option, in my view, is the printing press. This explains the desperation with which the regime has displayed over the reintroduction of a local currency, printed by the Reserve Bank. All the nonsense about it being an “export incentive” and an “optional currency” along with the other hard currencies on the markets do not explain the massive advertising and the clumsy attempts at subterfuge.

They have run out of options and the only way the regime can cover the shortfall in revenues is to print money. Contrary to public statements this will have to be in very large quantities and the inevitable consequences will be a resumption of local inflation and the depreciation of the local currency to the point where it will be worthless. Already all bank balances and savings have been converted into Government debt which will be worthless if we do not secure a massive international rescue package and resume the tough, fiscal discipline that Mr. Biti imposed on the country in 2009.

And I am afraid, Mr. Chinamasa is no Houdini.

Eddie Cross
Member of Parliament for Bulawayo South
8/12/2016