Zimbabwe budget unsustainable
Crunch time approaches in Zimbabwe as finance minister Tendai Biti’s midyear fiscal review that the country cannot continue to present its directionless drift.
Most of the budget is spent on salaries
Zimbabwe can’t afford to finance an election
“We act and save ourselves, we do nothing and drown”
— TENDAI BITI
Crunch time approaches in Zimbabwe. If one single message shines through finance minister Tendai Biti’s midyear fiscal review last week (July 18) it is that Zimbabwe cannot continue its present directionless drift.
“We act and save ourselves, we do nothing and drown,” he said in his review titled: “From Crisis to Austerity: Getting Back to Basics”. Yet there is relatively little Zimbabweans can do to save themselves economically, unless and until real political change takes place.
In fairness to Biti, he did the best he could, but as finance minister in an unwieldy, overmanned and underresourced administration he had precious little room for manoeuvre. The public service wage bill will absorb 73% of all government spending in 2012, leaving just 11% for capital investment and 16% for nonwage recurrent expenditure. “The situation where 73% of our expenditure is on wages for 235000 people (the civil service) while 27% of the remaining budget goes to the rest of the economy or 13,7m people is not sustainable,” says Biti.
Because Zimbabwe is trying, with limited success, to operate a cash budget, the projected 15% shortfall in revenue this year forced Biti to cut spending by a similar margin to US3,4bn (30% of GDP), with the entire burden falling on capital and nonwage spending.
That he was forced to take this route in an economy with an investment requirement over the medium term in infrastructure, mining and manufacturing in excess of $30bn illustrates not just the absence of fiscal space, but also another dimension of Zimbabwe’s economic unsustainability.
And yet, thanks to the fortunate conjuncture of dollarisation in early 2009, buoyant commodity prices, until recently, especially for gold and platinum, a rebound in tobacco production and prices and the discovery of diamonds, the Zimbabwe economy has managed an average growth rate of some 7,5% annually over the past three years.
Inflation is forecast at 5% this year — 4% in the first half of 2012 — but this may be on the low side, given surging world food prices, the rebound in fuel prices internationally and some modest indirect tax hikes last week. Biti raised fuel duty by 25% but said the pump price should not change because oil prices fell in the second quarter.
Unfortunately, however, the country’s recovery path is unsustainable, not only in budgetary terms. Last year, the IMF reckons, there was a current account deficit in the balance of payments of over $3bn or 35% of GDP. So far this year the deficit has widened further despite protectionist measures such as a 25% import surcharge on selected consumer goods imposed in January.
In 2010 — the latest figure available — private and government consumption spending between them absorbed 110% of GDP. Savings were negligible, meaning that fixed investment of only 14% of GDP had to be funded offshore, as did a sizeable chunk of consumption spending.
This means Zimbabweans must save more and spend less, a message without appeal in today’s Zimbabwe. Instead, the focus is on foreign capital, itself a bizarre aspect in the light of the policy stipulating that businesses must be majority-owned by indigenous (black) Zimbabweans.
The deeper irony is that since the advent of the government of national unity (GNU) in February 2009, Zimbabwe has “balanced” its external accounts through a combination of offshore borrowing, foreign aid, diaspora inflows and accumulated arrears. Without these inflows, the economy would have continued along the 10-year “meltdown” path from 1998 to 2008. Indigenisation minister Saviour Kasukuwere and others in his localisation camp are oblivious of, or ignore, this unpalatable truth.
But such heavy reliance on foreign capital is undesirable as well as unsustainable. Both foreign debt at 111% of GDP and arrears of some $7bn or 70% of GDP are unmanageable. Over the 2010-2012 period, fresh offshore borrowing is estimated at $2,3bn against foreign investment — both portfolio and direct — of half that. The government hopes that by 2013 it will be possible to secure a staff-monitored programme with the IMF as a staging post towards eventual debt forgiveness.
Until then, Zimbabwe will continue to accumulate offshore arrears — an estimated $3bn between 2009 and 2012. Also since 2009, $178m in domestic arrears have built up, most of them owed to local service providers like the stateowned telephone company, Tel-One.
Biti lowered the growth forecast for 2012 to 5,6% from the over-optimistic 9,4% projected in the main budget last November and while he made no forecast for 2013 the consensus private-sector view is that Zimbabwe has now moved onto a slower growth path. Three “binding” constraints — electricity, finance for long-term investment and working capital, and politics — will limit growth over the next two years.
Zimbabwe cannot afford to continue in muddle-through mode, not least because per capita incomes today are 10% below their 1965 level (see graph), when then prime minister Ian Smith declared unilateral independence. Incomes are about 39% below their peak of 1991 and 30% lower than at independence in 1980.
Put another way, to escape long-run political instability the next administration after elections some time in 2013 will have to overcome a formidable crisis of unfulfilled expectations. In the wake of the recent supreme court ruling in Harare instructing the 88-year-old President Robert Mugabe to call by-elections in three Matabeleland constituencies, politicians from the three parties that signed the September 2008 Global Political Agreement (GPA) must make some urgent choices.
Assuming that the supreme court ruling applies to all 26 vacant parliamentary constituencies, as it should, political leaders must decide whether they want to risk a mini-election that might destabilise the already-fragile coalition government by shifting the delicate balance of power between the three parties. There appears to be little enthusiasm for this, not least because the finance ministry cannot afford to finance by-elections on this scale.
This narrows the choice to one between full implementation of the GPA (including a referendum on a new constitution, a new voters’ roll and constituency delimitation), which would rule out elections until late 2013, or calling fresh polls under the existing (1980) constitution. Biti admits that the country cannot finance a referendum and would need donor funding, as also would a costly voter re-registration programme.
More disturbingly, the draft new constitution provides for an enlarged parliament which the country cannot afford and probably doesn’t need. Accordingly, from a narrowly economic viewpoint, an election under the existing constitution but with revised electoral arrangements enacted recently by parliament would be the way to go, but this would run into a political impasse since the two wings of the Movement for Democratic Change are committed to implementing fully the 2008 GPA.
Whichever option the politicians choose will have far-reaching ramifications for the economy. Though elections under a new constitution would impose further strain on the national budget, they would open the way to the removal of the remaining economic sanctions while providing greater clarity, though not certainty, around future economic policies, especially those affecting investment. Without that clarity Zimbabwe’s economy will continue to underperform. Biti did as much as he could — the ball is now in his colleague’s court.