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Fiscal budget and the economy

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Treasury has expanded considerably, the nation-wide consultative process for the 2011 fiscal budget framework, due to be announced before the end of November 2010.

Crafting a balanced fiscal budget is a tough call, even for large regional economies like South Africa, with a diverse and predictable revenue base.

It is doubly difficult for the Zimbabwean economy going through nascent recovery, pressed down by a myriad of overarching constraints.

A greatly informalised economy coupled with a narrowly defined revenue base and an ever-expanded expenditure wish list is sufficient headache for even the most astute and dexterous of economic policy makers.

The economic recovery is inching forward steadily, but perceptibly, with capacity utilisation now averaging about 40% – 50%, across key sub-sectors in agriculture, mining and manufacturing.

A few sub-sectors in manufacturing, notably food and beverages, have realised capacity well in excess of 70%. In mining, the platinum sub-sector is also growing measurably and will continue to grow as mines expand current capacity.

Deposit growth has continued moderately, with total deposits at $2,3 billion and loan/deposit ratio increasing to an average of 66%.

The government has revived the lender of last resort function of the Reserve Bank, through a fund amounting to $7 million.

Recapitalisation is progressing as companies expand various capital-raising initiatives.

This notwithstanding, large segments of the economy continue to face constraints.

Domestic demand remains low, as the economy remains stuck in a cyclical low-demand, low-capacity and low-wage equilibrium.

The high level of import dependence ensures that a significant part of any stimulus flows out to other economies through imports – the country is in effect exporting jobs.

Access to credit remains a challenge for many companies, across all sectors of the economy. The credit crunch is much more pronounced for small businesses with weaker balance sheets.

These typically borrow through the informal money markets, at a much higher premium.

On a sectoral basis, agriculture recovery has been buoyed by increased tobacco output, but significant medium-term potential can only be unlocked through substantive agriculture sector reforms that confer security of tenure, an appropriate leasehold system and ensure collaterised access to agriculture funding and proper marketing systems.

The entire agriculture value chain must be structured in sequence to remove distortions and marketing rigidities, enhancing real returns for farmers.

Such a new paradigm reconfigures agriculture as a business for which viability underpins growth.

As envisaged, the mining sector continues to power economy-wide recovery, with overall growth projected in excess of 40% in 2010.

The mining sector is forecast to account for about two-thirds of exports and an increasing share of GDP.

Price stability and a fairly predictable economic environment have occasioned steady recapitalisation in mining, though the industry is still far below medium-term potential and significantly undercapitalised.

Mining recovery, however, continues to face similar constraints as all other sectors of the economy.

Recurring power outages have curtailed growth.

Across most mining sub-sectors, loss in production hours has been as high as 120 hours per week or more. Many mines have purchased generators, increasing operational costs for the industry.

Earlier this year, the government announced indigenisation and empowerment regulations, which immediately triggered controversy among the coalition partners in government and heightened uncertainty.

The regulations have since been revised to incorporate stakeholder inputs, including the sectoral boards and the revisions to emphasise purchase of shares at fair market value. Notably confidence has not yet recovered.

Appropriately implemented, within the context of stakeholder consensus, the indigenisation and economic empowerment (IEE) initiative has the potential to create new growth opportunities and give impetus to the economic recovery.

The converse also applies. A haphazardly implemented and ill designed IEE has potential to scuttle recovery and growth by amplifying uncertainty and undermining the building blocks of business growth.

The fiscal budget framework: some perspectives
As alluded to before, crafting the national budget for Zimbabwe is fraught with real challenges – the lack of fiscal space, the limitless infrastructure demands, social service delivery in health and education and wage adjustments for the increasingly restive civil service, 236 000 strong.

In light of the above, whatever policy decisions for 2011, there will always be larger segments of the national budgetary demands which will be unfunded.

The private sector therefore recommends adherence to a set of guiding principles in crafting the fiscal budget to optimise on recovery and growth prospects.

The multi-layered financing needs of our country can only be realised within the context of a growing economy. The following guiding principles are critical for ensuring optimum growth:

l First things first

l Low taxation, equity and fairness

l Government focus on core business

lOpportunity for all

l Stakeholder consensus

lPolicy Framework

Principle No.1: First things first

The principle of first things first embeds a rationalisation process which allows the fiscal budget formulation process to focus first on fundamental critical areas necessary for economic growth.

The principle implies that the government redefines its national imperatives and realigns economic policy for the realisation of those national imperatives.

Government is unlikely to be able to fund every budgetary requirement, but can structure and prioritise those areas that have trigger mechanisms for economy-wide gains.

Much larger governments abroad, which preside over larger resource bases, also face constraints of fiscal space and across the leading economies, right-sizing the civil service and expenditure cuts are core elements of the budgetary process.

There is no country which can live in perpetuity beyond its means. Equivalently, all nations face an inter-temporal budget constraint and must decide within the resource envelope, what will be priority areas, subject to the budget constraint.

The government of Zimbabwe is not designed and has no capacity to simultaneously frontload a multiplicity of objectives and projects, because of the evident resource limitations.

Cognisant of the above principle, the Chinese government under Deng Xiaoping, the father of Chinese market reforms, early in 1979, focused on a narrowly defined set of objectives — immediate and sustained poverty reduction and creating a platform for China to become a global economic player over the long run.

To achieve these objectives, China focused on attracting inward investment for export-led growth.
Everything else was subsequent, ancillary and incidental to the core objectives.

The Chinese authorities knew that growth would be uneven, that inequalities may persist in the interim, that balanced growth (harmonious development in Chinese terms) would take long to entrench, but they were and are unambiguous about their core objectives, which they pursue unremittingly and very judiciously.

Principle No.2: Low taxation, equity and fairness

A low aggregate demand, low-capacity utilisation and low-wage equilibrium suggests that the economy requires a stimulus.

The multi-currency prevailing precludes any monetary policy stimuli, hence only fiscal stimulus is presently deterministic. That stimulus implies the need for lower taxes, to kick-start consumption demand in the economy.

Lower taxes imply higher disposable incomes and higher domestic demand, output and employment.

Lower taxes also enhance business re-investment through retained earnings, particularly key for an economy facing constrained access to international credit lines. Lower taxes improve the country’s competitiveness as the taxation regime is a critical determinant of investment.

Lower taxes imply a lower alternative cost of capital as enhanced cash flow confers critical leverage in debt financing negotiations.

Taxation should also embed the principles of fairness and equity. Broadly defined, contribution to taxes should encompass all but also take account of sector-unique business conditions and critical ingredients for growth.

The mining industry is inherently capital intensive and taxation should ideally incorporate recapitalisation requirements, in particular as the industry has not recapitalised to any significant degree over the past decade.

Taxation should be forward looking and proactive implying Authorities should be ready to give up a dollar today if that will give rise to a five-dollar revenue inflow over the medium term.

This is the principle underpinning investment and the call for an improved investment environment and improved doing business conditions in Zimbabwe.

A growing economy is the clearest guarantee for increased revenue flows and economies grow only in response to investment.

Principle No.3: Government refocus on core business

Once upon a time, it was fashionable for governments to pride themselves in what they were doing on behalf of their citizens — an overly bloated, unsustainable welfare system, (mainly industrial countries) and a panoply of populist, patronage-style, sub-economic interventions in many developing economies.

Both were unsustainable and have imposed significant social costs on the very people these systems were designed to serve.

The hard truth is simply that governments can not afford a disparate range of dirigisme – “be-all and do-all” type of programmes for people. Governments are not designed to do things for citizens.

Governments must create an enabling environment for people to do things for themselves through innovation and enterprise. For many years, a myth seemed to prevail that governments cannot be broke.

The recent experience of Greece, Zimbabwe and many other economies on the brink is testimony against this fallacy.

Instead, government must refocus on a core set of key narrowly-defined objective areas — social services delivery in health and education, national security, an effective and above reproach justice system, among its core objectives.

In addition, the government must focus on creating an enabling environment that allows businesses to grow — effective regulatory and supervisory mechanisms, oversight responsibility, an even playing field, effective competition (anti-trust laws), anti-corruption and prudent management of the macroeconomy.

Of course, the government also has a responsibility to ensure that as the economy prospers on the back of good economic policies, societal improvement occurs with a sense of decency and responsibility towards the vulnerable, hence safety nets.

Principle No.4: Opportunity for all

Opportunity for all is the underlying theme governing sustainable enterprise development, new inventions and innovation — a commitment by government to make sure that the socio-economic playing field confers equal opportunity for all citizens to achieve and actualise their potential.

Economies, both large and small, are characterised by marked inequalities — a dynastic or generational type that confers disproportionate opportunities to one group of people, while simultaneously marginalising large swathes of the population, becoming de facto the wretched of the earth.

As such, the political economy of many countries is often characterised by dichotomies of the “haves” and “have nots” — the poor and the exceedingly nouveau riche. To a significant degree, Zimbabwe has no “middle class”, yet evidence abounds that creating a viable middle class is a prerequisite for fundamental growth and national economic development.

The fiscal budget formulation process could create the platform for the re-emergence of a critical middle class in Zimbabwe.

As per the famed Chinese proverb, a journey of a thousand miles begins with one step – the budget should give clear signals in this regard.

A proactive, forward-looking fiscal policy framework must strive to create conditions for equity, fairness and opportunity for all citizens.

The key is to ensure that there are no large segments of the population that are excluded from national economic activity, disconsolate bystanders, unable to participate in any form of sustenance for economic benefit.

Such is the present untenable situation in Zimbabwe where large sections of urban and rural poor are cut off from any form of gainful activity, immobilised by conditions not totally dissimilar from those faced by their forefathers, a thousand generations ago.

For many parts of the country, there is no organised commercial production other than the rudiments of communal farming, as has been the case since time immemorial; there is no organised marketing for farm produce, there is no meaningful infrastructure other than the dusty, decrepit gravel roads or occasionally an over silted dam or long abandoned irrigation systems.

It is evident that the fiscal budget cannot answer to all these generational challenges.

What is critical is to ensure that the budget framework creates conditions for accelerated investment in key sectors of the economy to lift production, employment and the livelihoods of ordinary people.

There is something fundamentally wrong when a nation’s young — its flower and promise — troop beyond its borders to seek jobs in ever-increasing numbers.

The fiscal budget framework must create conditions which are such that the owner of a small-sized business, in mining, agriculture or any sector can work diligently and save incrementally to grow his business, knowing full well that authorities have put in place tax measures to support his initiatives.

The fiscal budget framework must create hope even for a ground-zero kid in Dotito, Dzoro or Domborutinhira, so that she can know that if she remains in school and works hard, with diligence and fortitude, over the years, she has as much chance of going to university or higher tertiary institutions, to obtain a relevant qualification that allows her to strike out towards her life’s dreams and aspirations, like any other child in any part of the world.

That will only be achieved if the budget framework redoubles its focus on infrastructure, health and education – the key social sectors of the economy, capable of unlocking the economy’s medium-term and long-run production potential.

Principle No.5: Stakeholder consensus-driven policy framework

There are different ways of ordering economic activity, even under capitalism, as there is no one uniform prevailing brand of capitalism.

Culture, ethos, values, beliefs, mores and a dozen other invisible customs are all enmeshed in the way business is organised and propagated in different countries.

It is tempting to ask, why there are recurring industrial action episodes in Britain (e.g. BA) and France — the French, with recurring frequency burn down cars with abandon during strikes, but across the border in German cities, no such excesses occur. In Sweden and many parts of the Nordic world, industrial action episodes are rare. What is the difference?

There may be more than one answer to the above but here is a key difference: In Germany, Sweden and many Nordic countries, the economic policy framework is driven more by stakeholder consensus than unilateralism.

Government, business and labour routinely come together for a genuine round table stakeholder engagement, to distil a roadmap for global competitiveness.

On the contrary, Anglo — French capitalism has more individualism focus and unions find it easy to be adversarial as part of the bargaining process, routinely disrupting work, if they feel disregarded.

Stakeholder consensus has its foundation on a shared vision and common objectives. It does not mean that there are no differences, but stems from the recognition that as Government, business, labour and other stakeholders, there is more benefit for all if the economy is not subjected to intermittent disruptions.

Workers feel that they are part of a fair process and their commitment to higher productivity is commensurately rewarded.

Similarly, the benefits accruing from economic activity are more evenly shared in Germany and Nordic countries in comparison to the Anglo- French capitalism. There are still income disparities, but much less pronounced in comparative terms.

The consensus-driven German/Nordic capitalism is dominated more by an extensive welfare state, while the Anglo-French has more individual millionaires in per capita terms.

Both systems have each its own successes (and certainly can not be compared to communism) and each has advantages and disadvantages, but it is evident one system confers greater competitive advantage than the other.

Consensus is critical; creating a sense of belonging and inclusiveness — an openness and transparency that is a central thread for higher productivity and growth.

Our country needs genuine stakeholder engagement to dissipate the kind of embedded mutual distrust across key stakeholders and to forge a common vision that will take Zimbabwe forward to face the challenges of the 21st century.

Joseph Mverecha is Chamber of Mines Economic Policy and Investments manager. He writes in his personal capacity.

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