In an economy with inflation nearing 200% a year, budget figures come with severe health warnings as Finance Minister Mthuli Ncube can attest. His presentation on August 1 was his third in nine months with two major revisions — the first in the Staff Monitored Programme (SMP) in April and second this week. Revenue, originally projected at $6,2 billion has been increased 126% to $14 billion, while expenditure is up 140% to $18,6 billion.
As is usually the case in chronic inflation situations, revenue tends to run ahead of spending, which is why the Minister was able to boast of an $804 million surplus in the first half of 2019. This was primarily the result of new and higher taxes, especially fuel duty, now the largest single contributor and set to become more so, and the pernicious 2% money transactions tax (IMTT), supplemented by “fiscal drag” in the form of three digit inflation. In the second half of the year, the inflationary impact will increase while the doubling of fuel duty should generate an extra $400 million a month and consolidate this tax by far the main contributor to the fiscus.
There is something ironic for a government which wants to reduce inflation, to rely on it to both increase revenues and reduce real expenditure.` Equally ironic is the enhanced reliance on indirect or consumption taxes, which now account for close on 80% of tax revenue, since these taxes increase inflation directly – as with fuel duty — or indirectly as with customs duties and the 2% IMTT. This is not what one would normally expect from a “revolutionary” political party.
Despite higher taxation, which is eroding disposable incomes, the budget deficit will still increase from the $1,56 billion estimated in the original budget to $4,5 billion. This will be less than 5% of Gross Domestic Product (GDP), which government does not care to forecast, but which will presumably more than double from the $42,2 billion estimate in the SMP.
This puts the official target of upper middle-income status by 2030 into context. In US dollars, GDP will be around $10 billion and per capita incomes below US$700 a head – light years away from the upper middle-income threshold of US$3 896 per head.
The budget is silent on a number of issues. There is no mention of the media-reported 50% pay award to civil servants. The allocation for employment costs was increased $1,5 billion (37%), of which $462 million was for the April cost-of-living adjustment and pensions.
Also omitted was any discussion of how the $4,5 billion budget deficit will be funded and an update on the promised rollover of $2,7 billion of Treasury Bills. Surprisingly, the interest bill for domestic debt is actually reduced, despite increased borrowing to come and higher interest rates.
The decision to defer the publication of year-on-year inflation figures until February 2020 is puzzling. The parallel with what happened in 2009 is misleading since then there were no meaningful comparable figures for 2008.
This time, there is a revised series based on February 2019, which will be the basis for year-on-year calculations.
For the next two to three months, the markets should brace for some high monthly numbers, due mainly to the series of fuel price increases, including the one in the budget and the overdue steep increase in electricity prices announced this week.
There are more knock-on effects to come. The most recent increase in fuel prices assumed an exchange rate of $7,5 to the US dollar, since when the rate has devalued a further 22% to over $9 to the US unit. There is a raft of service cost increases in the budget, while there will have to be a catch-up in fees for State schools and health services.
Clearly, the currency is critical. The fundamentals are not encouraging — inflation approaching 200% against 6% or so in the country’s main trading partners. The import compression in the first five months of the year is unlikely to be sustained at the level of a 25% decline because of increased diesel, electricity, maize, wheat and other food imports.
Exports are flat partly reflecting sluggish world demand, the drought, weaker tobacco prices and production cutbacks attributable to load-shedding, while capital inflows are depressed at a time the country is increasingly reliant on Diaspora remittances from people denied the vote by this government.
Having devalued almost 90% since February, it would be astonishing if the exchange rate continued to weaken at the same rate. But unless and until there is a marked improvement in foreign currency inflows, the exchange rate will remain under pressure.
Nor are the inflation fundamentals encouraging. Recent studies suggest that once annual inflation exceeds 50%, there is only a 34% probability of the rate stabilising or declining. When it goes higher, the probability is even lower.
This is the inflation psychosis at work. It does not help when people who ought to know better – Governor John Mangudya, at the Reserve Bank of Zimbabwe and Minister Ncube — feed the psychosis by promising results and then failing to deliver. Nor does it help to have massively negative real interest rates, themselves a sign of policy dysfunctionality.
For the rest of 2019 and into 2020 the economy will remain in stagflation. Real GDP will fall more than the official 2,1%, an absurd forecast in a country with three-digit inflation. In such an environment, no reasonably competent forecaster would dream of predicting GDP to the accuracy of a tenth of a percentage point. Yet, that is the forecast in both the SMP and the budget.
The output decline is likely to be greater – at least 5% and very probably more. The reality is that consumer spending accounting for 80% of GDP is falling precipitously pointing to a far larger decline in GDP.
At some point, policy-makers will have to acknowledge that the Zimbabwe crisis will not be solved by budget tinkering, money policy foolishness, or IMF SMPs, but by meaningful political change as the basis for a broad consensus in the fields of social and economic policy.
Professor Anthony Hawkins writes in his personal capacity. This article first appeared on The Source