Chinamasa made right calls: Economists

HARARE - Economists have said Finance minister Patrick Chinamasa made the right calls on some key elements of fiscal policy on one of the harshest budgets in a generation on Thursday, slashing spending, re-engaging with international lenders and attracting foreign investors.

Bond markets rallied and rating agencies gave it a cautious welcome. But analysts questioned whether Chinamasa’s budget would shore up the economy in the short-term given the scale of the squeeze which lets virtually nobody off the hook.

Years of economic mismanagement have led to a collapse in domestic demand in combination with a struggling manufacturing industry and agricultural sector, devastating the Zimbabwean economy.

It is the first budget to be presented since former President Robert Mugabe resigned after 37 years in power.

Zimbabwe-watchers IHS Markit and NKC African Economics were eager to see the budget to gauge whether Chinamasa and President Emmerson Mnangagwa are determined to make policy changes that will reverse the economic decline of the past two decades.

The national budget was presented under the banner: “Towards a New Economic Order” and acknowledges that a decline in domestic and foreign investor confidence has led to a disappointing economic performance over recent years.

Chinamasa talked of a paradigm shift in the way Zimbabwe does business and manage the economy, public enterprises and finances, and said the aim of the budget is “getting the economy speedily back on track.”

Patrick Chinamasa

Patrick Chinamasa

Even though some policy changes will have to wait until the executive has obtained the mandate of the ruling Zanu PF party at its extraordinary conference in Harare next week, some bold pronouncements did indicate that the new president and his Finance minister have correctly identified some priority areas for policy change and covered some of the areas where future regulations will boost revenue and cut spending.

Some of the key policy changes include: the progressive reduction of the share of employment costs to initially 70 percent in 2018, 65 percent in 2019, and below 60 percent of total revenue by 2020.

But the big move was on the Indigenisation and Economic Empowerment Act of 2009, which required all companies operating in Zimbabwe to be 51 percent or more owned by black Zimbabweans.

Chinamasa said the indigenisation policy will henceforth apply only to diamond and platinum mining.

Alisa Strobel, senior economist Sub-Saharan Africa at IHS Markit said amending and relaxing the Indigenisation and Empowerment Act is one of the key policies that is structured to re-attract foreign investments.

“Furthermore, the proposed amendments will confine the 51/49 Indigenisation threshold to only two minerals, namely diamonds and platinum in the extractive sector. The 51/49 threshold will not apply to the rest of the extractive sector or any other sector in the economy — suggesting openness to any investor, regardless of nationality,” Strobel said.

IHS Markit said it welcomed the government’s aim to address the high country risk perception among existing and prospective investors, by abiding by the terms of Bilateral Investment Protection and Promotion Agreements Zimbabwe.

Chinamasa also said a planned export tax on processed platinum would be deferred to 2019.

On the expenditure side, the focus was on ruthless cuts and austerity to try to reverse the ruinous deficits that the government has been running.

“We forecast that the budget deficit will run to $1,47bn in 2017 (8,7 percent of GDP); it was $1,45bn (8,9 percent of GDP) in 2016,” NKC analyst François Conradie said.

Chinamasa stated that: “At the heart of the economy’s fundamental economic challenges is an unsustainable budget deficit, whose financing through issuance of Treasury Bills and recourse to the overdraft with the Reserve Bank is untenable.”

An expenditure ceiling was introduced in the form of explicit targets: a deficit in 2018 of below 4 percent of GDP, and 3 percent of GDP in subsequent years. Expenditure is budgeted at $5,743bn.

Former Finance minister Tendai Biti said the government is saddled with a lot of demands and pressures that will make it impossible to achieve the desired target growth.

IHS Markit said it welcomed the government’s expressed efforts in servicing and re-scheduling of domestic and external public debt obligations that are consistent with agreements with lenders and creditors.

However, critically proposed government employment costs are still too high to address the country’s fiscal imbalances.

There were cheers in the National Assembly when Chinamasa announced plans to fire 3 400 ‘‘youth officers’’ who were essentially intimidators on behalf of Mugabe.

The Finance minister said all civil servants older than 65 will have to take retirement, and a freeze on civil service recruitment will be kept in place.

Conradie said somewhat inexplicably, he does not intend to touch bonuses for civil servants next year, for which he has budgeted $176m.

Lawmakers were less impressed by expenditure on defence ($420m) and healthcare ($408m). Some $132m has been budgeted for the elections set to be held in August next year; Mnangagwa has said that election will be “democratic”, but many expressed doubt.

Spending cuts will also include the closure of a number of diplomatic missions and more stringent rules will be imposed on official travel: smaller delegations and greater use of economy class flights.

Chinamasa also said the funding of local government “provincial and metropolitan structures” is “unsustainable” and urged Parliament to reconsider the Constitution on this; this is a difficult debate given the necessity of local government for good governance.

On the revenue side, the presentation contained the good news that cumulative tax and non-tax revenue collections for the period January to September 2017 exceeded the target ($2,812bn compared to a target of $2,741bn).

Chinamasa said government was considering the privatisation of some publicly-owned firms, giving the statistic that 70 percent of the 93 State-owned enterprises (SOEs) are technically insolvent, but did not elaborate.

Conradie said Chinamasa made the right calls on some key elements of fiscal policy, “and we hope next week’s Zanu PF conference will contain more measures to attract investment.”