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Fiscal consolidation: Panacea to Zim economic crisis?

Cash shortages, heavy taxation, and a hyperinflationary environment are some of the signs that Zimbabwe is possibly facing its worst economic crisis in a decade.

Ordinary citizens have complained that the situation is unbearable but President Emmerson Mnangagwa insists these “painful reforms” are necessary for the country to stabilise its economy.

The plight of ordinary citizens worsened when Finance and Economic Development Minister Professor Mthuli Ncube introduced austerity measures in 2018 by cutting down on public spending and introduced a two percent tax on intermediated financial transactions to improve the government coffers.

Authorities also de-dollarised the economy yet in the parallel market, the foreign exchange rate continues to fluctuate.

Many have wondered what President Mnangagwa means when he claims to understand the ‘pain felt by people,’ as they do not know for how long they can bear with it.

However, these ‘painful reforms’ are deliberate conditions created by the government and are known as fiscal consolidation to reduce fiscal deficits, where government expenditure is higher than revenue and level of the country’s public debt, whose domestic debt stands at $9.6 billion according to the 2019 National Budget.

Fiscal consolidation, according to a managing consultant at Ziopra Consulting group, Munyaradzi Mugowo, refers to discretionary policies and policy measures taken by the government to reduce the budget deficit and public debt to sustainable levels.

“Fiscal consolidation is implemented by either increasing revenue or reducing expenditure or combining both instruments. Historically, inflation has also been found to be effective in reducing the stock of domestic government debt.

“Governments can either deliberately create hyperinflationary conditions or take advantage of inflation to reduce the domestic component of public debt,” he said.

Muguwo explained that reducing government debt is important as it is a keep component when calculating Gross Domestic Product (GDP) which is used by investors to measure a country’s ability to make future payments on its debt obligations.

The managing consultant added fiscal consolidation adjustment could be implemented in two ways: front loading or back loading

“Front-loading is squeezing all measures of fiscal consolidation in the first years where the effects will be adverse and harsh while backloading is spreading measures over a long period especially in an environment, whose economy is in a slowdown.

“In our case, authorities seemed to have front-loaded all these measures –combined tax increments, cutting expenditure (austerity measures) and financial repression (where there is no cash in the economy) when the economy is already in a downturn,” Mugowo said.

He noted that fiscal consolidation is implemented depending on initial macroeconomic conditions such as the initial level of deficit and debt; the phase of the business cycle and the financial conditions.

“You don’t implement fiscal consolidation in a recession where there is a currency crisis or when initial conditions are not conducive because the weight of these factors and effects are felt by people. There was no gradual consolidation to give the economy enough time to recover,” the consultant said.

To review the success of fiscal consolidation, Mugowo said it was necessary to look at the primary budget balance revenue versus expenditure, whereas the finance minister says the government has reported a surplus.

“But if you look at the supplementary budget, the government has been running on a deficit. Another way to check if fiscal consolidation is working is the debt level but there are no figures from the government to see if the debt has reduced,” he noted.

On how long fiscal consolidation was supposed to last, Mugowo said “about two years.”

In April, at an International Business Conference, hosted by the 2019 Zimbabwe International Trade Fair, Prof Ncube said he would do away with austerity measures after one more year.

Prof Ncube said it was “a bad idea” to have austerity measures for a longer period, as the country was steadily managing its debt.

In 2017, a report prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association, said for Zimbabwe to attain debt sustainability, sharp fiscal consolidation was required.

“Zimbabwe is in debt distress, and its total public and external debt are unsustainable. With longstanding external arrears, foreign financing has been scarce, and large fiscal deficits are lately financed through domestic borrowing…Attaining debt sustainability would require sharp fiscal consolidation and external support from the international community,” read part of the article.

Meanwhile, economics analyst, Dr. Felix Chari, said the government was “clueless” otherwise the country should have seen improvements in the economy.

“If they had a clue we should have been seeing improvements but the economy is worsening with each passing day. Surely we have given (Prof) Mthuli (Ncube) a long time to fix the economy and whatever he was implementing should have brought results by now. But we don’t see anything save for a worsening economic crisis,” Dr. Chari noted.

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