Does Chinamasa's budget pass the test?

Does Chinamasa's budget pass the test?
Published: 12 December 2017
Well, it has come and gone. Finance and Economic Development Minister Chinamasa delivered an interesting budget which, as was expected, had its own fair share of highs and lows.

The much anticipated budget dealt some good measure as it highlighted issues needing attention in order to put Zimbabwe's economic train back on the rails. However, his efforts still missed some critical elements, required to actually power the economy forward.

To his credit, Minister Chinamasa's delivery was brilliantly honest in terms of its underlying assumptions. He demonstrated Government's acute understanding of the critical state of the economy. He acknowledged at length the failure of government over recent years to adhere to fiscal order and discipline. He agreed with the common view that excessive indiscipline by the Government right across its breadth and depth has bled the economy and led us to where we are. This level of candour inspires some confidence. In order to start resolving a problem, the very first step is to first identify the problem and then honestly accept the realities engendered by the problem. Hats off to him!

Secondly, Minister Chinamasa did a good job in aligning the Budget statement to the new vision outlined by President Emmerson Mnangagwa. The constant reference to the President's speech right through his statement showed that there is already a high level of buy-in, not just by his own ministry, but right across the entire Government. Minister Chinamasa touched on critical elements of the New Economic Order', articulating how various sectors of the economy will be impacted. He clearly understands that the Ministry of Finance and Economic development will play a key coordinative function in this new dispensation. That is the reason his budget touched on the need to review the indigenisation act through amendments to be pushed through as soon as possible. This will be quite reassuring to foreign investors.

Minister Chinamsasa cemented the need to tell the world that "Zimbabwe is now open for business" highlighting strongly that Government is seized with putting in place supportive measures that seek to rebuild confidence and compete for investment. Hence, re-engagement with the global community takes centre stage in his address, as does the need to establish new relationships and strengthen existing relationships with international funders. Minister Chinamasa also recognizes the critical role of the Zimbabwean diaspora in the economic recovery agenda of the country, stating that "the diaspora plays an active role in the broader economy, particularly through investments in the domestic economy, as well as knowledge and technology transfer", further calling for the creation of conditions for an investment-led economic recovery that is underpinned by the active participation of the diaspora in the "broad economic calculus". This position of the government is certain to enthuse the diaspora and rekindle strong feelings of loyalty to their country. Fortunately, Hon Chinamasa is the custodian of the diaspora policy, and pledges that Government will, therefore, be strengthening platforms for engaging the Zimbabwean diaspora with a view to coming up with a policy framework that provides incentives and guaranteed security for diaspora investments. In view of the mega deals such as the NRZ-DIDG-Transnet transaction, Government must urgently follow through on this commitment.

To his further credit, Minister Chinamasa dealt at length with measures meant to address the problems in Agriculture, outlined plausible solutions to the problems.

The lengths to which he went to address Issues to do with tenure security for farmers, unlocking the capital value of agricultural land, working on weaknesses in the current financing mechanisms under the special agriculture programmes, marketing challenges and the need to improve the sustainability of small holder farming through special schemes such as the strategic partnerships with Anchor Farmers.

The Anchor Farmer concept integrates commercial farming and smallholder farmer outreach, providing farmers with access to inputs, agronomic advice, and markets. He proposed a massive 150 percent allowable deduction on expenditure related to technical and support services availed to smallholder farmers by anchor farmers which in my view is a substantial incentive for established farmers to want to work with and assist in integrating upcoming farmers into mainstream agriculture.

The budget was also very solid on civil service reform proposals; the need to revamp and revitalise state owned enterprises; transform the public finance management system; addressing inefficiencies caused by rent seeking by government officials and accelerating the ease and cost of doing business reforms.

There are indeed many other positives in the budget but this column notes some glaring shortcomings.

On employment creation, the budget seems to make only sweeping references to the need for jobs but lacks comprehensive strategies specifically aimed at creating new jobs.

Whilst the minister acknowledges the negative consequences of excessive money supply growth caused by excessive government borrowing, which has caused dislocations in the monetary system, he does not seem to provide any solutions to the problem. Indeed he spoke of the need to curb the fiscal deficits, reduce the need for government to rely on inflationary Treasury bills and RBZ overdraft financing, improve foreign currency inflows, but he did not attend to the need to re-look at the additional instability and damage that has been inflicted on the economy by Bond Notes. It is as clear as daylight that this monetary based export incentive is inflationary and is inflaming key variables such as the exchange rate.

This is impacting the cost structures in the economy. Minister Chinamasa only proposes cosmetic solutions to the problem, namely prioritising foreign currency allocations to producers of essential goods and services; exercising flexibility in the issuance of import licences to those with "free funds", in order to avert shortages of essential goods not produced locally. These solutions ignore an obvious critical fact, that the "free funds" that the Minister refers to are being sourced from the informal market, and this is what is making the problems worse. Minister Chimasasa in this respect completely misses the point that we need to remove bond notes from the system so that the foreign exchange starts to return to the banking system, otherwise we remain doomed. The parallel market will continue to thrive unless we return to the system where some 30 percent or so of transactions in the economy were in US Dollar notes, which were in continuous circulation. There are no concrete proposals aimed at restoring and maintaining the integrity of the multicurrency system by revising the export incentive scheme. This I identify as a major weakness.

The Minister of Finance was however, quite correct to observe that his policy prescriptions merely address the symptoms, and require to be buttressed by additional efforts aimed at fundamental issues related to fiscal imbalances and low production.

As things stand the economy is facing unprecedented challenges from many fronts, with inflation and monetary instability posing as major risk factors. I saw very little by way concrete proposals to deal with these risks. The economy is facing acute foreign currency position, despite significant projected growth in export receipts. The import bill is still projected to rise further from $6,4 billion last year to $6,8 billion this year. The country's external position will therefore remain precarious and the dislocations in the financial system, the foreign exchange markets and the real goods market (multiple tier pricing ) are likely to continue.

Did Minister Chinamasa deliver a JOBS BUDGET?

Finally perhaps more importantly I need to state that Ministers Chinamasa budget was only going to be relevant to the ordinary man if all his policy measures were keenly focused on CREATING NEW AND SUSTAINABLE JOBS IN THE ECONOMY. If truth be told, he did not do too well on this front. Perhaps he assumed that employment creation is an implicit objective. My view however, is that the citizens are desperate for JOBS and therefore employment creation must necessarily have been an explicit objective in the budget. Minister Chinamasa's effort therefore falls short of heeding the loud calls by His Excellency that "we need JOBS!, JOBS!, JOBS!!!!" Let us now wait and see how he follows through on this ambitious but very interesting plan.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the he is associated or connected with.
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