The Parliament Budget Office (PBO) says the budget deficit could reach a “record breaking” $3 billion this year as Finance and Economic Development minister Mthuli Ncube says he will soon announce cost-containment measures to lower State expenditure.
BY TATIRA ZWINOIRA
The PBO says rising expenditure has been skewed towards recurrent spending due to rising government employment costs and capital transfers, with the deficit accounting for 11,6% of gross domestic product (GDP).
Zimbabwe recorded a budget deficit of $2,6 billion last year, 8,4% of the GDP.
Ncube said on his Twitter handle that the 2% transfer tax imposed with effect from October 13 this year was just the first part of reducing the budget deficit.
“To contain Zimbabwe’s budget deficit, we have to do two things, one is revenue expansion and the other is cost containment and the introduction of 2% transfer tax is only one leg of the measures. Government has also to do its part in terms of reducing expenditure,” Ncube said.
“Government is going to reduce expenditure and soon we are going to announce those measures to make sure that we meet the people of Zimbabwe half way and we contain the budget deficit so that we live within our means.”
Already, part of the major measures proposed in the Transitional Stabilisation Programme, running from this month until December 2020, to address expenditure include establishing a public financial management system, trimming the civil service and wage bill.
Introducing the 2% transfer tax has already been widely met with negativity from all sectors of the economy due to the lack of consultation with stakeholders and was partly behind the recent bull run on the Zimbabwe Stock Exchange (ZSE).
The ZSE market capitalisation has risen by 51% to over $20 billion since October 2.
“The imposition of a 2% tax on all non-cash money transfers came as a surprise to all and we suspect followed little, if any, consultation. The announcement was followed by widespread panic and heavy criticism from all sectors of the economy to the extent that the minister was forced to announce a number of exemptions to the tax …” Imara Asset Management (Zimbabwe) Ltd chief executive officer John Legat in the latest research note.
“… which in practice may also be unworkable or administratively burdensome. Had the tax been 0,2% with a maximum limit, he might have gotten away with it, but sadly, the damage has now been done.”
Legat said a budget deficit for the first six months, estimated at $1,4 billion and potentially $2,7 billion for the full year, imply a massive fiscal injection into the economy.
“Before the minister revised the GDP numbers, this amounts to 16% of GDP and follows 10% of GDP in 2016 and 2017.
These are big numbers and the fact that the deficit has primarily been financed by creating RTGS [real time gross settlement] dollars which itself has given rise to money growth of over 40% explains why corporate volume and revenue growth in a wide variety of sectors have been so strong,” he said.
“Further adding fuel to the fire have been artificial RTGS dollar prices that have in essence been linked to the US dollar. When and if the fiscal deficit is finally reduced, the money supply declines and prices are based on the RTGS dollar exchange rate, then we should expect to see a sharp slowdown in demand as prices and the economy adjust. In short, expect deflation.”
Legat added that addressing expenditure and reducing the budget deficit would only be possible by “being able to source foreign currency”.