Populist Measures Deepen Fiscal Crisis

Goverrnment’s recent decision to award soldiers and police a hefty “special allowance” a few weeks before Zimbabwe holds a crucial general elections on July 30 shows that President Emmerson Mnangagwa’s administration is pursuing catastrophic populist agendas at the expense of the economy.

Ironically, Mnangagwa, who assumed office in November 2017 after a military intervention that toppled Robert Mugabe, had committed to break away with the past punctuated with extravagant expenditures in relentless pursuit of an “economics ahead of politics” policy.

The move has already courted the ire of critics, who argue that the new administration is greasing the palms of the country’s military, which helped propel Mnangagwa to the presidency.

The decision to award soldiers and police officers “special allowances” of 22,5% and 20% respectively comes after the Reserve Bank of Zimbabwe’s first quarter 2018 report showing that government had cumulative revenue collections of about US$1,2 billion, against total expenditure outlays of US$1,4 billion, resulting in a widening budget deficit of US$225,4 million.

According to the report, public expenditure surpassed the target of US$1,1 billion by US$273,3 million, exposing government’s fiscal indiscipline and unbridled spending. Zimbabwe has over the years continued to overspend, with last year’s deficit outturn standing at US$1,707 billion, representing 9,4% of gross domestic product.

The issuance of Treasury Bills (TBs), which government has largely relied upon to service an unsustainable budget deficit, has also been cited by investment analysts as the core of Zimbabwe’s economic problems. This has driven the demand for scarce foreign currency, as well as creation of excess money supply, which is largely in the form of Real-Time Gross Settlement (RTGs) and mobile balances.

Faced with a wave of resentment at home, Mugabe often played the populist card, much to the detriment of the national economy which has been decimated by decades of gross mismanagement and corruption.

In 1997, the local dollar spectacularly plunged to an all-time low when Mugabe disbursed $50 000 in Zimbabwe dollars to each veteran of the 1970s liberation war outside the budget. The subsequent intervention of Zimbabwe in a war that destabilised Central Africa’s Great Lakes region and the sovereignty of the Democratic Republic of Congo (DRC) without the approval of Parliament also exacerbated the hemorrhaging of the country’s economy.

In the case of the new administration, it appears Mugabe’s propensity to spend recklessly continues to be mirrored in how Mnangagwa has attempted to navigate the country’s frail economy from the woods through his “Zimbabwe is open for business” mantra.

Dissapointingly, and against the advice of the International Monetary Fund (IMF), Mnangagwa has continued to follow in the footsteps of his predecessor by pursuing a narrow policy of self-preservation that has left the economy in the dumps.

The IMF, among other international financial institutions (IFs), which are cumulatively owed an external debt estimated at US$12 billion by Zimbabwe, have advised the southern African country to adopt austerity measures which include trimming public expenditure.

The structural reforms proposed by the global finance houses would also pave way for re-engagement with Harare and restoration of credit lines as spelt out under the Lima Plan, which the southern African country has since shelved as it battles to extinguish its huge debt stock.

Zimbabwe’s fiscal deficit has widely been attributed to government’s propensity to award salary increments to the civil service, in an economy characterised by a debilitating cash crisis, widespread company closures, a widening trade deficit and spiraling joblessness.

Earlier this year, the IMF warned Harare that effecting salary increments for the country’s bloated civil service would scupper efforts to place the economy on a firm growth path, while denting investor confidence.

“Fiscal consolidation is a critical element for stabilising the economy since persistent large deficits crowd out private sector investment, exacerbate external imbalances, and further undermine confidence in the currency regime,” said the Bretton Woods institution last month in an online global update.

“Given the tight fiscal space, it is important to prioritise and rationalise all spending, ensuring that needed expenditure increases are met with commensurate cuts in other expenditures with revenue increases to minimise the impact on the deficit target.”

Bindura University Faculty of Commerce lecturer Felix Chari said government was servicing its ballooning civil service wage bill through borrowing on the domestic market, crowding out the private, an assertion monetary authorities deny.

“The special allowance awarded to soldiers and police officers increased government expenditure which is already exceptionally too high for Zimbabwe’s level of revenue generation which remains repressed. This will severely impact on economic growth prospects as government borrows to finance unproductive expenditures that do not create productive assets for the government,” said Chari.

Recent statistics show that the bulk of loans extended by local banks are being taken by government through the issuance of debt instruments, a situation which has increased the cost of money while crowding out the private sector.

Economist and legislator Eddie Cross says the “special allowance” awarded to soldiers and police would have the ripple effect of fuelling inflationary pressures, while gobbling up government revenues in recurrent expenditure, leaving virtually nothing for capital and social outlays.

“It is unhealthy and will only result in high inflation. We are also likely going to witness monetary and fiscal instability going forward as a result of that,” said Cross.

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