The much anticipated 2012/2013 Fiscal Policy Statement was presented last week by the Minister of Finance,Tendai Biti.
Policies presented since 2009 have left the market with hope that indeed we are recovering from the trough.
By contrast, the policy presented last week depressed sentiment as it confirmed that tough times are ahead. Growth for 2012 was officially trimmed down to 4,4% from the mid-year revised target of 5,6%. The new growth rate is less than half the 9,4% that government was projecting at the beginning of the year.
Economic performance in 2012 was greatly constrained by a poor farming season together with shortages of liquidity. Revenue targets for 2012 now stand at US$3,5 billion from a revised target of US$3,6 billion. When the year began government anticipated revenue inflows would total US$4 billion. Diamond revenues have not been coming in as projected.
Agriculture is now projected to expand by 4,6%. Initially the sector was estimated to contract by 5,8%. The positive outturn is due to the better than anticipated tobacco crop output at 144 million kilogrammes against an initial estimate of 130 million kilogrammes.
Manufacturing remains in the doldrums and a small growth of 2,3% is expected this year, down from 13,9% registered in 2011. A host of challenges continue to surround the sector, including shortages of funding and stiff competition from imports.
A current account deficit for 2012 is likely to be at US$2,9 billion as imports are projected to end the year at US$8 billion against exports of US$5,1 billion.
Growth for the coming year is projected to come in at 5% with the mining sector expected to grow by a massive 17,1%, buoyed by the resumption of nickel and asbestos production. We nonetheless doubt that production of the latter will resume as funding requirements for Shabanie and Mashava mines are huge.
Agriculture, together with the finance and insurance sector are expected to grow by 6,4% and 6%, respectively. These figures look ambitious in light of evidence on the ground.
The 2012/2013 farming season may well be a disaster just like the 2011/2012 as preparations are already lagging behind. Agriculture remains under-funded as the issue of security of tenure on land remains unresolved. There is need to finalise ownership of land so that farmers can use their land as collateral in accessing finance from banking institutions.
Finance and insurance sectors are unlikely to grow by 6% as anticipated by government, as moves to control deposit and lending rates are likely to be the main hindrance.
Biti outlined some measures to be adopted by BAZ and RBZ towards drafting a memorandum of understanding that will guide operations of banks. These include scratching of bank charges on deposits below US$800, a mandatory interest rate of at least 4% per annum on deposits above US$1000 held for a term above 30 days.
Essentially all civil servants will now be accessing banking services for free. The minister believes that banks should make money from generating loans which might not necessarily be true as lending is just one division within banks.
There are other supporting services whose charges cannot be met from just lending.
A ceiling on lending rates of 10% will restrict funding to the productive sectors. Banks will not advance loans at rates lower than their cost of funding.
Equally depositors will hold back their money if they perceive the rate on deposits to be too low. Furthermore, we do not believe that deposits from NSSA and Old Mutual are sufficient to lower the cost of funding in the economy as appetite for cash remains high. Early this year NSSA introduced a similar arrangement whereby it capped lending rates at 15% but the approach did not lower lending rates.
The proposals from the Minister of Finance are in a way a form of price control and history has shown that market forces cannot be controlled without dire consequences. If anything, margins have been trimmed and this will work against efforts being made by players to mobilise resources to meet the new capital requirements set by the Reserve Bank.
There is a need to come up with a concrete solution to address our funding needs which unfortunately the budget statement did not proffer. Unless government comes up with a timeous solution, all the recovery recorded since 2009 is likely to dissipate.
Revenue targets for next year were set at US$3,8 billion, with US$3,3 billion of this going towards recurrent expenditure. This implies that only US$500 million will go towards capital expenditure. If anything, the funding challenges that engulfed the economy in the current year are likely to persist in 2013.
The country needs external funding if it is to maintain the growth rates that have been achieved over the past three years. It is unfortunate government is incapacitated from borrowing because of the huge debt overhang of approximately US$10,1 billion.