7 December 2018

Zimbabwe: State of the Economy and Way Forward

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Below is a statement by the Hon Professor Mthuli Ncube, Minister of Finance and Economic Development, on the State of the Economy and the Way Forward, issued on 5 December 2018

On 22 November 2018, I presented the 2019 National Budget to Parliament under the theme -- "Austerity for Prosperity". The Budget constituted the first economic and financial framework for implementing the Transitional Stabilisation Programme (TSP), which is also an initial stepping stone towards realising Vision 2030.

And indeed, that ambitious Vision is duly the theme of this Conference -- "Towards an Upper Middle Income Economy by 2030".

To give perspective to this conference theme, allow me to briefly walk delegates on the state of our economy, before highlighting the thrust of the TSP and the 2019 National Budget.

In the 2019 National Budget, I indicated that during the first half of 2018, the economy exhibited signs of strong recovery, riding on improved confidence from a peaceful pre-election environment and prospects for increased investment.

GDP Growth

In 2018, key growth drivers were agriculture and mining, complemented by the services sectors.

With regards to agriculture, tobacco and cotton yields outperformed the 2017 levels and 2018 Budget targets, to support overall sector growth of 12,4 percent. Similarly, in mining, gold output surpassed last year's production levels, to give mining growth estimate of 13 percent.

Tourism and other service sectors (with average growth of 5 percent) also added positive contribution to the 2018 growth momentum, all to a growth expectation of about 6,3 percent in 2018 during the first half of the year.

Regrettably during the last half of the year, there were noticeable challenges, which posed some risks to economic activity, and these are associated with foreign currency supply challenges, fiscal imbalances, financial sector vulnerabilities, infrastructure deficiencies and capacity underutilisation, among others.

Nonetheless, the economy remains resilient and is expected to record a solid growth of 4 pecent in 2018.

Public Finances

Positive economic performance, gave scope to better revenue collections for the nine months of the year, which amounted to US$3,8 billion, against a target of US$3,4 billion. By year end, solid collections of US$5,3 billion are anticipated.

However, while revenues exceeded Budget targets, total expenditures for January to September 2018, overshot to reach US$6,5 billion against a target of US$4,1 billion. Taking into account the expenditure developments to September, outturn to year end is estimated at US$8,2 billion, against a budget of US$5,3 billion, implying an expenditure overrun of US$2,8 billion (11,7 percent of GDP).

Such a high deficit is clearly unsustainable against acceptable international levels of around 3 percent of GDP. The high budget deficit has been feeding into the rapid build-up in domestic debt stock which stood at US$9,6 billion as at end of September 2018 as well as other macro vulnerabilities.

The bulk of domestic debt is also in Treasury bills, issued for recapitalisation of public enterprises, settling Government obligations and RBZ debt assumption.

GDP Rebasing

Zimbabwe has undertaken a rebasing of Gross Domestic Product in line with international norms, which require replacing of the old base year, taking cognisance of changes in structure of the economy. This exercise is undertaken following sector surveys by ZIMSTAT.

These surveys reflected significant changes in the number of establishments in specific sectors and the whole economy (5 419 to 38 137). And also important is that the surveys captured the GDP contribution by the informal sector, which has grown bigger in Zimbabwe.

The whole exercise culminated in the adoption of a new base year 2012 from the previous 2009 base year. Subsequent changes of GDP numbers in line with the new base year indicate that GDP at current prices for 2016 has moved upwards from US$16,6 billion to US$20.5 billion, while at constant prices it grew by 29,2 percent from US$14,2 billion to US$18,3 billion.

The rebasing exercise also revealed some vital information on our public finances. In essence, there is notable fall in revenue to GDP ratio, reflecting that revenue generating capacity of the Zimbabwean economy is yet to be harnessed and that the current tax system has scope for expansion.

In addition, the higher revenue to GDP ratio before rebasing implies that a higher tax burden is being shouldered by a few taxpayers while tax evasion, particularly in the informal economy, remains quite high.

With regards to trade, exports during the first half and part of the third quarter were on the rise, underpinned by growth in gold, platinum, chrome and tobacco exports, on the back of favourable prices and increased production.

Exports of goods and services for the first three quarters of the year amounted to US$3,79 billion, against US$3,44 billion recorded during the same period in 2017.

The growth in exports, however, suffered a knock in the third quarter of 2018 due to challenges related to foreign currency shortages, particularly for key exporters. This compromised the ability of exporting firms to cover their costs of key consumables, hence reduced production.

Imports

On the other hand, the pressure emanating from rising internal growth during the first nine months of the year, propelled the demand for imports of goods and services.

A total of US$5,87 billion in merchandise imports were recorded during the first nine months of the year, against US$4,86 billion of the same period last year.

These imports were mainly dominated by fuels, electricity, fertiliser, chemicals, soya, medicines and few other consumables.

The higher growth of imports relative to exports implies a widening trade balance of US$2,1 billion during the first three quarters of the year, compared to US$1,4 billion.

The deteriorating trade balance, higher primary income payments relative to receipts and slowdown in transfers, particularly remittances, gave rise to a widening current account balance.

This second part of Zimbabwe's twin deficits has also a role in igniting the macro instability including inflationary pressures during the fourth quarter of the year through rising parallel exchange premiums.

As a result, annual inflation, which averaged 2,9 percent during the first half of 2018 shot to 20,8 percent in October 2018, reflecting the dangers of living with the twin fiscal and current account deficits.

The Transitional Stabilisation Programme

In view of the above challenges and our quest for transforming the country into upper middle income status, Government has launched a short-term stabilisation strategy -- the Transitional Stabilisation Programme (Oct 2018-Dec 2020), which is a ready under implementation and to be followed by two strategic successor plans -- Five-year National Development Plans: NDP 2021-2025 and NDP 2026-2030.

The Transitional Stabilisation Programme's immediate task is centred on macro and fiscal stabilisation and laying a solid foundation for attaining the overall goal of a strong, sustainable and shared growth.

Such growth will be anchored on good governance and promotion of democratic principles, equitable access to means and outcomes of production, as well as modern infrastructure that supports day-to- day socio-economic activities.

Sustainable and shared growth will also prioritise efficient delivery of public services and restoration of Zimbabwe's rightful place in the global economy.

Implementing the Transitional Stabilisation Programme by powering the respective strategic and transformative divers for change and development is initially through the 2019 Budget.

The Transformative Drivers of Change

Macro-Fiscal Stabilisation

The primary objective of the TSP and hence the 2019 Budget is to stabilise the economy by targeting the fiscal and current account twin deficits, which have become major sources of overall economic vulnerabilities including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.

The strategy for reducing the budget deficit entails managing expenditures while stimulating economic activity in order to broaden the revenue base for any future expenditures required for development.

In addition, during the macro stabilisation phase, efforts will be directed at mobilising and optimising revenues without compromising the viability at source.

On the other hand, managing the current account deficit, as already indicated in the Budget, will require measures on managing our import bill while stimulating exports and other forex inflows.

Treasury Bill Issuances

High fiscal deficits became entrenched largely due to expenditures committed outside the Budget framework and financed primarily through Treasury Bill issuances and RBZ overdraft.

Going forward, with immediate effect, all Treasury bill issuances will be strictly through the auction system and for financing expenditures under the Budget framework and for short-term cashflow mismatches.

The overdraft facility with the RBZ is now limited to 5 percent of previous years' revenues and for the sole purpose of smoothening cashflows.

The Public Finance Management Act is, therefore, being amended to penalise any Treasury Bill issuances outside the Budget framework.

Expenditure Containment

The Budget emphasises on living within means by instilling fiscal discipline and rationalising expenditures in order to create additional financial capacity for funding developmental expenditures and enhancing delivery of public services.

Consequently, a number of measures on containing expenditures are already under implementation, targeting the wage bill and other operational expenditures.

In support of expenditure containment measures, the Budget is also introducing measures on improving expenditure controls, fiscal transparency, and reporting.

Tripartite Negotiating Forum (TNF)

Social dialogue has proved to be a key platform for addressing various social and economic challenges between the three social partners, namely, Government, labour and business.

The TNF, therefore, provides scope for negotiating a social contract that also reduces pressure on the wage bill with the objective of enhancing the economic development process of the country and at the same time promote consensus building for the national good.

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Penalties under the Public Finance Management Act

Compliance with provisions of the statutes that govern public finance management is central to fiscal discipline and the achievement of Government development and service delivery objectives.

The PFM Act empowers the Treasury to exercise general direction and control over public resources, and further provides for financial misconduct in cases of wilful and/or negligent failure to perform duty and exercise powers in compliance with provisions of the Act.

Treasury will, in the context of amending the Public Finance Management Act, propose measures that enhance the enforcement of approved penalties, for cases of non-compliance with requirements of the Act, to achieve improved accountability in the management of public resources.

Multi-Currency System

In the 2019 Budget, I reiterated that the country is still using the multi-currency system, which was put in place by Government in 2009. From this multi-currency basket, the US dollar is our reference currency, also applying to the 2019 National Budget.

Government commits to preserving the value of money balances on the current rate of exchange of 1 to 1, in order to protect people's savings and balance sheets. This value preservation arrangement is hinged on consistent implementation of prudent fiscal and monetary policies, as well as disciplined market conduct by a economic agents as espoused in the Transitional Stabilisation Programme.

Going forward, the objective is to build foreign reserves and credit lines, as part of the strategy for the value preservation objective.

In the same vein, as macro-fiscal consolidation progresses, Government will establish a strong inclusive framework, through an interim Foreign Currency Allocation Committee, with broader representation as was the case in the past.

This will, however, be in the context of gradually exiting from exchange controls to market-based mechanisms that promote efficiency in foreign currency allocation.

Re-engagement for External Debt Resolution

Re-engagement with co-operating partners and International Financial Institutions to discuss and map the way forward on the country's Arrears Clearance Road Map continues. The last meetings were held in October 2018, in Bali, Indonesia.

In summary, the co-operating partners are in support of the Transitional Stabilisation Programme, as it captures adequately the reforms that Government is implementing, in order to turn around the country's economic fortunes.

However, the international community emphasised the need to consistently implement the measures as outlined in the TSP and, therefore, implementation of reforms under the Transitional Stabilisation Programme holds the key for advancing the arrears clearance strategy and unlocking of new financing.

Productive Sectors

The 2019 Budget recognises the current constraints of limited fiscal space against high demands, and, therefore, initially focuses on quick-win flagship projects and programmes across key sectors of the economy, with a view of stimulating inclusive growth with jobs.

Consequently, the 2019 Budget prioritises agriculture, infrastructure rehabilitation and development which ordinarily supports our productive sectors besides other social-economic activities.

Public Services Delivery

In the same vein, the Budget prioritises healthcare, education, water and sanitation as delivery of these services remains utmost important and yet still falls short, that way imposing hardships on parts of the population.

Details on these sectors will be dealt with by the respective Ministers.

Infrastructure Development

Infrastructure development is prioritised under the 2019 Budget and the Transitional Stabilisation Programme as a key ingredient for attracting investment, reducing the cost of doing business and facilitating business operations.

Treasury in consultation with line ministries and other departments has drawn an Infrastructure Development Plan. The 2019 priority projects have been selected through further engagements with line ministries, public entities and stakeholders.

A number of the identified projects will be accorded high priority, With their execution being tracked by Cabinet under the 100-Day Programme Cycle. This will ensure adequate resources are directed towards effective projects delivery, including access to critical construction inputs.

The list also includes projects that address emerging infrastructure gaps, which have put the lives of the public at risk, particularly in the water and sanitation, housing and energy sectors.

Infrastructure Spending and Finance

A total of US$2,6 billlion will be invested in infrastructure during 2019, of which US$1,1 billion will be mobilised through the Budget and US$1,5 billion as off-budget financing.

Already, Government has facilitated mobilisation of off-budget loan funding through public entities, which will result in US$969 million being disbursed during 2019 for ongoing works at Hwange 7 and 8 Thermal Power Station (US$350 million), Harare-Masvingo-Beitbridge Road Upgrading Project (US$250 million), NRZ recapitalisation (US$216 million) and R. G. Mugabe International Airport (US$78,2 million).

Furthermore, statutory and public entities own resources will contribute US$390 million, whilst development partners are expected to invest US$99,4 million, mostly targeted at projects in energy, water and sanitation, transport and irrigation sectors.

Inclusive and Private Sector Led Growth

Government deems all sectors of the economy as having potential and abundant capacity to contribute to economic growth and jobs creation. Critical for triggering this opportunity is harnessing and organising the requisite financial and human capital resources for this purpose.

An aggressive investment drive is fundamental under the thrust "Zimbabwe is Open for Business". This necessitates enhanced efforts on reforming the business and investment environment, under the Ease of Doing Business Reforms.

The shortcomings identified under the Ease of Doing Business Reform Agenda are being prioritised with specific actions being instituted under 100-Day Rapid Results Plans.

Other investment initiatives include the formation of the Zimbabwe Investment and Development Agency (ZIDA), through amalgamation of the Joint Venture Unit in the Ministry of Finance and Economic Development; Zimbabwe Special Economic Zones Authority; and the Zimbabwe Investment Authority.

As of 31 October, 2018, a total of fifty two (52) investment proposals with an aggregate value of US$57 billion had been received for appraisal.

Already, eleven (11) of them have already been approved by Government, setting the stage for preparations towards commencing operations. The approved projects have a combined value of US$5,3 billion. The bulk of the projects are work in progress and are at various stages of processing.

Venture Capital Funding

Further to this, Government is also establishing an enabling environment to attract investments through venture capital.

Venture capital firms match financing to entrepreneurs potentially viable good projects, thereby contributing to the success of investee companies. Consequently, upcoming firms grow and create jobs, increase overall innovation, productivity and growth at macroeconomic level is realised.

It is envisaged that such investments will complement Government efforts in turning around the economy.

Tax Incentive for Jobs

The Budget also made proposals for a taxation regime targeting job creation, especially incentivising investors, corporates and entrepreneurs. Consultations with the private sector are ongoing with a view of identifying strategies for promoting job creation in the economy.

SMEs Support, Youth and Women Empowerment

As with previous Budgets, the TSP and the 2019 Budget continue to capitalise empowerment banks as well as the respective empowerment funds in the ministries of SMEs, Women and Youth.

This is in recognition of the immense potential of the above players in the economic transformation agenda.

Devolution

Devolution is a key tenet for equitable, shared and sustainable growth. As such the 2019 National Budget committed 5 percent of Central Government revenue collections for distribution to provincial and local tiers, in line with the constitutional provision under Chapter 14 on devolution. This constitutes US$310 million to be distributed upon the promulgation of an enabling Act of Parliament in 2019.

An interim inter-governmental-fiscal transfer Framework, which allocates the resources, cognisant of socio-economic disparities across provinces and local authorities is being developed.

Such a framework takes account of provincial population size, poverty levels and infrastructure deficit in the areas of health and education, and economic disparities within and between provinces, among other relevant considerations.

Conclusion

Austerity for Prosperity

Ordinarily measures on cutting on expenditures, mobilising more resources through taxes entail foregoing certain benefits in the short term,

Therefore, as we implement the macro-economic stabilisation measures to our fiscus and current account adjustment, inevitable hardships will be unavoidable.

However, the objective is to build the base for a prosperous economy in line with our Vision 2030. And precisely, this Budget under the theme "Austerity for Prosperity" promises a better future by doing the right things now.

And, attaining a better future is within reach, despite some of the hardships of the past, Currently, the economy remains resilient, with performance exceeding expectations. Government policy initiatives will see solid growth in 2019, that way sustaining revenue and exports performance above targets.

The re-engagement efforts are also raising investors' interest with more than US$15 billion worth of projects being negotiated.

Therefore, as the Budget focuses on addressing macro-fiscal challenges, the economy should start genuine stabilisation for sustainable growth,

Hon. Prof. Mthuli Ncube is Minister of Finance and Economic Development in the Government of Zimbabwe.

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