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Think-tank says Zim budget a fantasy
ZimOnline
December 07, 2006

http://www.zimonline.co.za/Article.aspx?ArticleId=585

HARARE - The Economist Intelligence Unit (EIU) says Zimbabwe's 2007 national budget is a journey through fantasyland and warns that quasi-fiscal spending and interest payments could spike the country's budget deficit to 64 percent of Gross Domestic Product (GDP) in 2006.

In a commentary on the 2007 budget announced by Finance Minister Herbert Murerwa on 30 November, the EIU said the budget followed the pattern of recent years, whereby forecast government spending and inflation are understated and future economic performance is exaggerated.

Murerwa said despite Western sanctions against the Harare administration, the lack of World Bank or International Monetary Fund (IMF) loans, and the fact that foreign aid to Zimbabwe is marginal (and mostly humanitarian), the southern African nation’s economy was on the path to recovery.

The Finance Minister optimistically projected that GDP would grow by between 0.5 percent and one percent, having contracted by 2.5 percent in 2006 and 3.8 percent last year.

The EIU noted that such projections are not overly reassuring since Murerwa was similarly optimistic last year about economic performance in 2006, predicting growth of 2.5 percent.

"In other words - and not for the first time – the numbers simply don't add up," said the respected international economic think-tank.

The comments by the EIU come at a time when an IMF team is in Zimbabwe to assess the country’s economic performance.

The outcome of their assessment could mean the difference between Zimbabwe's expulsion from the Bretton Woods institution or another reprieve for a country that has consistently defaulted on loan repayments to the Fund.

Harare owes more than US$127 million in arrears to the IMF alone out of a total of US$2.2 billion owed to foreign creditors as at 31 October.

The EIU noted that as recently as July, Murerwa projected a budget deficit of 18.7 percent of GDP in 2006, but later revised the figure to 43 percent of GDP, excluding interest payments.

The reason for the revision is the inclusion of quasi-fiscal or off-budget spending by the Reserve Bank of Zimbabwe (RBZ).

Murerwa said quasi-fiscal expenditures would be incorporated into the 2007 budget and that the current stock of funds lent out by the RBZ would be amortised over three annual budgets.

The first Z$100 billion for the amortisation fund has already been allocated.

He instructed that all government and related departments’ borrowing requirements would from now on be met from sources outside the RBZ.

According to the EIU, total government spending would rise to Z$824 billion if quasi-fiscal expenditure was included in the budget.

"Even this understates the actual magnitude of the deficit, however, because it carefully excludes interest payments of Z$119 billion. Taking these into account the total deficit rises to Z$692 billion (US$2.77 billion), or 64 percent of GDP," said the EIU.

Murerwa's budget was also found short on critical issues such as how he hoped to finance the interest bill and deficit without further fuelling money supply growth and inflation.

Zimbabwe has the highest rate of inflation in the world, which was pegged at 1 070.2 percent in October.

Murerwa hinted last week that RBZ governor Gideon Gono would devalue the Zimbabwe dollar and speculation is rife that the governor will adjust the rate to 500 Zimbabwe dollars to the American greenback from Z$250:US$1 at present.

Other market watchers have been speculating that the central bank chief could let the exchange rate slide to as low as 1 000 local dollars to the US unit.

Rates in the illegal parallel market – where the bulk of foreign currency is traded - are at present around 2 500 Zimbabwe dollars against the US unit, which means there would still be a huge free-market premium even if Gono opts for the latter, according to the EIU. - ZimOnline

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