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Critique of the 2009 National Budget and Monetary Policy Statement
Zimbabwe Congress of Trade Unions (ZCTU) / LEDRIZ
February 09, 2009

1. Introduction

The 2009 national budget was presented to Parliament by the Acting Minister of Finance, Patrick Chinamasa on the 29th of January 2009. For the first time, the budget estimates are presented in Zimbabwe dollars, United States Dollars and South African Rands. The budget statement acknowledges that the economy is in crisis, which it largely blames on internal policies. Even though it still apportions some blame to external factors such as drought and sanctions, the accent is clearly on internal factors. For instance, the statement observes that the collapse of agricultural productivity is due to the inadequate supply of inputs (seed, fertilizer, chemicals etc), late review of producer prices, and inefficiency of GMB payment arrangements for farmers which resulted in a shift from controlled commodities such as maize and wheat to cash crops such as soya beans. This position is in line with the one taken by the Ministry of Finance in past budget statements, where it broke ranks with the official blame game. This led to the Ministry officials being castigated by the President as being 'bookish'. In fact, the open confrontation with the Reserve Bank of Zimbabwe resulted in the resignation of the then Minister of Finance, Herbert Murerwa, who had openly defied the Presidium, pointing to the foolhardiness of the extended and unaccountable role of the Reserve Bank, and especially its quasi-fiscal activities, which he blamed for the hyperinflation.

The budgetary statement also acknowledges the importance of a stable macroeconomic environment which allows forward planning, transacting in stable currencies while implementing reforms aimed at restoring the value of the local currency, holistic policies, unity of purpose amongst stakeholders and the re-engagement of the international partners to ensure regular and sustainable inflows and access to foreign currency to achieve the anticipated economic turnaround. The need to remove current distortions arising from multiple exchange rates and the licensing of businesses to transact in foreign currency, alongside the local currency is highlighted.

Clearly therefore, the budget statement breaks rank with the 'populist' approach that resulted in the implementation of half-hearted and wrong-headed interventions, including price controls that undermined viability and resulted in widespread shortages of basic commodities and the collapse of industry and the economy. It states clearly that: "Excessive money supply growth rates, emanating from unbudgeted expenditures made through the Reserve Bank, as well as low supply of goods and services remain the major sources of inflation," (paragraph 80, page 28). It goes on to contend that " . . . the 2009 Budget thrust should, therefore, shift from policies that promote and fuel consumption to those which create wealth, through supporting our productive sectors, particularly agriculture, mining, tourism and manufacturing, whose capacity utilization is now below 30%," (paragraph 83, page 28). It argues that "Essential for shoring up the value of the Zimbabwe dollar will be implementation of a combination of strict and painful fiscal and monetary measures that relate the Zimbabwe dollar monetary base to developments in the real sector, and avoidance of recourse to money printing beyond the economy's production of goods and services. Realising this requires discipline and commitment to our expenditure and revenue targets and, therefore, expenditures outside the Budget will not be entertained," (paragraphs 145-146, page 43).

The international context is outlined as one characterized by the emerging global financial crisis which has resulted in depressed demand and falling commodity prices. As a result of the global financial crisis, growth estimates at that level have been revised downwards to 3.7 percent in 2008, forecast to remain subdued at no more than 0.5 percent in 2009. Economic growth in Sub-Saharan Africa is projected to fall below 5 percent in 2009, while the anti-inflationary measures implemented in the sub-region are expected to keep inflation below 10 percent in 2009. Sources of funding, including foreign direct investment, lines of credit and migrant remittances are accordingly expected to decline significantly.

The economic outlook for Zimbabwe is gloomy as exemplified by the worsening balance of payments deficit, which increased from US$33 million in 2007 to US$410 million in 2008. This deterioration in the balance of payments is due to underperforming exports, which declined from US$1.606 billion in 2007 to US$1.376 billion in 2008, a reduction of 14.3 percent. Mineral exports, which are a major source of total exports, declined from US$801.8 million in 2007 to US$676 million in 2008, a reduction of 15.7 percent. Tobacco exports, which used to account for the single largest source of commodity exports, fell by 24.3 percent from US$247.3 million in 2007 to US$203.7 million in 2008. Even receipts from tourism at US$29.1 million, were 55 percent below the previous year. On the other hand, imports increased from US$1.9 billion in 2007 to US$2 billion in 2008.

On the part of the working people, their conditions became unbearable, with transport costs taking up the whole salary, resulting in workers failing to go to work, especially in the public sector. The difficulties in accessing cash from banks compounded the situation. Health delivery institutions scaled down operations, with some facilities closing down due to lack of equipment, essential consumables, drugs and loss of skills. The social sector, as well as social protection, has virtually collapsed as hyperinflation accelerated to 231 million by July 2008. In essence, Zimbabwe is a classic case of a failed state. The capacity of the state to raise revenues is limited, with VAT accounting for only 5.3 percent of total revenues as a result of price controls and collapse of the productive sectors of the economy. Public infrastructure, including water and sewer reticulation systems have deteriorated beyond their economic life and hence need rehabilitation and maintenance. With such low levels of sanitation, a cholera outbreak occurred since August 2008, which has spread to all the ten provinces. The collapse in domestic confidence in the local currency has robbed many Zimbabweans of a unit of account, means of payment and store of value.

Clearly, the budget statement paints a dismal picture of the economy, with the acting Minister thanking the western and other donors for humanitarian assistance, yet for so long these had been vilified.

2. Budget Highlights

According to the statement, the 2009 budget will focus on:

  • inflation reduction;
  • food security and productivity in agriculture;
  • water management;
  • guaranteed fuel and electricity supply;
  • improved delivery of health and education services;
  • infrastructure rehabilitation in transport (roads, railways and airports);
  • improved telecommunication systems;
  • efficiency of public enterprises;
  • stimulating the productive sectors, notably agriculture, manufacturing, mining, tourism and construction among others;
  • provision of housing , including for those in the public sector; and
  • social protection.

The budget aims at reducing inflation to double digit levels and a positive growth of about 2 percent in 2009. On the basis of a projected GDP of US$5.5 billion, revenues are estimated at US$1.7 billion in 2009. The total budget is estimated at US$1.9 billion, with the outstanding US$200 million being resources committed by cooperating partners for earmarked specific programmes.

One of the key policy proposals of the budget is the liberalization of the foreign exchange market, implying all transactions can now be legally undertaken in foreign currency alongside the local currency. The budget therefore merely recognized and legitimized the status quo as follows: "In line with the prevailing practices by the general public, Government is, therefore, allowing the use of multiple foreign currencies for business transactions, alongside the Zimbabwe dollar," (paragraph 139, page 42).

Just as a character is 'killed' in a soap opera, the role of the Reserve Bank in quasi-fiscal operations is removed through the explanation that the central bank liquidated its quasi-fiscal expenditures through its investment surpluses. Hence, forthwith, the RBZ will now concentrate on its core mandate of ensuring stability of prices and the financial sector.

On remuneration of public sector employees, the acting Minister proposed that they will continue to be paid their salaries in local currency with periodic reviews in line with the cost of living developments. In addition, a monthly allowance will be paid in foreign currency to facilitate access to a basket of goods and services now being charged in foreign currencies. This will initially be done through a voucher system pegged to a basket of goods for a family of six which the Monetary Policy Statement (MPS) set at US$100; to be phased out in line with improvements in foreign currency inflows. The actual modalities of this arrangement will be announced in February.

Insurance and pension funds, including NSSA, are now allowed to conduct business in local or foreign currency with effect from 1 February 2009. The stock market is now allowed to trade in both local and foreign currency. Similarly, local authorities such as ZESA, ZINWA and NOCZIM can charge in both local and foreign currency. In addition, tariffs will be reviewed to economic levels through the 'user pays' principle. This therefore implies there is no more cheap fuel, water, electricity etc. A trigger mechanism for the price of fuel and petroleum products is proposed. The management of water was decentralized to local authorities with effect from 1 February 2009, with ZINWA reverting to its status prior to 9 May 2005.

The domestic pricing regime was liberalized to remove restrictive price controls, with the role of the National Incomes and Pricing Commission (NIPC) reviewed to focus on monitoring price trends obtaining in the region and beyond; advising government on import parity based pricing. The agricultural pricing and marketing was also liberalized. Import parity related maize and wheat grain floor prices in foreign currency or the Zimbabwe dollar equivalent will prevail. Millers and other grain merchants will have to compete to purchase maize and wheat direct from farmers, alongside GMB, at prices not lower than import parity related floor prices. The financing of agriculture is now the responsibility of banks.

Toll gates will be installed along all major roads to help provide resources to maintain and upgrade the national road infrastructure with effect from 1 March 2009. The budget constraint was seen as an opportunity enlisting the participation of credible private investors who can participate in joint ventures under the Built Operate and Transfer (BOT) or Built Own Operate and Transfer (BOOT) arrangements.

A raft of tax proposals was also made:

  • Corporate tax to be collected in the currency in which business is conducted as from 1 January 2009 at 35 percent;
  • Customs duty to be collected in foreign currency from 30 January 2009;
  • Carbon tax and the NOCZIM Debt Redemption levy to be levied in foreign currency with effect from 30 January 2009 and to be reviewed with effect from that date;
  • Excise duty on second hand cars to be levied in foreign currency from 30 January 2009;
  • Presumptive taxes on the informal economy to be made in foreign currency;
  • Capital gains tax and stamp duty to be paid in foreign currency from 30 January 2009.

The budget statement proposed separate foreign currency tax tables for employees remunerated in foreign currency with effect from 1 February 2009. While PAYE used to be remitted within 15 days of the following month after collection, the budget statement proposed to review this to the third day of the following month as from 1 January 2009. The responsibility to regulate and control school fees was taken back to the Ministry of Education, Sport and Culture from the NIPC, with the latter focusing on compliance with the set fees. The domestic debt of Z$5500 quintillion is to be redeemed with immediate effect.


3. Highlights of the Monetary Policy Statement (MPS) of 2 February 2009

The key policy positions enunciated in the Monetary Policy Statement of 2 February 2009 are as follows:

  • Removal / lopping of a further 12 zeroes off the value of the currency with immediate effect, implying that Z$100 trillion is revalued to Z$100;
  • Introduction of 7 new denominations: Z$500, Z$100, Z$50, Z$20, Z$10, Z$5 and Z$1 which will circulate alongside the existing ones and will be withdrawn from July 1, 2009;
  • Devaluation of the Z$ from a mid-rate of Z$12.4 billion to the US dollar to Z$20 trillion (old money) or Z$20 (revalued). The interbank rate will continue to be the reference rate;
  • All businesses, public enterprises, educational institutions and government departments are now empowered to price their goods and services in foreign currency. Businesses are to display prices in both a foreign currency and Zimbabwe dollars at the daily interbank market rate;
  • All organizations that charge for their products and services in foreign currency are to apply for a licence at a cost structure ranging fromUS$10 for a street hawker in urban areas to US$12 000 for businesses in the main centres per annum. Severe penalties are threatened for those who demand foreign currency payments but who are unlicenced;
  • A two-tier system for public utilities will be applied such that corporates and residents of low-density areas will be required to settle their bills in foreign currency, while those in high density and communal areas will pay in Z$s;
  • Organisations charging fees in foreign currency must sell 5% of revenues to the RBZ at the ruling exchange rate, with exemptions applicable for educational institutions and rural traders;
  • Urban and private schools can charge fees in foreign currency, while those in communal areas will continue to accept Z$s;
  • Farmers can sell their produce in foreign exchange, while exporters (tobacco, cotton) will be entitled to 100% of their export proceeds in foreign currency. Tobacco and cotton merchants must raise offshore lines of credit and may not source their foreign currency requirements locally;
  • Banks can levy charges for FCA accounts and foreign transactions in foreign currency. Interest rates for foreign currency loans are capped at 6% above LIBOR;
  • Foreign exchange registered shops can pay their employees in foreign currency provided salaries are paid into employee FCA accounts. All corporates can pay salaries and wages in foreign exchange;
  • To facilitate the position taken in the 2009 budget that public sector employees will be paid a monthly allowance in foreign-currency-denominated vouchers; the MPS requires that retailers and wholesalers issue such vouchers which will then be sold to employers, including Government departments, which in turn will use the vouchers to pay for the allowances. Foreign currency to pay for such vouchers will be considered as a first charge against government's foreign currency collections from taxation;
  • Diamonds, platinum and emeralds are classified as strategic reserve assets as the case with gold, implying RBZ will licence and closely oversee the financial flows in these minerals, as well as other marketing arrangements. The provision allowing platinum and diamond mining companies to maintain offshore FCAs has been revoked with immediate effect;
  • There will now be a two-tier money market structure with different interest rates for domestic and foreign currencies;
  • Statutory reserves are reduced to 10% for commercial banks for all classes of deposits;
  • Exporter retention rates were increased from 85% to 92.5% with exporters being allowed to retain their FCA deposits indefinitely;
  • Stock brokers will now pay a 1.5% financial sector stability levy on all foreign trades, while sellers in foreign exchange will pay a fee of 3.5% in foreign currency to the RBZ, thereby raising transaction costs; and
  • Gold producers can export their production directly, paying Fidelity Printers and Refiners for processing costs, while retaining 92.5% of the export value. Arrears of an estimated US$30 million for overdue payments by the RBZ have been converted into 8% 12-month bonds with interest payable on maturity. Interest payments will be backdated to the time when the RBZ should have reimbursed the exporter.

With respect to exchange controls:

  • Corporates and individuals can pay for goods and services offshore and repay foreign debt without prior RBZ approval;
  • Exchange control management will be decentralized to authorized dealers;
  • Capital account transactions will still require exchange control approval, including disinvestment, cross-border investment, rights offers and restructuring, among others;
  • All foreign currency accounts for parastatals and ZIMRA must be transferred to the RBZ so that all foreign exchange inflows to the government are centralized;
  • Individuals and corporates are allowed to export up to $250,000 in cash on a "no questions asked basis" with immediate effect, while deposits of up to $250 000 in FCAs will also be allowed with no questions asked.

4. Critique

4.1 Political hide and seek game

Whereas the acting Minister stated that he had consulted widely, the opposition and other key stakeholders have indicated that they were not consulted, implying that the budget statement may not reflect a consensus position, contradicting the importance of national cohesion and unity of purpose highlighted in the statement as key success factors.

More fundamentally, however, the timing of the budget statement raises eyebrows. Why was the budget crafted and announced as the political parties were negotiating the creation of a Government of National Unity? Was it then an attempt by one party to upstage the other?

It is intriguing that the budget was presented without due regard to the ongoing attempts at creating a Government of National Unity. It allocates votes of expenditure to 25 cabinet portfolios as opposed to the 31 in the power sharing deal of 15 September 2008. Critically, the new structures (including the Prime Minister's Office) and Ministries established through the power sharing deal are not included in the budget. Given that the Ministry of Finance is scheduled to go to the MDC-T, the new minister may not necessarily accept the budget as currently crafted, and hence, the exercise may have to be done again.

4.2 Absence of a Medium Term Economic Strategy and Questionable Assumptions

The budget is an instrument for implementing an agreed medium term development strategy. In this case, there is no such policy, implying the budget is not necessarily implementing any comprehensive, coherent development strategy. Liberalising the economy is not a policy strategy as the lessons of the 1980s and 1990s with structural adjustment the world over suggest. Closer home, the experiences of ESAP and the liberalization of the Zambian economy under Chiluba testify to this. In the absence of an overall strategy, the budget is reduced to a groping exercise.

Another issue is that the budget and monetary policy statement were crafted by the current regime, and not by the in-coming power sharing government. In fact, the new direction proposed, and in particular partial dollarisation and liberalization, may very well be out of desperation than conviction, in which case it is a matter of 'new wine in old wineskins'. The Biblical wisdom in Matthew 9 verses 16-17 is very apt: "No one puts a piece of unshrunk cloth on an old garment; for the patch pulls away from the garment, and the tear is made worse. Nor do they put new wine into old wine-skins, or else the wineskins break, the wine is spilled, and the wineskins are ruined. But they put new wine into new wineskins, and both are preserved," (Quoting the New King James Version). The MDC-T has made it known that the Governor's position is not guaranteed, and hence it is clear if they take charge of the Ministry of Finance, which supervises the RBZ, the relationship will not work. In this regard, the focus and priorities of the government of national unity and that of the current regime may very well be at odds, implying the need to re-craft both the budget and monetary policy statement.

The starting point should not just be fiscal discipline, but rather cutting our coat according to our cloth. This implies the need to restructure the government structure to reflect the resource base and agreed national priorities. Exhorting ministries to live within their budgets, when the bloated government structures are retained will not work, as has been the case in the past. The time has come for Zimbabwe to put the cart before the horse, by radically restructuring government to reflect the resource base and national priorities, not political accommodation. That is where the power sharing deal fails in that it has increased, rather than rationalize government structures.

Interestingly, the revenue estimates amounting to US$1.7 billion are based on the assumption that comprehensive and mutually reinforcing macroeconomic reforms will be implemented. The revenue estimates are also based on the expectation that output will grow and that the capacity to collect revenues is there, which is not the case. With the global downturn, which will depress demand for exports and export prices, foreign currency earnings are likely to fall further in 2009, while remittances will be undermined by the depression in the source economies. Given the transitional nature of the power sharing deal, and the animosity between the protagonists, the transition is likely to be a messy affair, and external funding may focus on humanitarian assistance.

The raft of tax increases to be paid in foreign currency may not materialize, resulting in the realization of a budget deficit, which can no longer be financed through credit creation (printing money), as in the past. With over 70 percent of revenues from indirect taxes, the tax structure is regressive and penalizes the ordinary Zimbabwean. Moreover, recourse to cost recovery will rekindle inflationary pressures. The stark reality therefore is that we will not have a balanced budget, and with revenues not meeting projections. Without recourse to printing money, the expenditures will have to be cut further. Money supply will be determined by the inflows of foreign currency. Thus, the combination of the global recession, falling export earnings and remittance inflows, will inevitably imply a deflated domestic economy with both output and employment declining markedly.

4.3 The Achilles Heel of Partial Dollarisation

The partial dollarisation of the economy will not work for a number of reasons. In the first instance, the government opted for partial dollarisation (multicurrencing) because it cannot finance full dollarisation, with official foreign currency reserves projected at only 0.8 months of import cover in 2008. Full dollarisation involves the RBZ buying the deposits of the banks and financial system as a whole, and converting them to US$s, which is not feasible without external assistance. This partial dollarisation approach leaves the majority of the people out of the system, and hence it is an elitist project. Reference to use of currency of choice in the monetary policy statement implies people have a choice. Many do not. Trying to dollarise without dollars will not work. It is also a fiction that the local currency will remain legal tender and 'a' and not 'the' means of payments. The public sector workforce will not accept the vouchers and salaries denominated in Z$s. Furthermore, it is implausible that retailers will raise the vouchers, knowing very well that these are not backed by adequate foreign currency reserves.

4.4 Unrealistic Objectives

Given the critical importance of external support for economic recovery, it is unlikely that the ambitious objectives of price stabilization (double digit inflation by year-end), food security, guaranteed provision of water and electricity, rehabilitation of infrastructure, efficiency of public enterprises, stimulating the productive sectors, notably agriculture, manufacturing, mining, tourism and construction among others; provision of housing , including for those in the public sector; and social protection will be achieved in 2009. Only US$53.5 million was allocated for social protection, yet almost half the population (about 6 million Zimbabweans) are in need of food aid. On this estimate, the amount allocated for social protection works at US$8.9 per person per year, a ridiculously low amount.

As the budget statement rightly observes, achieving these objectives requires the consistent implementation of comprehensive reforms, underpinned by national cohesion and unity of purpose by all stakeholders. Given that there is no such overarching credible development strategy on the ground, and the polarization that characterises the Zimbabwean polity, which will take time to reverse, these objectives are as unrealistic as they are unachievable.

4.5 Entrenching Enclavity and Dualism

As explained above, the budget and MPS will reinforce enclavity and dualism and contain no specific measures to deal with this inherited and now entrenched structural distortion. Neither does the budget take a human-rights approach that prioritises basic socio-economic rights to water, health care, education, provision of basic utilities, housing and sanitation, decent employment and poverty reduction. The demise of the formal sector, and the absence of supply-side incentives to resuscitate and engender inclusive, pro-poor growth, coupled with the likely adverse impacts of the global financial crisis and anti-inflation measures, implies the decent work deficits that characterize the economy and entrenches poverty and its feminization will abound.

Critically therefore, the budget fails to provide stimuli for a new paradigm that is pro-poor and inclusive, fails to promote the integrability of marginalized groups (women, youths, people with disabilities and people living with HIV and AIDS) and sectors, especially the informal and rural economy, and unleash a more employment-intensive pathway out of poverty. The dilapidated state of infrastructure provides an opportunity to leverage pro-poor, employment intensive infrastructure programmes, which the budget and monetary policy statements fail to take advantage of. Regrettably, circular and cumulative causation will be sustained, with the rich (with access to foreign currency) getting richer, while the poor will certainly become the poorer. Thus, both the budget and MPS do not provide the basis for a paradigm shift to foster a pro-poor, employment-intensive recovery and inclusive growth pathway for Zimbabwe.

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