What fiscal discipline, what savings and what growth?

The goal of public policy, particularly the national budget, is to steer the economy towards this desired objective and the macroeconomic policies themselves must be constantly reviewed against cardinal performance indicators and benchmarks.
But an economy where the government is too broke to provide basic social services or pay its workers a decent wage and those it owes; an economy where civil servants and the general workforce sell their skins to pay rent, electricity and water bills that gobble their earnings down to the last cent; an economy where money circulates outside financial intermediaries and banks have nothing on their books to lend and an economy where severely undercapitalised firms struggling to recover have to pay Value Added Tax before collecting it through accelerated remittance periods, is to be very polite, an economy by another name.
This is the economy whose books Finance Minister Tendai Biti, seeks to appraise today in a mid-term fiscal policy review.
“We have not borrowed from anyone,” Biti said on Friday. “That fiscal discipline should show our seriousness about returning to macroeconomic fundamentals.”
The remark seems to suggest that if a government does not incur any new debt to fund its operations, then it has achieved fiscal prudence and must therefore get a standing ovation.
But wait a minute, is Zimbabwe’s national budget balanced in the first place? What is the ratio of the deficit to the budget and gross domestic product (GDP)?
Here we go.
On January 30, Patrick Chinamasa, the then acting minister of finance, presented a budget valued at US$1,7 billion, which matched revenues and expenditures.
47 days later, Minister Biti, cut revenue projections by US$700 million but added US$2 billion to the initial expenditure to make provisions for additional ministries and the Short Term Emergency Recovery Programme-based projects, thereby creating a budget deficit of about 350 percent of the budget.
“Mr Speaker Sir, given that over and above the initial proposed 2009 budget provisions of US$1,7 billion we face other emergency financial requirements to end of the year amounting to over US$2 billion, it is imperative that we engage the international community for financial support,” Biti said.
In a scenario like this, failure to borrow to finance planned government operations, including paying salaries and servicing debts, does not amount to fiscal discipline or “cash budgeting.”
Rather it reflects either serious deficit spending if the government resorts to spending future income on current operations, or serious government failure if it abandons the projects it had planned to implement during the current financial year after failing to raise the finances required.
More bluntly stated, Finance Minister Biti should be the last one among all fiscal authorities in the world to talk about fiscal discipline or savings and economic growth for these macroeconomic variables can only be pursued after a government has met its basic commitments such as paying a decent wage, providing enough clean water, electricity, public health care and education and after re-opening a closed university.
Listening to Minister Biti, it is not clear whether fiscal discipline or savings or growth is a means to an end or an end in itself.
Are these variables so sacred that the Minister can flintily weave through a crowd of miserable, starving, grossly underpaid and utterly demoralised and dejected civil servants all the way to Parliament to tell the world that “we saved” and hope to grow by some 3,5 to  four percent this year?
To begin with, it is not very difficult to achieve growth if a government  deliberately sets it as a target to grow by a certain magnitude.
The only difference is the type of growth it desires, whether it’s growth with equity where the government attempts to strike a balance between economic and social policies or jobless growth based on high-tech production methods, or ruthless growth where a government seeks to grow the economy without regard for welfare issues.
By setting a growth rate target of four percent after failing to pay civil servants a decent wage, the Minister and his fiscal team appear to have cast their dice at the last option — ruthless growth through an inverted welfare system that unfairly transfers purchasing power from households to the government and indirectly to private firms.
Naturally, moral suasion has short legs and can only walk a limited distance. As expected, it is business as usual all over again in the civil service because as workers, they are not on voluntary service.
It is strange to hear someone talking about savings in this low-income economy with the lowest disposable incomes in the world, but it is even stranger for the Finance Minister of such an economy to set a savings target of 25 percent or more of GDP.
Firstly, GDP being a quantitative value and savings being its dependent variable, the ratio may mean nothing unless the economy makes quite a big jump.
Suppose, through some miraculous foreign investment, the economy actually grows by four percent this year as the fiscal authorities say, it means Zimbabwe would only have added US$128 million and attained a GDP value of just US$3,328 billion from US$3,2 billion last year, an income level that can be compared with the profits of some private companies on the continent.
The value created is hardly enough to resuscitate ZESA Holdings and the National railways of Zimbabwe.
Secondly, which economic agent has the capacity to lift the savings average of the country when firms are broke, banks are broke, workers are broke and the government itself is broke and none of them can save anything?
Suppose firms secure enough lines of credit to re-capitalise today; suppose also that power supply improves today and firm X decides to increase output, the puzzle that immediately confronts it is: what percentage increase in production should it target and how much of the additional products will actually sell. In a low income economy with low aggregate domestic demand like Zimbabwe — where civil servants earning US$100 per month in allowances constitute over 70 percent of the critical mass of consumers — industrial output can only increase if disposable incomes increase exponentially, implying that the savings of firms, governments and households from profits, taxes and wages can only rise if the other one rises.
A solution to this dilemma is, however, simple: an obsession with figures, though scientifically sound, can only create fantasies.
The fiscal authorities should concentrate on nursing the economy, attending first to the most critical spots such as wages, utilities, social services, banking, currency, investment and domestic debt servicing before dreaming about growth and savings.
Furthermore, it is not enough for the government to keep on saying, “we don’t have the money,” to pay civil servants and the companies it owes.
A good target would be to say ZESA should add 250 megawatts to the national grid this year or Harare Hospital should have 100 dental surgeons by December.
Base currency
Although Zimbabwe uses the United States dollar as a base currency and the South African rand as a peripheral currency, monetary conditions in the country are largely influenced by monetary and other macroeconomic movements in South Africa. Dependent heavily on imports from Africa’s largest economy — both raw materials and finished goods — Zimbabwe has borne the brunt of recent caprices in the rand-US dollar exchange rate in the form of rising consumer and producer prices.
In addition to the challenge created by a narrow circulation of foreign currency in rural areas where people have had to dispose assets to finance consumption expenditures, this problem has sparked a continuing debate on whether the country should resort to the rand as a base currency or revert to the Zimbabwe dollar. Without offering a solution, Minister Biti on Friday ruled out the latter: “The Zimbabwe dollar as we speak now is dead and moribund. It’s not our intention to resuscitate the corpse of the Zimbabwe dollar for so long as we are not able to achieve a growth rate of at least four percent of GDP, for so long as exports are not 70 percent of GDP and for so long as our savings are not at least 25 percent of GDP.
“Confidence and predictability and legitimacy are key in the economy before we can think of bringing back the Zimbabwe dollar.”