Govt grinding to a standstill

The IMF mission in Zimbabwe meeting senior government officials

FISCAL pressures, which worsened last year due to higher-than-budgeted-for wage increases against the backdrop of a weakening economy, have escalated in the New Year amid fears that government operations may grind to a halt unless Treasury gets substantial cash injection to avert the simmering crisis, the Financial Gazette can report.

Last year, revenue shortfalls against the background of a shrinking economy — worsened by weakening international commodity prices — conspired with the hike in salaries to heighten fiscal pressures, but government averted an implosion through implementation of a package of revenue and expenditure measures, which included a blitz on businesses to raise tax.

In the face of thinning disposable incomes and their effect on consumer demand, which has always been weak, these measures did not take long to backfire. The economic situation tightened during the later part of last year, resulting in government failing to pay annual bonuses to civil servants on the agreed dates.

Government released a revised pay calendar for civil servants, with only members of the military still expected to get their salaries during the traditional mid-month dates. Teachers and the rest of the civil service will get paid on month-ends. This has triggered fears of possible default in the payment of civil servants salaries because of the worsening cash flow situation.

Teachers received their salaries on January 27 as scheduled and other civil servants are expected to get their salaries today in line with the 2015 salary schedule. This year, recurrent expenditure is projected at 92 percent of the US$4,1 billion National Budget, with the bulk of that accounting for salaries. Employment costs last year took an estimated 82 percent or US$3,2 billion of the 2014 budget.

With revenue taking a severe knock, the few projects that government could fund under this year’s budget will suffer as resources are diverted towards salaries. Indications are that funds raised by other agencies like the Zimbabwe National Roads Administration are being diverted towards Treasury for purposes of paying salaries. As a result, road projects are likely to suffer.

The government’s salary bill amounts to about US$3,32 billion, or 81 percent of total expenditure, leaving a balance of US$798 million for operations, debt service and capital development programmes. What this means is that salaries alone may end up gobbling the entire budget, leaving nothing for projects and debt repayment. Government is saddled with a US$8 billion debt.

Government currently has about 553 000 employees on its payroll. But there have been allegations that the payroll has a lot of ghost workers. Finance and Economic Development Minister Patrick Chinamasa has denied this. The fiscal pressures would be more telling in the first quarter of the year. It is during this period that the situation may get out of hand for several reasons.

Firstly, revenue inflows have suffered severe battering as companies continue to bleed due to a combination of depressed consumer demand and high operational costs. The mining sector has been the worst hit, as international prices of major metals have been on the decline. Gold producers have already sent an SOS to government, pleading with the administration to lower some of the taxes levied on the sector.

What has made Zimbabwe’s situation difficult is that companies have missed out on the benefit that was supposed to arise from falling international prices of fuel as government sought to capitalise on the situation to raise revenue. Increasingly, government’s aggressive taxation methods are catching up with it.

Government has had to cut the expected revenue outturn for this year to US$3,5 billion, from the US$4 billion announced in the 2015 budget. The downward revisions were made in line with the requirements of the International Monetary Fund (IMF)’s Staff Monitored Programme (SMP).

Speaking at the Confederation of Zimbabwe Industries 2015 economic outlook symposium, Chinamasa, said the economy was in “a sad and sorry state”, highlighting challenges confronting government in meeting its obligations. He said budget implementation continued to face expenditure pressures against low revenue collections.

Speaking at the Confederation of Zimbabwe Industries 2015 economic outlook symposium recently, Finance Minister Patrick Chinamasa, said the economy was in “a sad and sorry state”, highlighting challenges confronting government in meeting its obligations. He said budget implementation continued to face expenditure pressures against low revenue collections.

The IMF has indicated in its latest report on Zimbabwe that the country’s “economic situation remains difficult”, highlighting that the external position was precarious, with low international reserves, a large current account deficit, and an overvalued real exchange rate and growing external arrears.

Tony Hawkins, a professor and the University of Zimbabwe’s School of Management, said government revenue was likely to come under pressure from an underperforming economy. He said the nature of problems confronting the economy was such that policymakers could do very little to stem the slide.

“Given the structural nature of the problems, there is relatively little policymakers can achieve, especially in the short-term. In this situation it makes more sense to focus on medium-to-long-term constraints and priorities,” said Hawkins. The current situation would be discomforting to government, which recently committed itself to a SMP with the IMF as it makes moves to re-engage the international community.

An SMP is an informal agreement between a country authorities and the IMF which allows the Bretton Woods institution’s staff to monitor the implementation of a country’s economic programme. The main objective of the new SMP programme for Zimbabwe is to strengthen the country’s external position, as a prerequisite for arrears clearance, resumption of debt service, and restoration of access to external financing.

The IMF said government has committed itself “to consolidate the fiscal position, eliminating the primary budget deficit by end-2015”. Developments on the ground clearly indicate this will not be achieved. The IMF also said government would “aim to accumulate international reserves and seek to mobilise international support for resolving the country’s external debt situation. The authorities intend to restore confidence in the financial sector, as well as improve public debt and financial management.”

So far, a few banks have collapsed, and Reserve Bank of Zimbabwe governor John Mangudya said that it was normal during harsh economic periods.

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