The International Monetary Fund (IMF) has given the nod to fiscal policy measures that are currently being implemented by Government through treasury, arguing they are a step in the right direction and will help create room for more efficient capital spending and subsequently lead to economic recovery and growth.
The world monetary body’s country representative Patrick Imam, told Business Weekly this week that reducing the budget deficit may raise confidence if “economic actors believe that the fiscal position of the Government is brought to a sustainable level”.
Government is currently implementing fiscal policy measures under its economic blue print, the Transitional Stabilisation Programme (TSP) aimed among other things to reduce the country’s budget deficit.
A widening budget deficit has been blamed for most of the country’s ills with Finance and Economic Development Minister Mthuli Ncube, saying the country’s perennial budget deficit “has been a major source of overall economic vulnerabilities, including inflation, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages”.
As a result, Government, under the TSP, has made trimming the country’s budget deficit a top priority to stabilise the economy that has not been performing well. However, since September, the country has been recording a primary surplus according to Minister Ncube.
As part of the TSP, Government has also embarked on structural reforms that are meant to wean off loss-making parastatals and reduce public spending.
Said Imam: “Without these adjustments and reforms, Zimbabwe would have been on a path to a repeat of what happened a decade ago.”
In that decade, Zimbabwe went through a crippling hyperinflation programme that was only brought to an end through dollarisation.
As a result, these TSP measures are fully supported by the IMF with Imam saying “rationalising unproductive spending such as subsidies to inefficient and loss-making State-Owned Enterprises (SOEs) may in fact be good for growth”.
In tandem with SOEs reforms proposed by the TSP, Government has earmarked several parastatals for privatisation, partial privatisation and liquidation.
Significant progress has already been made with some SOEs having already appointed transactional advisors, while some are already in negotiations with potential suitors. Some are even optimistic of meeting the fourth quarter partial privatisation deadline.
The IMF believes weaning off these companies will help create room to protect more efficient capital spending and may divert savings to social spending and public infrastructure development and rehabilitation.
“By accelerating structural reforms, such as reforming loss-making parastatals or improving the business climate, private sector investment would be encouraged, which would counter the effect of reducing public spending,” said Imam.
Swift implementation needed
The IMF, however, believes the country has to move fast in implementing the reforms if it is to restore stability and investor confidence.
Said Imam: “The government has made a start on all three fronts but needs to move faster and implement what the reform it set itself.
“More needs to be done to restore stability and to restore private sector confidence, which is key to ensure that the conditions for growth and poverty reduction are in place.”
There are, however, fears that the adjustments that have been made, which include the introduction of a 2 percent intermediated financial transactions tax, might have negative social ramifications.
The IMF, however, believe that as much as the adjustments are a major source of concern, in terms of social consequences, it’s something the Staff Monitored Programme, which it agreed with the Government of Zimbabwe, will guard against.
“This is why in the MPS (Monetary Policy Statement), there is a commitment by the Government to raise social spending to help the most vulnerable sections of the population.
“In addition, the policy of containing inflation as much as possible and bringing it back to low double-digits, if not single digits, in the near term should also help the most vulnerable segments, who are least able to protect themselves from inflation,” he said.
“I think we all agree that the burden of the adjustment should not fall on the most vulnerable elements in society.”
Fuel subsidies a burden to the poor and the vulnerable
Imam spoke against fuel subsidies, saying they are not effectively targeted at the poor, but are actually a burden.
He said there is need to relook at the fuel subsidies in terms of sustainability and whether the financing of these subsidies is having a positive effect in the economy.
He said the aim of the subsidies is presumably to help the neediest.
“Right now, if you look at the fuel subsidies, they largely go to the middle-and upper classes, who have large cars. But is it fair that a villager, who pays taxes and doesn’t drive a car, subsidies a CEO of a company for instance who can afford the fuel?” asked Imam.
“If the government wants to help the poor, there are more cost-effective and efficient ways of doing this, such as through conditional cash transfers as is done in many countries for instance.
“Second, from an environmental perspective, fuel subsidies lead to overconsumption of fuel, which hurts the environment.
“In the Zimbabwean context, protecting the environment is key, as it constitutes an important source of sustainable wealth that we must preserve, such as through attracting tourists.”
Imam also believes fuel prices in the country are among the lowest in Africa resulting in some of it being often times smuggled to neighbouring countries.
“This means we are subsidising our neighbours, and as a result, we have these huge fuel lines. This is another form of inefficiency”.
He said these subsidies therefore, by leading to overconsumption, impact the balance of payments negatively, and lead to an outflow of foreign exchange.