Zimbabwe’s Revised 2009 Budget

Zimbabwe’s Revised 2009 Budget
and the Short-Term Emergency Recovery Programme
The new Minister of Finance has responded quickly to the weaknesses of the first attempt at preparing a budget for 2009 by launching in the budget debate in Parliament a more cautious replacement.
In this, the Minister scales down to US$1 billion the spending proposals, matching this to the more modest sum that he believes government can expect in tax receipts, and he makes no assumptions that aid will be bound to make the budgeting easier. He does acknowledge taking guidance from the country’s performance in the first quarter of 2009, during which revenues were not even sufficient to cover public sector salaries for those months.
Low collections from VAT, PAYE and customs duties are blamed, but no reference is made to the continuing violations of human rights that have dismayed the donor community and caused most of those in a position to help to hold back their support.
In the original budget, the lowest ministry vote was for US$2,6 million, but in the revised version five of them are to receive sums less than US$2 million. The sums to be voted for each ministry have mostly been reduced by appreciable amounts, but this is partly because the number of ministries has been increased from 25 to 32.
The votes, for Education, Health, Home Affairs (Police) and Defence now come to US$520 million, or 56,5% of the total Vote Appropriations, and in the earlier version these came to US$828,1 million, but only 46,5% of the total.
In his presentation to Parliament, the Minister makes frequent references to the just-released Short-Term Emergency Recovery Programme (STERP), which was conceived after the signing of the Unity Accord in September. The 128-page document makes mention of every possible economic activity, every social dimension, every financial institution and every political aspect it claims is needed to create an economy:
a) Able to sustain itself through food self sufficiency
b) Weaned off the current price distortions
c) That creates jobs and employment opportunities
d) Confers equal opportunities and treatment to all its citizens
e) That accepts the equality and central role of women and mainstreams gender in all facets of the same
f) That takes cognisance of the environment and global environment changes
g) With functional infrastructure such as roads, water and telecommunications
h) That is people centred and inward looking
i) That guarantees freedom of expression and property rights
j) That generates confidence and inter-sectoral synergies
k) That reduces poverty
l) That is free of any sanctions and measures and is totally integrated in the region and continent.

Unfortunately, some of its suppositions are questionable. In the Preface the claim is made that the people were empowered through “the crowning consolidation of our herd-won independence”, the Land Reform Programme. As President Mugabe wrote the Preface, this claim appears to have forbidden the authors of the document from even considering the possibility that this same Land Reform Programme is the root cause of the difficulties that STERP is supposed to rectify.
Equally questionable is the claim that the removal of sanctions will “facilitate a sustainable solution to the challenges that are currently facing the country”. This claim is made even though the authors acknowledge that the sanctions have been applied against individuals accused of violating human rights, not against the country.
According to the document, “measures have been taken against Zimbabwe, denying the country the right to access credit facilities from international financial institutions…as well as denying Zimbabwean companies access to lines of credit”. However, these are not sanctions. The fact is that Zimbabwe disqualified itself from access to credit facilities and it did this by failing to meet its repayment commitments on previous loans.
The last four pages of the Budget Estimates, the Blue Book tabled in Parliament with the Budget Statements, show the details of several hundred foreign loans, the repayments on every one of which is in arrears. The total amounts outstanding add up to US$2,35 billion.
Without question, the Land Reform Programme can be blamed for the country’s inability to pay its debts. This programme broke the back of Zimbabwe’s largest industry, its commercial farming sector, and in its disabled state, this industry was of far less value to every other sector, particularly manufacturing, transport, construction and banking.
As commercial farming was the source of most of Zimbabwe’s exports, the lost export revenue had an immediate effect on the country’s ability to service its debts. But the need to import increasing quantities of food – also because of Land Reform – made foreign exchange scarcities an absolute certainty.
STERP does not address this subject. In his Foreword to the document, the new Minister of Finance, Tendai Biti, makes the important observation that “the absence of property rights has guaranteed perpetual backwardness”, but STERP makes no case of the urgent need to re-instate the property rights that were destroyed.
Neither does it suggest that Zimbabwe should re-engage the collateral value of the land to fund the recovery of this most important sector and, through this, make possible the recovery of the rest of the country. Instead, it tries to make a case for funding support that adds up to US$8,4 billion, which is more than double Zimbabwe’s Gross Domestic Product. The short-term period referred to in the STERP title in the period to December 2009.
Despite making all-too obvious cases for urgent improvements and the need to rebuild capacity in every possible area, this recovery programme seems destined to join the long list of earlier recovery plans, all of which were also eloquent descriptions of attractive destinations. Like them, this one also fails to describe the vehicle and route map needed to get there.
However, in his revised budget presentation the Minister announced some essential changes and clarified a number of important issues and it is pleasing to note that most of these demonstrate his determination to reduce governments direct involvement in business affairs.
An exception to this is his position on gold, but as Dr Gono’s earlier permission to gold miners to export their own gold was so surprising, the change is not expected to surprise anyone. As Dr Gono did not have the existing legislation repealed, it remains in place, but all miners are assured of receiving world market prices.
“In short, the pricing gap in respect of which domestic prices lagged behind international prices is a thing of the past. In the case of gold, the same will remain a strategic reserve asset whose licensing and marketing will be in line with the Gold Trade Act,” said the Minister.
With its adoption of relatively stable foreign currencies in place the now defunct Zimbabwe dollar, the question of measuring inflation now has to be dealt with differently, but one of the newer inflationary pressures has been overcome with the removal of all foreign currency surrender requirements.
As this affected the prices of inputs to the manufacturer, the prices of sales to retailers and the end prices to consumers, the cascading effect was adding a significant percentage to selling prices. The surrender of 5% of turnover also reduced profitability by an even wider margin, so its removal will assist the recovery of many producers.
However, the hopes expressed in the STERP paper that manufacturing capacity utilisation will rise from 10% to 60% between March and December 2009 seem unlikely to be achieved. The document says government will support the manufacturing sector through the establishment of external lines of credit for the importation of raw materials and equipment, but to do so, government will need to be much more aggressive about its intentions to place the country’s producers onto a more secure footing.
Zanu PF’s long-standing hostility to the business sector needs to be completely transformed by the deliberate removal of the many disincentives and handicaps placed in the way of business development. If it removes all discouraging legislation, it will be able to safely leave to the private sector the task of securing its own credit lines and investment inflows.
Government’s should immediately disabuse itself of the belief that investors will be satisfied by assurances that the Indigenisation and Empowerment Act will not be applied. Only when equity investment flows have started will the country see lenders’ confidence restored, but while this Act remains in the statute books, it will be enough to prevent any prospect of attracting the desperately needed capital.
Given the difficult conditions currently affecting capital movements all over the world, Zimbabwe faces the challenge of competing against very heavy odds and it cannot afford even the hint of a government inclination to dilute the ownership or control of an investor’s interests.
If government is successful in raising external funding, it should use this to work on the country’s physical and social infrastructure, concentrating first on electricity supplies, water, transport, health and education.
Success in these areas, together with improvements in municipal services, will greatly enhance the private sector’s chances of restoring production volumes, exports, employment growth and government’s tax revenues. Progress in all of these will depend upon restoring the skilled personnel base, but all of these will depend upon government moving aside and letting businesses get on with the job.
While important changes have come through already with the political changes this year and many of the phrases and sentiments expressed in the STERP document are pointing to the acceptance of market-related principles, much more work has to be done to expunge the still present evidence of lingering command-economy constraints.
Support for some of these appears to rest purely on satisfying the claims of small, but influential groups whose only concern is the preservation of privileges and personal protection. They are opposed to the very concepts of market-related incomes, sometimes because they are completely out of their depth in competing in such markets, but more often because they claim to have earned entitlements in recognition of their status or their past loyalty.
Whatever their concerns, their continuing involvement in the political arena appears to account for the very slow process of change that has been evident ever since the signing of the Unity Accord in September. Renewed farm invasions, abductions, arrests and many acts of violence that could have been ruled out by the same political heavyweights appear to have been deliberately caused by them to slow the progression of events.
However, they have lost their access to foreign exchange at privileged exchange rates and with the new Minister of Finance having brought an end to quasi-fiscal activities funded by the Reserve Bank, their chances of using their leverage to tap into deliveries of essential imports and agricultural machinery are rapidly disappearing.
Whichever way recent events are interpreted, the inescapable fact is that a major change has taken place and Zimbabwe’s fortunes were placed upon a new track. Although very little momentum has built up so far, politicians in opposition to Zanu PF now have authority, the Zimbabwe dollar is now dead and the Reserve Bank’s influence has been greatly reduced. These have placed power into the hands of people with distinctly different motivations.
Their challenges are immense, and long before they began to grasp the full measure of the repair work to be done they recognised the tasks to be way beyond the resources of this country. However, hopes that quick and generous assistance will come from the international donor community and development agencies have to await the further changes that will make Zimbabwe deserving of assistance.
It is on these changes that Zimbabwe must now concentrate its efforts. Regrettably, the STERP document, despite all its pleasant sentiments and agreeable phrases, will not be enough to persuade business leaders to invest in our disabled productive sectors, nor will it encourage donors and development agencies to rebuild our disabled infrastructure. They are all looking to us to make the moves needed to impress them, and every one of these moves lies in the political arena.
John Robertson