Monday, July 20, 2009

Comments on The Mid-Term Supplementary Budget for 2009 - from John Robertson

I hope that you will find my attempts to summarise the economic aspects of Minister Biti's Budget presentation helpful. I find it hard to escape the feeling that he is overstating the extent and even the reasons for the improvements noted so far. Most of the improvements are not the result of government actions, but of government backing off and therefore allowing parts of the markets and the business sector to recapture the initiative.
This is certainly a huge improvement, but it has yet to translate into a recovery of capacity, specially among those who remain dispossessed.

The closing observations in the Minister of Finance’s mid-term budget statement were chosen well. Although he was forced to accept that severe constraints are still keeping many urgent needs beyond reach, he clearly intended to remove all doubt about his intentions:
“We are slowly liberating ourselves from the era of economic fascism and economic hedonism” was one of his remarks, and more thoughts were captured in, “We have a duty to rise above the mediocrity of subjectivities and the sterility of conflict. We have a duty to ignore the long sulk of godfathers.”
The first 130 pages of the Minister’s presentation examine the extensive range of economic handicaps he and the country have been bequeathed by a decade of appallingly bad economic mismanagement. He points out that the Global Political Agreement had to be signed because of the absence of a viable option to the “attrition, stalemate, conflict, violence, debilitating and dis-empowering effect of a decade-long political crisis”, and that “Zimbabwe is too valuable a dream to be squandered”.
Arguing that the crisis led to a “massive de-industrialisation of the economy, deep seated poverty, sustained periods of negative GDP growth rates, the collapse of social services, food shortages, and massive despondency in the country”, the Minister reminded Parliament that, “The fundamental reality that brought all the actors into an unhappy compromise has not gone away”, because, as he points out, “…there is little delivery and execution of agreed positions taken in the Global Political Agreement, particularly on matters around human rights and the rule of law…”, and, “The reality of the matter is that political factors need to be liquidated as a matter of urgency so that the country does not continue to be held hostage to the past.”
After the initial changes to the Former Minister of Finance’s budget had cut revenue and expenditure figures by half to US$1 billion, mid-course correction changes were inevitable and each ministry attempted to improve on the amount allocated. However, as this table from the Minister of Finance’s presentation to Parliament shows, the forecast revenue has been decreased and the total expenditure increase being provided for will have to be financed by the Vote of Credit. This is funded by donor contributions specifically earmarked for budget support. Of the total US$391 million shown in the table, US$117 million has been received already and the balance is expected by the end of the year.
Information shown in the Supplementary Estimates of Expenditure also tabled in Parliament on July 16th permits calculations to be made to show the extent to which cuts were made to the amounts applied for by each ministry and this table shows the extent of the changes for each ministry:

Together with cuts to the Constitutional and Statutory Appropriations, the total expenditure is reduced by US$220 million, but this amount is to be used to improve upon the US$100 a month allowance that has been given to public servants since dollarisation earlier this year.
To the US$34 million a month this has absorbed so far, a further US$14 million a month is now to be added and the Minister’s wording suggests that further sums will be provided to permit some differentiation between grades. At Zimbabwe’s depressed levels of activity, public sector salaries amount to 35% of total expenditure and 13% of GDP. With the forecast recovery of the economy and improvements in both the tax revenue and GDP, the Minister expressed his wish to see these percentages reduced to 30% of expenditure and 8% of GDP to prevent them from crowding out non-wage expenditures.
However, the prospects of the hoped-for recovery remain far less promising than the Minister suggested in his presentation. He appears to have been persuaded that capacity utilisation had already improved considerably in manufacturing, but the evidence strongly suggests that the severe power cuts alone will have made significant increases in output impossible for most.
To this problem must be added the inability of the banks to offer the overdraft facilities or the longer-term loans needed to rebuild stocks of materials, carry out long overdue maintenance and repairs or attract back the skilled personnel or experienced operators to staff production lines.
Although the extent of the recovery that does prove possible will be off a very low base, the constraints presently affecting output are certain to impose severe limitations and these will be reinforced by the reluctance of buyers on the domestic as well as export markets to place too much reliance on Zimbabwe’s suppliers at this stage.
Although some mineral prices are beginning to improve and the gold miners have at last been granted more acceptable marketing arrangements, the severely debilitating handicaps imposed on them in recent years have left them in need of more working capital than most can afford, or can obtain from the equally handicapped banks.
Government’s acceptance of the need to make far-reaching changes has not been enough to overcome the lingering effects of years of losses that eroded each company’s skills, physical capacity, standing with customers and suppliers and financial stamina. A few undoubted successes have been welcome and these have helped reduce the import bills for some goods, but these might not be sufficient to offset the continuing declines in other sectors.
Agriculture appears to have attracted the most exaggerated forecasts of recovery, but the sizes of this year’s crop deliveries were set by events and conditions in 2008, very few of which were favourable. For the hoped-for recovery in 2010, the disappearance of government’s capacity to offer subsidies has brought the financial realities home to previously generously supported farmers. Even though the quantities of local fertiliser are inadequate, unsold stocks are accumulating for lack of buying power; so next year’s harvests are already in doubt.
Hopes of a rapid improvement in the business outlook have not been realised mostly for reasons related to the recovery of confidence. Widely known political requirements have not been fulfilled and the pace of change is unlikely to improve before these receive the needed attention.
John Robertson
July 19 2009

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