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Reviewing Zimbabwe's austerity reforms

02 Sep 2019 at 09:37hrs | Views
Zimbabwe's Finance Minister Prof Mthuli Ncube
Zimbabwe launched its austerity measures under the Transitional Stabilization Programme (TSP) in October 2018. The stabilization programme itself is running from October 2018 to December 2020. Austerity measures are aimed at implementing cost cutting measures to reduce the public sector wage bill, which consumed close to 90% of budget allocations between 2008 and 2018. Furthermore austerity reforms aim to increase tax revenues with the introduction of the 2% Intermediated Monitory Transfer (IMT) Tax, restructuring of the civil service and privatization of State Enterprises and Parastatals (SEP). These initiatives are meant to bring about fiscal balances in the public sector.

Austerity measures are policies aimed at reducing government spending, increase tax revenues, or achieve both. The measures act as contractionary fiscal policies as they slow economic growth. That makes it even more difficult to raise the tax revenues to pay off debts in the medium to long term. In most cases, austerity measures have led to slow economic growth and increased unemployment to the extent that it becomes more disastrous if the intended objectives of such measures are not implemented fully or if the results are not realized in the economy. Zimbabwe is implementing its austerity measures under the watchful eye of the International Monitory Fund (IMF) through the staff monitored programme, which covers a period from May 2019 to March 2020. The fund recently warned the government against unsustainable increases in wages for its over 400 000 civil servants, after the introduction of the Zimbabwean Dollar pushed up inflation to more than 176% in June 2019.

Austerity reforms can be controversial. Major criticisms against the IMF's austerity conditions include the economic decline realized after cuts in government expenditure. The measures have been deemed to be anti-developmental, self-defeating and tending to have an adverse effects on the poor in society. In 2014, the European Union (EU) imposed austerity measures on Greece during its debt crisis. Greece's austerity measures included tax reforms in a country where unemployment and tax hikes had curbed economic growth for years. In 2012, Greece's debt-to-GDP ratio was 175% (One of the highest in the world). Financial lenders required Greece to reorganize its revenue collection agency to crack down on tax evasion. Other specific measures required Greece to reduce public sector head count by 150 000, lower civil service wages by 17%, reduce pension benefits above US$1 300 per month by 20-40% and raise property taxes. The Greek government agreed to these reforms and privatized more than US$38 billion in state-owned assets in 2014. It also promised to sell an additional US$55 billion in assets by 2015. Greece is slowly coming back to economic life after years of turmoil, thanks to the tough austerity measures it adopted to manage the crisis and over US$280 billion in bailout packages from IMF and the EU. Greece's economy is expected to grow by 1.9% this year after a nine-year debt crisis that shrank it by more than a quarter.

In 2011, the Portuguese government cut wages by 5% for top government workers under its own version of austerity measures. It also raised Value Added Tax (VAT) by 1%, increased taxes on the wealthy, privatized more state entities, cut military and infrastructure spending. In April 2011, Portugal received a financial package from the IMF and the EU worth US$115 billion under its 3 year austerity programme which was to end in May 2014. In 2014, the government reversed the reform agenda after a spate of general strikes and instead offered incentives to businesses. That reversal and a willingness to boost spending had a powerful effect on the economy. Creditors criticized the policy changes, but the gamble paid off. Market confidence picked up while production and exports grew steadily. Since the third quarter of 2014, the Portuguese economy has been expanding, with average annual GDP growth rate of 1.5%. The country's GDP grew by 2.7% in 2017, the highest in many years and created as many jobs.

The Zimbabwean government has set a target of reducing its budget deficit to 5% of GDP this year from 12% in 2018. The government has pointed out that its austerity programme is yielding positive results and highlighted that its treasury department recorded a budget surplus of Z$804 million between January and June 2019 on the back of fiscal discipline in government expenditure. It is fair to say that the 2% IMT Tax has been very instrumental in increasing revenues with contributions of more than Z$112 million per month. The government is anticipating a budget deficit of Z$4.61 billion (US$450 million) in 2019. The government budget deficit has been growing from US$1.42 billion in 2016, US$2.62 billion in 2017 and US$2.73 billion in 2018.


Zimbabwe's Budget Figures since 2009

Austerity measures have hit Zimbabwe's civil service very hard with most civil servants taking home a salary less than Z$582 (US$50) since March against a family basket which costs Z$1700. Persistent threats of strikes and demonstrations have crippled key sectors such as education and health care. Government recently tabled 76% increase to civil service salaries in a development that will see the lowest paid worker earning Z$1 023 (US$100) up from $582. Civil servants feel that the lowest paid worker should pocket Z$4750 and are not happy with the increment from the same government which has hiked prices for most public services by more than 500% in the last 4 months.  

In terms fiscal adjustments, the country has trimmed its domestic debt stock from Z$9.5 billion in December 2018 to Z$8.8 billion as of June 2019. However the central bank continues to float Treasury Bills to finance government operations despite government claims of recurring budget surpluses, with Z$90 million of TBs being auctioned in August 2019 alone. In terms of civil service restructuring, not much has been done apart from laying of 3 188 youth officers who received entry level civil service salaries when they were laid off. Recruitment freezes effected before the TSP programme have been lifted in key sectors such as health and education.

There has also been slow progress on the privatization front where Z$350 million is anticipated to be raised. Most investors are developing cold feet on the few state entities on the shelf for a number of reasons which range from the recent monitory changes which pose exchange rate risks, hyperinflation, difficulties to remit dividends and the lack of stability in the local economy. In the first half of 2018 alone, US$212 million was spend on recapitalizing ailing parastatals by the government and more debts have been assumed by the taxpayer in order to make state entities appealing to would be investors.

Despite the government's best intentions, austerity measures tend to shrink economic growth, cripple public service delivery and ultimately reduce tax revenues which may far outweigh the benefits of reduced public spending. The IMF has predicted that Zimbabwe's economy will contract by 5.2% in 2019 and the treasury department has also acknowledged the same. Independent analysts believe that the contraction could be in a double digit zone. The treasury department has not managed to remodel the murky command agriculture scheme due to political pressure despite abundant evidence that the program is a black hole. It has allocated more than Z$4.4 billion to the program this year alone despite adverse reports by the Auditor General of massive fraud in 2018.

Zimbabwe's austerity measures have also avoided cuts on foreign travel by top civil servants for medical treatment and other services. The government is still footing a huge bill for bloated entourages that visit various regional and global events, hotel allowances and upkeep for several foreign missions. Zimbabwe's austerity reforms have to be fully implemented within the given timeframe of 2 years so as to wean the government of consumption induced borrowing. The IMF is likely not going to offer any bailout packages to Zimbabwe, thus the country has to lift itself out of any economic slowdown induced by the austerity measures. Fears are that austerity reforms have been acting as a double edged sword that leads to economic recession, job cuts and company closures while failing to tackle runaway government expenditure, which is the elephant in the room.  

Victor Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.


Shipping vehicles from UK to Zimbabwe for less
Source - Victor Bhoroma
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