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Zimbabwe: Economic Policies Evaluation

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Introduction

Zimbabwe is located in the southern part of Africa and is classified as a developing nation. It sits on world class platinum, chrome, diamonds and iron ore deposits. Furthermore, its economy is diversified and its population small and educated land. This paper has chosen two Southern African countries “South Africa and Zambia” to address the size, growth and composition of Zimbabwe government expenditure.

Background of the study

In 1980 Zimbabwe celebrated its independence signed a number of agreement amongst government elites that new desirable economic policies needed to be implemented for the sustainable development and existence of regime. Economic policies designed by the government and its core advisers aimed at job-creating growth by transferring control over prices from the state to the market, by improving access to foreign exchange, dropping administrative controls over investment and employment decisions, and by plummeting the fiscal deficit (Taruvinga, 2002). It gained local support and was announced before economic problems had gone out of control. A forty percent devaluation of the Zimbabwe currency was allowed to take place and price and wage controls were distant (Sichone, 2002).

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The sombreness plan in Zimbabwe was tailed by economic hitches of increased severity (Taruvinga, 2002). Economic growth, occupation, wages, and public service spending constricted sharply, inflation was not reduced, the budget deficit persisted well beyond target, and many industrial firms, particularly in textiles and footwear, shut in retort to augmented competition and high real interest rates (Davis 2000). Poor living standards in the country increased during this time and on the constructive side, capital formation and the percentage of exports in GDP increased and urban–rural inequality fell.

Zimbabwe new economic policies are being constraint by tremendously unfavourable conditions similarly to what happened to agricultural output, exports, public revenue, and demand for local manufacturing which dropped dramatically due to drought. Drought was mostly pronounced in the year of 1992, 1993 and 1994 which averaged 2.6%. South Africa under government of ruling party ANC annulled its trade agreement with Zimbabwe and exposed its exports to punitive tariffs, just as Zimbabwe compact its own, backing significantly to deindustrialisation.

The Zimbabwe government’s failure in bringing the fiscal deficit under control demoralised the effectiveness of those components in the program that were surveyed through. This gave birth to growth in public borrowing, sharp rises in interest rates, and skyward pressure on the exchange rate just as local firms were exposed to cut throat global competition. Firms could not stand and others were forced to streamline, and new investment was hopeless in both the formal and informal sector. The government concentrated on the social services and led to serious declines in the quality of health and education. However, this did not helped in eliminating budget deficit which continued to prevail. Two decades later the government embarked on a Fast Track Land Reform programme and to worsen the situation budget deficit and debt for the nation increased inevitably.

Problem statement

Zimbabwe’s economy has been branded by cycles of moderate growth shadowed by periods of deterioration and regression. In 2014 Zimbabwe accomplished all the money convergence targets in respect of inflation, budget deficit and public debt. However, Zimbabwe remains right on the back of implementation of a comprehensive package of reforms geared at improving the macroeconomic stability. Economic activities in Zimbabwe are being weighed down by energy shortages, diminishing international metal prices, tight liquidity and as well not undermining the role of policy inconsistencies in an uncertain and uncompetitive business environment. Extracted faintness and disorderliness in the management of public finance is aggravating the situation, which in shot transmit vulnerabilities in budget, debt, foreign exchange generation and availability

Justification of the project

Notwithstanding the importance of growth in SADC which aims to eliminate poverty and attaining of economic assimilation through enactment of thorough macroeconomic policies. The SADC region has been characterised by very little scholarly attention on this contemporary issue. This project fills this gap in literature by providing missing information that is SADC specific on the role of fiscal policy and budget deficit in driving external balances. Existing literature in this area mainly focused on developed countries with only a few sources focusing on the Sub Sahara region

Theoretical literature review

Keynesian macroeconomics has demonstrated how government spending may either be favourable or detrimental to the nation various spending patterns (Kweka and Morrissey, 2000).The neoclassical models has developed a steady state which is indomitable by exogenous growth factors in technology mostly cited by “Wagner’s Law” which stylised facts of government spending. It explains the long-run predisposition of government expenditure to propagate in respect to gross domestic product. Government expenditure can be well-thought-out as an outcome, or an endogenous factor, instead of a cause for national income growth. On the other hand, Keynesian recommendations regard government spending as an exogenous factor, which could be used as a policy instrument. Romer (1989) recognized endogenous growth models as a notable differentiation between productive and non-productive government expenditures. This deduces that productive use have straight impact upon development yet unproductive expenditures have indirect or no impact at all.

Data Sources

Below statistics is mainly based on information provided by SADC central banks through the secretariat of the SADC committee of Central Bank Governors (CCBG). Furthermore, data was sourced from the international monetary fund IMF and World Bank economic outlook (2015).

RSA 2018 Budget Highlights / budget framework

GDP growth rate is forecast to reach 2.1 % by 2020. RSA’s budget deficit is narrow from 4.3 % of GDP. RSA economy has benefited from strong growth in agriculture, higher commodity prices and in recent months, an upturn in investor sentiment. The main budget of non interest expenditure is expected to remain constant at 26. 6% of the country’s gross domestic product between the years of 2017/ 18 and 2020/2. Furthermore, the proposed tax measures will raise an additional Thirty Six Billion Rands (R36 Bn) in 2018/ 19. Value added tax rate will increase from 14% to 15% from April 2018 (World Bank, 2017).

Current Policies Evaluation

Currently, Zimbabwe has an unfinished repeal of a controversial indigenisation law that deters foreign ownership of local businesses to 49 percent. The new government announces that the $5.1 billion budget which is first since Mugabe’s shock resignation on 21 November 2018 has to be passed by parliament. Recently, Zimbabwe now encompasses measures to fight corruption and waste, counting a ban on first-class air travel for rest of officials except the president and his assistant. The government is currently taking measures to reduce a number in overseas diplomatic posts and compulsory retirement for civil servants over 65.

Repairing strained ties

Zimbabwe is mending strained ties with EU (European Union), UK (United Kingdom) and USA (United States of America) as a means of luring new lines of credit from the World Bank and (IMF) International Monetary Fund. The country is currently in arrears to the World Bank and other creditors to the tune of around $5 billion. Zimbabwe Finance Minister Patrick Chinamasa predicts that the economy would raise by 4.5% by end of 2018, compelled by his severity measures and projected growth in the mining and agricultural sectors.

Selling off state firms

To minimise wastage of resources, the government of Zimbabwe has also introduce a hiring freeze, eliminate posts handed to members of the ruling party’s youth wing and sell-off loss-making state corporations. Zimbabwe government is under pressure since $3.2 billion of next year’s budget will be required to recompense the country’s vast state wage bill.

Proposed budget spending

The new government of Zimbabwe plans to diminish diplomatic missions and embargo first-class travel for everyone except the president and his deputy as it tries to revive a devastated economy from further unnecessary spending. The new Zimbabwe government under President E D Mnangagwa is planning to amend an indigenisation law deterring foreign ownership of business to no more than 49% of share so as to getting the economy speedily back on track. The $5.1bn proposed budget, to be funded mainly from taxes and as well needs Parliament’s approval. In the latest Budget there is a proposal to cut spending by dismissal of more than 3 400 youth officers deployed across the country who had been accused of fronting a terror campaign against Mugabe’s opponents.

Some of the proposals included availing loans to industry at accessible rates, increased beneficiation in the mining sector, issuance of bonds at competitive rates, upward review of civil servants salaries and increasing the tax-free threshold, among other submissions. Other participants urged the Government to make sure there is adequate funding for research and development, which is considered a critical element in boosting economic growth. Such proposals certainly make sense insofar as a low aggregate demand, low capacity utilisation and low wage equilibrium suggests that the economy requires a stimulus.

However, the multi-currency system prevailing precludes any monetary policy stimuli, hence only fiscal stimulus is presently deterministic. Most submissions that had been constructed by participants are becoming apparent and will likely put pressure on the upcoming national budget. Current capital budget allocations of below 16 percent of the total budget are far below best practice thresholds of close to 25 percent, required for promoting sustainable development. It is therefore critical that Government moves to contain consumptive expenditures in order to free up resources for capital investments, as well as achieving desirable deficit targets. This is especially so in view of a constrained fiscus notwithstanding an anticipated rise in revenue collections for the year of circa $6 billion.

Policy recommendations

Treasury need to focus on containment of the ‘budget deficit’ as one of the key fiscal anchors. An improved budget position has a positive impact on expenditure and debt management, and creates fiscal space for funding development programmes, as well as attainment of overall macroeconomic stability. The new government need to rationalise and cut foreign travel costs, and maintain a civil service jobs and wage freeze, as part of measures to reduce public expenditure.

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