HARARE- In a major climbdown, Zimbabwe’s treasury has revised upwards its expenditure levels for the current year to reflect the various economic headwinds being faced by the economy.

In his state of the economy address document presented to parliament of Zimbabwe on Wednesday, seen and analysed by Equity Axis, finance minister, Mthuli Ncube, highlighted several changes to his 2019 budget, and these include a revised revenue as well as expenditure performance for the full year.

Expenditure for the year is now targeted at $12.2 billion up from the initial budget of $8.1 billion, a staggering 50% jump. Revenue for the year has been revised upward to $9.3 billion up from $6.1 billion which again is a 50% revised growth.

Of significance however is the widening budget deficit which had initially been forecasted to come off to $1.6 billion in 2019 from $2.8 billion in 2018.  Given the revised budget of $12 billion, the budget deficit will grow to $2.9 billion which is ahead of last year’s deficit.

This is a major blow on Mthuli Ncube, who on being appointed as finance director declared the twin deficits of fiscal and current account, as Zimbabwe’s key economic enemies. He promised to tackle the deficits in a very short space of time to allow for fiscal consolidation and restoration of economic stability.

In the past, the prevalence of higher deficit levels has driven government to borrow excessively from the private sector to support the budget shortfall. Since 2014 government has been spending beyond its own revenue levels.

Over the past 4 years, annual budget deficits have averaged $1.8 billion with the highest deficit being that of 2018 at $2.8 billion. Against these deficit levels, government's domestic debt has spurred to a cumulative total of $10 billion with half of the debt being accrued over the last 5 years.

To attract public sector funding for its budgetary needs, government has issued securities known as Treasury Bills which attracted an interest rate known as a coupon of 5% bi-annual. Further to this, government also settled some debts using treasury bills which would eventually be discounted deeply in the secondary market.

Through the multiplier effect, money supply has responded, growing astronomically over the last 5 years and closed at $10 billion in 2018. Hard currency balances have however not grown at a quicker pace to match the growth in money supply, consequently resulting in a USD supply strain.

Fractures in the economy have since widened in response to money supply and the immediate implication has been a spiraling inflation. The inflation level is now at 75.6% which is the world’s second highest.

Government’s revised 2019 budget comes against this rampant inflation, which has eroded real incomes. At an exchange rate of 1:3.3 times, real incomes have reduced by over 80% in value and even worse off against the parallel exchange which is used to price products across the market.

The revision in expenditure, which Equity Axis anticipated as early as January and reiterated in later periods, has been brought about by the demands from the civil service, particularly a hike in wages. Earlier in April a 25% salary wage took effect which is an addition to an earlier 10% hardship allowance offered in January 2019.

In a briefing this week, government said it is going to offer another salary hike to the civil service in the second half of the year given further growth in inflation. In April, cabinet approved a 30% subsidy to processors on most crops from the current season.

These subsidies are meant to contain a potential prices implosion as a price pass on effect from food processors. It may however not prove to be as effective given that other factors will not be constant. For example the cost of operations including fuel and wages are already under upwards pressure.

Cyclone Idai and El Nino drought will further push the cost of food importation and undbudgeted for expenditure upwards especially in the present lean period given weak food reserves.

Other capital projects budgeted at $2 billion in 2019, will also attract significant repricing and thus driving government expenditure upwards. These combined factors will militate to make 2019  a worse off year in terms of economic performance.

Analysts at Equity Axis, solicited for a comment on these latest numbers, pointed out that the deficit level for 2019 will surpass the projected $2.9 billion market to about $4 billion. They said revenue projection, revised to $9.3 billion, is far-fetched, and will grossly miss target.

“The argument here is that, it will be very difficult to attract similar or better revenue collections in the remaining 3 quarters of the year, as those achieved in the first quarter at $1.9 billion given the prevailing macro environment. Incomes are coming off in real terms, companies are scaling back on production and already, those reporting for the first 3 months of the year, have shown drastic volumes loss”

“These factors combined with a runaway exchange rate, which is referenced for most product’s pricing in the market, makes it impossible for revenues from the second quarter onwards, to surpass  first quarter's performance. We should recognize that first quarter revenue benefited from residual flows from the prior years, but the economy is now almost drying up and therefore aggregate demand falling” the analysts said.

Although it may be too early to write the minister orbituary, it is clear that the economy is off rails and that he has failed to live up to his promises, and the desperate Zimbabweans’ expectations.

The wider budget deficit, will have to be funded again by TBs, but this time at an even escalated level than before because of the magnitude of deficit and also the expected high interest rates which would result in a sharp growth in money supply and an unimagined gap between RTGS balances and USD balances in the economy and consequently drive the RTGS$ to a possible crushing end .

EQUITY AXIS NEWS