In his state of the economy address to Parliament, Mthuli Ncube revealed that he has revised the 2019 national budget by 50% upwards from the initial budget. For 2019, government had set an initial budget of $8.1 billion with tax collections suiting 74% of the total expected expenditure, about 7% of the budget being matched by grants and the difference which is an equivalence of circa $1.6 billion was categorized as a budget deficit and would have been covered through borrowings from the private sector. Although these cumulative borrowings now sitting at $10 billion, have been identified as the key source of money supply growth and the consequent monetary crisis in Zimbabwe, the $1.6 billion deficit outturn would have been a better off position considering it was a huge cutback from a deficit of $2.8 billion incurred in 2018.

Expenditure for 2019 is now targeted at $12.3 billion, which is 3 times higher than the 2018 budget expenditure and 50% ahead of the initial 2019 budget of $8.1 billion. Likewise, tax revenue is now expected to reach $8.3 billion which is 43% above the initial target of $6 billion and 53% above the 2018 total tax collections. These growths in either Revenue and Expenditure however do not cancel out each other given they are all coming from a different base. Revenue is coming from lower base while expenditure is coming from a relatively higher base. By implication, a 50% growth in revenue from a lower base would lag an expenditure growth of equal magnitude coming from a higher base. In absolute terms revenue is growing by $2.8 billion from initial budget while expenditure is growing by $4.5 billion and these 2 are therefore not proportional in value equivalence. In this expected scenario costs have been revised by a higher absolute margin while revenue is expected to lag grossly.

Another way to look at it will be to factor the difference in absolute revenue and expenditure before and after the May 2019 revision. According to the initial 2019 budget, a revenue of $ 6.6 billion inclusive of grants and expenditure totalling $8.1 billion would give a deficit of circa -$1.6 billion. Fast forward to May, the revised revenue is now at $9.3 billion while expenditure will sit at $12.2 billion to arrive at a deficit of $2.9 billion. Clearly this is a worsening deficit, up by $1.3 billion from the initial deficit projection. Before we look at what will give rise to the deficit, let us ascertain what will fund this deficit level as this has more impact on the behaviour of some of the key economic aggregates such as inflation.

World over countries incur deficits but are able to manage them using leverage mainly from multilateral lenders and international developmental banks without necessarily affecting their money supply and in instances where domestic resources mobilization is utilized the accruing benefits in terms of economic growth as measured by production, will show a spontaneous growth at an even quicker rate. This phenomena thwarts inflation occurrence and mitigate possible currency weakening. This is so because the improved liquidity in the economy will be absorbed by increased production and market equilibrium is maintained. Likewise, as production in the economy increases, import substitution as well as exports also increases, thus stabilizing the currency market.

Back to Zimbabwe’s scenario, for example, in 2018 alone money supply grew by over 40% year on year to over $10 billion and this growth could not be matched by economic growth which was initially pegged at 4%. This growth in money supply was a result of government’s tendency towards private debt, solicited through open market operations, via Treasury Bills. At $10 billion in total money supply as at December, it means a total of more than $2.5 billion was injected into the economy in 2018 alone, given the aforementioned growth. This additional money only stimulated GDP by $1.1 billion from $22 billion to $23.1 billion. It therefore means additional money injected into the economy was channeled mostly to non-productive demands and this is easy to comprehend because the structure of our national spend is tilted in favour of recurrent expenditure, where civil service wages are the key driver.

This approach will be sustained into 2019 since government has no alternative to funding the deficit. The only alternative would have been to contain the deficit through a proper austerity. Government and particularly the central bank has over the past 3 years come to the defence of this expansionary monetary policy, charging it has helped save ailing industries, local production and stimulate exports. However, a more profound question will be that of whether the cost associated with these activities resulted in a commensurate economic growth. Clearly, this is not the case as costs measured by money supply only brought about a less significant growth, as shown earlier. In 2019, it is likely that this scenario will be repeated and the net outcome will be very negative. We expect the economy to register a negative growth of -3.8% while money supply may grow by over 25%. Given a declining national output and a quicker growth in money supply, inflation is therefore likely to rise at faster levels, thus maintaining the rising momentum.

Some would however argue that this budget revision was necessitated by a change in the operating environment particularly the official recognition of local electronic currency as a legal currency as well as the sharp growth in inflation. Indeed, it was, but the underlying principle does not change. A worsening deficit, without a commensurate quicker growth in production result in higher inflation, all else being equal. The variable of money supply is very delicate and inflation is typically highly responsive to any movement in this variable.

Another aspect, which the writer feels is a gross abuse of statistics for self-aggrandisement, is that of a rebased GDP. The minister of finance unreservedly believes GDP is now at RTGS$70 billion given the changes in currency. Interestingly at the same time the minister was uttering these baseless statements in parliament on Wednesday, Delta CE Pearson Gowero, was telling market analysts at a briefing that in real dollar terms the economy has contracted by over 60% since the promulgation of the interbank. What this means is that for starters a GDP of $22 billion (rebased in October 2018) was already largely in RTGS$ save for minor discrepancies and on promulgation of the official exchange rate would have been divided by the interbank rate to come up with a USD value. To now multiply this GDP figure by the prevailing interbank rate of 3.3 times, is an error of commission and gross negligence which only serves to sanitise the deficit and government’s underperformance.

It is important to note that this is the second time in under 6 months that government has revised upwards the GDP levels.  By implication, this will lower the ratio of deficit to GDP. Most economies closely watch the deficit levels as a percentage of GDP and Zimbabwe has averaged closed to 15% in the past, while targeting 5% in 2019. A lower ratio shows low gearing and easy absorption of debt. To achieve this lower level, government either has to increase production at a faster rate or lower its debt levels. In the case of Zimbabwe, debt levels are expected to go up as shown by projected surging deficit for 2019. So only by reengineering GDP figures would government be saved from the embarrassing high deficit/GDP levels. In essence one cannot resort to the engineered numbers for solace to justify government's move to increase its deficit levels, since these are only a result of engineering and technicalities.

In capping, the outlook now looks more menacing than ever before as fiscal imbalances are set to prevail into the forseeable future. The hope brought by a not so austere austerity, has all but faded into the blue. As Equity Axis we even project a higher deficit level of about $4 billion premised on a revenue slowdown from the second quarter onwards. We have been on record saying the fiscal surpluses are only temporal and that in the second half government will run steep budget overrun as aggregate demand sharply slows down, while cost pressure on the part of government escalates. It is also worrying that the current account looks set to be on a worse off path given underperformance by key exports drivers that is Gold and Tobacco. Earnings from these 2 key commodities will fall by between 25% to 30% in the current year resulting in further exchange rate pressure. A growing money supply, impacted by deficit financing, will only make matters even worse.