Sink or Swim: Mthuli Ncube faces stern test in inaugural budget statement

Image Credit: Reuters

Zimbabwe’s economy is bleeding, has been for a while, but the upcoming budget statement by finance minister Mthuli Ncube presents him with the opportunity to suture up the economic wounds. More importantly, this will be an opportunity to prove that he has the backbone to stand up for treasury’s independence and display its resolve in achieving long-term fiscal sustainability. 

After all, that is the reason why he was headhunted by the Mnangagwa administration, in theory at least. The exact details of his coming on board as minister are not public but if there is any truth to rumours that he was initially hesitant, then he will have some considerable clout in pushing his agenda, to the extent that he had to be courted to accept the post.

Events following his appointment as minister have been anything but smooth however. The seemingly never-ending contradictory statements from treasury and the central bank have all but contributed in creating warped market perceptions and interpretations of policy. 

Last October’s consumer panic-buying delirium, amid pervasive pricing distortions has become the quintessence of the unwanted effects flawed communications from his office can have. Treasury will have to avoid such a recurrence with a lucid budget statement, come November 22.

Mr Ncube’s inaugural budget statement will undoubtedly build upon his Transitional Stabilization Plan (TSP), which mainly focuses on ensuring a steady macro-economic environment and the enacting of reforms toward a private sector led economy. 

Treasury anticipates GDP to grow at 9% in 2019, according to the TSP, although this is likely to be reviewed downward as the year progresses. Much like most emerging markets reeling under the pressure of muted growth, where “fiscal consolidation” has become the by-word, this too will be the overarching theme of the budget statement.

Limited room for tax hikes

Following the public backlash after the introduction of the Intermediated Money Transfer Tax (IMTT), treasury will have limited legroom to further hike taxes to fund its expenditure. Treasury may find recourse in increasing sin taxes on alcohol and tobacco related products, which has been its backstop over the years.

Mthuli Ncube might even be creative and introduce a sugar tax, just as South Africa did in 2017, or offer little compensation against bracket creep – a phenomenon occurring when inflation pushes wages and salaries into higher tax brackets - as he seeks to find more revenue for the fiscus.

The jury is still out on the merits of the (IMTT) itself, with some concern that increasingly higher taxes on a shrinking formal tax base may lead to the “laffer curve effect on consumer demand.” This economic theory states that higher taxes generally stifle economic growth through limiting the money available for consumers to spend, thereby disincentivising people from working. 

Ultimately, this affects productivity and by implication, government’s tax revenues too. More so, higher taxes have been observed to lead to tax avoidance and evasion, something treasury was seeking to counter through the introduction of the IMTT in the first place. Further tax increases in the budget statement will inevitably become an exercise in futility.

Efficient government spending

Lately, revenue collections have outperformed expectations, with 2018 half-year gross collections coming in at $2.41 billion against a target of $2.1 billion, for instance. However, history tells us that government has not always utilized its revenues in areas where it can get more ‘bang for its buck.’

Government spending has repeatedly been both too high and poorly targeted, with recurrent expenditure such as civil service salaries and state subsidies taking up a significant chunk of government spending.

To this end, a complete breakdown of how much has been raised through the IMTT, and what it has been spent on, or its intended use may go a long way in placating the public’s outcries. Ultimately, Mthuli Ncube’s fiscal consolidation efforts must primarily be spending-based, with a greater focus on increasing spending efficiency. Government  spending must foster private-sector led development in all economic domains.

In a show of how touchy the issue of civil service reform is, Mr Ncube while acknowledging the urgent need to tackle government’s unsustainable wage bill, has seemingly avoided talk of retrenchment of government workers.

Instead, he has used carefully selected choice of words such as, changing the “orientation, structure, temperament, performance and efficiency of the civil service.” However, this seems to be just kicking the can down the road, delaying the necessarily inevitable.

The market will be watching whether the finance minister maintains bonus payments for the civil service, and more importantly, whether President Mnangagwa will support treasury, should Mthuli Ncube decide to take the radical route and altogether scrap bonuses. Memories of former president Robert Mugabe disowning then finance minister Patrick Chinamasa after such an attempt will still be fresh in the minds of many.

Debt relief

Zimbabwe`s single biggest elephant in the room however, is the clarity on a sustainable monetary policy framework for the country going forward. The current one has clearly failed, despite government’s continued insistence of parity between the US dollar and the bond note. 

Varying prices when paying for goods and services with either the US dollar, bond note or mobile payments only buttress this point. Without finality on this issue, government’s recovery efforts will be hamstrung. Although, monetary policy frameworks are ideally the remit of the central bank, the market will be looking to Mr Ncube’s budget statement for clues on the direction government is leaning toward.

Zimbabwe is in debt distress and the resolution of debt and arrears owed to multilateral creditors, and the Paris Club is critical. The required adjustment of Zimbabwe’s debt to make it more sustainable will be very onerous without some form of debt relief. Following the rebasing of the country’s GDP, some analysts have warned that Zimbabwe effectively disqualified itself from the IMF’s Highly Indebted Poor Country (HIPC) debt relief option.

Nonetheless, Zimbabwe still qualifies for the IMF’s Poverty Reduction and Growth Trust (PRGT) concessional lending support. More specifically, treasury may pursue the Rapid Credit Facility support, which is normally a single up-front pay out for low-income countries facing urgent balance of payments needs, such as Zimbabwe is facing.

Some estimates put the figure needed by Zimbabwe to ease BoP pressure to be between $600 million to $1 billion. The budget statement will thus be instructive in understanding the route treasury will take in trying to resolve the country’s debt and arrears.

Belt tightening for all

2018 has not been an easy year for consumers. They have had to withstand the worst of higher prices for essential products and services, while salaries have largely been stagnant. While treasury officials stress that the reform measures being undertaken entail pain and sacrifice by all, actual realities seem to show only consumers taking the pain.

Imagine a scenario where the president himself would have publicly declared taking a salary cut as the head of state, or visibly limiting the number of foreign trips. Traveling to Guinea to sign a couple of MoUs hardly seems like a sacrifice nor the globetrotting by the minister himself to summits and conferences with no tangible benefits to the citizenry, the recent World Investment Forum’s session on entrepreneurship in Switzerland, being a case in point. Mere platitudes of cost cutting in the higher echelons if government will not cut it. The sacrifice by government has to not only be real; it must be strictly adhered to.