Fiscal overruns haunt Zim

ZIMBABWE is likely to experience higher spending as the government tries to cushion the economy from the expected El Niño-induced drought.

El Niño weather patterns are usually associated with higher temperatures and low rainfall, which can significantly impact agricultural productivity.

Previous El Niño droughts led to significant losses in crop and livestock production, highlighting the importance of proactive measures.

The latest 2024 Budget Strategy Paper (BSP) is projecting a gross domestic product (GDP) growth rate of 5,2% next year.

The growth, according to Treasury, will be anchored on sustainable budget deficits of less than 3% of GDP to protect the Zimbabwe dollar against market turbulences.

But with the country expecting El Niño’s return, economic analysts said fiscal expenditure will overshoot, piling pressure on the currency.

“There is a possibility that spending is going to increase due to social protection costs and the importation of grain,” Prosper Chitambara, chief economist at the Labour and Economic Research Institute of Zimbabwe, said.

“That will be in the first half, or probably the greater part of next year. For this year’s grain production there was a significant improvement.

“So, El Niño will affect the 20232024 season. I think pressure on public spending will be felt more during the greater part of next year. And of course it affects agricultural production, it affects output. We are expecting output for next year to be subdued because agriculture affects the rest of the economy.”

Chitambara said if there was a challenge in agriculture, the rest of the economy, including manufacturing, is affected.

“If there is no food it means the government is forced to come up with mitigatory measures and obviously that affects the macro-economy.”

Another economist Farai Chigora said: “It is going to have a big impact on our budget. We don't even have that much of our reserves in terms of forex to import. So, we are going to get almost a negative side of our balance of payment.

“We are going to move towards more expenses than the revenues we would get and it will again go towards the deficit. So there is a lot in terms of economic destruction when this drought is there”.

In his analyses, economist Zvikomborero Sibanda said for an agro-based economy like Zimbabwe, El Niño will likely spell a disaster.

“As such, there are high chances of above-average fiscal spending in the 2HY23 (second half of 2023) and beyond as the government is expected to cushion the economy and its citizens from a likely devastating drought,” he said.

“Elevated fiscal spending increases Zimbabwe dollar liquidity in the market, thereby destabilising the Zimbabwe dollar and market prices.”

In its analysis of the BSP, the Zimbabwe Coalition on Debt and Development said the nation, together with other Southern African Development Community member states, will experience subdued agricultural activity.

“Elevated fiscal spending is expected in 2HY23 and beyond as the government seeks to cushion the economy and citizens from a likely drought that will threaten the Zimbabwe dollar and price stability,” it said.

In 2024, the Treasury projects to collect the equivalence of 19,2% of GDP in tax revenues.

This will be underpinned by tax administration initiatives to enhance tax enforcement and compliance and adoption of technology. The tax base will be expanded through embracing emerging technologies.

Similarly, services imports are predicted to rise from US$1,4 billion in 2022 to US$1,5 billion in 2023.

Farai Chigora, another economist, said an increase in imports was a leakage in an economy.

“It is taking money from the economy. Any increase in imports is not a good sign,” he said.

“But comparing now to the exports in the same period, they increased by 3%. If you are to see what we imported and what we exported, that is when you even go down and say is this contributing to the standards of living of the populace? Is it contributing to industrial development?

“Our exports to South Africa have decreased and imports have also decreased. At the end of the day, we have a trade deficit with South Africa of 11%. We don't have more exports going to South Africa as compared to imports.”

The ballooning of Zimbabwe’s import bill follows the government’s recent decision to allow the importation of basic commodities to improve their availability and halt price increases.

Researchers at Wealth Access Securities warned that lowering import tariffs would likely result in the flooding of cheap products from neighbouring countries, threatening the viability of local manufacturers.

“South African exporters are set to benefit more as most of our local products are sourced from Zimbabwe’s biggest business partner. Moreover, consumers are likely to choose imported products over domestic products,” they said in a report.

“We are of the view that retail companies both listed and unlisted like Pick n Pay, OK Zimbabwe, Choppies and Spar will have to deal with a decline in margins due to stiff competition from the informal sector.”

Retail chain OK Zimbabwe this week issued a statement bemoaning the rise of Zimbabwe’s informal operators, saying they were creating a whole new spat of “dangerously unhealthy competition”.

“Most formal retailers now are battling for survival,” OK Zimbabwe said.

“The rise of the unregulated informal operators who are mostly arbitraging has caused more headaches than good for the formal ' guys' like OK Zimbabwe, TM PNP, Gain Cash & Carry and so many more.”

It added: “In instances where some are paying taxes, some are not, where some are using the regulated bank exchange rate; some are not hence causing artificial or distorted price points in the stores.”

OK said the informal retailers were using the black-market rate and mark the same products downwards causing “forced death” on the formal retailer.

"The dangers are apparent as some have even started closing shops, some are under corporate rescue and many jobs are going to inevitably be lost."

For instance, Metro Peech & Browne Wholesalers recently went under corporate rescue administration, partly due to unfair competition from the informal sector.

As such, there are high chances of above-average fiscal spending in the 2HY23 (second half of 2023) and beyond