The Sunday News
THE Sunday News is publishing parts of the Transitional Stabilisation Programme Reforms Agenda to conscientise the public on the Government’s new economic trajectory.
*Continued from last week
The fiscal deficit, a major cause of macro-economic instability and financial sector vulnerability, is estimated at US$1,4 billion at the close of the first half of 2018, and projected at over US$2,7 billion in the absence of corrective measures. Hence, the adoption and implementation of measures to begin regain of control and management of Budget expenditures over the period January 2019 to December 2020 is targeted to support gradual recovery in Budget expenditures on essential infrastructure.
Financial Sector Vulnerabilities
Unsustainable and prolonged fiscal deficits that perpetuate uncontrolled borrowing from the domestic bank and non-bank financial system, including recourse to the overdraft at the Reserve Bank, pose financial vulnerabilities to the entire banking and financial system. These impact on money supply growth, domestic price and currency stability, as well as on the stock of domestic bank deposits and non-bank savings available for channelling towards credit to the productive private sectors.
Credit to Government
Annual growth in money supply to May 2018 stood at 40,8 percent, from US$6,5 billion last year to US$9,1 billion, underpinned by growth in domestic credit of 47,3 percent, mostly to Government. Net credit to Government stood at US$6,2 billion as at end June 2018, up from US$3,9 billion as at end June 2017.
Credit to the Productive Sectors
Growing reliance on domestic sources for Budget deficit financing in the face of limited external financing, also impacts negatively on growth in credit to the private sector, which increased marginally by 6,1 percent from US$3,5 billion as at end June 2017 to US$3,6 billion as at end June 2018.
Sustainable Deficit Financing
While the Transitional Stabilisation Programme measures to tame the fiscal deficit will be gradual, Treasury will in the interim resort to non-inflationary financing mechanisms for the deficit.
Treasury Bill Issuances
The stock of outstanding Treasury bills as at June 2018 is US$6,7 billion, with a maturity value of around US$8,3 billion.
During the period 2017 to June 2018 Government issued Treasury bills and bonds amounting to US$4,3 billion to cover the financing gap. Of the US$4,3 billion issued, US$2,9 billion accounts for 2017 issuances, while the remaining US$1,3 billion was issued during the period to June 2018. In this regard, Government will from January 2019, revive the issuance of Treasury bills through an auction system as part of monetary policy operations to influence liquidity developments in the economy.
In addition, Government will, under the Transitional Stabilisation Programme, revive the issuance of bonds through the development of a secondary bond market, beginning 2019.
Under the new thrust, the practice of settling Government obligations using Treasury bills will be discontinued, with such Bills only issued to raise resources for financing deficits and cash flow timing gaps arising from the Budget approved by Parliament.
The Reserve Bank, as banker to Government, will only issue Treasury bills via issuance of a Treasury Bill Issuance Note by the Accountant General. On maturity, of the Treasury bills, the Reserve Bank will also be given authority, in writing from the Accountant General to debit the Government Account. This will further improve accountability for disbursements made from public resources, while enhancing scrutiny over and monitoring the deployment of borrowed funds, maturity profiles and sustainability of the debt portfolio.
Fiscal and Financial Stabilisation Committee
Treasury will preside over a Fiscal and Financial Stabilisation Committee to co-ordinate and monitor adherence to the fiscal and monetary targets outlined by the Transitional Stabilisation Programme.
The Transitional Stabilisation Programme recognises the role of domestic resource mobilisation in financing the transformation of the Zimbabwean economy towards upper middle-income status by 2030, complemented by bilateral and multilateral financial injections. This requires review and development of a much less complicated tax system.
While compliance with fiscal and customs laws remains critical to the economic development of Zimbabwe, nurturing a competitive business environment will require support and innovation in the design and administration of taxation policies and measures. This calls for innovation in the design and administration of taxes, to include simplified tax structures for micro, small and medium enterprises. Underpinning the thrust of the Transitional Stabilisation Programme tax policy is movement towards sustainable taxation, reduced penalties and interest, also nurturing businesses to enhance capacity to pay their tax dues, and remaining operational in order to produce, export, and create employment.
Plugging Revenue Leakages
Furthermore, the Programme targets eradication of corruption, which is a major source of leakages to public revenues, and also a major cost to various productive activities. Therefore, the Programme will institute strong measures to plug these leakages.
Targeted areas include, among others: Unethical Corrupt practices at Ports of Entry and Exit; Tax Evasion and Avoidance practices; Smuggling and Money Laundering; Unethical Procurement practices.
Mobilising Domestic Savings
The Transitional Stabilisation Programme will oversee implementation from 2019, of the Financial Sector Development Plan that promotes emergence of a stable, sound and resilient financial system that supports efficient mobilisation and allocation of resources, necessary to achieve economic diversification, shared and sustained growth as well as poverty alleviation.
Hence, the Transitional Stabilisation Programme will prioritise implementation, over the period to 2020, of policy measures to enhance savings.
Financial Sector Support for Development
Cost of Credit: In view of the significance of credit in driving economic activities, the Transitional Stabilisation Programme targets increased access to affordable credit by all productive units of the economy with appropriate tenors. Currently, banking institutions operate under lending rate thresholds as guided by the Reserve Bank, with lending to the productive sectors of the economy capped at 12 percent per annum, and 15 percent for non-productive sectors. A penalty rate of 3 percent per annum is charged on non-performing loans. Government is considering further reviewing downwards the lending rate thresholds, to 8 percent per annum and below, to improve the competitiveness of the productive sectors.
Competitiveness of Exporters
Production of goods for export remains Zimbabwe’s major source of foreign currency to support realisation of Vision 2030 towards a Prosperous and Empowered Upper Middle Income Society with job opportunities and high quality of life for its citizens. Support for competitiveness of domestically produced goods in both regional and international markets is, therefore, central to the initiatives under the Transitional Stabilisation Programme.
Monetary Policy Reforms
The current cash and foreign currency shortages bedevilling the economy require attention and Treasury and the Reserve Bank continue to explore options to address them. The short-term measures that are critical in tackling these challenges include currency reforms and improving foreign currency generation to stabilise the foreign exchange market. It also means strengthening Monetary Policy conduct and use of the Monetary Policy Committee, and move to a market-based foreign currency allocation system.
The Programme will, therefore, institute measures that seek to strengthen the economy’s balance of payments, particularly with regards to enhancing exports, currency competitiveness, improving capital inflows, as well as managing over dependency on imports. Consequently, while a new and a more competitive currency appears to be part of the solution, it will be a challenge to introduce, given low confidence in its stability and little foreign reserves to support it.
PART II: Institutional reforms to achieve growth and development
The Section outlines the institutional arrangements to achieve macro-economic objectives of the Programme focusing on the following: Budget Expenditure Control; Reform of the Public Service; Public Enterprises and Local Authorities’ Service Delivery; Empowerment of Provinces; Rent Seeking and Corrupt Behaviours; Ease of Doing Business; Integrating into Global Financial Markets; Sustainable External Flows.
Budget Expenditure Control
Government will be implementing austerity measures aimed at addressing fiscal and debt challenges for sustained macro-economic stability and growth. In furtherance to the fiscal stance alluded to in the 2018 Budget, the Transitional Stabilisation Programme targets strengthening fiscal responsibility over control and management of expenditures, and entails:
Embarking on a comprehensive Fiscal Deficit Reduction Programme; Announcing to the market limits to Central Bank lending to Government and quasi Government entities; Financing fiscal deficit requirements from the market, and at market interest rates; Aligning Treasury Bill issuances to Parliament approved Budget borrowing requirements, to avoid discretion over Parliament unsanctioned ad-hoc issuances.