AT first sight it is almost too good to be true. Zimbabwe’s economy has “grown” about 2 percent in the three years since dollarisation and the launch of the seriously misnamed government of national unity in February 2009.

In fact, the economy is not growing but recovering, and by the end of this year will have recouped no more than half of the ground lost during what some call the “lost decade” to 2008.

Inflation is averaging 4 percent, which, after 231m percent in mid-2008, beggars belief. But the calculation is suspect: the numbers are based on arbitrarily calculated US dollar prices in December 2008 and a consumer budget survey carried out in the 1990s.

Though exports have recovered dramatically, increasing almost 150 percent since 2008, the trade gap has more than doubled from less than $1bn to over $2bn in 2011 (23 percent of GDP), forcing finance minister Tendai Biti to impose a 25 percent surcharge on selected consumer imports from next January. Being part of the dollar monetary area, Zimbabwe cannot devalue the currency, so Biti has had to fall back on backdoor internal devaluation in the form of the surcharge and some increased import duties.

On the face of it the fiscal situation is healthy enough. Biti warned in July that the budget deficit could reach $700m this year, and presenting the 2012 budget last week he said that despite spending overruns of more than $400m on the public service wage bill and another $190m on other expenses, he had still managed to balance the budget of $2,95bn . This was achieved because revenues were 9 percent above budget while spending was cut by 11 percent ($300m), chiefly as a result of underspending on capital projects.

In 2012, the minister will have more headroom, thanks to prospective diamond revenues of about $600m from the controversial Marange diamond fields . (International organisations have voiced concerns that there may have been human rights breaches in and around the mining area.) The expectation of this additional income has enabled Biti to increase public spending by a whopping — but almost certainly inflationary — 35 percent to $4bn or 48 percent of GDP.

To his credit Biti has earmarked the bulk of this diamond windfall for capital investment, though there is no guarantee that money will actually be invested next year.

But look closely at the fine print and it is clear that all is not what it seems. If a further $785m in (mostly) foreign, but also domestic, debt arrears, as well as $500m in donor assistance are factored in, public spending will be almost $5,4bn, or 63 percent of GDP, and the budget deficit (before grants) will be 16,5 percent of GDP. Even more worryingly, employment costs, including pensions, will absorb 58 percent of the budget, crowding out spending on essential operations, maintenance and investment. Next year employment costs will be 27 percent of GDP — three times the sub-Saharan average of less than 9 percent.

In a word, the budget is unsustainable. Sooner rather than later, the coalition or its successor — assuming that there will be elections in the first half of 2013 — will have to bite the austerity bullet and negotiate a debt-forgiveness deal with financially strapped donors, who can be expected to offer less generous terms than in the past .

Given the strength of precious metal prices, Biti plans to double the mining royalty on platinum to 10 percent and increase that on gold to 7 percent from 4,5 percent. To add to mining house pain, he is also promising to take an axe to some of their tax code benefits like capital allowances. None of this will go down well with companies already struggling to comply with the government’s 51 percent black-ownership law.

Such tax tinkering, however, is fiddling with the edges of the problem, which lies on the spending side . Radical public- sector restructuring, including privatis ation and public service downsizing, as well as debt relief, are pre requisites for sustained recovery.

But so long as some policy makers — though not Biti — believe Zimbabweans will become prosperous via the free lunches of diamonds and indigenis ation, the country’s governments will stop short of doing what is necessary. www.fm.co.za