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High govt spending crippling economy: IMF

15/05/2017 00:00:00
by UK Bureau
 
Finance minister Patrick Chinamasa
 
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EXCESSIVE government spending against subdued income is adversely impacting Zimbabwe’s economy with the current liquidity squeeze likely to worsen unless the administration controls its voracious appetite for cash, the IMF has warned.

The country has struggled to shake off a serious economic crisis which has lasted more than a decade and now looks to be worsening with the government struggling to pay its workers and ordinary Zimbabweans forced to spend hours in bank queues, unable to access their money.

The opposition has blamed Finance Minister Patrick Chinamasa for the cash crisis, accusing him of raiding deposits to feed the government's apparently insatiable desire for cash instead of controling it.

A team from the Fund was in the country between May 2 and 13 for discussions with the Harare government, the private sector representatives, and civil society in the context of the 2017 Article IV Consultations.

In a statement issued at the conclusion of the visit, team leader Ana Lucía Coronel warned Harare against continuing the current high levels of government expenditure.

“The economy is facing difficulties,” she said.

“A severe drought and slow reform momentum have led to high expenditure levels since late 2015, despite subdued revenues. With a difficult external environment limiting access to foreign inflows, the ensuing large fiscal imbalances are being financed by domestic borrowing.

“The expansionary fiscal stance and curtailed net capital flows have resulted in cash shortages, hampering economic activities.”

The IMF team said although recovery in mining and agriculture where a bumper harvest is reported for the just ended season will drive growth, government expenditure represented a serious threat to the momentum.

“Maintaining the growth momentum will require action to expedite the authorities’ plans to reduce the deficit to a sustainable level.

“Excessive government spending, if continued, could exacerbate the cash scarcity, further jeopardize the health of the external and financial sectors, and, ultimately, fuel inflation.”

The high government expenditure was blamed on, among other things, employment costs with the Harare administration resisting pressure to reform its public service and reduce a State wage bill that takes up more than 90 percent of revenues.



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“Spending pressures stem from high employment costs, government transfers to support specific economic sectors, and elevated discretionary expenditure,” said the IMF.

“Action on these three fronts, while safeguarding social outlays, is therefore crucial. Reducing the wage bill could involve reviewing allowances and benefits and evaluating the size of the civil service with a view to eliminating non-essential posts.

“Government interventions to support agriculture, while understandable, could be redesigned with the aim of maximizing the benefits on production while minimizing the risks to the public-sector balance sheet. Reinforcing the government’s efforts to curtail non-priority spending is also pressing.”

With export performance constrained by a long struggling economy and little capital support from outside, Zimbabwe has found itself struggling with serious shortages of cash, particularly the US dollar resulting in endless queues at the banks.

A move by the central bank to introduce so-called bond notes has failed to mitigate the crisis with authorities blaming indiscipline which has seen retailers supposedly not banking their takings.

However, the IMF said confidence was a key requirement.

“Restoration of confidence is essential for attracting the necessary dollar inflows to the economy. Refraining from central bank financing of the deficit and containing the issuance of debt and quasi-currency instruments is vital.

“Furthermore, the financial sector should restore its role of intermediating resources in the economy by channelling deposits to productive credit rather than financing fiscal operations.”

The Fund challenged government to “demonstrate that Zimbabwe is open for business”.

“This will include enhancing efforts to tackle corruption, encouraging private sector investment, allowing the market to determine prices, promoting labour flexibility, and creating a stable legal and regulatory framework to reduce policy uncertainty.

“Moreover, there is room for enhancing domestic revenue mobilization, boosting transparency in the mining sector, and improving governance in public enterprises to strengthen the country’s fiscal position.”


 
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