Deficit financing is a practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Although budget deficits may occur for numerous reasons, the term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures.
The influence of government deficits upon a national economy may be very great. It is widely believed that a budget balanced over the span of a business cycle should replace the old ideal of an annually balanced budget. Some economists have abandoned the balanced budget concept entirely, considering it inadequate as a criterion of public policy.
Deficit financing, however, may also result from government inefficiency, reflecting widespread tax evasion or wasteful spending rather than the operation of a planned countercyclical policy.
Where capital markets are undeveloped, deficit financing may place the government in debt to foreign creditors. In addition, in many less-developed countries, budget surpluses may be desirable in themselves as a way of encouraging private saving.
Deficit financing in Zimbabwe
In July 2020 Zimbabwe’s finance minister Mthuli Ncube said the country was on track to meet its budget deficit target of 1.5% of Gross Domestic Product (GDP) in 2020 in a key update that was absent from his mid-term budget. Ncube, said he would not seek additional funding in 2020 since the national treasury had spent less than half of its budget despite pressure from the COVID-19 pandemic.
“I am still focusing on a budget deficit of 1.5% of GDP and we are well on our way to achieving that,” Ncube said during a review of the half-year budget held virtually. This would be an improvement on 2019’s 4% deficit. Economic analysts were worried that President Emmerson Mnangagwa’s government was trying to balance the budget at the expense of spending more on social services and the health sector, even as it grappled with the Coronavirus pandemic.
To correct a budget deficit, a nation may need to cut back on certain expenditures, increase revenue-generating activities or employ a combination of the two. The macroeconomic effects of a fiscal deficit depend on how it is financed. Printing money to finance a deficit leads to inflation, domestic borrowing causes a credit squeeze which crowds out private investment as well as consumption while external borrowing has an effect on the current account and real exchange rate.
In 2016 government faced a financing gap of $800 million due to low revenue and high expenditure, amid fears it was going to borrow from the domestic market to plug the hole. The projected domestic loan repayments stood at $678.6 million and a budget deficit of $150 million, resulting in a financing gap of $828.6 million for the year. According to the first quarter treasury bulletin of 2016, government issued Treasury Bills worth $245 million on the domestic market during the period. Of the amount borrowed, $15.9 million went towards financing the budget deficit, while $229.1 million went towards debt repayment and other activities.
Warning from Economists
The Confederation of Zimbabwe Industries (CZI) warned about the likelihood of uncontrolled inflation being triggered due to unavailability of revenue sources to fund government's deficit during the 2019 mid term budget review in August 2019. CZI chief economist, Tafadzwa Bandama told captains of industry in August 2019 that the midterm budget review had failed to address the issue of how accrued fiscal deficits would be dealt with.
"The country's budget deficit is about $4,6 billion and this is emanating from total expenditure of $18.6 billion against revenues of $14 billion. So how is this budget going to be financed because according to the mid-term policy review, bank financing is going to be around $1.2 billion, non-bank finance will be at $4.6 billion while net foreign financing will be minus $1.2 billion," Bandama said.
She noted that an analysis of the deposit base shows that the money available for financing the budget deficit gap is about $1.8 billion which are the RTGS$ balances which were held in the economy arguing they were not enough to sustain and finance the budget deficit. Bandama said that this presents the risk of increasing money supply as was the norm in the old days where direct printing was used to finance the budget deficit.
She raised concerns that money supply could also increase through subsidies and from government suppliers of goods and services who may take a position by over-invoicing knowing that they are going to receive treasury bills. She called for stream lining of government ministries to emulate countries like Botswana which have less than ten ministries against Zimbabwe's 22.
The fiscal deficit problem in Zimbabwe
Following a decade of contraction from 1998 to 2008, the economy recorded real growth of more than 10% per year in the period 2010-13, before falling below 3% in the period 2014-17, due to poor harvests, low diamond revenues, and decreased investment. Lower mineral prices, infrastructure and regulatory deficiencies, a poor investment climate, a large public and external debt burden, and extremely high government wage expenses continue to impede the country’s economic performance. As a result, the country has experienced growing expenditure demands against sluggish revenues leading to cumulative deficits. The persistent and rising budget deficit in Zimbabwe is now the elephant in the room that is threatening macroeconomic stability. The pace of economic growth (Economic Growth in Zimbabwe) influences the creation of additional fiscal space that accommodates additional expenditure demands like infrastructural development and social services.
Zimbabwe enjoyed budget surpluses from 2009 to 2011 during the Government of National Unity (GNU), a period of cash budgeting. From 2012 to date, the country has been experiencing fiscal deficits which became more pronounced from 2016. In the outlook, deficits are expected to gradually shrink on the back on improved revenue.