Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation. However, fiscal consolidation is not in itself a policy. Rather, it links to underlying issues and imbalances in individual sectors, such as welfare, pensions, health care and education: fiscal consolidation is a key tool for addressing these other concerns.
A fundamental policy decision made under Zimbabwe's New Administration was to live within its means and this entailed embracing a wide range of expenditure containment and revenue enhancing measures from 2018 to date. Fiscal consolidation was meant to restore economic stability through addressing perennial twin fiscal and current account deficits. To that end, during the life span of the Transitional Stabilisation Programme (TSP), Government managed to keep the budget almost balanced while current account deficits turned into surpluses. Fiscal deficit as a percentage of Gross Domestic Product (GDP) declined from -10.5% in 2017 to a surplus in 2019, and with almost balanced budget in 2020.
Measures taken to achieve Fiscal Consolidation
Fiscal consolidation was achieved through a number of interventions such as, among others:
- Introduction of the 2% Intermediated Money Transfer Tax (IMTT), effective 13
October 2018. The measure managed to generate additional revenue which acted as a buffer for exigencies such as impact of Cyclone Idai and drought and support for social services, social protection, and infrastructure development;
- Maintaining balanced budgeting by placing emphasis on living within means;
- Rationalising expenditures in order to create additional financial capacity for funding developmental programmes and enhancing delivery of public services;
- Reining in off-budget expenditures by scrapping unsustainable distortionary subsidies, leaving those which protect vulnerable groups and these include agricultural inputs, maize meal, public transport, health, education and other social services;
- Containing excessive borrowing by ensuring zero recourse to Reserve Bank of Zimbabwe (RBZ) financing; and
- Restructuring of domestic debt into long term marketable instruments.
Evidence-based reforms are more long-lasting
Achieving fiscal consolidation involves a realignment of the role of government in society. It entails questioning what is the need for public goods and services and whether the government is best placed to provide these directly, indirectly or not at all. Answering these questions requires evidence and data. Evidence-based decision making examines and measures the likely benefits, costs and effects of government decisions. Evidence can be gathered using a 360-degree approach: looking to the future to identify risks and opportunities, looking to the past to evaluate what has worked and what has not, and looking horizontally to identify synergies across Ministries and levels of government. A whole-of-government approach that is open and inclusive can identify linkages between different sectors and groups (particularly because a risk in one area may be an opportunity somewhere else, or a benefit to some may come at a cost to others) and prioritise goals and objectives.
Fiscal Consolidation in Zimbabwe
According to ZBC News in May 2020 the government’s fiscal consolidation program had started paying dividends as was being evidenced by the exceeding of revenue collection targets for the first quarter of 2020 by 11 percent to $14 billion Zimbabwe dollars.
Since 2018, the Government of Zimbabwe embarked on an ambitious project of fiscal recalibration through the famous austerity for prosperity economic initiative which culminated in government through the Ministry of Finance and Economic Development adopting massive rationalisation of government expenditure and on the other hand enhancing revenue streams. The rationalisation programme was fast bearing fruits as employment costs were within acceptable thresholds of 40 percent and below, coming from as high as 80 percent whilst capital expenditure had greatly improved laying the necessary foundation for prolonged economic growth.
The Minister of Finance and Economic Development, Mthuli Ncube, said that he was satisfied by the level and progress of fiscal consolidation that the economy had witnessed. The achievement of a sustainable fiscal consolidation can be traced back to the introduction of the Transitional Stabilisation Programme (TSP) in 2018 which ushered several economic reforms towards changing the country’s economic fortunes.
A major expenditure outlay related to employment costs, which rose from 48% of total revenues in 2009 to a peak of about 78.3%1 in 2017, before receding to 61% in 2018. Following fiscal reforms under the TSP, the employment costs have been placed on a “sustainable footing”, with any salary reviews aligned to economic growth (Economic Growth in Zimbabwe) and government revenues.
Consequently, employment costs are expected to continue the downward trend to be about 42% by end of 2020, against deemed sustainable levels of around 30% of total revenues, that way allowing provision for investment in developmental projects.
Similarly, Government managed to record current account surplus for the first time in decades. Current account improved from a deficit of US$1.4 billion in 2018 to a surplus of US$311.2 million in 2019.
Notwithstanding the impact of foreign currency shortages, the improvement in current account balance was also a reflection of the effect of import compression measures undertaken by Government and improved competiveness that came with the introduction of the local currency.
Government satisfied with fiscal consolidation results in 2019
Measures contained in the Transitional Stabilisation Programme (TSP) and 2019 National Budget have seen Government revenue collections surpassing targets by 8,2 percent, Finance and Economic Development Minister Professor Mthuli Ncube said in May 2019. “Fiscal consolidation and stabilisation measures in the TSP and the 2019 National Budget are paying dividends, with revenue collection in the first quarter of 2019 performing above target by $146 million while expenditures were contained below the target of $218,9 million,” said Prof Ncube.
“As a result, a budget surplus of $443,1 million was realised during the quarter, creating an additional space of financing social development programmes and unforeseen exigencies related to drought and the impact of Cyclone Idai.”
Cumulative tax and non-tax revenue collections in the first quarter of the year jumped to a record $1,9 billion against a target of $1,8 billion, resulting in a positive performance of $146 million or 8,2 percent. The Intermediated Money Transfer Tax (IMMT) — commonly known as the 2 percent tax — generated monthly averages of $95 million against a target of $50 million. The Government’s Transitional Stabilisation Programme ends in December 2020 by which time the country’s economy is expected to have taken shape for serious growth.