2021 Pre-Budget Strategy Paper

The Government of Zimbabwe through the Ministry of Finance and Economic Development launched the 2021 Budget Strategy Paper (BSP) in line with the commitment of ensuring broader stakeholder involvement in policy formulation processes, that way generating effective public participation in policy and programmes implementation.

Introduction

The government said the 2021 Budget Strategy Paper (BSP) constitutes a valuable tool meant to guide consultative discussions and sharing of ideas on national priority policies, programmes and projects for the 2021 National Budget. Under the theme Building Resilience and Economic Recovery Post COVID-19 the Budget Strategy Paper focusses on strengthening the economy to withstand any potential climatic (drought, cyclones, floods, pests) and macroeconomic shocks, as we focus on attaining inclusive and sustainable growth towards Vision 2030.

The targeted constituency include the Tripartite Negotiating Forum Partners comprising Government, Business and Labour as well as parliamentarians, private sector players, civic society organisations, academia, and all other interested parties/individuals inclusive of cooperating development partners. In addition, the 2021 Budget Strategy Paper marks the transition from the Transitional Stabilisation Programme (TSP), coming to an end in December 2020, paving way for the longer term National Development Strategy: 2021-25, as the country ascends towards Vision 2030, for attaining a middle income status economy.[1]

Global Economy

The impact of the COVID-19 pandemic combined with challenges related to trade tensions, Brexit and other geo-political factors, remain key drawbacks to global economic growth prospects. The latest October 2020 global growth contraction has been revised to -4.4%, an improvement compared to the June forecast of -4.9%. The review reflects the better performance mostly in advanced economies where activity began to improve from the second quarter when lockdowns were gradually lifted.

Deeper downturns in 2020 are expected across all economic blocks such as advanced economies (-5.8%); emerging and developing economies (-3.3%). Advanced economies are generally the worst hit, in particular the UK, France (both -9.8%), Italy (-10.6) and Spain (-12.8%).

Global Trade

Global trade is expected to grow by 8.3% in 2021, recovering from a projected -10.4% contraction in 2020. This is due to a gradual pick-up in international mobility and domestic demand, in line with the general recovery from the pandemic.

Domestic Economy

The domestic economy, which, in 2018-20 was confronted with climatic, macroeconomic and the current Covid-19 shocks, is projected to contract by -4.5% in 2020. The government said since the gradual opening of the economy during the beginning of the second half of the year, economic activity was picking up. From 2021 as with other global economies, the government expects the economy to be out of the woods with a growth projection of 7.4%, riding on stabilisation gains recorded under the TSP, expected improvement in the climatic and investment conditions and planned strategies and programmes under the NDS.

Fiscal Consolidation

The government made a fundamental policy decision 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 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.

Fiscal consolidation was achieved through a number of interventions such as, among others:

  • Introduction of the 2% intermediated money transfer tax, 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 financing; and
  • Restructuring of domestic debt into long term marketable instruments.

Restoration of Monetary Policy

The country has been increasingly losing international competitiveness by maintaining use of foreign currencies as primary domestic currency. Government, through Monetary Policy Statements of 1 October 2018 and 20 February 2019, introduced the local currency, restoring the monetary policy instruments in the process.

Restoration of monetary policy increased tools at the disposal of Government to influence economic activity. This is important especially when the economy has received limited external financial support. As part of enhancing effectiveness of the monetary policy, the Monetary Policy Committee & New RBZ Board were established and the Central Bank has since introduced monetary targeting with a view of containing money supply and hence inflation.

Macroeconomic Prospects for 2021

Prospects for 2021 and beyond are based on the following broad assumptions:

  • Recovery from Covid-19 pandemic;
  • Resumption of global economic activity;
  • Good agricultural season;
  • Enhanced revenue collection;
  • Sustainability of the auction system;
  • Tourism and trade resumption;
  • Materialisation of mining investment targets;
  • Firming international mineral prices;
  • Recovery in domestic aggregate demand;
  • Macro stability characterised by currency stability, declining annual inflation averaging 134% and fiscal stability;
  • Domestication of value chains; and
  • Further control of wasteful expenditures and value of money on all expenditures.

The 2021 Macro-Fiscal Framework

In 2021, the economy is predicted to recover from a projected contraction of -4.5% in 2020 to a growth of 7.4%, driven by consumption (2.6%) and investment (5.8%) improvements.

The recovery in consumption is mainly anchored on expected stabilisation of inflation through ongoing policy interventions which should aid restoration of purchasing power of consumers. Employers including Government will continue to review wages and salaries in line with inflation developments and budget capacity to restore eroded incomes as the economy recovers.

Public investment is also expected to contribute 5.1% to GDP growth as Government pushes on some of the projects that stalled during the year. From the production side, all sectors of the economy are expected to register positive growth in 2021, with the agriculture and mining sectors expected to record the highest growth rates of about 11% each, and tourism (6.8%) and electricity (10%) among the major sectors.

Inflation

Inflation (Zimbabwe Inflation Rates) is projected to slow down significantly, with average annual inflation projected at 134% during the year 2020. The slowdown in inflation will be attributed to deepening of the foreign currency auction market (Foreign Exchange Auction System) which is expected to sustain exchange rate stability. Reserve Bank is also expected to continue to curtail growth in money supply which is one of the major drivers of inflation. Furthermore, the anticipated better agriculture season should result in reduced demand for foreign currency, further supporting exchange rate stability.

The 2021 National Budget Proposed Priorities

The 2021 National Budget is guided by the National Development Strategy (NDS I): 2021-25, to be launched in October 2020. The NDS I is a successor to the TSP which coming to an end in December 2020. It will consolidate the achievements of TSP as we move towards towards Vision 2030, for attaining a middle income status economy. The focal areas of the NDS are as follows:

  • Inclusive growth and macro-stability;
  • Food security and nutrition;
  • Governance;
  • Moving the economy up the value chain &structural transformation;
  • Human capital development;

Environmental protection, Climate Resilience and natural resource management;

  • Housing delivery;
  • Digital economy;
  • Health and wellbeing;
  • Transport, infrastructure and utilities;
  • Image building and international engagement and re-engagement;
  • Social protection;
  • Youth, sport and culture; and
  • Devolution.

The main messages from the NDS consultations is on repositioning the economy towards a sustainable growth path critical for reducing poverty and growing per capita incomes. Based on the NDS pillars, the 2021 Budget will focus on fewer areas which include the following:

  • Inclusive Growth and Macro-stability;
  • Developing and Supporting Productive Value Chains;
  • Optimising Value in our Natural Resources;
  • Infrastructure, ICT s and Digital Economy;
  • Human Capital Development and Well-being;
  • Effective Institution Building & Governance; and
  • Engagement and Re-engagement.

Conclusion

The 2021 National Budget is a bridge of the TSP and the successor five-year National Development Strategy 2021-25, hence, stakeholder contributions should seek to consolidate the work of the TSP, as we move towards the attainment of the Vision 2030.




References

  1. [1], eBusiness Weekly, Accessed: 21 October, 2020