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Addressing fiscal imbalances at the core of Zimbabwe’s financial crisis could boost long term development

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Addressing fiscal imbalances at the core of Zimbabwe’s financial crisis could boost long term development

Addressing fiscal imbalances at the core of Zimbabwe’s financial crisis could boost long term development
Photo credit: Jekesai Njikizana | AFP | Getty Images

Resolving the ongoing financial crisis and sustaining growth in Zimbabwe will require bold measures to correct fiscal imbalances, according to a World Bank report released today. In 2016, the fiscal deficit increased sharply to 10% of GDP boosting short term growth, but also depleting resources to support medium- and long-term development.

The second edition of the Zimbabwe Economic Update (ZEU) finds that although GDP is expected to grow moderately by 2.8% in 2017, it may remain too low to improve per capita income levels as exports recover and imports are curtailed by administrative measures. The ongoing financial fragility is expected to hinder long term investments by both large and small companies.

Fiscal imbalances lie at the core of Zimbabwe’s ongoing financial crisis: the central government’s fiscal cash deficit moved to 10% of GDP in 2016, up from 2.3% the previous year. The deficit was largely financed from domestic financial markets as external arrears prevented Zimbabwe from gaining access to international capital markets. Cash shortages followed, financing for imports dried up, and the current account deficit narrowed dramatically.

The fiscal expansion in 2015/16 boosted short-term growth but depleted resources to support long-term development. Growth remained positive in 2016 at 0.7% and is set to rebound to 2.8% in 2017. However, cash shortages are projected to depress Zimbabwe’s medium-term growth prospects as they limit investment for an ongoing structural transformation. Growth rates for 2018/19 are being revised down to less than 1 percent, sharply negative in per capita income terms.

Fiscal adjustment is key to growth but complicated by the absence of consolidated public accounts. The size of the public sector is difficult to determine, precisely. A conservative estimate puts total public spending – including expenditures by the central government, local authorities, and state-owned enterprises and parastatals – at roughly 50 percent of Zimbabwe’s GDP.

Such scale and scope of a public sector are exceptional for a country of its population size (about 16.3 million) and income level, and the state’s extensive role in the economy could be a significant obstacle to growth.


Joint report urges Zimbabwe to consolidate its public accounts

To better understand the fiscal challenges at the core financial crisis, the Government of Zimbabwe and the World Bank jointly conducted a Public Expenditure Review (PER), also released today which examines in detail government spending across a broader range of public sector institutions, than previously considered together. In a series of five volumes, the PER provides new, in-depth information on spending by central and local government, state-owned enterprises, and in education and social protection. 

“The joint review of public expenditures offers a good starting point for reducing the fiscal deficit in an equitable manner. A lower deficit, preferable lower than the 7 percent of GDP projected for 2017, is crucial for financial stability and long-term growth. It may require difficult measures to reduce the large public sector wage bill,” said Paul Noumba Um, World Bank Country Director for Zimbabwe.

The PER finds that the dominant role of the state in the economy, while at times critical to addressing short term vulnerabilities, has become a significant obstacle to long term growth. The structure of spending remains constrained by the large public sector wage bill, and the structure of financing in some sectors exacerbates rather than moderate inequality. In particular, social protection spending is dominated by public sector pensions while allocation for safety nets remain small. User fees, which favor wealthier households, are now a crucial source of financing for basic services – in basic education they account for around $800 million annually, equal to the national budget on education. 

The PER also finds that in the broader public sector, state-owned enterprises have become a major source of fiscal risk and net transfers from central government, while local authorities face a mismatch between service delivery mandate and their capacity to mobilize and manage spending effectively.

“The PER recommends extending similar levels of oversight, that are currently applied to the national budget, to all elements of broader public sector spending,” said Johannes Herderschee, Senior Country Economist and co-author of the report. “This would allow for a more coordinated fiscal policy and efficient use of government resource”. 

Since 2009, Zimbabwe has made major strides in rebuilding its public financial management system – it should go further to publish consolidate public sector accounts and reform local government financing in line with the 2013 Constitution. A new corporate governance bill for state owned enterprises and parastatals under preparation should strengthen oversight and improve performance of this sector. Ultimately, Zimbabwe should examine the role of the state in all its parts, to ensure that it has a public service fit for purpose to create the foundation for long term growth.

The first five volumes of the report are part of an evidence-based series designed to strengthen the basis for public expenditure policy in Zimbabwe:

Volume 1 of the Public Expenditure Review (PER) looks at the overall size of Zimbabwe’s public sector and the composition of the central government’s expenditure between 2011 and 2015.

Conservatively estimated at around 50 percent of GDP, the scale and scope of Zimbabwe’s public sector are exceptional for a country of its population (15.6 million plus), as well as its size and low income status. Revenue generation remains vigorous, with Zimbabwe’s ability to raise taxes and revenues reflecting the fact that citizens and firms are willing to pay for public services.

But, because public spending is dominated by personnel costs, the government’s ability is limited – both in terms of delivering public services and in terms of conducting sound fiscal policy. Both the country’s capital budget and basic operations are underfinanced.  

The central government accounts for about half of the country’s total public spending and 25% of GDP. These expenditures are well accounted for in the public financial management system as well as being subject to parliamentary oversight. Public spending by local authorities and state-owned enterprises or parastatals represents over 20% of Zimbabwe’s GDP but has been subject to less oversight. Coordinating spending across these different arms of the state has also been a challenge. 

The PER advocates in favor of producing a consolidated set of public sector accounts, seeing them as a key step toward improving the government’s management of its expenditure overall. 

Volume 2 of the series examines spending at the subnational level. Zimbabwe’s local authorities provide a range of vital public services, including transport, energy, water and sanitation, healthcare, education, local law enforcement, and public housing.

The 2013 Constitution of Zimbabwe reinforced the administrative and financial autonomy of local governments, but the fiscal space has not kept pace with service delivery needs. The PER’s second volume estimates that total local government spending reached US$1.2 billion or 8 percent of GDP in 2014, the most recent year for which data could be compiled.

These expenditures have exceeded revenues by over 50% since 2013; thus, the fiscal stance of local authorities is neither stable nor sustainable. Service delivery was, however, improved in areas that applied cost-recovery tariffs. Ultimately, ensuring service delivery at the local level will require both improvements in the capacity of local governments to collect local revenues and the implementation of the intergovernmental transfer system envisaged in the Constitution.

Volume 3 examines the financial and operational performance of State-owned Enterprises and Parastatals (SEPs), which play an especially significant role in Zimbabwe’s economy. SEPs are responsible for much of the nation’s core infrastructure and dominate key sectors such as energy, transportation, communications, and agriculture. Aggregate value-added, generated by SEPs, fell from 16.8% of GDP in 2012 to 13.4% in 2014. SEP tax contributions also fell and fiscal transfers increased.

The PER’s third volume finds that the financial and operational performance of SEPs stems from weak corporate governance and fragmented oversight mechanisms. The government has announced plans to prepare a Public Entities Corporate Governance Bill which, if implemented, will apply Zimbabwe’s good practice National Corporate Governance Code to its SEPs.

Volume 4 analyses public, household, and donor spending on primary and secondary education from 2009 to 2015, with a focus on its effectiveness, efficiency, and equity.

In 2014, public and private sources each accounted for just under US$800 million in education spending, while donors contributed another US$50 million. Total spending on primary and secondary education reached over 10% of GDP, which is comparatively high for countries with Zimbabwe’s income level. However, public education spending is dominated by employment costs (a full 99% in 2014) with little to no resources available for capital investment, maintenance, or school supplies.

Schools rely almost exclusively on parents’ contributions to fund non-wage costs. These factors are contributing to a widening infrastructure deficit as the school-age population is expanding. And there are growing inequalities in access to education.

Volume 5 analyzes trends in social protection spending, which are driven by Zimbabwe’s social-insurance systems. Public spending on social insurance rose from 2% of GDP in 2010 to 4.4% in 2015. However, at the same time, spending on social safety nets dropped from 1.9% of GDP to 0.7%. Two-thirds of social protection spending is devoted to civil service pensions, which cover 1.3% of the population. The remaining third includes spending on the Harmonized Social Cash Transfer (HSCT), which is targeted to lower-income households.

The PER’s fifth volume recommends that the government consolidate its social safety net programs and reform the civil service pension system.

This Public Expenditure Review (PER) was prepared jointly by the Government of Zimbabwe and the World Bank. Other volumes of the PER are planned for publication in September 2018. 

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