Business Development

Why the National Budget is the main driver of macroeconomic instability

Prof Mthuli Ncube, Minister of Finance and Economic Development

By Professor Gift Mugano

 

The Minister of Finance and Economic Development, Prof Mthuli Ncube presented the mid-term fiscal review on 28 July 2022.

 

For starters, the budget per se has no fundamental problem with our economic situation. This is particularly so because the budget deficit as reported by the Minister of Finance is less than 5% of gross domestic product. This is within the stipulated range. However, the real problem with the budget is how the funds are distributed as well as the procurement process.

 

From a distribution perspective, you will see that 34.5% of the budget is allocated towards capital projects while 12% is going towards the agricultural sector. Ironically, the players or service providers who are participating in road and dam construction are also the same players we see heavily involved in the agricultural programmes which are funded by the government. What it means is that a few individuals will be stashed with huge RTGS balances which they will offload into the black market – this has been the phenomenon since 2018. This explains why the exchange rate is running away.

 

From a procurement perspective, government departments purchase various requirements from middlemen who later on go and procure the very same commodities from manufacturers and add excessive marks plus massive forward exchange rates which are currently in excess of ZWL$1800 per USD at a time when the parallel market rate is around ZWL850. The very same suppliers are given prepayments which enable them to offload their abnormal profits on the black market.

 

In order to address this anomaly, the Minister of Finance and Economic Development issued a statement that compels government service providers to use formal rates and avoid going to the black market.

 

In addition, in his mid-term budget review, he announced that government will set up a Value for Money Unit. Both of these measures will not be effective as far as I am concerned. My humble view on its lack of effectiveness is hinged on the fact that it is targeting criminals involved in black market activities who are aided by the very same government in the first instance.

 

For example, for any rational economic agent, does it make sense for the treasuries in the first instance to pass payment of a requisition that factored in a forward exchange rate of say ZWL 2,000 instead of ZWL400? Yet, ironically, men and women in the street can easily deduct the exchange rate used on any of the commodities in the shop – that is why households for example will see that this commodity is cheaper to buy using USD or ZWL.

 

So, if it is granted that treasury releases payment in advance for commodities being priced by the supplier at a ridiculous rate, under their watch, how can we expect the very same office to push for effective implementation of the very same instrument compelling suppliers from going to the black market?

In addition, I think for the interest of the readers it is also important to ask a question as to how you expect the very same treasury to place emphasis on this recent instrument when they don’t buy direct from manufacturers. For example, why is treasury buying supplies such as dairy products from say Mugano Private Limited who will later on go to Dairibord to buy the very same products? Isn’t it logical that government must buy direct from Dairibord as in this case?

 

In these two examples, it is quite clear that the Ministry of Finance and Economic Development is largely responsible for the exchange rate spikes and inflation spiral.

 

It is important to note that the proposal to establish a Value for Money Unit is a very important and right step. This unit inter alia stamps out the use of middlemen was not necessary, elimination of forwarding pricing/exchange rate exchange rates and double pricing which is characterised the construction work. However, its effectiveness will depend on POLITICAL WILL, especially in view of the prevalence of concentration of few suppliers (who have political muscle).

 

 

About the author

Byron Adonis Mutingwende