Understanding Economic growth : A nuanced approach
Nevanji Munyaradzi Chiondegwa
There has been a view raised that seems to cast aspersions on the recorded economic growth and projections as predicted by both the World Bank and Government of Zimbabwe.
The questions stem from what the critics call a stagnant budgetary policy framework. The argument forwarded is that the fiscal budget has been consistently capped at USD4,2 billion. The pegging has been against projected tax revenues which have been sustained at about the same level as the budget. Thus the question on the projections and the possibility of achieving Vision 2030.
It is irresistibly persuasive and correct to say that there is a close relationship between economic growth and fiscal policy, more specifically relating to budgets.
Capital expenditures, as with expenditures on key social sectors such as health, education, transport and communications, have a major rendering on economic growth, simultaneously taking into account underlying budgetary constraints.
The questions and assumptions while correct are fundamentally flawed in view of the two Government Economic blueprints since 2018, the Transitional Stabilisation Program (TSP), and then the successor National Development Strategy 1 (NDS1) blueprints.
Though this piece does not intend to delve deeper into the budgetary figures, it will try to simplify a few areas so that it can be clear that indeed the economy has been on a sustained growth trajectory.
Assuming the budget figures mentioned are correct, I will bring to the fore the structural faults that were corrected by treasury through TSP, faults that had been draining the fiscus thus relegating finances to revenue expenditure only.
In the past years, the focus had been on current expenditure, such as paying of salaries, and Government spent close to 95 per cent of total budget to salaries. The salaries were directly exported by the same civil servants to South Africa to import foodstuffs and other essentials, as well as to Japan for second hand cars. The obvious result was a destruction of the local manufacturing industry in Zimbabwe.
The impact was such that the country did not have Zimbabwean products in shops for a long period and the country had become one giant supermarket.
In comparison, today, close to 80 per cent of commodities on big chain supermarkets shelves are locally manufactured. One must hasten to point out that the civil service, who are still the largest recipient of budgetary allocations, is now chewing only about 49 per cent of the national budget since 2018. The money released from salaries has now been directed to capital projects such as roads, dams, ports of entry and Agricultural mechanisation and expansion.
The key is not what you have( budget ) but how you have used what you have( where you have directed your consumption). It is therefore not the size of the budget but how the little resources available are deployed.
So far, as reflected in the above figures, it would be agreed that treasury has greatly improved on expenditure and efficient deployment of available resources.
In 2021, the Government resolved to move funds from salaries (consumptive) and deployed the funds towards inputs for farmers. The agricultural sector grew by plus 30 per cent, pushing the national economic growth rate according to World Bank figures to 5.2 per cent, an upward revision of their initial projection of 3.9%. This growth occurred despite the adversity of Covid-19 on the economy.
Increasing the size of land under crop led to increased demand for inputs. Every local firm involved in manufacturing agricultural inputs registered a jump in business. This way a million plus farmers were empowered, employment was created, increased demand for local goods and services and expanded the tax base among other gains.
In short, the economy grew.
Economic growth rate is not squarely pinned on budget size but how the available funds were deployed.
The mining sector registered exceptional growth, albeit at almost zero Government funding, same with manufacturing. It was however Government policy which allowed this growth.
In June 2021, the Confederation of Zimbabwe Industries (CZI) reported that about 38 per cent of manufacturing sector firms indicated that they had undertaken expansions, including technology upgrade and new investments in the second quarter, which also supported investment in increasing capacity.
CZI reported that industrial capacity utilisation rose from 47 per cent in 2020 to 61% in 2021.
Government has been deploying budget funds to the most critical areas. Gains have been recorded in improving electricity supply which had been the incessant cry of both manufacturing and mining industry. Even the farming community had been affected by the electricity shortage. The actual Megawatts in electricity is up but with the increased industrial usage and capacity, demand rose as well hence the current shortage, but key economic sectors continue to be prioritised.
There is enough evidence that there is a transition in the economy from a finished goods importer to an equipment and raw materials importer. According to the figures released by the Reserve Bank of Zimbabwe 70% of foreign currency auction funds are going to import of machinery and raw materials.
Sustainable government revenue comes from taxes. Lately, government, in a bid to attract investment and to boost manufacturing, has been offering a lot of tax incentives to companies or sectors.
Players in the Tourism sector and Agricultural equipment importers were exempt from paying duty. Those importing capital equipment and certain raw materials are not paying duty. New investors in some sectors such as Special Economic Zones enjoy tax holidays.
The idea behind the tax holidays is to grow the tax base first. This is one of the reasons why the national budget has remained almost same for now.
The rural folk the Government has been empowering do not pay tax. The empowerment drive was also extended to the gold sector, some taxes were cut resulting in a 50 per cent jump in Gold deliveries from 19 tonnes in 2020 to 29 tonnes in 2021.
Lastly, there is a good reason why progressive countries allow their leaders including the stupid ones full two terms. Most economic policies need to run their full cycles without disturbances, painful as it may be, in order to realise their full potential.
Reality is that more funds should be moved towards climate proofing of the Agricultural sector.
Zimbabwe needs more dams, boreholes and irrigation infrastructure. The country has to expand power generation. All this is being done. Several new dams have been built with more currently under construction or with contractors on the ground to begin on some. This is all growth.
Fiscal policy is hinged on Government spending and tax rates. So if Government spends less on consumption and focused more on capital expenditure, while maintaining tax rates, the result may look like a stagnant revenue from taxes, yet real growth is noticed in the economy. This is the core of how there has been recorded Economic growth.
In short Government uses tax and public spending (as directed by budget) to influence macroeconomic productivity levels by either increasing or decreasing one of the two.
The budget size has its size determined by projected tax revenues. Tax holidays and incentives have huge impact on the budget and thus keeps it almost consistent and constant but real growth was recorded. The numbers from CZI and the retail industry do confirm existence of a vibrant economy on a growth trajectory.
It has to be noted that all these figures have been confirmed by the World Bank. A deliberate attempt to avoid figures presented by Government agencies was made in the hope that the growth can be seen while removing from it the slur of propaganda. 5.2% Economic growth during a pandemic is a big jump. It must be noted that this was achieved this without external support!
So Zimbabwe is indeed on the correct path and Vision 2030 is not a mirage but achievable and all fundamentals are correct towards its achievement.
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