Salary cuts to reduce govt deficit: WB

Zimbabwe’s central government deficit is projected to narrow to 4,8% of Gross Domestic Product (GDP) in 2017, down from almost 10% last year if significant fiscal adjustment, such as cuts in compensation benefits/wages of public sector workers are made, a World Bank (WB) report has shown.

In a report, Macro Poverty Outlook for Zimbabwe, the bank said gradual deterioration in economic conditions could rapidly escalate in the absence of a strong fiscal adjustment programme.

The World Bank said fiscal adjustments involving salary cuts would be a challenge in the run up to next year’s general elections.

“This baseline projection requires significant fiscal adjustment, such as cuts in compensation benefits/wages of public sector workers.

Alternatively, it would involve deep cuts in non-wage-bill expenditures. Such actions represent a challenge, in particular in the run up to elections that are scheduled for no later than July 31, 2018. Revenues are already over 25 % of GDP and the public sector accounts for more than 50% of GDP, leaving little scope for further increase,” the bank said.

Government deficit is the amount by which government’s spending is more than the money it receives.

Finance minister Patrick Chinamasa has been struggling to implement austerity measures in light of dwindling inflows to Treasury coffers. On two occasions, government reversed Chinamasa’s plans to cut government expenditure through salary cuts and freezing of bonuses to civil servants.

WB said the administrative allocation of officially available foreign exchange and excessive printing of bond notes hold the potential for leading to a rise in the black market exchange rate.

The authorities, WB said, have discouraged the development of a black market exchange rate in spite of their experience that such measures are ineffective when price pressures increase.

“The baseline projection assumes a reasonably efficient and transparent allocation of available foreign exchange earnings. So far, markets have been allowed to operate; companies with export earnings use offshore banks to manage their assets and repatriate export earnings by paying for imports directly without repatriation of export earnings,” the WB said.

It said the overall poverty rate was projected to increase slightly adding projected economic growth rates in the context of continued high population growth were not strong enough to prevent a gradual increase in the number of poor by some 300 000 per year.

“For extremely poor households, however — those that depend for a large part (estimated at around 70% on average) of their income on agriculture — the rebound in agricultural production in 2017 is likely to bring down the extreme poverty rate by
four percentage points, reducing the number of extreme poor to around 2,24 million,” said the WB.

The bank said the government was likely to continue to rely on domestic financing of the budget with unfortunate consequences for credit to the private sector which in the case of monetary financing would lead to inflation.

Clearing of external arrears may serve to open international flows of capital and avert excessive use of domestic financing, it said adding that prospects for such development, however, remain uncertain at the present time.–newsday