Zimbabwe: Mired in Transition: Zimbabwe: Mired in Transition

6. Fiscal Space Challenges, Policy Options & Zimbabwe’s Economic Recovery

155 Introduction and background The Zimbabwe economy experienced a precipitous decline between 1999 and 2008, cumulatively losing at least 48 per cent of GDP (Government of Zimbabwe (GoZ), 2009). By March 2007, the economy was operating in a hyperinflationary environment,1 largely because of over-printing money as one of the major sources of financing the budget deficits, but without a corresponding growth in output of goods and services (Makochekanwa, 2007). Industry failed to cope with the rising costs of inputs due to the depreciation of the local currency. National output dropped against declining industrial capacity utilisation2 to levels below ten per cent across the economy (GoZ, 2009). The sustained effects of spiralling inflation brought by quasi-fiscal activities of the Reserve Bank of Zimbabwe (RBZ) and the contraction of output undermined the country’s capacity to collect revenue (IMF, 2010). By 2008, Zimbabwe had fallen into a state of almost complete economic and social collapse characterised by poor public services, especially in the areas of primary healthcare, the provision of clean water and electricity and shortages of basic commodities. In September 2008, the country’s political adversaries agreed on a new path forward and signed an inter-party agreement known as the Global Political Agreement (GPA). This agreement defined the framework for the new government formed in February 2009. In line with Fiscal Space Challenges, Policy Options & Zimbabwe’s Economic Recovery Jabusile M. Shumba & Mohammed Jahed 6 156 FISCAL SPACE CHALLENGES, POLICY OPTIONS … Article 3.1(a)3 of the GPA, the new government introduced a new macroeconomic policy framework – the Short-Term Emergency Recovery Programme (STERP) – whose main key goals were to stabilise the economy, recover the levels of savings, investment and growth and lay out the basis of a more transformative mid-to-long-term economic programme that would turn Zimbabwe into a progressive developmental state (GoZ, 2009). In addition to the multi-currency framework being part of the new economic path, a number of measures were also introduced, among them being fiscal prudence measures such as cash-budgeting, RBZ reforms such as abolishing quasi-fiscal activities and strengthening public finance with the introduction of the Public Finance Management Bill. Suspending the use of domestic currency and introducing a multi-currency trading system limited the RBZ’s discretion to ‘create’ money by extending credit to the government or the banking system and eliminating the possibility of inflationary financing. This and other fiscal policy measures managed to tame hyperin flation and restore some form of economic stability. Revenue collections from taxes recovered against the backdrop of reform measures, rising from US$4 million in February 2009 to close out the year at a total of US$973 million, accounting for 18.6 per cent of GDP (Ibid.). The improvement in revenue collections continued in 2010, and the government revised the projection during the mid-year fiscal policy review from US$1.440 billion (26 per cent of GDP) to US$1.750 billion (31.7 per cent of GDP) based on the strong performance seen during the first half of the year. However, revenue collections have yet to reach the levels seen prior to the decade of economic decline and the challenge of restoring of social services and infrastructure remains. The government is thus faced with the task of creating fiscal space in order to stimulate the public spending instrument in promoting economic growth. It is against this background that this chapter outlines Zimbabwe’s fiscal space challenges, argues for public expenditure reforms and discusses some policy options for increasing fiscal space for growth-enabling priorities. Defining the concept of fiscal space In its broadest sense, fiscal space can be defined as the financial capacity of a government to provide budgetary resources for a desired 157 Jabusile M. Shumba & Mohammed Jahed purpose, without prejudicing the sustainability of its financial position (Heller, 2005). It is necessary that the manner in which a government raises revenue be sustainable, ensuring that it does not fail to meet its debt obligations. There are several ways in which a government can create fiscal space: UÊÊ >˜}iÃÊ̜ÊÌ>Ý>̈œ˜\Ê/>ÝiÃÊ>ÀiÊV >À}iÃÉviiÃʈ“«œÃi`ʜ˜Ê>˜Êˆ˜`ˆvidual or entity exacted pursuant to legislative authority by a government. They vary in form, ranging from tolls, customs and excise duty, valued-added tax and taxes on personal income. A government can raise additional resources by increasing taxes, broadening the tax...