Broke govt cuts spending amid tight fiscal space

KEY POINTS

• The ZiG currency has depreciated 46% since April.
• Treasury orders ministries to prioritize wages and social services.
• Economists say rising informality and tax declines worsen the crisis.

For the rest of 2024, Treasury has directed government ministries to prioritise expenditure on necessities, concentrating on wages and social services while reducing travel-related costs.

This order was issued since Zimbabwe’s budgetary space is being strained by the ongoing devaluation of the Zimbabwe Gold (ZiG) currency.

ZiG currency loses 46% value, straining fiscal space

The Zimbabwean dollar was replaced with the ZiG in April, but since then, it has lost 46% of its value. When officials abandoned a fixed exchange rate regime in September due to market pressure, the currency plunged 43% against the U.S. dollar, going from US$1:ZiG13.99 to US$1:ZiG24.39 in a single day.

According to newsday, the government further widened the gap between revenue and expenditure in October 2024 by implementing a backdated salary review for state servants, adding to the fiscal strains. The financial difficulties were emphasised by Finance Secretary George Guvamatanga in a circular dated November 13 that NewsDay was able to receive.

“There was a significant discrepancy between revenue inflows, which were sometimes collected with a one-month lag, and local currency expenditures that instantly adjusted to the new exchange rate due to the recent 43% depreciation of the local currency unit (ZWG) against the U.S. dollar,” Guvamatanga stated. 

These include limiting overseas trip approvals to instances supported by non-governmental sources, prioritising payment of outstanding commitments while delaying local workshops except those pre-approved by Treasury, and reducing operating fuel allocations by 50%.

According to Auditor General reports, MDAs have been criticised for squandering funds allocated for both local and international travel allowances.

According to newsday, as of Friday, the currency was trading at US$1:ZiG25.28 on the interbank market, having debuted in April at US$1:ZiG13.56. The exchange rate fell from US$1:ZiG20 early this year to US$1:ZiG40-50 on the parallel market.

Economists warn of informal sector challenges and tax declines

The government’s budgetary management, according to economist Gift Mugano, has become unduly dependent on taxes, which has impeded economic progress.

Instead than taxing the economy into collapse, the government should concentrate on expanding it. Mugano remarked, “This is killing the goose that lays the golden eggs.”

He pointed out that important taxes like the intermediated money transfer tax (IMTT), which used to account for 16% of total tax income, now only make up 3.41%.

According to ZimStats, corporate tax contributions have also decreased, from 15% to 9.5%, which reflects the informal sector’s increasing dominance, which currently accounts for 88% of jobs. 

“In order to power the economy, the government must address the growth of the informal sector, boost production, and invest in energy,” he stated.