Fiscal prudence key for macroeconomic stability

Zimbabwe must continue pursuing a prudent fiscal policy to achieve macroeconomic stability, create fiscal space for an economic recovery and restore lost ground in human capital development, the World Bank has said in the Zimbabwe’s Economic Update (ZEU).

Macroeconomic stability is measured by the Gross Domestic Product (GDP), inflation rate and unemployment rate which the World Bank expects to stabilise in 2022.

World Bank projected GDP growth in Zimbabwe to reach 3.9 percent in 2021 spearheaded by the agricultural sector strengthening further in 2022 with the economy growing at 5.1 percent as the deployment of vaccines intensifies and implementation of National Development Strategy 1 (2021-2025) bears fruits.

The ZEU expects the Zimbabwean fiscal policy to remain prudent in 2021, thus underpinning macroeconomic stability.

“Effective management of public finances will depend on continued measures to ensure tight control of expenditures, particularly public wages, while at the same time provide adequate resources for basic service delivery,” reads the update.

In brief, the prudent fiscal policy can be summarised in four aspects, controlling deficits, adjusting structure, advancing reforms, and increasing revenue while curbing expenditure.

Zimbabwe’s 2021 fiscal policy has been prudent with the main target being a fiscal deficit of -1.3% of GDP in line with the National Development Strategy 1’s fiscal consolidation objectives which strictly limit the fiscal targeted deficit to below 2% of GDP.

Treasury department believes that the attainment of the targeted deficit will allow containment of the public debt of about 64% of GDP, which is within the 70% of GDP stipulated in the Public Debt Act and within reach of the SADC recommended threshold of 60% of GDP, thus prudent.

“To attain the above targets, fiscal policy will continue to prioritise revenue enhancement measures, whilst pursuing expenditure management thrust initiated from 2018 on the launch of the Transitional Stabilisation Programme (TSP),” Treasury said in its 2021 fiscal policy.

According to ZEU, for Zimbabwe to maintain fiscal discipline in the medium-term while addressing key social needs there is need for the improvement of revenue collection through better tax policies and administrative efficiency, reviewing COVID-19 response measures and scaling ineffective incentives as well as increasing the transparency of subsidies and keeping wage costs constant as a percent of GDP.

Fiscal discipline should be matched by monetary discipline on which the central bank must keep tight control of monetary supply growth; enhance transparency and predictability of monetary policy, liberalize the foreign exchange market, strengthen governance and anti-corruption.

“Conservative monetary policies are expected to reduce inflation and stabilize prices in the medium-term. Assuming appropriate policies, prices could stabilize by 2022 at a much lower inflation rate of around 22 percent,” reads the update.

Zimbabwe’s central bank is working hand-in-hand with the treasury department with its 2021 Monetary Policy which intends to rollover some policy measures to deal with the maintenance of price and financial system stability in order to maintain macroeconomic stability.

The ZEU further urged regulators to reduce the regulatory burden and policy inconsistencies, reduce barriers to regional trade and strengthen trade facilitation, privatize key State Owned Enterprises (SOEs) in the medium term and discontinue forex retention policies to support economic activity.

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