Addressing Fiscal Imbalances at the Core of Zimbabwe’s Financial Crisis Could Boost Long Term Development

June 21, 2017

HARARE, June 21, 2017 - Resolving the ongoing financial crisis and sustaining growth in Zimbabwe will require bold measures to correct fiscal imbalances, according to a World Bank report released today.  In 2016, the fiscal deficit increased sharply to 10% of GDP boosting short term growth, but also depleting resources to support medium- and long-term development.

The second edition of the Zimbabwe Economic Update (ZEU) finds that although GDP is expected to grow moderately by 2.8% in 2017, it may remain too low to improve per capita income levels as exports recover and imports are curtailed by administrative measures. The ongoing financial fragility is expected to hinder long term investments by both large and small companies. 

To better understand the fiscal challenges at the core financial crisis, the Government of Zimbabwe and the World Bank jointly conducted a Public Expenditure Review (PER), also released today which examines in detail government spending across a broader range of public sector institutions, than previously considered together.  In a series of five volumes, the PER provides new, in-depth information on spending by central and local government, state-owned enterprises, and in education and social protection. 

The joint review of public expenditures offers a good starting point for reducing the fiscal deficit in an equitable manner. A lower deficit, preferable lower than the 7 percent of GDP projected for 2017, is crucial for financial stability and long-term growth. It may require difficult measures to reduce the large public sector wage bill,” said Paul Noumba Um, World Bank Country Director for Zimbabwe.

The PER finds that the dominant role of the state in the economy, while at times critical to addressing short term vulnerabilities, has become a significant obstacle to long term growth.  The structure of spending remains constrained by the large public sector wage bill, and the structure of financing in some sectors exacerbates rather than moderate inequality.  In particular, social protection spending is dominated by public sector pensions while allocation for safety nets remain small.  User fees, which favor wealthier households, are now a crucial source of financing for basic services – in basic education they account for around $800 million annually, equal to the national budget on education. 

The PER also finds that in the broader public sector, state-owned enterprises have become a major source of fiscal risk and net transfers from central government, while local authorities face a mismatch between service delivery mandate and their capacity to mobilize and manage spending effectively.

The PER recommends extending similar levels of oversight, that are currently applied to the national budget, to all elements of broader public sector spending,” said Johannes Herderschee, Senior Country Economist and co-author of the report. “This would allow for a more coordinated fiscal policy and efficient use of government resource”. 

Since 2009, Zimbabwe has made major strides in rebuilding its public financial management system – it should go further to publish consolidate public sector accounts and reform local government financing in line with the 2013 Constitution.  A new corporate governance bill for state owned enterprises and parastatals under preparation should strengthen oversight and improve performance of this sector. Ultimately, Zimbabwe should examine the role of the state in all its parts, to ensure that it has a public service fit for purpose to create the foundation for long term growth.  

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