Reliability of Treasury projections questioned

THE reliability of projections by Treasury on key macroeconomic fundamentals has been questioned after most of the fiscal authorities’ predictions for 2022, chief among them the inflation trajectory and targets, turned inaccurate.

This has prompted the Parliamentary Committee on Budget and Finance to conclude that the predictions were based on the wrong assumptions.

Earlier, authorities projected that Zimbabwe’s inflation rate would end 2021 at single digit level, following a post dollarisation climb that saw it peak at 837,5 percent in June 2020.

The rate appeared to fall thereafter, in line with Treasury’s estimates, plunging to a two year low of 50,1 percent by June 2021, but rose again astronomically to close 2021 at 60,7 percent amid a wild monthly run and rapid exchange rate depreciation.

The budget and finance committee, however, noted that subsequent developments after the presentation of the 2022 National Budget in November 2021, both on the global and domestic front have created enormous challenges for the economy.

Such developments included the Russia/Ukraine conflict whose spill overs are being felt through fuel, food and fertiliser price increases and shortages globally.

Locally, the committee said there was poor rainfall distribution in both space and time across the country after incessant rains in January were followed by prolonged dry spell in the first week of February to end of March.

This led to failed crop establishment forcing most farmers to replant several times.

Rampant market indiscipline particularly on the parallel market also led to debauched depreciation of the local currency and rapidly increasing inflation.

In response to some of these challenges, on May 7 2022, President Mnangagwa announced a cocktail of measures to restore confidence, preserve value and restore macroeconomic stability.

According to the committee’s report, depreciation of the local currency and the inflationary environment experienced during the first half of the year resulted in both revenues and expenditures performing above their original target.

The committee said it was, however, not satisfied with the reliability of the Ministry of Finance and Economic Development’s projections.

“The underlying assumptions on which the projections were based were wrong and as such, headline inflation steadily accelerated from 60,7 percent in January to 191,6 percent in June 2022 and has climbed to a peak of 256,9 percent as of July 2022.

“The 2022 budget had projected annual inflation, recorded at 54,5 percent in October 2021 to decline and close at between 52-58 percent. The revised estimates were therefore above the original estimates by close to 100 percent,” the committee said in a recent report to Parliament.

It noted that revenue was forecast at $850 million in the original budget, but the figure has been stretched to $1,7 trillion following the presentation of the mid-term budget review while expenditures, initially seen at $968 million have been reviewed to $1,89 trillion.

“The supplementary budget is therefore 96 percent of the original budget. The committee therefore calls upon the Macroeconomic Working Group (MWG) comprising the Ministry of Finance, RBZ and ZimStat to up their game in terms of improving on their forecasting.”

Projected economic growth rate was also revised from 5,5 percent to 4,6 percent on account of reduced output from the 2021/22 agricultural season, compounded by continued depreciation of the local currency and rising inflation.

The committee is concerned with the credibility of this projection given that the prediction that economic expansion of 7,8 percent growth was registered in 2021 was largely driven by agriculture, which grew by 33,6 percent.

In 2022, agriculture is expected to contract by 5 percent and the budget committee said this “should be reflected in the overall growth rate as agriculture contributes significantly to the overall growth. The economy also grapples with inflationary pressures, reduced aggregate demand and forex challenge”.

The committee noted that the statement failed to acknowledge that the surge in annual inflation was due to speculative pricing arising from forward pricing practices and adverse inflation expectations.

It also cited the continued arbitrage in the economy following the depreciation of the Zimbabwe dollar against major currencies on the parallel market among inflation drivers.

“The auction system has not addressed price indexing to the parallel market,” the parliamentary committee said in its report.

“Credibility issues also creep in as economic agents recall the assurances they were given in the 2020 budget that monthly inflation was expected to fall to single digit figures from the first quarter of 2020 to close the year around 2 percent,” the committee said.

Economist, Eddie Cross, said predictions made by the Ministry of Finance and Economic Development at the beginning of the year were based on an outlook which was completely unrealistic, which have since been overtaken by events, “but not negatively”.

“I still believe the fundamentals are in place, the Ministry continues to operate on a fiscal surplus and I think that is the critical thing; they are not printing money to cover the fiscal deficit; they are living within their means’ I think they are doing right,” he said.

But economist, Professor Gift Mugano differed, saying Zimbabwe’s Treasury predictions were no longer reliable and that because they always missed targets, the vast majority of economic agents no longer trusted or used them, rather depending on expert guidance for their planning and budgeting.

“For example, if you look at inflation, we were targeting 25-30 percent, but look at where inflation is now; 257 percent and the budget, I will just give you two, we were expecting $968 billion and now we have $1,9 trillion.

“So, the Ministry of Finance has to set a tone on the economy, world over, when the ministry of finance sets projections, economic players, business, academics, universities, everyone, development partners they use those numbers to inform their plans; their budget as well.

“So, if the economy is expected to grow by 5,5 percent, you see even the companies project their sales; their businesses to grow in the same direction…We now have the risk of no one listening to the Ministry of Finance,” Prof Mugano said.

“I have realised that they (companies) no longer follow what the Ministry of Finance says, but they now bring in expert opinion to guide them on how they should plan their strategy and their budgets.

‘The risk is that the Ministry of Finance will fail now to direct economic players in a particular path which is desired. My advice is that the Ministry of Finance must always exhaust views from various stakeholders including voices they do not know.

Prof Mugano gave an of view he gave in November at a pre-budget conference on how things would develop in the economy in the coming months, saying Treasury did not pay heed to his submissions around dollorisation, inflation and exchange rate dynamics, which he said have come to pass.

“I think what is required, in the spirit of what the President says “listening Government”, it’s only fair to say the President is desirous to have a listening Government, but he is not the Government alone, it is therefore necessary for the Government ministers to listen to bring everyone on board,” he said.-ebsuinessweekly