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4.5 STRATEGIC POLICY ISSUES FOR THE NEW MILLENNIUM
ELEMENTS OF A MEDIUM TERM FRAMEWORK FOR THE NEW MILLENNIUM
Any budget must be based on an economic framework that reflects:
As it is, the millennium budget appears to be emerging outside the framework of any policy framework. It only alludes to the fact that this year is the final ZIMPREST year. No mention of the current NEPC Medium term Plan is made.
Below are principles that could guide the construction of a framework for a budget for the year 2000.
Focus on Human Development
In the new millennium, financial and economic policies must strive to focus on human development. Economic development should be perceived in its proper context; that is:
the progressive fulfilment of social and economic needs, aspirations and capacities of all the people through programmes that promote dialogue and popular participation, accountable governance, transparency, equity and fairness.
There is need for a departure from approaches that treat human development as a peripheral and residual issue in economic development. Dialogue and participation are important concepts for economic development, as well as for social stability and nation-building.
Growth as the Dynamic for Basic Needs Focused, People-driven Economic Development
A healthy and functioning Zimbabwe economy will be supported by policies targeted at:
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Focus on Domestic Resource Potentials
This is based on the recognition that the primary engine of development is the natural and human resource endowments and potentials, capabilities, opportunities and infrastructures that exist within Zimbabwe.
POLICY FRAMEWORK FOR RAPID ECONOMIC RECOVERY
The prospect for economic recovery in Zimbabwe is contingent upon a five pronged debt alleviation focused strategy that addresses the following:
The establishment of a political, institutional and policy framework that is:
The alleviation of the domestic debt burden and establishment of economic stability which can be achieved through:
Complementary reforms to further liberalise the banking and financial sector to ensure:
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An integrated empowerment programme targeted at currently marginal economic sectors, through:
Protection of Health through:
Domestic debt accumulation has become an intractable problem which requires urgent measures to curtail its debilitating effect on the economy. Any debt restructuring option must however have as its foundation fiscal prudence. Anything less than a clear unambiguous commitment to fiscal rectitude will yield only temporary relief to the domestic debt overhang.
Existing Options for Debt Alleviation
Government undertakes fiscal consolidation measures to reduce the primary deficit. A radical overhaul of the civil service and expenditure patterns is required.
International Donor Support
It is important to cultivate international goodwill as a matter of priority. Bilateral support and, where feasible, obtaining quick disbursing concessional borrowing to support the budget, is necessary. Any prospect that Zimbabwe can afford to alienate the international community is a delusion. In an increasingly integrated global economy, Zimbabwe needs the international community.
Accelerate sale of Government assets to reduce debt stock. The principle governing asset sales must be to prevent the recurrence of Latin American pitfalls of disposing valuable assets for a song.
Restructure debt by issuing longer-term stock. Government may have to pay the price to attract investors to longer-term stock
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Explore avenues for swapping short-term debt for longer-term foreign debt. This would require offshore bilateral funding of approximately US$1.5 billion, which would be used to extinguish short-term treasury bills with long-term Government stock. This option requires international confidence in domestic macro-economic management.
Develop Capital Markets
OTHER COMPLEMENTARY PROGRAMMES (MEDIUM-TERM)
Financial and Monetary Sector Development
Despite the existence of a fairly developed and specialised finance sector, its role in meeting the needs of the job-creating informal and small-scale sector and also the poor and vulnerable has been limited. As presently structured, the sector will continue to serve only a narrow segment of the urban and formal economy. The focus of the strategy is on the establishment of linkages between the financial sector and the rest of the economy to allow for the progressive integration of this sector into the country's overall development strategy. This allows the development of a financial sector that is responsive to the broad needs of various sectors of the economy. Elements of this strategy include:
Success in addressing the above will be contingent on the following:
Financial liberalisation cannot succeed in an unstable macro-economic environment characterised by high and unstable inflation, balance of payments crises and external debt. Macro-economic stability is a primary condition for successful financial liberalisation.
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Stringent fiscal policy
In a number of developing countries, high budget deficits have contributed to the failure of economic reforms. This is because these deficits are largely monetized. They are cause for excessive monetary expansion, which fuels inflationary pressures. High budget deficits will also be a drain on the resources mobilised through reform measures. Clearly, financial liberalisation will be accompanied by stringent fiscal reforms.
An adequate regulatory and supervisory framework
Financial reforms entail the entry of many new players in the market, most of which are deposit-taking institutions and some of whom are involved in extensive lending activities. To curb excessive monetary growth, which has the potential to fuel inflation, effective regulatory and supervisory mechanisms should be put in place to check on the quality of loan portfolios, the adequacy of capital and soundness of bank management. Regulatory reforms should aim at enhancing the safety and efficiency of the financial system.
The pace of reforms
The implementation of reforms can be done swiftly and drastically or they could be introduced gradually. Evidence shows that too swift a pace of change can create problems especially because economic agents are not given sufficient time to adjust. In countries where interest rates and reforms were rapid and simultaneous (e.g. domestic stabilisation, opening up of capital account), problems of inflation, bank runs and supervision were experienced. Changes, which saw interest rates skyrocket overnight, resulted in problems of adverse selection and moral hazard.
The sequencing of reforms
Financial sector reforms will be gradual commencing with measures that stabilise the economy and then followed by the opening up of the capital account. Premature opening of the capital account (i.e. when the domestic capital market is still repressed and interest rates are fixed at low levels) may generate macro-economic instability through destabilising capital flows. Massive inflows or outflows of capital have substantial effects on domestic inflation, exchange rates and interest rates, depending on whether the country operates under fixed or flexible interest rates. Thus, the capital account should be opened only after both liberalising of the domestic financial sector and opening the current account in the balance of payments.
The political sustainability of the reforms
Economic reform is a political decision and so its success also depends on the political sustenability of the reforms. The adequacy and efficiency of the planning mechanisms for the reforms, the political will to execute the reforms through, and popular acceptance of the reform process, are crucial elements.
Credibility of reforms in the eyes of the public
Popular acceptance and support for the reform process is a crucial element in the success of such policies.
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Existence of complimentary policies
Financial liberalisation alone does not guarantee competition in the financial sector. There is need for accompanying legislation to promote competition in order to avoid the creation of cartels in the setting up of interest rates, a role that would have been relinquished by the Government.
Factors in the global/external environment
A favourable international environment, for instance, favourable terms of trade for a country's exports, absence of trade barriers among others are important factors to consider when implementing reforms.
The vicissitudes of weather and global markets can either promote or militate against the success of reforms. Although the finance sector is important in any economy, its potential to enhance development and help to create jobs depends on broader factors such as the nature of the macroeconomic environment, the policy regime, and incentive structures.
In view of the challenges of the declining economy, poverty and AIDS, the budget for the year 2000 must address the need for urgent economic recovery, particularly the restoration of macroeconomic balance and stability. There is need to establish conditions for low and stable prices, low interest rates and a stable exchange rate. In addition, the solutions so proposed in the budget must avoid being marginal. They must be comprehensive and integrated, with clearly defined timeframes and targets for a core domestic debt reduction.
The budget as it is presently constituted fails at its core to deal comprehensively with the problem of domestic debt. The measures for the alleviation of the problem are marginal.
© Friedrich Ebert Stiftung | technical support | net edition fes-library | August 2001