The economy has shrunk by 33% in real terms cumulatively since 1999 to the extent that in 2002 the forecast real GDP decline is 10% to 15% by year-end. The challenge is how can the national budget contribute to reversing this economic decline. The national budget should contribute to the creation of a stable macro-economic environment, which is conducive for economic growth and development.
- Inflation Policy: The challenge is to reduce inflation from the current three digit/hyperinflation (135% pa) for August and currently forecast at nearly 200% by year end, to a two digit target in the first instance. The national budget should help put in place measures that address the fundamental sources of inflation, the major one being the cumulative inflationary financing of the budget deficits. The inflation problem is the biggest challenge in the search for macro-economic stability. High inflation increases costs of production, discourages savings by reducing real interest rates and above all it erodes the welfare of the whole population especially that of the poor, thus increasing and deepening poverty.
- Interests Rate Policy: The economy is experiencing negative real interest rates resulting from the combination of the low interest rate policy and hyperinflation and this is discouraging domestic savings. This is complicated by the fact that credit to the private sector under the low interest rate policy is going into consumption and speculative activities and not into productive activities. At the same time it is acknowledged that government has an interest in keeping nominal interest rates low in order to keep interest payments on domestic debt sustainable. The challenge is to have an interest policy, which will encourage savings as well as keep interest payments on domestic debt sustainable for both government and the private sector. This cannot be achieved without addressing the inflation problem, showing that addressing inflation is high priority in the sequencing of macro-economic policies.
- Exchange Rate Policy: While the exchange rate has been fixed at 1US dollar to 55 Zimbabwe dollars since 1999, in reality the economy is operating under an unofficial parallel market rate of 1US dollar to 750 Zimbabwe dollars as of October 2002 reflecting a serious shortage of foreign currency and hence the heavy unofficial devaluation of the Zimbabwe dollar. Under this scenario it is imperative for the authorities to acknowledge this reality and put into place mechanisms to address the challenge of realigning the exchange rate to reflect the levels of current economic activity. This should be combined with measures to address the supply constraints in the economy thus encouraging total production and exports.
- Investment and Employment Creation Policies: Investment has fallen from 24% of GDP in 1991 to 8.2% of GDP as of April 2002. The economy is facing a structural unemployment rate of 70%. Given this scenario, the challenge goes back to addressing the macro-economic fundamentals mentioned above starting with inflation so as to create an environment, which is conducive to investment, removal of structural rigidities and employment creation.
- Debt Management Policy: Both foreign debt and domestic debt need to be managed on a sustainable basis so as to release resources for development and poverty reduction.
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