Turning to the second issue, the broader issue of a medium-term (3 year) budget cycle and fiscal consolidation process, it is important to take at least a 3-year horizon in the budgetary process and performance.
This will allow for gradual approach to fiscal consolidation towards targets, giving the whole process a roadmap that is transparent.
For example, the Ministry of Finance would set a target for the budget deficit for Zimbabwe of say 3% and below, by year 3, and then work towards achieving this goal.
This is followed by clear expenditure control measures, especially recurrent expenditure, and revenue collection targets that meet the budget deficit targets, and commensurate borrowing targets from the market.
By setting such fiscal boundaries, that enables monetary policy run by the central bank to have clearer and fewer fiscal constraints which is key to its pursuit of its objective function of inflation control and targeting, and payment system stability.
Monetary policy can begin to work again and a Monetary Policy Committee (MPC) is introduced, without the shackles of fiscal indiscipline. Good examples exist in South Africa and Botswana, for purposes of peer-learning.
On the third item of macroeconomic coordination, there is need for fiscal and monetary policy coordination, in order to make sure that monetary policy is not over-relied upon to a point where it attempts to become a substitute for fiscal policy. Indeed, the central bank should not be involved in quasi-fiscal activities.
Fiscal policy should be disciplined in order to enable monetary policy in the form of inflation targeting, in the main, to be equally disciplined, and be effective. Fiscal indiscipline contributes to inflation and pushes up domestic borrowing.
Rising debt means even higher debt in the future in an environment of high interest rates and low growth. High interest rates, exacerbated by a weak banking sector and prescribed assets investment environment, then squeeze out private sector borrowing.
Banks merely prefer to hold treasury bills with high yield and lend less to the private sector. The yield curve in the fixed income market, would then be downwards slopping, and stifle the growth of a proper bond market with medium and long-term maturity instruments — all leading to falling domestic investment and lower growth.
Continued next page
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