Fiscal Deficit in Zimbabwe Essay

Zimbabwe, once a vibrant and diversified economy and hope for Africa’s future, was on the verge of collapse had it not been for the introduction of the multi-currency system after the formation of the inclusive government. It has had a perpetual fiscal deficit post 1990 accompanied by high inflation, negative economic growth, high unemployment and a reduction in the standard of living as measured by the per capita income basis until the dollarization in February 2009. Dollarization has seen a steady growth in the economy including an improved fiscal deficit backed by improved tax remittances especially from corporates.

The government has run huge budget deficits (22% of GDP in 2000) and printed money to cover the gaps — with the predictable results of high inflation. Badly needed support from IMF was suspended because of the country’s failure to meet its budgetary goals and servicing of previous debts. Its 1998 – 2002 involvement in war in the DRC, drained hundreds of millions of dollars from the economy while the government’s land reform programme put further strain on the limited resources.

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The government increased its expenditure towards the agriculture sector so as to resuscitate it and foster economic growth. However, the persistence of the problem remained, forcing a solution in politics which saw an inclusive government being formed in September 2009. This fostered the removal of Zimbabwean dollars and a limited interference by the Reserve Bank of Zimbabwe (RBZ). RBZ was blamed for printing excess money and causing inflation hence crumpling the whole economy.

Now we have had several monetary and fiscal reforms. One highlight was the introduction of the multi-currency system known in some sectors as dollarization. There was an immediate impact on inflation, GDP and the standard of living. This improved the supply of food and many companies became operational again. The financial sector was revived, with the Zimbabwe Stock Exchange re-opening in February 2009. However, indigenization was introduced, with all companies being mandated to be owned 51% by black Zimbabweans.

There were mixed reactions across the economic divide with some companies opting to shut down. Discord from the inclusive government has, however, seen the ship sailing steadily with minimal growth in the economy. This article provides a deep analysis centred on the consequences of budget deficits on economic crisis and whether high taxes are the solution to the escalating fiscal deficits. 1. 2 Statement of the Problem The perpetual budget deficit highlights that there still exist some problems in the revenue generating capabilities of the government.

High levels of fiscal deficits have been blamed for causing high levels of inflation, inefficient resource allocation and overburdening of taxpayers. Is taxation the solution to the Zimbabwean crisis? The paper’s exploration is intensified especially to clarify the importance of tax revenue as a source of funds for developmental purposes for a developing country 1. 3 Purpose of the Study This study aims to: 1) To explore the causes of fiscal deficit and its repercussion on the Zimbabwean economy. ) To reveal patterns and trends on the fiscal deficit 3) To establish and evaluate the reliability of revenue generating capacity of the government 4)

To make recommendations for the reduction in fiscal deficit. 1. 4 Research Questions 1. Is taxation the solution to the central government’s persistent budget deficits? 2. What is the impact of indigenization on the budget deficits? 3. Where is the perennial deficit emanating from? 4. What is the best way forward in Zimbabwe to eradicate this deficit? 1. Hypotheses The study is guided by the following hypotheses: Ho: Taxation can be used as the solution to the perennial budget deficit. H1: The Zimbabwean perennial budget deficit requires further tools and solutions beyond taxation. 1. 6 Significance of the Study This paper will be of benefit to the following parties: Researcher. The document will be of significance to the researcher as it is a requirement for the partial fulfilment of their post graduate degree programme, and also widening the understanding of public finance. Government.

The research will bring newer dimensions into the understanding of the causes of the budget deficit in Zimbabwe thereby creating a platform on which proactive solutions can be crafted. Community. The Zimbabwean community will benefit by applying the recommendations towards the restructure of the fiscus and the international community will take the Zimbabwean case as a learning point in their own situations. 1. 7 Assumptions o The study is premised on the assumption that there is a positive relationship between the level of taxation and the budget year-end position. Higher taxes in the economy are not welcome to subjects. o Researcher will be able to conduct a thorough research and that the research subject will respond truthfully. 1. 8 Scope of the Study The study’s scope is mainly focused on Zimbabwe a developing country that has had fiscal deficits from year to year since 1990. Deficits on the national budget means the central government is spending more than it is has collected and generated. Expenditure would have been greater than revenue, and ideally this should be equal.

Revenue should equal expenditure, with no need for surplus as this denotes a sub-optimum employment of economic resources within the economy. A deficit is not welcome either, it reflects overspending, a situation faced by the country since 1990. The study intends to focus mainly on the budget deficit plaguing the nation and determines its link with the revenue collected from tax. The study covered the period, 2000 to 2010. 1. 9 Limitations The researcher is likely to face the following constraints: · Work overload, ranging from visiting the various data sources and preparing for examinations. Unwillingness to give information within some of the subjects considering this public information confidential.

· The researcher had to work under pressure since she was not employed by the public sector, visiting the various ministries and departments in gathering required data. · There were problems in gathering information considered confidential information hence the researcher had to rely on publicised information. · Bias associated with questionnaires was reduced through other sources of information meant to validate the data collected through questionnaires. . 10 Delimitation of the Study The study was undertaken in Zimbabwe’s capital city Harare as the researcher believed that Harare will be representative of the country and that the main data sources (Zimra and The Ministry of Finance) are located in Harare. The sample size included 10 officials from ZIMRA, 10 from Ministry of Finance, and 10 from Private sector. 1. 11 Summary The objective of this proposal was to introduce the research and the budget deficit concept culminating into the final dissertation.