Zimbabwe Public Expenditure Review, with a focus on agriculture

First Published in The World Bank on   December 30th, 2019   |   by   Gracelin Baskaran

Zimbabwe Public Expenditure Review,  with a focus on agriculture

Executive Summary

This report examines agricultural spending in Zimbabwe. It is a joint product between the Government of Zimbabwe and the World Bank. This Public Expenditure Review (PER) is the 6th in a series with previous volumes, published in 2017, focusing on local government service delivery, state-owned enterprises and parastatals, education, social protection, and cross-cutting issues.

The PERs are intended to support the Government of Zimbabwe in improving its fiscal management. Agriculture plays a critical role in Zimbabwe’s economy. About two thirds of Zimbabweans work in agriculture and many Zimbabweans, directly or indirectly, depend on it. Food security in Zimbabwe is intimately linked to agricultural production, especially of maize. The sector used to be at the center of the economy, accounting for about 20% of Gross Domestic Product (GDP) 10 years ago, however, its contribution has since declined to about 10% in recent years. The government continues to intensify efforts to increase productivity in agriculture, and the sector remains a top priority under the Transitional Stabilisation Programme (TSP), covering October, 2018 to December, 2020.

Public spending on agriculture needs to be understood against the backdrop of Zimbabwe’s history of land reform. Land reform in Zimbabwe can be classified into two main phases, the Land Reform and Resettlement Programme I (LRRP 1) from 1980-1998 and LRRP II, commonly referred to as the Fast Track Land Reform Program (FTLRP), since 2000. The Government of Zimbabwe undertook its land redistribution program to address the socio-economic injustices of the colonial era. The LRRP I was at first carried out under the principle of willing buyer-willing seller. However, the requirement that land be acquired through the market, coupled with lack of funds and legal constraints, gave rise to the FTLRP, which fundamentally altered the production structure of agriculture, Zimbabwe’s most important economic sector. Chapter 1 illustrates the heavy toll these changes took on Zimbabwe’s income per capita. The result was the plummeting of government revenue, thus reducing fiscal capacity to stem the decline with fiscal support.

Between 2011 and 2015, spending on agriculture had been broadly comparable to other countries. Chapter 2 draws on the ongoing exercise of remapping expenditure to specific programs (or program-based budgeting (PBB)) to examine expenditure categorization and trends. It shows that between 2011 and 2015, agricultural spending in Zimbabwe had been broadly in line with global standards. Yet, given the considerable investment needed to recover from the losses to agricultural productivity from the early 2000s, spending between 2011 and 2015 was insufficient to meet the needs of agriculture. Donors provide significant support to agriculture in Zimbabwe, but that appears to be poorly coordinated with the government, and the reporting of spending could be better integrated with the government’s systems. Overall, agricultural spending varied between 5 and 6% of GDP. Spending soared in 2016/17, however, as the government introduced a new program: Command Agriculture.

Government introduced the new program, Command Agriculture, in 2016/17 in order to reverse decline in agricultural production. As Chapter 3 shows, the dramatic changes to Zimbabwean production and the broader economy following the FTLRP, increasingly depleted sources of resilience: revenue had collapsed, weakened tenure security undermined access to credit, irrigation infrastructure had decayed, and there was greater vulnerability to drought. Access to international capital dried up. Agricultural diversification fell, and the Strategic Grain Reserve was depleted. In an attempt to arrest the decline, government embarked on massive spending on agriculture in 2004, a first round of quasi-fiscal activities (spending financed with RBZ credit) and which was a harbinger of the Command Agriculture scheme over a decade later. Hyperinflation in 2009 was a consequence of these activities, costing Zimbabwe its own currency and monetary policy through dollarization, leaving it more vulnerable to global monetary and terms-of-trade shocks. Following a brief period of optimism after dollarization, the external environment deteriorated, and banks experienced rising loan impairments, making them more reluctant to finance the private sector. When drought struck again in 2015, the economy had few buffers left to respond to this shock and government introduced the Command Agriculture program to shore up production and guarantee national food security.

The Command Agriculture program required significant outlay. Given limited buffers and the emergency created by the drought, there was little time to prepare for the Command Agriculture program. There was lack of transparency and parliamentary oversight. Private sector involvement in risk mitigation was more limited than may have been possible. The main costs of the Command Agriculture scheme relate to a Special Maize Programme, providing inputs to farmers, and the price wedge between procurement and sales prices by the Grain Marketing Board (GMB), to which all maize produced in Zimbabwe must be sold. While the GMB has moved toward setting procurement prices at import parity, the sales prices remains much lower, driving the cost to the fiscus. The fiscal outlays were largely financed through the monetization of debt with the Reserve Bank of Zimbabwe (RBZ). It is difficult to establish the value for money of the Command Agriculture program: although production increased, this was partly due to the recovery from drought. Substitution of crops to those supported by the Command Agriculture program may have also resulted in higher production. In Chapter 3, estimates based on available data suggest that the Command Agriculture program had a large financial outlay, but had the government not stepped in through this initiative, it would have incurred high economic costs due to lower production, which would have also adversely affected food security.

Sustainable agricultural spending cannot be separated from structural reforms to raise agricultural productivity, and rebuilding of macroeconomic resilience. The losses to agricultural productivity since the 2000s could have been at the core of many of Zimbabwe’s macroeconomic dislocations, including hyperinflation in 2009 and high inflation in 2018; a banking crisis in 2015; the loss of an independent monetary and exchange rate policy, limited access to international capital, and at least three currency reforms – dollarization, bond notes, and the digital Real-Time Gross Settlements (RTGS), and mushrooming of public debt and liabilities, including compensation claims from former farmers who were evicted under the FTLRP. Zimbabwe is highly vulnerable to shocks, be they from drought or the global economy. Chapter 4 provides broad recommendations to enhance the sustainability of agricultural spending, placing particular emphasis on the need to reverse the decline of agriculture, within a broader framework of macroeconomic reforms and private sector development.

Some steps to rebuild resilience have already been undertaken in 2019, but the fiscal cost of agriculture has proven difficult to contain. Positive steps include strengthening fiscal credibility and adoption of the RTGS$ as a new, digital currency. The government is committed to accelerating re-engagement with the international community and the International Monetary Fund (IMF) has commenced a staff-monitored program aimed at implementing a coherent set of policies that would facilitate a return to macroeconomic stability. These developments bode well for agriculture and the rest of the economy. Yet, while the 2019 Budget had originally dramatically reduced the cost of the Command Agriculture program to about 0.5% of GDP, adjustment budgets over the course of the year have raised agricultural spending back to unsustainable levels, at an estimated 5.4% of GDP for 2019.

This PER develops some concrete policy recommendations. The analysis points to strong links between agriculture and the broader economy. While land reform and agricultural spending could have caused macroeconomic dislocations since the 2000s, agricultural production has also been a victim of these dislocations. Rebuilding sources of resilience is critical, and this includes recreating fiscal buffers, beyond agricultural spending. Such buffers are particularly important to mitigate droughts, which are becoming more severe with climate change. Secondly, the analysis suggests that agricultural spending responds to structural constraints, in the agricultural sector, without addressing these constraints it will be difficult to control spending on agriculture. The PER thus develops some immediate recommendations to reduce the cost of the Command Agriculture program, while also looking at the structural issues that need to be addressed to raise productivity in agriculture.

Recommendations to reduce the cost of the Command Agriculture program.

v  Reduce the price subsidy in GMB procurement and sales

v  Reduce public spending on private goods and reform agriculture finance

v  Improve targeting and the provision of inputs and reduce defaults.

Recommendations for agricultural productivity and fiscal sustainability.

v  Strengthen security of tenure

v  Enhance investment in infrastructure, especially upstream irrigation

v  Foster skills and experience
Promote effective Agricultural Knowledge and Innovation Systems

Several knowledge gaps remain. For example, a rigorous value-for-money analysis of the Command Agriculture and other agricultural support schemes should be conducted once 2017 data from the Poverty Income Consumption and Expenditure Survey becomes available. Improving the quality of data (including national accounts) would also allow for more accurate inferences – on the expenditure side, the adoption of the PBB methodology is a positive step that should be maintained. Furthermore, detailed development of the recommendations provided in this PER is needed. The ongoing joint visioning exercise for the agricultural sector between the Government of Zimbabwe and the World Bank, and an upcoming Agriculture Finance Diagnostic will provide opportunities for this.

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