Gvt keeps hand on pulse

Zimbabwe will not relent on the implementation of a coterie of fiscal, monetary and other measures to deal with domestic currency volatility and arrest resurgent inflation, according to Finance and Economic Development Minister, Professor Mthuli Ncube.


Mthuli said Treasury, together with the Reserve Bank of Zimbabwe, were working tirelessly to stabilise the Zimbabwe dollar through interventions that include stifling liquidity growth, stemming out arbitrage in the economy and lowering the negative impact of imported inflation.


Addressing a Political Actors Dialogue (POLAD) currency Indaba on Thursday, the Treasury chief said on the monetary front the Government had adopted a position to ensure zero growth in broad money supply to avoid excessive flow of liquidity that ends up hurting the currency.

The interventions follow an inflation resurgence, which has seen the annual rate retreat to three digit figure territory, 131,7 percent in May, from 94,6 percent in April, reversing gains achieved since mid 2020 when it progressively declined from a post dollarisation high of 837,5 percent in July 2021 to 50,1 percent in June last year.


Inflation had responded to the introduction of the weekly auction system, which the minister said had to date disbursed a cumulative US$3,2 billion to productive sectors and improved access to reasonably priced foreign currency by industry and boosted capacity utilisation.


During the POLAD meeting, business leaders demanded greater consistency on policy measures and devotion to promises from the Government to instill confidence amid the currency’s exchange rate tailspin that has been mainly blamed for driving a resurgent inflation run.


Mthuli said while the economy faced challenges of rising inflation due to currency volatility and rising global commodity prices due to the war in Eastern Europe, key fundamentals remained intact in terms of fiscal and monetary policies as well as the current account situation.


He also said the Government would also not abandon the dual currency regime in the near term, as switching to US dollar mono-currency would wipe out “the banking system”, the balance sheets of companies and pension funds, which presented challenges in the past.


Similarly, adoption of a mono-currency regime to use only the local currency would present new challenges that include the need for banks to convert all US dollar reserves, held by exporters, to Zimbabwe dollars while also putting the country under pressure given the limited forex reserves position.

“So, growth in money supply is well contained in terms of M0 growth, but we noticed that perhaps when it comes to broad money, that growth has remained positive and that has partly contributed to part of the currency volatility that we have seen; so we are dealing with that.


“On the monetary front, we have a strategy of containing growth in money supply; both reserve money and broad money,” he said. On the fiscal front, Minister Ncube said the Government would strive to live within budget and restrict the budget deficit to less than 1,5 percent of gross domestic product (GDP).


He said the Government, which appreciates the “wonderful work” on accelerated infrastructure development, was making sure local currency payments to contractors for public infrastructure programmes are staggered to avoid the impact of such flows on the local currency.


“We are spreading out payments to contractors to minimise the impact of this liquidity on the exchange rate on the market. But also, we have decided to split the payments to contractors so that 50 percent is domestic currency and the other 50 percent is hard currency.”


A liquidity management committee has since been established, between the Reserve Bank of Zimbabwe and the Ministry of Finance and Economic Development to keep an eye on the amount of money in the economy to prevent its undesired impact on the domestic currency.


Measures have also been put in place to promote the use and desirability of the Zimbabwe dollar for local transactions, including increasing the scope of public payments in local currency for taxation, duties and mining royalties, which have 50 percent payable in Zimbabwe dollars.

Last month, the minister said, the Government announced a number of interventions to address currency volatility, which entailed a temporary ban on bank lending, direct payments for imported goods from source market and tighter trading conditions on the stock market.


Through measures announced by President Mnangagwa, the Government also introduced a 4 percent tax on intermediated money transfers, to encourage use of the Zimbabwe dollar, and also said it was at an advanced stage to comesate pensioners and depositors who lost money after the currency switch in 2019.


“We noticed that there was quite a bit of speculative lending within banks; corporates basically diverting some of the liquidity, not towards the real sector, but towards driving parallel market rate upwards and some of the liquidity finding its way into the equities market and creating an asset price bubble,” he said.


The equities and currency bubble, driven by speculative funds from banks, had to be “pricked” , he said, hence the brief ban on bank lending, which allowed the central bank to introduce measures to limit avenues through which speculative liquidity enters the market.


Further interventions, which the minister referred to as macro-prudential measures, were in the offing to ensure the monetary policy becomes effective in dealing with the challenge of exchange rate volatility seen as the major driving of rising prices.


To contain inflation, Mthuli said the Government has allowed duty free importation of basic commodities, which he said should go a long way in stabilising prices in the economy, which are also under pressure from the effects of the war in Ukraine.


The Government, committed to reduce the cost of food in the country amid an inflation surge, took measures to encourage maize deliveries to the Grain Marketing Board by attaching anincentive of US$90 per tonne to the previously gazetted price of $75 000.


This puts the price of maize per tonne in Zimbabwe above the US$280 per tonne landed cost of importing maize from the region compared to $300 per tonne, using the official exchange rate, which local farmers now realise for deliveries to the GMB.


Reserve Bank Governor Dr John Mangudya said the currency volatility seen in Zimbabwe lately was a symptom of what is happening in the economy, which he said included apprehensions around inflation, which are informed by past experiences with hyperinflation.


This, Dr Mangudya said, had pushed economic agents and individuals alike to prefer holding US dollars to local currency, by quickly converting into the hard currency upon receiving it, to hedge against the expected loss of the value of the Zimbabwe dollar.


The central bank chief, however, stressed the need to step out of the past and face the new era the country is now in.


The governor lamented the growing arbitrage culture in the local economy, saying it was damaging. He also accused some of the beneficiaries of the auction system of spearheading depreciation of the local currency on the parallel market rate.


“Currency volatility is a symptom emanating maybe from the fear factor of past experiences before dollarisation, but why should we live in the past, so whenever people get Zim dollars people want to throw it away and buy US dollars to get value and what do we see, pricing volatility.


He lamented the growing arbitrage culture in the local economy, citing that it was damaging, highlighting that some of the benefactors of the auction system were at the forefront of skyrocketing parallel market rates.


“We need to change our arbitrage business models, we don’t want to be blaming people, butwe are blaming the humanity in people.


“It is very unfair that a business person we have sold foreign currency to at willing buyer willing seller rate today thinks is clever goes and sale the money at a higher rate is that fair, because I would have sold my money to you today at $340, but you go and sale the money at $500, so the issue we are seeing is about behavior,” lamented Dr Mangudya.

Economist Eddie Cross, writing on his blog, said Zimbabwe needed to revert to a mono domestic currency regime that sees all export and forex receipts converted to local currency once received and economic agents applying for forex through banks when they forex.


“The solution is very simple, like all good ideas. In all our neighbouring countries, Zambia, SA, Mozambique, Malawi, and Botswana, the currency of choice is the national currency, the Pula, Kwacha, and the Rand. If you want to do business, you go to a Bureau de Change or a Bank and you change your own currency into theirs and you are set to go,” he said.-eBusiness Weekly

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