Economy was overheating . . . we had to act — Guvamatanga

TREASURY has dismissed the assertion that measures implemented by the Government to stabilise exchange rate volatility and inflation are suffocating the economy, saying the interventions were in fact necessary as the economy had started overheating up.

Secretary for Finance and Economic Development, George Guvamatanga, in an interview yesterday, debunked claims the current exchange rate and inflation stability was because the Government had stopped paying for goods and services supplied.

“There is a big misrepresentation that is going on in the market that the Government stopped making payments, that is not correct, because if we had stopped the Government would not have been operational by now, if we were not paying anyone right now all our operations would have grounded to a halt.

“What we have said is that we are not paying invoices and contracts priced at parallel market rate, or overpriced. Obviously, there are those who are adamant and some who have adjusted, some are adjusting voluntarily without approaching them that we now want to change prices,” he said.

While acknowledging demand had subsided, amid the tight liquidity crunch, Guvamatanga argued that the previous “apparently” strong aggregate demand was artificial and unsustainable, adding “everybody” now needed to adjust to the now prevailing new normal.

He poured cold water on claims that everything would unravel once Treasury resumed payment on invoices for public contracts, stressing that they were still paying 60-70 percent of normal Government bills including contracts that are compliant to the recently introduced “value for money” pricing policy.

Economist, Eddie Cross, said the recent stopping of payments to contractors and suppliers by the Government, was not sustainable as it had seen minimal liquidity circulating in local currency which is negatively impacting on the economy.

“Lately Government has taken measures to control liquidity in the local economy and they have been effective in halting the devaluation of the local currency on the parallel market rate, I don’t think this is a long-term solution at all to the real problem.

“I think Government will have to revert to normal on that and when they do that the pressure on the local currency will resume,” said Cross.

Another Economist, Prosper Chitambara, said elections and agriculture spend “might result in an increase in public spending and depending on how that public spending will be financed, it could create or cause a bit of instability in the economy, which could see the exchange rate depreciating at an excessive inflationary rate.”

Guvamatanga, however, believes Government made the right decision to intervene.

“The economy was overheating; everyone was overtrading and the majority of people who were reporting increased business activity were foreign currency trading; the demand was artificial. It was artificial demand because everyone wanted to get rid of Zim dollars.

“So there is a readjustment that is required, even the Treasury has to readjust such that even our revenue, we must review them down. I do agree demand has gone down, but people must know that some of the aggregate demand was artificial,” Guvamatanga said.

This comes amid the ongoing campaign to enforce fair pricing on all public works and supply contracts, through the value for money programme. The Treasury has since called for a downward review of prices across the economy to ensure long term domestic currency and inflation stability.

To rein in exchange rate and inflation volatility, Guvamatanga recently suspended payments on all public contracts and directed ministries, departments and agencies (MDAs) to review all prices to ensure they are fair and comply with the legislated willing buyer-willing selling pricing regime.

Previously, suppliers to the Government and all its arms grossly inflated prices as part of measures to hedge against exchange rate depreciation and the attendant inflation caused by the domestic currency used to settle public obligations.

Zimbabwe’s inflation climbed to a post dollarisation high of 837,5 percent in 2020 after the domestic currency was reintroduced in February 2019, following a 10-year hyperinflation induced hiatus, but fell progressively to 50,1 percent in June last year.

Since then, the annual rate, however, resumed a rapid upward trajectory to reach 285,02 percent in August, contrary to projections by authorities that inflation would decline progressively this year to about 35 percent by year end.

The measures rolled out by the Government, including a tight monetary policy position characterised by high bank policy rate to discourage speculative borrowing and the review of public contract pricing, followed realisation of the role of Government in managing overall liquidity. The Treasury said the Government was the biggest spender in the economy paying approximately $50 billion a month to contractors, who went on to buy foreign currency on the black market, causing an exchange run blamed for driving an inflation resurgence reminiscent of the hyperinflation era.

Such problems also emanated from illegal currency dealings funded from the billions of Zimbabwe dollars the Government paid for the massive infrastructure projects, including roads, dams, schools and health institutions, being built countrywide.

“The issue is not about the quantum of money, the issue about the rate (at which the total price is arrived).”

Following measures to tackle the pricing madness in the economy, which has squeezed the excess liquidity, some taxpayers are reportedly now asking Government permission to pay their quarterly obligations in forex.

To enforce the value for money pricing policy Guvamatanga wrote to all public entities stating “Treasury has noted with concern that line ministries, departments and agencies (MDAs) are submitting pay runs for the disbursement of cash for goods and services procured using parallel market rates.

The directive was followed by a slowdown in payments on existing invoices.. Coupled with measures by the Reserve Bank of Zimbabwe (RBZ) to squeeze excess liquidity in the market, Zimbabwe has enjoyed remarkable exchange rate and inflation stability since.

“As you are aware, such pricing frame works by the suppliers of goods and services, have not only been causing inflationary pressures, but also fuelling parallel market activities,” Guvamatanga said in his letter to MDAs.

The correspondence suspending payment runs for all existing contracts submitted as at July 31 2022 was copied to Deputy Chief Secretary Martin Rushwaya, Auditor General (AG) Mildred Chiri, Clerk of Parliament Kennedy Chokuda and National Prosecuting Authority (NP) administration director Admire Munowenyu.

Guvamatanga’s letter, which was also copied to all ministerial permanent secretaries, said the government has ended up paying grossly inflated prices to various suppliers and contractors making the Government indirectly complicit in factors driving instability in the economy.

Guvamatanga said the current approach to pricing for Government contracts “a matter of going back to basics,” which is not exclusive to public contract pricing”, “its across the whole of the business world”, adding some businesses had started reviewing their pricing.

“It’s not a Government (only) thing. P ‘n Pay needs to do it, OK (Zimbabwe) needs to do it, Spar (Zimbabwe) needs to do it, everyone needs to adjust. Everyone needs to adjust and say the days of pricing things at 1,4, 1,5 (times the actual price are gone).-ebusinessweekly