Budget surplus anchors falling inflation
FINANCE and Economic Development Minister Mthuli Ncube revealed last week that Zimbabwe posted $9.8 billion budget surplus in the first quarter to March 2021, but the message got muted reception.
When Zimbabwe had its first budget surplus in 2018, Minister Ncube said this positive development demonstrated the new administration’s commitment to fiscal consolidation and budgetary discipline.
The Treasury chief said a balanced budget was a key factor in maintaining value of currency, since an expansionary fiscal policy causes rapid money supply growth, which Zimbabwe does not have fond memories of.
Minister Ncube said the latest budget surplus was recorded as the Government continued with its unrelenting grip on fiscal consolidation to ensure stability and restore market confidence.
He said the significant drop in the annual inflation rate to 240,6 percent by March 2021, from a post dollarisation high of 837,5 percent in July 2020, was testimony to the success of ongoing stabilisation efforts.
While the message received negligible applause, the central bank says there is more to it than meets the eye, especially from a monetary policy perspective, given what has happened to the economy in the past.
Reserve Bank of Zimbabwe (RBZ) governor Dr John Mangudya said in an interview the budget surplus was a positive development for the economy, as it dove tails into the bank’s policy of tight liquidity control.
The central bank chief pointed out that because Zimbabwe was operating a cash budget, surpluses meant Treasury will not turn to the central bank to cover the deficit, which increases money supply.
Dr Mangudya said in the event of a budget deficit, the fiscal gap needs to be covered through funding from the central bank, as the banker to Government. This results in money creation, which stretches liquidity.
An expansionary monetary policy (creation of new money), the Governor said, was not consistent with efforts to rein in inflation under a tight monetary policy framework, as well as maintaining exchange rate stability.
“In Zimbabwe we use a cash budget, so from the cash budget, there has been a surplus. It is good for the country. They (Treasury) are not borrowing from the Reserve Bank to fund their expenditure,” Dr Mangudya said.
“The reason why a (budget) deficit is always bad is that it creates more money. To us it is very good. The Reserve Bank is a banker to Government, it is a banker to all the banks in the country, when they are in deficit, we give them money.
“But by doing so, we are creating money (liquidity). So, if there is no (huge) deficit it means we (RBZ) are not creating any money. It is good for the whole economy because no additional money is created into the economy.
“A deficit for the Government needs to be financed through the central bank. If there is no deficit it means there is no creation of new money and therefore inflation is anchored,” Dr Mangudya said.
The central bank governor said he anticipates July inflation to come below 3 percent, anchored by tight monetary policy, low food inflation due to bumper harvest and the unflinching success of cash budgeting.
The annual rate is projected to fall to between 102 and 103 percent, which the Governor contends should take another massive dip to around 55 percent in July, because of the high base effect from 2020.
He said inflation surge may only be pressured by non-food items, following increases in rates for key inputs like electricity, but remained confident its impact in the price index will be outweighed by stability of food prices.
Zimbabweans hold unpleasant memories under the First Republic of what rapid inflation increase brings after hyperinflationary of 2008 saw inflation reach 500 billion percent, according to the International Monetary Fund.
Prices of goods and services doubled or tripled in a matter of hours, rendering peoples’ incomes worthless while the majority of workers and pensioners lost their entire lifetime savings, whose values were wiped.
However, under the Second Republic, a tight monetary and fiscal policy stance, controlled market liquidity by RBZ and fiscal consolidation and discipline on the part of Treasury, have restore stability.
Annual inflation, which hit 837 percent in July 2020, amid exchange rate volatility, has dropped to 162 by May 2021, while the exchange rate has hovered around $83-$84/US$1 since September 2020.
A more stable environment has also allowed robust economic activity to take place with both Minister Ncube and Dr Mangudya confident the economy will this year achieve its growth target of 7,4 percent.
Zimbabwe’s economy is estimated to have contracted by 4 percent, according to the World Bank, due to the negative impact of Covid-19, which disrupted global supply and value chains and pushed Government to impose national lockdowns.-ebusinessweekly.c.zw
