Zim needs stable, efficient foreign exchange to dispel inflation trap risk
Economists have argued that the country is at risk of entering an inflation trap and it needs to sort the currency issue since inflation is currency driven in Zimbabwe.
This came as Finance and Economic Development Minister was forced to have a supplementary budget for the year 2022 on rising inflation.
Economist Prof Tony Hawkins said, “The revised budget was a result of the escalating inflation issue facing the country. In the build-up, the hope was for the budget to address the declining purchasing power facing the public. The government had already implemented a 100 percent increment in civil service salaries leading up to the budget pronouncements.”
The decision to revise the IMMT and income tax thresholds follows a similar logic that aligns with easing the burden on consumers. Whether these measures amount to anything significant in the short or long term is debatable. It seems problematic that the size of the threshold and salary revisions do not align with actual changes in market prices.
Fiscal performance figures show government expenditures hitting an implied value of US$3,29 billion in the first half of 2022. The outturn is slightly below the initially budgeted US$4,04 billion but still 39 percent higher than the US$2,37 billion implied actual expenditures for the same period in 2021.
The spending translated to a half-year fiscal deficit of an implied US$0,17 billion, from a surplus of US$0,01 billion in the comparative 2021 period.
For the revised full-year budget, the government is anticipating a fiscal deficit of US$0,8 billion from an initially budgeted surplus of US$1,1 billion in 2022.
The deficit stems from a downward revision to the government’s expected revenue to US$7,6 billion from US$9,5 billion, with expenditure levels expected to remain at the same level as initially budgeted at US$8,3 billion.
On a year-on-year basis, the expected fiscal deficit is relatively unchanged from the 2021 outturn.
Economist Dr Prosper Chitambara said that “On assessment, the government had ambitious revenue and expenditure targets leading into 2022. The inflation surge is expected to take a bigger bite out of the revised budget, especially expenditures. Arguably, the loss of value of the ZWL is the biggest threat to the government’s fiscal plans.”
According to the economists, so far the government has managed to cap expenditure growth by using its non-market exchange rate to determine its civil service salary adjustments. That approach might become difficult to sustain under increasing civil discontent.
“To completely dispel the inflation trap risk the government has to either establish a stable and functional exchange system, or access fresh lines of foreign credit,” Prof Hawkins concluded.-ebusinessweekly
