Word From ZNCC
In the fight against the Covid-19 pandemic, almost all economies in the world engaged in expansive monetary and fiscal policies in an attempt to salvage the situation and avoid plunging into deeper economic contraction.
When the fight against the Covid-19 pandemic was almost won, the Russian Federation invaded its neighbour, Ukraine, and this was received with widespread condemnation especially from the Western World.
The United States of America (USA), the United Kingdom (UK), and the European Union (EU) responded by imposing stiff economic and financial sanctions on Russia and also providing financial and military support to Ukraine.
As the war was a surprise to many, the provision of relief to Ukraine by the Western World was factually unbudgeted for and the same applies to the emergency response to curtailing the spread of the Covid-19 pandemic, and the measures which were put in place to provide relief to firms and households at the peak of the outbreak of the virus.
The response of the USA to the coronavirus has been described as the costliest economic relief effort in modern history in some quotas. At US$4 trillion, the assortment of grant
s, loans and tax breaks even exceeded the cost of the Afghanistan war. Since the start of the war in Ukraine, billions are also being pumped in to support the Kyiv’s defense from the Russian attacks. Accordingly, the source of the funds needs further interrogation and the analysis of the potential effects to the global economy as well.
Figure 1 depicts the trajectory in the growth of US narrow money in USD millions (M1) before, during and after the Covid-19 scourge. There was sharp growth in narrow money between April and May 2020. Since then, both narrow money (M1) and broad money (M2) were growing way above the pre-pandemic levels as shown on Figure 1. Table 1 gives the figurative comparisons of the pre-pandemic and pandemic levels in narrow money, broad money, reserves of depository institutions and total borrowings from the Federal Reserve.
As shown on Table 1, total borrowings from the Federal Reserve increased substantially from US$209.20 million in October 2018 to US$83,125.60 million in August 2020. The worldwide response to the Covid-19 pandemic required extraordinary measures and a significant budget funding to the health and social sectors. Despite the high injection of liquidity into the economy by the Fed, the US dollar has strengthened against major currencies in the world except for the Russian Ruble and a few other currencies. Other countries were also taking similar measures in the fight against the pandemic. The US dollar has risen by almost 15 percent against some of the world’s major traded currencies in 2023.
The average rising in the prices of goods and services prompted more interest rate hikes around the world, as central bankers try to increase the value of their own currencies and further tighten financial conditions in an attempt to arrest inflation.
Emerging economies with big dollar-denominated debt balances have been hit particularly hard by the strengthening dollar, including Sri Lanka. With investors being attracted by higher returns in US assets following the hike in interest rates, the demand for short-term US Treasuries has been high pushing up the price of the dollar relative to other currencies. However, continuous raising of interest rates by central banks in most parts of the world where currencies are being devalued raises recession risks. Securities that were bought before the hike in interest rates are suffering considerable losses in the United States with a recent example being the collapse of the Silicon Valley Bank in the beginning of the second week of March 2023 and the possibility of a contagion effect causing widespread bank runs. As of 13 March 2023, the Signature Bank was reported to have faced a similar situation while, the stocks of other banks like the First Republic Bank were plummeting.
The expansive monetary and fiscal policies that were put in place in the past three years elevated inflationary pressures and the geopolitical developments have increased risk and uncertainty in the world.
Global trade has also been negatively affected as a result of supply chain disruptions with many countries facing balance of payments challenges.
Though the policies were justified amidst the adversity, rising prices of goods and services and the cost-of-living has called for the authorities to implement counter policies to reverse the trend while, supporting a sustainable recovery.
With inflation being viewed as number one public enemy, the monetary authorities are raising interest rates to tame inflation and this has negatively affected investment and aggregate demand.
In this regard, world economies are expected to continue tightening financial conditions and there is an anticipation that as a result, economic activities will decelerate sharply across the globe with the majority of the major economies plunging into a recession.
According to the Global Economic Prospects Report of January 2023, global growth is expected to decline further to 1,7 percent in 2023 from the projected 3 percent just six months before. The slowdown in China from a growth rate of 8 percent in 2021 to an estimated growth of 2,7 percent in 2022 and an expected growth of just 1 percent in 2023 poses a threat of a global recession if the current challenges persist into the second half of the year.
The expected growth in the USA remains largely below 2 percent for 2022 and 2023. The growth for South Africa and several countries in Sub-Saharan Africa, remain sluggish as these countries suffer harshly from geopolitical and climate risks as well as power shortages. The share of high-income countries with food price inflation has risen to 87,3 percent. With Governments constrained in terms of resources to support the poor, it is an uphill task to ensure a decent living for the masses and this will have a bearing on the profitability of enterprises. Global uncertainty is driving investors away from emerging market economies.
Evidently, the focus of monetary policy is on maintaining financial and macroeconomic stability to facilitate for a sustainable economic growth and recovery. Complementary fiscal and trade policies must also be in place and the authorities are compelled to collaborate in earnest to avoid setting up and implementing conflicting policy objectives. Building investor confidence in both the financial sector and macroeconomic policy need not be over emphasised especially in an environment characterised by high volatility and high levels of uncertainty.
Growing calls for enhanced regulation of the financial sector are problematic to investment and growth of the sector. In essence, deposit protection need to be bolstered coupled with enhanced monitoring of the activities of financial institutions rather than increasing regulations.
In conclusion, financial institutions are encouraged to educate their clients on financial risk mitigation mechanisms and strategies as part of their corporate social responsibilities.
The Zimbabwe National Chamber of Commerce (ZNCC) is a non-profit making membership based organisation whose mission is to lead in business development in the national economy and a premier channel of communication between the private sector and the various authorities in Zimbabwe. Join ZNCC to stay updated on business and trade opportunities across various sectors of the economy in Zimbabwe and across the borders. This article was prepared by the Zimbabwe National Chamber of Commerce for Business Weekly