eBusiness Weekly
Tapiwanashe Mangwiro
Zimbabwe’s Treasury, amid the battle to contain resurgent inflation and rapid depreciation of the local currency, which forced it to issue a supplementary budget nearly the size of the original expenditure plan, has taken its fight to save the economy from further buffeting to the public entities procurement processes.
As reported by this publication last week, Secretary for Finance and Economic Development, George Guvamatanga issued a directive to Government line ministries, departments and agencies to review their procurement contracts and align them to the requirements of the willing buyer willing seller exchange rate pricing regime.
The Treasury secretary noted that the issue of contracts that are priced against parallel market rates has caused currency instability and driven inflation. Therefore, he believes that using the willing- buyer-willing seller rate will arrest inflation and rapid currency depreciation on the parallel market.
“In this regard, Treasury is immediately suspending all payments to MDAs (ministries, Departments and Agencies) while awaiting your submission of reports of findings of the due diligence exercise on all running and future contracts with special focus on pricing.
“Going forward, you are required to seek Treasury approval on contract prices in order to ensure effective control in the utilisation of public resources as guided by the (Public Finance Management) Act,” Guvamatanga said.
Interestingly, industry had previously urged the government to find sustainable ways to manage the excessive flow of huge amounts of money from large public tenders onto the parallel market, arguing this was the main driver of inflation and exchange rate disparities in the market.
Giving oral evidence to Parliament’s committee on budget, finance, and economic development, on the prevailing situation at the auction system in May 2022, Confederation of Zimbabwe Industries (CZI) president Kurai Matsheza accused private players with hoards of cash from public tenders of fuelling inflation through black market forex purchases.
The CZI president warned the Government not to punish ordinary citizens for crimes being perpetuated by known cash-rich culprits whom President Emmerson Mnangagwa described as ‘economic hit-men”.
Guvamatanga added that, “Any future payments will have to be reviewed and signed off by the accounting officer ensuring value for money in procurement and confirming that the pricing framework is in line with government policy.”
“The demand for extra money (to finance public expenditure programmes) is exerting pressure on the Treasury in demanding more fiscal resources which are not aligned to the revenue inflows, thereby creating an inherent fiscal risk of unsustainable budget overruns and budget deficits,”
reads the directive in part.
Economist Dr Prosper Chitambara said, “It is no secret that government suppliers are wreaking havoc on the foreign exchange market. After procurement, and providing goods and services, the suppliers are paid in local Zimbabwean dollar currency, which they often rush to offload on the parallel market to buy foreign currency as a store of value.
Economists also believe that the flooding of local currency on the parallel market puts pressure on the exchange rate and accelerates the depreciation of the local currency relative to the foreign currencies. With the supply side of local currency unrestricted, the exchange rate shifts rapidly due to the limited forex.
Economic analyst Farai Mutambanengwe said, “Obviously this directive is a cause for concern because the market rates are significantly higher than the willing buyer willing seller rate. If a supplier wants to supply laptops, which need to be imported and they cannot access money at the willing buyer willing seller rate it means they cannot supply them.”
“So, evidently the MDAs (ministry, departments and agency) procurement will come to a standstill because goods are priced at the parallel market rate which is where they get their foreign currency. So under the current market dynamics, the suppliers will not be able to supply the government because it is not viable for them.”
Economic analysts have also argued that the move by Treasury will not really help in reducing inflation and rapid depreciation of the local currency but could instead negatively affect ongoing projects and stall all procurement processes by the government and its arms.
Analyst Batanai Matsika said, “Suppliers will just increase their prices in US dollars and then accept the willing buyer willing seller rate, thereby pushing inflation higher up again. In all honesty the measure will not solve the issue of inflation or currency depreciation.”
Said Mutambanengwe on the measures to arrest inflation and currency depreciation “I do not think it is an efficient measure to arrest inflation and currency depreciation because you cannot use legislation to correct such an issue. Government just wants to limit trade but we have seen it with the S.I 127 that legislation cannot fix this because it is just an exchange rate problem.”
The widespread belief in the country is that the government should not look at staggering payments for public supplies or tenders but should increase the portion of foreign currency paid in order to reduce pressure on foreign currency.
Dr Chitambara added that “Making them longer contracts will prejudice the supplier given the chronic inflationary environment as the longer the contract the more the value is lost on both the parallel market and the official markets. The supplier will suffer when paid in smaller tranches because the exchange rate would have moved way better.”
“This also means that the economy might see a delay in the completion of infrastructural projects, but I think the solution is that their greater part of their payments is done in foreign currency and that is a win-win situation for both the contractor and the economy they are trying to protect,” Dr Chitambara concluded.
Others were however in support of the new measures.
Through his Twitter account, economist Prof. Gift Mugano described the move by Treasury as “a game changer!”.
“It will restraint the exchange rate from running away if pursued vigorously,” he said.
