eBusiness Weekly
Golden Sibanda
ZIMBABWE’s Treasury says it will maintain a stranglehold on regulated flow of liquidity into the economy to maintain inflation and exchange rate stability, which caused authorities, consumers and businesses unending nightmares until just over a month ago.
The domestic economy has been enjoying palpable stability on the inflation and exchange rate front for roughly over a month now after the Treasury suspended payments on over charged contracts for public infrastructure programmes.
The Treasury then instructed all Government departments, ministries and agencies to review all contracts signed with suppliers and contractors to ensure the prices are fair and conform to the legislated requirement of willing buyer willing seller exchange rate pricing system.
Over-priced contracts settled in large single or bullet payments enabled the beneficiary contractors to indiscriminately buy foreign currency on the parallel market to hedge against inflation, which put pressure on the value of domestic currency against the US dollar.
Analysts always claimed the excessive flow of liquidity into the market through speculative trading in forex by contractors undertaking public infrastructure projects was one of the major drivers of exchange rate volatility and consequently inflation resurgence.
Zimbabwe has seen its domestic currency, which was reintroduced in 2009 at $2,5/US$1 after a decade long hiatus forced by hyperinflation, depreciate to about $543/US$1 on the willing buyer willing seller market and upto $850/US$1 on the parallel market.
The rapid depreciation of the domestic unit ignited an inflation resurgence, which saw the annual rate peak at a post dollarisation high of 837,5 percent in July 2020 before the introduction of a forex auction saw it plunge to a two-year low of 50,1 percent in June last year.
Finance and Economic Development Minister, Mthuli Ncube, yesterday said in an interview that Treasury had already begun implementing measures aimed at moderating the flow of liquidity into the economy to avoid repeated attacks on the domestic currency, which have pushed inflation higher.
“Our strategy is to regulate the amount of liquidity that flows into the market, this is a new policy that we will continue implementing, but secondly, we wanted to be clear that we wanted to discourage the use of inflated prices by contractors to the Government.
“That is what we have done in terms of slowing down payments and requesting a value for money audit. This is a new model, going forward there will be value for money processes that we implement on every contract that comes through the Government.
“So, that is the new policy and I think everyone will agree with me that the policy is working. This is of course not a single policy, it is a package of policies, which was announced by His Excellency (President Mnangagwa), which include increases in interest rates to make sure we can deal with issues of speculation.
“Speculative borrowing is being discouraged effectively as I speak, among other measures that we have put in place,” he said.
“We will regulate the flow of liquidity and payments into the market, as I said it’s a new policy. We have already started this by the way, with contractors especially those who are developing our roads, where we have been paying half in foreign currency and the other half in Zimbabwe dollar, but then spreading out the Zimbabwe dollar component.
“So, we have already started this and this will be expanded to all other contractors once these value for money processes have fully begun in terms of implementation and we are already implementing by the way; this is a new modality, we will continue with that modality,” Mthuli.
Value for money has been defined as a utility derived from every purchase or every sum of money spent. Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchase.
The concept of Value for Money (VfM) in everyday life is easily understood as “not paying more for a good or service than its quality or availability justify”. In relation to public spending, it implies a concern with economy (cost minimisation), efficiency (output maximisation) and effectiveness (full attainment of the intended results). It must also support the value of equity.
In Zimbabwe’s case, contractors have been fleecing the Government through forward pricing to cover for or in anticipation that exchange rate volatility would lead to inflation that diminishes the value retained by contractor upon being paid.
And amid the rampaging and expectations of continued depreciation of local currency, contractors offloaded large sums of money paid for supplies to the Government or multimillion dollar bullet payments relating to public infrastructure programmes.
The huge demand for US dollars, either for purposes of preserving value or procurement of forex to import goods or services, created a vicious cycle that continued to drive the downslide in the value of the Zimbabwe dollar.
The economy, however, appears to have stabilised, especially from late last month, as a result of aggressive measures by the Government to rein in market indiscipline, and market watchers are confident the latest intervention to introduce smaller denominations of gold coins will likely anchor stability of both the local currency and prices.
The Reserve Bank of Zimbabwe (RBZ) has also responded by further tightening the screws on money supply growth, which saw it hike the bank policy rate from 80 to 200 percent, and introduction of gold coins, which hit the market on July 22, to mop up excess liquidity as well as provide an alternative asset to hedge against inflation.
“The high demand for the gold coins will assist in mopping up liquidity from the market and thus strengthen demand and enhance the value of the local currency,” RBZ Governor Dr John Mangudya said recently when presenting the mid-term monetary policy statement.
Finance and Economic Development Ministry permanent secretay, George Guvamatanga, last month directed all line ministries, Government departments and agencies to review their procurement contracts and put them within the framework of the willing-buyer, willing-seller exchange rate pricing regime, which is now a legal requirement.
This followed revelations that the majority of Government contracts were pegged against parallel market rates and therefore driving currency instability.
“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,” said Guvamatanga when making the directive.
“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.”
