Government is now paying contractors undertaking various public infrastructure programmes partly in US dollars to curtail the amount of liquidity flowing into the economy at a time the local currency is on a precipitous free fall.
The Zimbabwe dollar has fallen to between $300 and $430/US$1 on the parallel market, $173/US$1 on the RBZ weekly auction and $275/US$1 on the interbank market, since reintroduction at $2,5/US$1 in February 2019.
Zimbabwe reintroduced the local unit in 2019 after a 10-year hiatus forced by hyperinflation, which the International Monetary Fund said peaked at 500 billion percent in August 2008.
The country now uses a dual currency regime, Zimbabwe dollar and US dollar, and Treasury says it cannot afford a mono-currency (Zimdollar) given its limited access to external financing.
While Finance and Economic Development Minister, Professor Mthuli Ncube this week denied the negative impact of billions of dollars from Treasury being pumped into the economy to fund capital programmes, he however, admitted challenges monitoring how the funds are eventually used.
Rather, Mthuli opined the budget had done extremely well to revamp and drive investment in the country’s key infrastructure in line with the policy thrust to cut on recurrent expenditure.
Admittedly, Government’s ban on all bank lending was an open acknowledgement that the local currency was taking brick bates from excessive liquidity in the economy, which is now driving inflation due to local currency depreciation.
During a recent episode reminiscent of the horrors of the hyperinflation era, which wiped out all savings and pensions, Zimbabwe’s inflation peaked at a post dollarisation record of 837,5 percent in 2020.
Inflation had progressively retreated after the introduction of the auction system in June 2020, which allocates forex for key imports, touching a two- year low of 50,1 percent in June last year.
But amid the galloping depreciation of the Zimbabwe dollar, inflation has taken off once again, shooting to 96,4 percent in April from 74,6 percent in April 2022.
Mthuli said a combination of imported global inflation, due to Russia/Ukraine war and a coterie of domestic factors, chiefly exchange rate volatility, were driving the resurgent inflation.
Splitting payments for infrastructure projects
In an interview with ZTN’s the Mint Special Programme on Wednesday, Mthuli said Treasury had split “payments for infrastructure programme on a ratio of 30-70 percent,” in favour of Zimbabwe dollar payments.
“As a Government we decided that the only way to support growth through its budgetary or fiscal policy is by increasing the amount that is spent on the public sector investment, that is one way to do it.
“You start then making sure your recurrent expenditure does not exceed a certain percentage of the overall revenue, in our case we have made sure recurrent expenditure stays below 50 percent of our revenues.
“Which means that we have 50 percent that we can spend on growth oriented and that is what we have been doing. That is our policy under the NDS1 strategy,” he said.
Analysts say efforts by the Reserve Bank of Zimbabwe (RBZ) to stabilise the domestic currency were being undone by massive liquidity into the market from Treasury’s capital projects.
Economists also said this year’s budget had increased the proportion of funding going to public infrastructure programmes to 34 from 32 percent in 2021 while state funded agriculture programmes will gobble about 12 percent of the fiscus.
The RBZ, Professor Gift Mugano said, was violating true principles of a Dutch Auction by taking the average rate as the ruling exchange rate, instead of the highest bid, which would help close the rate with open market exchange rate.
He noted deficiencies in the manner the central bank was running the auction system had also created challenges in the quest for unitary exchange rate.
Further, Mugano said the bank should use long term funding, such as through public private sector partnerships to finance infrastructure and the commodity exchange to raise funding for agriculture.
In defence of agriculture funding
But Mthuli insisted the funding of capital projects as well as agriculture using short term financing from the budget had no harm on the local currency, but admitted monitoring the final destination of the funds was a challenge.
“That’s not correct, it does not matter which way the Government spends money, it is actually worse if the bulk of Government expenditure is on recurrent expenditure,” he said.
However, in admission of the impact of excessive liquidity on the currency, Government announced a raft of measures at the weekend to defend the precipitous collapse of Zimbabwe dollar.
Curiously, the measures were silent on specific measures to curtail the flow of harmful doses of billions of Zimbabwe dollar liquidity from massive public infrastructure programmes, including roads, dams, schools, health facilities and state administration facilities.
Economic analysts say, together, public infrastructure programmes and state funded agriculture programmes would this year gobble about 46 percent of the nearly trillion dollar 2022 national budget.
Mthuli, nonetheless, sees it otherwise. “I think the issue is about monitoring, the issue is about spacing it out, and that is what we are doing and also making sure it is split between hard currency and domestic currency.
“Those are some of the strategies that we have in order to manage that liquidity flow into the parallel market,” the minister said.
“We are averaging 30 percent hard currency and 70 percent soft currency, the Zimbabwe dollar.”
Despite the challenges Zimbabwe is facing regarding the currency issues, Mthuli insisted the economy was not in a crisis and remained on course toward projected growth of 5,5 percent this year.
While the minister said he still had two months until his 2022 mid-term review, he said the Government was convinced the economy would build on the projected 7,8 percent growth for 2021, even in the face of strong global headwinds emanating from the Russia-Ukraine war.
He also said the Government, among its measures to ward off the buffeting on the local currency, announced a temporary ban on bank lending to Government, private sector and individuals to reduce quarterly money supply growth to zero percent.
Further, the Government introduced a 4 percent intermediated money transfer tax (IMTT) on US dollar withdrawals to encourage use of the Zimbabwe dollar.
Part of the measures also entailed tighter trading conditions on the Zimbabwe Exchange, where short term stock holdings is now penlaised through a 40 percent capital gains tax while transfers between transfers of brokers is now prohibited.