The Sunday Mail
Golden Sibanda and Martin Kadzere
ECONOMIC analysts expect Finance and Economic Development Minister Professor Mthuli Ncube to announce new measures to contain and bring Zimbabwe’s galloping inflation under control when he presents his midterm fiscal policy review statement in a fortnight, now that he is done with major policy changes.
While meeting church leaders to apprise them of recent currency changes at the request of First Lady Auxilia Mnangagwa on Tuesday last week, Minister Ncube said he will present his midterm fiscal policy review statement in two weeks.
With inflationary pressures continuing to mount, economic analysts said it was critical for fiscal authorities to continue containing expenditure within confines of Treasury’s revenue envelope to avoid tipping the economy into hyperinflation mode.
Arguably, Minister Ncube’s biggest palace coup in rebalancing Zimbabwe’s economy has been the ability to put Government finances in order, the first in a long time that this has happened in Zimbabwe.
The Government is now running recurrent primary budget surplus and has halted money-printing, which led to hyperinflation in 2008.
In a bid to discourage speculative borrowing, the Reserve Bank of Zimbabwe last month raised its overnight lending rate to 50 percent to protect the local currency after ending a decade of dollarisation.
This, together with the reintroduction of local currency and banning of the multi-currency, in place for slightly over a decade, will also give the central bank a full range of instruments and latitude to defend the value of local currency and stymie inflationary pressures.
Economist and former Bulawayo South parliamentarian Eddie Cross concurred when saying that Treasury has registered huge success on the fiscal front through “the elimination of the fiscal deficit, which has been the main source of our macro-economic woes.”
Analysts also agree that any supplementary funding requirements should, at most, be capped below 5 percent of gross domestic product (GDP) to avoid potential risk of fuelling money supply growth into unproductive sectors which could prolong the episode of high inflation.
There also is general consensus among economists that Zimbabwe’s success in bringing inflation under control heavily depends on effectiveness of measures to ensure exchange rate stability, which has been the largest source of inflationary pressures.
“The chances of falling into hyperinflation are real now. The real reason why there has been such inflation is that the interbank market (for trading of foreign currency) has not been working to the maximum.
“Authorities need to put more policies and build more confidence to get the banks and other players to start trading on the market,” he said.
Minister Ncube, in his Budget Review Statement, is expected to pronounce concrete measures to counter inflationary pressures and keep inflation under check.
The minister has, however, indicated that Zimbabweans should not expect any further seismic policy shifts following full re-introduction of the Zimbabwe dollar, with the focus now shifting towards growing the economy.
Soaring food prices and other basic commodities since September 2018 pushed Zimbabwe’s annual inflation to post dollarisation high of 175,66 percent last month, up from 97,85 percent in May, according to the latest data from the Zimbabwe National Statistical Agency.
Zimbabwe, which in February 2014 entered deflation before returning to above sub-zero levels after 29 months, saw massive inflation take off in October last year when the rate jumped to 20,85 percent from 5,39 percent.
The biggest pain of sustained inflationary spike has largely been the fact that salaries have continued to significantly lag behind price increases, in fact, incomes have remained stagnant to a very large extend.
Inflationary pressures largely emanated from the policy announcement related to currency reforms, which began in October last year and started with directive for the separation of Foreign Currency Account Nostros and the Real Times Gross Settlement accounts.
Along the way, Government announced the Transitional Stabilisation Programme in October 2018, which entailed a number of targeted reforms, introduced the 2 percent intermediated money transfer tax (October 2019), national budget that had inflationary elements (November 2018), partial liberalisation of fuel (January 2019), exchange liberalisation (February 2019) and full liberalisation of fuel procurement in May this year.
The other major move was abolishment of 1:1 fixed exchange rate after the Reserve Bank of Zimbabwe introduced the interbank market, which initially saw some prices creep up before they started falling.
Last month, the Government finally announced that the US dollar, South African rand, Botswana pula and other foreign currencies were no longer legal tender in Zimbabwe, effectively abandoning the multi-currency regime, which Zimbabwe adopted in 2009 when hyperinflation rendered the Zimbabwean dollar worthless.
The move also averted the country from plunging into full re-dollarisation when the economy did not have enough US dollars to support this. The continued rapid depreciation of the local currency against the US dollar had seen most businesses preferring to quote prices in US dollars in a country where the majority are paid RTGS dollars.
Minister Ncube said he was happy that the Government had moved “quite fast” on the issue of major currency reforms, as further delays would have prolonged market volatility and uncertainty, but essentially, this marked the end of major policy changes.
Notably, Reserve Bank Governor Dr Mangudya has on a number of occasions rightly noted that while a lot of appropriate interventions have been adopted, positive mark response has proved difficult to come by due to crisis of confidence, as people keep looking back to the miserable experiences of the past and hyper-inflationary era, which lasted until 2008.
And Minister Ncube has pledged to keep hammering on the measures to restore confidence in the economy and Government through sound policies and transparency in economic management.
Action on currency was critical given that the dollar crunch in Zimbabwe was now unsettling prices, because as demand for the greenback grew and the exchange rates rose, they put inflation under pressure.
With that in mind, economists said now that the major currency reforms were complete, the biggest fiscal incentive expected from the Government was to bring down inflation.
Minister Ncube said the Government’s national budget was now posting regular surplus, specifically over the last six months.
“Indeed the biggest fiscal incentive that the fiscal authorities can offer to industry and the economy at large to stimulate economic growth and productivity…is the commitment to bring down inflation.
“This will allow industry to preserve capital, while the households will be able to conserve their earnings and provide a sustainable market for goods and services produced in the economy.”
Economist Dr Gift Mugano said the high inflation levels the country was currently experiencing resulted from “policy shocks” related to currency and other economy wide key reforms.
“We do not want more surprises,” economist Dr Gift Mugano said in an interview. From a policy perspective I think we did not do right in that we were making piece meal announcements, month in month out,” he said.
“In every announcement there is a reaction from the market and in many cases the reaction is adverse and it’s also excessive in that people go beyond a limit because they are even responding through (massive) price adjustments.
“Our shock absorbers are finished and what we now want to hear from the minister (of Finance) are measures to stimulate growth. Firstly, we anticipate the minister to raise tax bands for PAYE so that people earning low salaries pay little or no taxes at all.
“This will stimulate spending and at the same time boost demand. We do not want to get into a trap of low aggregate demand which might take us into recession,” Dr Mugano added.
These sentiments were shared by Dairibord Holdings group chief executive Anthony Mandiwanza who said “once the disposable income is compressed due to high inflation, then aggregate demand for goods is reduced.”
Confederation of Zimbabwe Industries president Henry Ruzvidzo weighed in saying that the high inflation over the past few months had created distortions in the market, including loss of purchasing power for the Zimbabwean consumers.
“Some stability is now evident and will allow for the establishment of a new equilibrium for the economy and restoration of aggregate demand.”
Minister Ncube has already indicated that he will review tax free thresholds to improve disposable incomes. “What we will be doing is to review upwards the thresholds for those paying income tax and PAYE…to give relief to those earning below the poverty datum line because of the increase in inflation,” said the Minister.
Dr Mugano said after the currency reforms Government should now move towards production enhancement. This, he said, should be in the form of tax breaks and tax exemptions.
“The currency is the victim of supply side bottlenecks. It is therefore important the minister announces supply side enhancing policies,” said Dr Mugano.
Importantly, there is a technical explanation to what will also happen to inflation come September, that inflation will fall sharply but not to levels most may be comfortable with, as the period will see huge drop in the gap between indices for the 2018 and 2019, given that inflation last year started rising from a very low base.