Zim economy fundamentally strong

08 May, 2022 - 00:05 0 Views
Zim economy fundamentally strong

The Sunday Mail

The surge in prices witnessed  recently and captured in the sudden jump in monthly inflation to 15,5 percent last month was unexpected and by all the laws of economics should not have happened.

Zimbabwe’s economy is fundamentally strong. We export more than we import and have been for some time.

We have been balancing our budget, with the Government since the start of the Second Republic, using taxes not borrowings or printing to pay national bills. Growth in money supply has been severely restricted.

The auction system introduced in 2020 ensured the productive sectors could access foreign currency.

And everything was working and coming right, steadily, with falling inflation continuing after the first large drop after the start of the auctions and Zimbabwe settling down as a normal country.

Even the International Monetary Fund and the World Bank reckoned we were doing things correctly; they had some ideas over fine tuning but nothing dramatic.

Then towards the end of last year we saw the monthly inflation rising, and this was directly connected to the black market exchange rate. This then moved faster over recent weeks. The black market rate is seen, by Government agencies and those who dislike the Government, as the driver of the inflation, so there is no dispute what is causing the problem.

In his analysis and raft of corrective measures yesterday, President Mnangagwa, flanked by his two top economic advisors, Minister of Finance and Economic Development Mthuli Ncube and Reserve Bank Governor John Mangudya, was careful not to be totally condemning.

Indeed, besides the dishonest, there are those who need to be reassured and need to be supported in their moves to act rationally. At the same time those who want to mess around need to be deprived of the means of doing so. So the clean up announced is largely triple in its thrust, without any revolutionary changes such as redollarisation, but rather strengthening the systems in place so we can move rapidly back onto the road of steady progress.

The first is strengthening the legal markets for foreign currency, the auctions and the interbank market. The delays in transferring foreign currency to the productive importers who successfully bid on the auctions have been seen as a problem for a swathe of manufacturers. These have been in the process of being fixed, along with more openness on the auction system itself, but will now be solved.

The backlog will be cleared this month using Government funds, the President announced, and will not be allowed to come back. In future all allotments must be paid within two weeks. Also, only what money is available from the surrendered export earnings will be on sale although the present tighter rules of who is allowed to bid and how they bid are to be retained.

This should put the manufacturing sector back into an area where they can precisely calculate their costs and avoid any “just in case” pricing using the black market. Along with the auctions, the interbank willing buyer and willing seller market, now operating for just over a month, has been extended to US$5 000 a day. It has seen success on the pilot scheme of US$1 000 a day with the banks actually buying more foreign currency than they sell. So it is working and moving a chunk of the black market into the official world.

Retailers and wholesalers can use this interbank rate from now on with a 10 percent margin.

This moves them into an open but legal market and fairly obviously the President and his advisors see that interbank rate becoming the real rate. This is how most countries set their exchange rates.

The second set of measures was adjusting some tax rates and the money supply targets to prevent the creation of money supply by messing around with financial deals. Reserve money supply growth is now to be zero, and banks are temporarily barred from lending so another tap is turned off.

We need to remember that while earlier inflation was a result of the Government printing money, we have been seeing the private sector doing much the same. Now they cannot.

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