A 200% increase in money supply between December 2015 and May 2017 is unsustainable and could stoke inflationary pressures in the economy, the IMF has warned.
By Chris Muronzi
IMF mission chief for Zimbabwe Gene Leon told businessdigest in an interview this week inflation would close the year at 7%.
“The increase in money supply (over 200% between end-December 2015 and May 2017) is being created by the overdraft from the central bank to the government that is used to finance the large fiscal deficit,” Leon said.
“Indeed, as noted by the IMF’s Executive Board at the 2017 Article IV Consultation, the ongoing deficit financing modalities, particularly the credit from the central bank, are unsustainable and have significant potential for generating inflationary pressures.”
Leon said government had been made aware of the inflation risk stemming from the growth in money supply and have indicated commitment to engage.
“The authorities are keenly aware of the risks to inflation, given Zimbabwe’s recent experience with hyperinflation, and have expressed a willingness to contain the money creation,” he said.
Leon also raised concern over the glut of Treasury Bills (TBs) on banks’ balance sheets to banks’ capital structures given that TBs are increasingly illiquid.
“Theoretically, TBs are risk-free and liquid. Our concern is that the massive issuance of TBs in Zimbabwe has impacted this perception, with TBs now becoming increasingly illiquid and hence being discounted. These developments pose clear risks to the balance sheet of banks and the financial sector more generally,” he said.
Should the central bank not slow down on its money creation exercise, Leon said inflation would accelerate.
“There is a risk that inflation accelerates if the discounts between the physical US dollars and the quasi-currencies widen as the creation of money exacerbates the cash crisis. An associated issue is the fact that inflation affects the poor disproportionately more,” he added.