Fiscal stability under threat due to new policy thrust

IN the week under review, monetary and fiscal authorities introduced swift changes to policy in a bid to ensure currency and general economic stability. The Ministry of Finance announced revised salaries for civil servants, adjusted by 50% and a US$75 food stamp, which for now has been given a three-month lifespan, subject to review.

Respect Gwenzi

The RBZ, which for the past three months has been running battles with parallel market dealers through the Financial Intelligence Unit, announced the resumption of the Reuters Foreign Currency trading platform. The platform was suspended in March barely two weeks after it was introduced as an enhanced way of improving trade on the interbank market.

While the RBZ has been seeking to suppress or stabilise the exchange rate through busting “speculative” dealers, the fiscal authorities have been left at the messy of the monetary developments. Typically, currency depreciation of proportions attained in Zimbabwe presently, spontaneously stimulates inflation. Since the beginning of the year the Zimbabwean dollar (Zimdollar) has lost 75% on the parallel market while inflation stood at 755,5% as at May. The June outturn is expected to hover closer to the psychological 1000% as losses in exchange rate widen. The Zimdollar is now trading at 1:105 to the US dollar on the same market. By implication value erosion has been rife, significantly lowering the purchasing power and real value of earnings. For example at exchange rate of 1:100 a civil servant in Zimbabwe is now earning about US$35 before the announced new salaries for June.

A continuous battering of the local currency inevitably puts pressure on the Finance Ministry to address the welfare crisis regardless of the treasury status. Conversion of Q1:20 Zimbabwe Revenue Authority (Zimra) earnings to US dollars put the total at US$463 million and simulating same on an annual basis gives a mere US$1,9 billion. Historically, Zimra has earned about US$3,5 billion in annual earnings in stable post dollarisation years. This sharp variance means the national purse has been dwindling in real terms, thus giving rise to the risk of overblowing expenditure.

Now to look at the cost impact of adjusting the wage bill and paying an allowance of US$75 plus the pensioners allowance. A total monthly cost of US$30 million will arise, which gives an annual total of US$360 million. Average income earned by government in US dollars equates to almost the same level using conservative figures (royalties US$150 million plus corporate taxes on exporting businesses US$215 million) while more liberal estimation would put the figure at US$400 million.

Be it as it may, a clear observation is that government’s newly introduced allowance of US$75 for the civil service plus that of pensioners, chews up almost the entire foreign currency earnings due to government. Government, however, has other pressing imports such fuel, which to date has been trading at a huge discount given the plunging exchange rate. Fuel costs Zimbabwe US$1,2 billion per year, deducing to a monthly bill of circa US$100 million. As resources are rechannelled towards welfare, government will have no choice but to forgo or significantly cut subsidies in many sectors. While this will further stimulate inflation, it removes market distortions and relieves pressure on the fiscus.

Given the tight variance to potential US dollar earnings, the risk of an accumulating payments backlog at the RBZ will increase. Broadly though the evaluation, from our viewpoint is that fiscal resources earned directly by government are very thin and cannot sustainably cover the US dollar costs created in the latest instances without forgoing other expenditure lines. Electing to accumulate new costs and sustaining the status quo will give impetus to the need by the RBZ to suppress the preferential exchange rate at which retentions and unutilised nostros are liquidated. This, however, will result in the downside of widening the gap between the preferential rate and the interbank rate, amplifying market distortions and discouraging exports. The government will need to navigate the terrain more carefully cognisant of the full impact these dynamics may have on the economy. The currency will only be sustainably saved by strong fundamentals such as rising production, rising employment levels, fiscus reconfigurations and trade rebalancing.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net