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Ncube riding against tide


  • LAST week on Thursday, Professor Mthuli Ncube, Zimbabwe’s Minister for Finance and Economic Development, presented his 2021 Mid-term Budget and Economic Review to the national Parliament. These are some of the major highlights of the presentation:
  •  Gross Domestic Product (GDP) is now projected to grow by 7,8% this year, up 0,4 percentage points from an initial projection of 7,4%. Inflation is expected to close the year between 22% and 35%, with a monthly outturn below 3%.
  •  The 2021 fiscal spending ceiling is to be maintained at ZW$421,6 billion (around US$5 billion, 18,2% of GDP). The Treasury chief expects Zimbabwe Revenue Authority (Zimra) to raise revenues to the tune of ZW$390,8 billion (US$4,5 billion, 16,4% of GDP) thus putting the Public Sector Borrowing Requirement (a budget deficit) at ZW$30,8 billion (US$360 million) or -1,3% of GDP. The deficit will be financed entirely through domestic borrowing -issuance of Treasury Bills and Treasury notes.
  •  Total domestic debt as of April 2021 stood at ZW$20,9 billion (US$244,1 million) while total Public and Publicly Guaranteed External debt including the Reserve Bank of Zimbabwe (RBZ) external guaranteed debt amounted to US$10,5 billion, translating to 71,2% of national GDP. Of this amount, external debt arrears alone are more than US$6,5 billion.
  •  In the first half of 2021, the country received diaspora remittances to the tune of US$746,9 million, up 158,7% from US$288,7 million in the comparable period last year. For the full year, diasporas are expected to send circa US$1,3 billion.
  •  As of July 26, 2021, the government through the Grain Marketing Board (GMB) has procured 636 884 tonnes of grains from farmers worth ZW$20,9 billion

No significant policy measures were proposed as the minister emphasized the need to stay the course pronouncing that the existing policies are achieving desired results and remain adequate.

“We only need to stay the course, and any substantial policy changes will be introduced through the 2022 National Budget,” Ncube said.

I agree with the minister on the notion of staying within budget as this is critical for sustained macroeconomic stability. Budget overruns lead to more money supply and excessive exchange rate depreciation as those deficits get monetised.

But, be that as it may, fiscal spending continues with its northward trend, raising doubts on the ability of the central government to stay within its 2021 spending ceiling. In my opinion, the 2021 budget deficit is on course to significantly breach the official target —  a mockery of the “stay the course” principle.

National Treasury preliminary estimates show that overall expenditures in the first half of 2021 were ZW$197,6 billion (US$2,3 billion), 4,1% above the target of ZW$189.8 billion (US$2,2 billion).

In April, civil servants were awarded a 25% salary hike which led to excess spending of about ZW$6,1 billion (US$71,2 million) on the compensation of employees. Also, in its quest to cushion the public from the damaging impacts of the Covid-19 pandemic and gradually spiking cost of living, cumulative spending on social benefits and subsidies mounted ZW$9,96 billion (US$116 million) above target.

Last month, the government awarded an additional 50% salary hike for civil servants. Also, the same Treasury is now projecting to spend at least ZW$60 billion (US$700,9 million) purchasing grains from farmers, an amount that was not initially anticipated.

This agricultural season, the country has experienced an El Viejo, with national staple maize production now projected at 2,7 million tonnes against a national annual requirement of about 2,2 million tons for both livestock and human consumption.

According to the National Oceanic and Atmospheric Administration (NOAA), El Viejo is the opposite of El Nino in which the Pacific Ocean upwelling (rising of cold water from the depths to replace warm water) increases, bringing nutrient-rich water to the surface.

It typically lasts nine to 12 months and results in wetter-than-normal weather conditions particularly in Southern Africa.

If we are going to stick with the initial budget, the national Strategic Reserve should gobble about ZW$8 billion (US$93,4 million).

Further, the government is projecting to spend more on vaccines this year. Treasury statistics show that of the budgeted US$100 million, about US$93,2 million has already been spent on vaccine procurement.

With no further details from the Treasury, it is not clear how vaccine purchases will be financed months ahead.

Fiscal spending is rising at lightning speed.

I believe that the level of economic activity across the economy is now not matching the growth in the money supply.

In June, the government instituted Level 4 (very high) Covid-19 lockdown measures. All public gatherings but funerals remained banned, business operating hours reduced, with long curfew hours. This is constraining output growth yet more money is being pumped into the system.

According to the father of monetarism, Milton Friedman, it is the growth in the quantity of money that affects prices. The simple intuition behind this line of argument is that, when everyone has enough money to buy whatever they need, we end up with a shortage of some goods in the economy.

That shortage will cause prices of some or all goods in the market to rise.

Recently, prices of basic commodities like cooking oil and sugar have risen by significant amounts. The price hikes are in line with the Zimbabwean dollar, which is plummeting in the parallel market driven by excess liquidity, now trading northwards of ZW$150 to the greenback.

The government attributes parallel overrun to speculative behaviours when it is the result of its ill-thought policies. For instance, record weekly amounts of forex are traded on RBZ auctions. However, it is reported that the Bank is facing prolonged settlement challenges. The time lag between a business putting a forex bid and receiving the bid amount is now running into weeks if not months. Hence, the parallel market is providing relief to forex demanders while waiting to receive their allotments.

This alone shows the misalignment of the auction-rate with market fundamentals. The economy is recovering from the 2020 recession, fueling forex demand as production improves.

If the auction resembles market forces, with forex demand currently outpacing supply, the Zimdollar should plummet by bigger margins to equilibrate the market. However, for the whole of July, the Zimdollar only lost a paltry -0.25%.

These are the early signs either showing manipulation of the rate by RBZ or indicating the disbursement of insider information.

Fixing the rate without a war chest of reserves to support it leads only to Armageddon. So, staying the course should not be put in black and white only, but also to practice.


Sibanda is an economist at Equity Axis. — zvikomboreros@equityaxis.net.

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