HomeAnalysisMid-term monetary, budget analysis

Mid-term monetary, budget analysis

By Victor Bhoroma

THE latest mid-term budget and monetary policy statements were presented in a low key mode with emphasis on avoiding policy shocks that can rock the economy.

The Zimbabwean government revised upwards the country’s growth forecast from 7,4% to 7,8%. The forecast is anchored on the bumper harvest expected in the 2021 agricultural season, a stable macro-economic environment, bullish commodity prices and vaccination efforts towards the Covid-19 pandemic.

The International Monetary Fund (IMF) projected that the local economy will grow by 6%, while the World Bank had a modest forecast at 3,9%.

Of late, local economic analysts have tapered their growth expectations (forecasts of between 3-5%) in light of the continued impact of Covid-19 on business operations, limited tourist arrivals in the country, resurgent power cuts and the widening spread between the auction rate and the parallel market exchange rate.

Agriculture  rebound

Growth of the agriculture sector in 2021 has been revised upwards on due to expectations of a bumper harvest in almost all crops particularly maize, wheat, groundnuts, and sorghum. The sector is estimated to grow by 34%, up from the initial budget projection of 11%. The improved crop harvest is driving consumer spending and reducing the import bill for agriculture related raw materials and commodities.

Maize production is estimated at 2,7 million metric tonnes (175% growth from 980 000MT produced in the 2020 season), while wheat production is expected to grow to 280 000MT (from 150 000MT), sorghum to grow to 244 000MT (from 104 000MT in 2020) and soya bean production to increase by 51% from 47 000MT in 2020.The government anticipates that 1,9 million MT of grain, valued at ZW$67.7 billion, will be delivered to the Grain Marketing Board (sole buyer of maize in the country).

Out of the quantum, ZW$13,3 billion (US$155,4 million) had been paid by the end of July 2021. Thus growth in money supply is inevitable in the last four months of 2021 as the government rushes to clear payment backlogs for maize and cotton deliveries made so far. This will further devalue the local currency and put pressure on foreign currency.

Revenue performance

The government budgeted to collect ZW$391,8 billion (US$4,8 billion then) in 2021. In the first half of 2021, revenue collected amounted to ZW$198.2 billion (US$2,3 billion) while expenditure totaled ZW$197 billion (US$2,3 billion) thereby generating a book surplus of ZW$570 million (US$5,8 million). Capital spending amounted to ZW$67 billion (US$782,7 million) against a budgeted ZW$58 billion (US$677,5 million).

The increase in government funded capital projects has seen positive returns in the cement manufacturing and construction sector with notable progress on the Gwayi-Shangani Dam, Beitbridge-Harare Highway and the Emergency Rehabilitation Programme Phase II where various urban and rural roads are undergoing a facelift.

The current account balance for 2021 is projected to remain in a surplus position of US$612 million compared to US$1,1 billion recorded in 2020.The current account position points to relatively weak domestic demand as evidenced by low consumer spending and reduced imports for strategic commodities such as petroleum.

Debt  repayment

Zimbabwe is yet to table a debt repayment plan for the over US$10,7 billion (72% of GDP) now owed to Multilateral funders such as the Paris Club, World Bank, African Development Bank (AfDB), European Investment Bank (EIB) among others.

The current headache being on how to raise the US$3,5 billion owed to former commercial farmers under the Global Compensation Deed. The compensation to former commercial farmers is not yet included on the country’s official debt position as the farmers have not yet signed a cessation agreement.

The government is considering borrowing the money directly from private investors to fund the compensation and has appointed London-based Newstate Partners LLP to help it secure US$1,75 billion by July 2022.

During the first quarter of 2021, debt service payments amounting to US$17,04 million were made with token payments totaling US$1,6 million, payments to multilateral creditors amounting to US$4,11 million and bilateral creditors taking US$11,33 million.

A clear debt clearance plan will be critical in repairing relations with the international community and lenders, and in unlocking future credit lines especially for infrastructure development where government funding is inadequate.

Recurring  expenditure

The government stated that recurring expenditure towards civil servants was 41% of total expenditure. The government last awarded a 45% salary increment to its restive civil servants in March 2021, which means the lowest paid civil servant (B1 grade) still earns ZW$17 000 (US$200). The figure is way below the Total Consumption Poverty Line (TCPL) of ZW$37000 (US$432) in July 2021. The effect of such poor remuneration is that consumer confidence and domestic demand remains low while public service delivery is compromised.

Services such as education and health care have deteriorated in the last three years and there is an urgent need for the government to redirect a portion of foreign currency earned from taxation to remunerating civil servants.

A salary in sync with the family TCPL for the lowest paid civil servant would go a long way in restoring public service delivery and improving aggregate demand in the economy. Similarly, adjusting the tax free threshold to ZW$20,000 (US$233,64) would have helped to cushion thousands of civil servants now living in poverty.

Monetary  developments

The central bank maintained the bank rate at 40% and put an interest rate cap of 10% for medium term lending facilities. This means that the rates are not in sync with inflation trends, which impacts productive sector lending and resurgence of the credit market.

The central bank has managed to reduce inflation to 56,37% as of July 2021, a key milestone towards the adjusted target of between 22% and 35% by December 2021. The consumer basket keeps increasing, reflecting the impact of parallel market exchange rates and growth in money supply. Money supply estimates for August 13 show that Reserve Money (M0) is about ZW$24.82 billion (about US$290 million), which underscores the dominance of the US dollar on the domestic market.

Foreign currency deposits with local banks have surged from below US$500 million in July 2020 to over US$1,8 billion in August 2021, while it is estimated that over US$1,5 billion circulates in the informal sector. The anticipated payments to farmers for delivered produce will add more pressure on the exchange rate and devalue the Zimbabwean Dollar as the country heads for the festive holidays.

Auction  inefficiencies

The pegged auction market rate is gradually denting economic recovery efforts across various sectors such as mining, exports and agriculture, among others. There have been delays in the settlement of winning bids with backlogs running more than two months and a backlog of approximately US$200 million.

This means that the auction system is failing to satisfy demand and there are billions of local currency tied up in the banking system waiting for settlement in foreign currency.

These backlogs provide a lifeline to the parallel market, not just for foreign currency but for various commodities where the government sets price ceilings such as fuel, grain, cotton and gold among others.

The spread between the pegged auction market rate and parallel market rate is now widening with the former at US$1:ZW$85,75 while the latter is trading at US$1:ZW$160.

The spread creates a fertile ground for market instability through price distortions and unrealistic forward pricing on future payments. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics.

The recent budget and monetary policy statements played it safe in terms of ensuring economic stability. However, to sustain economic recovery efforts, the government needs to allow the auction rate to be market determined in line with money supply and other macro-economic dynamics.

This means the central bank role should be limited to creating incentives for an inclusive foreign exchange market, regulating financials markets and bank supervision (through analysing national payments and transaction reports).

To guarantee a true auction system, commercial banks should be mandated with matching buyers and sellers for the available foreign currency (declared beforehand) and bids should be limited to the declared foreign currency for settlement within 48 hours.

This will help in market price discovery and relieve the central bank from the perpetually seeking external facilities to support the auction system. An inefficient auction system is the biggest deterrent to sustained economic recovery efforts this far.

  • Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. —  vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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