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‘$18bn stimulus to stoke inflation’

BY TATIRA ZWINOIRA

The government’s $18 billion stimulus package to breathe life into the local economy battered by the effects of the coronavirus outbreak will worsen inflation because of lack of external funding, a financial advisory firm has warned.

A week ago President Emmerson Mnangagwa unveiled the stimulus package, but the government has been mum on the source of funding amid revelations that external funders are reluctant to assist Zimbabwe because of its poor debt settlement record.

Finance minister Mthuli Ncube recently wrote to the International Monetary Fund, World Bank and African Development Bank pleading for financial support and warning that Zimbabwe was on the verge of economic collapse.

The international financial institutions did not respond to the request, as observers warned that Zimbabwe was on its own.

Equity Axis, a Harare-based advisory firm, said the bailout package would be mostly funded through the creation of new money by the Reserve Bank of Zimbabwe (RBZ) and this did not bode well for efforts to contain runaway inflation.

“Before the new money injection of $18 billion, which we anticipate will be released gradually until the end of July, the reserve money balance in Zimbabwe (March) was sitting at $12.4 billion,” reads Equity Axis’ latest ‘Zimbabwe Economic Research Note — May 2020’.

“Adding $18 billion brings the total to $30.4 billion possibly by end of 2020, an annual growth of 200%.

“A 50% annual growth in base money in 2019 was corresponded by a 90% depreciation in the Zimbabwe dollar over the same period.”

Equity Axis added: “While a number of variables are held constant, the baseline remains that without commensurate growth in production and strong external balance position, inflation is likely to respond to the stimulus in a harsh manner.”

Without any external financial support, due to government’s lack of political and economic reforms, experts expect Treasury to turn to its traditional sources of funding its expenditure, namely, financial instruments and the central bank’s overdraft facility.

Inflation occurs if money supply grows faster than the economic output under otherwise normal economic circumstances.

Since the economy is set to contract by as much as 20%, according to Treasury, any increase in money supply will push inflation up.

The depreciating Zimbabwe dollar pushed the March month-on-month inflation to 26,59% while the year-on-year inflation rate was 676, 39%.

In its latest Africa Monitor for Southern Africa, the United Kingdom-based financial services firm, Fitch Solutions, said unless the government implements reforms, the socioeconomic situation in the country would continue to worsen.

“Amid inter- and intra-party divisions, and a continued focus on short-term political requirements, we expect the government to make little substantive progress on reform over 2020,” Fitch Solutions said.

“Zimbabwe has a Staff-Monitored Programme with the International Monetary Fund (IMF), but negotiations on a successor arrangement have made little progress.

“The IMF continues to stress the need for reforms to restore stability, improve foreign-exchange policies and the monetary policy framework, and contain fiscal spending.

“However, the authorities have struggled to stabilise the currency, and efforts to placate striking public-sector workers are constraining efforts to reduce expenditure.”

Fitch Solutions said it expects Zimbabwe’s annual inflation rate for 2020 to be at 185,7%.

“The wage increase will exacerbate price pressures and undermine efforts to reduce expenditure on salaries and pensions, which already account for around 90.0% of state spending (although this is not necessarily reflected in official data),” the firm said.

Fitch Solutions was referring to the 140% salary increase for civil servants implemented in January.

“Further strikes are likely given still elevated levels of inflation, which will erode real wages, while we expect shortages of basic goods to spark periodic protests over the coming quarters,” the firm added.

“Reflecting this, social stability remains the poorest-performing subcomponent of our short-term political risk index (STPRI), with a score of 27.5 out of 100 (lower scores indicate higher risk).”

Zimbabwe’s overall STPRI score of 38.5 placed it 39th out of 48 Sub-Saharan African countries.

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