Fiscal pressures causing money supply growth: Economists

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Alpha Media Group


AS the Reserve bank of Zimbabwe released the Mosi-oa Tunya gold coins recently, economists warned the government to guard against exchange rate and physical pressures causing money supply growth. They argued that this results in disparities between the Budget Strategy Paper (BSP) and Actual Budget numbers. They made the remarks during the four-day conference of the Institute of Chartered Accountants of Zimbabwe (ICAZ) held in Victoria Falls in Matabeleland North from July 21 to 24. The Theme of the conference was Reconnecting Shifting Gears Levelling Up! Financial economist and banker Micheck Ugaro said a significant share of funds are channelled to infrastructure (34,5%) and Agriculture (12%), equating to about ZW$450 billion. Ugaro noted that Zimbabwe's budget has risen from ZW$8,1billion in 2019 to ZW$968 billion in 2022 against an average negative GDP growth. “Proof of treasury pumping money is that MOF (Ministry of Finance) requested for Condonation of ZW$6,7billion and ZW$102 billion in 2019 and 2020 a clear sign that treasury is pumping money in the market," he said. "The 2020 budget was ZW$63 billion. Government spent more than ZW$102 billion. Results of Money Supply Growth are Inflation Expectations, disparities between the BSP and Actual Budget numbers, e.g, Budget Strategy Paper 2022: (July): Revenue ZW$533 billion." Ugaro said the likely outcome of 2022 fiscal performance given projected 5% GDP growth is most likely inflationary hence increased demand for a hedge (USD) which is a vicious cycle, a dog chasing its tail. The economist and banker noted that the 2022 Budget assumptions have changed due to the galloping exchange rate where inflation was targeted at 30% maximum but now is sitting at 191%. He said a budget review is now necessary, but warned that it would fuel more pressure on the exchange rate. He called for fundamentals to support price and exchange rate stability that are robust. “Prices unjustifiably settle on levels higher than average disposable incomes, pausing risks to sustainability of aggregate demand, forward pricing means beneficiaries purchase forex at whatever price hence distorting the pricing dynamics in the whole economy,’’ Ugaro said. He said the introduction of gold coins is a good initiative saying the move should be accompanied with a realistic exchange rate. ICAZ president Davison Charamba said there was no appropriate rate even in a single market in the country. “There is an official RBZ auction rate. Willingseller willing-buyer and the informal rate/ black market rate, which rate is then appropriate within that one particular market. No rate is consistent, the situation we are in points to the fact that the USD is not interchangeable with the Zimbabwean dollar at an official rate,’’ Charamba said. Below are excerpts from Ugaro’s presentation on the state of the economy: Expected results of the Prescriptions: •Reverse the transitory spike in prices and exchange rate because of: Strong commitment to implementation of confidence building measures • Convince economic agents that the perceived economic uncertainty is imaginary and not real. • It is envisaged that forex circulation will improve and buttress liquidity hence stabilise the exchange rate and hence its pass through effects to inflation. • Gold coins will now provide a formal means of value preservation and hence alleviate pressure on USD demand • Real interest rates aligned to inflation will curb speculative borrowing while preserving value for local currency depositors Another quote from the authorities: “Domestic pricing dynamics are currently driven by parallel exchange rates which are based on a thin market, which inherently has high price volatility and low liquidity. This explains why current prices have settled beyond the average national incomes, with significant implications to both consumers and businesses.” “Quick price adjustments to perceived parallel exchange rate movements has distorted pricing dynamics and led to unjustified exchange rate misalignments” Gold coins in detail • Coins are being introduced value“ • • Name: Mosi Oa Tunya Gold Coin Weight: one troy ounce • Purity: 22 carats a• Buyer shall Certificate • • Vesting period of 180 days On market with effect from 25 July 2022 • To be sold through the Bank and its subsidiaries, Fidelity Gold Refinery (Private) Limited and Aurex (Private) Limited. • Local banks and selected international banking partners • • Safe custody certificate will also be issued. The coin will have liquid asset status ( easily converted to cash) • • Can be used for transactional purposes The coin will have prescribed asset status • Collateral. The coin can be used as security for loans and credit facilities Buy Back Arrangement At the instance of the holder, the Bank will buy back the coin.