THE Confederation of Zimbabwe Industries (CZI), the country’s largest industrial lobby group, says money supply growth continues to pose a real threat to exchange rate stability and relevant authorities should employ measures to rein in liquidity expansion.
Given the direct relationship between current inflation dynamics and the Zimbabwe dollar exchange rate, CZI said the Government must find a non-inflationary way to finance the agriculture sector this year.
While for instance, reserve money plunged to $13,35 billion in the week to August 7, from $16,6 billion in the week to July 31, it has grown exponentially from just $9,2 billion at the end of January this year.
“Printing money increases the money supply, which results in the depreciation of the currency, which feeds into inflation,” CZI said in the business member grouping’s July 2020 macroeconomic briefing note.
However, Reserve Bank of Zimbabwe Governor Dr John Mangudya, is on record saying the central bank will maintain a stranglehold on money supply growth through its monetary targeting framework to entrench the relative stability of the exchange rate.
“You are aware that we have something called the monetary targeting framework. Our monetary targeting framework is that we are very stringent on money creation; so there is less creation of money in this country,” Dr. Mangudya said.
The central bank chief added that the RBZ was convinced that one of the major objectives of the foreign currency auction system was to ensure the exchange rate and price stability.
The governor stressed the point that the obtaining stability of the exchange rate reflected the positive impact of the auction system and other measures to restrain liquidity growth.
“So, by removing, mitigating, or minimising the volatility in the exchange rate means we achieve our mandate of price stability as a central bank,” the governor said.
Notably, though, CZI also said there was a commitment in the 2020 Mid-Term fiscal statement that there will be no recourse to central bank financing of the national budget deficit and fiscal slippages at all costs.
“To achieve this feat requires strict discipline as well as monetary and fiscal policy alignment,” CZI said.
The industrial lobby group pointed out that the growing number of Covid-19 positive cases meant an increased need for health expenditure and injection of liquidity under the Government’s $18 billion bailout, which might lead to money creation.
In the outlook, CZI said the build-up in incipient inflation over the short-term was subject to dynamics in the foreign exchange market, where the exchange rate has shifted from 25 to 1 to 82,9 to 1 against the greenback.
The government has indicated though that funds from the $18 billion economic recoveries and the stimulus package, will not be dished out like “confetti at a wedding party” but will be extended to deserving borrowers in the productive economic sectors.
To give the foreign exchange auction market an opportunity to operate efficiently, CZI said both local and central government should continue to collect taxes, fees, and rates in local currency in order to create demand for local dollars.
The captains of industry, however, noted the fact that the introduction of the auction market on June 23 had helped stabilise the exchange rate, calling for measures to sustain the positive momentum.
“Tax revenue constitutes 97 percent of total revenue and levying value-added tax, pay as you earn and income taxes in local currency should go a long way in creating demand for the local currency, as taxes contribute significantly to revenue,” CZI said.
The industrial grouping noted though that the business community was still skeptical about the foreign exchange auction given “the currency ambiguity obtaining in the economy”, which sees growing usage of the US dollar in many transactions.
There is now widespread use of the US dollar in the form of Government allowances, levies, fees, and taxes, in the informal sector, large supermarkets, medical services, and educational institutions. This comes after the Government
last year embarked on the process of de-dollarising the economy, amid crunch US
The Government has since given businesses the green light to charge in
both foreign and local currency after initially outlawing the use of US dollars upon reintroduction of the domestic currency last year.
The outbreak of the coronavirus has created uncertainty for businesses with some unsure whether they will reopen after the lockdowns due to cashflow challenges and as a result of subdued demand.