‘Fiscal pressures to drive money supply, inflation’


PRESSURE to finance the importation of grain, electricity, fuel and agricultural inputs is expected to push the government to print money to buy foreign currency and increasing money supply, a stock broking firm has said.

The southern African nation is in the throes of its worst economic crises in a decade with biting shortages of foreign currency, grain, fuel and rolling power cuts that last up to 20 hours a day.

Last June, authorities ended the 10-year use of multi-currency regime by reintroducing the Zimbabwe dollar, the sole legal tender, which is fast-losing value since then.

In its 2020 economic outlook report, Morgan & Co said it envisaged the parallel market rate to continue moving northwards.

“Our assessment is that controlling money supply growth will be a mammoth task given a number of economic realities. Firstly, foreign currency shortages continue to loom and there is a high propensity of imports among economic agents, government included,” the stock broking firm said in a research note.

“Secondly, the drought in Zimbabwe will require Treasury to create new money. Finally, the government still has strong appetite for foreign currency given the need to finance agriculture, farming inputs, energy imports (fuel and electricity). This huge appetite or demand will likely to push the parallel market exchange rates ($70 to US$1) and this will have a pass through effect on pricing and inflation. Given the shortages of foreign currency in the broader economy, we contend that the RBZ (Reserve Bank of Zimbabwe) will be forced to print money so as to finance foreign currency purchases.”

Money supply as of July 2019 increased 62% year-on-year to $17 billion driven by profits or realised foreign exchange gains.

“The formal exchange rate has moved from 1 to 17. The redenomination of the foreign currency positions into local currency resulted in inflated balances, hence the increase in money supply,” the firm said.

Morgan and Co firmly believes Zimbabwe is following the steps of Venezuela, a situation that might worsen the former’s economy.

“Venezuela unveiled the Sovereign Bolivar to tackle hyperinflation in 2018, with two coins and paper denomination ranging from 2 up to 500 Sovereign Bolivars. The continuous economic decline in Venezuela has resulted in the country issuing new 10 000, 20 000 and 50 000 bills to make payment ‘more efficient’ and ‘facilitate business transactions’. Zimbabwe on the other hand, introduced the bond note in 2016 which was pegged 1:1 against the US dollar. However, the deteriorating macro-economic environment has resulted in the parity being disbanded in February 2019.”

The research firm said the long-standing hyperinflation in Venezuela also triggered expectations of higher inflation in Zimbabwe in 2020 given the strong similarities.

“We note that the main difference between Zimbabwe and Venezuela has been that monetary authorities in Zimbabwe have been tightening money supply or liquidity and this phenomenon has also contributed to wide spread poverty. The strategy has been to maintain the growth of money supply between 8 and 10% thus anchoring inflation pressures,” it said.

The company added that the inflationary pressures being experienced in Zimbabwe and Venezuela were being caused by the depreciating currencies in both countries.

“Depreciating currencies in both Zimbabwe and Venezuela have led to inflationary pressure. In September 2019, Venezuela’s annual inflation rate topped 39 113,8%. Meanwhile the International Monetary Fund (IMF) projects a rate of over 200 000% for 2020. We note that Venezuela’s hyperinflation woes are hinged on the performance of the price of the oil. Oil accounts for 96% of the country’s exports and the collapse of the crude oil prices in 2014 resulted in a foreign currency crisis,” it said.

“Further, the introduction of a currency peg, installation of the import controls, the nationalisation of other industries and the establishment of subsidies for food and consumer goods were also driving factors in the country’s inflation problems. Similarly, Zimbabwe’s output increased the country’s dependence on imports.” – News Day