Poll spending may stoke inflation

Prof. Gift Mugano
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As the country readies for harmonised general elections next year, fears abound the period going into 2023 will result in massive election spending that may stimulate inflationary pressures, if not managed properly, economic analysts have warned.

By Nelson Gahadza

In recent weeks, the economy has witnessed relative stability largely as a result of measures instituted by the authorities as they seek to tame inflation and exchange rate volatility.

Treasury announced a raft of measures aimed at taming exchange rate fluctuations and curb speculative behaviour including the suspension of payments to Government contractors, agencies and departments.

The introduction of gold coins has also provided investors an alternative asset class and assisted Government in mopping up excess local dollars that saturated the market.

To ensure the current disinflation trend is sustained, authorities have resolved to maintain a tight monetary policy stance which should be buttressed by continuous fiscal prudence and close monitoring of wage-push inflation.

Global inflation shocks resulting from geopolitical tensions, rising food and energy prices as well as supply chain disruptions, however, present downside risks to the country’s inflation outlook.

Economists who spoke to Business Weekly, said the prevailing local economic stability remains fragile, hinged on Government’s ability to continue to control money supply as well as insulate the economy against global supply and inflation shocks.

Economist Prosper Chitambara said from past experiences and even from other countries, electoral related spending has a destabilising effect on the macro-economy, but this differs from country to country.

“We expect that spending related to elections next year may result in inflationary pressures being generated,” he said, adding “what is needed is the removal of inefficiencies in public spending.”

Chitambara said the Government has been implementing value for money in the procurement matrixes and it’s critical to ensure that such reforms are followed through.

“We have seen a stabilising effect that has come from value for money in the procurement to ensure Government contracts are not inflated. This seem to sustain stability that has been witnessed in the past weeks,” he said.

As political parties seek to outclass each other in the upcoming elections, they spend significant amounts on campaigning materials, vehicles and other activities.

The electoral body, the Zimbabwe Electoral Commission (ZEC), requires its own budget to manage the elections while the political parties on their part receive funds under the Political Parties (Finance) Act 2:11.

During the 2018 elections, ZEC spent over US$300 million while earlier in the year $500 million was released for political parties towards by-elections.

Economics Professor, Gift Mugano, said naturally there is no restraint on election spending and it emerges through higher exchange rate and inflation spiral.

“Already we can see the pattern of spending towards elections and the election mode has

already been defined.

“For example, target support to households is now 3,5 million against previous levels of 2,3 million and that is already evidence.

“Looking at the Zimbabwe Statistical Agency (Zimstat) figures, we do not have 3,5 million households, but already these are expenditures put by government ambitiously,” he said.

Mugano said due to overspending by the Government, it will be difficult to sustain the current stability.

“We expect the 2023 budget will be massive because it will have to sustain what the government has already started in terms of expenditure and it will focus more on social spending than before,” he said.

He noted that spending will be on things like salaries which will be increased as workers are part of the electorate.

“Workers are part of the electorate and they are very smart and will take advantage of the season and demand for salary increases which will put government in a tight corner and will give in, if they don’t give them, they will not vote for them,” he said.

Vince Musewe, an economist said it is most likely we are going to see a surge in money supply as election funds are spent in campaigns.

“ . . . elections are a huge business. The impact could be an uptick in inflationary pressures as retailers seek profits and middlemen also put their cut,” he said.

He said there is nothing much government will do to salvage the situation as they have vested interests in the election season.

Economist Victor Bhoroma, said the Government’s propensity to print money is very high and this will undoubtedly create more pressure on limited foreign currency.

“Parallel market rates will respond just as much as consumer prices,” he said.

To maintain the current stability, he said the central bank has to end all quasi fiscal operations so that money printing can be in tandem with economic growth.

FBC Securities in its third quarter 2022 economic review report, said the prevailing local economic stability remains fragile, hinged on the Government’s ability to continue to control money supply as well as insulate the economy against global supply and inflation shocks.

“We believe positive domestic economic growth remains a possibility given the positive developments in the mining and tourism sectors.

“Growth may, however, be below the 4,6 percent projection owing to restrictive factors such as the currency crisis, soaring inflation, liquidity constraints, policy missteps and perennial power shortages.

“We also note the upward revision of interest rates, increasing the cost of borrowing, as a limiting factor to desired growth projections as it weighs down aggregate demand,” it said.

Fitch Solutions, a global rating agency said with inflation remaining sticky for longer, and the risk of rapid growth in money supply in the run-up to general elections in 2023, it expects the Reserve Bank of Zimbabwe (RBZ) to raise the policy rate further, to 240 percent in 2023.

“We expect that a recent resurgence in inflationary pressures in Zimbabwe will put further pressure on real household disposable incomes, weighing on social stability.

“The Government will likely contain any potential increase in violent unrest, though this would risk disrupting economic activity as in 2019 and weigh on already poor perceptions of political standing,” it said.

However, an economist and former member of the RBZ monetary policy committee (MPC) said the Government will not exceed their budget in 2023 and we might see a change in emphasis. – Business Weekly