PHILLIMON MHLANGA
Government took a hawkish stance last week in combating exchange rate volatility and high inflation, but a securities firm is worried about the possibility of increased government spending as the country goes to the polls next month.
The move, FBC Securities said, could threaten the relative economic stability experienced in the past few weeks.
It said there is a likelihood of a significant injection of liquidity into the economy, which could potentially undermine stability efforts to restrain inflation and halt currency depreciation.
In its latest report, released this week, FBC Securities believes increased government spending towards the upcoming harmonised elections poses threat to the country’s economic performance.
According to the securities firm, the economy is vulnerable to shocks from high inflation, fluctuating exchange rates, and an uncertain economic outlook that are likely to have an effect on the economy this year.
FBC Securities said liquidity management was key as the country goes to polls in 42 days amid uncertainty around money supply and possible disruptions.
“The upcoming harmonised elections are set to take place in August this year, against the backdrop of persistent currency devaluation, rampant inflation, a local energy crisis and global economic shocks posing threat to the country’s economic performance.
“We believe liquidity management remains key to taming inflation and exchange rate movements. Without careful liquidity management, increased money supply may have a destabilising effect on the economy in H2,” FBC Securities said.
It continued: “Given ongoing efforts to tame inflation and arrest currency devaluation, the risk of destabilisation owing to increased government spending is a key consideration. It is therefore important to consider the possible impact of election spending on inflation and economic stability.
“The African Development Bank earlier this year highlighted elections as a risk to recovery and economic resilience in some countries, including Zimbabwe.
“Historically, there has been a trend of increased government expenditure in election years. In 2018, the country’s budget deficit more than doubled to 11.1% of GDP from an initial 5% forecast. This was due to a spike in election related expenditure, most notably, increased public sector salaries and purchase of farming inputs.”
The government now expects the economy to expand by 6% this year, up from initial projections of 3.8%, thanks to better agricultural output and increased access to electricity.
Despite the measures put in place over the course of this year, the Zimbabwe dollar lost 739% and 742% of its value on the parallel and official markets, respectively, between January and June of this year.
The Reserve Bank of Zimbabwe has reaffirmed its dedication to its strict monetary policy, which aims to restore and maintain the stability of the exchange rate and inflation.
But, FBC Securities warned: “Huge injections of liquidity into the economy may potentially undermine these efforts as there exists a strong correlation between money supply, exchange rate and inflation as evidenced by spikes in the depreciation of parallel market rates that have coincided with bulk payments by government to service providers.
Unless carefully managed, increased liquidity owing to increased government expenditure may have a destabilising effect on the local economy in the second half of the year, resulting in further devaluation of the currency and loss of value.”
Local operating conditions in the first half of the year were characterised by currency volatility, frequent power outages, and a strict monetary policy.
“Destabilisation of the local currency and persistent inflationary pressures remain pertinent,” FBC Securities said.
