Zimbabwe will have an expansionary fiscal policy this year which will force monetary authorities to be accommodative to finance rising government expenditure amid indications expenditure will exceed the budgeted ZWL$64bn, a leading brokerage firm has said.
“Even before the start of the fiscal year (Jan 1, 2020), the authorities had announced the re-introduction of grain subsidies, which were abolished in the November budget, as well as subsidies for seven other food items. Transport subsidies have been increased, while upward pressure on salaries remains imminent,” Invictus Securities said in a December monthly market update and economic outlook report.
It warned that the budget deficit will widen this year to more than ZWL$5bn with government struggling to borrow from the domestic market. Government raised ZWL$794m out of the ZWL$1.77bn it would have raised from the auction of Treasury Bills in the latter half of the year.
“This means that not only did the government fail to raise the budgeted Z$1.96 billion in domestic borrowing, but because the deficit was Z$1.3 billion above budget, it was left with a Z$2.5 billion funding gap. This is likely to widen in 2020,” Invictus said.
It said Treasury will also have to find a minimum of another Z$10 billion to finance loan repayments and capital spending that was not provided for in then budget.
Some of this, Invictus said, will have to be funded by central bank credit creation while the RBZ has already promised to increase the note issue to 10% or 12% of money supply. In September, the note issue was Z$800m or 3.4% of money supply, meaning that the authorities will need to print some $2bn of new notes to meet its 10% target, it said.
“This allied with triple-digit inflation, and increased government and private sector borrowing will ensure that money supply doubles during 2020.
Despite this, the authorities will maintain their negative real interest rate policy in order to avoid the build-up of nonperforming loans in the banks, while also pressuring banks to make soft loans to distressed businesses,” Invictus said.
In its third meeting in November, the Monetary Policy Committee of the Reserve Bank of Zimbabwe warned that the 2020 National Budget had a “potential expansionary impact on money supply, which limits the scope for tightening of monetary as required under the bank’s disinflation programme”.