Halt in government payments could harm economy
TREASURY’S decision to halt payments to contractors after accusing them of fuelling parallel market foreign exchange trade and inflation will have a trade-off effect that will slow down economic growth, a new report has shown.
Public procurement is central to government service delivery. It involves large sums of money.
These services, according to insiders, gobbled up ZW$50 billion a month on the purchase of motor vehicles, information communication technology systems, fuel, furniture, road and dam construction. They are usually paid through taxpayers’ funds. Sometimes these are financed by loans, donor funds grants but due to lack of funding because of failure to repay debts and arrears as well as financial restrictions (targeted sanctions), foreign funding is limited.
While the discrepancy between the official and parallel market rates has narrowed following the stringent measures, business is already feeling heat. Their working capital positions have been affected and this may soon prompt authorities to lift the suspension.
Desperate to defending the currency against all odds, authorities announced a cocktail of measures which have relatively tamed parallel market activity.
The introduction of the gold coin and the halting of payments by Treasury as measures to curb inflation and the exchange rate seem to deliver the intended objectives. Experts however say this will come at a price.
Since the time the coins were introduced in July 2022, the uptake has been huge and the instrument remains oversubscribed every week, mopping up excess liquidity from the market.
As of 26 August 2022, a cumulative total of 6 799 gold coins had been sold out and 95% of the gold coins were sold in local currency, according to the press statement released by the RBZ.
In early August 2022, Treasury took a step further in reducing the velocity of the local currency by suspending payments to its suppliers and contractors.
These measures saw the headline year-on-year inflation increase at a decreasing rate compared to prior months to 285.01% in August from 256.94% in July while headline month-on-month dropped significantly by 13.18% to 12.38% during the same period.
In addition, the parallel rate remained stable around ZW$750:US$1 while the auction rate depreciated faster, closing on the premium gap to end the month of August at around 50%.
Akribos Research Services in its monthly research note for August said the current macro-economic stabilisation will be short term.
“We believe that the Treasury will likely continue to delay releasing payments to its suppliers and contractors to achieve convergence between the auction and parallel rates,” reads the report.
“However, on the other hand, despite achieving stability, we expect the results to be short-lived. The temporary suspension of payments to suppliers and contractors has a trade-off effect on GDP as it slows the pace of ongoing projects in the agriculture, mining, and infrastructure development sectors.
“We expect the Treasury to lift the ban in the near term as it implements the 2022 supplementary budget (ZW$929 bn). Due to limited access to adequate forex through formal channels, most suppliers and contractors will continue to resort to the parallel market for the importation of raw materials. For raw materials that can be locally sourced, too much money will end up chasing too few goods. This will give inflation more legs to run and the parallel rate to further depreciate.”
Akribos also says while gold coins have played a role in mopping up excess liquidity, the new asset class may soon be traded on a secondary market.
“On the other hand, if the worst-case scenario materialises of investors failing to redeem the gold coins at the prevailing international gold price through formal channels at the end of the vested period, we expect the gold coins to be discounted in the secondary market and this may result in loss of value, the report reads.
“When this happens, investors which seek to continue to hedge against inflation and exchange rate depreciation will likely shift their attention back to the US$ as a store of value and this process will see the further devaluation of the ZWL$. Against this background, we, therefore, maintain our view that inflation is likely to end the year above 400% while the parallel rate hovers between the lower and upper bound of ZW$1 200-ZW$1 500 against the US$.”