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Inflation, exchange rate volatility disrupt Finance minister’s party

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EXCHANGE rate volatility and resurgent inflation are spoiling the party for Zimbabwe’s Finance minister Mthuli Ncube who has not missed the slightest opportunity to trumpet his economic gains since he was appointed in 2018.

BERNARD MPOFU

Ncube says the economy and economic fundamentals have stabilised under his stewardship – he often brandishes his “budget surplus” and a series of purported economic reforms to underline that – and is now growing strongly with a Gross Domestic Product (GDP) of 7.8% growth in 2021, which is above the 3.4% average growth for Sub-Saharan Africa.

He also always boasts about enhancing revenue collection, containing expenditure and ensuring fiscal balance.

“However, towards the end of the year traces of volatility in the exchange rate and inflation have been visible. Nonetheless, authorities were aware of the causes of the volatility and have made the adjustments promptly,” Ncube said in an economic outlook presentation at a symposium last week.

The Zimbabwe dollar has been under pressure and depreciating at an alarming rate to an average of US$1:ZW$300 on the parallel market, while the official exchange rate is US$1:ZW$155.

Zimbabwe’s annual consumer price inflation climbed to 72.7% in March, from 66.1% in the prior month, reaching its highest point since last June. Main upward pressure came from transportation, at 84.2% versus 66.6% in February, and food (75.1% versus 69.3%), as rising fuel and bread prices triggered a wave of price hikes of basic commodities across the economy.

Inflation has been gradually rising since September last year, with monetary authorities attributing this to the parallel exchange rate’s pass-through effect on domestic inflation witnessed toward the end of last year. On a monthly basis, consumer prices advanced 6.6%, following a 7% rise in the previous month.

The Reserve Bank of Zimbabwe’s Monetary Policy Committee met on 1 April to consider developments on the domestic and international macro-economic environment fronts as well as the impact of global geopolitical factors on the economy.

But Ncube is always optimistic, boasting about what he views to be progress.

“Economic performance in 2021 witnessed a great improvement, with GDP registering a growth of 7.8%, which is above the 3.4% average growth for Sub-Saharan Africa,” he said.

“This was as a result of good 2020/21 agriculture season, higher international mineral commodity prices, a stable macro-economic environment, improved access to foreign currency through the foreign currency auction system, increased industry capacity utilisation and better management of Covid-19 pandemic.

“We also witnessed strong performance in the external sector driven by exports and remittances.  The country exported goods worth US$4.3 billion during the first three quarters of 2021 compared to US$2.9 billion exported in 2020 same period.

“The country’s external sector fundamentals continued to show resilience as evidenced by strong current account performance in 2021. Preliminary estimates point to a current account surplus position of US$926.8 million in 2021, representing a 36.6% increase from US$678.3 million recorded in 2020.

“Stock of domestic debt as at end December 2021 amounted to ZW$32.6 billion, an increase from ZW$16.7 billion as at end December 2020 and a decrease in terms of share of GDP, 1.1% in 2021 from 1.4% in 2020.

“In terms of public finances, revenue collections amounted to ZW$481 billion against expenditures of ZW$545 billion and the resulting budget deficit of ZW$64.1 billion, resulting in a budget deficit of -2.1% of GDP, above the anticipated -1.3%.”

He said capacity utilisation for 2021 surged to 66% from 47% recorded in 2020.

Drinks, tobacco and beverages subsector recorded the highest capacity utilisation value of 79% in 2021.

Other subsectors such as foodstuffs and chemical and petroleum products recorded more than 20% increase from 2020.

This was largely driven by fairly stable macro-economic environment, localisation of value chains (import substitution), stable inflation, continued foreign currency auction system and notable investments across manufacturing subsectors, he said.

But inflation and exchange rate volatility are destabilising Ncube’s progress.

“Several policy measures have also been adopted to stabilise the currency and lower inflation, including, among other things, fiscal consolidation and restrained reserve money growth,” he said.

“Government plans to issue a US dollar-denominated bond on the local stock exchange (Victoria Falls which should help develop the yield curve). Government has commenced payments  under the Global Compensation Deed, while the interim target for making half of the US$3.5 billion total has been extended to July 2022,” he said.

“The Financial Action Task Force removed Zimbabwe from the list of countries that are considered to be insufficiently compliant in implementing Anti-Money Laundering and Counter Financing of Terrorism Standards on 4 March, 2022, following the successful implementation of the FATF Action Plan.”

Ncube also says he has introduced economic reforms: Re-introduction of local currency, introduction of the Dutch Forex Auction, removal of fuel and electricity subsidies, operationalising Zimbabwe Investment and Development Agency, implementation of Special Economic Zones, spending within budget, curbing speculative borrowing, tightening reserve money at 5% for the quarter ending June 2022 and liberalising the foreign exchange market.

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