ON THE CLIFF’S EDGE
Is Zimbabwe's history repeating itself?
While evidence has emerged that Robert Mugabe’s government is printing an oversupply of money, the central bank says exports will save the day. The IMF believes the current deficit financing model is unsustainable
Is Zimbabwe’s government creating money — electronic and physical — to escape a burgeoning fiscal deficit?
A clear confirmation of money creation could not have come at a more opportune time.
The newly appointed International Monetary Fund (IMF) mission chief for Zimbabwe, Gene Leon, told the Financial Mail last month that between December 2015 and May 2017, Zimbabwe’s money supply jumped dramatically, thanks to an overdraft created by the central bank to allow government to finance a fiscal deficit.
Finance minister Patrick Chinamasa says Zimbabwe had a US$900m fiscal deficit in the 2016 financial year. He says this was financed through treasury bills issuance.
Leon said government debt is now US$4bn, up from $2bn last year, as a result of the issuance of treasury bills.
Banks’ balance sheets are awash with government paper.
"The increase in money supply is created by the overdraft from the central bank to government that is used to finance the large fiscal deficit," he said. "The ongoing deficit financing [vehicles], particularly the credit from the central bank, are unsustainable and have significant potential for generating inflationary pressures."
Zimbabwe’s annual broad money supply — a measure of the money in circulation, which includes physical currency and demand deposits — increased by 20% in March to $5.88bn. But Reserve Bank of Zimbabwe governor John Mangudya is still playing hide and seek with some of the facts. Late last month, he claimed to have issued bond notes amounting to $160m to finance incentives to exporters. A further $15m was outstanding, he said. And last month, the central bank said it would put an additional $60m worth of bond notes into circulation.
However, this takes the total number of bond notes in circulation above the $200m value the bank claims is backed by an African Export-Import Bank facility. This stokes fears that Mangudya is running the printing press beyond the $200m facility, much like his predecessor, Gideon Gono, whose actions sparked hyperinflation and eventually led to the collapse of Zimbabwe’s currency.
The strange movement of money does not stop there. Another $900m was parcelled to state enterprises as working capital, Chinamasa said in his recent mid-term fiscal policy review statement.
Should bond notes lose further value through discounting, inflation could rise faster, said Leon. Prices of some goods have already risen by more than 20% since the introduction of bond notes late last year. "The risk is that if inflation accelerates, the discounts between the physical US dollars and the quasi-currencies widen as the creation of money exacerbates the cash crisis," he said. "An associated issue is the fact that inflation affects the poor disproportionately."
In fact, inflation is likely to close the year at about 7%, after breaking into positive territory for the first time in two years in February. The value of bond notes on the black market has suffered. Cash dealers, speaking on condition of anonymity, say demand for cash is strong.
But deputy central bank governor Kupukile Mlambo says cash problems in the economy can be solved if the country ups its exports. To encourage this, commercial banks have invited entrepreneurs to apply for finance for export-generating projects.
Mlambo has spoken in support of this. "The solution to the cash crisis is not from printing any money because we can’t print [US dollars]. The solution is in us exporting more. That is where our foreign currency comes from. We need to understand that what we are calling a cash crisis is a scarcity of foreign currency."
The IMF expects discounting of the US dollar and bond notes to worsen.
This week cash dealers were quoting rates as high as 25%-28% for cash rates, from 20% quoted last month.
The IMF said after its recent visit: "Financing constraints and declining confidence are likely to result in stagnant economic activity in the medium term. Inflation will likely increase as monetary financing of the deficit raises the premium on US dollars against the quasi-currency instruments.
"Political polarisation is undermining the prospects for fiscal consolidation and reform, imperilling the financial sector and external stability."