Finance Minister, Mthuli Ncube, has warned that persistent inflation will force the government to pursue an aggressive path to further tighten monetary and fiscal policies to cool down an already overheated economy.
Zimbabwe is currently experiencing the sharpest and most prolonged resurgence of inflation since July 2020 when it peaked to 837%.
It went down to about 60.7% in January this year. However, it rose to 285% in August this year. Ncube has projected annual inflation to hit two-digit levels next year.
The Treasury chief believes further tightening of the monetary and fiscal policies will slow down the increasingly evident inflation momentum and promote economic stability in the short to long term.
Ncube told Business Times that the door was definitely not closed yet, vowing that the government will get on top of runaway annual inflation.
“Macroeconomic stability is going to remain a priority for the government through exercising fiscal restraint. On its part, the central bank is expected to keep liquidity on check through various instruments at its disposal,” Ncube said.
“We also expect cooperation from the private sector and other stakeholders by exercising restraint, especially from desisting from forward pricing.”
The economy has been battling exchange rate and currency volatilities.
This week, the Zimbabwe dollar was trading at ZWL$613.37:US$1 on the official market, while on the parallel market, it was trading at ZWL$750: US$1. The government believes it will converge in the coming weeks.
The government recently introduced several policy measures in response to domestic currency depreciation and inflationary pressures.
In addition to tightening monetary stance, the Reserve Bank of Zimbabwe increased interest rates to 200% from 80% to curb speculative borrowing.
The central bank also introduced gold coins to mop up excess liquidity in the market.
On the other hand, the Treasury has been battling supply shocks and was forced to review suppliers’ contracts and procurement processes by the institution of value for money audits to prevent forward pricing and speculative behaviour also helped to contain the exchange rates.
Since the introduction of the gold coins, the authorities have mopped out close to ZWL$9bn from over 8000 gold coins and this has left the market with limited local currency.
“We should therefore stay the course and foster long term stability which is necessary for sustained growth,” Ncube said.
Crystal Candy general manager Jimmy Psillos said policy tightening, especially the liquidity squeeze, has brought stability and the country has a golden opportunity to achieve that.
“The key lessons we have learnt in the past few weeks is that we have the power to control inflation without any statutory instruments.
“We can consolidate our gains if we keep liquidity super tight, properly fund the RBZ for all operations including surrender and allow the WBWS market to actually be “willing seller” and “willing buyer,” Psillos said at the Confederation of Zimbabwe Industries congress held recently.
He said two aspects of maintaining discipline include extended periods of high interest rates and very tight liquidity.
“These will lead to sustained convergence of the exchange rate and another scenario could be backing the currency with reserves and ending adverse expectations in the economy,” he said.
Psillos said if inflation and exchange rates were stable this would allow the central bank to lower interest rates.
He said high inflation remains public enemy number one and can be controlled if the government tightens the lid on money supply.
“Inflation hurts the most vulnerable in society, leaves scars on society for decades and causes people to pay a price not worth paying,” Psillos said.
“Despite tight monetary and fiscal stances there is still money creation for the funding of the surrender and the auction backlog, loans to state enterprises, payments to the government contractors and private sector credit creation.”
Economist Gift Mugano said there should be a political will for the value money concept to sustain the stability achieved so far. Ncube said the government had adopted the value for money process in which government officials that play a midwife role in inflating prices will be dealt with while suppliers will be blacklisted and excluded from future contracts.
“We are getting into an election period; naturally the government has a tendency to become weaker as far as these principles for value for money are concerned,” Mugano said.
“For how long should they keep the liquidity tight as the people who have the tenders for everything in the country means there is corruption and holes in the tendering system There are very few suppliers, the same people you see in construction you see them in agriculture and consumables hence corruption remains a threat to this stability.
Added Mugano: “If we can win against corruption, yes we can win the stability issue.”