Economic, inflation, and currency developments presented by Professor Mthuli Ncube, Minister of Finance and Economic Development at the Polad currency indaba at the Rainbow Towers on the 16th of June 2022
The Government is working tirelessly to ensure economic growth and stability. As you may be aware we are faced with a challenging global crisis, emanating from the global tensions which erupted in February 2022.
This is in addition to our own historical challenges of sustained periods of economic imbalances, in particular, the twin deficits of fiscal and current account.
Global Economic Developments
The IMF which originally projected global economic growth at 5,9 percent in 2021 to 4,4 percent in 2022 mainly based on the assumption of successful global vaccination programmes has since revised the 2022 global economic growth projection downwards to 3,6 percent in April 2022.
The downward revision was mainly on account of the global tensions, which escalated the disruption in global supply chains.
Consequently, energy prices have jumped sharply, since Russia is a supplier of the world’s natural gas (19 percent) and oil (11 percent). Brent crude oil prices have increased to as high as US$129/barrel from around US$77/barrel in December 2021, similarly to natural gas and fertiliser prices.
Inevitably, this situation has caused imported inflationary pressures on the local economy. For example, domestic fuel prices have also been increasing reaching a peak of US$1,75 per litre. Wheat prices also surged by nearly 24,5 percent from US$390,50/mt to US$533,2/mt in March 2022 alone, which is a record high in 14 years.
Further, since we import the bulk of our fertilisers, the rise in fertiliser prices has had devastating effects on agriculture’s cost of production output and ultimately food prices. On a positive note for Zimbabwe, international precious mineral prices have been firming and this might increase revenues from mineral export proceeds.
Domestic Economic Developments
Economic performance during the first quarter of 2022 reaffirms the positive growth trajectory as projected in the 2022 National Budget. The economic growth to end year 2022 is, however, now projected to slow down to 4,6 percent from the 5,5 percent initially projected.
The downward revision is attributed to unfavourable 2021/22 rainfall season compounded by continued depreciation of the local currency and rising inflation. The impact of geopolitical developments brought by the Russia/Ukraine conflict is also expected to continue weakening the growth potential of the economy through imported inflation.
Notwithstanding, the adverse global and domestic developments, the positive economic growth of 4,6 percent in 2022 is on account of increased activity in the mining (8,2 percent), construction (13,8 percent), accommodation and food services sectors (28,8 percent).
This growth projection is underpinned by the multiple currency regime and favourable commodity prices that will support mining production and export receipts.
The economy has been experiencing sustained inflationary pressures especially during first half of 2022. Headline inflation steadily accelerated from 60,7 percent in January to 131,7 percent in May 2022. On a monthly basis, headline inflation increased to double digit in April and was sustained in May at 15,5 percent and 21 percent, respectively.
This has been driven partly by external factors, particularly Russia-Ukraine conflict, which impacted negatively on import prices of raw materials, food and liquid fuels.
On the domestic front, adverse inflationary pressures such as forward pricing and sustained depreciation of the exchange rate worsened by widening premium were the main drivers of inflation. Despite the recent policy measures, inflation risks remain elevated. The major driving force being high growth in broad money supply. The quarter-on-quarter reserve money growth targets were progressively reduced from 22,5 percent to 10 percent in the fourth quarter of 2021.
The target was further reduced to 7,5 percent during the first quarter of 2022, and then to zero in May 2022. Despite the containment of reserve money growth within target, annual broad money continues to increase at an increasing rate.
The growth in broad money reflects an expansion in local currency transferable deposits and foreign currency deposits. The local currency, however, is the one reflecting a huge growth driven mainly by domestic credit.
On an annual basis, net domestic credit increased by 242,73 percent in March 2022 to $425,90 billion, reflecting an expansion in net credit to private sector.
The Government continues to leave within its means, with expenditure having been contained with the resource envelop. Revenue collections for the period January to March 2022 amounted to $181,2 billion against a target of $169,5 billion.
Expenditures for the same period amounted to $174 billion against a target of $342 billion. Resultantly a cash budget surplus of $6,5 billion was realised during the first quarter of 2022.
Reforms taken in response to shocks
In response to the current geopolitical crisis and internal shocks, the Government together with the Central Bank adopted several policy measures to stabilise the currency and lower inflation, including, among other things, fiscal consolidation and restrained reserve money growth. Policies that are currently in place include:
- Reduction in strategic reserve levy on domestic fuel price from 12,7 US cents/litre to current levels of 8,7 US cents/litre for the whole year of 2022 beginning January 2022 through SI 31 of 2022 and released some strategic fuel stocks.
- Fiscal consolidation guided by the principle of cash budgeting without recourse to Central Bank overdraft.
- Continuation of partial dollarisation (dual currency system)
- Coordination of liquidity injection into the economy by the Liquidity Management Committee;
- Treasury continues to pay in foreign currency for expenditures with foreign components to reduce activity on the parallel market;
- Tightening monetary policy by reducing the quarterly reserve money growth target from 5 percent per quarter to 0;
- Treasury together with the GMB improved their management of grain procurement as they remain one of the drivers of parallel exchange rate.
- All mining royalties are now payable in Zimbabwe Dollars up to a limit of 50 percent of royalties due;
- All duties and taxes on the importation of designated motor vehicles are now payable in Zimbabwe dollars up-to a 50 percent of duties and taxes payable; and
- All domestic taxes due from exporters on their export receipt are now payable in both foreign and local currency in direct proportion to the approved export retention levels.
- Restoration of lost value on bank deposits by compensating individuals who had funds in their bank accounts of US$10 000 and below as of the end of January 2019.
- Clearance of foreign auction backlog by the end of May 2022 and going forward, the Reserve Bank will ensure that all foreign currency allotments are settled timeously and that the auction system only allots foreign currency that is available.
- Reviewing the willing-buyer willing-seller trading limit to a maximum of US$5 000 per day with a limit of US$20 000 per week per individual.
- Introduced a differential taxation system for the Intermediate Money Transfer Tax (IMTT). Two percent would continue to apply to local currency transfers; and all domestic foreign currency transfers to attract the Intermediate Money Transfer Tax (IMTT)
- Review Foreign Currency Cash Withdrawal Levy for amounts above US$1 000 from the current 5 cents per transaction to 2%.
- Settlement of foreign currency tax obligations in local currency at willing-buyer willing-seller exchange rate.
- Liquidation of the surrender portion of export proceeds to be settled at the willing-buyer willing-seller exchange rate.
- Suspension of Third-Party Country payment on Foreign Payments
- Suspension of lending by banks
- Fostering discipline in the Stock Market by prohibiting Inter account transfers between client sub-account with a broker and third-party funding of client subaccounts. Review of Capital Gains Tax for shares held for a period not exceeding 180 days to 40 percent in line with the individual maximum marginal tax rate for Pay as You Earn (PAYE).
- Enhancing market discipline through reviewing Civil penalties upward and instituting appropriate legal changes to elevate some of the financial crimes to become criminal offenses which automatically attracts jail sentence.
- Opening up of the Public Transport System
- Duty free importation of basic commodities in order to cap price increases, through competition. These basic commodities include rice, flour, cooling oil, margarine, salt, sugar, maize meal, milk powder, infants milk formula, tea, petroleum jelly, toothpaste, bath soap, laundry bar and washing powder.
- Payment to farmers of $75 000 plus US$90 per tonne, to ensure improved food supply.
Further, Government plans to issue a USD 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 has been extended to July 2022. The Financial Action Task Force (FATF) removed Zimbabwe from the list of countries that are considered to be insufficiently compliant in implementing Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) Standards on 4 March 2022, following the successful implementation of the FATF Action Plan.
COVID-19
Zimbabwe, together with the global community has been under attack from the Covid-19 pandemic since March 20, 2020 which posed several challenges retarding the full attainment of the desired economic outcomes. To mitigate the impact of the disease, the Government has spent over US$122 million on the procurement of 22,4 million doses, enough to vaccinate every adult. Mobilisation of additional resources is underway to ensure that the target population is fully vaccinated, and this will continue until 2023.
Government also appreciates the continued support coming from Development Partners to complement efforts in addressing the Covid-19 pandemic. To date, the Government has received US$150 489 560 from Development Partners, which has been spent on Covid-19-related expenditures. Zimbabwe also received US$961 million in SDR allocation from the IMF.
It is our sincere hope that the global tensions will be resolved in the near future and the prices would normalise and our business community and the general populace people will act responsibly in relation to prices and exchange rate movements. In the meantime, we are monitoring the developments, if the situation worsens, Government would find other areas to intervene to cushion against price increases and exchange rate depreciation.