LOCAL financial services firm, IH Securities has raised concern over how the $18 billion stimulus package will be funded considering that government has not been able to secure external funding.
BY TATIRA ZWINOIRA
Last month, Finance minister Mthuli Ncube wrote to international financial institutions (IFIs) asking for a bailout or debt relief package but got no positive response owing to the country’s low credit worthiness and failure to implement substantive political as well as economic reforms.
“The government has set aside $18 billion (US$720 million), circa 29% of this year’s national budget, as a stimulus package to support the economy,” said IH Securities, in its April 2020 monthly snapshot.
“We are yet to ascertain how the government intends to fund this package as it has been unable to receive debt relief packages from the International Monetary Fund (IMF) due to concerns over its credit worthiness owing to arrears still owed to the World Bank and African Development Bank.”
As a result of not being able to secure external funding, IH Securities predicts that government will likely print money to fund its stimulus package. “Going forward, the likely impact is money supply growth triggered by the proposed stimulus package, as we believe government is likely to print money in order to finance the stimulus package,” IH Securities said.
One of the consequences of increasing money supply is inflation.
According to economics, inflation can happen if money supply grows faster than the economic output under otherwise normal economic circumstances.
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Already, inflation has continued to surge upwards with March month-on-month inflation rate up to 26.59%, over the previous month, resulting in a year-on-year inflation rate of 676,39%, which is also higher than the February figures.
“Our view remains that month-on-month inflation will continue on an upward trend owing to trickle down effects from increases in retail consumer prices, increased electricity tariffs, unplanned costs of mitigating supply chain disruptions during the current global pandemic,” IH Securities said.
Driving inflation means the continued fall of the Zimbabwe dollar on the parallel market, currently US$1:$49, which is being used as the exchange rate in light of the fixed official rate of US$1:$25.
“The Bankers’ Association of Zimbabwe along with other business leaders has called for periodic devaluations of the pegged dollar rate to stabilise foreign exchange markets and better reflect the economy which struggles with foreign currency availability to match the levels of the exchange rate,” IH Securities said.
“Concerns arise from the gap between the interbank exchange rate and the parallel market rate and this deficit has caused arbitrage opportunities.”
IH Securities added: “In the current economic climate, we lean towards defensive sectors like food retail, food processing, pharmaceuticals and communications and technology. We also reiterate our belief that cash or near cash cover will be critical”.
