‘We have fuelled the black market’

FINANCE minister Mthuli Ncube says the emergence of the informal foreign exchange market has been driven by money supply growth that is not backed by United States dollar deposits.
He said this scenario has been brought about by government’s unrestrained expenditure. Since 2016, parallel exchange rate premiums for the bonds notes and real time gross settlement (RTGS) balances have gradually risen as money supply has ballooned largely as a result of money creation to finance government’s budget deficit through domestic credit.
“The parallel exchange rate premiums have been on the rise, particularly from 2018, driven mostly by shortage of foreign currency against rising money supply that is not backed by US dollar cash,” the minister said in his pre-budget paper last month.
“This has given rise to speculative demand, as well as induced demand for US dollars as an asset. The eventual pass-through effect of rising exchange premiums has been filtered into sudden price increases, particularly on goods.
“Assuming non-corrective measures, the parallel market will worsen and feed into inflationary pressures,” he added.
According to the central bank, money supply grew by 106,05 percent between January 2016 and August 2018, from $4,75 billion to $9,8 billion.
Parallel market rates have grown from levels of around 10 percent in 2016 to 400 percent after government separated foreign currency accounts (FCAs) into two categories, namely nostro FCAs and RTGS FCAs.
Zimbabwe Economics Society president, Lovemore Kadenge, shared the minister’s opinion.
He said the currency crisis is a result of widening fiscal deficit that is being financed through domestic borrowing.
“This has resulted in an increase in aggregate demand not matched by aggregate supply. The end result has been inflation and widening black market premium.
“We need to put a rein on government domestic borrowings. We must eat what we kill,” he told The Financial Gazette last week.
The cumulative budget deficit for the period January to June 2018 stood at $1,21 billion, against a cumulative target to June of $388,7 million. Treasury said the huge deficit was a result of mainly “unbudgeted expenditures” relating to support towards the controversial agriculture input support schemes as well the wage bill, of which $500 million is expected to go towards the pre-election review of salaries, alone.
Gift Mugano, another economist, said the currency crisis could only be resolved by closing the gap between the supply of money and hard cash deposits.
“There is need for the country to get fresh capital through lines of credit and Treasury has been making efforts to get such funding,” Mugano told this publication thi