Someone creating hot money — industry
WITH Zimbabwe’s economy in a tailspin again, roiled by the rapidly depreciating Zimbabwe dollar, industrial players believe only one factor is responsible; creation of “hot money”.
“Hot money” entails speculative capital flows, which move quickly in and out of markets, as economic agents seek high profit, consequently leading to market instability.
Market analysts believe that large bullet payments to public contractors and suppliers to the Government are some of the sources of the excess liquidity that is exerting pressure on the local currency.
This happens when people seek a reliable and safer store of value, which in Zimbabwe’s case happens to be US dollars.
The domestic currency has also suffered immensely from warped confidence due to bouts of hyperinflation that have wiped out savings since 2009.
Zimbabwe’s central bank says the excessive demand for US dollars in the country is driven by two key factors; the need to store value in a volatile environment and forex requirements for imports.
Authorities argue though, that the behaviour of the exchange rate is out of sync with fundamentals, as the domestic unit keeps plunging against the greenback despite strong forex inflows.
Depreciation has seen the Zimbabwe dollar, reintroduced at $2,5/US$1 in February 2019, after a hyperinflation-induced hiatus, tumbling to $1 400/US$1 on the official interbank market and changing hands at roughly more than $3000/US$1 on the parallel market.
Because pricing in Zimbabwe follows changes in the exchange rate, the continuous depreciation of the local currency has caused distortions that have pushed prices higher.
This has seen Zimbabwe’s monthly inflation rate responding in tandem in April 2023, surging by 2,4 percent in April from 0,1 percent in March.
However, on an annualised basis, the rate slowed to 75,2 percent from 87,6 percent previously.
But it is important to note that the decline in the annual inflation rate for April largely reflects the positive effect of a high base after the rate peaked at 285 percent last year.
Volatility and the declining value of the Zimbabwe dollar have rekindled memories of the recent past, when annual inflation peaked at a post-dollarisation high of 837,5 percent in July 2020.
Zimbabwe’s largest industrial lobby group, the Confederation of Zimbabwe Industries (CZI), president Kurai Matsheza, contends that “hot money” is being created somewhere.
The question that begs an answer, Matsheza says, is who is responsible?
“Our suspicion is that it (volatility) can only come from one source; there is (too much Zimbabwe dollar) money chasing the US dollar. As businesses, we do not create money.
“So, who is creating this money? We do not know, but we are engaging the authorities to say guys, let’s identify the cause. But it can only be one way; people have money that is creating this run on the exchange rate,” he said.
He said it was baffling that the rate continued to depreciate despite Zimbabwe generating significant inflows of foreign currency. The Southern African country received US$11,6 billion in foreign currency inflows in 2022.
“Some projections are saying we are going to hit US$13 billion this year. So, on the (forex) generation side, there seems not to be a problem. So, somebody is creating money that is chasing the US dollars,” Matsheza said.
“We are creating hot money nobody wants to hold that Zimbabwe dollar (for long). As soon as someone gets the (Zimbabwe dollar) money, they want to (quickly) pass it on”.
CZI has since proposed that given the strong demand for gold-backed digital gold tokens, authorities should consider using the bullion securities to pay public contractors and suppliers to the Government.
On its part, Treasury insists it has not printed money since assuming the reins nearly five years ago.
On an annual basis, the local currency component of broad money increased by 322.47 percent for the month of March 2023.
Secretary for Finance and Economic Development George Guvamatanga, said the pressure on the exchange rate appeared to come from the velocity of money once it left the Treasury’s purse.
“I will categorically state that since I came into this office, I have never printed money. Since I came into this office, I have never borrowed even a dollar from the Reserve Bank.
“Despite the fact that within the Finance Act, we put a provision that (Treasury) can borrow up to 5 percent of my total budget, but I had an opportunity last year to borrow. I was in a tight situation and needed temporary accommodation for 24 hours from the Reserve Bank.
“My team here refused me to borrow, and that’s how disciplined we have been, so when I pay contractors, that is why we monitor M3 and Reserve Money . . . , there is no money printing.
“What simply happens is that what increases is the velocity of money. The velocity when I have the money here at Treasury, and the velocity when in your account . . . it is different,” he said.
Guvamatanga said even salaries for Government workers, which constitute about half the $4,2 trillion national budget, cause movements in the exchange rate.
He said while payments to contractors and suppliers to the Government increased the velocity of money, this was how it worked in other “normal economies”.
The velocity of money is a measurement of the rate at which money
is exchanged in an economy. It is the number of times that money moves from one entity to another. The velocity of money also refers to how much a unit of currency is used in a given period of time.
“As long as I pay from revenue generated from taxes and I am not borrowing from the Reserve Bank of Zimbabwe that should never be an issue at all, because that does not increase the money supply,” Guvamatanga said.
Earlier, economist, Professor Gift Mugano, said the challenges besetting the economy stemmed from using a short-term instrument, the national budget, to finance longterm infrastructure projects like roads and dams.
“The budget, being a big budget of $4,2 trillion, my argument (has been) it would push the (exchange) rates up because you now have a significant share of liquidity coming from the Government when you pay contractors and service providers,” he said.
“When talking about Zimbabwe dollar liquidity, we have contractors and service providers, the testimony of that was when the Government black listed about 13 companies.
“It is inevitable that they would participate in the black market. Last year we had quite a significant number of companies blacklisted by the Government, it is testimony that they are participating in the black market.
“Why is it like that; it’s because anything we are doing in Zimbabwe there is a significant share or component of foreign currency, so they need to get that foreign currency, whether its road construction or what, anything you see.
“But it is critical to say in order to make some profits, they (contractors) need to preserve value; so you would see that beyond buying foreign currency, you cannot touch (invest in) property they very expensive because there are people with a lot of money buying properties, particularly those (cash rich contractors/service providers) afraid of being blacklisted.
“The other challenge pushing the exchange rates higher are the civil servants, who are getting a component of their salaries in Zimbabwe dollars, which is quite significant. This time around, civil servants are getting about $2,2 trillion of the national budget, which is 52 percent.
“The civil servants are also facing a market which is under dollarisation pressures, so the Zimbabwe dollar they are getting they also want to change it into US dollars to preserve value, so every month they are in the market, and that also creates pressure on the rate,” he said.