‘Treasury should up USD threshold for contractors’

ZIMBABWE’S Treasury should increase the United States dollar threshold of payments to contractors and public service providers to reduce pressure on the parallel market foreign exchange rate, economic analysts say.

The market watchers also said the Reserve Bank of Zimbabwe (RBZ) should consider scrapping the 25 percent export retention completely, a form of money printing driving liquidity growth in the economy.

The public sector has often been blamed for stoking money supply growth by paying huge sums of the Zimbabwean dollar to companies carrying out various key infrastructure projects.

Companies paid by the Treasury for work or supplies to the Government offload huge sums of money on the parallel market to buy the greenback in order to store value or secure forex for imports.

The pressure to hedge the Zimbabwe dollar earnings against depreciation has always been cited as one of the major factors fuelling the instability of the domestic currency.

Economics principles dictate that high money supply ultimately leads to high inflation as more money chases a limited amount of goods and services.

In the case of Zimbabwe, the high supply of Zimbabwe dollar liquidity has been blamed for driving the foreign exchange rate against the US dollar.

The weighted average exchange rate stood at $1 888/US$1 as of yesterday, while the parallel market rate has hovered around a steep $3 500/US$1, widening the average gap between the official and the parallel market exchange rate by nearly 100 percent.

Economist, Professor Gift Mugano said the Government should exercise restraint on money printing to curtail pressure on the exchange rate.

He, however, lauded the central bank for introducing 100 percent retention of domestic foreign currency earnings, from the 15 percent surrender requirements, a move he said demonstrated efforts to reduce the money supply.

“It is not a secret that money supply is increasing from the central bank, more work is needed on the liquidity management side, on the other hand, the Ministry of Finance (and Economic Development) needs to consider upping the threshold (of US dollars) they are using to pay service providers to reduce pressure on the parallel market.

“We are not done yet in terms of managing money supply. I advise the RBZ to scrap off 25 percent on export retention because we are nearly dollarised so no need to retain the 25 percent and print money on that,” said Professor Mugano.

He said the obtaining price hikes, which are being blamed on business, were a symptom of excessive money printing, adding that he had long professed the current instability on the basis of excess liquidity from the budget.

“When the rate goes up, prices go up and you blame business, but it is all a result of excessive liquidity.

“You are aware that about 13 companies were blacklisted last year, they were not retailers or manufacturers, but contractors, these are the guys that are pushing the rate.

“Manufacturers and retailers just become the victim of the exchange rate and it is passed on and the consumer suffers.”

According to a local think tank, Zimbabwe Coalition on Debt and Development (Zimcodd), the government should contain the money-printing craze to rescue the free-falling local currency.

“The rate at which the RBZ is injecting money into the economy is far exceeding the rate of growth of economic activity in the real sector. The money-printing pressure is coming from rising fiscal spending and infrastructure projects.

“Also, by selling forex (at the auction market) and gold coins in fragile Zimbabwe dollar at an overvalued official interbank rate, authorities are making huge losses as they are encouraging distortionary arbitrage activities,” said ZimCodd in its recent periodic review.