New Zimbabwe.com

Budget deficit could trigger uncontrolled inflation

By Alois Vinga


THE unavailability of revenue sources to fund government’s deficit could trigger uncontrolled inflation, the Confederation of Zimbabwe Industries (CZI) has warned.

CZI chief economist, Tafadzwa Bandama told captains of industry early this week that the recent midterm budget review had failed to address the issue of how accrued fiscal deficits will be dealt with.

“The country’s budget deficit is about $4,6 billion and this is emanating from total expenditure of $18.6 billion against revenues of $14 billion. So how is this budget going to be financed because according to the mid-term policy review, bank financing is going to be around $1.2 billion, non-bank finance will be at $4.6 billion while net foreign financing will be minus $1.2 billion,” Bandama said.

She noted that an analysis of the deposit base shows that the money available for financing the budget deficit gap is about $1.8 billion which are the RTGS$ balances currently held in the economy arguing this was not enough to sustain and finance the budget deficit.

Bandama said that this presents the risk of increasing money supply as was the norm in the old days where direct printing was used to finance the budget deficit.

She raised concerns that money supply could also increase through subsidies and from government suppliers of goods and services who may take a position by over-invoicing knowing that they are going to receive treasury bills.

“This means that the sequencing of policy implementation is better especially by raising revenue first and then spend what we have because monetary financing of the budget deficit is counterproductive. It increases money supply in the economy.

“Any liquidity injection into the economy is going to have a disproportionate depreciation on the exchange rate. You acknowledged two minutes ago that the Gross Domestic Product will decline by almost 2 % which means that the budget deficit can even grow wider resulting in an uncontrollable exchange rate and rising inflation,” Bandama told delegates who included Finance Minister Mthuli Ncube.

She called for stream lining of government ministries to emulate countries like Botswana which have less than ten ministries against Zimbabwe’s 22.

The country’s inflation has risen to 176 % and the recent fuel hikes are likely to push it further upwards.