When Zimbabwe announced an $18 billion stimulus package amongst its COVID-19 pandemic measures the big question was how it would be funded. Multiple times Finance Minister Professor Mthuli Ncube could only answer that they were looking for funding and working with partners. This was in the midst of revelations that the nation had written to international financial institutions asking for assistance. A plea which had gone unanswered until the World Bank intervened with a fund largely repurposed from Cyclone Idai relief funds. Through his twitter account, yesterday Finance Minister confirmed that the programme would be funded through quantitative easing.
The revelation was not so much of a surprise. If you’ve been paying attention to Zimbabwe’s economy the writing has been on the wall. A look at the uncontrolled money supply growth in Zimbabwe over the last couple of years clearly shows that they have been introducing money into the market. While it is referred to as printing money the exercise also refers to electronic money which Zimbabwe has a lot of. So much in fact that even though new notes are introduced the target of 10-15% of the money supply being available in cash can’t be reached because the electronic money supply keeps growing.
Chair of Parliamentary Portfolio Committee on Public Finance Tendai Biti has accused the Ministry of Finance of running a Ponzi scheme together with the Reserve Bank of Zimbabwe as a means to pay salaries and government obligations. This coming hot on the heels of The RBZ calling Ecocash a Ponzi scheme in their ongoing fight over allegations of Ecocash being complicit in the parallel market for foreign currency which they blame for rampant inflation.
While it is easy to attack the Ministry of Finance, RBZ and the Government of Zimbabwe over using this measure to stabilise the economy given the impact of both COVID-19 and the lockdown that has been implemented to curb its spread, we have to be fair in that quantitative easing has been applied by many governments in the face of the pandemic. The United States of America, Australia, South Africa have all availed government bailout funds which are implicitly or explicitly quantitative easing. The obvious problem is the Zimbabwean context is that we have been quantitative easing for quite some time now and while this measure is intended to fight the COVID-19 pandemic it will ultimately feed our long-running inflation problem.
What does this mean?
It simply means that funding for our $18 billion package will come from creating more money. Increased money supply means more Zimbabwean dollar money chasing goods, services and foreign currency. Ultimately we can expect further exchange rate depreciation and increased inflation. This news comes as we are about to receive news on April inflation bearing in mind that March Inflation was at 676% year on year.