Reserve Bank of Zimbabwe Governor Dr John Mnagudya speaking after the 3rd meeting of the Monetary Policy Committee said the Bank will take measures to counter the expansionary effects of the recently announced 2020 budget. The budget which made small modest moves to put money back in the hands of Zimbabweans through tax breaks such as the increase of the tax-free thresholds and 0.5%cut in the Value Added Tax rate was criticised by many analysts as not doing enough. Meanwhile, the government through the RBZ issued more Treasury Bill’s this week to raise the borrowing by the government since their reintroduction in August to $1.5 billion dollars.

The questions concerning the money supply growth and inflationary pressure come after the combination of budget expansionary plans and the introduction of an eventual additional $1 billion dollars in cash notes and coins to the existing money supply. The RBZ argues that the additional money will not have an inflationary effect as they are using a money supply targeting system to put a lid on both inflation and exchange rate depreciation of the Zimbabwean dollar which was reintroduced this year.

The money supply growth target for 2019 was 10%, however, the recorded money supply growth rate was 80% as of October this year, which marked 8 months since the February reintroduction of the Zimbabwean dollar. After the austerity measures resulted in the astronomical growth of inflation from a lowly 5.39% to a whopping 440.01% which is believed to be an understatement of the true extent of inflation it is hard to believe that an expansionary budget would bring  inflation down to double digits as the government targets in 2020.

All eyes will be on the RBZ to see if they can indeed live by the monetary targets methodology they have set out to follow. The words coming out of the Reserve Bank are words we have heard before but the results are clear for all to see. Meanwhile, the government continues to go to the market to borrow for government projects. With an expected budget deficit of around $5.2 billion dollars and no multinational financial support the government is left absent choice on how to finance the budget deficit.

In the recent past treasury bills had an inflationary effect as they resulted in the creation of greater money supply. As such many are wary of the effect the current appetite for issuing treasury Bills will have on the monetary position. A cash strapped government borrowing from the public with no clear means of paying back points to likely policy of printing more money to pay back the debt.