Govt doubling down on what many believe caused the Zimdollar to collapse last year

After a couple years of recession, the Zim economy grew in 2021. The World Bank says we grew by 5.1%. 

Now, increased economic activity necessitates and causes a growth in money in the economy.  With this in mind, it is reasonable to have the 27% growth in reserve money we saw here.

Only problem with this is that the govt wants to “buttress the growth trajectory established in 2021” and might end up shooting us in the foot.

The government will almost double 2021 spending this year. This will be done to drive economic growth as we seek to grow by 5.5% in 2022.

Government spending and inflation

This plan of theirs is fraught with potential problems. Govt spending or so called expansionary fiscal policies often lead to inflation. 

The Zim govt says in addition to taxes, they will fund their spending by issuing bonds. All well and good, this won’t lead to an increase in reserve money. Both taxes and bond issues in effect mean the government gets its funding from the market and not necessarily from printing (or issuing itself) money. 

Crowding out

However, the govt will likely crowd out the private sector. Like we saw with open market operations, they will be attractive to many in the private sector. So, rather than risk investing in their businesses, they just lend the money to the govt. The much needed private sector growth will be curtailed a little with each bond that is bought. 

Govt inefficiency

So, the private sector which employs the majority of Zimbos grows at a lower rate. And our hopes will then be on the govt to efficiently spend it all. Yes, the same people who can misplace US$15 billion will become our efficiency champions. Yeah, right.

High taxes, low growth

Also to consider is how funding from taxes may not result in the adequate demand growth which helps economies grow. Taxes represent a reduction in people’s spending power. The Zim govt taxes like its going out of fashion and so the taxed will not be able to spend as much on the goods for sale in the country. Businesses suffer for this. 

However, it has the effect of reducing the chances of inflation. I hope the RBZ is reading, because when people have reduced disposable income thanks to taxes, or anything really, demand drops and so suppliers cannot increase prices willy nilly.

How govt spending hurt us in 2021

We should note that the govt wishes to divert part of its spending to infrastructure in 2022. There were significant infrastructure projects that were funded in 2021 and we are not the better for it.

Many economists and businesspeople becried that beneficiaries of these huge infrastructure project tenders were the same ones flooding the market with Zimdollars. They argue these massive amounts of money were chiefly responsible for the parallel foreign exchange market collapse. 

That’s where the main problem lies. The govt spends billions of Zimdollars and yet all the beneficiaries of that money look to convert it into USD at the earliest convenience. 

So, in 2022, the promise that the govt will double its spending means double the Zimdollars on the black market. Which will lead to an accelerated Zimdollar collapse. That’s even before the US interest rate hikes come in to complete the job and tank the Zimdollar for good.

More terrible ways to spend our money planned

Thing is, we can complain when, say, a road construction company helps tank the Zimdollar. As we have the right to. However, if the road is built, we can then enjoy the road. On the flip side, what if the spending went to parastatals? What can we point to after all is said and done in that case? 

Zimbabwean state-owned companies are not the bastion of stellar performance. Therefore it saddens me that there are significant amounts earmarked for recapitalisation of parastatals. It’s as if all the above wasn’t enough, the govt will be wasting even more time and money on state-owned companies. They promised us they would be selling them off a while back. Guess it was the old govt fib cause they are actually recapitalising.

How many of us are truly excited that the govt, with a straight face, confirmed that AirZimbabwe is ripe for a recapitalisation exercise in 2022? I am not alone in thinking they should just sell off as many of these companies as they can. Instead, they are committed, even to AirZim of all companies.

Two steps back

Let’s be honest, fixing the Zim economy will be no easy task. I do not envy those in decision making positions. There are so many dials and switches to mess about with that it would take a miracle to get the plane off the ground.  

However, when we see two contradictory govt positions we can’t help but get mad. All the gains made in tightening the money supply and somehow taming inflation a little are offset by other fiscal policies. In my opinion, govt spending will be the death of us. Just like it was a major factor in our initial hyperinflation run in the noughties. 

With the 2023 election cycle, we can be certain (off-book) govt spending will reach ungodly levels. My advice – enjoy the calm before the storm.