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'Money supply growth to blame for forex premiums'

by Staff reporter
08 Dec 2017 at 05:06hrs | Views
The mis-match between the supply and demand for foreign exchange, has led to the emergence of foreign exchange premiums in the market, Finance and Economic Development Minister Patrick Chinamasa has said. Presenting his 2018 National Budget, Minister Chinamasa said the continued financing of the country's budget deficit with Treasury Bills is untenable.

"Money creation, through domestic money market instruments which do not match with available foreign currency, only serves to weaken the value of the same instruments, translating into rapid build-up in inflationary pressures, to the detriment of financial and macro-economic stability," said Minister Chinamasa.

He said the mis-match between the supply and demand for foreign exchange, has also led to the emergence of foreign exchange premiums in the market. He noted that while the panic buying of 22-23 September 2017 was largely driven by speculative tendencies, it was also an indication of the diminished confidence caused by the disparity between electronic money balances, and available foreign exchange.

"In addition, the growth in money supply witnessed in the past few months, emanating from the purchase of agricultural produce by the GMB, and the domestic financing of the Presidential and Command agricultural programmes, coupled with heightened inflation expectations, have a great potential to adversely affect the inflation outlook."

Minister Chinamasa said the room for domestic financing of the large fiscal deficit has now been fully depleted, and additional monetary financing of the deficit can only lead to inflation and further economic deterioration. In an effort to curb the continued weaknesses in the financial sector, and currency in particular, Minister Chinamasa said the RBZ will have to put in measures that will sterilise the impact on the stock of money supply.

"This calls for the Reserve Bank to put in place policy measures to sterilise the impact on the stock of money balances within the economy."

In support of the monetary measures, Minister Chinamasa said there is need to adopt Fiscal Anchors that will instil and strengthen fiscal discipline in an effort to improve budget management and enhance co-ordination of fiscal and monetary policies. The fiscal anchors will include halving the Budget deficit for 2018 to below 4 percent of GDP.

This will also include ceiling of Government borrowing from the central bank in line with Section 11(1) of the Reserve Bank Act [Chapter 22:15], which requires that Reserve Bank lending to the State at any time shall not exceed 20 percent of the previous year's Government revenues.

Government will also reduce the share of employment costs in the budget to initially 70 percent in 2018, 65 percent in 2019, and below 60 percent of total revenue by 2020.

Source - the herald