2020 Budget: What comes of inflation?

Harare – Finance and Economic Development Minister Professor Mthuli Ncube on Thursday presented the 2020 National Budget, his second since being appointed the treasury chief.

The 2020 budget came on the back of a bleeding economy, exacerbated by persisting foreign currency shortages, currency instability, reeling power cuts, fuel shortages, lack of confidence in government policies, policy inconsistencies and spiking inflation.

All these have had far reaching consequences on the wider populace whose incomes have been eroded, alas continued depreciation in the value of the local currency reintroduced in June 2019.

Coming from the era of austerity which headlined the previous 2019 budget, in the process sparking widespread outrage and accused of further impoverishing citizens instead of providing a cushion, Professor Ncube although he never admitted to the negatives, showed a gleam of willingness to better living standards, but so he did without convincingly addressing the elephant in the room, inflation.

The 2020 national budget came with the theme, “Gearing for Higher Productivity, Growth and Job Creation.” Sounds noble but implementation is key.

To talk about growth, one needs to consider inflation among other key factors.

In a typical fashion, always a man full of confidence and often accused of sheer arrogance towards the situation on the ground, Professor Ncube talked about targeting single digit inflation in 2020 and also gave an ambitious GDP growth target of 3% in the respective year.

Given the current economic challenges including power shortages, possible drought ahead and high exchange rates, it is difficult to imagine an economic boom in the near future, with the economy set to contract between -6.5% and -10% in the current year.

“Monthly inflation is expected to fall to single digit figures from the first quarter of 2020 to close the year around 2% on the back of commitment by central bank to fight inflation through implementing an active reserve money targeting programme,” Ncube said.

On his GDP projections he said the 3% growth will be buoyed by agriculture (5%) and mining (4.7%) sectors.

Although the core relationship between inflation and economic growth can be debatable in the study of economics, there is need to sustain high economic growth together with low inflation.

Some consensus exists, suggesting that macroeconomic stability specifically defined as low inflation, is positively related to economic growth.

Inflation imposes negative externalities on the economy when it interferes with an economy’s efficiency.

As is the on-going case in Zimbabwe, inflation can lead to uncertainty about the future profitability of investment projects. This leads to more conservative investment strategies than would otherwise be the case, ultimately leading to lower levels of investment and economic growth.

Inflation may also reduce a country’s international competitiveness, by making its exports relatively more expensive, thus impacting on the balance of payments.

In an equally worst case scenario, inflation can interact with the tax system to distort borrowing and lending decisions.

Most listed companies in the domestic market have been reporting a spike in earnings largely driven by inflationary price adjustments, against significant decline in consumer spending and local currency value, thus easily discrediting the financial statements.

Such can be the negative impact of inflation and government should address it in a sincere manner.

Professor Ncube announced that government will with effect from January 2020, remove the existing grain marketing subsidies for maize and wheat, that were being provided to Grain Millers through the Grain Marketing Board.

“This means the prices of basic commodities may adjust,” he said.

The price adjustment points northwards for basics such as bread and mealie-meal and this will likely trigger price increases across the board.

So much is needed to steer the country back into the path of real economic recovery, and being realistic could be the first step.

There is need for authorities to ensure an environment that can help boost investor confidence and gain extra revenue from increased economic activity. Perhaps the ZWL$63.8 billion 2020 National Budget could be successfully achieved.

Equity Axis News

Raynold Mhotseka

Raynold Mhotseka is a Journalism and Media Studies student at the University of Zimbabwe. He serves as a news writer at financial research firm, Equity Axis where he is currently on attachment. He can be contacted through the following email links, rayjnr.mhotseka@gmail.com and raynoldm@equityaxis.net.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.