Political will and stability and consistent macroeconomic policies that can pave the way for the government to implement sound monetary policies that will enable it to stop excessive printing on money are required to turn the country’s fortunes around and curb rampant inflation which soared to 220.9 percent last month. The monetary policies should be aimed at achieving stable prices, full employment and high levels of economic growth.
Zimbabwe Financial Holdings (Finhold), says in its latest quarterly report on the economy, most players in the financial sector, industry and commerce, have expressed concern at the increasing seigniorage – the financing of government’s budget deficits through printing of money by the central bank- because it has largely fuelled inflation as there is now “too much money chasing too few goods”.
The report says as seigniorage can be measured as the central bank’s net credit to the government expressed as a proportion of net domestic credit to the government from the banking sector as a whole, the fact that central bank fiscal activities, which are the major source of seigniorage, are large, well concealed and extremely difficult to quantify makes any attempt to measure the extent of seigniorage with a high degree of accuracy in a country like Zimbabwe difficult.
But studies have shown that financing a government’s budget deficit through increased government borrowing from the central bank has severe inflationary implications. Studies elsewhere have shown that for any given level of a government’s budget deficit, inflation is normally higher, if a large proportion of the deficit is financed from the central bank. During the period 1973 – 1993, the extent of seigniorage for developed countries was estimated at 12.4 percent, compared to 65.9 percent for developing countries. Over the same period, inflation in developed countries was 6.1 percent, compared to 11.3 percent for the developing countries.
“Using a similar measure of seigniorage in Zimbabwe, statistics show that it rose from 20.9 percent in 1994 to 49.4 percent in 1998, while the rate of inflation also rose from 22.3 percent to 31.7 percent over the same period. Further analysis of seigniorage data in Zimbabwe appears to show that, printing money or increasing government borrowing from the Reserve Bank, impacts negatively on inflation with a one-year lag,” the report says. “For example, when the level of seigniorage declined from 14.2 percent in 1995 to -40 percent in 1996, the inflation rate fell from 21.4 percent in 1996 to 18.8 percent in 1997. A further analysis of the data also shows that seigniorage increased sharply to 49.4 percent in 1998, and a year later, the rate of inflation rose to a six-year high of 58.5 percent.”
The report says in addition to printing money, seigniorage increases through the central bank imposing high reserve requirements on commercial banks. From 1994 to 1998, the Reserve Bank of Zimbabwe raised the statutory reserve ratio for commercial and merchant banks from 13.5 percent to 25 percent. Seigniorage rose from 20.9 percent in 1994 to 49.4 percent in 1998 while lending rates also increased from 36.4 percent to 49.3 percent over the same period.
The increase in lending rates impacted negatively on the productive sector. In 2001, when the government accounted for 38.7 percent of net domestic credit, capacity utilisation in Zimbabwe’s manufacturing sector fell by an average of 58 percent. The crowding out of the private sector was followed by downsizing, company closures and loss of jobs. A total of 400 manufacturing companies closed and filed for formal liquidation in 2000 and a further 92 the following year.
Real growth also slumped. When seigniorage rose from -40.0 percent in 1996 to an estimated 24 percent in 2001, real economic growth also declined from 8.5 percent to -7.3 percent over the same period. The report, however notes that such a conclusion is not conclusive given other factors such as a downturn in the global economy and the slump in tourist activities, particularly after the 2000 national referendum, which also contributed to the decline in economic growth.
The report says the negative impact of high levels of seigniorage on the economy can also be seen from the fact that because of the high levels of inflation, collected tax revenue, in real terms, falls, while government expenditure rises faster. This tends to worsen the government’s budget deficit. Higher levels of inflation tend to reduce revenue which accrues to government, in real terms, because of lags in tax collection.
To deal with the high levels of seigniorage and their adverse impact on the economy, the report says that there is need for fiscal discipline. Public sector borrowing from the Reserve Bank of Zimbabwe should be maintained at a very low level. Obliging a central bank to meet a range of fiscal expenditures not only undermines its independence, but compromises its monetary control, and the attainment of price stability in the country.
It says since seigniorage, reduces economic growth over the medium term, the Reserve Bank of Zimbabwe’s monetary policy should aim to keep broad money supply growth from year-to-year within a moderate range that is consistent with stable prices. Money supply growth rose from 57 percent at the beginning of last year to about 170 percent at the end of the year. Inflation rose from 116.7 percent to 198.9 percent during the same period. Domestic borrowing increased from $205 billion to $346 billion.