Chinamasa budget formalises parallel market exchange rate

Acting finance minister Patrick Chinamasa used the higher United Nations exchange rate to convert expenditure estimates submitted by ministries.

He told parliamentarians in a televised 2009 budget presentation that, while expenditure estimates by ministries were in Zimbabwe dollars, he had to use the UN exchange rate to come up with final allocations to government departments.

The UN rate has been pegged at 35 quadrillion Zimbabwe dollars for every one United States dollar for the past month.

This means that, while Chinamasa's budget statement was silent on the devaluation of the Zimbabwe dollar, the government effectively embraced the more realistic parallel market rate.

The UN rate is, in fact, much higher than the commonly used black market exchange rate of around 40 trillion Zimbabwe dollars to the American greenback.

Economists said the decision to use the unofficial exchange rate would pass off as an attempt by President Robert Mugabe's government to formalize the parallel market rate and thereby bring its estimates in line with the reality on the ground.

What the minister did was to semi-legalise what was already existing, said Bulawayo-based economist Eric Bloch.

Another economist, who works for a Harare investment firm, said the move by Chinamasa was a harbinger for more exchange rate reforms to come.

We are likely to see more measures being introduced by (Reserve Bank of Zimbabwe governor Gideon) Gono during the coming weeks to free the exchange rate and allow the market to play its role in determining the exchange rate, said the economist who spoke on condition of anonymity.

In another widely anticipated move, Chinamasa officially dollarised the beleaguered Zimbabwean economy by embracing a basket of foreign currencies as official alternatives to the free-falling local dollar.

The minister announced the liberalization of the foreign exchange regime to allow all economic sectors to use multiple currencies when charging for their goods and services.

The move would see private companies allowed to pay salaries in hard currency while civil servants would get part of their wages in local currency, with the remainder coming in the form of a foreign currency allowance and newly introduced vouchers.

The vouchers would be pegged at the value of a basket of goods for a family of six.

The voucher system is an interim arrangement to be phased out gradually in favour of payment through the banking system as inflows of foreign currency improve, Chinamasa said.

The latest development follows the partial dollarisation of the Zimbabwean economy after the RBZ last September allowed selected businesses to sell their goods and services in foreign currency.

Chinamasa also broke with recent government tradition by weaning off thousands of newly resettled farmers who had perennially depended on government support since 2000 when the government launched its chaotic and often violent land redistribution programme. 

The financing of agriculture should be the responsibility of the banking sector, Chinamasa said, adding that the RBZ would soon announce measures to encourage financial sector support for farmers.

He also announced the suspension of quasi-fiscal activities of the RBZ, which he blamed for fuelling inflation.

Other key highlights of the budget included projected total expenditure of US$1.9 billion against anticipated revenue of US$1.7 billion, resulting in a budget deficit of three percent in 2009.

Chinamasa ambitiously forecast his fiscal measures and others to be announced soon by Gono would immediately breathe some life into the tottering economy to propel it to a massive two percent growth in 2009.

 

Gross Domestic Product is projected to grow to about US$5.5 billion and that figure formed the basis for the revenue projections for this year.

 

Revenue collections are normally projected at about 30 percent of GDP, Chinamasa said.

 Government employment costs would account for the largest component of the expenditures for 2009, taking up US$482.8 million or more than 25 percent of the proposed spending until the end of the year.

The move is meant to cushion civil servants and prevent ongoing strikes by public school teachers and health workers from blowing out of control.

Chinamasa also allocated US$167 billion and US$149.8 billion for the revival of the health and education sectors.

 

Service provision by the two sectors has nearly collapsed due to successive years of under-funding and an unprecedented exodus of skilled personnel.

 

Chinamasa pledged to reduce Zimbabwe 's problematic inflation problem to double-digit levels by the end of 2009.

 

The country currently has the world's highest inflation, which was last estimated at 231 million in July 2008. Independent economists say the figure could be anything in the trillions.

 

He also removed the monopoly of the Grain Marketing Board (GMB) to allow private millers to compete with the state-run company for maize and other locally produced grains.

 

As Chinamasa put it, the GMB would become the buyer of last resort but would maintain its monopoly as the sole exporter of grain from Zimbabwe .