eBusiness Weekly
Tapiwanashe Mangwiro
The recent announcement on a possible US dollar denominated civil servant bonus payment this year, came at a time teachers had been calling for such a payment to their relief. However, this was not because the Ministry of Finance and Economic Development is such a listening Government department, but because they had to weigh the less economically destructive route between paying the 13th cheque in foreign currency or paying it in the local RTGS dollar.
Going with the foreign currency payment method proved to be less costly as it reduced the risk of overshooting inflation in the economy due to an unexpected influx of huge RTGS dollar. With inflation already responding to the recent $36 billion released for grain payments at different stages since August, it was a no-brainer to pay civil servant bonuses in foreign currency.
A release of RTGS dollar in the economy would dent the pact made by the Reserve Bank of Zimbabwe to industry that it would work on reducing money supply growth in the economy.
The bank halved its quarterly money supply growth to 10 percent at the recent Monetary Policy Committee meeting, and the finance ministry desperately needs industry’s backing hence minimising the growth of money supply from the local currency side.
By giving out foreign currency, Treasury has found a way to inject the much-needed foreign currency in the economy, with the monthly bureau de change US$100 disbursements moving slower than anticipated.
Such a huge release will result in the reduction of RTGS dollar in the economy, making the parallel market rate depreciation slower as there will be fewer RTGS dollars to chase the already scarce US dollar.
RBZ hopes that this release will be effective in reducing the local currency in the market, making it to be in demand and preserving its value. This move, however, will be effective till year-end before parents begin to hunt for school fees. The move will most likely be offset by the funding of the agriculture season and continued wheat payments.
On a side note, the foreign currency bonuses do benefit the civil servants as they give them more purchasing power than their RTGS salaries. With the employees not trying to get the US dollar on the parallel market at a higher premium, which is currently at $185 to a single US dollar about $85 above the official market rate. Automatically it gives them an extra $85 per each US dollar to spend in the economy.
As is the case with every good news regarding civil servants’ salaries, retailers begin to lick their lips wanting to increase prices in order to absorb as much as they can from the increase, hence we are about to witness a US dollar inflation in the economy. The November 2021 official Blended Inflation Rate will give us a glimpse on the direction of the US dollar inflation.
Industry is not going to take the decision lightly especially with the authorities pushing them to embrace the local currency in their businesses. This will look like a stab in the back and we are most likely to see them rebel by sending most of their goods to US dollar only shops for them to have a piece of the pie and create artificial shortages in the formal retail shops where most will use the local currency.
Besides the industry, such a move is going to result in loss of confidence in the local currency as the Government itself is doubting its own currency. Service providers will most likely react by rejecting the local currency in favour of the greenback as it is more lucrative and appealing, even for the Government if this move is anything to go by.
It is not a secret that Treasury is going to use part of the Special Drawing Rights (SDRs) from the International Monetary Fund (IMF), of about US$965 million to fund the bonus payment. Economically it is a bad idea especially for a country that is struggling to build foreign currency reserves and has outdated machinery that needs huge capital outlays to get back to efficiency, to spend hard earned money for consumptive purposes.
Going forward this has resulted in raised expectations for civil servants as they now feel their employer can afford to pay them in foreign currency and we will see more frequent work actions with the workforce demanding better wages and most specifically in foreign currency.
Conclusively the decision to pay bonuses in foreign currency was weighed and chosen as the less economically destructive decision, numbers wise, but economic is also a behavioural subject and the decision will surely have a greater negative social impact which will be felt for longer as well.
However, the numbers make more effects on the economy than behaviour making the decision rational under the circumstances.
