Govt sees its infrastructure spending as a source of pride, ZNCC sees it as the main source of inflation

Harare's Delport Road. Road construction has come at the cost of inflation

The government sees its increased infrastructure spending as one of its successes, but one of the country’s biggest business groups blames it for rising inflation and currency instability.

Announcing a raft of new economic measures on Saturday, President Emmerson Mnangagwa blamed “negative sentiment” and what he called economic sabotage for the currency crisis. But the Zimbabwe National Chamber of Commerce (ZNCC), in a sharply critical response to the measures, says it is government spending that is undermining the Zimbabwe dollar.

“The Government’s financing model for on-going programmes and developmental projects has been the major driver of the rapid depreciation in the local currency. Government is using short-term financing mechanisms to finance the Emergency Road Rehabilitation Programme, Construction of Dams and funding critical programmes like Census and by-elections,” the ZNCC says in a note circulated on Monday.

Government estimates that it needs about US$40 billion to fund critical infrastructure over the next five years. But, unlike peer economies that can borrow money abroad to fund infrastructure, Zimbabwe has been shut out of debt markets and must fund some projects on its own.

In the 2022 budget, Treasury set a budget of Z$164 billion for infrastructure, which was about 18% of total spending.

This spending, the highest in years, has helped leading construction companies, who have reported increased volumes, which they attribute partly to government. Cement consumption has increased to 1.4 million tonnes per year from below 1 million in 2017, according to PPC. Lafarge has built a new factory that doubles cement capacity to 1 million tonnes per year.

Masimba Construction, one of the companies contracted on public projects, in March said its order book had grown by 200% last year, partly due to government contracts.

But ZNCC says the downside is that these projects are helping to feed inflation.

“The Zimbabwean dollar being paid by Government to the contractors is ending up chasing the greenback on the parallel market as they seek to preserve value,” the group says.

In its response to the economic measures announced on Saturday, the ZNCC says:

  • The forex auction system is mainly serving as a foreign currency allocation mechanism through the priority list
  • Having President Mnangagwa announce the measures shows that the RBZ is not independent
  • There are not enough US dollars in the market to support full dollarisation, but a fast de-dollarisation is not ideal either
  • Only a social contract can restore faith in government policies and restore confidence in the currency
  • Suspending bank lending legitimises “a parallel banking system” and “no investor would be attracted to such an economy where lending can be suspended overnight”.