Covid-19 USD civil service allowances: Another money printing dalliance?

Government is the country`s largest employer, and by implication influences the spending patterns of large swathes of consumers. Establishing the exact number of civil servants under its employ is an imprecise endeavour. In an interview in August 2019, finance minister Mthuli Ncube noted that the total government payroll was about 400,000 individuals a month.

Separately, some estimates put the total number of civil servants excluding those in the security forces at 250,000. Meanwhile, a 2019, Labour Force survey by ZimStat, reveals that some 249,000 people, representing 2% of the population, receive a monthly pension or some social security funds. A conservative estimate would thus arrive at a monthly amount of at least US$37.8 million, that government will be paying its workers, as part of the recently announced COVID-19 allowances, running until August 2020. 

Converted at the ruling interbank rate of 57, this translates to roughly ZWL2,1 billion a month. To be clear, government does not have such resources in USD terms. In our view, this is why civil servants will not be accessing hard cash, but will rather make use of electronic balances in FCA Nostro accounts. At this point, it is also worth noting that this is over and above the 50%, local currency denominated salary increase government also announced together with the COVID-19 allowance.

This unbudgeted expenditure will represent an appreciable increase in the level of money supply in the market, which itself has been growing exponentially since 2013. This has been driving inflation high, and weakening the ZWL exchange rate. The IMF notes that government`s real wage bill increased from 42% to 85% of tax revenue between 2010 and 2016, largely driven by higher compensation following dollarisation.

Lately however, government attempts to freeze recruitment and retrench employees have curtailed employment growth and have seen the wage bill moderate, to align with the regional average. Facing growing pressure from its workers however, government has been undertaking nominal salary increments, largely to quell unrest within the civil service over the years. It is in this context that the recent COVID-19 allowances and salary hikes must be looked at. 

However, these token increments have evidently failed to keep up with the soaring inflation. Resultantly, government workers have seen real incomes being wiped out by as much as 80%, from roughly an average of US$416 a month in 2016 to about US$60 currently. As a result, the wage bill as a share of revenue has declined sharply from 90% in 2017 to an estimated 37% in 2019 per the IMF. 

To the extent that the proposed salary hikes were unbudgeted for, and that, without resorting to printing money, government does not have the wherewithal to sustain such expenditure, the wage bill as a proportion of revenues is set to increase sharply. Perhaps unsurprisingly, the bulk of civil servants have not accepted this 50% salary increase, even when packaged with the quasi-USD allowances.  The Public Service Commission has nonetheless asserted that this allowance does not shut the door on further negotiations between the Government and its workers.

One of the immediate consequences of this move in my view is to drive inflation which is inching toward the 1,000% mark. This means that in the near term, pressure on wage growth will remain high, fuelling an unsustainable wage-price spiral in the economy as civil servants push for their incomes to match prices of commodities. However, given the evident propensity of central government to create new money, wages and prices will not converge, and this will otherwise see real purchasing power falling, consumption pulling back, a continued weakening of the ZWL dollar, and the overall economy. 

This move therefore carries outsized high risks for the country`s inflation outlook. To the extent that government workers may be given the leeway to liquidate their FCA Nostro balances into ZWL dollar at the intervening official rate, then the downside risk to money supply growth will be elevated, and will in turn drive inflation further. Additionally, government workers may opt to liquidate their FCA Nostro balances in the hopes of acquiring hard cash, something they will not be able to do at their banks. If this were to happen, the alternative market rate will potentially weaken further. It is worth noting however that at this point, the full picture regarding the operational mechanics of this facility are not yet clear.

Shortages of goods

Another downside risk as a result of these allowances is that following the initial spurt in consumption economy wide due to relatively higher disposable incomes, shortages of basic goods will emerge, at least in the formal market. Government has announced that instead of accessing hard cash civil servants will obtain an electronic card through which they will transact. Retailers in turn are compelled to quote their goods in both local currency and the US dollar. Again, while the intricacies of the mechanics of this FCA Nostro card are yet to be ascertained at this time, it  is unclear whether retailers will be able to make payments offshore against these Nostro balances in order to re-stock. 

In my view, this will likely not be the case due to foreign currency constraints faced by government itself. Since offshore payments to foreign suppliers require physical cash to back up electronic balances, it is inevitable that retailers and wholesalers may fail to pay their foreign suppliers. This will have the effect of compromising the supply of imported goods in the local shops. 

This phenomenon will largely affecting formal and large retailers, since trade in the informal market is now mostly being conducted in US dollars anyway. To counter this, formal retailers may find ways to limit the availability of goods on their shelves, opting to direct the goods to the informal market where there is the possibility of earning real hard currency. Local manufacturers may also likely shun the formalised shops for this reason, creating the very real possibility of shortages in the formal market.

Dollarisation perceptions stoked

Perhaps the greatest indirect implication of this move by government lies in how it has further stoked the market`s, not least, its workers` perceptions ever closer toward adopting a fully dollarized economy. As is, some government workers that have embarked on industrial action are demanding US dollar payments, and it is difficult to see a climb down from this position. The fact that some informal traders have stopped accepting some versions of the ZWL2 and ZWL5 dollar notes currently in circulation will only serve to embolden calls for US dollar denominated wages by members of the civil service. 

The present reality however is that there are now three different ‘currencies’ in circulation, namely the US dollar, the ZWL dollar – together with its variants; Ecocash and RTGS electronic balances and the FCA Nostro balances. What currency survives is largely a function of market confidence, which in turn affects acceptability. These dynamics favour the entrenchment of the US dollar as the currency of choice, at a time when the supply of the greenback is constrained in part due to low exports, compounded by even slowing diaspora remittances, while the supply of local currency continues to grow apace. 

These factors in our view make a complete dollarisation unlikely for the time being. What will obtain however, and in truth, the situation that the country is already facing, is a reversion to a multi-currency system with the ZWL dollar being part of the currency mix. Be that as it may, at least from a transacting perspective, the US dollar is the more favoured currency, and will only grow in prominence, while the depreciation of the ZWL dollar progresses until such a time as complete confidence in it wilts away. I see the COVID-19 allowances catalysing this process.