There has not been much attention given to the role of free funds in the Zimbabwean Economy. Economists have not paid attention to this critical area perhaps for good reason as there is little public information available and also the fact that they appear as an Index to the National Budgets.
Free funds can be defined as funds parked in the economy for various purposes with no immediate need to liquidate them. Their availability during their tenure helps stimulate economic growth through the multiplier effect. They also boost business and market confidence.
The significant inflow of free funds has a positive influence and if often followed by the inflow into the formal banking systems and we need no other case study than the Government of National Unity period which began in 2009 and ending in 2013.
The million dollar question is where did funds to kick start the economy come from in 2009? Did the economy receive significant bail outs from leading lenders such as IMF and World Bank? Not much came from these leading international lenders.
So who opened the funding valves? The answer lies squarely in the 2009 Budget under the Annex Table (Consolidated Donor Support). The period witnessed a ramp up in Donor Aid funding to Zimbabwe compared to previous years and this persisted throughout the GNU period.
To make it easier for readers, take for instance a leading Donor Agency that approves aid worth $800m to Zimbabwe and if all the funds are transferred to local banks in the first quarter of the year but being used for the next 8 months. The funds automatically become free funds and banks can lend to borrowers for productive use in the economy.
This helps boost business confidence which explains why in 2009 even cash kept at home ended up being channeled into the formal banking system.
Averaging a USD 1 Billion per annum from 2009 to 2022, the roleplayed by free funds cannot be underestimated especially in an economy where lenders have not provided significant loans and bail outs. Apart from Afrexim Bank and more recently, The IMF US$900m SDR Facility-there hasn’t been a significant inflow of funds by external lenders.
Researches and student of Economics therefore need to study the National Budget Annexes from 2009 to date and also review external loans extended to the nation during the same period.
The 2022 National Budget showed a massive slump in the Free Funds and we raised concern on the implications of half the budget or possibly lower than half coming into Zimbabwe’s coffers.
The budget clearly showed Free Funds flight and add other complex matters arising, the nation in a foreign currency squeeze characterised by steep currency rates hikes. To solely point towards Free Funds flight would be incorrect as in 2022 Zimbabwe received a record US$12 Billion in export receipts leaving a positive trade balance of US$300 million according to Take-Profit Organisation.
Although the trade balance has been sliding into negative territory, however the fast depreciation of the local currency in May 2023 is unprecedented. And the slide continues well into June 2023 and showing no signs of stopping. This is what prompted this write up-did the gap of free funds in 2023 precipitate the current volatility?
What is the sensitivity of free funds to the economy?
Should the situation return to normalcy, will free funds have played a critical role?
