By John Robertson
MUCH has been made of the downt
urn in the rate of inflation in recent months, but many people do not feel that inflation is really coming down. What are the facts?
The fact that matters most is that the rate of increase in prices has decreased. Prices are still rising, but they are rising less often and sharply than they did a year ago. And because we measure inflation against the figures of a year earlier, what happened last year directly affects the measurements we are talking about this year.
The graph shows the course taken by inflation in 2002, 2003 and the first half of 2004, and that the inflation gap between the 2002 and 2003 figures was widening for most of the year.
In January 2003 the measure against January 2002 was 208%, and this had widened to 598% by the end of the year. Mathematically, the slope of the 2003 line was steeper than that of the 2002 line. In 2004, we see that the slope of the line is less steep for the first six months, so the gap between the lines has become narrower.
The big question is whether the gap will continue to shrink in the coming months, or will it widen out again? Forecasting inflation under current uncertainties is more than usually difficult, particularly as the Reserve Bank, in choosing to define inflation as “enemy number one”, has also chosen to lock on to the exchange rate as the principal weapon to use against it.
As has been the case all too often in the past, they are treating the symptom rather than the disease.
The exchange rate movements certainly did contribute to the sharply rising rates of inflation last year, but the pressures came from the scarcities of foreign currency that resulted from the loss of about half the country’s foreign earnings.
An attack on the more basic causes of inflation should have attended to the problems that caused the earlier losses of foreign earnings, but nothing was done to keep tobacco producers on the land, to keep gold miners happy, to make tourists feel more comfortable or look after the producers in the dozens of other foreign exchange-earning sectors.
So inflation was driven by scarcities of foreign exchange. The scarcities gave rise to the development of a reasonably efficient parallel market for foreign exchange, and this market permitted the buyers and sellers to negotiate a price — the exchange rate — at which deals could be made. But for the parallel market, the downturn in foreign earnings would have had much more serious repercussions for every business in the country.
Export businesses that survived 2002 and 2003 did so because of the parallel market, and this is no less true for those dependent on imports.
A few extra complications are affecting businesses this year, one of which is that the strong demand for goods from cross-border traders last year has now stopped completely.
This fall in demand left unsold stocks overhanging the market, and many of these goods were produced with materials that had been paid for with very expensive money. Competitors sourcing materials more cheaply this year could easily undercut the prices being sought by those who were trying to recover last year’s costs, so their prices had to be kept down in their efforts to compete. That also helped to slow the rate of inflation this year.
Unfortunately, the stocks that were not being sold on the local market could not be exported either, largely because of the exchange rate that was established by the so-called auction system from January. The exchange rates that emerged from this policy were far below those that exporters would need, particularly if the goods had an import content of any importance.
The “auction” rate did improve in the first few months, but producer costs — the industrialists inflation rate — rose steeply because wage settlements were still catching up with earlier higher inflation rates and Zesa wanted to make up for years of neglect in its maintenance programmes. Insolvent city councils made things worse when they stepped up rates to slow their declines into deeper debt traps and many other increases added to production costs.
Consumer price increases slowed, but producer price increases appear to have carried on rising as rapidly as before. New considerations will make sure that the second half of the year in not a repeat of the first half. Most of the surplus stocks of consumer goods have been dispersed, but some of them have faced a new source of competition, cheap imports from the Far East.
For goods of this type, reduced local production has resulted from difficulties experienced in capturing enough foreign exchange from the highly regulated currency “auction”, but scarcities will not emerge because of the consignments of low quality production over-runs that factories in the Far East can dump on to inadequately protected markets like Zimbabwe’s.
At the now virtually fixed exchange rate, the Zimbabwe dollar is becoming over-valued. This means that many goods can be more cheaply sourced from abroad if the importer can secure the needed foreign exchange.
However, with the damage being done to export revenues, importers’ prospects of capturing these funds will become progressively worse. Allocations of foreign currency to factories will also suffer and as customers find they have fewer choices, the cost increases experienced by the surviving producers will be more easily passed on to their customers, so more inflation will be the result.
On food stocks and production volumes, the situation is likely to be even more threatening to inflation. Government’s considerable efforts to persuade the population that food stocks and harvests are more than adequate have been called into question by every analyst. Evidence is emerging that the country will need to import a high proportion of its food requirements.
The dairy, pork and poultry industries have been cut back to little more than half their former sizes and producers of canned foods are unable to secure steady flows of their inputs of vegetables, fruit and meat. Grain imports might be big enough to prevent complete stock-out situations, but it seems very probable that the distribution of maize meal will be uneven enough to cause concern.
At the first sign of localised shortages, hoarding will begin to absorb large quantities and we should expect to see these cause more severe shortages over more extensive areas, and more inflation as the shortages cause hoarding and further price increases.
If this is what does happen, the rising inflation will certainly become the target of new government measures. We might expect, but should not welcome the re-imposition of price controls on most foods. These will simply cause deepening shortages as black markets develop. Not for the first time, the real inflation rate will then be much higher than the official statistics suggest.