RESERVE Bank governor Gideon Gono this week said “inflation reduction remained the overriding objective of the central bank”, a week after a parliamentar
y committee said his monetary policies had “evaded tackling inflation”.
Gono this week made fresh adjustments to his mid-year monetary policy statement, targeting mainly the financial sector and the equities market in moves he said was meant to give additional measures that would “stabilise the economy in the medium-term”.
In its review of the monetary policy, parliament’s budget, finance and economic development portfolio committee said it had “noted with concern the rising inflation”, saying despite Finance minister Herbert Murerwa and Gono declaring the economic scourge “the country’s number one enemy”, both had dodged tackling it.
“The highly inflationary environment has made planning complex for all sectors of the economy, including government,” the committee noted in its report presented to parliament last week.
While Gono’s fresh adjustments to monetary policy on Monday indicated the central bank’s desire to reduce inflation, the governor failed to give a clear plan over how the central bank would deal with the problem, which has troubled the country’s economy for the past six years.
He did not mention any inflation targets or outlook for the few remaining months of the year.
Gono’s review skirted details on excessive government expenditure, as well as the central bank’s own quasi-fiscal operations, blamed recently for pushing inflation to record highs.
The Central Statistical Office on Tuesday announced a marginal decline in inflation to 1 023,3% year-on-year to September from 1 204,6% for August.
Earlier on in the year, Gono made a rare admission that the central bank had printed trillions of dollars to purchase United States dollars for repayment of International Monetary Fund (IMF) arrears to stave off the imminent expulsion of the country from the Bretton Woods institution.
Huge sums of cash had also been printed to raise money for grain and fuel imports, as well as for other quasi-fiscal operations by the central bank, fuelling huge money supply growth.
Government, whose borrowings on the local money market have been breaking weekly records, also continues to be a major source of inflation.
Printing money stokes money supply growth that provides impetus to soaring inflation.
Money supply has been on an expansionary trend since the beginning of the year while inflation, which eased in the month of July, rebounded to touch an all-time high of 1 204,8% year-on-year for August.
The IMF has forecast inflation to average 1 216% this year, and to average 4 278,8% next year.
The forecast suggests that inflation could breach the 5 000% mark next year.
During the current year, the IMF predicts that real GDP will contract by 5,1% and by a further 4,7% next year.
The parliamentary committee said monetary and fiscal policies were simply labelling inflation the chief enemy “without proffering solutions”.
“Neither (fiscal nor monetary) policy set a target that is being worked towards,” the committee said, noting that Gono had said during the committee hearings that it was every Zimbabwean’s responsibility to bring inflation down.
Gono has previously located the major inflation drivers in government and monetary operations, areas far beyond ordinary’s citizens’ responsibility.
In his January policy statement, Gono said major inflationary pressures in the economy had arisen from high money supply growth and supply bottlenecks related to poor agricultural production. Dwindling production had adversely affected other sectors of the economy like manufacturing, still heavily reliant on agriculture.
In a report last month, the Zimbabwe Independent noted a stampede on the parallel foreign currency market as both individuals and corporate institutions scrambled to buy foreign currency to preserve their wealth following grim inflation forecasts by the IMF.
The inflationary cycle has made it unattractive to hold the local currency when costs of goods and services are increasing on a daily basis.
Put differently, people are now making sure they spend their little incomes as fast as they can on goods rather than save.
The population, in order to avoid the inflationary effect, flees the domestic currency as a store of value, and instead shifts their wealth into hard currencies and durable goods.
That problem has been compounded by serious shortages in the economy. Scarcity, by nature, generates inflation, and this adds impetus to a problem the government is already exacerbating through money printing.
Fuel is in short supply, as are maize meal, the country’s staple food, most of the basic commodities such as sugar and cooking oil, as well as foreign currency. These shortages have invented informal markets for fuel and foreign currency. The parliamentary committee said stakeholders were concerned by rising inflation, and expected measures from authorities that would bring inflation levels down.
Such measures, the committee said, included a reduction in government expenditure, increased productivity and the elimination of speculative behaviour, itself caused by inflation.
“Both the monetary and fiscal policies seem to gloss over the real challenges facing the economy,” the committee said.
“There is an urgent need to rebuild the country’s productive sector by investing correctly in the two main pillars of the economy, that is agriculture and mining, which have a longer development period, but produce a sustainable income,” the committee said.
“There is need for government to live within its means and to put in place measures to advance development through production.”
In what appeared like a climbdown from his aggressive quasi-fiscal operations, Gono said he would “restrict and forbid non-performing parastatals and local authorities from accesssing central bank support”.
Parastatals and local authorities, he said, had to seek financial assistance from their parent ministries rather than the central bank.
In trying to turn around the economy, Gono has concentrated all efforts on fighting inflation, itself one of the critical forces driving and fanning the economic problems Zimbabwe faces.
“Some parastatals and local authorities have developed seemingly perpetual reliance on the Reserve Bank for support, unacceptably surrendering their cash-flow planning and survival needs to us,” Gono said.
But unless he gets solid government support and committment to fight corruption, mismanagement and the intricate web of patronage which misallocates both human and financial resources away from critical sectors, he has a long, unwinnable battle ahead of him.