Eric Bloch Column

Government may re-fuel inflation


PROGRESS in reducing inflation over the last 10 months has been spectacular, and is very greatly attributable to the actions of Reserve Bank of Zimbabwe governor Gideon Gono. From the moment that he took office on December 1 2003,

one of his key economic targets was to curb the rampant hyperinflation and, as rapidly as possible — which he estimated to be three years — to bring the year-on-year rate of inflation down to single-digit levels.


Inflation peaked at an all-time high of 622,8% in January 2004 and has been in constant decline ever since. Within six months it had fallen to 362, 9%, a decrease of over 40%, and by October 2004 the inflation rate had fallen to 209%. Within a relatively short period of time it had reduced to approximately one-third of the horrendous record height attained in January and the governor, Acting Finance and Economic Development minister Herbert Murerwa and the International Monetary Fund all foreshadow a rate of between 160% and 180% by year-end.


Gono’s favourite phrase is that “there is no gain without pain”, and it’s undeniable that the war on inflation, and the victories in that war to date, have occasioned some considerable pain. In particular, a key weapon in the war was containment of the depreciation of the Zimbabwe dollar in order that landed costs of imports not escalate unduly.


However, despite the importance of that objective, it had a major negative factor in that it rapidly eroded export viability for the agricultural, mining and manufacturing sectors, as well as the viability of many tourism enterprises. The governor sought to compensate the exporters by provision of various incentives and of loan funding at concessional rates. Regrettably, however, those compensations did not suffice as the loss of access to even lower cost offshore loan facilities and the magnitude of inflation, albeit declining, outweighed the benefits extended by the governor.


Although the immense prejudice suffered by exporters cannot credibly be gainsaid, it does not minimise the import of the lowering of inflation achieved to date. The fall in inflation has not alleviated the widespread poverty that afflicts so very many Zimbabweans, for prices continue to rise for as long as there is inflation, but that fall in inflation has contained, to some extent, the intensification of that poverty.

The expectation of the governor is that in 2005 inflation will fall to a maximum of 50% and in the following year to below 10%. That expectation has been substantially reiterated by Murerwa in his recent 2005 budget statement. It is to be hoped that those expectations are well-founded and will materialise.

However, the prospects are not very high due to two factors.


The first of those factors is merely technical. The rate of inflation is determined by calculation of the percentage of movement in the Consumer Price Index (CPI) between a prior date — for example, a year previous — and the current date. As the CPI had soared upwards to a draconian extent in 2003, the 2004 indices were measured against a very high base, resultant in the decline being significant in extent.


However, as the months of 2005 go by, the measure will be against indices from which movement will be considerably lesser than in the prior year and therefore the extent of decrease in inflation will be far less.


But what is of greater importance is that the very great extent to which inflation may, in fact, rise once again as a result of governmental acts of commission and of omission. First and foremost is government’s gross inability to contain the excesses of its parastatals and to restructure those parastatals as viable, commercial entities.

The parastatals have recurrently proved themselves as incapable of containing their operational costs, and equally or even more incapable of addressing their cash flow requirements in any manner other than by repeated increases in charges. In particular the increases in charges do not even achieve the intended objective of enhanced revenues. As charges increase, so the demand for the goods or services of the parastatals diminishes.
 
The parastatals are repeatedly oblivious to “the law of diminishing returns”, whereby the greater the prices or the rates of charges, the lesser the demand and, therefore, the lesser the revenue inflows.


It becomes ever more apparent that most parastatals will not even consider whether their viability could not be attained by recourse to achieving efficiencies instead of afflicting the consumer further. First and foremost of such parastatals are Zimpost and Tel*One.

While the year-on-year inflation to October 2004 was 209%, the inflation in communication costs was a gargantuan 2 999,6%. In other words, inflation of communication costs was more than 14 times overall inflation!


Zimpost has already increased its charges three times in 2004, and then has imposed increases of more than 50% with effect from December 1 2004. It now costs the equivalent of about 20 loaves of bread to send one Christmas card to the United Kingdom.


As for Tel*One, it too endlessly increases its charges. If, instead, it would ensure effective operations of its networks, the consumer would be able to make many more calls, thereby giving Tel*One its needed revenues. In practice, it can take recurrent dialling for over four hours to be able to connect to a telephone subscriber elsewhere in Zimbabwe than in the home town or city of the originator of the call, and as many hours to transmit a fax.


But it is not only the communication parastatals that resort to extortion of exorbitant charges. The same holds good for power utility Zesa, with domestic electricity charges having risen by 347% in the year to October 2004, while charges to commercial consumers have risen to an even greater degree. Yet another major increase is scheduled for next month, based upon a spurious justification of rationalisation to regional average rates.


And, in like manner, the government’s transportation parastatals — National Railways of Zimbabwe, Air Zimbabwe and Zupco — continuously increase their charges, almost in direct correlation to declining operational efficiency and decreasing customer care.

Inconceivably, it is now cheaper to transport coal by road than it is to transport it by rail. The only difference between the business and economy classes on Air Zimbabwe’s domestic flights are greater legroom, a glass of fruit juice and a massively greater airfare. Both classes are blessed with very attentive and capable cabin staff, but Air Zimbabwe’s head office has little, if any, concern for the passenger other than to extract ever more in fares.


However, government’s fuelling of inflation is not limited to parastatal mismanagement. It continues to borrow heavily in the domestic market, with a further $4,5 trillion of borrowings budgeted for 2005. Those borrowings are sourced mainly from prescribed assets of pension funds, insurers and like institutions, and from the private sector, “crowding out” commerce and industry and other economic sectors, and thereby fuelling inflation.